A Student’s Approach to

Taxation in South Africa

Third edition

2023
ASStuddeen
nt’ss Ap
Apppro
oaach
h to
o
T xa
Tax ation
n in
in So
Soutth
hAAffricaa
Third
Th d edi
e tio
on

2202
233

L BR
RU
UW
WER
R
MCoom ((UP
M P) CA(S
C SA)
Seniorr Leecturrer: Schhool of Acco
A ounntanccy, UFS
S

C CA
ASS
S
MC
M Com (UP P)
S or Lectu
Senio L urerr: Deparrtment of Taxa
T ation
n, UNI
U ISA

K CO
OE
ETZ
ZEE
E
DC
Comm (UUNISSA) CA A(SAA)
P fessoor: Scho
Prof S ool of
o AAccoounttingg Sciiencces, NW
NWU

D CU
UCCCIIOL
LIL
LLO
O
M om (Taxx) (U
MCo UFS
S) Prrofessioonal Acccoun
ntan
nt (S
SA))
BDDO

K
KL DE
DE HA
H RT
T (V
Volum
mee ed
ditor))
PhD
P D Acccouuntiing Scieencees (U
Unissa)
S or Lectu
Senio L urerr: Deparrtment of Taxa
T ation n, UNI
U ISA

AD KO
AD KOEK
KEM
MOOE
ER
PhhD (Taaxatiion))(UP
P) CA(S
C SA))
A ociate Profe
Asso P essor: SSchool off Acccou
untaancy
y, UFS
U

A OO
OSSTH
HU
UIZ
ZEN
N
P
PhD Acccoun ntin
ng SScien
ncess (U
Unisaa) C
CA(S
SA)
Seniorr Leecturrer: Schhool of Acco
A ounntanccy, UFS
S

C ST
TED
DA
ALL
L
MCoom ((UP
M P) CA(S
C SA)
S or Lectu
Senio L urerr: Deparrtment of Taxa
T ation
n, UNI
U ISA
Members of the LexisNexis Group worldwide
South Africa LexisNexis (Pty) Ltd
www.lexisnexis.co.za
JOHANNESBURG Building 8, Country Club Estate Office Park, 21 Woodlands Drive, Woodmead,
2191
CAPE TOWN TBE Waterfront, 3 Dock Road, V & A Waterfront, Cape Town, 8001
DURBAN TBE Umhlanga, Block A, Park Square, Centenary Boulevard, Umhlanga, 4319
Australia LexisNexis, CHATSWOOD, New South Wales
Austria LexisNexis Verlag ARD Orac, VIENNA
Benelux LexisNexis Benelux, AMSTERDAM
Canada LexisNexis Canada, MARKHAM, Ontario
China LexisNexis, BEIJING
France LexisNexis, PARIS
Germany LexisNexis Germany, MÜNSTER
Hong Kong LexisNexis, HONG KONG
India LexisNexis, NEW DELHI
Italy Giuffrè Editore, MILAN
Japan LexisNexis, TOKYO
Korea LexisNexis, SEOUL
Malaysia LexisNexis, KUALA LUMPUR
New Zealand LexisNexis, WELLINGTON
Poland LexisNexis Poland, WARSAW
Singapore LexisNexis, SINGAPORE
United Kingdom LexisNexis, LONDON
United States LexisNexis, DAYTON, Ohio

© 2023
First edition 2021
Second edition 2022
Reprinted 2022

ISBN 978 1 776 17490 4 (softback)

978 1 776 17491 1 (e-book)
Copyright subsists in this work. No part of this work may be reproduced in any form or by any means
without the publisher’s written permission. Any unauthorised reproduction of this work will constitute a
copyright infringement and render the doer liable under both civil and criminal law.
While every effort has been made to ensure that the information published in this work is accurate, the
editors, publishers and printers take no responsibility for any loss or damage suffered by any person as a
result of the reliance upon the information contained therein.

Editor: Marjorie Guy

Technical Editor: EDS Team

Printed by Pinetown Printers

 Preface

A Student’s Approach to Taxation in South Africa was written for undergraduate stu-
dents with the specific purpose of combining in one volume the provisions of the
Income Tax Act 58 of 1962, as it applies to individuals and businesses for the year of
assessment ending 28 February 2023. Simple language is used and the relevant sec-
tions of the Act are provided and explained in simple terms.
A further characteristic of this book is the steps used to explain certain topics. This is
especially handy for students who are making use of distance education. At the end
of each chapter are exam preparation questions, with solutions, that can be used to
revise the various principles of the chapter.
This work is directed at undergraduate students. It is not written specifically for tax
practitioners but may in fact be used by general accountants for addressing basic tax
problems.
The book contains various examples and practical case studies. All examples and case
studies relate to the year of assessment from 1 March 2022 to 28 February 2023 (the
2023 year of assessment). Unless otherwise indicated, all dates will fall within the
2023 year of assessment. A date of 3 August will thus refer to the August of this year
of assessment, 3 August 2022, and 2 February will refer to 2 February 2023.
A Student’s Approach to Taxation in South Africa integrates some basic technology into
taxation students’ studies. Some examples have so-called e-mails inserted. You can
electronically download the responses to these e-mails either on your computer or on
your smartphone. The e-mail questions are based on errors students traditionally
make in exams or on aspects students are sometimes uncertain about. The responses
to these e-mails do not provide any new content but seek to embed concepts. Stu-
dents who don’t have access to the electronic answers are not disadvantaged, as these
answers do not contain any new information. Each chapter also contains one or more
additional questions that are available electronically.
This work is updated to include all relevant legislative amendments to the end of
November 2022.
We would like to thank all the people who offered us their invaluable advice.
Although extreme care was taken to update, review and edit the content of this book,
some errors or anomalies may still occur. To help us and your fellow students, please
send any errors or anomalies you find to dhartkl@unisa.ac.za.

AUTHORS

v
 Assumptions and
abbreviations

Unless expressly stated to the contrary, the following assumptions must be made
when interpreting the examples and examination preparation questions in this vol-
ume:
• References to ‘the Act’ bear reference to the Income Tax Act 58 of 1962 (as amended).
• The use of the concept ‘South Africa’ or ‘Republic’ refers to the Republic of South
Africa and vice versa.
• All individuals are residents of the Republic.
• No double tax agreements between South Africa and overseas countries are in
force.
• Enterprises are registered as vendors for value-added tax (VAT).
• The cost price of all purchases made by vendors registered for VAT purposes is net
after any input tax credit to which they are entitled.
• All married persons are married out of community of property.
• Taxpayers, their spouses and their children are not persons with a disability as
defined.
• Medical costs fulfil the requirements of section 18 of the Act.
• The ages given are the ages of the persons on the last day of the year of assessment.
• In the case of an individual, the current year of assessment ends on 28 Febru-
ary 2023.
• All calculations are in Rands only.

Abbreviations used in this volume

The Commissioner of the South African Revenue Service ................. The Commissioner
South African Revenue Service ..................................................................................... SARS
First-in, first-out ................................................................................................................ FIFO
Last-in, first-out ................................................................................................................ LIFO
Pay-as-you-earn .............................................................................................................. PAYE

vii
A Student’s Approach to Taxation in South Africa

Value-added tax ................................................................................................................. VAT

Kilometers............................................................................................................................. km
Close corporation................................................................................................................. CC
Secondary tax on companies ............................................................................................. STC
Capital gains tax ................................................................................................................ CGT

viii
 Contents

Page
Preface ......................................................................................................... v
Assumptions and abbreviations ........................................................................... vii
Chapter 1 Introduction ............................................................................................. 1
Lizelle Bruwer
Chapter 2 Value-added Tax (VAT) ......................................................................... 19
Lizelle Bruwer
Chapter 3 Gross income ........................................................................................... 159
Karina Coetzee
Chapter 4 Special inclusions .................................................................................... 207
Annelize Oosthuizen
Chapter 5 The taxation of non-residents ................................................................ 219
Karina Coetzee
Chapter 6 Income exempt from tax ........................................................................ 241
Kerry de Hart
Chapter 7 General deduction formula ................................................................... 267
Annelize Oosthuizen
Chapter 8 Specific deductions and allowances ..................................................... 305
Carien Cass
Chapter 9 Expenditure and allowances relating to capital assets ...................... 359
Carien Cass
Chapter 10 Capital gains tax...................................................................................... 399
Alta Koekemoer
Chapter 11 Taxation of companies and company distributions ........................... 473
Doria Cucciolillo
Chapter 12 Prepaid taxes ........................................................................................... 511
Annelize Oosthuizen
Chapter 13 Individuals ............................................................................................... 549
Kerry de Hart

ix
A Student’s Approach to Taxation in South Africa

Page
Chapter 14 Fringe benefits ......................................................................................... 601
Karina Coetzee
Chapter 15 Retirement benefits ................................................................................. 661
Kerry de Hart
Chapter 16 Taxation of trusts .................................................................................... 683
Doria Cucciolillo
Chapter 17 Donations tax........................................................................................... 737
Karina Coetzee
Chapter 18 Estate duty ............................................................................................... 759
Cinzia Stedall
Chapter 19 Administrative procedures.................................................................... 799
Cinzia Stedall
Appendices ...................................................................................................................... 839
Index ................................................................................................................................. 853

x
 1 Introduction

Page
1.1 Introduction ......................................................................................................... 1
1.2 Taxation in perspective ...................................................................................... 2
1.2.1 Types of taxation .................................................................................... 2
1.2.2 Classification of taxes ............................................................................ 2
1.2.3 Criteria of a good tax system................................................................ 3
1.3 The budget process ............................................................................................. 4
1.3.1 Medium-term expenditure framework .............................................. 4
1.3.2 The national budget............................................................................... 4
1.3.3 The Income Tax Act 58 of 1962 (the Act) ............................................ 6
1.4 Calculation of taxable income (section 5)......................................................... 8
1.4.1 General principles when calculating taxable income ....................... 8
1.4.2 Calculating the taxable income of a company or close corporation 10
1.5 Selecting an enterprise type ................................................................................. 13
1.6 Tax implications of the different enterprise types ............................................ 14
1.7 Summary................................................................................................................. 16

1.1 Introduction
Taxes are levied to enable the government to provide services to the people. Another
view is that taxes are contributions to the State for the ultimate benefit of all who
enjoy the privileges and protection offered by the State.

1
A Student’s Approach to Taxation in South Africa 1.1–1.2

There are many role-players in the South African tax landscape and each role-player
has an important role to play. Some of the role-players, and their responsibilities,
include:
Role-player Responsibility
Minister of Finance The minister is mandated with the task of overseeing a number of
financial functions within the South African government, includ-
ing responsibility for National Treasury, the South African Rev-
enue Services (SARS), the Financial Intelligence Centre (FIC) etc.
National Treasury The governmental department responsible for the fiscal policy
that can be used to achieve the macro-economic goals of South
Africa.
South African Rev- Tax collection agency of South Africa. Responsible for
enue Service • the collection of tax revenue as mandated by the South African
(SARS) Revenue Services Act of 1997;
• ensuring compliance by taxpayers; and
• facilitating legitimate trade by protecting South Africa’s bor-
ders from illegal trade.
The Commissioner The person responsible for the management of SARS and who
of SARS reports directly to the Minister of Finance.
Legislation Specific laws, other than tax laws that also impact the tax land-
scape in South Africa such as:
• the South African Constitution, including the Bill of Rights;
• the Promotion of Administrative Justice Act (PAJA); and
• the Protection of Personal Information Act (POPIA).
Other • Taxpayers (companies, natural persons, trusts, farming, bank-
ing etc.)
• Professional accountancy bodies (SAICA, SAIPA, SAIT etc.)
• International organisations (Organisation for Economic Coop-
eration and Development (OECD), the World Bank etc.).

1.2 Taxation in perspective

1.2.1 Types of taxation

In South Africa we pay a variety of taxes of which the main types are income tax,
(which includes capital gains tax), value-added tax (VAT), excise and customs duties
and a whole range of other taxes such as transfer duty and local authority taxes.
South Africans also pay donations tax and estate duty (which tax the transfer of
wealth), securities transfer tax on shares and local property rates.

1.2.2 Classification of taxes

There are several ways to classify taxes ranging from the tax calculation method used,
to identifying the person who is ultimately responsible for paying the tax.
Taxes are classified according to different factors.

2
1.2 Chapter 1: Introduction

Based on what the various taxes are levied on (also known as the tax base)
• Income Tax on income earned, for example normal tax levied on taxable income.
• Consumption Taxes on the sale or use of goods or services, for example VAT,
excise duty on domestic consumption, and customs duty and import tariffs on for-
eign trade. These taxes take the form of price increases and affect the consumers.
• Wealth Taxes on the ownership of assets or capital gains made on the sale of
property, for example capital gains tax, estate duty, donations tax and local author-
ity taxes.
• Other Taxes that are levied on specific business transactions, for example stamp
duty, transfer duty and securities transfer tax.

The method used to calculate the tax (also known as the tax rate structure)
• Proportional tax Tax is levied at a fixed rate on the amount of income earned,
for example income tax on companies is levied at a fixed rate of 27% of taxable
income.
• Progressive tax The rate that is used to calculate the amount of tax is determined
by the person’s income. The higher a person’s income, the higher the tax rate that
is used to calculate the tax, for example income tax levied on natural persons.
• Regressive tax The tax rate decreases with the increase of a person’s income. No
such form of tax exists in South Africa, although there are arguments that VAT is
an example of a regressive tax.

The person who has the responsibility of paying the tax

• Direct tax The impact and incidence of tax falls on the same person (the person on
whom the tax is levied bears the impact, while the person who ultimately pays the
tax, bears the incidence). Income tax and capital gains tax are therefore direct taxes.
• Indirect tax The seller bears the impact of the tax, while the consumer ultimately
pays the tax. VAT is an example of an indirect tax.
The classification of taxes, as set out above, is an important consideration in the
design of tax policies in South Africa. Depending on the macro-economic objectives
that the South African government want to achieve, an appropriate tax (or fiscal)
policy has to be formulated, taking into account the criteria of a good tax system.

1.2.3 Criteria of a good tax system

As early as 1776, Adam Smith, in his Wealth of Nations, recognised that the levying of
taxation should comply with certain basic criteria or norms and proposed the follow-
ing four canons (or principles) of taxation:
• Equity The subjects of every state ought to contribute, almost in proportion to
their abilities, towards the support of the government, that is to say in proportion
to the benefits which they enjoy under the protection of the state.
• Certainty The tax that every individual is bound to pay should be certain and not
arbitrary. This means that the time and manner of payment, and the amount to be
paid, should be clear and plain to the contributor and to every other person.

3
A Student’s Approach to Taxation in South Africa 1.2–1.3

• Convenience Every tax should be levied at the time or in the manner most con-
venient for the contributor to pay it.
• Economy Every tax should be such that the contributor pays the minimal add-
itional cost for administration and in submission costs beyond its actual tax, but it
must still be sufficient to provide the treasury of the State with the amount it
requires.
In the modern context, these principles must also include the broader principles of
social justice, which include the elimination of inequality, the recognition and respect
of diversity, and the provision of supportive environments to all members of society.

1.3 The budget process

The tax rate to be used for a specific year of assessment is determined after the budget
process has been completed and the government knows how much revenue they
require.

1.3.1 Medium-term expenditure framework

The government’s budgeting process starts with the preparation of the medium-term
expenditure framework document. This document sets out the expected expenditure of
the different government departments and the expected revenue for the next three years.
The document is prepared to assist in the government’s main objectives, as set out in
the National Development Plan. The expenditure framework also seeks to implement
certain broad economic policy objectives.
These macro-economic policies include –
• the maintenance of full-time employment;
• the achievement of a high rate of economic growth;
• the maintenance of price stability (that is to say the prevention of inflation); and
• the maintenance of external equilibrium (that is to say the maintenance of a
favourable balance of payments and a stable exchange rate).
The three-year framework and the budget process form part of the fiscal policy that
can be used to achieve the macro-economic goals. Fiscal policy influences the total
demand in the household’s economy. An increase in government expenditure or a
decrease in taxes will increase disposable income and therefore demand. This will lead
to increased supply (goods being made) and therefore an increase in employment (or a
decrease in unemployment). Fiscal policy is controlled by National Treasury.
The second measure that can be used to achieve the macro-economic goals is mon-
etary policy. Monetary policy is the action by the monetary authority (South African
Reserve Bank) aimed at influencing the use of money and credit; this is done through
changing interest rates. The Reserve Bank controls the interest rates and therefore the
monetary policy. It is important to note that taxation measures do not form part of
the monetary policy but of the fiscal policy.

1.3.2 The national budget

Each year during February, the Minister of Finance presents his budget proposals in
the form of a ‘budget speech’ to Parliament. It has become customary for the budget

4
1.3 Chapter 1: Introduction

speech to start with a short review of the economic, political, social and other circum-
stances that have had an effect on the budget proposals.
In the second part of his speech, the Minister discusses the most important items of
estimated state expenditure, the reasons for these items of expenditure and the policy
objectives the State wishes to achieve. He also discusses the sources of the revenue to
be used in defraying this expenditure and, as taxes form the major proportion of this
revenue, the details of proposed tax changes.
The third part of the speech refers to the budget documents tabled at the session.
These documents include –
• the estimate of expenditure to be defrayed from the National Revenue Fund;
• the estimate of income to be received;
• the statistical/economic survey;
• the tax proposals;
• comparative figures of income; and
• any other relevant documents.
These documents give an indication of how the income received during the year will
be spent by the government. Table 1.1 summarises budgeted government expendi-
ture for the 2022/2023 fiscal year.

Table 1.1: Budgeted government expenditure (source: Budget 2021)

Type of expenditure Percentage
of expenditure as
budgeted
Social Development 16,9%
Debt-service costs 14.0%
Basic education 13,8%
Health 12,0%
Community Development 11,0%
Economic development 10,5%
Peace and Security 10,2%
Post-school education and training 6,1%

5
A Student’s Approach to Taxation in South Africa 1.3

The documents provided to Parliament also indicate how the income will be collected.
Table 1.2 provides a summary of government’s planned income for the 2022/2023
fiscal year:
Table 1.2: Sources of government income (source: 2022 Budget Highlights)
Amount received Percentage
Type of tax
R‘billion of income
Personal income tax 587.9 37%
VAT 439.7 27%
Corporate income tax 269.9 17%
Fuel levies 89.1 6%
Customs and excise duties 117.4 7%
Other 94.5 6%
Total 1 598.5 100,0%

From the table above it is clear that the government receives most of its income from
income tax levied on individuals and companies, and VAT. Once a year National
Treasury and SARS publish tax statistics, giving information about how and where
taxes were collected.

Tax statistics

According to the 2021 tax statistics South Africa had 20 million registered individual
taxpayers. Some interesting facts are
• There were 22.9 million registered taxpayers .
• 37,2% of taxpayers are registered in Gauteng.
• 26,2% of assessed taxpayers were 35 to 44 years old.
• 46.4% of assessed taxpayers were female.
• Travel allowances were the largest allowance for individuals: 23,1% of total allowances
assessed.
• Retirement fund contributions paid on behalf of employees was the largest fringe
benefit (59,2% of the total fringe benefits assessed).
• Contributions to retirement funding was the largest deduction (85,5% of all deductions
granted).

1.3.3 The Income Tax Act 58 of 1962 (the Act)

After debate by Parliament and referral to the Standing Committee on Finance (and
possibly to other committees), the draft taxation bills are presented to the State Presi-
dent for signature and are finally promulgated as an Act of Parliament by publication
in the Government Gazette. The result of this is that these Acts now become part of the
main Income Tax Act and this results in a change to the Act.
When calculating your tax liability or when advising a client about their tax affairs, it
is critical to ensure that you are referring to the correct version of the Act. If you use a
previous or later version of the Act, the calculation or advice that you give might be

6
1.3 Chapter 1: Introduction

incorrect or out of date, resulting in negative tax and financial implications for your
client and even for yourself.
Interpretation rules If the language of the Act provided for absolute certainty, there
would be no necessity for interpretation. Unfortunately, this is not the case and the
many court decisions on tax matters are testimony to the need for interpretation. The
circumstances and situations giving rise to income and expenses are also often very
complex, making the application of the provisions of the Act difficult and uncertain.
Where a dispute relating to the application of the Act to a particular case arises be-
tween the revenue authorities and a taxpayer, the parties frequently must rely on the
courts to give a decision.
The principle of legal precedence, known in Latin as the stare decisis rule, means that
the decision taken in a court case (the ratio decidendi, that is to say the reason or
grounds for a decision of the court) is binding on all lower courts. The hierarchy of
the different courts in South Africa is important in the context of the interpretation of
tax legislation and it can be illustrated as follows:

Supreme Court of Appeal (SCA)

• The SCA is based in Bloemfontein (Mangaung) and is
the highest court in South Africa, except for constitu-
tional matters, which are dealt with by the Constitu-
tional Court.
• Bound by its own decisions.
• Decisions by the SCA are binding on all lower courts.
Legal precedence / Hierarchy of the courts

Provincial Divisions of the High Court

• Deals with appeals from the Tax Court.
• Bound by its own decisions and decisions from the
Supreme Court of Appeal (SCA), but not bound by
the decisions of High Courts from other provinces.

Tax Court
• Not an official court of law.
• Deals with tax disputes where amounts exceed R1
million or if a party wants to appeal the decision of
the Tax Board.
• Bound by High Court decisions and decisions from
the Supreme Court of Appeal (SCA)

Tax Board
• Not an official court of law.
• Deals with tax disputes where amounts are less than
R1 million.
• Decisions by the Tax Board are only binding on the
parties involved, but do not create any legal prece-
dence.

7
A Student’s Approach to Taxation in South Africa 1.3–1.4

The interpretation of law is a very complex field of study and for the purposes of this
book, it is sufficient to take note of a few of the more important rules of interpre-
tation. The need for interpretation will arise only where a provision in the Act is not
clear.
• Hardship is no criterion Even if a certain provision in the Act leads to hardship
for the taxpayer, provided the language of the section is clear, the fact that it gives
rise to hardship cannot be taken into consideration.
• The literal meaning must be applied If the literal meaning is clear, it must be
applied even if it may give rise to apparently unfair results.
• The intention of the legislature The intention of the legislator must be applied. A
governing rule in interpretation is, in general, to try to ascertain the intention of the
legislature from a study of the provision in question.
• The contra fiscum rule The benefit of the doubt must be given to the person
sought to be charged, except in cases where a provision in the Act is designed to
prevent tax avoidance. In these cases it should be interpreted in such a way that it
will prevent the mischief against which the section is directed. The rule can be
summarised as follows: the benefit of the doubt would therefore be given to the
taxpayer, except where tax avoidance is involved.
A distinction must be drawn between interpretation by the courts and a practice
adopted by the South African Revenue Service (SARS). Where the wording in the Act
isn’t clear, the courts cannot take note of the SARS practice or base their interpreta-
tion on the practice. Instead, the court must apply the rules of interpretation. Apart
from interpretation, the practice of SARS plays an important role in the administra-
tion of the Act. ‘Interpretation Notes’ are issued from time to time to inform tax-
payers about some practices that apply.

1.4 Calculation of taxable income (section 5)

The Income Tax Act 58 of 1962 (the Act) determines that income tax must be paid
annually in respect of the taxable income received by, accrued to or in favour of a
person. Persons other than companies (that is to say natural persons and trusts), are
taxed on taxable income received by or accrued to them during the 12-month period
ending on the last day of February each year. Companies (including close corpor-
ations) are taxed on taxable income received by or accrued to them during the finan-
cial year of such companies.

1.4.1 General principles when calculating taxable income

The Act provides a fixed framework to be used when calculating taxable income. This
framework, with the exception of certain provisions that apply only to natural
persons, applies to all taxpayers. The order of the framework is important as the

8
1.4 Chapter 1: Introduction

components build on one another and certain deductions are limited to specific
taxable income amounts. The basic framework is as follows:

R
Gross income (as defined in section 1) xxx
Less: Exempt income (section 10) (xxx)
INCOME (as defined in section 1) xxx
Less: Deductions (section 11 and other capital allowances) (xxx)
Add: Taxable capital gain (section 26A) xxx
Less: Retirement fund contributions (section 11F (for a natural person))
Less: Donations deduction (section 18A) (xxx)
TAXABLE INCOME (as defined in section 1) xxx

Normal tax calculated (less primary, secondary, tertiary rebates and medical tax
credits for a natural person) xxx
Less: Provisional tax (xxx)
Less: Employee’s tax (for a natural person and certain companies) (xxx)
NORMAL TAX DUE xxx
Add: Withholding tax on dividends xxx
TOTAL TAX LIABILITY xxx

The framework commences with gross income. Gross income is defined in the Act
and is divided into two parts. Firstly, there are the general requirements that have to
be met for an amount to be considered gross income, and secondly, there are specific
inclusions that are subject to tax although they do not meet the general requirements.
The second component in the calculation of taxable income is exempt income. Once
gross income is determined there are some amounts that would have been included
in gross income but the Act makes provision that they are not subject to income tax.
These amounts that have been included in gross income can then be excluded from
the calculation of income in terms of the provisions of the Act.
The last component in calculating taxable income is allowable deductions. The deduc-
tions can be divided into three main groups, namely:
• expenses that are deductible in terms of the general deduction formula;
• amounts that are deductible in terms of specific rules in the Act; and
• expenses that relate to capital assets which have specific rules that regulate the
allowances that can be claimed.
After deductions have been taken into account, the amount is referred to as taxable
income. The next step is to calculate the normal tax payable by the taxpayer based on
the taxable income.
The normal tax of a natural person is calculated by using a progressive tax table.
Once the tax has been calculated according to the table, natural persons (depending
on their age) are entitled to rebates as well as medical tax credits. Trusts are taxed at a
flat rate of 45% on their taxable income and companies and close corporations are
taxed at a flat rate of 27% (unless a company is a small business corporation as de-
fined for tax purposes (see chapter 11)).

9
A Student’s Approach to Taxation in South Africa 1.4

REMEMBER

• The tax rate of companies and close corporations was reduced from 28% to 27% for
years of assessment ending on or after 31 March 2023 (that is to say where the year of
assessment of the company or close corporation commences on or after 1 April 2022).
The rate of 27% is used for purposes of this book, unless the year of assessment in an
example or question indicates otherwise.

1.4.2 Calculating the taxable income of a company or close

corporation
When completing a tax return for a company or close corporation, you are required to
start with the accounting net profit and adjust it for differences between the account-
ing and income tax calculations. This follows the same approach required by the
income tax return of a company or close corporation, known as the ITR14.
When adjusting the net profit, it is important to understand how this amount is
calculated for accounting purposes, namely:
R
Income xxxx
Less: Expenses (xxx)
Net profit xxxx

If you now have to calculate the taxable income starting with net profit, it implies that
certain income is already included and certain expenses have already been deducted
to calculate the net profit. In order to process the correct adjustments, you need to
consider income and expenses separately.
Income
The income for accounting purposes can differ from the income for income tax pur-
poses.

REMEMBER
• Income for income tax purposes is gross income less exempt income.

You therefore have to consider the gross income and exempt income provisions of the
Income Tax Act.

10
1.4 Chapter 1: Introduction

When working through the income as reported for accounting purposes, you may
come across the following situations:
Situation Example Net profit/Accounting profit
adjustment
The amount received is Cash sales No adjustment needs to be made to the
included in accounting accounting profit.
income and is the same as
the amount that should be
included in income for
income tax purposes.
The amount received is Compensation An adjustment is needed.
included in accounting for defama- As the amount is included in accounting
income but is excluded tion (capital in income, it is included in net profit.
from gross income. nature) As it is not subject to income tax,
because it is capital in nature, the
amount must be deducted from the
profit to effectively exclude it from
taxable income.
The amount received is Local divi- An adjustment is needed.
included in accounting dends As the amount is included in accounting
income but is exempt for income, it is included in net profit.
income tax purposes. As it is exempt for income tax, the
exempt amount must be deducted from
the net profit to effectively exclude it
from taxable income.
The amount received is Rental An adjustment is needed.
not included in account- received in As no amount has been included in net
ing income but should be advance profit, the amount must be added to the
included in gross income accounting net profit to calculate taxable
income.
The amount received that A capital gain An adjustment is needed.
is included in accounting on the sale of The amount is included in the account-
profit differs from the an asset. ing income and therefore in net profit.
amount that should be Only a portion of the amount is subject
included in income for to income tax (taxable capital gain).
income tax purposes. To calculate the correct taxable income,
the amount included in the accounting
income must be deducted to eliminate
the accounting gain that was included
and then the correct amount for income
tax purposes must be added.

Expenses
Expenses for accounting purposes can differ from the expenses for income tax pur-
poses. Remember that expenses for income tax purposes consist of deductions in
terms of the general deduction formula, specific deductions and capital allowances.

11
A Student’s Approach to Taxation in South Africa 1.4

When working through the expenses, you can have the following situations:
Situation Example Net profit/Accounting profit adjust-
ment
The amount (expense) Cash pur- No adjustment needs to be made to the
deducted in the expenses chases of trad- accounting profit.
for accounting purposes is ing stock
the same as the amount
that must be deducted for
income tax purposes.
The amount (expense) Compensation An adjustment is needed.
deducted for accounting paid due to As the amount is deducted as an ac-
purposes is not deductible negligence counting expense, it has reduced the net
for income tax purposes. profit, but because it is not deductible
for income tax (as it is capital in nature),
the amount must be added back to the
net profit to effectively eliminate the
effect of the accounting deduction.
The amount (expense) is Rental ex- An adjustment is needed.
not deducted when calcu- pense paid in As the amount is not deducted as an
lating the accounting advance accounting expense, the whole amount
profit but is deductible for has to be deducted from the net profit to
income tax purposes. calculate taxable income.
The amount (expense) Depreciation An adjustment is needed.
deducted for accounting (accounting The amount is deducted in the account-
purposes differs from the expense) in ing expenses as depreciation, and has
amount that should be contrast to a therefore reduced the net profit.
deducted for income tax wear-and-tear A wear-and-tear allowance for income
purposes. allowance on tax purposes can differ from deprecia-
an asset (in- tion.
come tax)
To calculate the correct taxable income,
the amount deducted in the accounting
expenses must be added back to the net
profit to effectively eliminate the reduc-
tion and then the correct amount as per
the Income Tax Act must be deducted to
calculate the taxable income.

This book refers to the tax calculation of all persons (taxpayers) and not only compa-
nies. A person is defined in the Act and includes individuals (natural persons) and
business entities such as companies and trusts. As some tax implications differ for
different persons, it is important to also have a broad understanding of the different
enterprise types and the impact that the type has on the calculation of taxable income.
Some provisions of the Act are applicable only to certain persons while other provi-
sions are applicable to all persons. Each chapter will make it clear to which person the
provisions being discussed is applicable.

12
1.5 Chapter 1: Introduction

1.5 Selecting an enterprise type

When starting a business, a potential business owner needs to determine what kind
of activities to undertake and where the market for the product or service is. After
having established the need for the product or service and finding the correct place to
do business, they will need to choose the business structure. There are a number of
factors that influence this choice, one of which is the taxation implications of the legal
form that is chosen. The legal form of the business has a direct bearing on the way the
business is taxed. When taxpayers have to decide what form of business enterprise to
set up, they have the following options:
• sole trader;
• partnership;
• close corporation (only for existing close corporations);
• company; or
• trust.
Generally, the tax calculations of these forms of business can be divided into two
categories, namely tax calculations where persons are taxed in their own hands on the
income received (for example a sole trader or partnership) and those where the
business is taxed, and not the individual (for example companies, close corporations
and trusts). In order to select the best business type, a number of factors have to be
considered, for example:
• Limited liability: Are the entrepreneur’s personal assets exposed to the risk of
business failure?
• Legal standing: Are there limitations on the activities that may be undertaken or
on the number of people that can be involved in the business?
• Legal requirements: Are there any formal requirements that have to be met (for
example, a company must appoint an auditor)?
• Risk of failure: Is the risk of failure limited to the assets of the business?
• Protection of beneficiaries: Does a failure in the business affect the assets of the
spouse, children or heirs?
• Provision of retirement capital: Is the entrepreneur entitled to a pension when
they retire or can they sell the business to obtain a retirement nest egg?
• Taxation liability: What are the income tax, capital gains tax and estate duty
implications of the chosen enterprise?
• Other taxes: Are there any other taxes payable by the specific business type?
• Flexibility: Can the activities and structure of the business be adapted to changes
in the business environment, for example, the introduction of a new tax?
• Administration: How many administrative requirements must be met (for example,
a company must have annual meetings and minutes of meetings must be prepared)?
• Costs: What costs are associated with the enterprise form (for example, a company
must appoint a secretarial official and an auditor while a sole trader does not)?

13
A Student’s Approach to Taxation in South Africa 1.5–1.6

After these factors have been considered, the most appropriate business type must be
selected for the specific situation. The most important income tax implications of the
different enterprise types are discussed in the next section.

1.6 Tax implications of the different enterprise types

Some of the tax implications of the different enterprise types can be summarised as
follows:
Sole trader
• There is not a separate legal entity and therefore the sole-proprietorship and the
owner are not separate taxpayers. The profit from the business must be added to
the natural person’s (owner’s) income from other sources to calculate their taxable
income.
• The interest earned on the business’ bank account together with other interest
received by the taxpayer qualify for the R23 800 annual interest exemption (per-
sons over the age of 65 qualify for R34 500).
• Drawings from the business are not taxed as the profit before drawings is added to
the taxpayer’s taxable income at the end of the year of assessment.
• If the business activities result in a loss at the end of the year of assessment, the loss
can normally be set off against income from other sources.
• The profit or loss from the business must be taken into account when calculating
the limits for the deduction of retirement fund contributions and donations (refer
to chapter 13).
• The business cannot qualify as a small business corporation (refer to chapter 11),
but can qualify as a micro business.
• The taxable income of the sole trader is calculated by adding the income from
business activities and income from other sources, and then the tax is calculated
according to the tax tables for natural persons and thereafter the applicable rebates
and tax credits are deducted.
Partnership
• There is not a separate legal entity and therefore there is not a separate taxpayer.
Each partner must add their portion of the business (partnership) profit to their
income from other sources to calculate their taxable income.
• The pro rata portion of the interest earned on the business’ bank account together
with other interest received by the taxpayer qualify for the R23 800 annual
interest exemption (persons over the age of 65 years qualify for R34 500).
• Drawings from the partnership are not taxed as each partner’s portion of the profit
before drawings is added to their taxable income at the end of the year of assess-
ment.
• If the partnership realises a loss at the end of the year of assessment, the partner’s
portion of the loss can normally be set off against income from other sources.
• The partnership cannot qualify as a small business corporation (chapter 11), but
can qualify as a micro business.

14
1.6 Chapter 1: Introduction

• The taxable income of a partner is calculated by adding their portion of the profit
from the partnership to their income from other sources, and then the tax is calcu-
lated, if the partner is a natural person, by using the tax tables and thereafter the
rebates are deducted.

Close corporation (CC)

• There is a separate legal entity and therefore there is a separate taxpayer. For
income tax purposes, the close corporation is deemed to be a company. The profit
of the close corporation is not added to the member’s income from other sources to
calculate the member’s taxable income. The profit or loss from the business will
therefore not be taken into account when calculating the member’s limits for re-
tirement fund contributions and donations.
• The interest earned on the business’s bank account does not qualify for any exemp-
tion.
• Distributions to members are subject to a withholding tax on shareholders (divi-
dends tax). Any distributions received by the members are added to their gross
income but then exempted as distributions constitute a dividend.
• If the close corporation realises a loss at the end of the year, the loss cannot be set
off against the member’s income from other sources; it will be carried forward to
be set off against future profits of the CC.
• The close corporation’s normal income tax payable is calculated at a flat rate of
27%. Distributions to members are subject to a withholding tax on shareholders of
20% (dividends tax).
• The close corporation can qualify as a small business corporation, resulting in the
CC paying normal income tax based on a sliding scale.
• Where the turnover is less than R1 million, the close corporation may qualify as a
micro business resulting in it having the option to select to be taxed on turnover. If
this selection is made, tax is calculated on a sliding scale on turnover.

Company
• There is a separate legal entity and therefore there is a separate taxpayer. The profit
of the company is not added to the shareholder’s income from other sources to cal-
culate the shareholder’s taxable income. The dividend is added to gross income but
is then exempt. The profit or loss from the business is not taken into
account when calculating the shareholders’ limits for retirement contributions and
donations.
• The interest earned on the business’s bank account does not qualify for any exemp-
tion.
• Dividends to shareholders are subject to dividends tax. Any distributions received
by the members are added to their gross income but then exempted as distribut-
ions constitute a dividend.
• If the company realises a loss at the end of the year, the loss cannot be set off
against the shareholders’ income from other sources.

15
A Student’s Approach to Taxation in South Africa 1.6–1.7

• The company’s normal income tax payable is calculated at a flat rate of 27%. Dis-
tributions to shareholders are subject to a withholding tax on shareholders of 20%
(dividends tax). The company can qualify as a small business corporation (refer to
chapter 11) or a micro business and is then taxed on the applicable sliding scale tax
rate.

Trusts
• There is a separate legal entity and therefore there is a separate taxpayer. The profit
of the business in the trust that is not distributed to the beneficiaries must not be
added to the beneficiaries’ income from other sources to calculate their taxable in-
come. The business income distributed to the beneficiaries or to which they have a
vested right must be added to their income from other sources when calculating
their taxable income.
• Income that is distributed by the trust retains its character. Because interest retains
its character, any interest earned on the trust’s bank account that is distributed to a
beneficiary together with other interest received by the taxpayer (beneficiary) qual-
ify for the R23 800 annual interest exemption (persons over the age of 65 qualify for
R34 500). The trust itself does not qualify for any interest exemptions.
• If the trust realises a loss at the end of the year, the loss cannot be set off against the
beneficiaries’ income from other sources.
• The taxable income of the beneficiary includes the distributed income from the trust
and tax is calculated according to the tax tables and thereafter rebates are deducted.
Undistributed income is retained in the trust and is subject to income tax at a flat rate
of 45%.
• The trust cannot qualify as a small business corporation.
The framework as explained in 1.4 used to calculate taxable income is the same for all
the different enterprise types and is discussed in more detail, in the next section.

1.7 Summary
In this chapter a brief overview of the main types of taxes, as well as the fundamental
principles underlying a good tax system and aspects to consider when interpreting
tax legislation, were discussed. A taxpayer that decides to conduct a trade, must
consider the tax consequences of such a decision. Prior to trading, a taxpayer usually
needs to decide on a business structure. Business types include sole traders, partner-
ships, close corporations, companies and trusts. Once the business structure has been
selected and trading has commenced, the taxable income of the business has to be
calculated.
The first step in calculating a person’s taxable income is to determine the gross in-
come received. Certain amounts included in gross income are, however, specifically
exempt from income tax. The net amount after deducting the exempt income from
gross income is called ‘income’. Expenses that are incurred in the production of
income can be deducted in terms of the general deduction formula or as specific
deductions. After deducting the allowable deductions and allowances from the
income, the remaining amount is the taxable income from operations. After adding
the taxable capital gain, the total taxable income for the year is obtained. This amount

16
1.7 Chapter 1: Introduction

is used to calculate the tax due for the year. For individuals two further deductions
are allowed after the capital gain is included, namely retirement fund contributions
and donations.
Although the basic framework for calculating taxable income for the different tax-
payers is the same, there are a couple of minor differences between the different types
of taxpayers. It is therefore important to ascertain which type of taxpayer you are
calculating income tax for.

17
 Value-added Tax (VAT)
2

Income Donations Estate Value-

tax tax duty added tax

Page
2.1 Introduction............................................................................................................ 23
2.2 VAT in perspective ................................................................................................ 25
2.3 Calculation of VAT ................................................................................................ 26
2.3.1 The accounting basis (section 15) ........................................................... 27
2.3.1.1 Invoice basis .............................................................................. 27
2.3.1.2 Payments basis.......................................................................... 28
2.3.2 Tax periods (section 27) ........................................................................... 31
2.3.3 Tax returns and payments (sections 28 and 25 of the
Tax Administration Act) ......................................................................... 33
2.3.4 Penalties and interest (section 39 and Chapter 15
of the Tax Administration Act) .............................................................. 34
2.3.5 Refunds (section 44 and Chapter 13 of the Tax
Administration Act) ................................................................................. 34
2.4 The basics of output VAT ..................................................................................... 36
2.5 The levying of output VAT (section 7(1)) ........................................................... 38
2.6 Output VAT: Supply of goods or services (section 7(1)(a)) ............................. 39
2.6.1 Supply ........................................................................................................ 39
2.6.2 Goods or services ..................................................................................... 39
2.6.2.1 Goods ......................................................................................... 39
2.6.2.2 Services ...................................................................................... 40
2.6.3 Vendor (sections 23, 50, 50A and 51(2) and sections 22
and 23 of the Tax Administration Act).................................................. 41
2.6.3.1 Registration as a vendor: Compulsory registration
(sections 23(1), (2), (3) and (6), 50 and 50A) .......................... 42

19
A Student’s Approach to Taxation in South Africa

Page
2.6.3.2 Registration as a vendor: Voluntary registration
(section 23(3))........................................................................ 44
2.7 Output VAT: In the course or furtherance of an enterprise
(section 7(1)(a)) ....................................................................................................... 45
2.7.1 Enterprise or activity carried on continuously or regularly ............ 46
2.7.2 Goods or services are supplied for a consideration .......................... 47
2.7.3 Specifically included in the definition of an ‘enterprise’ .................. 47
2.7.4 Specifically excluded from the definition of an ‘enterprise’ ............ 47
2.8 VAT levied: Importation of goods (sections 7(1)(b) and 13) .......................... 48
2.8.1 Importation of goods from BLNS countries ....................................... 49
2.8.1.1 Time of importation (section 13(1)(iii)) ............................. 49
2.8.1.2 Calculation of VAT on importation (section 13(2)(b))..... 49
2.8.2 Importation of goods from other countries ........................................ 49
2.8.2.1 Time of importation (section 13(1)(i)) ............................... 49
2.8.2.2 Calculation of VAT on importation (section 13(2)(a))..... 50
2.9 VAT levied: Imported services (sections 7(1)(c) and 14) ................................ 52
2.9.1 Imported services: Meaning of ‘supply’ ............................................. 52
2.9.2 Imported services: Time of supply (section 14(2)) ............................ 56
2.9.3 Imported services: Value of the supply (section 14(3))..................... 56
2.10 Output VAT: Zero-rated supplies (section 11) ................................................ 56
2.10.1 Zero-rated supply: Exported goods (section 11(1)(a)(i) and (ii)) .......... 56
2.10.1.1 Direct exports (goods consigned or
delivered to an export country
(definition of ‘exported’ – paragraph (a))) ........................ 57
2.10.1.2 Indirect exports (goods delivered in South Africa
to non-residents under the Export Regulations
(definition of ‘exported’ – paragraph (d)))........................ 59
2.10.1.3 Goods delivered by a vendor to a foreign-going
ship or aircraft (‘exported’ – paragraphs (b) and (c)) ...... 61
2.10.1.4 Goods supplied under a rental agreement
(section 11(1)(c) and (d)) ...................................................... 62
2.10.2 Zero-rated supply: Exported services (section 11(2)) ........................ 62
2.10.2.1 Exported services: Transportation (section 11(2)(a),
(b) and (d)) ............................................................................. 62
2.10.2.2 Exported services: Ancillary services to exported
goods (section 11(2)(e)) ........................................................ 62
2.10.2.3 Exported services: Services rendered outside
South Africa (section 11(2)(k)) ............................................ 63
2.10.2.4 Exported services: Services to non-residents
(section 11(2)(l)) .................................................................... 63
2.10.3 Zero-rated supply: The sale of a going concern
(sections 11(1)(e) and 18A) .................................................................... 66
2.10.3.1 General .................................................................................. 66
2.10.3.2 Specific examples relating to going-concern sales .......... 66
2.10.3.3 Calculations relating to going-concern sales.................... 68
2.10.4 Zero-rated supplies: Other ................................................................... 69

20
 Chapter 2: Value-added Tax (VAT)

Page
2.11 Output VAT: Exempt supplies (section 12) ..................................................... 72
2.11.1 Exempt supply: Financial services (sections 2 and 12(a)) ................. 72
2.11.2 Exempt supply: Donated goods and services (section 12(b))........... 75
2.11.3 Exempt supply: Accommodation (section 12(c)) ............................... 75
2.11.3.1 Exempt supply: Residential accommodation
(section 12(c)) ........................................................................ 75
2.11.3.2 Taxable supply: Commercial accommodation ................ 76
2.11.4 Exempt supplies: Other......................................................................... 80
2.12 Output VAT: Deemed supplies (sections 8, 8A and 18(3)) ............................ 81
2.12.1 Deemed supply: Ceasing to be a vendor ............................................ 82
2.12.1.1 Meaning of ‘supply’: Ceasing to be a vendor
(section 8(2)) ......................................................................... 82
2.12.1.2 Value of the supply: Ceasing to be a vendor
(section 10(5))........................................................................ 82
2.12.1.3 Time of supply: Ceasing to be a vendor
(sections 8(2) and 9(5)) ........................................................ 85
2.12.2 Deemed supply: Indemnity payments ............................................... 85
2.12.2.1 Meaning of ‘supply’: Indemnity payments
(section 8(8)) ......................................................................... 85
2.12.2.2 Value of the supply: Indemnity payments
(section 8(8)) ......................................................................... 86
2.12.2.3 Time of supply: Indemnity payments (section 8(8)) ....... 86
2.12.3 Deemed supply: Supplies to independent branches......................... 88
2.12.3.1 Meaning of ‘supply’: Supplies to independent branches
(paragraph (ii) of the proviso to the definition
of ‘enterprise’, sections 8(9), 11(1)(i) and 11(2)(o)) ........... 88
2.12.3.2 Value of the supply: Supplies to independent
branches (section 10(5)) ....................................................... 89
2.12.3.3 Time of supply: Supplies to independent branches
(section 9(2)(e)) ..................................................................... 90
2.12.4 Deemed supply: Fringe benefits .......................................................... 90
2.12.4.1 Meaning of ‘supply’: Fringe benefits (section 18(3)) ......... 90
2.12.4.2 Value of the supply: Fringe benefits (section 10(13)) ........ 91
2.12.4.3 Time of supply: Fringe benefits (section 9(7)) .................. 96
2.12.5 Deemed supply: Payments exceeding consideration ....................... 97
2.12.5.1 Meaning of supply: Payments exceeding
consideration (sections 8(27) and 16(3)(m)) ...................... 97
2.12.5.2 Value of supply: Payments exceeding consideration
(section 10(26))...................................................................... 97
2.12.5.3 Time of supply: Payments exceeding consideration
(section 8(27))......................................................................... 97
2.12.6 Deemed supplies: Other
(section 8(3), (7), (13), (15), (25) and (29)) ............................................ 98
2.13 Output VAT: Non-supplies (section 8(14)) ...................................................... 101
2.14 Output VAT: No apportionment (section 8(16)) ............................................. 102

21
A Student’s Approach to Taxation in South Africa

Page
2.15 Time of supply (section 9) .................................................................................. 102
2.15.1 Time of supply: General rule (section 9(1)) ........................................ 102
2.15.2 Time of supply: Connected persons (section 9(2)(a)) ........................ 103
2.15.3 Time of supply: Rental agreements (section 9(3)(a)) ......................... 103
2.16 Value of the supply (section 10) ........................................................................ 104
2.16.1 Value of the supply: General rule (section 10(3)) .............................. 104
2.16.2 Value of the supply: Connected persons (section 10(4))................... 105
2.16.3 Value of the supply: Entertainment (section 10(21)) ......................... 106
2.16.4 Value of the supply: Dual supplies (section 10(22)) .......................... 107
2.16.5 Value of the supply: Supply for no consideration (section 10(23)) .... 107
2.17 Basics of input VAT ............................................................................................ 107
2.18 Tax invoices (sections 16(2) and 20) .................................................................. 110
2.19 Debit notes and credit notes (section 21).......................................................... 112
2.19.1 Debit notes .............................................................................................. 112
2.19.2 Credit notes............................................................................................. 112
2.20 The determination of input VAT (section 17) .................................................. 114
2.20.1 Turnover-based method ....................................................................... 117
2.20.2 Special apportionment method............................................................ 119
2.21 Input VAT: Denial of input VAT (section 17(2)) ............................................. 119
2.21.1 Denial of input VAT: Entertainment ................................................... 119
2.21.2 Denial of input VAT: Club membership fees and subscriptions .... 120
2.21.3 Denial of input VAT: Motor car ........................................................... 120
2.22 Input VAT: Deemed input tax on second-hand goods
(sections 1, 18(8) and 20(8)) ................................................................................ 122
2.22.1 Zero rating of movable second-hand goods exported
(proviso sections 11(1) and 10(12)) ...................................................... 124
2.23 Special rules: Instalment credit agreements .................................................... 126
2.23.1 Meaning of ‘supply’: Instalment credit agreements ......................... 126
2.23.2 Value of the supply: Instalment credit agreements (section 10(6))....... 127
2.23.3 Time of supply: Instalment credit agreements (section 9(3)(c)) ...... 127
2.24 Special rules: Fixed property ............................................................................. 129
2.24.1 Meaning of ‘supply’: Fixed property .................................................. 129
2.24.2 Value of the supply: Fixed property ................................................... 129
2.24.3 Time of supply: Fixed property ........................................................... 130
2.24.3.1 Time of supply: Fixed property supplied in
the course or furtherance of an enterprise........................ 130
2.24.3.2 Time of supply: Fixed property not supplied
in the course or furtherance of an enterprise .................... 131

22
2.1 Chapter 2: Value-added Tax (VAT)

Page
2.25 Special rules: Foreign supplies of electronic services
(sections 1 (definition of ‘enterprise’), 23 and 20) ........................................... 133
2.26 Adjustments: 100% non-taxable use
(sections 18(1), 9(6), 16(3)(h), 10(7), 18D, 9(13), 10(29) and 16(3)(o)) ............. 134
2.27 Adjustments: Subsequent taxable use (section 18(4)) ..................................... 138
2.28 Adjustments: Increase and decrease of taxable use
(sections 18(2), (5) and (6) and 10(9)) ................................................................ 140
2.29 Adjustments: Game-viewing vehicles and hearses
(sections 8(14)(b) and (14A), 9(10), 10(24) and 18(9)) ...................................... 143
2.30 Adjustments: Supplies of going concerns (section 18A) ................................ 144
2.30.1 100% taxable usage ................................................................................ 144
2.30.2 More than 50% taxable usage for the purposes of the going
concern .................................................................................................... 145
2.30.3 Less than 50% of the selling price relates to the going
concern .................................................................................................... 147
2.31 Adjustments: Leasehold improvements
(sections 8(29), 9(12), 10(28) and 18C) ............................................................... 148
2.32 Adjustments: Irrecoverable and recoverable debts (section 22) ................... 150
2.33 Tax rulings............................................................................................................ 153
2.33.1 Chapter 7 of the Tax Administration Act: Advance Rulings ........... 153
2.33.2 Section 41B of the VAT Act: VAT rulings and VAT class
rulings...................................................................................................... 153
2.33.3 Section 72 of the VAT Act: Arrangements and decisions to
overcome difficulties ............................................................................. 154
2.34 Tax avoidance (section 73 of the VAT Act and section 102 of the Tax
Administration Act) ............................................................................................ 154
2.35 Unprofessional conduct (Chapter 18 of the Tax Administration Act) ......... 154
2.36 The influence of VAT on income tax calculations .......................................... 155
2.37 Summary .............................................................................................................. 155
2.38 Examination preparation .................................................................................. 156

2.1 Introduction
Almost every time a consumer purchases goods or services from a vendor in South
Africa, he has to pay a price that includes value-added tax (VAT). VAT is a type of
indirect tax and a direct cost to the final consumer, as he cannot claim the amount
back from the South African Revenue Service (SARS).
However, in certain instances an enterprise registered as a vendor may claim the
VAT it has paid back from SARS. It is therefore critical to understand the mechanisms
of VAT in an enterprise, as it has a direct cash-flow effect on the enterprise.

23
A Student’s Approach to Taxation in South Africa 2.1

VAT

Output tax Tax charged Input tax

on supplies on imports on supplies
by the vendor (refer to 2.8 and 2.9) to the vendor
(refer to 2.17–2.22)

Standard-rated Zero-rated supplies Exempt supplies

supplies (refer to 2.10) (refer to 2.11)

Adjustments
(refer to 2.26–2.32)

Supplies Deemed Non-supplies

(refer to 2.4–2.7) supplies (refer to 2.13)
(refer to 2.12)

Time of Value
supply of supply
(refer to 2.15) (refer to 2.16)

Critical questions

When dealing with VAT, a person is normally confronted with the following questions:
• How does the VAT system work?
• When and at what rate is VAT levied?
• When does a person need to register as a vendor?
• How long is a VAT period?
• What are the requirements for the documents that are the driving force of the VAT
system?
• How does zero rating of supplies work?
• When is a supply an exempt supply?

continued

24
2.1–2.2 Chapter 2: Value-added Tax (VAT)

• In which other special circumstances must output tax be raised?

• When will input tax be denied?
• What are the timing rules for supplies?
• How do I determine the value of a supply?
• Which accounting basis may be applied in the VAT system?
• What do I need to know about returns, penalties and refunds?
• Can there be avoidance schemes in respect of VAT?
• How does the VAT system influence income tax calculations?

2.2 VAT in perspective

VAT is levied in terms of the Value-Added Tax Act 89 of 1991 at a rate of 15%. The
VAT rate was increased to 15% on 1 April 2018, after being constant at a rate of 14%
for nearly 25 years, since 1993.
The VAT system is not unique to South Africa; it is in operation in at least 140 coun-
tries around the world. VAT is an indirect tax, which means that the tax is not
assessed directly by SARS, but indirectly through the taxation of transactions. The
supplier must pay the tax over to SARS, while the user pays VAT to the supplier
when the goods or services are acquired. VAT is a tax on the consumption of goods
and services in South Africa and is also sometimes referred to as a destination-based
tax.
VAT is essentially an inclusive tax, which means that a price charged by a vendor
includes VAT. This means that a price tag, advertisement, tender, quotation or
other statement of a price must include VAT, unless the price is clearly broken
down into a value, VAT and consideration components (sections 64 and 65).

Tax statistics
According to the 2021 tax statistics there were 880 553 registered VAT vendors in South
Africa. SARS received the following VAT payments per sector:
Financial intermediation, insurance,
R167,8bn
real-estate and business services
Manufacturing R53,8bn
Wholesale and retail trade, catering
R59,5bn
and accommodation
Construction R19,3bn
Transport, storage and communication R21,4bn
Community, social and personal services R22,2bn
Mining and quarrying R21,5bn
All other sectors R28,8bn

25
A Student’s Approach to Taxation in South Africa 2.3

2.3 Calculation of VAT

Calculation of VAT payable or VAT refundable

Step 1: Calculate output tax (refer to 2.5 to 2.14).

Step 2: Calculate input tax (refer to 2.17 and 2.20 to 2.22).

Step 3: Determine whether there are any VAT adjustments that must be con-
sidered (refer to 2.26 to 2.32).

Step 4: If the input tax claimable exceeds the output tax payable, the credit is
refundable to the vendor. If the output tax payable exceeds the input
tax claimable, the debit is payable by the vendor to SARS.

Output Input VAT

Less Add/Less Adjustments Equals
Tax Tax payable/refundable

Tax statistics
According to the 2021 tax statistics the following output tax was paid and input tax
claimed during the fiscal year:

R million
OUTPUT TAX
Standard rate (excl. capital goods and services
and accommodation) 1 479 180
Standard rate (only capital goods and/or services) 32 496
Supply of accommodation 1 520
Adjustments 16 956
Total output tax 1 530 151
INPUT TAX
Claimed on capital goods and/or services 96 657
Claimed on capital goods imported 5 130
Claimed on other goods and/or services 1 108 902
Claimed on other goods imported 138 656
Claimed on adjustments 14 787
Total input tax 1 364 131

26
2.3 Chapter 2: Value-added Tax (VAT)

REMEMBER

• Output VAT and output tax has the same meaning and refers to the VAT that a vendor
must levy on a supply and pay over to SARS.
• Similarly, input VAT and input tax has the same meaning and refers to the VAT that a
vendor can claim on goods or services supplied to the vendor that will be used for the
making of taxable supplies.

2.3.1 The accounting basis (section 15)

The timing of the VAT payable or refundable depends on the specific VAT accounting
basis of a vendor. There are two accounting bases that may be applied by a vendor to
account for VAT, namely
• the invoice basis; and
• the payments basis.
The accounting basis determines the time of supply for VAT purposes.
The two accounting bases are discussed in the following two paragraphs.

2.3.1.1 Invoice basis

In terms of the invoice basis, VAT is accounted for when:
• an invoice is issued; or
• any payment is received,
whichever occurs first.
The invoice basis is the default basis for VAT registration, unless:
• the prospective VAT vendor is a person who qualifies to apply for registration on
the payment’s basis (refer to 2.3.1.2); or
• it is a person that qualifies for voluntarily VAT registration but whose value of
taxable supplies haven’t yet reached R50 000 (refer to 2.6.3.2).
One of the exceptions for the time of supply rules of the invoice basis applies to a
taxable supply of fixed property. The supplier is required to account for output tax as
and when payment of the purchase price is received (except in the case of certain
transactions with connected persons). In other words, VAT on fixed property transac-
tions is accounted for on the payment’s basis.

Example 2.1
A vendor registered on the invoice basis supplied the following goods:
(a) On 2 February goods were delivered at a client’s premises and the invoice for the
goods was issued on the same date. The payment for the goods was received on
31 March.
(b) On 29 April a client paid R100 000 for goods delivered on the same date. The invoice
was issued on 14 May.
You are required to determine the time of the above supplies for VAT purposes.

27
A Student’s Approach to Taxation in South Africa 2.3

Solution 2.1
(a) As the invoice for the goods was issued before payment was made, the time of the
supply is the date the invoice was issued, which is 2 February. The date of payment
(31 March) is irrelevant.
(b) As the payment for the goods was made before the issue of the invoice, the time of
supply is 29 April, when payment was made. The date of delivery of the goods is
irrelevant.

When a vendor changes from the invoice basis to the payment’s basis, he should
calculate the amount payable or refundable, which is the amount of input tax payable
on his creditors’ balances less the amount of output tax receivable on his debtors’
balances (refer to 2.15 for the other time-of-supply rules).

2.3.1.2 Payments basis

In terms of the payments basis, VAT is accounted for when:
• payments are made (purchases); and
• payments are received (sales).
However, vendors (except for public authorities, municipalities and municipal enti-
ties) who account for VAT on the payments basis are required to account for VAT on
the invoice basis on the supply of any goods (other than fixed property) or services
for which the consideration in money is R100 000 or more (including VAT).

Example 2.2
A vendor registered on the payments basis supplied the following goods:
(a) On 2 February goods are delivered at a client’s premises and the invoice for R15 000
for the goods was issued on the same date. The payment for the goods was received
on 31 March.
(b) On 29 April a client paid R50 000 for goods delivered on the same date. The invoice
for the goods was issued on 14 May.
(c) On 19 July trading stock is delivered at a client’s premises and the invoice for
R180 000 was issued on the same date. Payment for the goods was only received on
31 August.
You are required to determine the time of the above supplies for VAT purposes.

28
2.3 Chapter 2: Value-added Tax (VAT)

Solution 2.2
(a) The consideration of the supply is lower than R100 000 and the time of supply is the
date the payment is received – 31 March.
(b) The consideration of the supply is lower than R100 000 and the time of supply is the
date the payment is received – 29 April.
(c) As the consideration of the supply exceeds R100 000, the time of supply is deter-
mined by applying the time-of-supply rules for the invoice basis and that is the ear-
lier of payment or the date the invoice is issued. The invoice is issued before
payment is made and the time of supply is therefore on the date the invoice is issued
– that is to say 19 July.

A vendor may account for VAT on the payments basis only if the vendor applied to
the Commissioner in writing and the vendor is one of the following persons (that is to
say registration on the payments basis is not automatic):
• a public authority;
• a municipality;
• a municipal entity that supplies electricity, gas, water, drainage, or services relat-
ing to the removal or disposal of garbage or sewage;
• an association not for gain;
• a water board or any other institution which has similar powers to a water board;
• a regional electricity distributor, for example City Power in Johannesburg;
• a foreign supplier or intermediary of electronic services (refer to 2.25 for further
information regarding foreign suppliers of electronic services);
• the South African Broadcasting Corporation; or
• a natural person or an unincorporated body of persons of which all the members
are natural persons (a partnership of which all the partners are natural persons),
and the total value of the taxable supplies in a 12-month period has not exceeded
R2,5 million (excluding VAT).

Example 2.3
Which of the following persons qualify to register on the payments basis for VAT pur-
poses? Support your answer with a reason.
(a) A sole proprietor whose turnover (taxable supplies) in a 12-month period amount to
R2,8 million.
(b) A South African resident company.
(c) The regional electricity distributor in the Western Cape, REDI.

29
A Student’s Approach to Taxation in South Africa 2.3

Solution 2.3
Person Does the person qualify to register on the pay-
ments basis for VAT purposes?
(a) A sole proprietor whose No. While a sole proprietor is a natural person, the
turnover (taxable supplies) total value of taxable supplies in a 12-month
in a 12-month period period exceeds the R2,5 million threshold.
amounts to R2,8 million.
(b) A South African resident No, companies are not on the list of persons who
company. can apply for registration on the payments basis in
terms of section 15(2) of the Act.
(c) The regional electricity Yes, regional electricity distributors are on the list
distributor in the Western of persons who can apply for registration on the
Cape, REDI. payments basis in terms of section 15(2) of the Act.

Any vendor that is voluntarily registered for VAT purposes with the value of its
taxable supplies not exceeding R50 000, must register on the payments basis (refer to
2.6.3.2). Such vendor should continue to be registered on the payments basis until the
value of its taxable supplies exceeds R50 000. Unless such a vendor otherwise quali-
fies for the payments basis as listed above, such vendor must convert to the invoice
basis from the commencement of the tax period immediately following the tax period
when the total value of taxable supplies has exceeded R50 000.
When the taxable supplies of a vendor (individual and unincorporated body of
persons) who accounts for VAT on the payments basis exceed R2,5 million, he must
inform the Commissioner in writing, as he will now have to account for VAT on the
invoice basis. The reverse situation also applies but is not compulsory.
The following can be disregarded when determining whether a vendor’s taxable
supplies exceed R2,5 million:
• the ending of or a substantial and permanent reduction in the size or scale of an
enterprise carried on by the vendor;
• the replacement of a plant or other capital asset used in an enterprise carried on by
the vendor (for example selling old plant and machinery to replace them with new
plant and machinery); or
• abnormal circumstances of a temporary nature.
If a vendor’s tax basis changes, he must provide particulars to the Commissioner on
the prescribed form. This allows for the calculation of the tax payable or refundable
as a result of the change in the tax basis.
If the vendor changes from the payments basis to the invoice basis, he should prepare
a list of his enterprise’s debtors and creditors, showing the amounts owing at the end
of the tax period immediately preceding the change-over period. The amount payable
or refundable will be the output tax due on his outstanding debtors’ balances less the
input tax receivable on his creditors’ balances.

30
2.3 Chapter 2: Value-added Tax (VAT)

REMEMBER

• The payment basis is not available to vendors that are not natural persons (except for
those entities listed above).

Example 2.4
Paul is a natural person carrying on a sole proprietorship and is currently registered for
VAT on the payments basis. As a result of his flourishing business, his taxable supplies
(excluding VAT) for the previous 12 months have increased to R2,5 million. He now must
make the required adjustment in respect of debtors and creditors and will change over to
the invoice basis as from 1 August of the current year of assessment. On 31 July of the cur-
rent year of assessment, Paul’s records reflected debtors (including VAT) of R350 000
(Note 1) and creditors (including VAT) of R315 000 (Note 2).

Notes
1. Included in his debtors is an amount of R10 000 for zero-rated sales made to export
debtors. Also included in debtors is an amount of R12 000 for interest on long out-
standing debtors’ balances. Interest is an exempt financial service and no VAT should be
levied on this.
2. Included in creditors is an amount of R80 000 for the purchase of a motor car in respect
of which the input tax is denied.
Calculate the VAT adjustment which Paul needs to make as a result of the change from
the payments to the invoice basis.

Solution 2.4
Output tax not yet paid in respect of debtors:
R
Export debtors: Zero-rated nil
Interest: Financial service, thus exempt nil
Other debtors: (R350 000 – R10 000 – R12 000) × 15 / 115 42 783
Less: Input tax not yet claimed in respect of creditors:
On motor vehicle: Input denied nil
Other creditors: (R315 000 – R80 000) × 15 / 115 (30 652)
Net output tax adjustment 12 131

2.3.2 Tax periods (section 27)

Income tax is calculated with reference to a year of assessment, which is usually a
period of 12 months. VAT is calculated and paid in respect of each tax period (as
defined in section 1 of the Tax Administration Act). Every vendor is registered for a
specific tax period or VAT assessment period.
It is important to note that a tax period for VAT purposes is not the same as a year of
assessment for normal tax purposes. For information on years of assessment for
companies, refer to chapter 8. For information on years of assessment for natural
persons, refer to A Student’s Approach to Income Tax/Natural Persons.

31
A Student’s Approach to Taxation in South Africa 2.3

Section 27 of the VAT Act provides for different categories of vendors and their
various tax periods.
Category A: Periods of two months ending on the last day of January, March, May
etc. (odd-numbered calendar months).
This is applicable to vendors with taxable supplies that do not exceed
R30 million in a 12-month period, or farmers with taxable supplies
that exceed R1,5 million in any given 12-month period.
Category B: Periods of two months ending on the last day of February, April,
June etc. (even-numbered calendar months).
This is applicable to vendors with taxable supplies that do not exceed
R30 million in a 12-month period, or farmers with taxable supplies
that exceed R1,5 million in any given 12-month period.
Category C: Periods of one month ending on the last day of each month.
The following vendors fall into this category:
• those whose taxable supplies during a period of 12 months exceed,
or are likely to exceed, the value of R30 million;
• those who have applied in writing to be placed in this category;
• those who have repeatedly been in default in terms of the VAT
Act.
Category D: Periods of six months ending on the last day of February and August
respectively. Vendors who only carry on farming activities with
taxable supplies of less than R1,5 million in value over 12 months fall
into this category. A vendor that is a registered micro business (refer
to chapter 8) who has made written application in this regard, could
also qualify as a Category D vendor.
Category E: Periods of 12 months ending on the last day of their year of assessment
for normal tax purposes. Vendors falling into this category include:
• companies and trust funds whose activities consist solely of:
– the letting of fixed property or movable goods to; or
– the administration or management of;
companies that are connected persons in relation to the vendor;
• those connected persons are all registered vendors and are entitled
to deduct the full amount of input tax.
• tax invoices are issued, and payments are only made once a year,
at the end of the year of assessment.
In determining the value of taxable supplies for a 12-month period, the following
must be excluded:
• supplies arising from the ending of an enterprise or a substantial and permanent
reduction in the size or scale of an enterprise;
• supplies resulting from the replacement of capital assets (for example selling an
old manufacturing building and acquiring a new factory building); and
• supplies resulting from temporary abnormal circumstances.

32
2.3 Chapter 2: Value-added Tax (VAT)

The Commissioner may permit a vendor’s tax period to end within ten days either
before or after the last day of the month during which the period was originally
supposed to end. The future tax period, as approved by the Commissioner, must be
used by the vendor for a minimum period of 12 months commencing from the tax
period during which the change is made (section 27(6)(ii)). A binding general ruling
(Interpretation Note No. 52) stipulates that a vendor could use the ten-day rule if the
cut-off date is:
• a fixed of the week;
• a fixed date in a calendar month; or
• a fixed day in accordance with ‘commercial accounting periods’ applied by the
vendor. (The vendor should supply the necessary proof for this option (for exam-
ple minutes of a board meeting).)

2.3.3 Tax returns and payments (sections 28 and 25 of the

Tax Administration Act)
In terms of section 28 of the VAT Act, read together with section 25 of the Tax
Administration Act, a return in the form prescribed by the Commissioner must be
submitted within 25 days after the end of the tax period (in other words, by the 25th
of the month following the end of the tax period). The VAT payable or refundable
must be calculated and any amount owing be paid to SARS on the same day that the
VAT return is submitted. The Commissioner has prescribed that a payment made on
a business day, using a SARS drop box, must be received by no later than 15:00 oth-
erwise it will be deemed to have been received on the following business day.
An exception applies where the vendor is registered to submit its VAT returns and
payments via SARS’s e-filing system, as the vendor is then required to submit itsVAT
returns and make payments via e-filing on the last business day of the month only, as
opposed to the 25th day of the month (where a return is submitted and payment
made through e-filing on or before the last business day of the month, the submission
and payment is deemed to have been made on the 25th day of the month). Where a
return is submitted via e-filing, but payment is made by electronic transfer (as op-
posed to via e-filing), the submission and payment must be made before the 25th day
of the month. The following table summarises the different payment methods and
prescribed dates:

Payment method Return due date Payment due date

Payment at ABSA, Albaraka Bank
Ltd, Access Bank, FNB, HBZ Bank 25th 25th
LTD, Nedbank and Standard Bank
E-filing of return and payment via
SARS’ e-filing or electronic fund Last business day Last business day
transfers (EFT)
Electronic fund transfers
25th 25th
(including Internet banking)

33
A Student’s Approach to Taxation in South Africa 2.3

REMEMBER
The Commissioner may alter the normal rules as presented above and prescribe the
following:
• the form and manner (including any specifications relating to any means of electronic
communication) in which returns must be submitted and payments be made;
• the date for the submission of returns and the making of payments (section 28(4)).

2.3.4 Penalties and interest (section 39 and Chapter 15 of the Tax

Administration Act)
If a person who is liable for the payment of VAT fails to make the payment within the
prescribed period, the Commissioner, in accordance with Chapter 15 of the Tax
Administration Act, impose:
• a penalty of 10% of the tax payable (section 213 of the Tax Administration Act); and
• interest at the prescribed rate (section 39(1)(a)(ii)).
The interest is calculated from the first day of the month following the month in
which payment is due, for each month or portion of a month for which it remains
unpaid.
A person who is aggrieved by a ‘penalty assessment’ notice may, on or before the
date for the payment in the ‘penalty assessment’, in the prescribed form and manner,
request SARS to remit the penalty (section 215 of the Tax Administration Act). Such
penalty may be remitted in a case where:
• the vendor has failed to register for VAT and disclosed this voluntarily to SARS; or
• the non-compliance was nominal, or it was the vendor’s first incidence of non-
compliance; or
• the non-compliance was due to exceptional circumstances.
Interest may be waived if the late payment was beyond the control of the vendor
(section 39(7)(a) and Interpretation Note No. 61). A vendor is allowed to object and
appeal against the decision by SARS not to waive penalties and interest (sec-
tions 32(1)(a)(vi) and 220 of the Tax Administration Act).

REMEMBER
• The Commissioner has the right to fix the specific time of the day on which any VAT
payment must be made.
• Any payment received after such time, is treated as a late payment for VAT purposes.

2.3.5 Refunds (section 44 and Chapter 13 of the Tax Administration

Act)
If the input tax of a vendor exceeds his output tax or if an amount of output tax is
erroneously paid in respect of an assessment in excess of the amount payable in terms
of the assessment, a vendor is entitled to a refund.
The Commissioner may only refund an amount if the return (the VAT201) reflecting
the amount to be refunded is submitted within five years after the date on which the

34
2.3 Chapter 2: Value-added Tax (VAT)

return was due. If the return is submitted after five years from the date on which it
was due, the vendor loses the refund and the refund amount reverts to SARS (sec-
tion 44 of the VAT Act).
The Commissioner may only refund an amount of VAT mistakenly paid by a vendor
(for example, the vendor’s VAT liability is R10 000, but the vendor mistakenly paid
R11 000 over to SARS), if the claim for such refund is received within five years from
the date on which the incorrect payment was made. In addition, if the vendor does
not provide SARS with its banking details, in writing, within 90 days from the sub-
mission of the claim for the refund, it will be deemed that SARS did not receive the
claim from the vendor, that is to say no refund will be made.
An amount is not refundable if the amount is less than R100, but the amount must be
carried forward in the vendor’s account (section 191 of the Tax Administration Act).
If the Commissioner does not refund the VAT within 21 business days after receipt of
the vendor’s VAT return, interest is payable in accordance with Chapter 12 of the Tax
Administration Act. The 21-day interest-free period only commences from the date
the vendor submits relevant material, requested by SARS for purposes of verification,
inspection or audit of a refund in accordance with Chapter 5 of the Tax Administra-
tion Act or prescribed banking particulars are supplied to the Commissioner (that is to
say only when the Commissioner does not already have the prescribed banking
particulars). Interest is paid in accordance with Chapter 12 of the Tax Administration
Act if the Commissioner fails to pay in time (section 45).
A vendor that carries on separate enterprises, for example through different branches
or divisions, can register each enterprise separately for VAT purposes if certain
requirements are met (refer to 2.6.3.1). A refund that is owed to a vendor that carries
on these separately registered enterprises may be set-off against an outstanding tax
debt of the vendor, or the tax debt of any of the separately registered enterprises,
whatever the case may be.
If the refund and interest is due to a vendor who has an outstanding tax debt, the
refund must be treated as a payment by the taxpayer that is recorded in the tax-
payer’s account (section 191 of the Tax Administration Act).

Example 2.5
A vendor carries on an enterprise and supplied goods and services for R1 150 000 (includ-
ing VAT of R150 000) during a tax period.
You are required to calculate the VAT payable by or refundable to the vendor if he paid
the following amount of input tax on goods and services supplied to him during the tax
period:
(a) R60 000
(b) R160 000.

35
A Student’s Approach to Taxation in South Africa 2.3–2.4

Solution 2.5
R
(a) Output tax 150 000
Less: Input tax (60 000)
VAT payable 90 000
(b) Output tax 150 000
Less: Input tax (160 000)
VAT refundable (10 000)

REMEMBER

The VAT calculation is therefore the amount of output tax less the amount of input tax.
Section 17(2) of the VAT Act provides that input tax may not be claimed in respect of cer-
tain goods or services. The input tax is denied although VAT was charged to the vendor
when the goods or services were acquired and even though it is going to use the goods or
services wholly for the making of taxable supplies. The input tax is denied to the extent
that such goods or services are acquired for the purposes of entertainment or relate to the
supply of a motor car (refer to 2.21).

2.4 The basics of output VAT

Output tax is the tax charged under section 7(1)(a) by a vendor for the supply of
goods or services by him. A vendor who sells trading stock or provides a service to
customers must pay the VAT he levied on every transaction over to SARS.
A person registered as a vendor levies VAT on all business transactions in respect of
taxable supplies. This includes transactions with both registered VAT vendors and
non-vendors (persons not registered for VAT). This also includes the sale of capital
assets and trading stock because, unlike the Income Tax Act, the VAT Act does not
distinguish between capital and revenue nature.
The zero-rating of a supply will always take preference over either being exempt or
standard-rated. It is useful to think about the different types of VAT supplies in a
hierarchy: we will always firstly determine whether a supply is zero-rated in terms of
section 11; if it is not zero-rated, we will then consider whether it is exempt in terms
of the provisions of section 12, and if it is neither zero-rated nor exempt, it will be
standard-rated.
The VAT Act provides for two types of supplies, namely:
• taxable supplies, consisting of:
– supplies at the standard rate (presently 15%); or
– supplies at the zero rate (0%) (refer to 2.10); and
• exempt supplies (refer to 2.11).

36
2.4 Chapter 2: Value-added Tax (VAT)

The different types of VAT supplies are:

Taxable supply Exempt supply

Standard rate supply Zero-rated supply

No VAT
@ 15% @ 0%
applicable

All other supplies Listed in Act Listed in Act

(not zero-rated or exempt) (section 11) (section 12)

Supplies charged at the zero rate are taxable supplies charged with VAT at 0%.
Exempt supplies are supplies that are not charged with VAT at all.
Supplies or transactions are all taxable at the rate of 15% unless they are taxed at 0%
or are specifically exempt. It is thus important to know exactly which supplies are
taxed at 0% (refer to 2.10) and which are exempt (refer to 2.11), as all the other sup-
plies are taxable at the standard rate of 15%.
In order to be able to calculate the VAT component of taxable supplies at the standard
rate, it is necessary to apply the tax fraction to the consideration of such supplies.
The tax fraction is the fraction calculated in terms of the formula:
r where:
100 + r
r is the rate of tax, thus 15%.
15
100 + 15
15
=
115
In the case of a zero-rated supply, ‘r’ in the formula will be 0.

Example 2.6
Vendor Ltd’s sales (all standard-rated taxable supplies) for a specific tax period amounted
to R46 000 (including VAT).
You are required to calculate output tax in respect of the supplies.

37
A Student’s Approach to Taxation in South Africa 2.4–2.5

Solution 2.6
R
Tax fraction × taxable supplies
= (15 / 115) × R46 000 6 000
This output tax must be paid over to SARS.
If the zero rate was applied to Vendor Ltd’s supplies, the output tax would be:
Tax fraction × taxable supplies
= (0 / 100) × R46 000 nil
Rnil output tax has been levied, and Rnil is payable to SARS.

How will the calculation change if the VAT rate is 16%?

2.5 The levying of output VAT (section 7(1))

VAT is primarily collected by enterprises that are registered for VAT as agents for
SARS throughout the production and distribution chain. If an enterprise is registered
for VAT (‘vendor’) and makes taxable supplies of goods and services, it must charge
output tax on these supplies and collect it from the recipients of the supplies. If the
vendor acquires taxable supplies of goods and services from another vendor (the
supplier), the VAT paid on such expenses may be claimed as input tax.
Output VAT is levied on:
• the supply of:
– goods; or
– services;
– in South Africa;
– by a vendor;
– in the course or furtherance of an enterprise carried on by him; or
• the importation into South Africa of goods by any person (does not need to be a
vendor) (refer to 2.8); or
• the supply of imported services to a non-vendor or to a vendor in respect of non-
taxable supplies (refer to 2.9).
VAT is levied if any of the above three situations arise. It is thus important to under-
stand the different definitions to be able to decide whether or not a specific transac-
tion attracts VAT.

38
2.6 Chapter 2: Value-added Tax (VAT)

2.6 Output VAT: Supply of goods or services (section 7(1)(a))

For a transaction in South Africa to have VAT consequences, the following require-
ments should be met in terms of section 7(1)(a):
• there should be a supply (refer to 2.6.1);
• of goods or services (refer to 2.6.2);
• by a vendor (refer to 2.6.3);
• in the course or furtherance of an enterprise (refer to 2.7).

2.6.1 Supply
The first requirement for a transaction in South Africa to attract VAT is that the
transaction should constitute a supply for VAT purposes. According to the English
Usage Dictionary, ‘to supply’ means to provide or to make available.
According to the definition of ‘supply’ in section 1 of the VAT Act, the term ‘supply’
includes a sale, rental agreement, an instalment credit agreement, as well as all other
forms of supply, whether voluntary, compulsory or by operation of law, irrespective
of where the supply is affected.
It is clear from the definition of ‘supply’ that a supply also includes supplies under
barter exchange transactions and expropriation of property. A barter exchange trans-
action occurs when goods are supplied for a consideration that is not money, for
example, when John supplies his farm to Janet in exchange for Janet’s holiday home
in Knysna. Expropriation occurs when someone’s possession is taken in order to use
it for a public purpose.
However, for a supply to occur, it appears that there must be at least two persons
involved, namely the supplier and the recipient of the goods or services. The recipi-
ent is the person to whom the supply is made.
In order to avoid any confusion about whether a transaction is a supply or not, and
whether certain transactions are deemed to be either a supply of goods or a supply of
services or not, deemed provisions are contained in sections 8 and 18(3) of the VAT
Act. Section 8 also deems certain transactions to be a supply for VAT purposes, alt-
hough they do not meet the requirements of the applicable definitions (refer to 2.12).

2.6.2 Goods or services

The second requirement for a transaction in South Africa to attract VAT is that the
supply should be either a supply of goods or a supply of services.

2.6.2.1 Goods
‘Goods’ are defined as:
• corporeal movable things;
• fixed property;
• any real right in such thing or fixed property; and
• electricity.

39
A Student’s Approach to Taxation in South Africa 2.6

‘Corporeal things’ are items that can be physically touched (in other words, tangible
assets).
‘Fixed property’ includes land, improvements to the land, sectional title units, shares
in a share block company, time-share interests and a real right to such land, unit,
share or time-sharing interest. SARS believes transactions involving fractional owner-
ship interests in fixed property would mostly constitute the supply of fixed property
and not the supply of shares.
‘Real rights’ include rights such as servitudes or usufructs.
The supply of ‘electricity’ is specifically included as part of the definition of goods to
clarify that electricity falls within the ambit of goods and not services. VAT is calcu-
lated on the final price of the electricity supplied, including the amount of the envi-
ronmental levy.
The following are not included in the definition of ‘goods’:
• Money: As money is not ‘goods’ as defined, the supply of cash, for example,
through the granting of a loan by a bank, does not attract VAT. Money includes
bills of exchange, postal orders, promissory notes etc. Money excludes coins made
from a precious metal (other than silver). Precious metals are gold, platinum and
iridium. Money is excluded when used as currency and not as a collector’s piece or
investment article. This implies that a person who collects coins must pay VAT
when they are acquired. Kruger Rands are made from gold coins. They are there-
fore goods and not money. If they are supplied they could attract VAT, but their
sale is zero rated.
• Revenue stamps: These are not included in the definition of ‘goods’, except when
acquired by stamp collectors. It is important to note that this does not include
normal postage stamps but refers to a stamp issued by the State as proof of pay-
ment of any tax (revenue stamp). Normal postage stamps attract VAT under the
normal rules, since they constitute proof of payment for services rendered by the
postal company. Stamps disposed of or imported as collectors’ items also attract
VAT.
• Certain rights: These are rights arising from a mortgage bond or pledge of goods
and are excluded from the definition of ‘goods’.

2.6.2.2 Services
The term ‘services’ is also defined very widely and includes the granting, cession or
surrender of any right or the making available of any facility or advantage.
If a supply is not a supply of goods and not specifically excluded in the definition of
‘’goods’ or the definition of service’, the supply constitutes a service.
For example: A buys a business from B. He pays R100 000 for the fixed assets and
R50 000 for the goodwill in the business. The fixed assets are clearly property and are
therefore ‘goods’. The goodwill is not included in the definition of ‘goods’ and it is
not specifically excluded from the definition of ‘goods’ or the definition of ‘services’.
Goodwill therefore constitutes the supply of services. The supply of services includes,
for example, trademarks, goodwill, patents and know-how payments.
Advancements and developments in technology over the past couple of years have
introduced certain concepts that require clarification in terms of the tax treatment

40
2.6 Chapter 2: Value-added Tax (VAT)

thereof. One of these concepts is cryptocurrency (for example, Bitcoin). Cryptocur-

rencies are not ‘money’ as defined since it is not issued by the South African Reserve
Bank as legal tender. As cryptocurrencies are not tangible moveable things, they do
not constitute ‘goods’ for VAT purposes. As stated above, the term ‘service’ for VAT
purposes is very widely defined and includes the making available for any facility or
advantage, or the granting of any right. Cryptocurrencies therefore comprise the
supply of a service for VAT purposes. This was confirmed by the fact that the defini-
tion of ‘financial services’ for VAT purposes specifically includes cryptocurrencies
(refer to 2.11.1).
It is important to note that certain transactions are deemed to be either a supply of
goods or a supply of services, even though they do not seem to be so (refer to 2.12).

2.6.3 Vendor (sections 23, 50, 50A and 51(2) and sections 22 and 23
of the Tax Administration Act)
The third requirement for a transaction in South Africa to attract VAT is that the
transaction should constitute a supply of goods or services by a vendor.
If a person is a vendor, he has to levy VAT on his taxable supplies (selling price), and
input tax credits may be claimed on certain purchases and expenses. If, on the other
hand, a person is not a vendor, VAT is not levied on his supplies (the selling price of
goods and services does not include VAT) and no input tax credit can be claimed on
the purchases or expenses.
A ‘vendor’ is a person who is, or is required to be, registered under the VAT Act.
The definition of a ‘person’ includes a public authority, a municipality, a company, a
close corporation, a body of persons (whether vested with a legal persona or not, for
example, a partnership or a joint venture), a deceased or insolvent estate, and a trust
fund.
Although a partnership is not a separate person for income tax purposes, it is a sepa-
rate person for VAT purposes, and the partnership, not the individual partners,
should register as a VAT vendor. When a partnership is dissolved as the result of a
member leaving or dying, or a new partner joining, and a new partnership is formed,
the old and new partnerships are regarded as one and the same vendor (section
51(2)).
While it is the partnership (or joint venture, provided that it is not incorporated) that
is registered as the vendor for VAT purposes, every member of that partnership is
liable (jointly and severally with the other members of the partnership) to perform
the duties of the partnership. In addition, each member is also liable for paying any
amount of VAT on supplies made by the partnership while that person was a mem-
ber of the partnership.
For VAT purposes, SARS regards spouses married in community of property as an
unincorporated body of persons just like a partnership.
It is clear from the above that not only registered persons are vendors, but also every
person that should be registered. It is thus important to know the registration
requirements. A person is either obliged to register as a VAT vendor (compulsory
registration) or can choose to register voluntarily.

41
A Student’s Approach to Taxation in South Africa 2.6

2.6.3.1 Registration as a vendor: Compulsory registration

(sections 23(1), (2), (3) and (6), 50 and 50A)
In terms of section 23(1), a person is required to register in three instances of which
the first two are:
• at the end of the month during which the total value of the taxable supplies for the
preceding 12 months exceeded R1 million, that is to say we will consider past sup-
plies;
• at the beginning of the month, if it is anticipated that the total value of the taxable
supplies in terms of written contractual agreements will exceed R1 million for the
following 12 months, that is to say we will consider future supplies.
The third instance that could require compulsory VAT registration relates to foreign
suppliers of electronic services, who also have specific registration requirements
(refer to 2.25).
It is important to note that there is no reference to tax periods or financial years
therefore SARS will look at any consecutive period of 12 months.
The amount of R1 million refers to the value of the taxable supplies (thus excluding
exempt supplies but including zero-rated and standard-rated supplies) and value
excludes VAT (section 23(6)). In determining whether the value (turnover) exceeds
R1 million, the following must be excluded:
• the supplies arising out of the ending of an enterprise, or a substantial and perma-
nent reduction in the size or scale of an enterprise;
• supplies resulting from the replacement of capital assets; and
• supplies resulting from temporary abnormal circumstances, for example when the
grasslands of a sheep farmer used for grazing, are destroyed in a fire and the
farmer is therefore forced to sell all his sheep.
Where a person carries on two separate businesses, he must register when the joint
taxable supplies of the two businesses exceed R1 million, since it is the ‘person’ who
conducts the enterprise, not the ‘enterprise’, that registers for VAT. If each business is
conducted in a separate company (or other legal person), each company is required to
register only when the taxable supplies of that company exceed R1 million.
Branches or divisions within an enterprise may register as separate vendors if each
branch:
• maintains its own independent accounting system; and
• can be separately identified by reference to the nature of the activities carried out
or the location of the branch or division.
All the taxable supplies of all the different branches or divisions should be added
together to determine whether the R1 million-threshold has been met (section 50).

42
2.6 Chapter 2: Value-added Tax (VAT)

Example 2.7
Zulu (Pty) Ltd has three branches enterprises that only make taxable supplies. None of
the three branches are independent branches.
R
Branch 1: Turnover of 360 000 for 12 months (excluding VAT)
Branch 2: Turnover of 320 000 for 12 months (excluding VAT)
Branch 3: Turnover of 340 000 for 12 months (excluding VAT)
1 020 000
You are required to determine whether Zulu (Pty) Ltd is obliged to register for VAT pur-
poses if the above information applies to the 12 months ending 31 December of the cur-
rent year.

Solution 2.7
Zulu (Pty) Ltd must register as a vendor since the three branches together make taxable
supplies of R1 020 000, which is above the R1 million threshold. It is the person, Zulu
(Pty) Ltd, that must register, and therefore all of its taxable supplies must be taken into
account to determine whether the company meets the registration threshold.

However, where business activities are split between two different persons to avoid
the registration threshold of R1 million, the Commissioner may make a decision in
terms of which such separate persons (for example, a natural person and a legal
entity of which he is a member) are deemed to be a single person carrying on one
enterprise. The Commissioner will issue such decisions only if he is satisfied that
there is a split of an activity into more than one entity to avoid the registration
requirements of VAT. If such a decision is issued, the single person is required to
register (section 50A).

Example 2.8
Sibusiso is a plumber and carries on business as a sole trader. His turnover (excluding
VAT) for the past 12 months ending 31 December amounted to R550 000. He is also the
sole shareholder of a private company called ‘Sibusiso’s Plumbing Services’ with a turn-
over (excluding VAT) of R580 000 for the past 12 months.
You are required to determine whether Sibusiso is obliged to register for VAT purposes.

Solution 2.8
No, Sibusiso is not obliged to register as he and the private company are separate persons
for VAT purposes. However, if the Commissioner makes a decision in this regard,
Sibusiso might have to register as a vendor under section 50A, since the combined value
of taxable supplies for the two persons is R1 130 000, which exceeds R1 million.

43
A Student’s Approach to Taxation in South Africa 2.6

A group of companies cannot register as a vendor as each company is a separate

person for VAT purposes; each subsidiary (person) must register separately. Transac-
tions within the group are therefore subject to VAT (unless section 8(25) applies –
refer to 2.12.8).
A foreign company must register as a VAT vendor in South Africa when the compul-
sory registration threshold is exceeded, even if the company has no physical presence
in the Republic. This creates an administrative burden, as the foreign company has to
appoint a representative vendor in South Africa and it has to open a South African
bank account. If, however, the foreign company forms part of the same group of
companies (as defined in the Income Tax Act) as a resident vendor, the foreign com-
pany can elect to be registered as an independent branch of the South African resi-
dent vendor. If there are more than one foreign holding company or foreign
subsidiary company that forms part of the group of companies, all these foreign
companies will be registered as one branch for VAT purposes. The main resident
vendor and each foreign company included in the branch registration will be held
jointly and severally liable for any VAT due by the ‘single’, independent branch.
The VAT Act provides for certain requirements that must be fulfilled before a person
may register, such as having a fixed place of residence, having a bank account and
keeping proper accounting records. The onus rests on the person to register when it
becomes necessary, and this must be done within 21 business days after a person has
become liable for registration (section 22 of the Tax Administration Act). A person is
required to either register for VAT on www.sarsefiling.co.za, or fully complete a VAT
101 form, which is obtainable from SARS’ website (http://www.sars.gov.za, under
Businesses and Employers – My Business and Tax – Register for VAT). All required
documentation should be attached to the VAT101 registration form for the applica-
tion to be valid, and the form should be submitted to the SARS branch nearest the
enterprise within 21 business days.
A person, who applies for registration and has not provided all particulars and doc-
uments required by SARS, may be regarded not to have applied for registration until
all the particulars and documents have been provided to SARS. Where a person is
obliged to register and fails to do so, SARS may register that person (section 22 of the
Tax Administration Act).

2.6.3.2 Registration as a vendor: Voluntary registration (section 23(3))

Voluntary registration results in the levying of VAT on all taxable supplies, but this
allows the vendor to claim input tax credits in the case of goods or services that he
has acquired from vendors. It is not always beneficial for a person to register volun-
tarily. The nature of his clients and the goods or services rendered usually determine
whether a specific person should register. A person may wish to register if he is
supplying mainly to vendors or if he supplies zero-rated goods (for example farmers
or exporters).
There are four instances where a person can apply for voluntary VAT registration.
The first two instances where a person can voluntarily register for VAT are where
that person is conducting an enterprise and
• the value of the taxable supplies of all his enterprises are more than R50 000 during
a previous 12-month period (that is to say we consider past supplies); or

44
2.6–2.7 Chapter 2: Value-added Tax (VAT)

• the total value of taxable supplies of that person has not yet exceeded R50 000 but
can reasonably be expected to exceed R50 000 within 12 months from the date of
registration as a vendor (that is to say we consider future supplies).
Note that where the value of the taxable supplies has not yet exceeded R50 000,
such vendor will be registered on the payments basis (refer to 2.3.1.2) until the val-
ue of its taxable supplies exceeds R50 000. Regulation 447 contains a number of ob-
jective tests that can be used to determine whether a person can with ‘reasonable
certainty expect’ to make taxable supplies of more than R50 000, for example where
the previous two months’ income was at least R4 200 per month or there are writ-
ten contracts for more than R50 000.
The third instance where a person can voluntarily register for VAT is where that
person is continuously and regularly carrying on an activity listed in a regulation
made by the Minister. The nature of these activities is that it is likely to make taxable
supplies only after a period of time. Regulation 446 provides a list of what can be seen
as ‘ongoing and regular activities’ in the sectors of agriculture, farming, forestry and
fisheries, mining, ship and aircraft building, manufacturing or assembly, property
development, infrastructure development and beneficiation.
The fourth instance where a person can voluntarily register for VAT is in the case of a
qualifying welfare organisation, foreign donor funded project, share-block com-
pany or municipality that may register voluntarily, without any minimum taxable
supply or the conducting of an enterprise requirement.
Persons supplying commercial accommodation with a value not exceeding R120 000
in any 12-month period are not carrying on enterprises (refer to 2.7.4). Therefore, such
persons are eligible for voluntary registration only once the taxable supplies exceed
R120 000 for a 12-month period.
The Commissioner may cancel a vendor’s registration if the Commissioner is satisfied
that the vendor no longer meets the registration requirements as set out above
(section 24(5)). If the vendor does not meet the administrative or recordkeeping
requirements (under section 23(7)) the Commissioner can also cancel the vendor’s
registration (section 24(6)). The Commissioner must inform the vendor in writing of
such deregistration and the date from when the deregistration will be applicable
(section 24(7)).

2.7 Output VAT: In the course or furtherance of an enterprise

(section 7(1)(a))
The fourth requirement for a transaction in South Africa to attract VAT is that the
transaction should constitute a supply of goods or services by a vendor in the course
or furtherance of an enterprise.
An ‘enterprise’ is generally defined as:
• any enterprise or activity;
• carried on continuously or regularly;
• in South Africa or partly in South Africa;
• by any person;
• in the course or furtherance of which;

45
A Student’s Approach to Taxation in South Africa 2.7

• goods or services are supplied for a consideration;

• whether for profit or not.

REMEMBER
• For VAT purposes, it is required that the vendor supplies goods and services in the
course or furtherance of an enterprise. Enterprise is specifically defined in section 1 of
the VAT Act.
• For normal tax purposes, a person must be conducting a trade before deductions and
allowances can be claimed. Trade is specifically defined in section 1 of the Income Tax
Act.
• While these two definitions are similar, they are not the same and students must take
care to use the correct definition in the correct context.

2.7.1 Enterprise or activity carried on continuously or regularly

The above definition of an ‘enterprise’ requires an on-going activity. Once-off private
sales should thus usually not attract VAT, as they will not be deemed to be a supply
in the course of an enterprise.
Even if a vendor is carrying on an enterprise, all transactions he enters into that are
not in the course of that enterprise do not attract VAT. If, for example, a plumber sold
his private home, the supply of his home would not be in the course of the plumbing
enterprise and would therefore not attract VAT. If the plumber (vendor) sold the
offices from which he conducted his plumbing enterprise, the sale of the offices
would be in the course of the enterprise and should attract VAT. Thus, VAT should
be levied on all supplies that relate to the enterprise of the vendor, even if it is the
supply of capital goods.
Municipalities are included in the general definition of an ‘enterprise’ and will conse-
quently levy VAT at the standard rate on all supplies that are not otherwise zero
rated or exempt. However, it must be clear whether the supply of goods or services is
being made by the municipality itself, or in terms of the authority of the province (a
public authority), as a supply of goods or services by a public authority does not
necessarily attract VAT.

REMEMBER
• Where a municipality imposes a fine or penalty, such as a traffic fine, in respect of an
unlawful activity, that charge will not have VAT-consequences as it is not in respect of
any supply of goods or services by the municipality. Fines are generally levied in terms
of the national or provincial laws of the country.
• The collection of licence fees in terms of the Road Traffic Act will not be in the course or
furtherance of the municipality’s enterprise, as the actual levying of licence fees is in
respect of the supply of goods or services made in terms of the authority of the province
(public authority). However, where the municipality is paid a certain percentage of the
licence fees collected, the municipality is liable to account for VAT at the standard rate
on that amount as it is in respect of the collection service rendered to the province.

46
2.7 Chapter 2: Value-added Tax (VAT)

2.7.2 Goods or services are supplied for a consideration

Unless a charge (consideration) is raised for goods or services supplied, the supply
does not form part of the carrying on of an enterprise as defined. Certain transactions
between connected persons are however excluded from this general principle.
The term ‘consideration’ is defined as a payment in money or otherwise and
includes any act or forbearance in respect of the supply of goods or services, whether
voluntary or not, and whether by the person who received the goods or services or
not. A deposit on a returnable container is a consideration. Any other deposit, whether
refundable or not, is a consideration only if it is applied as such or if it is forfeited.
Consideration includes VAT, where applicable. The value of a supply excludes VAT,
and value plus VAT equals consideration for a supply.

Consideration = Value plus VAT

A donation to an association not for gain is specifically excluded from the definition
of consideration.

2.7.3 Specifically included in the definition of an ‘enterprise’

The definition of an enterprise specifically includes the following:
• Anything done in connection with the commencement or termination of an enter-
prise.
• The activities of a welfare organisation and implementing agencies that implement,
operate and manage foreign donor funded projects. These activities do not fall
within the general definition, since most of the supplies are made for no consider-
ation and the general definition requires a consideration to be charged for a sup-
ply. Activities of welfare organisations are specifically included to allow them to
register for VAT and claim back, as input tax, the VAT paid on the expenses.
• The supply of electronic services by a person from a place in an export country is
specifically included in the definition of an enterprise (refer to 2.25 for detailed in-
formation regarding foreign suppliers of electronic services).
• Any lease agreement entered between a foreign resident lessor and a South African
resident lessee with regard to the leasing of any foreign-owned parts relating to
foreign-owned ships. aircraft or rolling stock (such as trains) is specifically includ-
ed in the definition of enterprise.

2.7.4 Specifically excluded from the definition of an ‘enterprise’

The following do not constitute the carrying on of an enterprise:
• The supply of services by an employee to his employer. An employee or director
(other than an independent contractor) who receives remuneration cannot register
for VAT purposes, as he is not carrying on an enterprise. Therefore, no VAT is
levied on the salary of an employee or director. An independent contractor or
labour broker without an exemption certificate is carrying on an enterprise, even if
the employer deducts employees’ tax from the amount paid to him.
• A hobby.

47
A Student’s Approach to Taxation in South Africa 2.7–2.8

• An exempt supply (refer to 2.11).

• The supply of commercial accommodation, if the total value of such supplies does
not exceed R120 000 for a period of 12 months.
• Certain supplies made by branches or main businesses situated outside South
Africa. In a situation where a South African vendor is carrying on an enterprise in
South Africa, but the enterprise has a separate branch outside South Africa, the
supplies made by that branch would not be treated as part of the supplies of the
South African vendor. This is also the case if the main business is outside South
Africa and there is a branch in South Africa. Let us assume that we have a foreign
bank with the head office in the Netherlands. This bank operates in South Africa
through a branch located in Sandton. All the supplies of the South African branch
is part of an enterprise carried on in South Africa. However, the supplies of the
head office outside South Africa are excluded from the definition of an enterprise.
This is the case only if:
– the branch or main business can be separately identified; and
– an independent system of accounting is maintained for that branch or main
business.
• The supply of goods on a flash title basis. Flash title sales occur where a South
African supplier sells movable goods to a qualifying purchaser (QP1) and owner-
ship of the goods vests briefly (that is to say in a flash) in QP1, before it is immedi-
ately sold and exported to a foreign recipient. The supply of goods on a flash title
basis by QP1 will be deemed not to be in the course or furtherance of an enterprise,
provided that all necessary documentary requirements are met. However, QP1 can
apply in writing to SARS to have this exclusion ignored, in other words, that the
supply of goods on a flash title basis be in the course or furtherance of an enter-
prise.

2.8 VAT levied: Importation of goods (sections 7(1)(b) and 13)

In the case of the importation of goods into South Africa (even in the case of a non-
vendor), VAT is levied on the importation and collected by a Customs and Excise
SARS official at the border post. The VAT so collected is then paid over to SARS. The
importer of the goods must pay the VAT over to the Customs and Excise SARS offi-
cial at the border post, even if he is not a vendor (section 7(2)).
VAT is levied on the importation of goods as it would be to the disadvantage of local
suppliers if persons could buy the same merchandise overseas at a lower price
because the suppliers overseas did not have to increase their prices with 15% VAT. To
level the playing fields to some extent, the VAT cost is borne by the importer of
goods.
Note that VAT is aimed at taxing final consumption. If goods are therefore imported
by a vendor to be used or supplied in the course of making taxable supplies, the VAT
paid on importation qualifies as input VAT and is indirectly refunded to the vendor
via the VAT system (for example R115 VAT paid on the importation of goods (output
VAT) would be reduced with the R115 (input VAT) that the vendor incurred on the
importation of the goods). The VAT paid on the importation of goods only results in

48
2.8 Chapter 2: Value-added Tax (VAT)

a ‘cost’ for a person to the extent that those goods are imported by a person who is
not a VAT vendor or by a VAT vendor to the extent that those goods are not going to
be used in the course or furtherance of an enterprise.
Smaller items are often imported through the mail. The Commissioner may then
require the postal company to collect the VAT and provide him with the necessary
information with regard to such imported goods.
Provision is made, however, for certain imported goods to be exempt from VAT upon
importation. These goods are defined in Schedule 1 to the VAT Act (section 13(3)).
These goods not subject to VAT on importation include goods abandoned, destroyed
or damaged before entered for home consumption.
The rules applied to imports from customs union member countries are slightly different
to those applied to other countries. The customs union member countries are
Botswana, Lesotho, Namibia and eSwatini (formerly known as Swaziland) (BLNS
countries).

2.8.1 Importation of goods from BLNS countries

The customs union member countries do not levy any customs duty on any imports
from each other. VAT may however be charged. There are designated commercial
ports, such as, the different border posts through which imports are obliged to pass,
at which a Customs and Excise SARS official collects the VAT.

2.8.1.1 Time of importation (section 13(1)(iii))

The ‘time of supply’ is defined as the time when goods enter South Africa (sec-
tion 13(1)(iii)) and is usually when goods physically enter South Africa via a designated
commercial port.

2.8.1.2 Calculation of VAT on importation (section 13(2)(b))

VAT payable on goods imported from BLNS countries is equal to 15% of the total of:
• customs duty value; plus
• non-rebated customs duty payable and any import surcharges (section 13(2)(b)).
For imported goods from BLNS countries, the customs duty value must not be in-
creased by 10% (refer to 2.8.2.2).

2.8.2 Importation of goods from other countries

If goods are imported from other countries to South Africa, they have to be cleared
for home consumption by Customs and Excise, which also collects the VAT. It might
be that they are cleared on the same date of actual importation, but it also might be
that there is a difference between the date of actual importation and the date that the
goods are cleared. The goods are usually entered into a licensed Customs and Excise
storage warehouse before they are cleared for home consumption.

2.8.2.1 Time of importation (section 13(1)(i))

The time of importation is the date reflected on the Customs Bill of Entry (date
entered or cleared for home consumption) (section 13(1)(i)). This is usually the date
when the Bill of Entry is accepted by the Customs authorities.

49
A Student’s Approach to Taxation in South Africa 2.8

2.8.2.2 Calculation of VAT on importation (section 13(2)(a))

VAT payable on goods imported from countries other than the BLNS countries is,
according to section 13(2)(a), 15% of the total of:
• customs duty value; plus
• 10% of customs duty value; plus
• non-rebated customs duty payable and any import surcharges.

REMEMBER

• While the levying of VAT on the importation of goods is determined in terms of sec-
tion 7 of the VAT Act, the importer of the goods is not the one that levies the output
VAT.
• A Customs and Excise SARS official levies and collects the amount of output VAT on
behalf of SARS at the border post.
• Where vendors paid VAT on goods imported, they are permitted to claim the VAT paid
at the border, as input tax, subject to the normal conditions pertaining to input tax
deductions (refer to 2.17 and 2.20 to 2.22).

Example 2.9
Gert Smit Construction (Pty) Ltd imported marble, that has a cost price and customs
value of R120 000, from Zimbabwe. Import surcharges of R5 600 were levied.
You are required to determine the amount of the VAT levied on importation.

Solution 2.9
R
Customs duty value 120 000
Add: 10% of customs duty value 12 000
Add: Importation surcharges 5 600
137 600
× 15%
VAT levied on importation (R137 600 × 15%) (Note) 20 640

continued

50
2.8 Chapter 2: Value-added Tax (VAT)

Note
The output VAT of R20 640 is levied by a SARS Customs and Excise official at the border
when the goods enter the Republic. This output VAT is an additional charge to the
importer. The treatment of this additional charge after acquisition depends on whether
the importer is a registered VAT vendor that will be utilising the imported goods for the
purposes of making taxable supplies. To distinguish between the subsequent use of the
imported item to make taxable or non-taxable supplies, consider the following:
(a) Gert Smit imported the marble for use in his own home. This is not a taxable supply,
so he cannot claim the R20 640 VAT, levied by the Customs and Excise official, and
paid at the border post as an input tax deduction.
The journal entries for the purchase of the marble are as follows:
Transaction 1 Dr Cr
R R
Improvement to home 120 000
Bank 120 000
Marble purchased to affect improvements to private residence
Transaction 2
Improvements to home 20 640
Bank 20 640
Input tax paid on the importation of marble
The non-refundable VAT paid on the importation of marble to improve private
residence
(b) Gert Smit imported the marble to use it in one of his client’s homes in the course of
making taxable supplies. He charges the client R230 000 for the rendering of his ser-
vices. Gert is now entitled to claim the tax of R20 640 levied by the Customs and
Excise official and paid at the border post as an input tax deduction and needs to
charge output tax of R30 000 (R230 000 × 15 / 115) on the supply made to his client.
The journal entries for the purchase of the marble are then as follows:
Transaction 1 Dr Cr
R R
Trading stock 120 000
Bank 120 000
Marble purchased as trading stock
Transaction 2

Input Tax 20 640

Bank 20 640
Input tax paid on the importation of marble as trading stock

According to the proviso to section 13(2), the Minister of Finance may in certain
circumstances lay down a value for the goods by regulation.

51
A Student’s Approach to Taxation in South Africa 2.8–2.9

REMEMBER

• VAT is usually levied on the supply of goods and services of an enterprise (thus the
turnover) and is usually received by the vendor on behalf of SARS. The VAT relating to
the importation of goods is a calculated amount of additional VAT that was not
received on behalf of SARS, but that is paid in addition to the purchase price, in terms
of the VAT Act.
• A Customs and Excise SARS official collects the amount of VAT on behalf of SARS at
the border post.
• Where vendors paid VAT on goods imported, they are permitted to claim the VAT paid
as input tax, subject to the normal conditions pertaining to input tax deductions (refer
to 2.17 and 2.20 to 2.22).

2.9 VAT levied: Imported services (sections 7(1)(c) and 14)

VAT must also be paid to SARS under qualifying circumstances if services are
imported into South Africa.

2.9.1 Imported services: Meaning of ‘supply’

In terms of section 1 of the VAT Act, ‘imported services’ is defined as the supply of
services:
• by a supplier who is a non-resident or carries on business outside South Africa;
• to a recipient who is a resident of South Africa;
• to the extent that the services are used in South Africa for the purposes of making a
non-taxable supply.
In respect of imported services, VAT is not payable if the services are imported and
fully utilised for the purposes of making taxable supplies. VAT is payable only if the
service is imported by a non-vendor or by a vendor for purposes other than the
making of taxable supplies (section 7(1)(c)). The CSARS v De Beers court case consid-
ered the concept of ‘imported services’ for purposes of section 7(1)(c).

52
2.9 Chapter 2: Value-added Tax (VAT)

CASE:
CSARS v De Beers Consolidated Mines LTD
74 SATC 330
Facts: The taxpayer was in the business of otherwise than for the making of taxable
mining for and the international sale of supplies. In order to determine if the ser-
diamonds. The taxpayer was approached vices rendered by the English advisory
by a consortium of companies that pro- company were utilised or consumed by the
posed a complex transaction, the result of taxpayer for the purposes of making taxable
which would be the formation of a new supplies, the court looked at whether these
company and this new company becoming services were utilised to make taxable sup-
the holding company of the taxpayer. This plies in the course or furtherance of the
arrangement was done in terms of the taxpayer’s enterprise of buying and selling
provisions of section 311 of the old Com- diamonds. The court held that the foreign
panies Act. The taxpayer appointed an advisory services were not related to the
English advisory services company (this taxpayer’s primary activities, which was the
advisory company was based in London in mining and sale of diamonds, but that it
the UK) to assist the taxpayer with regards rather related to the interest of the tax-
to the finalisation of the proposed transac- payer’s shareholders. The services rendered
tion. This advisory company then invoiced by the English advisory company therefore
the taxpayer nearly R161 million for the constituted ‘imported services’ as they were
services that it rendered. The taxpayer did not utilised for the making of taxable sup-
not levy output VAT on this R161 million plies. The output VAT raised by SARS on
invoice. On assessment, the Commissioner the invoice of R161 million was thus pay-
able by the taxpayer in terms of sec-
of SARS determined that the English advi-
tion 7(1)(c) of the VAT Act.
sory company’s services constituted ‘im-
ported services’ as defined. Consequently, Principle: In order to determine whether
SARS assessed the taxpayer on an amount services constitute ‘imported services’, one
of output VAT on these imported services needs consider the purpose for which the
in terms of section 7(1)(c) of the VAT Act. services were acquired. If the purpose (that
The taxpayer lodged an objection to is to say the purpose of the acquirer of the
SARS’s decision. service) of the services was not to utilise or
consume it in South Africa for the purpose
Judgment: For a service to be classified as of making taxable supplies (which relates
an ‘imported service’, it is the supply of to a taxpayer’s core enterprise/activities),
services by a non-resident to a South Afri- then those services will constitute ‘im-
can resident to the extent that such services ported services’ as defined, and output
are utilised or consumed in South Africa VAT will be payable thereon.

If the recipient of the imported services is not a vendor, the recipient is required to
pay the VAT within 30 days from the time of supply (section 14(1)). The non-vendor
is required to also obtain, complete and retain a VAT 215 form.
If the recipient of the imported services is a vendor, the vendor is required to include
the VAT in the VAT 201 return corresponding to the tax period in which the supply
was made (proviso to section 14(1)).

53
A Student’s Approach to Taxation in South Africa 2.9

REMEMBER

• VAT is usually levied on the supply of goods and services (thus the turnover) of an
enterprise and is usually received by the vendor on behalf of SARS. The reversed
charge VAT relating to the imported services is an amount of VAT that was not
received on behalf of SARS, but an amount that is paid in addition to the charge for the
service. Although thus referred to as VAT, this is a reversed charge VAT that is paid by
the vendor to SARS, although he never received this amount as an agent on behalf of
SARS.
• Where vendors have paid VAT on imported services, such vendors are NOT permitted
to claim the VAT paid as input tax, as it relates to only non-taxable supplies.
• The VAT paid on imported services is a non-refundable cost for the South African
taxpayer and could be deducted for income tax purposes if the expense it relates to is
deductible for income tax purposes.

Example 2.10
A bank in South Africa received professional advice relating to their total business from a
company outside South Africa. The bank’s business entails the making of both taxable
and exempt supplies in a ratio of 80:20. The non-resident company charges the bank
R60 000 for such services.
You are required to determine the amount of the VAT that should be levied.

Solution 2.10
Since the bank acquired the services partly for the purposes of making exempt supplies
(20%), the bank will be required to account for VAT on 20% of the value of the services
(that is to say R60 000 × 20% × 15% = R1 800).
The journal entries for the transaction would be as follows:
Journal entry 1 Dr Cr
R R
Professional services 60 000
Bank 60 000
Professional services paid that is rendered to the Bank.
Journal entry 2
Professional services 1 800
Bank 1 800

continued

54
2.9 Chapter 2: Value-added Tax (VAT)

The reversed charge VAT on the professional services that constitute imported ser-
vices, to the extent that the service is not applied in the course of making taxable sup-
plies – in this case: exempt supplies (R60 000 × 20% × 15% = R1 800).
However, a private individual who does not make taxable supplies and who seeks pro-
fessional advice overseas to be utilised in South Africa will have to account for VAT on
the total value of that advice, since it will not be used in South Africa for the purpose of
making taxable supplies.
The journal entries for the transaction would be as follows
Journal entry 1 Dr Cr
R R
Professional services 60 000
Bank 60 000
Payment for professional services rendered to the
private individual.
Journal entry 2
Professional services 9 000
Bank 9 000
The reversed charge VAT on the professional services that constitute imported ser-
vices, to the extent that the service is not applied in the course of making taxable sup-
plies – in this case: private purposes (R60 000 × 100% × 15% = R9 000).
The individual is then legally obliged to pay the reversed charge VAT to SARS, but this is
not very practical and very difficult for SARS to administer.

The rationale behind the levying of VAT on imported services is to prevent unfair
competition. Private individuals or businesses making exempt supplies might be
tempted, if imported services are not subject to VAT, to acquire them from non-
resident suppliers rather than buy them locally and pay irrecoverable VAT on the
purchase price. The levying of VAT on the imported services would thus partly
prevent such persons from paying a lower price to non-residents.
VAT is also payable on imported services, even if the same person renders the ser-
vices. Where a person carries on activities outside South Africa (for example, a head
office) that does not form part of the activities of an enterprise (for example, a branch)
carried on by him in South Africa, the supply of services from such head office to the
branch also constitutes imported services (section 14(4)). This appears to be aimed at
preventing non-vendors from setting up an operation across the border (for example,
a branch, thus the same person) and then rendering services to themselves free of
VAT.
The following imported services do not attract VAT (section 14(5)):
• A supply of services that was already subject to VAT at 15%.
• A supply that, if made in South Africa, would be subject to VAT at 0% (refer to
2.10) or would have been an exempt supply (refer to 2.11).
• The supply of educational services rendered by foreign educational institutions to
South African students.

55
A Student’s Approach to Taxation in South Africa 2.9–2.10

• The rendering of services by an employee to his employer or the rendering of

services by a holder of office in performing the duties of his office. This thus results
in excluding the supply of certain services by a non-resident, for example, a direc-
tor, from falling within the ambit of imported services.
• For supplies of a service of which the value per invoice does not exceed R100.

2.9.2 Imported services: Time of supply (section 14(2))

A supply of imported services is deemed to take place on the earlier of the dates of:
• the issue of an invoice; or
• the making of any payment by the recipient,
in respect of that supply (section 14(2)).

2.9.3 Imported services: Value of the supply (section 14(3))

The value of the supply is the greater of:
• the value of the consideration for the supply; or
• the open-market value of the supply (section 14(3)).

2.10 Output VAT: Zero-rated supplies (section 11)

Supplies are all taxable at the rate of 15%, unless they are taxed at 0% or are specifi-
cally exempt. It is thus important to know exactly which supplies are taxed at 0% and
which are exempt (refer to 2.11), as all the other supplies are taxable at the standard
rate of 15%.
It is useful to think about the different types of VAT supplies in a hierarchy: we will
always firstly determine whether a supply is zero-rated in terms of section 11; if it is
not zero-rated, we will then consider whether it is exempt in terms of the provisions
of section 12; if it is neither zero-rated nor exempt, it will be standard-rated.
Supplies charged at the zero rate, often referred to as zero-rated supplies, are taxable
supplies although charged with VAT at 0%. This enables the vendor to claim back all
input VAT (if levied at 15% and provided that all documentary requirements are
complied with) in connection with the zero-rated supply.
Exempt supplies are supplies that are not charged with VAT at all. These differ from
zero-rated supplies in that no input VAT in connection with such supply may be
claimed.
The following types of supply are classified as zero rated in terms of section 11 of the
VAT Act.

2.10.1 Zero-rated supply: Exported goods (section 11(1)(a)(i)

and (ii))
The export of movable goods by a vendor to an overseas country may be zero rated
in certain circumstances.
The word ‘export country’ means any country outside the Republic, but the President
could determine that any country or territory be deemed not to be an export country.

56
2.10 Chapter 2: Value-added Tax (VAT)

The word ‘exported’ is defined in the VAT Act as the supply of movable goods under
either an instalment credit agreement or a sale (a transaction whereby ownership
passes or is to pass from one person to another) where such movable goods are
supplied in any one of the following ways:
• direct exports (paragraph (a) of the definition of exported); or
• indirect exports (paragraph (d) of the definition of exported); or
• goods delivered by the vendor to a foreign-going ship or aircraft for use in such
ship or aircraft (paragraphs (b) and (c) of the definition of exported); or
• goods supplied under rental agreements for use in an export country or customs-
controlled area (section 11(1)(c) and (d)).
The items listed above are discussed in more detail in the paragraphs that follow.

2.10.1.1 Direct exports (goods consigned or delivered to an export country

(definition of ‘exported’ – paragraph (a)))
Goods exported are, under the following circumstances, regarded as direct exports
and would therefore qualify for the zero rate. The supply of:
• moveable goods under a sale or instalment credit agreement;
• provided the goods are consigned and delivered to the recipient or the recipient’s
duly appointed agent or customer at an address in an export country;
• through a designated commercial port within the prescribed time period as set out
in Interpretation Note No. 30; and
• the supplier obtained and retained all documentary proof as set out in Interpreta-
tion Note No. 30.
The above refers to a situation where the supplying vendor exports the movable
goods:
• in the supplying vendor’s baggage (luggage); or
• by means of the supplying vendor’s own transport.
The zero rate also applies in circumstances where:
• the South African vendor uses a supplier’s cartage contractor to deliver the goods
on the vendor’s behalf to the recipient at an address in an export country;
• the cartage contractor is contractually liable to the South African vendor to effect
delivery of the goods; and
• the South African vendor is invoiced and liable for the full cost relating to such
delivery (Interpretation Note No. 30).
In order for the supplying vendor to apply VAT at the zero rate for the supply of
the movable goods by means of direct exports, the supplying vendor must obtain
and retain documentary proof that is acceptable to the Commissioner (section 11(3)).
Interpretation Note No. 30 stipulates the documentary proof required by the Com-
missioner. This includes:
• official documentation – the export or removal documentation prescribed under
the Customs and Excise Act; and
• commercial documentation – that is to say the documentation issued by a freight
hauler or freight forward businesses and other organisations, that provides proof

57
A Student’s Approach to Taxation in South Africa 2.10

of the transaction and the transportation of the movable goods, example, a tax
invoice, airway bill, bill of lading, recipient’s order or contract.
The supplying vendor must obtain the required documentary proof within 90 days
calculated from the date that the movable goods are required to be exported, gener-
ally 90 days from the earlier of:
• the time an invoice is issued; or
• the time payment is received.
When the supplying vendor does not obtain the required documentation within 90
days calculated from the date the movable goods are required to be exported, the
supply may, subject to the exceptions provided in Interpretation Note No. 30, be
deemed to be at the standard rate in the tax period within which the period of 90
days ends. Should the documentation be obtained at a later stage (within five years
from the end of the tax period that the invoice was or should have been issued),
an output tax adjustment may be deducted, provided that the necessary proof is
provided to the Commissioner (refer to Interpretation Note No. 30).
The zero rate also applies:
• if the customer is a South African resident who requests delivery to himself at
another address in an export country;
• where the movable goods are situated, temporarily or permanently, outside of
South Africa;
• where the movable goods are subject to a process of repair, improvement, manu-
facture, assembly or alteration by a third party in South Africa, where after the
goods are delivered to the vendor by the third party who then consigns and deliv-
ers the goods at an address in an export country; or
• in certain instances where movable goods are supplied to a vendor and delivered
to that vendor’s costumer at an address in an export country (an indirect supply).

Example 2.11
A foreign company (recipient in the export country) places an order with BT (Pty) Ltd
(a supplier in South Africa). BT (Pty) Ltd does not have the goods in stock and places
orders with CAZ (Pty) Ltd (another supplier in South Africa) with the instruction that the
goods are to be exported by CAZ (Pty) Ltd to the foreign company.
The above constitutes an indirect supply and the effect will be as follows:
CAZ (Pty) Ltd invoices BT (Pty) Ltd at the zero rate. CAZ (Pty) Ltd exports the movable
goods to the foreign company. BT (Pty) Ltd invoices the foreign company at the zero rate.

It should be noted that the zero rate is not applicable to supplies of second-hand
goods (that is to say previously owned and used goods) where a notional input tax
deduction was claimed by the South African vendor or any other person who is a
connected person in relation to the vendor when the goods were originally acquired.
In such circumstances, VAT is chargeable to the recipient equal to the notional input
tax deduction claimed by the South African vendor (proviso to sections 11(1) and
10(2)) (refer to 2.22.1).
As already pointed out, only movable goods can be exported. The supply of vouchers
entitling the purchaser to a service, for example, a phone recharge voucher, a prepaid

58
2.10 Chapter 2: Value-added Tax (VAT)

card, or a ticket to watch a rugby match cannot be regarded as a supply of movable

goods, as it relates to the supply of a service (an interpretation note on the VAT
treatment of vouchers is currently in draft format).

2.10.1.2 Indirect exports (goods delivered in South Africa to

non-residents under the Export Regulations
(definition of ‘exported’ – paragraph (d)))
The Export Regulations consist of three parts, all dealing with the indirect export of
movable goods. Part 1 of the EIS deals with transactions where movable goods are
supplied by a vendor to a qualifying purchaser and the qualifying purchaser is
responsible for exporting the goods from South Africa. An indirect export is thus
where B (a qualifying purchaser) buys goods from A (vendor in South Africa) and the
risk associated with ownership is transferred from A to B in South Africa.
A qualifying purchaser may not be a South African VAT vendor, unless it is a vendor
who is not a resident of South Africa and who acquires goods from a vendor in South
Africa with the sole purpose of selling those goods to another person who is not a
resident of South Africa. Further, a qualifying purchaser must be:
• a foreign diplomat;
• a foreign enterprise;
• a non-resident of the Republic;
• a tourist; or
• certain organisations established outside of South Africa and not conducting any
activity in South Africa (refer to the definitions of the Export Regulations).
The vendor is obliged to charge VAT at the standard rate on the supply to the quali-
fying purchaser and the qualifying purchaser is subsequently entitled to a refund of
the VAT charged from the VAT Refund Administration (the VRA) subject to certain
limitations and conditions. The responsibilities of the vendor include:
• charge VAT at the standard rate;
• issue a tax invoice to the qualifying purchaser and advise the purchaser of his
entitlement to a refund of the VAT;
• if supplying second-hand goods on which a notional input tax deduction was
claimed, ensure that the tax invoice includes a full and proper description of the
second-hand goods; and
• be able to furnish information to SARS when called upon to do so.
The qualifying purchaser must ensure that the movable goods are exported:
• from South Africa within 90 days, generally counted from the date of invoice (refer
to Part 3 of the Export Regulations for exceptions from this general rule); and
• via a designated commercial port in accordance with the prescribed Customs and
Excise procedure (refer to Part 1 of the Export Regulations for further details).
In the case where the qualifying purchaser appointed a cartage contractor to export
the movable goods, that cartage contractor takes over the responsibilities of the
qualifying purchaser. The cartage contractor should further ensure that the goods are
delivered, coupled with a tax invoice or invoice for the transport services and the

59
A Student’s Approach to Taxation in South Africa 2.10

applicable Customs documents, to the qualifying purchaser at an address in an

export country.
The VRA is authorised to make a refund of the VAT to the qualifying purchaser if the
qualifying purchaser has:
• fulfilled all required responsibilities; and
• submitted the required documentation within the required time period (refer to
Part 1 and 3 of the Export Regulations for further details).

Example 2.12
Mr Strempel is a non-resident on vacation in South Africa. While touring the Kruger
National Park, he decided to purchase a wooden giraffe figure. The curio shop charged
him R3 450 for the novelty item, including VAT at the standard rate of 15%. Mr Strempel
and his giraffe figure continued to tour the country for another two weeks before his
leave entitlement ran out and he needed to return to his home country, Germany by
means of a flight from O.R. Tambo International Airport. Mr Strempel took the giraffe
figure along when he left South Africa and was able to provide all the necessary
documentation to the VAT Refund Administration upon leaving the country.
You are required to explain the VAT consequences for Mr Strempel, the curio shop, and
the position of SARS.

Solution 2.12
Mr Strempel initially paid VAT of R450 (R3 450 × 15 / 115) when he purchased the giraffe
figure from the curio shop. The curio shop, being a VAT vendor, needs to charge the out-
put VAT of R450 and pay it over to SARS.
Upon leaving the country with the wooden giraffe, Mr Strempel can have the VAT of
R450 refunded to him. The VAT Refund Administration needs to refund this amount on
Mr Strempel’s departure with the item purchased in South Africa, as it is regarded as
being an indirect export in terms of the Export Regulations.

Part 2 of the Export Regulations provides for an exception to the rules in part 1 of the
Export Regulations This part applies in respect of exports of movable goods in which
case the supplier (that is to say the South African vendor) may at his own discretion
and risk decide to apply the zero rate. The supplying vendor may elect to supply the
movable goods at the zero rate where the vendor ensures that the movable goods are
initially delivered to a harbour or an airport or are supplied by means of a pipeline or
electrical transmission line in South Africa before being exported). This election by
the supplying vendor can also be made where the movable goods are consigned and
delivered to an agent (which may be a cartage contractor) of the qualifying purchaser
to be exported by road or rail. The zero rating is in both cases subject to the fulfilment
of several responsibilities and documentary requirements by the supplying vendor,
the qualifying purchaser and the agent of the qualifying purchaser.
Once again, the zero rate is not applicable to supplies of second-hand goods (goods
previously owned and used) where a notional input tax deduction was claimed by
the South African vendor or any other person who is a connected person in relation

60
2.10 Chapter 2: Value-added Tax (VAT)

to the vendor when the goods were originally acquired. Where the South African
vendor applied the standard rate in respect of second-hand goods to be exported, the
recipient of the goods is entitled to a VAT refund representing the difference between
the notional input tax claimed in respect of the acquisition of the second-hand goods
and the output tax charged by the South African vendor on the supply thereof (refer
to 2.22.1).
The following diagram summarises the differences between direct and indirect ex-
ports:

Were the goods physically

Yes
exported by the supplying
vendor?

No The export is a direct export

and zero rated
Were the goods delivered
by a supplier’s cartage
contractor? Yes

No

Did the supplying vendor ensure that

the goods are delivered to a harbour, Yes The export is an indirect export,
an airport or the purchaser’s agent or but may be zero rated at the
supplied by a pipeline or electrical supplier’s discretion and risk
OF
transmission before being exported?
OR
No
The export is an indirect export
and is standard rated

2.10.1.3 Goods delivered by a vendor to a foreign-going ship

or aircraft (‘exported’ – paragraphs (b) and (c))
Table A in Interpretation Note No. 31 stipulates the documentary proof required for
the zero rating of goods delivered by a vendor to a foreign-going ship or aircraft for
use or consumption on such ship or aircraft.

‘Foreign-going ship’ means:

• a ship or vessel engaged in the transportation of passengers or goods for reward
wholly or mainly on voyages between ports in South Africa and ports in export
countries or between ports in export countries; or
• a ship or other vessel registered in an export country where such ship or vessel is
utilised for the purposes of a commercial, fishing or other concern conducted outside
South Africa by a person who is not a vendor or resident in South Africa; or
• a foreign naval ship.

61
A Student’s Approach to Taxation in South Africa 2.10

‘Foreign-going aircraft’ means:

• an aircraft engaged in the transportation for reward of passengers or goods wholly
or mainly on flights between airports in the Republic and airports in export coun-
tries or between airports in export countries; or
• a foreign military aircraft.

2.10.1.4 Goods supplied under a rental agreement (section 11(1)(c) and (d))
The zero rate could be applied to movable goods supplied to a lessee or other person
under a rental agreement:
• if the goods were used exclusively in an export country or by a customs-controlled
area enterprise; or
• if the goods were used exclusively in a business conducted in an export country
(section 11(1)(d)).
Interpretation Note No. 31 (Table A) also stipulates the documentary proof required
in these circumstances.

2.10.2 Zero-rated supply: Exported services (section 11(2))

Table B in Interpretation Note No. 31 stipulates the documentary requirements for all
exported services. Section 11(3) requires the vendor to obtain and retain such docu-
mentary proof as required by the Commissioner. Exported services qualify for the
zero rate only if the documentary requirements are adhered to.

2.10.2.1 Exported services: Transportation (section 11(2)(a), (b) and (d))

The rendering of a transport service to passengers or goods is zero rated, according to
section 11(2)(a), if transported from:
• a place outside South Africa to another place outside South Africa;
• a place in South Africa to a place in an export country; or
• a place in an export country to a place in South Africa.
Any services comprising the insuring or arranging of insurance for any of the above-
mentioned passengers are also zero rated (section 11(2)(d)).
A typical example of this type of zero-rated service is tickets bought from SAA for a
flight from Australia to Rome, Johannesburg to Rome, or Rome to Johannesburg. The
zero rating is applicable to both South African residents and non-residents.
If the flight from Australia to Rome must land in Johannesburg and Cape Town as
well, the Johannesburg-Cape Town leg is also zero rated as it forms part of the Aus-
tralia-Rome ticket (part of international carriage) (section 11(2)(b)).

2.10.2.2 Exported services: Ancillary services to exported goods

(section 11(2)(e))
Where goods are exported, and additional services are supplied, the additional ser-
vices, such as the transport and insurance of goods, are also zero rated if supplied to a
non-resident who is not a vendor (section 11(2)(e)).

62
2.10 Chapter 2: Value-added Tax (VAT)

2.10.2.3 Exported services: Services rendered outside South Africa

(section 11(2)(k))
• A service is zero rated if it is physically rendered outside South Africa. It could
thus be zero rated even if the service is rendered to a resident, as long as the ser-
vice is physically rendered outside the borders of the country.
• Where a service is rendered to a customs-controlled area enterprise, the service is
also zero rated.
This zero-rated supply does not apply in the case of the supply of electronic services
rendered outside of South Africa (refer to 2.7.3).

2.10.2.4 Exported services: Services to non-residents (section 11(2)(l))

Services supplied to a non-resident (not physically rendered outside South Africa)
may only be zero rated if the services are supplied directly to that non-resident, or
any other person, and both the non-resident and the other person are not in South
Africa at the time the services are rendered.
A useful test to determine whether section 11(2)(l) is applicable (as provided in XO
Africa Safaris CC v CSARS), is to ask the following three questions:
• What services were supplied?
• To whom were the services supplied?
• Were the persons to whom the services were supplied residents of South Africa OR
were the persons present in South Africa when the services were supplied?
For example:
• If a South African tour operator sells a tour to a foreign tour operator, the services
are supplied to a non-resident, but if the actual tourists benefit from the services in
South Africa, the supply cannot be zero rated (refer to Interpretation Note No. 42
that also deals with VAT implications for travel agents, tour operators and travel
brokers).
• Accounting services rendered to a local branch of a non-resident company are not
zero rated as the non-resident has a presence (the branch) in South Africa while the
services are rendered.
• The supply of a tax opinion by a South African resident to a foreign company is
zero rated if the services were rendered while the foreign company did not have
any presence in South Africa.
The zero rating is not applicable if the service is directly in connection with:
• land, or improvements thereto, situated in South Africa; or
• movable property situated inside South Africa at the time the services are ren-
dered:
– except when the movable property is exported to the non-resident subsequent to
the supply of such service; or
– forms part of a supply that the non-resident makes to a registered vendor.

63
A Student’s Approach to Taxation in South Africa 2.10

Example 2.13
ABC (Pty) Ltd (a South African vendor) is instructed to replace the screen of a laptop
computer belonging to a visiting tourist. The supply by ABC (Pty) Ltd may not be zero
rated because the laptop is within the borders of South Africa. If, however, the laptop is
again exported directly after the supply, the zero rating may be applied.

Incidental benefits to a person in South Africa are, however, ignored.

Example 2.14
A local newspaper, run by a VAT vendor, inserts an advertisement for a foreign advertis-
er. This will be zero rated even though local readers of the newspaper may also inci-
dentally benefit from the advertisement.

Three important court cases have dealt with the issue relating to the zero rating of
supplies made to non-residents: Master Currency (Pty) Ltd v CSARS, Stellenbosch
Farmers’ Winery Ltd v CSARS and XO Africa Safaris CC v CSARS.

CASE:
Master Currency (Pty) Ltd v CSARS
[2013] 3 All SA 135 (SCA)
Facts: The taxpayer operated foreign ruling was a special arrangement which
exchange services (bureaux de change) in intended to relieve a non-resident of the
the duty-free area of a South African air- burden of having to apply for a refund of
port. These foreign exchange services were the VAT which would otherwise have
rendered to non-resident passengers. The been paid on goods purchased in the duty-
taxpayer sought to rely on a ruling issued free area and subsequently refunded by
by the Commissioner of SARS (under sec- the VAT Refund Administrator. The non-
tion 72) which indicates that supplies of resident would be able to qualify for the
goods in duty free areas were subject to refund as the goods are to be exported. The
VAT at the zero rate and subsequently non-resident does not qualify for any
levied output VAT at zero per cent on the refund in relation to the services and the
commission and transaction fee that it ruling would thus not apply to services.
charged departing passengers in respect of
the foreign exchange services. SARS, how- Principle: Foreign exchange services sup-
ever, raised an assessment where VAT was plied in the duty-free area of an interna-
charged at the standard rate on the com- tional airport are subject to VAT at the
mission and transaction fees charged by standard rate. The duty-free area of an
the taxpayer. international airport is therefore not
regarded to be outside the Republic. This
Judgment: The court concluded that Mas- judgment confirms a basic VAT principle
ter Currency could not rely on the ruling that goods or services consumed within
because the ruling was limited in its appli- the borders of the Republic are subject to
cation to goods supplied by duty free VAT at the standard rate unless the VAT
shops in duty free areas and therefore did Act specifically provides for an exemption
not apply to services. In addition, the or zero rating.

64
2.10 Chapter 2: Value-added Tax (VAT)

CASE:
Stellenbosch Farmers’ Winery Ltd v CSARS
74 SATC 235
Facts: The taxpayer was a producer and Judgment: The taxpayer, in terms of the
importer of liquor products. It had entered termination agreement, surrendered the
into a distribution agreement with a com- remaining portion of its right to the exclu-
pany in the UK, whereby the taxpayer sive distribution right and this surrender
acquired the exclusive right to distribute constituted the supply of services in the
Bells whiskey in South Africa. The period course of an enterprise. The exclusive dis-
of the distribution agreement was ten tribution right did not constitute movable
years. The UK company terminated the property as envisaged in section 11(2)(l).
distribution agreement with the taxpayer The supply was subject to VAT at the rate
three years earlier than agreed upon. of zero per cent.
As compensation for the early termination, Principle: Distribution rights constitute an
the taxpayer received an amount of incorporeal right (not goods as defined)
R67 million. SARS contended that the and the incorporeal right is situated in the
compensation amount of R67 million relat- place where the debtor resides. If the debt-
ed to the supply of ‘services’ as defined in or is a non-resident, the incorporeal right
section 1 of the VAT Act, but that the sup- will be located in the non-resident’s coun-
ply should not be zero rated and assessed try of residence.
VAT thereon at the standard rate.

CASE:
XO Africa Safaris CC v CSARS
[2016] 3 ZASCA 160 (SCA)
Facts: The taxpayer supplied South African applicable: (1) What services were supplied?
tour packages, including accommodation, (2) To whom were the services supplied? (3)
travel, and entertainment activities, to Were the services supplied to South African
foreign travel operators. The taxpayer residents OR persons who were present in
viewed these supplies as zero-rated in South Africa when the services were sup-
terms of section 11(2)(l) as the taxpayer did plied? If the answer to question (3) above is
not have a direct relationship with the Yes, the zero-rating of the services will not
foreign clients who made use of these tour be applicable. In the case of XO Africa Safa-
packages. The local services (accom- ris, since the services were supplied to
modation, travel and entertainment ac- non-residents (the foreign tour operators),
tivities) were supplied by other local sup- but the services were enjoyed in South
pliers and not directly by the taxpayer. Africa, VAT had to be levied at the standard
SARS, however, was of the view that the rate.
taxpayer contracted with local suppliers to
Principle: The supply of services to foreign
render these services to the CC, and then
parties are not subject to VAT at the zero
supplied these services to the foreign trav-
rate, if the services are rendered to persons
el operators and their foreign clients.
who are present in South Africa at the time
Therefore, the supplies should be subject
that the services are rendered. The benefit
to VAT at the standard rate.
of the services rendered is enjoyed and
Judgment: The court asked three questions consumed in South Africa and the zero-
to determine whether section 11(2)(1) is rating in section 11(2)(l) is not applicable.

65
A Student’s Approach to Taxation in South Africa 2.10

2.10.3 Zero-rated supply: The sale of a going concern (sections

11(1)(e) and 18A)
2.10.3.1 General
The sale of an enterprise as a going concern is dealt with in sections 11(1)(e) and 18A
of the VAT Act and Interpretation Note No. 57.
The disposal of an enterprise as a going concern is a zero-rated supply if the parties
agreed in writing that such enterprise, or part thereof, is disposed of as a going
concern, and all the following criteria are met:
• The parties have at the time of conclusion of the contract agreed in writing that the
enterprise will be an income-earning activity on the date of its transfer. (The inten-
tion to transfer it as an income-earning activity is sufficient. If, for whatever reason,
the enterprise is eventually not transferred as an income-earning activity, the zero
rating could still apply if their intention was to dispose of it as an income-earning
activity. The purchaser should not necessarily continue with the same income-
earning activity after the date of transfer.)
• All the assets necessary for carrying on the enterprise are disposed of by the sup-
plier to the recipient. (It is not required that all the assets be disposed of; only those
necessary for carrying on the enterprise. The phrase ‘disposed of’ includes an out-
right sale as well as a lease or rental of the assets necessary for carrying on of the
enterprise.)
• The parties have at the time of the contract agreed in writing that the consideration
for the supply is inclusive of VAT at the rate of 0%.
• Both the parties (supplier and recipient) must be registered vendors for VAT pur-
poses. The supplier must obtain and retain a copy of the recipient’s Notice of Regis-
tration (form VAT 103) as proof. Section 23(3)(c) provides for a purchaser to regis-
ter voluntarily based on the supplier’s history, in order for both parties to meet the
VAT registration requirements.
Section 11(1)(p) also allows for the zero rating of the disposal of an enterprise or parts
of an enterprise that are separately registered for VAT purposes but fall within the
same legal entity. The zero rating is only allowed if:
• that enterprise or part is capable of separate operation;
• that enterprise is an income-earning activity on the date of transfer thereof; and
• a tax invoice in relation to the supply is inclusive of VAT at the rate of 0%.

2.10.3.2 Specific examples relating to going-concern sales

The following examples, as set out in Interpretation Note No. 57, provide guidelines
on what constitutes an income-earning activity. It is clear from the Interpretation
Note that the intention should be the selling of an income-earning activity, not merely
the sale of a business structure.

Farming activities
The mere sale of a farm property constitutes the supply of the capital asset structure
of a business and not the farming enterprise. In order to supply a farming enterprise

66
2.10 Chapter 2: Value-added Tax (VAT)

as a going concern, the seller and the purchaser must agree that an operative income-
earning activity in the form of the farm, its equipment, grazing, cropping etc., will be
transferred.

Leasing activities
Where the seller of fixed property conducts a leasing activity, the contract must
provide for the leasing activity to be disposed of together with the fixed property in
order to constitute an income-earning activity. If the agreement does not provide for a
tenanted property to be transferred, an asset is merely sold.

Fixed property sold to tenant

An agreement to sell a tenanted property to the tenant does not constitute the dispos-
al of a going concern, as the income-earning activity (being the leasing activity) is not
sold to the purchaser – he obtains a capital asset without the capacity to continue the
leasing activity.

Seller leases back building

There is no agreement to sell an income-earning activity where the agreement pro-
vides that the seller-occupier of a commercial building will lease it back.

Usufruct and bare dominium

The bequest of the usufruct of an asset can qualify as the supply of an income-earning
activity if the same enterprise that was carried on in respect of the asset can be carried
on by the usufructuary. As the person to whom the bare dominium of an asset is
bequeathed cannot, on transfer, proceed with the activities of the enterprise, the
supply of the bare dominium cannot be zero rated.

Business yet to commence or dormant business

Property that is merely capable of being operated as a business does not constitute an
income-earning activity – an actual or current operation is required. For this reason,
the agreement to dispose of a business yet to commence or a dormant business does
not comply with the requirement.
As the parties must agree that on the date of transfer thereof the enterprise is an
income-earning activity, the zero rate can apply where the supplier is obliged to get
the business going and income earning in terms of the contract before transfer there-
of.

Sale of shares in a company

There is no supply of a going concern where ownership of an enterprise changes
through the sale of shares of a company. The supply of shares is, in terms of sec-
tion 12(a), read with section 2(1)(d), exempt from VAT (refer to 2.11).

Sale of share block shares

Where a vendor who has applied his share block for purposes of making taxable
supplies, sells such share to another registered vendor, the supply is zero rated if the
parties agree that the enterprise carried on in relation to such share block is disposed
of as an income-earning activity by way of the supply of the share.

67
A Student’s Approach to Taxation in South Africa 2.10

2.10.3.3 Calculations relating to going-concern sales

100% taxable usage
If all (or at least 95%) of the assets of the going concern were used for the making of
taxable supplies, the seller levies output tax at the rate of 0% on the full transaction.

More than 50% taxable usage for the purposes of the going concern
If the assets of the going concern were applied by the seller mainly for taxable sup-
plies in the going concern (that is to say more than 50%), but also partly for other
purposes, all the assets are deemed to form part of the going concern disposed of and
the full selling price is zero rated (refer to 2.30 for adjustments by both the seller and
purchaser).

Less than 50% of the selling price relates to the going concern
If the goods or services of the enterprise were applied by the seller partially for pur-
poses of the going concern, but not mainly (thus less than 50%), only the portion of
the selling price that relates to the going concern may be zero rated. Section 8(15)
determines that the seller must make an apportionment:
• The seller must charge VAT at the standard rate in respect of the non-going-
concern portion.
• The seller must charge VAT at the zero rate in respect of the going-concern por-
tion that was applied for taxable purposes.
(Refer to 2.30 for adjustments by both the seller and purchaser.)

Example 2.15
A vendor sells tenanted fixed property for R1 700 000. The building is partly let as resi-
dential flats (exempt supplies) and partly as commercial offices (taxable supplies).
Assume that all requirements are met and that the sale qualifies as the sale of a going
concern.
You are required to determine how much of the selling price will be subject to the zero
rating, if the building is used:
(a) 4% for residential flats and 96% for commercial offices.
(b) 60% for residential flats and 40% for commercial offices.
(c) 40% for residential flats and 60% for commercial offices.

68
2.10 Chapter 2: Value-added Tax (VAT)

Solution 2.15
(a) Residential flats 4% versus commercial offices 96%: As at least 95% of the assets of the
enterprise were used for the making of taxable supplies, the de minimis rule applies
and the entire (100%) R1 700 000 will be subject to VAT at 0%.
(b) Residential flats 60% versus commercial offices 40%: Only R680 000 (R1,7m × 40%) will
be subject to the zero rating.
R1 020 000 (R1,7m × 60%) will be subject to VAT at 15%.
(c) Residential flats 40% versus commercial offices 60%: The full selling price of R1,7m
will be zero rated as the assets are mainly (more than 50%) applied for taxable
supplies.

2.10.4 Zero-rated supplies: Other

The following types of supplies are also classified as zero rated in terms of sec-
tion 11 of the VAT Act (this list is not exhaustive and other zero-rated supplies there-
fore exist):
• The supply of goods (seed, feed, fertiliser etc.) and services for agricultural or other
farming purposes (section 11(1)(g)). VAT is, therefore, charged at 15% on all farm-
ing inputs purchased from VAT vendors and farmers can claim an input tax credit,
if the normal requirements are met.
• The supply of gold coins, such as Kruger Rands, which are issued by the Reserve
Bank (section 11(1)(k)).
• Certain basic foodstuffs; for example, brown bread, whole wheat brown bread,
maize meal, samp, mealie rice, rice, pilchards, milk and milk powder, fresh fruit and
vegetables (including mealies, but excluding popcorn), vegetable oil (excluding
olive oil), eggs and lentils (section 11(1)(j)). Dehydrated, dried, canned or bottled
fruit and nuts or basic foodstuffs cooked (or processed) and sold in a restaurant do
not qualify for the zero rating. Additional items that were added to the list of basic
foodstuffs, are cake wheat flour, white bread wheat flour, sanitary towels (pads)
and nappies (napkins and nappy liners for babies). Superfine maize meal is also on
the list of basic foodstuffs. These items were added to alleviate the effect of the in-
creased VAT rate on the poor of South Africa. Meat, including red meat and chick-
en, is not considered to be basic food-stuffs.
• The supply of fuel levy goods (for example, petrol and diesel, including biofuels)
and certain crude oil products used in the production of such goods (sec-
tion 11(1)(h) and (hA)).
• Illuminating kerosene (paraffin) marked as intended for use as fuel for illuminat-
ing or heating, and not mixed or blended with another substance (section 11(1)(l)).
• Certain goods supplied to a customs-controlled area enterprise (section 11(1)(m)
and (mA)).
• Goods supplied by a vendor to a foreign company:
– but delivered to a registered vendor (the recipient) in South Africa; and

69
A Student’s Approach to Taxation in South Africa 2.10

– used by the recipient wholly for the purposes of making taxable supplies (sec-
tion 11(1)(q)).

Example 2.16
A foreign company, ABC Plc, is contracted to supply goods to Recipient Ltd, a client in
South Africa. ABC Plc in turn contracts with Supplier Ltd, a local supplier, to supply cer-
tain goods that are to be delivered to Recipient Ltd in South Africa. Recipient Ltd is going
to use the goods wholly for taxable supplies.
You are required to discuss the VAT implications of the above.

Solution 2.16
The supply of the goods from Supplier Ltd (South African vendor) to ABC Plc is a zero-
rated supply. The supply of the goods from ABC Plc (non-resident and non-vendor) to
Recipient Ltd (South African vendor) does not carry any VAT, as ABC Plc is not a vendor.
The goods are also not imported goods. Recipient Ltd will not be entitled to input VAT, as
no VAT has been paid on this transaction.
Since the goods were supplied by Supplier Ltd, they will have to obtain a declaration
from Recipient Ltd that states that the goods will be used wholly for the purposes of mak-
ing taxable supplies. Only then can Supplier Ltd make the supply at the zero rate. If at a
later stage it is discovered that a false declaration was made by Recipient Ltd, the VAT
that should have been charged at the standard rate on the supply by Supplier Ltd on
behalf of ABC Plc will be recovered from Recipient Ltd in terms of section 61 of the VAT
Act.

• The supply of controlled animals or things by a vendor to a public authority,

whereby the vendor receives compensation in terms of section 19 of the Animal
Diseases Act 35 of 1984 (section 11(1)(r)).
• Certain fixed property supplied is zero rated, if it is supplied to:
– the Cabinet member responsible for land reform (section 11(1)(s)); or
– any person to the extent that the consideration is subsidised in terms of the
Provision of Land and Assistance Act, 1993 (Act 126 of 1993) (section 11(1)(t)).
• Services supplied directly in connection with land or improvements to land or
movable goods, where the land or movable goods are situated in an export country
(section 11(2)(f) and (g)).
• Services relating to intellectual property rights (including patents, designs, trade-
marks, copyrights, know-how, confidential information, trade secrets or similar
rights) and the acceptance of an obligation to refrain from pursuing or exercising any
such rights to the extent that the intellectual property rights are for use outside South
Africa (section 11(2)(m)).
• Services comprising vocational training of employees for the benefit of an employer
who is not a resident and a vendor (section 11(2)(r)).
• The charging of municipal rates (property rates and taxes) by a municipality (sec-
tion 11(2)(w)).

70
2.10 Chapter 2: Value-added Tax (VAT)

The zero rating of municipal rates is, however, not applicable where such rate is:
– a flat rate charged to the owner of the rateable property for rates and other
goods and services (such as supplies of electricity, gas, water, drainage, disposal
of sewage and rubbish); or
– a flat rate charged to a person exclusively for the supply of the other goods and
services as mentioned above,
and such flat rate is taxed at the standard VAT rate of 15%.
• International roaming services (that is to say the ability of a cellular customer to
make use of the internet and calling services of another service provider when
travelling across different geographical areas). These international roaming ser-
vices are only zero-rated if they are provided by South African telecommunication
providers (for example Vodacom and MTN) to international telecommunication
providers in terms of an agreement known as the Dubai ITR (section 11(2)(y)).

REMEMBER

Following the principle of the British Airways case (refer to 2.12.8), when zero-rated
municipal rates are charged by the owner of the property to a tenant using the property
for commercial purposes, the owner (if VAT registered) should levy VAT at the standard
rate on the recovery of the rates and taxes. The owner incurs the municipal rates as princi-
pal and not as the tenant’s agent. The municipal rates charged to the tenant as a disburse-
ment is just a method to calculate the total rental consideration which is subject to VAT.
The vendor has to obtain and retain the documentary proof listed in Interpretation Note
No. 31 in order to substantiate a zero-rate (section 11(3)).

REMEMBER
A zero-rated supply is a taxable supply and a vendor could claim back all input VAT
(levied at 15%) in connection with such supply.

Example 2.17
Mpho Motshoane (a VAT vendor) carries on the business of a dairy, and for the VAT
period under review he received R300 000 (VAT inclusive) for the sale of milk. During the
same period he incurred the following expenses (all amounts are VAT inclusive, where
applicable):
R
Purchase of cows from vendors – standard-rated supply 115 000
Fuel from vendors – zero-rated supply 18 000
Purchase of packing materials from vendors – standard-rated supply 57 500
You are required to calculate the VAT payable or refundable for the applicable VAT period.

71
A Student’s Approach to Taxation in South Africa 2.10–2.11

Solution 2.17
R
Output VAT
Sale of milk (zero rated) nil
Less: Input VAT
Purchase of cows (R115 000 × 15 / 115) (15 000)
Fuel (zero rated) nil
Purchase of packing materials (R57 500 × 15 / 115) (7 500)
Amount refundable by SARS (Rnil – R22 500) (22 500)

Can Mpho claim back VAT if he doesn’t have to pay any VAT?

2.11 Output VAT: Exempt supplies (section 12)

No output tax is levied in respect of exempt supplies, and no input tax relating to the
expenditure on these supplies may be claimed. Supplies classified as exempt sup-
plies are set out in section 12 of the VAT Act.

2.11.1 Exempt supply: Financial services (sections 2 and 12(a))

Section 2 lists the financial services that are exempt in terms of section 12(a). The fees
relating to these financial services are, however, not exempt, and VAT is usually
levied at the standard rate.
Financial services that are exempt, include:
• Any exchange of currency (section 2(1)(a)).
• Issue, payment, collection or transfer of ownership of a cheque or letter of credit
(section 2(1)(b)). When A buys an article for R570 from B, the supply of the article
could attract VAT at the standard rate. If A pays B per cheque, the supply of the
cheque does however not attract VAT as it is exempt from VAT. Where A pays B
cash for the supply of the article, the supply of the cash will also not attract VAT,
since the cash constitutes money that is excluded from the definitions of ‘goods’
and ‘services’.
• Issue of a debt security (section 2(1)(c)). When A borrows R100 from B, B provides
a loan to A. This provision of the loan does not attract VAT, as it constitutes an
exempt supply.
• Issue or transfer of ownership of a share or member’s interest (section 2(1)(d)). The
most common example of this is shares in a company or member’s interests in a
close corporation. The exemption also includes the issue and transfer of units in
collective investment schemes (previously unit trusts). Thus, when A sells his
shares in Company B to C, the sale of the shares is an exempt supply, and no VAT
will be levied. The supply of a share in a share block company does not form part

72
2.11 Chapter 2: Value-added Tax (VAT)

of the definition of a ‘financial service’ and could be taxed at either the standard or
zero rate if supplied by a vendor.
• The provision of credit and paying of interest (section 2(1)(f)). This implies that not
only the principal loan but also the interest thereon will be a financial service and
are therefore exempt from VAT.
• The provision or transfer of ownership of a life insurance policy, or reinsurance in
respect of a life insurance policy (section 2(1)(i)). This will include, for example, life
policies, endowment policies or funeral policies. The premiums and proceeds on
such policies are therefore exempt from VAT.
• The provision or transfer of ownership in a superannuation scheme (sec-
tion 2(1)(j)). This includes a pension, pension preservation, provident, provident
preservation, retirement annuity or medical aid fund. The contributions as well as
the proceeds from these funds are therefore exempt from VAT.
• The buying or selling of any derivative or the granting of any option (section 2(1)(k)).
A ‘derivative’ is a derivative as defined for purposes of the International Account-
ing Standard 39. The supply of the underlying goods and services is deemed to be
a separate supply at its market value and is not deemed to be a financial service.
The premium paid on an option contract does thus also not attract any VAT.
• The issue, acquisition, collection, buying, selling or transfer of ownership of any
cryptocurrency, such as bitcoin. While cryptocurrency is an internet-based digital
currency, it is not recognised as an official South African currency by SARS. They are
assets of an intangible nature. As the supply of cryptocurrencies is considered to be
financial services, it is exempt for VAT purposes (refer to 2.6.2.2).
In South Africa, banks and insurance companies are the biggest financial services
providers.
Financial services do not include:
• Fee-based financial services. The financial service is still be exempt, but the fee,
commission or similar charge attract VAT. Similarly, where any fee is charged for
the giving of advice on any of the services, this fee is taxable. For example: The
bank charges, on the overdraft account, attracts VAT at the standard rate, whereas
the interest, that is to say the consideration for providing the overdraft facility, is
exempt.
• Underwriting of the issue of a share or member’s interest.
• A consideration payable for renewal or variation of financial arrangements relating to
a debt security. This is a fee or commission and therefore it attracts VAT.
• Rental agreement payments. Rental agreement payments to a vendor usually do
not constitute an exempt supply for VAT purposes. If, for example, Vendor X rents
a building to Tenant Y, the rental payments paid by Tenant Y to Vendor X do not
constitute consideration for a supply that constitutes a financial service. The trans-
fer of a right to receive money (that is to say a debt security) in terms of a rental
agreement however constitutes the supply of a financial service and therefore be
exempt from VAT. If Vendor X in the above example decides to transfer his rights
in terms of the rental agreement for a consideration to Bank B, the transaction be-
tween Vendor X and Bank B constitutes an exempt financial service.

73
A Student’s Approach to Taxation in South Africa 2.11

• A merchant’s discount (being the charge made to merchants for accepting a credit
or debit card as payment). Although merchant’s discounts are taxable for VAT
purposes, discounting costs form part of financial services and are exempt supply.
• The supply of a cheque book.

REMEMBER
• Dividends paid by a company to a shareholder are not exempt for VAT purposes be-
cause it does not fall within the definition of ‘financial services’ in section 2. Dividends
paid in cash constitute the supply of money, that is to say currency and is therefore ex-
cluded from the definition of goods and services and will therefore not attract any
VAT. In the case of dividends in specie, there could be output VAT consequences in
terms of the adjustment provisions contained in section 18(1) (refer to 2.26).
• Although the provision of financial services is an exempt supply, it will be zero rated if
physically rendered outside South Africa.
• The zero rating of a supply will always take preference over either being an exempt
supply or a standard-rated supply. The zero rating of financial services therefore takes
precedence over exemption. It is important for vendors to determine whether the fi-
nancial services they supply are zero rated or not, as their input tax claim could in-
crease substantially when compared with the input tax credit if the supply of the
services was an exempt supply (refer to 2.20).
• Other services supplied to a non-resident (even if physically rendered in South Africa)
may be zero rated only if the services are supplied directly to that non-resident or any
other person, and both the non-resident and the other person are not in South Africa at
the time the services are supplied. For example: B Bank (a resident of South Africa)
provides a loan to a non-resident UK company and charges the UK company 6% inter-
est. The provision of the loan will be a zero-rated supply in terms of section 11(2)(l) of
the VAT Act, and the interest will be regarded as the consideration for such supply.

Example 2.18
The following items appeared on Ragdoll Boutique’s bank statements for September:
R
Internet banking fee 73,92
Service fee (bank charges) 162,35
Transaction costs 83,90
Administration costs 14,00
Interest charged on overdraft 116,40
Interest received on positive bank balance 83,20
You are required to indicate which of the above amounts include VAT and, if any, how
much VAT is included.

74
2.11 Chapter 2: Value-added Tax (VAT)

Solution 2.18
R
Internet banking fee (R73,92 × 15 / 115) – fee-based financial service 9,64
Service fee (bank charges) (R162,35 × 15 / 115) – fee-based financial service 21,18
Transaction costs (R83,90 × 15 / 115) – fee-based financial service 10,94
Administration costs (R15,00 × 15 / 115) – fee-based financial service 1,96
Interest charged on overdraft – exempt financial service nil
Interest received on positive bank balance – exempt financial service nil

2.11.2 Exempt supply: Donated goods and services (section 12(b))

The supply of donated goods and services by an association not for gain is exempt.
The exemption also applies if the goods being supplied were made or manufactured
by the association, provided that at least 80% of the value of the materials used consists
of donated goods.

Example 2.19
The Needy Association, an association not for gain, received second-hand clothes and
glasses as donations from members of the public. The Needy Association sells the clothes
to the public for R10 a piece and engraved the Association’s name on the glasses prior to
selling them to the public for R5 a glass.
You are required to determine the output VAT consequences of the above.

Solution 2.19
The supply of the clothes as well as the glasses will be exempt from VAT, since at least
80% of the value of these goods consisted of donated goods.

2.11.3 Exempt supply: Accommodation (section 12(c))

2.11.3.1 Exempt supply: Residential accommodation (section 12(c))
The supply of a dwelling under an agreement for the letting and hiring thereof is
exempt from VAT.
A ‘dwelling’ is defined as:
• any building, premises, structure or other place or part thereof;
• that is intended for use predominantly as a place of residence or abode of any
natural person;
• including fixtures and fittings belonging thereto and enjoyed therewith;
• except where it is used in the supply of commercial accommodation.
The above therefore implies, for example, that the supply of a house or flat to another
person who, in terms of a rental agreement, use the house or flat mainly for residential
purposes, is exempt from VAT (section 12(c)(i)). Usually hostels or hotels do not

75
A Student’s Approach to Taxation in South Africa 2.11

qualify for the residential accommodation exemption, as they supply taxable com-
mercial accommodation. The exemption, however, also applies where lodging or
board and lodging are supplied by an employer to his employee where:
• the employee is entitled to occupy the accommodation as a benefit of employment;
or
• the employer operates a hostel or boarding establishment mainly for its employees
rather than for a profit (section 12(c)(ii)).
The above exemption is applicable only to the supply of a dwelling under an agree-
ment for the letting and hiring thereof, and not applicable to the supply by means of a
sale. The normal rules apply in respect of the sale of a dwelling. If a non-vendor sells
a dwelling, no VAT is levied. If a vendor sells a dwelling, it does not attract VAT if it
was previously used to earn exempt rental income. This is so because any activity
involving the making of exempt supplies is specifically excluded from the definition
of an ‘enterprise’ and, therefore, the dwelling was not used in the course of an enter-
prise.
It is, however, different for a property developer – if he only temporarily rents out a
property before the sale thereof, he should still levy VAT on the sale, subject to the
requirements of section 18D (refer to 2.26).

REMEMBER

• There could never be both transfer duty and VAT on a single transaction. If a sale of
property attracts VAT, no transfer duty will be payable. If it does not attract VAT, trans-
fer duty will be payable.
• In all cases, the VAT provisions take precedence. One must first identify whether or
not the sale is subject to VAT (at either standard or zero rate); if so, transfer duty is not
payable.

2.11.3.2 Taxable supply: Commercial accommodation

Meaning of supply: Commercial accommodation
It is clear from the above definition of ‘dwelling’ that the supply of accommodation
does not qualify for the exempt status if it is the supply of commercial accommoda-
tion. Commercial accommodation is, therefore, subject to VAT at the standard rate.
‘Commercial accommodation’ is defined as:
• lodging or board and lodging, together with domestic goods and services, in any
house, flat, apartment, room, hotel, motel, inn, guesthouse, boarding house, resi-
dential establishment, holiday accommodation, unit, chalet, tent, caravan, camping
site, houseboat or similar establishment that is regularly or systematically sup-
plied;
• lodging or board and lodging in a home for the aged, children, physically or men-
tally handicapped persons; or
• lodging or board and lodging in a hospice.

76
2.11 Chapter 2: Value-added Tax (VAT)

REMEMBER

• The VAT Act is not clear whether student accommodation in student houses will be
exempt from VAT or subject to VAT at the standard rate. It is submitted that that the
letting of residential accommodation to students in student houses fall within the ambit
of ‘residential accommodation’ and will therefore be exempt for VAT purposes.

Value of the supply: Commercial accommodation (section 10(10))

Output tax must be levied on the full value of the supply where accommodation and
domestic goods and services are supplied by a hotel, boarding house or similar
establishment for a period of 28 days or less.
Where domestic goods and services are supplied at an all-inclusive charge in an
enterprise supplying commercial accommodation for an unbroken period exceeding
28 days, the consideration in money is deemed to be 60% of the all-inclusive charge
(section 10(10)). This 60% will apply from day one if the period exceeds 28 days.
It is clear now that the Act provides that short-term stays in commercial accommoda-
tion establishments are taxed at the full value of such supplies, while only 60% of
such value is taxed where the accommodation constitutes the dwelling of the occu-
pant (thus longer-term stays). The Explanatory Memorandum on the Revenue Laws
Amendment Bill, 2001 states that the reason for this is that persons resident in their
own or rented dwellings are not subject to VAT on the full cost thereof. Mortgage
interest and municipal rates, or alternatively, residential rent does not result in a VAT
cost. The South African VAT base is roughly 60% of Gross domestic product (GDP).
Natural persons living in long term commercial accommodation establishments
should be taxed at an equivalent rate.
‘Domestic goods and services’ are defined as any goods and services provided in an
enterprise supplying commercial accommodation, including:
• cleaning and maintenance;
• electricity, gas, air conditioning or heating;
• a telephone, television set, radio or other similar appliance;
• furniture and other fittings;
• meals;
• laundry;
• nursing services; or
• water.
The provision of domestic goods and services constitutes the provision of a room
together with certain of the services listed in the definition of domestic goods and
services (for example cleaning services, meals etc.) as well as any other goods and
services (for example the use of a safe) not listed in that definition which are provided
by an enterprise supplying commercial accommodation.

77
A Student’s Approach to Taxation in South Africa 2.11

REMEMBER
• Despite the fact that an occupant may be taxed only on a portion of the value of the
accommodation provided to him, the enterprise itself may deduct input tax as if the
occupant is taxed on the full value.
• The enterprise still bills the occupant for the full 100% of the value of the accommoda-
tion and not for only 60%. If the supply of commercial accommodation is for a period
exceeding 28 days, it is only the VAT that is calculated on 60% of the value.

The CSARS v Respublica court case clarified when the supply of the use of a building
by one vendor to another vendor constitutes commercial accommodation, as defined.

CASE:
CSARS v Respublica (Pty) Ltd
(1025/2017) [2018] ZASCA 109
Facts: The taxpayer concluded a lease HEI and its students and holiday visitors.
agreement with a higher education institu- There was no contractual relationship be-
tion (HEI) for the lease of a building. The tween the taxpayer and the students and
lease agreement provided that the HEI holiday visitors. The taxpayer did not pro-
could sub-lease the property to students as vide ‘board and lodging’ in terms of its
well as use the building to provide accom- lease agreement with the HEI.
modation to holiday groups during vaca- Principle: The supply of the use of a build-
tions. The taxpayer contended that the ing by one vendor to another vendor can-
lease of the building constituted the supply not constitute commercial accommodation
of commercial accommodation as defined (or ‘dwelling’) if the lessee is a juristic per-
and that, in terms of section 10(10) of the son, who by nature is unable to live in the
VAT Act, it was only obliged to levy VAT accommodation. A juristic person, like a
on 60% of the total consideration received HEI, cannot be the recipient of ‘board and
from the HEI in terms of the lease agree- lodging’. One hundred per cent (100%) of
ment. the value of the supply of the building is
Judgment: Two separate agreements were therefore subject to VAT at the standard
in place: The first between the taxpayer rate.
and the HEI and the second between the

Example 2.20
Hein is the owner of Rest-a-While, a bed-and-breakfast establishment situated in the
Natal Midlands. His total annual receipts from the bed-and-breakfast business amount to
R175 000. Most of the guests do not stay longer than three nights at a time. It does some-
times happen that a guest stays a month at a time. Hein charges R920 per night (exclud-
ing VAT) for bed and breakfast.
You are required to explain to Hein the VAT consequences of running his bed-and-
breakfast business.

78
2.11 Chapter 2: Value-added Tax (VAT)

Solution 2.20
The bed-and-breakfast business constitutes the provision of commercial accommodation. As
the annual receipts of the business exceed R120 000, Hein can register voluntarily for VAT
(still below the mandatory registration threshold of R1 million).
Should Hein decide to register, he must levy output tax on the supply of the domestic
goods and services (being a taxable supply) as follows:
• guests staying 28 days and less: 100% of the charge is subject to VAT at 15% (for exam-
ple, three nights at R920 × 100% × 15% = R414 output tax); and
• guests staying more than 28 days at a time: Only 60% of the charge is subject to VAT at
15% (for example, 30 nights at R920 × 60% × 15% = R2 484 output tax).
Hein will be entitled to an input tax deduction for VAT paid on the acquisition of goods
and services for the purposes of the bed-and-breakfast business because he is making
taxable supplies.
Should Hein decide not to register for VAT purposes, he does not have to account for
output tax, but then he will not be entitled to any input tax deductions.

Example 2.21
Jo Ndlovu is a property magnate and a vendor. During the current tax period Jo earned
the following amounts:
R
• letting of townhouses (purely for residential purposes) 242 000
• short-term stay (less than 28 days) in bed and breakfast hotels
(including VAT) 150 000
• board and lodging in boarding houses (all periods longer than
28 days – excluding VAT) 30 000
You are required to calculate the output tax in respect of the income earned.

Solution 2.21
R
Letting of townhouse, hiring of a dwelling, which is an exempt residential
supply nil
Bed and breakfast, commercial accommodation
• R150 000 × 15 / 115 = 19 565
Board and lodging, long-term commercial accommodation
• (R30 000 × 15% × 60%) 2 700

Where separate prices are charged for accommodation in a room and any other ser-
vices (for example meals, cleaning services, maintenance etc.) and the occupant stays
for an unbroken period exceeding 28 days, the charge must be apportioned between
the room (accommodation) provided and the other services. (VAT is levied at 100%
on the other services and only at 60% on the fee for the room). The only exception is
where the services are supplied together with the room (accommodation) at an all-
inclusive price.

79
A Student’s Approach to Taxation in South Africa 2.11

Example 2.22
Assume the all-inclusive daily rate at a hotel is R2 500 per day (excluding VAT). Included
in the R2 500 daily rate is the use of a post-box.
You are required to calculate the VAT if:
(a) the person stays in the hotel for four days; and
(b) the person stays in the hotel for 35 days.

Solution 2.22
R
(a) Full supply at standard rate (R2 500 × 4 × 15%) – output VAT 1 500
(b) Supply of the post box that is included in the all-inclusive
daily rate – output tax nil
Supply of commercial accommodation together with domestic goods and
services (R2 500 × 35 × 60% × 15%) – output tax 7 875

2.11.4 Exempt supplies: Other

Section 12 also provides for the following exempt supplies:
• The letting of leasehold land to the extent that it is used for accommodation in a
dwelling erected or to be erected on that land (section 12(d)).
• The sale or letting of land situated outside South Africa (section 12(e)).
• The supply of services by a:
– body corporate;
– share block company;
– housing development scheme; or
– home-owners associations,
where the costs of supplying such services are met out of the levies charged by
them are also exempt supplies (section 12(f )). Although provision is made for these
supplies to be exempt these persons can, however, apply to SARS for the levies to
be taxable or partly taxable. This exemption is not applicable to the supply of ser-
vices in connection with the management of a property time-sharing scheme.
• The transport of fare-paying passengers (in a bus or taxi, but not a game-viewing
vehicle or hearse) and their personal effects by road or railway, unless the service
is subject to VAT at the zero rate (section 12(g)), provided that the transport is:
– only by road and railway, but excluding a funicular railway (thus, it is not
applicable to air tickets);
– not for the purpose of courier services, since the exemption applies to the trans-
port of passengers and their personal effects, and not to goods; or
– for fare-paying passengers (thus, a supply of transport services by a hotel to and
from the airport is not an exempt supply if the residents of the hotel are not
charged separately for such service).

80
2.11–2.12 Chapter 2: Value-added Tax (VAT)

REMEMBER

• Travel by road or railway of fare-paying passengers within South Africa is an exempt

supply.
• Travel by air when a leg of the ticket is outside South Africa, is a zero-rated supply.
• Travel by air in South Africa is a standard-rated supply.
• Travel in a game viewing vehicle or hearse is subject to VAT at the standard rate.
• The letting of vehicles by a car-rental enterprise does not constitute an exempt supply
as the nature of these types of enterprises is to supply vehicles on a regular or on-going
basis, that is to say it represents taxable supplies.

• The supply of qualifying educational services by the State, a school, a public higher
education institution or certain institutions that meet the definition of a public
benefit organisation in section 30(1) of the Income Tax Act is an exempt supply
(section 12(h)(i)). This includes also private higher education institutions, provided
they are registered as such under the Higher Education Act. The exemption is not
applicable to technical training provided by an employer to his employees or em-
ployees of an employer who are connected persons in relation to that employer.
• The supply by a school, university, technikon or college, solely or mainly for the
benefit of its learners, of goods or services (including domestic goods or services)
for a consideration in the form of school fees, tuition fees or payment for lodging or
board and lodging, is exempt (section 12(h)(ii)).
• Membership contributions to employee organisations, such as trade unions, are
exempt (section 12(i)).
• The supply of childcare services by a crèche or an after-school care centre are also
exempt (section 12(j)).
• All supplies of goods or services as by a bargaining council to any of its members
(section 12(l)).
• All supplies of goods or services by a political party to any of its members to the
extent that the consideration for such supply consists of membership contributions
(section 12(m)).

REMEMBER

• The zero rating of financial services and transport services takes precedence over
exempt supplies. You will thus always first determine whether these supplies qualify as
zero-rated supplies. This may, for example, be the case if it relates to transport services.
Only if it is not zero rated will it qualify as an exempt supply.

2.12 Output VAT: Deemed supplies (sections 8, 8A and 18(3))

To avoid any confusion about whether a transaction is a supply or not, and whether
certain transactions are deemed to either be a supply of goods or a supply of services
or not, deemed provisions are contained in sections 8 and 18(3) of the VAT Act.
Section 8 also deems certain transactions to be a supply for VAT purposes, although
they do not meet the requirements of the applicable definitions.

81
A Student’s Approach to Taxation in South Africa 2.12

2.12.1 Deemed supply: Ceasing to be a vendor

2.12.1.1 Meaning of ‘supply’: Ceasing to be a vendor (section 8(2))
Output tax becomes payable on goods (except goods in respect of which input tax
was denied, for example, motor cars and entertainment (section 17(2)) and rights still
owned by a person on the day he ceases to be a vendor. On date of ceasing to be a
vendor, output tax also becomes payable on outstanding balances, owing to suppli-
ers, not older than 12 months.
These provisions do not apply where that person ceased to be a vendor as a conse-
quence of his death or sequestration and the executor or trustee of that estate carries
on that enterprise.

2.12.1.2 Value of the supply: Ceasing to be a vendor (section 10(5))

Value of the supply: Goods and rights owned
In the case of deemed supplies of goods and rights owned on date of ceasing to be a
vendor, the consideration is the lesser of:
• the cost of acquisition, manufacture, assembly, construction or production of the
goods or services, as well as related costs such as transportation or delivery, costs
relating to trading stock and other deemed costs, including VAT charged to the
vendor (if the goods or services were acquired from a connected person, then the
open-market value on the date of acquisition to the extent that it exceeds the con-
sideration); and
• the open-market value on date of ceasing to be a vendor.

REMEMBER

• The goods and rights could only trigger output tax to the extent that they were paid for
(provisos (v) and (vi) to section 8(2)).

Value of the supply: Outstanding balances owing to suppliers

The outstanding balances owed to suppliers should be divided in:
• Outstanding balances not older than 12 months: On the date of cessation of the
enterprise an output tax liability arises on the outstanding balances owing to sup-
pliers not older than 12 months. The consideration is the amount that has not been
paid (section 22(3) proviso (ii)(BB)).
• For outstanding balances owing to suppliers older than 12 months, section 22(3)
provides that a vendor is obliged to account for an amount of output tax if he has
not paid the full consideration for a supply within 12 months (refer to 2.31). The
output tax liability for these outstanding balances would therefore arise because of
the non-payment within 12 months and not because of the cessation of the enter-
prise. If the section 22(3) output tax liability had already been accounted for, no
additional output tax liability would arise on date of cessation of the enterprise.

82
2.12 Chapter 2: Value-added Tax (VAT)

REMEMBER

• The outstanding balances owing to suppliers could only trigger output tax to the
extent that input VAT was actually claimed on the supply that gave rise to the out-
standing balance (section 22(3)(a)).

Example 2.23
Mr Phillip de Vos trades as a sole proprietor under the name DeVos Golf. Phillip is regis-
tered on the invoice basis for VAT purposes and makes 100% taxable supplies. Phillip is a
category B VAT vendor. Phillip decided that he will deregister as a VAT vendor with
effect from 1 May of the current year because his taxable supplies permanently dropped
below the compulsory registration threshold of R1 000 000. You may assume that SARS
deregistered Phillip on 1 May of the current year.
On 1 May of the current year, Phillip provided you with the following list of assets and
liabilities of DeVos Golf:
Cost Open
Assets (Including market
VAT) value
R R
Delivery vehicle (Note 1) 180 000 110 000
Toyota Corolla – solely used for business purposes (Note 1) 320 000 270 000
Furniture – solely used for business purposes 115 000 135 000
Debtors (Note 2) 70 000 n/a
Trading stock 30 000 45 000
Liabilities
Creditors (Note 3) 40 000 n/a

Notes
1. The delivery vehicle not a ‘motor car’ as defined. The Toyota Corolla is a ‘motor car’
as defined.
2. The following is the debtors age analysis on the local credit sales of trading stock:
30 days 60 days 90 days Total
Amount (R) 20 000 27 000 23 000 70 000
Phillip is of the opinion that the 90 days outstanding debtors’ amount of R23 000 will
not be recoverable and consequently wrote it off on 1 May of the current year. Phillip
does not charge any interest on outstanding accounts.

continued

83
A Student’s Approach to Taxation in South Africa 2.12

3. The following is the creditors age analysis:

60 days 370 days Total
Amount (R) 15 000 25 000 40 000
The creditors older than 370 days are already outstanding for more than 12 months,
but no VAT adjustment has yet been accounted for. The 60 days creditors of R15 000
relates to the following goods and services purchased (cost prices including VAT
and market values are the same where applicable):
– R4 000 – trading stock which is still on hand
– R2 000 – trading stock which has already been sold
– R6 000 – services rendered to DeVos Golf
– R3 000 – amount still outstanding on the capital repayment of the delivery
vehicle.

You are required to:

Calculate the VAT consequences arising out of Phillip’s decision to deregister DeVos
Golf.

Solution 2.23
Output tax R
Delivery vehicle: (R110 000 – R3 000) × 15 / 115 (Note 1) 13 957
Motor car (Note 2) nil
Furniture: R115 000 × 15 / 115 15 000
Debtors: (Note 3) nil
Trading stock: (R30 000 – R4 000) × 15 / 115 (Note 1) 3 391
Creditors: – Older than 12 months: R25 000 × 15 / 115
(Note 4) 3
261
– Balance of creditors: R15 000 × 15 / 115
(Note 4) 1 957
Input tax
Irrecoverable debts: 23 000 × 15 / 115 (Note 5) (3 000)
VAT payable to SARS 34 566

Notes
1. A deemed disposal for VAT purposes arises when a person ceases to be a VAT ven-
dor (section 8(2)). Output VAT is calculated by multiplying the lesser of the cost
(including VAT) and the open market value by the tax fraction. However, sec-
tion 8(2)(v) provides that this shall not apply to assets where output tax has already
been accounted for in terms of section 22(3). As output tax has already been account-
ed for on an amount of R3 000 (the amount outstanding in respect of the delivery
vehicle) and R4 000 (the amount outstanding in respect of the trading stock on hand)
in terms of section 22(3), no deemed supply arises on these amounts.

continued

84
2.12 Chapter 2: Value-added Tax (VAT)

2. Input tax was denied with the initial purchase of the motor car (section 17(2)). No
deemed supply consequently arises with deregistration.
3. The general time of supply is the earliest of the issue of the invoice in respect of that
supply or the time a payment of consideration is received by the supplier (sec-
tion 9(1)). The output tax was therefore already accounted for by Phillip when the
invoice for the supply of the goods was issued.
4. Consideration for the supply was not paid within 12 months from the supply. A
deemed output tax therefore needs to be levied on creditors older than 12 months in
terms of section 22(3). The remaining creditor’s balance is subject to the deemed out-
put provisions in section 22(3) proviso (ii)(dd) as the vendor ceased to be a vendor
within 12 months after the supply.
5. Deemed input tax available in terms of section 22 where a vendor has made a taxable
supply for consideration, the output of which has been properly accounted for and
the consideration subsequently becomes irrecoverable.

Where a vendor deregisters solely because the total value of taxable supplies in the
preceding 12 months did not exceed the voluntary registration threshold of R50 000
or the compulsory registration threshold of R1 000 000. The Minister determined by
regulation that the output VAT payable in respect of the deregistration should be
paid within six months (section 8(2E)).

2.12.1.3 Time of supply: Ceasing to be a vendor (sections 8(2) and 9(5))

Where goods or rights are deemed to be supplied by a vendor who ceases to be a
vendor, the time of supply is immediately before the vendor ceases to be a vendor.

2.12.2 Deemed supply: Indemnity payments

2.12.2.1 Meaning of ‘supply’: Indemnity payments (section 8(8))
The reason for this deemed supply rule is as follows: If, for example, a vendor’s
trading stock is stolen, and he receives cash from his insurance company, he is effec-
tively in the same position as he would have been had he sold the trading stock.
SARS wants the output VAT on that disposal.
Also, when a vendor pays the insurance premiums under a short-term insurance
policy, the vendor is entitled to claim the input tax on the premium if the premium
was paid in the course or furtherance of the enterprise. When the vendor receives a
claim under a short-term insurance policy, the vendor is in certain circumstances
obliged to account for output VAT on the claim received. This is the case where a
vendor:
• receives an indemnity payment (claim) under a contract of insurance – this relates
to all taxable supplies (both zero rated and standard rated); or
• is indemnified under a contract of insurance by the payment of an amount of
money to another person.
The payment is deemed to be consideration received for the supply of a service to the
extent that it relates to a loss incurred in the course of carrying on an enterprise. It
relates only to short-term insurance and does not apply to payments received under a

85
A Student’s Approach to Taxation in South Africa 2.12

long-term insurance contract, for example, death benefits received. Just as premiums
for long-term insurance policies do not attract VAT (exempt supply of financial
service), any claim received under a long-term insurance contract does thus also not
give rise to any output VAT.
The insured must also be a vendor, as this deemed supply is not applicable to non-
vendors. There are also no deemed supplies where the payments are:
• not related to taxable supplies made by the vendor; or
• the payments relate to the total reinstatement of goods for which an input tax
deduction was denied (section 17(2)) to the vendor and such goods are stolen or
damaged beyond economic repair, which includes, for example, motor cars or
goods used for entertainment (refer to 2.21).

2.12.2.2 Value of the supply: Indemnity payments (section 8(8))

The ‘value of the supply’ is:
• the tax fraction;
• multiplied by the consideration received;
• multiplied by the percentage for which the loss was incurred by the vendor in the
course of his enterprise.

2.12.2.3 Time of supply: Indemnity payments (section 8(8))

The time of supply is the date of receipt of that payment or the date of payment to
another person, as the case may be.

REMEMBER

• If the insurer replaces the damaged or stolen goods, there can be no output VAT conse-
quences for the vendor, as there was no indemnity payment.
• If the payment is made to a third party to indemnify the vendor, the vendor also has to
pay output tax, although the vendor himself did not receive any money.

Example 2.24
Manufacturers Ltd recently suffered a robbery at its premises. Their insurance company
reimbursed them in cash, as follows:
R
• for delivery vehicle stolen 132 000
• for passenger vehicle stolen (input tax was denied with purchase) 300 000
• for microwave oven in canteen stolen (input tax was denied with purchase) 2 500
You are required to calculate the output tax in respect of the insurance payment received.

86
2.12 Chapter 2: Value-added Tax (VAT)

Solution 2.24

R
Delivery vehicle, not motor car as defined, could claim input tax in the past
R132 000 × 15 / 115 = 17 217
Passenger vehicle, motor car as defined, total reinstatement of goods where input tax was
originally denied – thus no output tax liability.
Microwave oven, entertainment, total reinstatement of goods where input tax was origi-
nally denied – thus no output tax liability.

Example 2.25
Ohno (Pty) Ltd recently experienced flooding of the ground floor at the premises rented
from Agnee (Pty) Ltd. Ohno’s insurance company replaced the following items:
• computers R48 000
• desks and chairs R80 000
• cupboards R12 500
Their insurance company also reimbursed Ohno in cash for other losses suffered as fol-
lows:
• fittings R93 600
The insurance company also paid Agnee for damages suffered amounting to R36 000.
You are required to calculate the output tax in respect of the insurance payments and
replacements.

Solution 2.25
Ohno is not required to account for output tax on the replacements by the insurance
company, since these replacements are not payments in money.
Regarding the fittings on which input tax could be claimed in the past, output VAT of
R12 209 (R93 600 × 15 / 115) must be accounted for.
Ohno is indemnified by the payment of an amount of money to a third party and must
account for output VAT of R4 696 (R36 000 × 15 / 115).

REMEMBER

• Output tax is usually not apportioned, but levied on the value of the full supply, even if
the supply was previously used only partially for taxable purposes. There are two
exceptions to the above rule, namely, fringe benefits and indemnity payments. For both
these types of supply, the amount of output tax is payable only to the extent that it
relates to taxable supplies made in the course of the enterprise.

87
A Student’s Approach to Taxation in South Africa 2.12

Example 2.26
BB Bank acquired insurance cover for a computer of which 40% was used for taxable
purposes and 60% for exempt supplies. The computer was stolen, and the bank received
an indemnity payment of R14 230 from its insurer.
You are required to calculate BB Bank’s output tax liability.

Solution 2.26
R14 230 × 15 / 115 × 40% = R742 output tax payable to SARS.
BB Bank’s output tax liability is apportioned according to 40% taxable supplies made.
With the initial purchase of the computer as well as with the monthly insurance premi-
ums paid, BB Bank was only entitled to 40% of the input VAT.

2.12.3 Deemed supply: Supplies to independent branches

2.12.3.1 Meaning of ‘supply’: Supplies to independent branches
(paragraph (ii) of the proviso to the definition of ‘enterprise’,
sections 8(9), 11(1)(i) and 11(2)(o))
When a vendor consigns or delivers goods to an address outside South Africa or
provides a services to a branch or main business that is permanently located at prem-
ises outside South Africa and is excluded from the definition of ‘enterprise’, such
vendor is deemed to make a taxable supply of goods or services, as the case may be,
in the course of his enterprise. (Such a foreign branch or main business is referred to
below as an ‘independent branch’.)
This applies only if the branch or main business:
• is permanently situated outside South Africa;
• can be separately identified; and
• has a separate accounting system.
When a supply is made by the foreign branch or main business, the supply is not
made in the course of an enterprise and such a supply has no VAT consequences (par-
agraph (ii) of the proviso of the definition of ‘enterprise’ in section 1).
The effect of this provision is that the local concern does not have to account for VAT
on the supplies made by the independent branch. All supplies by the ‘independent
branch’ shall be deemed to be carried on by a person separate from the local concern.
The local concern is regarded as a separate person to ensure that the normal rules
relating to exports and imports, as well as the supply of services, apply to the ‘inde-
pendent branch’ or local concern.
All supplies to the independent branch of goods or services are zero rated (sec-
tion 11(1)(i) and (2)(o)). However, the zero-rating provision of services do not apply if:
• the services are supplied to a person who is in South Africa at the time the services
are rendered;

88
2.12 Chapter 2: Value-added Tax (VAT)

• the services are supplied directly in connection with land, or improvements thereto,
situated in South Africa; or
• the services are supplied directly in connection with movable property situated
inside South Africa at the time the services are rendered,
– except when the movable property is consigned or delivered to the non-resident
at an address in an export country subsequent to the supply of such service; or
– forms part of a supply that the non-resident makes to a registered vendor.

2.12.3.2 Value of the supply: Supplies to independent branches

(section 10(5))
The deemed supply to an independent branch under section 8(9) is deemed to be
made for a consideration equal to the lesser of:
• the cost to the vendor of the acquisition, manufacture, assembly, construction or
production of the goods or services; or
• the open-market value of the supply.
The cost for this purpose expressly includes:
• any VAT charged in respect of the supply to the vendor of the goods or services or
of any components, materials or services used by him in the manufacture, assem-
bly, construction or production; plus
• any costs (including VAT) incurred by the vendor in respect of the transportation
or delivery of the goods or the provision of the services; plus
• if the goods or services were acquired from a connected person (who is a vendor),
then the open-market value on the date of acquisition to the extent that it exceeds
the consideration on the date of acquisition.

REMEMBER

• The value of a supply that occurs in terms of section 8(9) is usually determined with
reference to the lesser of the cost of acquisition (including VAT) or the open market
value of the goods or services supplied.
• However, where the supplying vendor initially acquired the goods or services, which
will be supplied in terms of section 8(9), from a connected person (a vendor) and the
open market value on the date of acquisition of such goods or services is higher than
the cost of acquisition, the actual cost of acquisition must be ignored and the open-
market value on the date of acquisition is effectively taken to be the deemed cost of
acquisition.
• The open market value for a supply is inclusive of VAT.

89
A Student’s Approach to Taxation in South Africa 2.12

2.12.3.3 Time of supply: Supplies to independent branches (section 9(2)(e))

In the case of delivery to a branch or main business outside South Africa, the time of
supply is when the goods are delivered to the branch or the service is performed.

Example 2.27
Africa (Pty) Ltd has its head office in Johannesburg and is a vendor for VAT purposes.
Africa (Pty) Ltd also has a branch in America, which is separately identifiable and has a
separate accounting system. Africa (Pty) Ltd purchased goods for R115 000 (VAT inclu-
sive) and then sold them to the branch in America. The branch then sold the goods to a
third party in America.
You are required to calculate the VAT consequences of the above transactions.

Solution 2.27
Africa (Pty) Ltd will be entitled to claim the input tax deduction of R15 000 (R115 000 ×
15 / 115) as the goods were purchased for the purpose of making taxable supplies. The
sale to the branch in America is a taxable supply at the rate of 0%. The sale by the branch
of the goods to a third party in America will not attract any VAT, as the supplies made by
the branch in America will not form part of the enterprise that Africa (Pty) Ltd carries on
in South Africa.

2.12.4 Deemed supply: Fringe benefits

2.12.4.1 Meaning of ‘supply’: Fringe benefits (section 18(3))
The provision of certain fringe benefits to employees by a vendor is a deemed supply
and is therefore subject to VAT. This applies only to fringe benefits as set out in the
Seventh Schedule to the Income Tax Act. Essentially, the output tax to be accounted
for by the employer (vendor) is intended to reverse that portion of the input VAT that
was previously claimed on those goods or services by that vendor.
Certain other employment benefits are not fringe benefits in terms of the Seventh
Schedule to the Income Tax Act and no output VAT is thus payable thereon, for
example:
• cash salaries;
• section 8(1) of the Income Tax Act – all allowances;
• section 8B of the Income Tax Act – broad-based employee share plans; and
• section 8C of the Income Tax Act – other share plans.
If the fringe benefit relates to:
• an exempt supply;
• a zero-rated supply; or
• the supply of entertainment (for example, meals, refer to 2.21),
there is also no deemed supply and thus no output tax is payable on that fringe
benefit.

90
2.12 Chapter 2: Value-added Tax (VAT)

The following fringe benefits are subject to VAT:

• Assets given to employees. (This refers only to assets given free of charge or at a low
rate. There is, however, no VAT applicable to assets supplied for entertainment
purposes, zero-rated or exempt supplies, or motor vehicles.)
• The right of use of an asset given to an employee (for example, the use of a com-
pany car provided to an employee).
• Services made available by the employer to the employee for private purposes.
The following employment benefits are not subject to VAT:
• Cash allowances (for example, entertainment, subsistence and travel allowances)
as these allowances are not fringe benefits in terms of the Seventh Schedule to the
Income Tax Act.
• Subsidies (supply of money).
• Long-service awards in cash (money and thus not goods or services).
• The supply of meals and refreshments (this is the supply of entertainment).
• Free or cheap holiday accommodation (‘accommodation’ is defined as part of
entertainment).
• Residential housing (exempt supply).
• Interest-free and low-interest loans (financial service – exempt supply).
• Paying a debt on behalf of an employee (not supply of goods or service).
• Share incentives or plans (financial service – exempt supply, section 8B and 8C of
the Income Tax Act are also not fringe benefits in terms of the Seventh Schedule).
• Pension and medical aid fund contributions (superannuation scheme, financial
service – exempt supply).
• Payment of home telephone expenses (payment of debt, financial service – exempt
supply).
• Bursary schemes (supply of money or educational services – exempt supply).
• International transport (zero rated).
• The supply of a motor car at less than market value, if the employer was denied a
deduction of input tax on the acquisition of the motor vehicle (section 8(14)).
• Any fringe benefit to the extent that it is granted in the course of making exempt
supplies (for example, if a person that makes only exempt supplies gives an asset
to one of his employees free of charge, such person would not be entitled to any
input tax on that asset and there is therefore no output tax on the fringe benefit).

2.12.4.2 Value of the supply: Fringe benefits (section 10(13))

In the case of fringe benefits (other than the use of a motor vehicle) that are subject to
VAT, the consideration in money for the supply is deemed to be the cash equivalent
of the benefit used for income tax purposes, multiplied by the tax fraction.

91
A Student’s Approach to Taxation in South Africa 2.12

REMEMBER

• The calculation of output tax on the fringe benefit does not apply to the supply of any
such benefit to the extent that it is granted by the vendor in the course of making non-
taxable supplies. This means that the output tax on the fringe benefit should be appor-
tioned to the extent that it relates to the making of taxable supplies. For example: Where a
bank making 20% taxable and 80% exempt supplies provides a fringe benefit to an
employee, the bank will apportion the output VAT (account for output tax on 20% of the
cash equivalent of the fringe benefit).
• Although the employee is the recipient of the fringe benefit, the payment of the output
tax is the obligation of the employer and not the employee.
• The output tax paid by the employer forms part of the employer’s salary costs.

Example 2.28
An employer purchases a watch at a cost of R1 150 (including VAT) to give to an employ-
ee as a fringe benefit. The value (cash equivalent) of the fringe benefit is the cost to the
employer exclusive of VAT, being R1 000.
You are required to calculate output tax in respect of the fringe benefit.

Solution 2.28
R
Output tax:
The tax fraction × the cash equivalent: 15 / 115 × R1 000 = 130

Where an employee is granted the right of use of a motor vehicle, the consideration is
calculated differently. It is calculated monthly as follows:
• 0,3% of the determined value (as calculated according to Regulation 2835), in the
case of a motor car as defined; and
• 0,6% of the determined value in the case of any other vehicle.

REMEMBER

• The determined value of the vehicle excludes VAT. The determined value for income
tax purposes is the retail market value inclusive of VAT. The determined value for VAT
purposes, however, still excludes VAT (Government Notice (GN) 2835 defines
‘determined value’ as exclusive of VAT).
• The rate of 0,3% is used if the employer was not entitled to claim an input tax credit in
respect of a motor car as defined.
• The rate of 0,6% is used in all other cases.
• The rates of 0,3% and 0,6% are per month. Therefore, if a vendor has a two-month VAT
period, the amount calculated should be multiplied by two.

continued

92
2.12 Chapter 2: Value-added Tax (VAT)

• When the employee pays anything for the right of use, a portion of this amount could be
deducted in the calculation of the consideration for the right of use of a motor vehicle.
Split this amount paid by the employee to determine the different items it relates to.
• In the case where the employee bears the full cost of maintaining the motor vehicle, a
deduction of R85 per month is allowed to establish the consideration. (This is not appli-
cable to fuel.)
• Where there is a reduction in the determined value, the depreciation allowance is
calculated according to the reducing-balance method at the rate of 15% for each
completed period of 12 months from the date on which the vendor first obtained such
vehicle, to the date when the relevant employee was first granted the right of use
thereof.

The calculation of output VAT in respect of the use of a motor vehicle

Step 1: Determine the value of the motor vehicle (excluding VAT and finance
charges). Take any reductions in the determined value into account.

Step 2: Determine the consideration for the use of the motor vehicle (value
determined in step 1 × 0,3% or 0,6%). If the input tax was denied, use
0,3% and if not, use 0,6%.

Step 3: Deduct the following:

• if the input tax on the vehicle was claimed, all amounts paid by the
employee to the employer, excluding finance charges and fuel.
(This should be excluded as it relates to a separate supply for value
(thus not free use of motor car) on which VAT is also levied. No
VAT is levied on the finance charges and fuel, and this should thus
not be deducted.)

or
• if the input tax on the motor car was denied, all amounts paid by
the employee to the employer, excluding finance charges, fuel and
the portion of the amount that relates to the fixed cost of the motor
car. (The portion of the consideration that relates to the fixed cost of
the motor vehicle does not include any VAT as no input tax was
claimed when the vehicle was purchased (section 8(14)).)
•R85 if the employee bears the full cost of repairs and maintenance.

Step 4: Multiply by the tax fraction to determine the output tax.

Step 5: Multiply by the percentage of taxable usage.

93
A Student’s Approach to Taxation in South Africa 2.12

Example 2.29
An employer grants an employee the right of use of a motor car. The employer was
unable to claim the input VAT when the vehicle was purchased for R161 000 (including
VAT). The employee bears the full cost of maintaining the vehicle.
You are required to calculate output tax for one month in respect of the fringe benefit.

Solution 2.29
Output tax:
Value of the motor vehicle: R161 000 × 100 / 115 = R140 000
Consideration for the use of the motor vehicle: R140 000 × 0,3% = R420
Less deductions: R420 – R85 = R335
Multiply by the tax fraction: R335 × 15 / 115 = R44
Multiply by the percentage of taxable usage: R44 × 100% = R44 output tax payable
If the vehicle had not been a motor car but a delivery vehicle, the employer would have
been able to claim the VAT paid on the vehicle as an input tax credit (R161 000 × 15 / 115
= R21 000), and output tax would have been calculated as follows:
Value of the motor vehicle: R161 000 × 100 / 115 = R140 000
Consideration for the use of the motor vehicle: R140 000 × 0,6% = R840
Less deductions: R840 – R85 = R755
Multiply by the tax fraction: R755 × 15 / 115 = R98
Multiply by the percentage of taxable usage: R98 × 100% = R98 output tax payable.

Example 2.30
An employee is granted the use of a company-owned motor car (input tax denied) with a
determined value of R320 000, that is fully used for taxable purposes. The employee pays
R1 200 per month, allocated as follows:
R
Fuel 224
Insurance 300
Repairs 140
Interest 326
Fixed costs of car 200
Total 1 200
You are required to calculate the VAT consequences of the above.

94
2.12 Chapter 2: Value-added Tax (VAT)

Solution 2.30
Output tax:
Value of the motor vehicle: R320 000 (determined value already excludes VAT)
Consideration for the use of the motor vehicle: R320 000 × 0,3% = R960
Less deductions: R960 – R300 (insurance) – R140 (repairs) = R520
The fuel (zero rated), interest (exempt), and fixed cost (input tax denied) are not
deductible.
Multiply by the tax fraction: R520 × 15 / 115 = R68
Multiply by the percentage of taxable usage: R68 × 100% = R68 output VAT per month
payable by the employer on the fringe benefit
Additional output VAT on consideration received:
The employer must also account for output VAT on the consideration paid by the
employee to the employer in respect of the insurance and maintenance. (The employer
probably claimed the VAT on these expenses paid by him.)
R300 + R140 = R440 × 15 / 115 = R57 output tax

Example 2.31
The use of a delivery truck, with a determined value of R350 000, of which 60% was used
for taxable supplies and 40% for non-taxable supplies, is granted to an employee. The
employee pays R800 for fuel to the employer.
You are required to calculate the VAT consequences of the above.

Solution 2.31
Value of the motor vehicle: R350 000 (determined value already excludes VAT)
Consideration for the use of the motor vehicle: R350 000 × 0,6% = R2 100
Less deductions: R2 100 – Rnil = R2 100
No deduction for fuel – zero rated (Note)
Multiply by the tax fraction: R2 100 × 15 / 115 = R274
Multiply by the percentage of taxable usage: R274 × 60% = R164
Note
The fact that the employee also pays for the fuel does not give rise to another output tax,
because it is a zero-rated supply.

95
A Student’s Approach to Taxation in South Africa 2.12

Example 2.32
A vendor who makes both taxable (70%) and exempt (30%) supplies provides certain
fringe benefits to its managing director. The monthly cash equivalent of each benefit for
employees’ tax purposes is as follows:
Fringe benefit Cash
equivalent
R
Interest-free loan 135
Residential accommodation 3 900
Free use of a company-owned motor car that cost the employer R230 000
(including VAT) 5 000
In addition to the above benefits, the managing director was given a computer during the
tax period. The cash equivalent of this benefit is R7 000.
You are required to:
(a) calculate the VAT payable by the vendor in respect of the fringe benefits granted to
the managing director for the two-month tax period;
(b) provide the journal entry that should be passed in the accounting records of the
employer.

Solution 2.32
Consideration
(a) Fringe benefit R
Interest-free loan – exempt supply nil
Residential accommodation – exempt supply nil
Free use of the company car
(R230 000 × 100 / 115 × 0,3% × 2 months) 1 200
Asset acquired for no consideration 7 000
Total 8 200
Extent used to make taxable supplies (R8 200 × 70%) 5 740
Total output VAT payable: R5 740 × 15 / 115 779

(b) Journal entry

Dr Salaries R779
Cr Output tax R779
Output tax in respect of fringe benefits provided to the managing director. The output
VAT thus results in an additional salary cost that should now be deductible for income
tax purposes in terms of the general deduction formula.

2.12.4.3 Time of supply: Fringe benefits (section 9(7))

The time of supply is deemed to be at the end of the month in which the cash equiva-
lent of the benefit or advantage, as determined under the Seventh Schedule to the
Income Tax Act, is granted to the employee or office-holder. However, where the
cash equivalent is not required to be included on a monthly basis, the supply is
taxable on the last day of the year of assessment of the employee.

96
2.12 Chapter 2: Value-added Tax (VAT)

2.12.5 Deemed supply: Payments exceeding consideration

2.12.5.1 Meaning of supply: Payments exceeding consideration
(sections 8(27) and 16(3)(m))
When a vendor receives a payment for a taxable supply of goods or services at the
rate of 15% that is in excess of the consideration charged (that is to say double pay-
ments), output tax is payable if the excess payment that is received is not refunded
within four months. The excess portion of the consideration is deemed to be a supply
of services performed by the vendor in the course or furtherance of his enterprise
(section 8(27)).
In the event that the excess payment is refunded on a date after the output tax has
been accounted for, the vendor becomes entitled to claim an additional input tax
credit (section 16(3)(m)).

2.12.5.2 Value of supply: Payments exceeding consideration

(section 10(26))
The consideration for the supply equals the excess portion of the payment received.

2.12.5.3 Time of supply: Payments exceeding consideration (section 8(27))

The time of supply is deemed to be the last day of the tax period during which the
four-month period ends. It should, however, be borne in mind that this is only the
case when the excess portion has not been refunded within four months of receipt.

Example 2.33
STP (Pty) Ltd issues a tax invoice to George Thompson for R115 (invoice no. 1025 dated
1 March of the current year of assessment). Three weeks later, STP sends him a statement
reflecting the purchase made as an outstanding amount due. Upon receiving the statement
on 28 April of the current year of assessment, George’s wife decides to pay STP R115. She
does this as she is unaware that George already paid the amount two days earlier.
STP (Pty) Ltd has a two-monthly VAT period ending on the last day of January, March,
May etc.
You are required to explain the VAT treatment of the payment:
(a) assuming STP (Pty) Ltd retains both payments and does not refund the overpayment
received from George’s wife;
(b) assuming STP (Pty) Ltd refunds the overpayment received by George’s wife on
25 October of the current year of assessment.

97
A Student’s Approach to Taxation in South Africa 2.12

Solution 2.33
(a) The excess payment of R115 received by STP (Pty) Ltd will be treated as a deemed
supply and output tax will be payable. STP will be liable to account for output tax
amounting to R15 (R115 × 15 / 115). The time of supply is 30 September of the cur-
rent year of assessment, which is the last day of the VAT period ending four months
after the excess amount was received.
(b) Upon refunding the amount of R115 to George’s wife, STP (Pty) Ltd will become
entitled to claim input tax amounting to R15 (R115 × 15 / 115). As the company
failed to refund the amount within four months of receipt, they previously needed to
account for output tax on the deemed supply. In terms of section 16(3)(m) they are
now entitled to claim an additional amount of input tax in the VAT period ending
30 November of the current year.

2.12.6 Deemed supplies: Other (section 8(3), (7), (13), (15), (25) and
(29))
Section 8 also provides for the following deeming provisions (this list is not exhaust-
ive and therefore other deeming provisions exist):
• When a supply is made under a credit agreement and the buyer has exercised his
right to rescind that agreement within a certain period of time (‘cooling-off’ period
of five days (section 9(2)(b))), that supply is deemed not to be a supply of goods or
services (section 8(3)).
• The sale of an enterprise as a going concern or part thereof, which is capable of
separate operation, is deemed to be a taxable supply of goods (that is to say the
whole business including any services (for example, goodwill) is deemed to be
goods (section 8(7)).
• Where a person bets an amount on the outcome of a race or any other event or
occurrence (for example, at a casino), the person with whom the bet is placed (for
example, the casino) is deemed to supply a service to the first-mentioned person
(for example, the punter) (section 8(13) and section 8(13A)). In the event that the
person with whom the bet is placed (for example, a casino) pays any prize or win-
nings, such person, if a registered vendor, is entitled to claim an input tax deduc-
tion. This input tax deduction is however limited to the input tax on the initial cost
of acquiring goods or services for this purpose (section 16(3)(d)) (refer to Interpre-
tation Note No. 41 that deals with the application of VAT to the gambling indus-
try).
• Where a single supply of goods or services would, if separate considerations had
been payable, have been charged partly at the standard rate and partly at the zero
rate, each part of the supply is deemed to be a separate supply (section 8(15)). This
principle was expanded upon in the CSARS v British Airways court case.

98
2.12 Chapter 2: Value-added Tax (VAT)

CASE:
CSARS v British Airways
67 SATC 167
Facts: The fare charged by the taxpayer in Judgment: The court agreed with the tax-
respect of its international flights included a payer that the total fare for the ticket
number of elements which were separately should be zero rated and held that a single
disclosed on the passenger ticket. One such supply of service is only capable of notion-
charge was the fees levied by the Airport al separation into its component parts, as
Company Limited (a separate independent contemplated by section 8(15), when the
vendor) to the taxpayer. This charge is lev- same vendor supplies more than one
ied to the taxpayer for the general airport service, each of which, had it been sup-
services (baggage handling facilities, wait- plied separately, would have attracted a
ing lounges etc.) that are made available different tax rate. The passenger service
to its passengers at the airport and was charge that the Airport Company Limited
referred to as the passenger service charge. charges to taxpayer is no more than a cost
The taxpayer separately reflects this charge that the taxpayer has to bear in order to
on the passenger ticket in order to recover it operate its carrier service. This is similar to
from its passengers. As the fare related to the cost it pays to land and park its aircraft.
international travel, the taxpayer zero rated The passenger service charge therefore
the total fare charged for the ticket. SARS relates to a service that was supplied by
relied on section 8(15), arguing that the another vendor (not the taxpayer) and
British Airways fare was a composite fare simply formed part of the cost of the
given for a single supply of a number of taxpayer’s supply of international trans-
services and wanted to apply the standard portation.
rate to the passenger service charge of the
fare as this service is provided in South Principle: The recovery of costs is not a
Africa. supply for VAT purposes.

Example 2.34
Mr Du Toit is an attorney practising in Johannesburg. Mr Du Toit provided legal services
to a client in Pretoria and is uncertain about the VAT consequences of this supply.
The breakdown of the charge to the client is as follows:
R
Legal advice fee (standard-rated supply) 80 000
Fuel costs incurred (zero-rated supply) 500
Gautrain tickets cost incurred (exempt supply) 1 200
Value of supply (excluding VAT) 81 700
Discuss the VAT consequences of the above supply.

99
A Student’s Approach to Taxation in South Africa 2.12

Solution 2.34
VAT will be levied at the standard rate on the total value of the supply (R81 700 × 15% =
R12 255). The provision of sections 8(15) and 10(22) (refer to 2.16.4) will not be applicable
in respect of the fuel and Gautrain ticket costs incurred as these will form part of the
expenses incurred by Mr Du Toit to perform the legal service, rather than a service sup-
plied by Mr Du Toit to the client.

• The supplying vendor (registered vendor) and recipient (registered vendor) are in
certain cases deemed to be one and the same persons in respect of certain company
re-organisation transactions that occurred in terms of section 42, 44, 45 or 47 of the
Income Tax Act (section 8(25)). The transactions to which this is applicable are
transactions whereby:
– A person disposes of an asset to a company in exchange for the company’s
equity shares (asset-for-share transaction; section 42 of the Income Tax Act).
– A company’s existence is terminated after it disposes of all its assets to another
company (amalgamation transaction; section 44 of the Income Tax Act).
– One company disposes of an asset to another company that forms part of the same
group of companies (intra-group transactions; section 45 of the Income Tax Act).
– A company distributes all its assets to another company that forms part of the
same group of companies in anticipation of its liquidation, winding up or dereg-
istration (transactions relating to liquidation and deregistration; section 47 of the
Income Tax Act).
– A person supplies fixed property to a company (either as part of an asset-for-
share transaction in terms of section 42 of the Income Tax Act, or as part of an
intra-group transaction in terms of section 45 of the Income Tax Act) and the
person and the company agree in writing that immediately after the supply, the
company will lease the fixed property from the person that supplied it.
– The effect of section 8(25) is that a re-organisation for VAT purposes is deemed
to be a non-event (no VAT is charged on the supply and no adjustments in terms
of sections 16(3)(h) and 18A are applicable). The VAT re-organisation provisions
only apply to a supply contemplated in section 42 or 45 if that supply is a going
concern. If a single transfer of trading stock or a capital asset occurs under a sec-
tion 42 or 45 transaction, the normal VAT rules apply.
However, parties in a section 42 or 45 transaction can agree in writing that the
provisions of section 8(25) must not apply (that is to say the transaction is not
treated as a non-VAT event), but that the going concern provision in sec-
tion 11(1)(e) should apply to the corporate transaction.
• Where a lessee (the supplying vendor) effects leasehold improvements to the
property of a lessor, the lessee is deemed to have made a taxable supply of goods
to the lessor to the extent that these leasehold improvements are made for no con-
sideration. There is no deemed supply if the lessee uses the leasehold improve-
ments wholly (100%) for the making of exempt supplies (section 8(29)). Refer also
to 2.31 for further VAT effects regarding leasehold improvements.

100
2.13 Chapter 2: Value-added Tax (VAT)

2.13 Output VAT: Non-supplies (section 8(14))

If a vendor supplies goods or services in the course or furtherance of his enterprise,
he is obliged to levy output VAT on these supplies. The exception to this rule is if the
vendor supplies goods on which the input tax has been denied in terms of the VAT
Act (refer to 2.21). Section 8(14) provides that, if the input tax has been denied in
terms of the VAT Act, no output VAT is levied on the supply because the supply is
deemed not to be made in the course or furtherance of an enterprise. Typical exam-
ples are where goods or services were acquired for entertainment purposes, or the
supply of a motor car (other than an employer granting the use of a motor car to an
employee (section 17(2)).

Example 2.35
Speedy purchased a motor car, a coffee machine for the canteen and a printer. He paid the
following for these items:
Motor car: R343 000 (including VAT – input VAT denied)
Coffee machine: R6 457 (including VAT – input VAT denied)
Printer: R6 900 (including VAT)
He then sells all three items.
You are required to explain the VAT consequences relating to the purchase and sale of the
motor car, coffee machine and the printer.

Solution 2.35
Provided Speedy acquired the printer for the purposes of making taxable supplies, he will
be able to claim an input tax deduction on the acquisition of the printer amounting to
R900 (R6 900 × 15 / 115). No input tax will be claimable on the acquisition of the motor
car and coffee machine, as input tax deductions are specifically denied on the acquisition
thereof, even if the goods will be utilised for the making of taxable supplies.
Speedy will be required to levy output tax on the sale of the printer only, since the said
supply will be made in the course or the furtherance of his enterprise. Speedy will not be
required to account for any output tax on the sale of the coffee machine and motor car,
since Speedy was denied input tax deductions on the acquisition of these items.

Where goods or services were acquired by a vendor wholly (that is to say 100%) to
make exempt supplies, the subsequent sale thereof is not subject to VAT, as the
supply is not made in the course or furtherance of the vendor’s enterprise.

REMEMBER

Where the initial input VAT was denied on a motor vehicle, but the vehicle was subsequent-
ly converted into a game-viewing vehicle or a hearse on which input tax is allowed (sec-
tion 18(9)), the ultimate sale of the vehicle will be deemed to be a supply in the course of the
enterprise, and VAT should thus be levied on this transaction (section 8(14)(b)) (refer to 2.28).

101
A Student’s Approach to Taxation in South Africa 2.14–2.15

2.14 Output VAT: No apportionment (section 8(16))

If a vendor acquires goods or services (partly for the purposes of making taxable
supplies and partly for the making of exempt supplies) and then subsequently sells
these goods, the vendor is deemed to make a taxable supply of goods or services in
the course of his enterprise. The total consideration received for such supply is sub-
ject to VAT (section 8(16)) and there is no apportionment of the consideration.
There are two exceptions to this rule, relating to fringe benefits and indemnity pay-
ments. For both these types of supplies, the amount of output tax is payable only to
the extent that it relates to taxable supplies made in the course of the enterprise.

Example 2.36
BBC Bank sells a computer to CNN Bank for R12 000. This computer was used 80% for
the making of taxable supplies and 20% for the making of exempt supplies.
You are required to advise BBC Bank on the VAT consequences of the transaction.

Solution 2.36
BBC Bank will be required to account for VAT at the standard rate on the full selling price
of R12 000 (R1 565 (R12 000 × 15 / 115)). However, BBC will be entitled to make an input
tax adjustment for the 20% exempt portion in terms of section 16(3)(h) (refer to 2.25).

2.15 Time of supply (section 9)

The time of supply is important for VAT purposes, as it determines when (that is to
say during which VAT period) a vendor must account for VAT. The time-of-supply
rules are applicable to both output and input VAT.

2.15.1 Time of supply: General rule (section 9(1))

The general rule of the time of supply is the earlier of:
• the date of the invoice; or
• the date the payment of the consideration is received by the supplier.
An ‘invoice’ is defined in section 1 as ‘a document notifying an obligation to make
payment’. This definition is wide enough to embrace any document notifying the
obligation to make payment, even though it may not be called an invoice. For exam-
ple: In certain circumstances a contract may constitute an invoice as defined.
The date of delivery of the goods or of providing the services plays no role in deter-
mining the time of supply. It plays a role only in special cases, such as when connect-
ed persons are involved.
Apart from the above general rule, there are also certain specific rules for special
types of transactions. Special rules also apply to vendors registered on the payments
basis (refer to 2.3.1.2). A special time of supply rule will always take precedence over
the general time of supply rule in section 9(1).

102
2.15 Chapter 2: Value-added Tax (VAT)

2.15.2 Time of supply: Connected persons (section 9(2)(a))

Where the supplier and recipient are connected persons:
• the time of supply is the time of removal in the case of the supply of goods that are
to be removed;
• the time of supply is the time they are made available to the recipient in the case of
goods that are not to be removed; or
• the time of supply is when the services are performed in the case of services.
In some instances, these deemed times of supply relating to connected persons are
not applicable and the general rule set out above (refer to 2.15.1) comes into play
instead. This occurs when an invoice is issued or a payment is made in respect of the
supply, on or before the day on which the VAT return would have been required to
be made for the tax period during which the deemed time of supply would have
arisen.
If, however, the total value of the consideration cannot be determined at the time the
goods are removed or made available or the services are performed, and the recipient
would have been entitled to claim input tax in on the full amount, the input VAT can
be claimed on the earlier of invoice or payment (the normal rule).
A ‘connected person’ for VAT purposes is:
• a natural person (including his estate) and his relative or the estate of a relative;
• a natural person and a trust fund of which a relative or estate of a relative may
benefit;
• a trust fund and a beneficiary;
• a partnership or close corporation and any member thereof or any other person
connected to that member;
• a company; and
– any other person (other than a company) where the person, his spouse, minor
child or trust fund in which they may be beneficiaries, separately or in aggre-
gate, holds at least 10% of the paid-up capital, equity-shares or voting rights of
the company (whether directly or indirectly), or
– a connected person to the person, spouse, minor child or trust fund;
• a company; and
– another company that is substantially controlled by the same shareholders, or
– a connected person to such other company;
• a vendor and a separate branch, or division separately registered; or
• any employer and the pension or provident fund of which most of his employees
are members.

2.15.3 Time of supply: Rental agreements (section 9(3)(a))

A ‘rental agreement’ is an agreement for the letting of goods, excluding a finance
lease. The rental agreement may state that the rental is payable on the first day of
each calendar month. Invoices are not necessarily issued monthly.

103
A Student’s Approach to Taxation in South Africa 2.15–2.16

When goods are supplied in terms of a rental agreement, the time of supply is the
earlier of the date on which payment is due, or the date on which payment is received.
If goods are delivered periodically, the time of supply is the earliest of payment
received or invoice issued.

2.16 Value of the supply (section 10)

As pointed out, it is important to note whether the rule refers to the value or the con-
sideration. If the rule refers to the value, then the amount of VAT is calculated by
applying 15% to the value amount, and if it refers to consideration, the amount of VAT
is calculated by applying the tax fraction (15 / 115) to the amount of the consideration.
For the purposes of VAT, there is a general valuation rule with certain specific rules
applying to the value of certain supplies. Where no specific rule exists, the general
rule applies.

2.16.1 Value of the supply: General rule (section 10(3))

The value of the supply of goods or services is either:
• the amount of the money if the consideration is in money; or
• the open-market value of the consideration if the consideration is not in money;
less
the amount of VAT included in the consideration.
When the vendor does not account for the VAT separately, the tax fraction is applied
to determine the VAT included in the consideration.

REMEMBER

• The value of a supply therefore refers to the amount excluding VAT.

• The consideration for a supply refers to the amount including VAT.
• The open market value of an item includes VAT in terms of the VAT Act.

Example 2.37
A vendor sells goods for R115 000 (including VAT). You are required to calculate the VAT
that is included in the consideration.

Solution 2.37
VAT is determined as: R115 000 × 15 / 115 = R15 000

104
2.16 Chapter 2: Value-added Tax (VAT)

2.16.2 Value of the supply: Connected persons (section 10(4))

When a vendor supplies goods or services to a connected person for:
• no consideration; or
• for a consideration that is less than the open-market value; or
• for consideration that cannot be determined at the time; and
• the connected person would not have been able to claim a full input tax credit,
the consideration of the supply is deemed to be its open-market value.

REMEMBER

• The value is usually determined with reference to the consideration, but for qualifying
transactions between connected persons, the actual consideration must be ignored, and
the open-market value of the supply is taken to be the deemed consideration.
• This special rule relating to connected persons is not applicable to the supply of fringe
benefits.
• Instances where a person is not able to claim a full input tax credit includes where
the person is a non-vendor for VAT purposes or where the person does not make 100%
taxable supplies.

Example 2.38
Arnold and Bob are connected persons. Arnold, a registered vendor, sells trading stock
valued at R10 000 to Bob, who only paid an amount of R4 000 for this trading stock. B is
also a registered vendor, but he is not entitled to a full input tax deduction (only 60%).
You are required to explain the VAT consequences of the above.

Solution 2.38
Arnold must account for VAT on the open-market value of the supply: R10 000 × 15 / 115
= R1 304. (The actual consideration received from Bob is ignored for VAT purposes.)
Bob will only be able to claim an input tax on the actual consideration of R4 000: R4 000 ×
15 / 115 × 60% = R313.
Bob has a VAT invoice showing the total consideration as only R4 000 and could therefore
not claim input tax on R10 000. The definition of ‘input tax’ further specifically states that
it is the tax charged and payable. Unless the parties decide to adjust their purchase price
to R10 000, Bob will always be able to claim only the input tax on the actual consideration.

Example 2.39
A vendor sells goods for R115 000 (including VAT) to its wholly owned subsidiary, which
is not registered as a vendor for VAT purposes. The open-market value of the goods on
the date of sale is R172 500 (including VAT).
You are required to calculate the VAT that is payable by the vendor.

105
A Student’s Approach to Taxation in South Africa 2.16

Solution 2.39
The open-market value of R171 000 must be used, since the recipient is a connected person
to the vendor, is not entitled to an input tax credit and the supply was for a consideration
less than market value.
VAT is determined as: R172 500 × 15 / 115 = R22 500

Note
It is therefore clear from the above that section 10(4) will be applicable when the connect-
ed person could either claim only a portion of the input tax or when the connected person
could not claim any portion of the input tax.

What would the effect be, had the wholly owned subsidiary in this
example been a registered vendor?

The reason for this special rule is that connected persons could try to limit the VAT
cost and therefore manipulate the prices so that the VAT cost is decreased. If the
recipient is a vendor and allowed to claim the input tax in full, no manipulation can
take place. The VAT paid by the one vendor is claimed back by the other vendor. No
special value of supply rules is therefore required.

2.16.3 Value of the supply: Entertainment (section 10(21))

When a supplier makes a supply of entertainment and no input tax can be claimed in
respect of the acquisition of goods and services for the purposes of entertainment, the
value of the supply is nil. This is the case even if the supply was made to a connected
person.

Example 2.40
Abraham bought coffee powder in bulk for his employees to consume at work. Abraham sold
half of the coffee powder to Beryl (a connected person) at a discount of 30%. Beryl also
obtained the coffee powder to provide it to her employees to consume while at work.
You are required to explain the VAT consequences of the above.

Solution 2.40
Abraham cannot claim the input VAT on the purchase of the coffee powder as this trans-
action is in respect of the acquisition of goods for the purposes of entertainment. The
value of the supply between Abraham and Beryl is Rnil: (section 10(21)), even though
Beryl and Abraham are connected parties. Beryl will therefore also not be entitled to claim
any input VAT on the purchase of the coffee powder from Abraham.

106
2.16–2.17 Chapter 2: Value-added Tax (VAT)

2.16.4 Value of the supply: Dual supplies (section 10(22))

Where a taxable supply is not the only matter to which a consideration relates, the
supply shall be deemed to be for such part of the consideration as is properly
attributable to it.

Example 2.41
Teboho, a registered vendor, sells his private house (worth R790 000) as well as his
computer from his enterprise (worth R10 000) to Bernadette. Bernadette pays an amount
of R800 000 for both items.
What are the VAT consequences of the above transaction?

Solution 2.41
The payment of R800 000 should be allocated to the different items to determine the VAT
consequences, since the selling of the private house (R790 000) will not attract VAT,
whereas the selling of the computer (R10 000) will be subject to standard rate VAT of 15%.

The above should not be confused with the situation where a single supply was
previously partially used for taxable purposes (refer to 2.14). That supply is a taxable
supply without an apportionment. The above example refers to a situation where a
single consideration (not supply) is received for more than one supply.

2.16.5 Value of the supply: Supply for no consideration

(section 10(23))
Where a supply is made for no consideration, the value of the supply is deemed to be
nil (excluding connected persons – refer to 2.16.2).
Promotional supplies, such as product samples given away for no consideration or
‘buy-1-get-1 free’ promotions, are generally regarded as taxable supplies if they are
made in an effort to promote other taxable supplies that are usually made for a con-
sideration by the enterprise. The value of these taxable supplies is still deemed to be
nil, as they are made for no consideration (Interpretation Note No. 70).

2.17 Basics of input VAT

Input tax is the VAT component of the payment for goods and services supplied to
the vendor for the purpose of making taxable supplies. For example, a vendor who
purchases stationery to be used in the making of taxable supplies, can claim the VAT
part of the expense as input tax. This input tax can be deducted from the output tax in
order to calculate the total VAT payable or refundable.

107
A Student’s Approach to Taxation in South Africa 2.17

Example 2.42
Purchaser Ltd, a vendor who only makes taxable supplies, acquired the following goods
from vendors during the tax period:
• computer: R13 800 (including VAT); and
• stationery: R4 600 (including VAT).
You are required to calculate input tax in respect of the goods acquired.

Solution 2.42
Tax fraction × goods acquired R
Computer = 15 / 115 × R13 800 1 800
Stationery = 15 / 115 × R4 600 600
The total amount of input tax for the period 2 400

Section 17(1) of the VAT Act provides that where goods or services are used partially
for the purpose of making taxable supplies, only the portion of the input tax attribut-
able to taxable supplies may be claimed as an input tax credit. However, if 95% or
more of the purchased goods or services will be used in the making of taxable sup-
plies, the full input tax credit may be claimed, and no apportionment is necessary (the
so-called de minimis rule) (first proviso to section 17(1)). De minimus is a Latin phrase
that means ‘something that’s too small or insignificant to be of importance’.
Only registered VAT vendors can claim input VAT. In addition, the claiming of an
input tax deduction is not automatic as there are four aspects that need to be consid-
ered:
• all documentary requirements must be met (refer to 2.18 and 2.19); and
• the goods or services must be acquired wholly or partly for the making of taxable
supplies (refer to 2.20) ; and
• VAT at the rate of 15% must actually have been paid by the vendor who wants to
claim the input tax deduction. If goods or services are purchased from a person
who is not a registered vendor, no input tax can be claimed, as no VAT has been
paid on the goods or services. The same principle applies if zero-rated goods or
services are purchased, for example petrol and diesel. Since output VAT was lev-
ied at a rate of 0%, there is no input VAT that can be claimed. The only exception is
the purchase of second-hand goods from non-vendors (refer to 2.22); and
• the claiming of an input tax deduction must not specifically be prohibited in terms
of section 17(2) (refer to 2.21).
As mentioned above, input tax may be claimed only if the vendor is in possession of
documentary proof that substantiates the vendor’s entitlement to the input tax. Such
documentary proof include:
• a tax invoice;
• a debit note or a credit note;

108
2.17 Chapter 2: Value-added Tax (VAT)

• a document acceptable to the Commissioner if the consideration for the supply is

less than R50;
• a document where the Commissioner is satisfied that there are sufficient records
available to establish the particulars required on an invoice for a supply;
• records as required to be maintained in section 20(8) for the supply of second-hand
goods (refer to 2.22);
• a bill of entry or other document, together with a receipt of payment of the tax in
the case of imported goods;
• a section 54(3)(a) statement received from the agent of the vendor who received an
invoice, debit note or credit note on behalf of the vendor; and
• any other documentary proof as is acceptable to the Commissioner (sec-
tion 16(2)(f)).
The issue regarding what documentary proof is acceptable to the Commissioner came
under review in the recent court case of South Atlantic Jazz Festival (Pty) Ltd v CSARS.

CASE:
South Atlantic Jazz Festival (Pty) Ltd v CSARS

Facts: The taxpayer organised an on. The taxpayer had requested tax invoices
international jazz festival (which it had from the sponsors but had not been
done for a number of years). It entered into provided with the tax invoices as requested.
sponsorship agreements with various large
businesses. In exchange for their Judgment: The court determined that this
sponsorship (cash, goods or services to an specific transaction was a barter transaction
agreed value), the businesses were given between persons dealing at arm’s length. In
preferential advertising and marketing the absence of any contrary indication, the
rights. SARS regarded the granting of these value that the parties attributed to the
rights by the taxpayer to the large goods or services that were exchanged, was
businesses as a taxable service. SARS a reliable indicator of their market value.
consequently raised output VAT on the The value of these goods and services were
value of the goods and services that were determinable from the sponsorship agree-
supplied by the businesses, as specified in ments. As SARS had used these sponsor-
the applicable sponsorship agreements. The ship agreements to determine the value of
taxpayer agreed with the levying of the the output VAT in respect of these goods
output VAT but contended that as it had and services, the sponsorship agreements
purchased goods and services from the were acceptable documentary proof for the
sponsors to an agreed value, SARS should claiming of input tax.
allow the taxpayer an input tax deduction
Principle: Where a vendor is entitled to an
in respect of the VAT on those supplies.
input tax deduction but is not in possession
SARS denied the taxpayer’s input VAT
of a valid tax invoice, the vendor may use
claim by a deduction in respect of input tax
any other document that has sufficient
that may not be claimed unless the vendor
information to substantiate his claim. The
is in possession of a valid tax invoice from
document must, however, be acceptable to
the supplier. The taxpayer only had the
the Commissioner.
sponsorship agreements to base its claim

Input tax should usually be deducted in the VAT return in the period during which
the time of supply occurs or, for imported goods, the period during which the VAT
on importation is paid. The vendor must, however, be in possession of the relevant
documentary proof to qualify for the deduction. In some cases, the vendor may claim

109
A Student’s Approach to Taxation in South Africa 2.17–2.18

an input tax without the relevant documentary proof if he has documents that prove
that he is entitled to the deduction but is waiting for the required document. Input tax
may be deducted in a later period if the vendor is unable to deduct input tax in the
aforementioned period (for example, because evidence is not received in time). This
later period may not be more than five years after the tax period during which the
input tax deduction should have been made (first proviso to section 16(3)).

2.18 Tax invoices (sections 16(2) and 20)

Tax invoices are the driving force behind the VAT system. No input tax may be
claimed unless a vendor is in possession of a tax invoice.
A registered vendor is obliged to issue a tax invoice only if the total consideration of
the supply exceeds R50 (vendors who are not registered do not issue tax invoices)
(section 20(6)). A document that is acceptable to the Commissioner should be issued
for supplies not exceeding R50.
A supplier, or the agent of a supplier, must furnish a recipient with a tax invoice
within 21 days of the date of the supply. Copies of tax invoices must clearly indicate
that they are only copies, since a vendor may issue only one original tax invoice
(section 20(1)).
Where the supply exceeds R5 000, the following information must appear on a tax
invoice and must be reflected in South African currency (rand) (unless the infor-
mation relates to a zero-rated supply) (section 20(4)):
• the words ‘tax invoice’, ‘VAT invoice’ or ‘Invoice’;
• the name, address and VAT registration number of the supplier (General Binding
Ruling No. 21);
• the name, address and VAT registration number (if the recipient is a vendor) of the
recipient (General Binding Ruling No. 21);
• an individual serialised number and the date on which the tax invoice is issued;
• a full and proper description of the goods or services supplied (including an indic-
ation that the goods are second-hand, if that is the case);
• the quantity or volume of the goods or services supplied; and
• either:
– the value of the supply, the amount of VAT charged and the consideration for
the supply; or
– where the amount of VAT charged is calculated by applying the tax fraction to
the consideration, the consideration for the supply and either the VAT charged
or a statement that it includes a charge for VAT and the rate at which the VAT
was charged.
Where the consideration for the supply does not exceed R5 000 an abridged tax
invoice may be issued. This abridged tax invoice should contain only the following
particulars:
• the words ‘tax invoice’, ‘VAT invoice’ or ‘Invoice’;
• the name, address and VAT registration number of the supplier;

110
2.18 Chapter 2: Value-added Tax (VAT)

• an individual serialised number and the date on which the tax invoice is issued;
• a description of the goods or services supplied (including an indication that the
goods are second-hand, if that is the case);
• either:
– the value of the supply, the amount of VAT levied, and the consideration paid
for the supply; or
– where the amount of VAT charged is calculated by applying the tax fraction to
the consideration, the consideration for the supply and the VAT charged or a
statement that it includes a charge for VAT and the rate at which the VAT was
charged.

REMEMBER

• The abridged tax invoice does not have to include the name, address or VAT regis-
tration number of the recipient or the quantity or volume of the goods or services.
• An abridged tax invoice may not be issued for zero-rated supplies.
• The requirement that the VAT amount should be reflected in South African currency is
not applicable to zero-rated supplies.
• A vendor may reflect the foreign currency of a supply on an invoice as long as the
South African currency is also reflected on it. Vendors should use the applicable daily
exchange rate as published on the South African Reserve Bank website. This rate is the
weighted average of the bank’s daily rates at approximately 10:30 (Binding General
Ruling No. 11). These rates are published on http://www.resbank.co.za.

If a tax invoice contains an error, for example the VAT registration number of the
recipient is incorrect, the supplying vendor can cancel the incorrect tax invoice and
re-issue the tax invoice with the correct information within 21 days from the date of
the request to correct it. The supplying vendor is not guilty of an offence by issuing a
corrected tax invoice but must ensure that there is a proper audit trail between the
initial invoice, the manner and/or reason for the cancellation and the re-issued tax
invoice.
If the Commissioner is satisfied that a vendor’s records are sufficient and that
it would be impractical to require a full tax invoice to be issued, he may direct
that certain particulars may be omitted or that no tax invoice needs to be issued
(section 20(7)). Interpretation note No. 56 grants approval to recipients (not suppliers)
to issue tax invoices, credit and debit notes if the recipient:
• determines the consideration for the supply;
• is in control of determining the quantity or quality of the supply; and
• obtained written authorisation from the Commissioner.
In the case where no formal documentary proof is required, the Commissioner is
granted discretionary powers in order to prescribe acceptable documentary proof
that a vendor must be in possession of before making any input tax deductions (sec-
tion 16(2)(f)) (refer to Interpretation Note No. 49 for guidance on documentary proof
for specific transactions).
There are also special rules regarding documentary proof for second-hand goods
(refer to 2.22) and foreign suppliers of electronic services (refer to 2.25).

111
A Student’s Approach to Taxation in South Africa 2.19

2.19 Debit notes and credit notes (section 21)

The VAT Act also provides for the issue of debit and credit notes if a supply is can-
celled, or the nature of the supply has changed fundamentally, or the consideration
has been altered or goods or services have been returned, and a tax invoice was
issued in relation to the original supply (section 21(1)). Debit and credit notes could
also be issued for the correction of incorrect tax invoices.

2.19.1 Debit notes

If the amount of VAT shown on the tax invoice is less than the actual VAT charged in
respect of the supply, a debit note must be issued.
The following information must appear on the debit note:
• the word ‘debit note’;
• the name, address and VAT registration number of the supplier;
• the name, address and VAT registration number of the recipient (if the recipient is a
vendor) (unless an abridged tax invoice was issued);
• the date on which the debit note was issued;
• either:
– the amount by which the value of the supply shown on the tax invoice has been
increased, and the amount of the additional VAT; or
– where the VAT charged is calculated by applying the tax fraction to the consid-
eration, the amount by which the consideration has been increased and either
the amount of the additional VAT or a statement that the increase includes VAT
and the rate of the VAT included;
• a brief explanation of the circumstances giving rise to the debit note; and
• sufficient information to identify the transaction to which the debit note refers.

2.19.2 Credit notes

If the amount of VAT shown on the tax invoice is more than the actual VAT charged
in respect of the supply, a credit note must be issued.
The following information must appear on the credit note:
• the word ‘credit note’;
• the name, address and VAT registration number of the supplier;
• the name, address and VAT registration number of the recipient (if the recipient is a
vendor) (unless an abridged tax invoice was issued);
• the date on which the credit note was issued;
• either:
– the amount by which the value of the supply shown on the tax invoice has been
reduced, and the amount of the reduced VAT; or
– where the VAT charged is calculated by applying the tax fraction to the consid-
eration, the amount by which the consideration has been reduced and the

112
2.19 Chapter 2: Value-added Tax (VAT)

amount of the excess (reduced) VAT or a statement that the reduction includes
VAT and the rate of the VAT included;
• a brief explanation of the circumstances giving rise to the credit note; and
• sufficient information to identify the transaction to which the credit note refers.

REMEMBER

• No credit note is required if a customer pays his account and receives a prompt pay-
ment discount, if the terms of the prompt payment discount offer are clearly stated on
the face of the tax invoice (proviso (C) of section 21(3)).
• It is not lawful to issue more than one credit or debit note. A copy credit or debit note
may, however, be provided where the original debit or credit note is lost, but it should
be clearly marked as a ‘copy’ (provisos (A) and (B) of section 21(3)).

Where an enterprise is sold as a going concern (refer to 2.10.3), VAT is levied on the
sale of the assets of the going concern at 0%. A recent amendment to section 21
determines that when the purchaser returns goods that were acquired in terms of the
going concern sale to the seller, the purchaser of the enterprise is allowed to issue a
credit note to the seller.
A Binding General Ruling (BGR No. 6) clarifies the VAT treatment of discounts,
rebates and incentives in the production, distribution and marketing of the packaged
consumer goods industry. The discounts, rebates and incentives can be divided into
two categories, namely variable allowances and fixed allowances. Early settlement
allowances and growth rebates (allowances linked to a volume target where a per-
centage discount is provided when a certain growth percentage has been achieved)
are categorised as variable allowances. The binding general ruling determines that
variable allowances are regarded as a reduction in the original purchase prices and a
credit note should be issued unless otherwise directed. If Vendor X supplies goods to
Vendor Z, Vendor X should issue a credit note to Vendor Z to facilitate the reduction
of the consideration payable by Vendor Z.
New store allowance (an allowance for the promotion of products with the opening
of a new store) and major refurbishment allowances (a payment to revamp a retailer’s
store to meet the required standard) are some of the fixed allowances as per the
binding general ruling. The binding general ruling determines that fixed allowances
are regarded as consideration for the supply of a service and a tax invoice must be
issued. If Vendor X supplies goods to Vendor Z, Vendor Z should issue a tax invoice
to Vendor X for the supply of the fixed allowance.

Example 2.43
OCS Wholesalers purchases trading stock from Kleentex (Pty) Ltd for R115 000. As OCS
Wholesalers exceeded the R75 000 purchase target for the month, they are entitled to a
growth rebate (variable allowance) of R20 000 and only paid the difference of R95 000
(R115 000 less R20 000).
Discuss the VAT implications of the growth rebate.

113
A Student’s Approach to Taxation in South Africa 2.19–2.20

Solution 2.43
With the original purchase transaction, Kleentex (Pty) Ltd issued a tax invoice to OCT
Wholesalers stating a consideration due of R115 000 (R100 000 plus R15 000 VAT). Kleen-
tex (Pty) Ltd must now also issue a credit note for the R20 000 growth rebate.
The credit note should indicate the reduction in the consideration of the supply of R20 000
(R17 391 plus VAT of R2 609). As Kleentex (Pty) Ltd has previously accounted for an
excess amount of output tax, they must either increase their input tax by R2 609 or reduce
their output tax attributable to the tax period by R2 609 (section 21(2)(b)). As OCS Whole-
salers has previously deducted input tax in relation to a supply and receives a credit note,
they must make the necessary adjustment in their VAT return (section 21(6)). The excess
tax (R2 609) must be accounted for by OCS Wholesalers by either increasing their output
tax or reducing their input tax for the tax period in which the credit note is issued.

Example 2.44
Assume that OCS Wholesalers again purchases trading stock from Kleentex (Pty) Ltd for
R115 000. As OCS Wholesalers just opened their store, they are entitled to a promotion of
new products allowance (fixed allowance) of R20 000. OCS Wholesalers again only paid
the net amount of R95 000 (R115 000 less R20 000).
Discuss the VAT implications of the promotion of new products allowance.

Solution 2.44
With the original purchase transaction, Kleentex (Pty) Ltd will again issue a tax invoice to
OCT Wholesalers with a consideration due of R115 000 (R100 000 plus R15 000 VAT). For
fixed allowances OCS Wholesalers is regarded to supply a service to Kleentex (Pty) Ltd
(in this case an advertising service of the product of Kleentex (Pty) Ltd with the opening
of their store). To correctly account for the fixed allowance, OCS Wholesalers must now
issue a tax invoice to Kleentex (Pty) Ltd for R20 000 (R17 391 plus VAT of R2 609). This
deemed supply for which the tax invoice is issued by OCS Wholesalers will result in them
having an additional output tax liability of R2 609 with Kleentex (Pty) Ltd having a corre-
sponding increase in their input tax deduction of R2 609.

2.20 The determination of input VAT (section 17)

Input tax is the VAT component of the payment for goods and services supplied to
the vendor for the purpose of making taxable supplies.
‘Input tax’ is defined as:
• the tax payable in terms of section 7 by a vendor:
– to a supplier on the supply of goods or services by the supplier to the vendor;
– on the importation of goods by the vendor; or

114
2.20 Chapter 2: Value-added Tax (VAT)

• an amount equal to the tax fraction of the lesser of:

– any consideration in money paid by the vendor; and
– the open-market value of the supply (not being a taxable supply),
by way of the acquisition of second-hand goods situated in South Africa by a
resident of South Africa.
The first two components of the definition of input tax relate to VAT that was paid by
the vendor when acquiring goods or services and importing goods. When goods or
services are acquired from a vendor, VAT is paid, and a tax invoice supplied. When
goods are imported, VAT output is levied, and this amount can sometimes be
claimed as input tax by a vendor.
VAT can be claimed as an input tax deduction only if VAT was paid by the vendor at
the standard rate or, in certain circumstances, also on the purchase of second-hand
goods (a notional or deemed input tax deduction). No VAT may be claimed if the
vendor does not have a valid tax invoice or the required documentation to claim a
notional input tax deduction (refer to 2.22).
To determine whether a VAT amount may be claimed as an input tax deduction, it is
important to determine the purpose for which the goods or services acquired will be
used.
If a vendor uses the goods or services wholly in the course of making exempt sup-
plies, the vendor would not be entitled to claim any input tax.
In the Consol Glass (Pty) Ltd v CSARS court case, consideration was given to the input
tax consequences when expenditure was incurred as part of a reorganisation, which
was regarded as financial services, that is to say exempt supplies.

115
A Student’s Approach to Taxation in South Africa 2.20

CASE:
Consol Glass (Pty) Ltd v CSARS
(1010/2019) [2020] ZASCA 175
Facts: The taxpayer, as part of a reorgani- The acquisition of companies in a reorgani-
sation transaction, acquired the shares in sation transaction is a financial service (as
two subsidiary companies through debt defined) and therefore constitutes an ex-
funding. After the acquisition, the taxpayer empt supply.
continued with the trading that was con-
ducted in the subsidiary companies. Be- Principle: The refinancing of debt does not
cause the servicing of the foreign debt form the making of taxable supplies by an
turned out to be too expensive, the taxpay- enterprise if the original debt was used in
er refinanced the reorganisation transaction respect of reorganisation transactions.
in South Africa. The services of both foreign Because there is no causal link between the
and local service providers were obtained to debt and the making of taxable supplies,
advise on the reorganisation arrangement no input VAT on the service fees relating
and to assist with the drafting of agree- to the debt paid can be claimed. In the
ments to put in place (among others) the same vein, since the imported services
refinancing agreement. The taxpayer would be used for the making of non-
claimed input VAT on the payments made taxable (exempt) supplies, a taxpayer
to the local suppliers and did not declare would have to pay output VAT on the im-
VAT on imported services for the payments ported services in terms of section 7(1)(c).
made to the foreign service providers.
If, however, the debt was used to acquire
Judgment: The court had to decide whether assets directly (and not as part of a reor-
there was a causal link between the original ganisation transaction), the input tax
financing transaction, the subsequent refi- would have been incurred in the making
nancing thereof in South Africa and the of taxable supplies and the claiming there-
making of taxable supplies by the taxpayer. of would have been permitted.

If a vendor uses the goods or services wholly in the course of making taxable sup-
plies, the vendor would be entitled to claim the full input tax.
If a vendor uses the goods or services only partially in the course of making taxable
supplies, either of the following input tax deductions may be made:
• the full input tax deduction (so-called de minimis rule) if the taxable use is not less
than 95% of the total intended use; or
• the portion that relates to the taxable supplies if the taxable use is less than 95%
(the input tax being apportioned by the vendor).

REMEMBER

Apportionment of input tax is thus compulsory where goods and services are acquired for
both taxable and exempt supplies, but output tax is never apportioned (except for fringe
benefits and indemnity payments).

The methods used to calculate the apportionment rate of input tax are discussed
below.

116
2.20 Chapter 2: Value-added Tax (VAT)

2.20.1 Turnover-based method

The only standard method of apportionment that is approved by SARS is the turn-
over-based method (BGR No. 16). Essentially, the turnover-based method entails the
total taxable supplies being expressed as a percentage of total supplies, and the
working thereof is illustrated in the following formula:
A = B × C / D where:
A = the deductible input tax;
B = total amount of input tax;
C = the value of all taxable supplies (including deemed taxable supplies) made
during the period; and
D = the value of all supplies (taxable and exempt) made during the period and the
sum of any other amounts not included in C, which were received or accrued
during the period, whether in respect of a supply or not (for example, dividend
income and statutory fines).
The amounts used in the above calculation should exclude VAT (‘value’ referring to
an amount that excludes VAT) and the percentage of taxable use should be rounded
off to two decimal places.
The percentage of taxable usage (C / D in the above formula) is calculated only once
a year, and the same percentage is used for all the inputs of that specific year if the
supply is not wholly applied for taxable or non-taxable purposes. A VAT adjustment
must be made annually to account for any shortfall or overestimation in the taxable
percentage used and should be effected after a period of three months after the finan-
cial year-end.
SARS states that the following amounts must also be excluded from the calculation:
• Supply of capital goods or services (other than goods acquired for supply under a
rental agreement or operating lease) acquired for use in the enterprise (including any
exempt activity).
• Supply of goods or services for which an input tax credit is denied (refer to 2.21).

Example 2.45
At the beginning of their current financial year, Kagiso (Pty) Ltd registered as a VAT
vendor. They did so as they realised that their taxable supplies in the coming year would
exceed the registration threshold.
The company owns several residential properties which it hires out to tenants. Addition-
ally, they manufacture and promote, ‘Flangals’, a new type of square potato chip. During
the last year, the company earned R175 000 (excluding VAT) from its letting activities and
R200 000 (excluding VAT) from manufacturing and promoting Flangals.
Immediately after registering for VAT purposes, the managing director authorised the
purchase of the following assets:
• A new computer, costing R23 000 (including VAT), to be used for administering the
residential letting activities and the chip manufacturing process.

continued

117
A Student’s Approach to Taxation in South Africa 2.20

• A new mixer, costing R16 100 (including VAT), to be used solely in the chip manufac-
turing process.
The managing director now wishes to determine what input tax the company can claim,
as they are registered for VAT purposes.
You are required to calculate the apportionment ratio of input tax using the turnover-
based method and apply this ratio to determine the amount of input tax that Kagiso (Pty)
Ltd can claim in its first VAT period.

Solution 2.45
The computer is going to be used in making both taxable supplies (the selling of potato
chips) and non-taxable supplies (the hiring out of residential accommodation). Therefore,
the input tax deduction that can be claimed must be apportioned.
The turnover-based method entails the total taxable supplies expressed as a percentage of
total supplies and is an acceptable means of determining an input tax ratio. The following
formula is applied: B × C / D, where:
C = the value of taxable supplies (R200 000), and
D = the value of all supplies (R375 000 = R200 000 (manufacturing income) + R175 000
(income from letting activities)).
Thus:
The input tax ratio for Kagiso (Pty) Ltd is calculated as R200 000 / R375 000 = 53,33%.
Input tax deduction on the computer:
As the computer is used for the making of both taxable supplies and exempt supplies, the
input tax deduction is determined using the input tax ratio of 53,33%. Kagiso (Pty) Ltd is
entitled to claim R1 600 (rounded) as an input tax deduction on the computer, calculated as
follows: R23 000 x 15 / 115 = R3 000 x 53,33%
Input tax deduction on the mixer:
The company is entitled to claim the full input tax deduction on the mixer as this machine
is used wholly for the making of taxable supplies.
Kagiso (Pty) Ltd will therefore be entitled to claim a further R2 100 (R16 100 × 15 / 115) as
an input tax deduction.

REMEMBER

The standard method of apportionment might not be relevant for all vendors. Even if a ven-
dor generally makes 100% taxable supplies, each expense must be evaluated on an indi-
vidual basis to determine whether a 100% or an apportioned input VAT deduction can be
claimed. Should an expense not fully relate to a taxable supply, for example bank charges
relating to investment income which constitute a minor portion of the vendor’s total turn-
over, individual apportionment based on the specific transaction could be necessary.

118
2.20–2.21 Chapter 2: Value-added Tax (VAT)

2.20.2 Special apportionment method

A vendor may use an alternative apportionment method (for example, the varied
input-based method, the floor space method, the transaction-based method and the
employee time method) if the turnover-based method does not yield a fair approxi-
mation of the extent of taxable supplies, only when prior approval is granted by
SARS.

2.21 Input VAT: Denial of input VAT (section 17(2))

Section 17(2) of the VAT Act provides that input tax may not be claimed by a vendor
(excluding a foreign donor-funded project) in respect of certain goods or services. The
input tax is denied even if the vendor paid input tax when the goods or services were
acquired and is going to use the goods or services wholly for the making of taxable
supplies.

2.21.1 Denial of input VAT: Entertainment

The input tax is denied on goods or services acquired to the extent that such goods or
services are acquired for the purposes of entertainment.
‘Entertainment’ as defined in section 1, includes the provision of food, beverages, accom-
modation, entertainment, amusement, recreation or hospitality of any kind, whether
provided directly or indirectly by a vendor to anyone in connection with an enter-
prise carried on by him.
In respect of entertainment expenses, there are five instances where the input tax will
not be denied:

Vendors in the business of supplying entertainment

• Input VAT can be claimed as long as a charge is made by the vendor for the enter-
tainment and the charge:
– covers all direct and indirect costs; or
– is equal to the open-market value of the entertainment supplied.
• Input VAT can be claimed if the entertainment is supplied for bona fide promotion-
al purposes to current customers or any excess food not consumed by the custom-
ers during a taxable supply, is subsequently given to:
– an employee of the vendor; or
– a welfare organisation.
• Input VAT can be claimed if the entertainment is supplied to an employee or
connected person and a charge is made to such person that covers all direct and
indirect costs of such entertainment.

Personal subsistence of a vendor, his employee or any self-employed natural

person
• Input VAT is not denied on any meal, refreshment or accommodation of a vendor,
his employee or any self-employed natural person who is by reason of the vendor’s

119
A Student’s Approach to Taxation in South Africa 2.21

enterprise required to be away from his usual place of residence and usual place of
business for at least one night.
A self-employed person is a person who is not an employee of the vendor but
who invoices the vendor for services rendered. A vendor may only claim the input
tax on the personal subsistence of a self-employed natural person where the self-
employed natural person is:
– by reason of his contractual obligations with the vendor;
– obliged to spend any night away from his usual place of business.

Vendors that operate taxable (not exempt) passenger transport services

• Input VAT can be claimed on entertainment as defined by these vendors. Taxable
transport services include travel by air in South Africa, which is standard rated. It
also includes cross-border travel (by air, sea or road), which is zero rated.

Vendors that organises seminars or similar events for reward

• Input VAT can be claimed on meals and refreshments provided during the event if
the costs of such meals and refreshments are included in the price of the ticket or
entrance fee.

Vendors who receive bets in respect of the outcome of a race or any other event
• Input VAT can be claimed on entertainment where the entertainment is continu-
ously or regularly supplied as a prize to its clients or customers (section 8(13)).

2.21.2 Denial of input VAT: Club membership fees

and subscriptions
The input tax deduction is denied in respect of any fees or subscriptions paid by the
vendor for the membership of a club or association of a sporting, social or recreation-
al nature, for example golf membership. Input tax is usually not denied in the case of
the payment of professional memberships. However, there are instances where
payments for professional membership will be denied the input VAT deduction.
Where the payment is for the professional membership of an employee, for example,
membership of the CA(SA) accounting profession in South Africa and the invoice is
not issued in the name of the vendor, the input tax deduction could be denied. The
reason for this is that the invoice for membership is usually issued in the name of the
individual member (the employee) and not in the name of the employer. As the
documentary requirements of section 20(4) are not complied with, no input tax can be
claimed by the employer.

2.21.3 Denial of input VAT: Motor car

The input tax on the acquisition of a motor car is also denied.
A ‘motor car’, as defined in section 1, includes a motor vehicle, station-wagon, mini-
bus, double-cab light-delivery vehicle and any other motor vehicle of any kind

120
2.21 Chapter 2: Value-added Tax (VAT)

normally used on public roads, that has three or more wheels and is constructed or
converted wholly or mainly for the carriage of passengers, excluding:
• vehicles capable of transporting only one person or suitable for carrying more than
16 persons;
• vehicles with an unladen mass of 3 500 kg or more;
• caravans;
• ambulances;
• vehicles constructed for a purpose other than the transport of persons which do
not have the ability to transport passengers;
• game-viewing vehicles constructed or permanently converted for the carriage of
seven or more passengers for game-viewing. The game-viewing vehicle should be
used in national parks, game reserves, sanctuaries or safari areas and exclusively
for the purpose of game-viewing, other than use that is merely incidental and sub-
ordinate to that use (refer to Interpretation Note No. 42 which also deals with the
VAT implications pertaining to the supply of game-viewing services in South Africa);
and
• vehicles constructed as, or permanently converted into hearses for the transport of
deceased persons and used exclusively for that purpose.
The denial of input tax does not apply in the case of a vendor who:
• is a car-dealer;
• runs a car-hire business at an economic rental;
• acquired the motor car for awarding that motor car as a prize in consequence of a
betting transaction-supply in terms of section 8(13); or
• regularly or continuously supplies motor cars as prizes to clients or customers
(other than employees, office-holders or a connected person in relation to that
employee, office-holder or vendor).
The denial of input tax also does not apply in respect of the related expenses that are
incurred as part of vehicle ownership, for example insurance premiums, maintenance
and repair costs etc.

Example 2.46
Mr Silindile is a vendor that bought a new motor car valued at R230 000 from Van Oordt
& Hills Motors Inc. in terms of a credit sale with monthly payments of R4 500. As an addi-
tional option Mr Silindile took out a maintenance plan and insurance on the motor car
resulting in an additional monthly payment of R500 and R400 respectively. All amounts
are inclusive of VAT. The motor car is used 100% for the making of taxable supplies.
You are required to determine the input tax deduction claimable (if any) by Mr Silindile.

121
A Student’s Approach to Taxation in South Africa 2.21–2.22

Solution 2.46
Mr Silindile cannot claim an input tax deduction on the cost of the motor car, because it
relates to the acquisition of a motor car and this deduction is denied in terms of sec-
tion 17(2). Mr Silindile can, however, claim an input tax deduction in respect of the
maintenance plan and insurance on the motor car as section 17(2) does not deny the input
tax deduction on these services supplied.
Note that if the maintenance plan and insurance payment were not separately indicated
on the VAT invoice but formed part of the supply of the motor car, the input tax deduc-
tion on these expenses would have been denied in terms of section 17(2) as it would have
related to the acquisition of a motor car as defined.

2.22 Input VAT: Deemed input tax on second-hand goods

(sections 1, 18(8) and 20(8))
When second-hand goods are acquired from a resident of South Africa (who is either
not a VAT vendor, or a vendor that used the second-hand goods solely for the
making of exempt supplies), and the goods are situated in South Africa, the VAT Act
provides that deemed input tax may also be claimed. Deemed input tax is also known
as notional input tax.
No deemed input tax on second-hand goods is available if:
• the goods were acquired from a person on a diplomatic or consular mission of a
foreign country established in South Africa;
• that was granted a VAT refund as contemplated in section 68.
‘Second-hand goods’ are defined in section 1 as:
• goods that were previously owned and used; and
• in respect of the transfer of a unit (referred to in Item 8 of Schedule 1 to the Share
Blocks Control Act), such a unit.
Second-hand goods do not include the following:
• animals;
• goods consisting solely of gold (unless it was acquired for the sole purposes of
supplying it in the same state, without any further processing, to another person);
• gold coins issued by the Reserve Bank in the Republic;
• goods that contain gold (unless it was acquired for the sole purposes of supplying
it, in the same or substantially the same state, to another person); and
• certain prospecting and mining rights.
Fixed property usually also qualifies as second-hand goods if it had previously been
owned and used. It has, however, been proposed that all the supplies of fixed prop-
erty as part of the land reform regime be excluded from the definition of second-hand
goods. The reason for the proposal is to prevent claims for notional input tax on such
land. The supply of land as part of the land reform regime is usually either zero rated
or exempt from transfer duty. No tax-related cost is therefore associated with the
acquisition of the land and the recipient of the supply is accordingly not entitled

122
2.22 Chapter 2: Value-added Tax (VAT)

to any notional input VAT. At the time of publication, the date on which this pro-
posal will take effect was not known yet.
The deemed input tax is calculated by the application of the tax fraction (15/115) to the
lesser of:
• the purchase price; or
• open-market value,
even though no VAT has actually been paid.
‘Open-market value’ is the consideration in money that the supply of goods and
services will fetch if freely offered and made between persons who are not connected.
Open-market value includes VAT, where applicable, in respect of taxable supplies.
This deemed VAT may be claimed as input tax to the extent that payment has been
made for the second-hand goods. If only a portion of the purchase price for the
second-hand goods has been paid, only the same relative portion of the deemed input
tax may be claimed.

REMEMBER

• This deemed input tax rule relates only to goods previously owned and used. The pur-
chase of trading stock from a non-vendor (except for antiques) would usually not quali-
fy as second-hand goods, as the trading stock was not previously used.
• The rule that the lesser of purchase price or open market value should be used in calcu-
lating the deemed input VAT does not apply to the motor industry on the trade in of
second-hand vehicles. It is not the intention of the VAT Act to deny an input tax credit
on an arm’s-length transaction between parties that are not connected persons. A bind-
ing general ruling (BGR No. 12) allows motor dealers to deduct the deemed input tax
on the full consideration (including any over-allowance amount) paid or credited to the
supplier for a second-hand vehicle traded-in under a non-taxable supply.

Example 2.47
Simunye (Pty) Ltd, a vendor for VAT purposes, acquired a second-hand machine from a
non-vendor for use in its business. The purchase price of the machine was R6 300 and the
market value was R7 800. The purchase price was paid in full.
You are required to determine whether any input tax may be claimed in respect of the
purchase.

Solution 2.47
Because the vendor has purchased a second-hand machine from a person not registered
for VAT purposes, a deemed input tax credit can be claimed on the second-hand machine.
The deemed input tax credit is based on the lower of the consideration paid (R6 300) or
open-market value (R7 800).
The deemed input tax is calculated as follows:
Tax fraction × consideration paid (15 / 115 × R6 300) = R822.

123
A Student’s Approach to Taxation in South Africa 2.22

If, after a deduction of input tax on second-hand goods, the sale is cancelled, the
consideration is reduced, or the second-hand goods are returned, and the input tax
actually deducted exceeds the input tax properly deductible, the difference should be
accounted for as an output tax (section 18(8)).
The recipient of second-hand goods must obtain and maintain a declaration by the
supplier stating whether the supply is a taxable supply or not, and must further
maintain sufficient records to enable the following particulars to be ascertained
(section 20(8)):
• The name of the supplier; and
– where the supplier is a natural person, his identity number;
– where the supplier is not a natural person, the name of the supplier and the
name and identity number of the natural person representing the supplier in
respect of the supply, and any legally allocated registration number.
* The recipient should verify the name and identity number of natural person
with reference to the person’s identity card and, the recipient should also
retain a photocopy of such identity card.
* The recipient should verify the name and registration number of any suppli-
er, other than a natural person, with reference to its business letterhead and
should retain a photocopy of such name and registration number appearing
on such letterhead.
• The date upon which such second-hand goods were acquired.
• A description of the goods.
• The quantity or volume of the goods.
• The consideration for the supply.
• Proof and date of payment.
No documentary proof is required if the total consideration for the supply of the
second-hand goods is in money and does not exceed R50.

2.22.1 Zero rating of movable second-hand goods exported

(proviso sections 11(1) and 10(12))
When second-hand goods are exported, the zero rating as per section 11 is not applic-
able if, in respect of such goods, deemed input tax has been claimed by that vendor or
another person where that vendor and that other person are connected persons.
When such second-hand goods are exported, the value of the supply shall be deemed
to be equal to the purchase price of the supplier. If the supplier bought the goods
from a connected person who was entitled to claim a deemed input tax on the
second-hand goods, the value of the supply is the greater of the purchase price of
those goods to the supplier and the purchase price of those goods to the connected
person. Effectively, the zero rate applies only to the mark-up.

124
2.22 Chapter 2: Value-added Tax (VAT)

Example 2.48
Aron (Pty) Ltd buys scrap metal from a non-vendor for R6 000 and claims a deemed input
tax deduction of R783 (R6 000 × 15 / 115).
You are required to explain the VAT consequences if:
(a) Aron (Pty) Ltd exports the goods for R7 000, and
(b) Aron (Pty) Ltd exports the goods for R4 000.

Solution 2.48
(a) Aron (Pty) Ltd will be required to account for output tax equal to the notional input
tax claimed (R783). The output VAT is based on the purchase price, irrespective of
the selling price. However, where Aron (Pty) Ltd accounted for VAT at the standard
rate of 15% in respect of the total amount charged, the purchaser, if a qualifying pur-
chaser, may claim the difference between the VAT paid and the notional input tax
deduction from the VAT Refund Administrator.
(b) Aron (Pty) Ltd will again be required to account for output tax equal to R783,
although the selling price of the goods is less than the purchase price. The output
VAT is based on the original purchase price, irrespective of the selling price.

Example 2.49
Adam buys second-hand goods for R2 000 and claims a notional input tax deduction of
R261, then sells them to Bart, a connected person, for R1 800. Bart claims an input tax
deduction of R235 based on the tax invoice provided by Adam. Bart exports the goods for
R1 980.
You are required to explain the VAT consequences in respect of the export.

Solution 2.49
Bart will be required to account for output tax of R261 (R2 000 × 15 / 115) which is based
on the greater of the price paid by the connected person (Adam) – R2 000; or the price
paid by (Bart) – R1 800.

125
A Student’s Approach to Taxation in South Africa 2.23

2.23 Special rules: Instalment credit agreements

2.23.1 Meaning of ‘supply’: Instalment credit agreements
An instalment credit agreement encompasses suspensive sale and finance leases
(refer to the definition in section 1). The definitions of a suspensive sale and finance
lease in section 1 can be summarised as follow:
Suspensive sale (paragraph (a)) Finance lease (paragraph (b))
The goods are sold by a seller to a pur- The rent consists of a stated or determin-
chaser for payment by the purchaser to the able sum of money payable at a stated or
seller of a stated or determinable sum of determinable future date or in instalments
money, at a stated or determinable future over a period in the future; AND
date or in instalments over a period in the
future; AND
Such sum of money includes finance charges Such sum of money includes finance charges
stipulated in the agreement of sale; AND and mark ups based on time-value of mon-
ey principles as stipulated in the lease;
AND
The aggregate of the amounts payable by The aggregate of the amounts payable
the purchaser to the seller under such under such lease by the lessee to the lessor
agreement exceeds the cash value of the for the period of such lease and any resid-
supply, meaning that the goods may not ual value of the leased goods on termina-
be supplied at a loss by the seller; AND tion of the lease, as stipulated in the lease,
exceeds the cash value of the supply,
meaning that the goods may not be sup-
plied at a loss by the lessor; AND
The purchaser does not become the owner The lessee is entitled to the possession, use
of those goods merely by the delivery to or or enjoyment of those goods for a period of
the use, possession or enjoyment by him at least 12 months; AND
thereof; OR
The seller is entitled to the return of those The lessor accepts the full risk of destruc-
goods if the purchaser fails to comply with tion or loss of, or other disadvantage to
any term of that agreement. those goods and assumes all obligations of
whatever nature arising in connection with
the insurance, maintenance and repairs of
those goods; OR
The lessee accepts the full risk of main-
tenance and repair of those goods and
reimburses the lessor for the insurance of
those goods and the lessor accepts the full
risk for the insurance of those goods.

It should be noted that all the requirements listed above should be met for a supply to
be in terms of a suspensive sale or in terms of a finance lease.

126
2.23 Chapter 2: Value-added Tax (VAT)

Although the definitions summarised above are similar to a large extent, it seems that
the major difference between a suspensive sale and finance lease lies in the person
carrying the risk of ownership of the goods supplied. In terms of a suspensive sale
the risk of ownership passes to the purchaser on the date that the suspensive sale
condition is complied with, where in terms of a finance lease the risk of ownership
passes to the lessee and the date that the lease agreement is concluded.

2.23.2 Value of the supply: Instalment credit agreements

(section 10(6))
In the case of instalment credit agreements, the consideration in money for the supply
is deemed to be its cash sale value. The VAT based on the cash cost is claimed in total
as input tax at the earlier of delivery or payment date by the purchaser or lessee,
while the seller or lessor raises output tax in total on the cash cost of the goods at that
time. The cash cost excludes interest, as interest is exempt from VAT because it con-
stitutes consideration for the supply of a financial service.

2.23.3 Time of supply: Instalment credit agreements

(section 9(3)(c))
In the case of instalment credit agreements, the time of supply is the earlier of the
time of delivery of the goods or the time any payment is received.
This rule does not apply when the supply is made under a credit agreement in terms
of which the buyer has a right to return the goods within a certain time. Thus, for a
suspensive-sale agreement, the time of supply is when the ‘cooling-off’ period of five
days has expired (section 9(2)(b)).

Example 2.50
A bank enters a finance lease on 15 May of the current tax year for the lease of a motor car
to a clothing manufacturer, as follows:
R
Cost of motor car 292 174
VAT 43 826
336 000
Finance charges 117 600
453 600
The agreement states that 36 monthly instalments of R12 600 (including VAT) are payable
starting on 30 June of the current year. The motor car was delivered on 1 June. The motor
car is a motor car (refer to 2.21) as defined for VAT purposes.
You are required to discuss the VAT implications of the above transaction if both parties
have a one-month tax period.

127
A Student’s Approach to Taxation in South Africa 2.23

Solution 2.50
The bank must account for output tax of R43 826 (R336 000 × 15 / 115) on 1 June on the
cash value of the motor car. The bank does not have to account for output VAT on the
finance charges as they constitute an exempt supply.
The clothing manufacturer is not able to claim any input tax deduction since the vehicle is
a ‘motor car’ as defined (refer to 2.21).
Should the clothing manufacturer purchase the car at the end of the lease, VAT is also
payable on any consideration paid for the vehicle at that stage. Again the manufacturer
would not be able to claim any input tax deduction, as it relates to the acquisition of a
motor car as defined.

Example 2.51
Assume the same information as in the above example, except that it is now a delivery
vehicle acquired in terms of a suspensive sale agreement, which provides for a deposit of
R42 000 payable on 15 May of the current tax year.
The monthly instalments are R11 025, and finance charges totalling R102 900 will be paid
over the 36-month period.
You are required to discuss the VAT implications of the above transaction.

Solution 2.51
The only difference is that the bank now must account for output tax of R43 826 (R336 000
× 15 / 115) on 15 May. This is also the date on which the manufacturer can claim the input
tax of R43 826, assuming that the delivery vehicle will be used exclusively to make taxable
supplies. Regarding a suspensive sale agreement, when a deposit is paid, it is immediate-
ly applied in reducing the total consideration due. Neither the bank nor the manufacturer
needs to account for VAT on the finance charges as it constitutes an exempt supply.

REMEMBER

• Where an amount of a supply of goods in terms of an instalment credit agreement has

become irrecoverable, there could be an additional amount of input VAT for the sup-
plier. The adjustment of the amount of input VAT should be restricted to the tax content
of the amount that has become irrecoverable in respect of the cash value of such supply.
The total amount due should be apportioned to determine the outstanding amount of
the cash value (first proviso (i) to section 22(1)).

continued

128
2.23–2.24 Chapter 2: Value-added Tax (VAT)

• No amount of input VAT could be claimed if there was an amount irrecoverable in

terms of an instalment credit agreement and the vendor repossessed the goods or is
obliged to take possession of the goods (second proviso (i) to section 22(1)). If, for
example, a vendor sold a lounge suite to a person in terms of an instalment credit
agreement, the full output VAT should be accounted for on the date of the supply. If the
person then fails to pay the outstanding debt and the vendor repossesses the lounge
suite (or where the debtor surrenders the lounge suite), no input VAT can be claimed as
irrecoverable in terms of section 22. This is on the basis that where the goods are repos-
sessed or surrendered, the debtor is deemed to make a supply to the vendor (original
supplier) in terms of section 8(10) for a consideration in money equal to the balance of
the cash value of the goods (section 10(16)) and the vendor is entitled to claim an input
tax deduction at such time when the deemed supply is made to it (section 9(8)) in terms
of the normal provisions (section 16(3)(a)(i)). Section 20(8A) determines the documen-
tary requirements that must be met when goods are repossessed and a deemed supply
arises in terms of section 8(10). These requirements include, among others, the date on
which the goods were repossessed or surrendered to the vendor.
• In the case where a vendor purchases second-hand goods from a non-vendor in terms
of an instalment credit agreement, the notional input VAT can only be claimed to the
extent of payment made, irrespective of the date of delivery (refer to 2.22).

2.24 Special rules: Fixed property

2.24.1 Meaning of ‘supply’: Fixed property
The term ‘goods’, as defined in section 1, includes fixed property and real rights in
fixed property. ‘Fixed property’, in turn, is also defined in section 1 and embraces:
• land and improvements to land;
• sectional title units;
• shares in a share block company conferring a right to or an interest in the use of
immovable property;
• time-sharing interests; and
• real rights in any of the above items.
Since all these forms of fixed property constitute ‘goods’ as defined, a vendor who
supplies, or is deemed to supply, fixed property in the course or furtherance of his
enterprise is required to account for VAT unless the supply is zero rated or exempt
from VAT.

2.24.2 Value of the supply: Fixed property

The rules pertaining to the general value of the supply also applies to fixed property.
However, no transfer duty is payable in respect of the acquisition of any property
under any transaction that is a taxable supply of goods for VAT purposes to the
person selling the property. This exemption, provided by section 9(15) of the Transfer
Duty Act 40 of 1949, applies whether the supply is a taxable supply subject to the
standard rate of VAT (15%) or is zero rated. Thus, a supply of fixed property that is
subject to VAT at any rate is exempt from transfer duty.

129
A Student’s Approach to Taxation in South Africa 2.24

REMEMBER

• Transfer duty is a separate tax levied by SARS on the value of any property acquired by
any person. Property includes land, fixtures and rights to land, rights to minerals,
shares or interest in residential property companies and shares in share-block compa-
nies.
• Fixed property transactions in South Africa are either subject to VAT or to transfer
duty.

If a supply of fixed property does not attract VAT at any rate, the supply is subject to
transfer duty. Transfer duty is levied at a sliding scale for all persons. No distinction
is made between natural persons and legal persons. The current transfer duty rates
are:

On the first R1 million of value 0%

On the value exceeding R1 million but not exceeding R1,375 million 3%
On the value exceeding R1,375 million but not exceeding R1,925 million 6%
On the value exceeding R1,925 million but not exceeding R2,475 million 8%
On the value exceeding R2,475 million but not exceeding R11 million 11%
On the value exceeding R11 million 13%

2.24.3 Time of supply: Fixed property

Where fixed property or a real right in fixed property is supplied by a vendor (there-
fore excluding second-hand goods), the time of supply is the earlier of:
• the date of registration (where registration of transfer is effected in a deeds registry);
or
• the date on which any payment is made in respect of the consideration for such
supply.
(Section 9(3)(d)).
The above time of supply rule is only applicable to sales of fixed property between
connected persons where the supply was deemed to take place at market value (if
section 10(4) was applied – refer to 2.16.2). If this is the case, then the input and out-
put tax should be claimed and paid in full on the actual date of the supply as deter-
mined by the above rule (section 16(3)(a)(iiA)).
Where the supply was not deemed to take place at market value (where section 10(4)
was not applied) we have to distinguish between fixed property that is supplied in
the course or furtherance of an enterprise (refer to 2.24.3.1) and fixed property that is
not supplied in the course or furtherance of an enterprise (refer to 2.24.3.2).

2.24.3.1 Time of supply: Fixed property supplied in the course

or furtherance of an enterprise
For fixed property transactions in the course or furtherance of an enterprise between
parties that are not connected persons, or where they are connected persons, but the
supply was not deemed to take place at market value (thus section 10(4) was not

130
2.24 Chapter 2: Value-added Tax (VAT)

applied), the above time of supply rule does not necessarily correlate with the actual
entitlement to claim an input tax or the liability to pay output tax. The input tax may
then only be claimed in proportion to the amount paid, irrespective of the date of
transfer. The output VAT is also only accounted for to the extent that payment is
received (sections 16(3)(a)(iiA) and (4)(a)(ii)). For these transactions, the special time
of supply rule is ignored, and we only have to focus on the payments as this would
trigger an output tax obligation or an input tax entitlement.
It does also not matter whether the applicable vendor is registered on the invoice
basis or payments basis as all input tax and output tax cash-flows arise only to the
extent payment has been made or has been received (section 16(3)(a)(iiA) and
(4)(a)(ii)).

REMEMBER

• The payment of transfer duty is not payment for a consideration, but payment of an
additional tax on the transaction.
• The payment of a deposit is not regarded as a payment until the deposit is applied as
part-payment or forfeited.
• Payment does not include seller financing or promissory notes.

There are, however, different rules pertaining to fixed property that is not supplied in
the course or furtherance of an enterprise (refer to 2.24.3.2).

2.24.3.2 Time of supply: Fixed property not supplied in the course or

furtherance of an enterprise
Fixed property that is not supplied in the course or furtherance of an enterprise could
include fixed property that is supplied by a vendor, but where the fixed property for
example related to exempt residential use. The fixed property, although supplied by a
vendor, would thus be regarded not to be supplied in the course or furtherance of an
enterprise as exempt supplies are specifically excluded from the definition of an
enterprise (refer to 32.7.4). Fixed property not supplied in the course or furtherance of
an enterprise would also include second-hand fixed property that is supplied by a
non-vendor. In both these cases the vendor buying the fixed property would be
entitled to a deemed input tax deduction on the ‘second-hand’ fixed property pur-
chased from a South African resident if such a vendor is going to use the fixed prop-
erty in the course or furtherance of making taxable supplies. In this case we, however,
have to distinguish between recipient vendors registered on the invoice basis and
recipient vendors registered on the payments basis.
Payments basis (section 16(3)(b)(i))
When a recipient vendor (that is to say the vendor, who purchases the fixed property)
is registered on the payments basis (refer to 2.3.1.2), the deemed input tax is always
claimable only to the extent that the payment has been made.
Invoice basis (section 16(3)(a)(ii)(bb))
The deemed input tax for recipient vendors (the vendor who purchases the fixed
property) registered on the invoice basis (refer to 2.3.1.1) can only be claimed once

131
A Student’s Approach to Taxation in South Africa 2.24

the fixed property is registered in the name of the vendor. After registration in the
name of the vendor, the deemed input tax can further only be claimed to the extent
that payment was made for the supply.

Example 2.52
Venter and Naidoo (Pty) Ltd purchased a house from a non-vendor South African resi-
dent for a consideration equal to R800 000. The open-market value of the house is
R750 000. Venter and Naidoo (Pty) Ltd will use the house for the purposes of making
taxable supplies. As the value of the fixed property is below R900 000, no transfer duty is
payable on the transfer of the fixed property. The registration of the property in the name
of Venter and Naidoo (Pty) Ltd occurred on 15 April of the current year. Venter and
Naidoo (Pty) Ltd borrowed money from ABC Bank and paid the full R800 000 to the non-
vendor on 20 March of the current year.
You are required to determine when and to what extent input tax may be claimed in
respect of the purchase of the house. The company is registered on the invoice basis (refer
to 2.3.1.1).

Solution 2.52
Because the vendor has purchased second-hand fixed property from a South African
resident, deemed input tax may be claimed for the house.
The deemed input tax credit is calculated as follows:
Tax fraction × (lesser of) consideration paid (R800 000) or open market value (R750 000)
= 15 / 115 × R750 000 = R97 826
Although the full consideration for the supply was paid on 20 March, the actual
registration of the house in the name of Venter and Naidoo (Pty) Ltd only occurred on
15 April of the current year. The full deemed input tax may be claimed only after
registration − in the tax period covering April of the current year – as the company is
registered on the invoice basis.
If it is assumed that only 80% of the house will be used by Venter and Naidoo (Pty) Ltd
for taxable purposes, the calculation for the allowable input VAT would have been as
follows:
R750 000 × 15 / 115 × 80% = R78 261
Whether Venter and Naidoo (Pty) Ltd paid cash or used third party financing to effect
payment makes no difference as to the timing of the deemed input VAT. If Venter and
Naidoo (Pty) Ltd, however, used financing that it obtained from the seller, the deemed
input tax is claimable to the extent that Venter and Naidoo (Pty) Ltd settles their debt to
the seller (that is to say to the extent that payment is made).
If the house was purchased by a natural person who is registered on the payments basis,
the input VAT will be claimable to the extent that payment has been made for the consid-
eration. Let us assume that the natural person is going to use 80% of the house for taxable
purposes, and that only R300 000 of the consideration has been paid on 20 March of the
current year. The input tax will then be as follows:
15 / 115 × R750 000 × 80% × R300 000 / R800 000 = R29 348
Thus, R29 348 may be claimed as a notional input tax deduction (refer to Note).

continued

132
2.24–2.25 Chapter 2: Value-added Tax (VAT)

Note
The deemed input tax could be claimed to the extent payment was made and to the extent
the property will be used for taxable purposes. This deemed input tax could be claimed in
the tax period covering March of the current year – to the extent of payment and we do
not need to wait for registration if the vendor is registered on the payments basis.

2.25 Special rules: Foreign suppliers of electronic services

(sections 1 (definition of ‘enterprise’), 23 and 20)
With changes and developments in technology, e-commerce (the buying and selling
of goods and services over the internet) has grown significantly over the last couple
of years. Foreign suppliers of electronic services usually do not have any physical
presence in South Africa, despite having numerous South African customers. In the
past, these foreign suppliers of electronic services did not levy any output VAT
because they were not registered (or required to register) as South African VAT
vendors. This gave them an unfair competitive advantage over local suppliers of
electronic services, who are required to levy output VAT on the services that they
render. To ensure that local suppliers of electronic services are not disadvantaged,
National Treasury introduced special ‘place of supply’ rules in relation to foreign
suppliers of electronic services to ensure that these foreign suppliers also have to
register as vendors for South African VAT purposes.
Electronic services include, among other things, internet-based games, e-books,
internet-based auction services, music and social networking services.
Foreign suppliers of electronic services fall within the ambit of the VAT Act due to
the definition of ‘enterprise’ in section 1 of the Act. The definition of an enterprise
specifically includes the supply of electronic services by a person from a place in an
export country. This inclusion applies where at least two of the following circum-
stances are present:
• the electronic services are supplied to a South African resident; or
• any payment for such services is made from a South African bank; or
• the electronic services are supplied to a person with a business address, residential
address or postal address in South Africa where a tax invoice will be delivered.
The activities of an intermediary of a foreign company that supplies electronic ser-
vices is also included in the definition of ‘enterprise’. An intermediary is defined as a
person who facilitates the supply of electronic services supplied by an electronic
services supplier. The intermediary is responsible for issuing the invoices and collect-
ing the payments for the supply of the electronic services. Where the intermediary is
a vendor who supplies electronic services on behalf of a foreign person who is not a
registered vendor, to persons in South Africa, the supply of the electronic services is
deemed to be made by the intermediary and not by the foreign person. The effect of
this is that a foreign supplier of electronic services such as Amazon, which only
supplies electronic services via a South African intermediary’s platform to South
African residents, is not required to register as a vendor for VAT purposes in South
Africa as the intermediary is deemed to supply the electronic services.

133
A Student’s Approach to Taxation in South Africa 2.25–2.26

In terms of section 23(1), a foreign supplier of electronic services must register (com-
pulsory registration) as a VAT vendor at the end of the month where the total value
of the taxable supplies made by foreign supplier has exceeded R1 000 000 in any
consecutive 12-month period. Foreign suppliers of electronic services are, however,
not required to register where the value of their taxable supplies exceed R1 000 000
only because of temporary, abnormal circumstances.
Foreign suppliers of electronic services (and their intermediaries) are allowed to
account for VAT on the payments basis, provided that the foreign supplier (and/or
the intermediary) applied to the Commissioner in writing to do so.
The supplies made by foreign suppliers of electronic services are subject to VAT at
the standard rate of 15% and do not qualify for zero rating in terms of section 11(2).
A foreign supplier of electronic services is required to issue a tax invoice that contains
particulars prescribed by SARS in Binding General Ruling No. 28. Additional infor-
mation on the tax invoices of foreign suppliers of electronic services include, for
example, the exchange rate used.

2.26 Adjustments: 100% non-taxable use (sections 18(1), 9(6),

16(3)(h), 10(7), 18D, 9(13), 10(29) and 16(3)(o))
In the case of goods or services acquired wholly or partially for making taxable supplies
that are then applied wholly for private, exempt or other non-taxable purposes, a
taxable supply arises for which output tax must be levied (section 18(1)).

≤ 100% taxable use  0% taxable use

The output tax is equal to the tax fraction multiplied by the open-market value (sec-
tion 10(7)), as determined in the following formula:
A×B
where:
A = the tax fraction, and
B = the open-market value.
The time of supply is the date on which the goods are applied for non-taxable pur-
poses (section 9(6)).
Where a vendor has made an adjustment to output tax as contemplated in sec-
tion 18(1) in circumstances where partial input tax was originally claimed, an addi-
tional input tax adjustment is provided for. The purpose of this adjustment is to allow
a deduction of the unclaimed portion of the input tax. The adjustment is required to
be made on the date on which the goods are supplied. For this purpose, the following
formula is to be used (section 16(3)(h)):
A×B×C
where:
A = the tax fraction;
B = the lesser of:
– adjusted cost (including VAT) of the goods or services (an exception
being that the cost for connected persons is the open-market value on the
date of the original transaction),

134
2.26 Chapter 2: Value-added Tax (VAT)

– B in formula A × B × C × D in section 18(4) (refer to 2.27),

– the open-market value on the date that a previous increase or decrease was
calculated if the open-market value was lower than the adjusted cost, or
– the open-market value of the goods or services at the time the change-of-
use adjustment is required.
C = the percentage use for non-taxable purposes for the period before the
adjustment.

REMEMBER

• The adjusted cost of an asset differs from the cost price of the asset. The ‘adjusted cost
of an asset’ refers to that part of the cost price of the asset where VAT has been charged
or would have been charged if VAT was applicable when the goods or services were
supplied to the vendor.
• Wages and finance charges are sometimes included in the cost price of an asset. These
costs would, however, not be included in the adjusted cost of the asset as no VAT is lev-
ied on either the wages or the finance charges.

Example 2.53
Dube Mahlangu purchased ten lawnmowers to be sold in his nursery. Each lawnmower
cost him R10 000 (including VAT). At the time of purchase, he intended to sell the
lawnmowers in the course of his business and claimed input tax of R1 304 (R10 000 × 15 /
115) per lawnmower. Dube decided to take one of the lawnmowers for his own private
use in his garden at home. Dube usually sells the lawnmowers for R18 000 each (includ-
ing VAT).
You are required to calculate the output tax.

Solution 2.53
R
Output tax adjustment is equal to the tax fraction multiplied by
open-market value = 15 / 115 × R18 000 2 348
If Dube originally acquired the lawnmower for making only 55% taxable
supplies, the VAT consequences would have been as follows:
Output tax
= 15 / 115 × R18 000 (section 18(1)) 2 348
Input tax
= 15 / 115 × R10 000 × 45% (non-taxable use) (section 16(3)(h)) 587

Where repairs, maintenance or insurance in respect of a motor vehicle used by a

vendor for making taxable supplies are subsequently deemed to be supplied by the
vendor because the vehicle is used for a purpose other than taxable supplies (such as
for private use), the value of the deemed supply is:
• the cost (including tax) to the vendor of acquiring the repairs, maintenance or
insurance; or

135
A Student’s Approach to Taxation in South Africa 2.26

• where adequate data has not been maintained, the amount prescribed by the
Minister in the Government Gazette (section 10(8)).

REMEMBER

• Section 18(1) is not applicable if the input has been denied in terms of the VAT Act (for
example, motor vehicles or entertainment assets) (refer to 2.21).
• The open-market value is used in cases where the use for taxable purposes decreases to
0%, but if the goods are still used in the course of making taxable supplies and the
extent merely decreases, section 18(2) will be applicable (refer to 2.28).
• A section 18(1) adjustment is made on the date of the change of use.

Property developers usually develop residential property (for example townhouse

complexes) with the principal purpose of selling the completed residential units in
the course of making taxable supplies. Section 18(1) would apply to property devel-
opers that are sometimes forced to shift from a resale intention to a rental application
due to weak selling market conditions. As these properties are rented out as residen-
tial accommodation that constitutes an exempt supply, the developer has a VAT
change in use that usually result in a section 18(1) output tax adjustment. This change
of use adjustment could force certain property developers into insolvency.
Section 18D was inserted in the Act in order to ensure that the VAT system provides
some relief to developers that rent residential fixed properties before intended sale.
Developers are granted a 12-month grace period to rent out residential property
before resale. This 12-month grace period is known as the ‘temporarily applied period’.
If a developer rents out fixed property for a fixed period longer than 12 months
(in other words, the fixed property is not temporarily applied), the provisions of
section 18D will not apply. The developer will then have to account for a change in
use adjustment in terms of section 18(1), which accounts for output VAT on the open
market value of the fixed property.
The relief provided for by section 18D lies in the fact that, instead of having to
account for output VAT on the open market value of the fixed property, the devel-
oper who temporarily (in other words, for 12 months or less) rents out fixed proper-
ty as residential accommodation will account for output VAT on the adjusted cost
of the fixed property. The adjusted cost essentially refers to the costs for the devel-
oper to construct, extend or improve the fixed property.

REMEMBER

• The relief provided for by section 18D lies in the fact that instead of having to account
for output VAT on the open market value of the fixed property when it is temporarily
rented out, output VAT is accounted for on the costs that the vendor had incurred when
constructing the fixed property.
• When a developer rents out fixed property as residental accommodation for 12 months
or less, section 18D(2) triggers a deemed taxable supply, which is why output VAT has
to be accounted for.

136
2.26 Chapter 2: Value-added Tax (VAT)

The time of supply for this change in use adjustment is the earlier of the date within
the tax period when the agreement for the rental of the fixed property as residential
accommodation comes into effect or the date when the dwelling is occupied by the
lessee (section 9(13)). The value of the supply, as stated above, is the adjusted cost of
the fixed property (section 10(29)).
Should a developer manage to sell the fixed property within the 12-month ‘temporar-
ily applied period’, such sale will be regarded as a taxable supply on which output
VAT has to be levied. In other words, irrespective of the fact that the fixed property
was temporarily used as residential accommodation (which is an exempt supply),
output VAT has to be levied on the sale thereof, if it is sold within the 12-month
rental period (section 18D(3)). In this case, the output VAT will be levied on the actual
consideration that the developer receives for the sale of the fixed property.
To compensate for the fact that a developer in this case would have had two output
VAT events (the first being the output VAT adjustment on the cost of the fixed prop-
erty in terms of section 18D(2) and the second the output VAT on the actual consider-
ation received for the sale of the fixed property), section 18D also makes provision for
an input VAT adjustment.
An input VAT adjustment is allowed in the following circumstances (section 18D(5)):
• if the developer managed to sell the fixed property within the 12-month temporari-
ly applied period and has to levy output VAT on the actual sale of the fixed prop-
erty in terms of section 18D(3); or
• if the fixed property was temporarily applied as residential accommodation (and
the developer had to account for an output VAT adjustment on the cost of the fixed
property), but is no longer rented out after the lapse of the 12-month temporarily
applied period; or
• if the fixed property was never temporarily applied for 12 months or less but was
initially rented out as residential accommodation for longer than 12 months and
the developer had to account for an output VAT adjustment in terms of sec-
tion 18(1) on the open market value of the fixed property.
The input VAT adjustment is based on the adjusted cost of the fixed property (sec-
tion 16(3)(o)).
The provisions of section 18D are only applicable to developers as defined. A devel-
oper means a vendor that continuously or regularly constructs, extends or substan-
tially improves residential fixed property with the purpose of selling that fixed
property (section 18D(1) – definition of developer). A person merely buying and
selling residential fixed property would not qualify as a developer and any temporary
renting by such a person would immediately result in a change of use adjustment
(section 18(1)).

137
A Student’s Approach to Taxation in South Africa 2.26–2.27

Example 2.54
Mr Chill is a residential property developer. Mr Chill recently completed a development
in Mooikloof, Tswhane. Due to the current market conditions Mr Chill is unable to sell
the residential units.
Discuss the VAT consequences of the following scenarios:
(a) Mr Chill decides to temporarily rent out the property as residential accommodation
for 12 months, with the intention to still sell the property. After 8 months, a buyer is
found, and the property is sold.
(b) Mr Chill decides to temporarily rent out the property as residential accommodation
for 18 months, with the intention to still sell the property. After 18 months Mr Chill
is still unable to sell the property.
(c) Mr Chill decides to temporarily rent out the property as residential accommodation
for 12 months, with the intention to still sell the property. After 12 months the rental
agreement came to an end and Mr Chill puts the property back on the market.

Solution 2.54
(a) An output VAT adjustment in terms of section 18D(2), calculated as the tax fraction
multiplied by the adjusted cost of the property, has to be made in the tax period
when the agreement for the renting of the property comes into effect. When the
property is sold within the 12-month temporarily applied period, Mr Chill has to ac-
count for further output VAT on the actual consideration received in respect of the
sale. An input VAT adjustment, based on the adjusted cost of the property, will be
allowed in the tax period that the property is sold.
(b) An output VAT adjustment in terms of section 18(1), calculated as the tax fraction
multiplied by the open market value of the property, has to be made in the tax peri-
od when the agreement for the renting of the property comes into effect, since the
rental agreement is for a fixed period exceeding 12 months. An input VAT adjust-
ment, based on the adjusted cost of the property, will be allowed in terms of sec-
tion 18D(5).
(c) An output VAT adjustment in terms of section 18D(2), calculated as the tax fraction
multiplied by the adjusted cost of the property, has to be made in the tax period
when the agreement for the renting of the property comes into effect. When the
property is put back on the market after 12 months, an input VAT adjustment, again
based on the adjusted cost of the property, will be allowed.

2.27 Adjustments: Subsequent taxable use

(section 18(4))
In the case of goods or services acquired wholly for the purposes of making non-
taxable supplies that are subsequently applied for making taxable supplies, an
adjustment must be made to input tax.

0% taxable use  ≤ 100% taxable use

138
2.27 Chapter 2: Value-added Tax (VAT)

This input tax is calculated by applying the following formula:

A×B×C×D
where:
A = the tax fraction;
B = the lesser of:
– adjusted cost (including VAT) of the goods or services, or
– open-market value of the goods or services at the time the change-of-
use adjustment is required;
C = the percentage by which the taxable use of goods or services has in-
creased (an increase to 95% or more is deemed to be 100%); and
D = if the goods are second-hand goods (refer to 2.22), the percentage of the
consideration that has been paid.
This adjustment is required to be made in the tax period when the goods are applied
for taxable purposes.

REMEMBER
• Section 18(4) is not applicable if the input has been denied in terms of the VAT Act (for
example, motor vehicles or entertainment assets) (refer to 2.21). For example: A vendor
took a fridge from the flat he rented for residential purposes to the kitchen of his
enterprise. Although the fridge is now utilised for taxable purposes, it relates to the
supply of entertainment, and no input tax deduction could be made in terms of this
section.
• Section 18(4) is also applicable (for example, if a motor car or entertainment asset was
acquired and, on purchase date, the input tax was denied, but subsequently the use of
the asset changed). For example, a warehouse purchased a fridge for the canteen.
Originally input tax was denied. Then the fridge was moved to the warehouse to be
used for taxable purposes and not the supply of entertainment. A section 18(4) adjust-
ment is permitted.
• The section 18(4) adjustment is applicable if there is an increase of taxable use, but only
if the taxable use before the increase was 0%. (For other increases of taxable use, refer to
2.28.)

Example 2.55
Mr Knowhow, a VAT vendor on the invoice basis, did the following in March of the cur-
rent tax period:
• He started to use his personal motor vehicle 100% for business purposes. His business
entails only taxable supplies, and he is not a car dealer. The motor vehicle cost him
R66 000 (VAT inclusive) and on the date on which he started to use it for business pur-
poses, it had a market value of R37 500.
• He started to use his private computer 100% for business purposes. The computer cost
him R11 355 (VAT inclusive) and had a market value of R7 300 when he started to use
it for business purposes.
• He started to use his private printer 97% for business purposes. The printer was
bought from a non-vendor for R2 500 and had a market value of R1 500 on the date on
which he started to use it for business purposes. The full purchase price had been paid.

continued

139
A Student’s Approach to Taxation in South Africa 2.27–2.28

• He converted 80% of his private residence into offices. He bought his residence for
R500 000. He bought the residence on credit from the seller and has paid only R300 000
up to date. At the date on which he started to use 80% of the residence as offices, it had
a market value of R750 000.
Calculate the VAT consequences of the above.

Solution 2.55
Motor vehicle
• Cannot claim input tax in terms of section 18(4), as input tax is denied in terms of
section 17(2) as it is a motor car as defined.
Computer
A×B×C
15 / 115 × R7 300 × 100% = R952 input VAT can be claimed in terms of section 18(4) in
the applicable tax period when he started to use it for the making of taxable supplies.
Printer
A×B×C×D
15 / 115 × R1 500 × 100% (Note 1) × 100% = R196 input VAT can be claimed
Offices
A×B×C×D
15 / 115 × R500 000 (Note 2) × 80% × R300 000 / R500 000 = R31 304 input tax can be
claimed
Notes
1. Taxable use of 97% is deemed to be 100% (as it is more than 95% – the de minimus
rule).
2. The lesser of the original cost R500 000 and the market value on the date of the change
of use – R750 000 – should be used.
3. The section 18(4) output VAT adjustment is made in the tax period when Mr
Knowhow starts using the goods for taxable purposes, that is to say March of the cur-
rent tax period.

2.28 Adjustments: Increase and decrease of taxable use

(sections 18(2), (5) and (6) and 10(9))
Where capital goods are used for taxable purposes, the extent of the taxable use could
change. The taxable use could increase or decrease. This is applicable only if the
decrease results in a lesser taxable percentage, but not to 0%, as section 18(1) is used
for such adjustments (refer to 2.26). If the taxable use increases from 0% to something
else, an adjustment in terms of section 18(4) should be made (refer to 2.27). If, how-
ever, there is an increase, but not from 0%, or a decrease, but not to 0%, then the
vendor also has to make certain adjustments to the input or output tax. This is the
case when, for example, the taxable usage was 35% in Year 1 and 60% in Year 2. The
adjustment for the increase is calculated in terms of section 18(5). If, for example, in
Year 3 the taxable usage decreases to 27%, the adjustment for the decrease is calculated
in terms of section 18(2).

140
2.28 Chapter 2: Value-added Tax (VAT)

Section 18(2)
≤ 100% taxable use  lower % of taxable use (but not 0%)

Section 18(5)
< 100% taxable use  higher % of taxable use

No adjustment needs to be made when:

• the adjusted cost of such capital goods or services is less than R40 000 (excluding
VAT);
• an adjustment in respect of section 18(4) had previously been made and the
amount then represented by B in the formula A × B × C × D in section 18(4) was
less than R40 000 (excluding VAT);
• the increase or decrease is equal to or less than 10%; or
• the input has been denied in terms of the VAT Act – for example, motor vehicles or
entertainment assets.
This adjustment is usually only made at the end of a year of assessment (sec-
tion 18(6)). If a vendor ceases to be a vendor prior to the end of a year of assessment,
the adjustment is required immediately before that vendor ceased to be a vendor
(proviso to section 18(6)).
The value of the adjustment is calculated as follows (sections 10(9) and 18(5)):
A×B×C
Where:
A = the tax fraction;
B = the lesser of:
– the adjusted cost (including VAT) of the goods or services (with the
exception that the cost for connected persons is the open-market value
on the date of the original transaction), or
– B in formula A × B × C × D in section 18(4) (refer to 2.27), or
– the open-market value on the date that a previous increase or decrease
was calculated if the open-market value was lower than the adjusted
cost price, or
– the open-market value of the goods or services at the time the change-
of-use adjustment is required; and
C = the percentage by which the taxable use of goods or services has de-
creased or increased (that is to say more than 10%).
In the case of a change of use relating to a decrease in the extent of taxable use or
application of capital goods or services, a deemed supply arises, and the adjustment
then results in output tax.
In the case of a change of use relating to an increase in the extent of taxable use or
application of capital goods or services, additional input tax credits may then be
claimed.

141
A Student’s Approach to Taxation in South Africa 2.28

Example 2.56
Jo Soap purchased a computer for his business for R48 000 (including VAT). 60% of the
business relates to taxable supplies. Input tax claimed was therefore R48 000 × 15 / 115 ×
60% = R3 757. At the end of Jo’s Year 1, Jo determined that 45% of his business would
now relate to taxable supplies. The market value of the computer on that date was
R45 000. At the end of Year 2, Jo determined that 80% of the business would now relate to
taxable supplies and the market value of the computer on that date amounted to R49 500.
Calculate the VAT consequences of the above.

Solution 2.56
R
Year 1 – reduction in the percentage taxable use
(section 18(2) output VAT adjustment)
15 / 115 × R45 000 × 15% (60% – 45%) 880
= Output tax payable by Jo
In terms of section 18(6), any output VAT adjustment in terms of section 18(2) is
deemed to take place at the end of the vendor’s year of assessment.
Year 2 – increase in the percentage taxable use
(section 18(5) input VAT adjustment)
15 / 115 × R45 000 (Note) × 35% (80% – 45%) 2 054
= Input tax claimable by Jo
In terms of section 18(6), any input VAT adjustment in terms of section 18(5) is
deemed to take place at the end of the vendor’s year of assessment.

Note
Although the market value was R49 500, the lower of the cost, current market value or the
value of the previous adjustment should be used.

REMEMBER

• Decrease in taxable use to 0%: Section 18(1) and an additional input tax credit in terms
of section 16(3)(h) (refer to 2.26).
• Increase in taxable use from 0%: Section 18(4) (refer to 2.27).
• Any other increases or decreases: Section 18(2) (decrease) and 18(5) (increase). Only for
capital goods or services.
• These section 18(2) and section 18(5) adjustments are only made at year end. The
market value at year end (and not at any other date) is relevant as the B value in the
formula.

142
2.28–2.29 Chapter 2: Value-added Tax (VAT)

Example 2.57
A vendor acquires capital goods or services partially (65%) for the purposes of making tax-
able supplies for R86 700 (including VAT). The vendor claimed R7 351 as input tax (R86 700
× 15 / 115 × 65%). The open-market value in all cases is R102 600.
Year 1: The taxable percentage increases to 80%;
Year 2: The taxable percentage reduces to 58%; and
Year 3: The taxable percentage is 0%.
You are required to calculate the adjustments to be made by the vendor.

Solution 2.57
Year 1: A×B×C
= 15 / 115 × 86 700 × 15% (80% – 65%)
= R1 696 (input tax adjustment)
Year 2: A×B×C
= 15 / 115 × 86 700 × 22% (80% – 58%)
= R2 488 (output tax adjustment)
Year 3: A×B
= 15 / 115 × R102 600 (market value for section 18(1))
= R13 383 (output tax adjustment)
Section 16(3)(h) – additional input
= A×B×C
= 15 / 115 × 86 700 × 42% (100% – 58%)
= R4 750 (input tax adjustment)

2.29 Adjustments: Game-viewing vehicles and hearses

(sections 8(14)(b) and (14A), 9(10), 10(24) and 18(9))

REMEMBER

• Transport in a game-viewing vehicle or hearse is subject to VAT at the standard rate.

When an input tax deduction has been denied in terms of section 17(2) in respect of
the acquisition of a motor vehicle, section 18(9) could subsequently grant the input
tax deduction if the motor vehicle were converted into a game-viewing vehicle or
hearse.
This converted game-viewing vehicle or hearse is deemed to be supplied to that
vendor in that tax period. The vendor can claim an input tax equal to the tax fraction
of the lesser of:
• the adjusted cost; or

143
A Student’s Approach to Taxation in South Africa 2.29–2.30

• the open-market value,

of that vehicle on the day before the conversion. However, the deduction should
exclude any amount of input tax that qualified for a deduction under another provi-
sion of the VAT Act.
Should this be the situation, and, upon conversion of a vehicle, a vendor managed to
claim an input tax deduction, the vendor would be liable to declare output tax on the
subsequent supply of the vehicle. This is the case as it would be deemed to be a
supply in the course or furtherance of the vendor’s enterprise (section 8(14)(b)). The
value of the supply would be deemed to be the open-market value of that vehicle
(section 10(24)).
Should a game-viewing vehicle or hearse subsequently be applied for a purpose other
than the purpose for which the input tax deduction was initially allowed, a supply at
the standard rate for these assets is deemed to take place (section 8(14A)). The value
of the supply is deemed to be the open-market value of that vehicle (section 10(24)).
The time of supply is deemed to be the time that the game-viewing vehicle or hearse
is supplied as contemplated in section 8(14)(b) and (14A) (section 9(10)).

Example 2.58
A station-wagon is purchased for R115 000 (VAT included). An input tax deduction is
denied in terms of section 17(2)(c), as the station-wagon falls within the ambit of the defi-
nition of ‘motor car’. The station-wagon is subsequently converted into a hearse for
R23 000 (VAT included). The market value on the date of the conversion was R116 000.
Calculate the input tax claimable as a result of the conversion of the motor vehicle.

Solution 2.58
Input tax of R3 000 (R23 000 × 15 / 115) is allowed on the conversion costs. An adjustment
will be allowed in terms of section 18(9), which will result in an input tax claim of R15 000
(R115 000 × 15 / 115) in relation to the acquisition of the station-wagon. The input tax
adjustment is based on the lower of adjusted cost (R115 000) and the open market value at
the date of the conversion (R116 000).
Where the hearse is subsequently sold to another undertaker, the supply will be subject to
VAT at the standard rate in terms of section 8(14)(b). Alternatively, where the hearse is
converted back into a station-wagon or it is no longer used to transport deceased persons,
a supply of the hearse is deemed to be made in terms of section 8(14A) and output VAT
will be payable by the vendor.

2.30 Adjustments: Supplies of going concerns (section 18A)

2.30.1 100% taxable usage
When all (or at least 95%) of the assets of the going concern were used for the making
of taxable supplies, and the going concern is subsequently disposed of to a purchaser

144
2.30 Chapter 2: Value-added Tax (VAT)

that will also use all (or at least 95%) of the assets for taxable purposes, the effect is
that:
• the seller levies output tax at the rate of 0% on the full transaction; and
• the purchaser pays Rnil input tax and may not claim any input tax on the transaction.

2.30.2 More than 50% taxable usage for the purposes

of the going concern
When the assets of the going concern were applied by the seller mainly (that is to say
more than 50%) for the making of taxable supplies, all the assets are deemed to form
part of the going concern disposed of and the full selling price is zero rated.
The effect of this type of going-concern sale is as follows:
• The seller is entitled to claim additional input tax credits in respect of that part of
the going concern for which input tax credits were not granted in the past. Initially,
when certain expenditure was incurred, part of the input tax was denied as it was
being used partially for non-taxable supplies. These additional input tax credits
relate to the change of use in respect of that part of the going concern goods ac-
quired partly for non-taxable purposes that are subsequently wholly applied for
making taxable going concern supplies (section 16(3)(h)).
Where partial input tax was originally claimed, an additional input tax adjustment
is provided for. The purpose of this adjustment is to allow a deduction for the un-
claimed portion of the input tax. The adjustment is required to be made on the date
on which the goods are supplied (section 9(6)) (refer to 2.26 for a discussion of sec-
tion 16(3)(h)).
• The seller will levy output tax at the rate of 0% on the full selling price of the sale
of the going concern.
• The purchaser will pay Rnil input tax and may not claim any input tax on the
transaction.
• The purchaser must raise output VAT in accordance with section 18A of the VAT Act,
based on the percentage of non-taxable use of the purchaser (not that of the seller).
– The purchaser must account for output VAT on that portion of the ‘full cost’ of
acquiring an enterprise that relates to its intended non-taxable use.
– If the taxable use is equal to or more than 95%, the non-taxable use is deemed to
be zero.
– For example, if a business is acquired as a going concern for R500 000 (includ-
ing VAT at 0%) and the intended taxable use is only 80%, the purchaser is re-
quired to account for output VAT on R100 000 (R500 000 × 20% (100% – 80%)).
This output VAT amounts to R15 000 (R100 000 × 15%).
– Should any of the assets acquired consist of items in respect of which an input tax
deduction was denied (for example, motor car or entertainment equipment – refer
to 2.21), the cost of acquiring the concern may be reduced by the cost of such as-
sets. Assume in the above example that R90 000 of the R500 000 relates to a motor
car and R15 000 relates to entertainment equipment and that the input VAT on

145
A Student’s Approach to Taxation in South Africa 2.30

both items is denied. Output tax should thus be raised on R79 000 ((R500 000 –
R90 000 – R15 000) × 20%). The adjustment according to section 18A then amounts
to R11 850 (R79 000 × 15%). This calculation can be summarised as follows:

Calculation of the section 18A adjustment

Step 1: Determine the total value of the going concern.

Step 2: Reduce such value by the value of assets that specifically relate to
100% taxable supplies.

Step 3: Reduce the value by all items for which input tax would have been
denied.

Step 4: Multiply the answer by the non-taxable use.

Step 5: Multiply the answer by 15%.

Example 2.59
Financinki (Pty) Ltd, a vendor, acquires a business as a going concern from Itsover (Pty)
Ltd at the zero rate for R500 000. Financinki determines that three office desks, six chairs
and two laptops will be used 100% to make taxable supplies. The value of these assets
amounts to R70 000. Included in the R500 000 purchase price is a motor car to the value of
R95 000 and a coffee machine to the value of R10 000. Except for the assets specifically
mentioned, Financinki estimates that for the rest of the assets 65% will be used for the
making of taxable supplies.
Itsover (Pty) Ltd used the chairs, desks and laptops 70% for the purposes of making non-
taxable supplies. The value of the above-mentioned items constitutes R70 000 of the
R500 000 purchase price. The original cost of these items for Itsover (Pty) Ltd amounted to
R114 000 (VAT inclusive). All the other items relating to the acquired concern were used
100% by Itsover (Pty) Ltd for the purposes of making taxable supplies.
Calculate all the VAT implications of the above transaction for both parties.

Solution 2.59
Itsover (Pty) Ltd R
Output VAT
Selling of the enterprise as a going concern:
((R500 000 – R95 000 – R10 000) × 0%) nil
Additional input VAT
Section 16(3)(h) relief
A×B×C
15 / 115 × R70 000 (lesser of cost or market value) × 70% (non-taxable use)
= R6 391 input VAT

continued

146
2.30 Chapter 2: Value-added Tax (VAT)

Financinki (Pty) Ltd R

Input VAT
Buying of the enterprise as a going concern:
(R500 000 × 0%) nil
Output VAT
Section 18A adjustment
Total value of the concern 500 000
Less: Items applied 100% for taxable use (70 000)
Less: Items on which input tax was denied
– Motor car (95 000)
– Coffee machine (10 000)
325 000
Multiply by the non-taxable use 35% (100% – 65%)
(R325 000 × 35%) 113 750
Multiply by 15% (R113 750 × 15%)
Output VAT to be paid to SARS 17 063

2.30.3 Less than 50% of the selling price relates to the going
concern
If the goods or services of the enterprise were applied by the seller partially for the
purposes of the going concern, but not mainly (thus less than 50%), only the portion
of the selling price that relates to the going concern may be zero rated.
• The seller should charge VAT at the zero rate on the going concern portion of the
supply.
• The seller must charge VAT at the standard rate in respect of the non-going-
concern portion.
• The seller can claim an input tax adjustment in respect of the assets used for non-
taxable purposes (section 16(3)(h) of the VAT Act).
• The purchaser may claim input tax credits where the assets acquired at the stand-
ard rate is applied for purposes of making taxable supplies. However, the purchas-
er cannot claim an input tax deduction in connection with the portion he is going
to utilise for non-taxable purposes.
• The purchaser is required to make a section 18A adjustment where he does not
apply the going-concern portion only for taxable purposes.

147
A Student’s Approach to Taxation in South Africa 2.30–2.31

Example 2.60
Barry sells a farm, together with crops and assets, that was used for taxable purposes
(farming), exempt purposes (provision of accommodation to labourers) and private pur-
poses (the farmhouse and game farm) is sold as a going concern to Zander for
R2 million (excluding VAT). Only 40% of the selling price relates to the taxable supply of
farming (going concern). The R2 million does not include any assets in respect of which
an input has been denied. Zander estimates that he will also use only 40% of the farm for
taxable purposes (going concern). The cost price of the concern for Barry amounted to
R900 000 when he originally bought it from a vendor.
Explain and calculate the VAT consequences of the above.

Solution 2.60
VAT consequences for Barry (seller) R
Output VAT
Two supplies are deemed to occur for VAT purposes. The supply relating to the going
concern is zero rated and the second supply is a supply at the standard rate.
Zero-rated portion: R2 000 000 × 40% = R800 000
R800 000 × 0% = nil
Standard-rated portion: R2 000 000 × 60% × 15% = 180 000
Input VAT
Section 16(3)(h) relief
A×B×C
15 / 115 × R900 000 (lesser of cost or market value) × 60% = 70 435
VAT consequences for Zander (purchaser)
Input VAT
Although he paid input VAT of R180 000, he cannot claim it as a deduction, as it is not
incurred for the making of taxable supplies.
No input VAT can be claimed on the portion relating to the going concern as 0% VAT
was levied by Barry.
Output VAT
The full supply of the going concern (40%) will be utilised for taxable purposes, thus, no
additional section 18A adjustment is required.

2.31 Adjustments: Leasehold improvements (sections 8(29),

9(12), 10(28) and 18C)
The VAT treatment of leasehold improvements (that is to say when a lessee is obliged
to effect leasehold improvements to the property of a lessor) was unclear for many
years. This uncertainty was removed by the introduction into the VAT Act of provi-
sions aimed specifically at the VAT treatment of leasehold improvements. In terms of
these provisions, consideration should be given to both the lessee as well as the
lessor.

148
2.31 Chapter 2: Value-added Tax (VAT)

Lessee (sections 8(29), 9(12) and 10(28))

When a lessee effects leasehold improvements to the property of the lessor, the lessee
is deemed to supply the leasehold improvements in the course or furtherance of his
enterprise. The time of supply is the date that the leasehold improvements are com-
pleted, and the value of supply is Rnil. The effect of this deemed supply rule is to
allow lessees to claim the input VAT that they incurred in respect of the leasehold
improvements.
This deemed supply rule does not apply in the following two instances:
• If the leasehold improvements are made by the lessee for a consideration (that is to
say the lessor pays consideration to the lessee to make the improvements); or
• If the leasehold improvements are used wholly (100%) for non-taxable purposes. An
example of leasehold improvements for non-taxable purposes is the erection of a
residential dwelling for the letting thereof. The letting of residential dwellings con-
stitute an exempt supply for VAT purposes.
Lessors (section 18C)
Where leasehold improvements are supplied to a lessor by a lessee (as in section 8(29)
above), the lessor would need to make an output VAT adjustment if any one of the
following two criteria is met:
• If the deduction of input VAT on the leasehold improvements would have been
denied in terms of section 17(2) (for example entertainment); or
• If the leasehold improvements are not going to be utilised by the lessor solely for
the making of taxable supplies.
If any one of the above two criteria is met, the lessor is deemed to supply the lease-
hold improvements at the date that the improvements are completed. This will result
in an additional output VAT liability for the lessor that is calculated using the follow-
ing formula:
A×B×C
where:
A = the tax fraction;
B = the value of the leasehold improvements stipulated in the lease agree-
ment
– if no value for the leasehold improvements is stipulated in the lease
agreement, use the open market value of the leasehold improvements;
C = the percentage by which the leasehold improvements are utilised for
non-taxable purposes (that is to say exempt purposes) at the date of com-
pletion of the leasehold improvements.

149
A Student’s Approach to Taxation in South Africa 2.31–2.32

Example 2.61
Jane Brand enters into a lease agreement with Khaya Dube for a vacant piece of land on
1 April. The lease agreement stipulates that Jane must erect a building on the piece of
land for R3 000 000. The ground floor of the building (60%) will be used by Jane for
making taxable supplies, while the top floor (40%) will be let to residential tenants (ex-
empt supply). The erection of the building was completed on 1 August. Khaya did not
pay any consideration to Jane for the erection of the building. Both Jane and Khaya are
VAT vendors.
Determine the VAT implications of the above for both Jane Brand and Khaya Dube.

Solution 2.61
VAT implications for Jane Brand (lessee)
Jane Brand will be deemed to have supplied the building (the leasehold improvements)
on 1 August (date of completion of the improvements) for Rnil. As she will be using the
building for the making of both taxable supplies as well as exempt supplies, she will need
to apportion her input VAT deduction in respect of the costs that she incurs.
VAT implications for Khaya Dube (lessor)
Khaya needs to make an output VAT adjustment in terms of section 18C as the building
(the leasehold improvements) will not be used solely for the making of taxable supplies
(40% of the building will be used for residential purposes, that is to say an exempt
supply).
The output VAT that Khaya needs to account for on 1 August (the date of completion of
the leasehold improvements) is calculated using the formula A × B × C:
15 / 115 × R3 000 000 (amount stipulated in agreement) × 40% (% non-taxable use)
= R156 522.

2.32 Adjustments: Irrecoverable and recoverable debts

(section 22)
When a vendor has accounted for output tax in respect of a taxable supply and all or
part of the consideration subsequently becomes irrecoverable, the vendor becomes
entitled to an input tax deduction. The amount of this input tax deduction relates to
the full amount of VAT levied on the original supply in the same proportion as the
amount of the irrecoverable consideration written off relates to the total consideration
(section 22(1)).

150
2.32 Chapter 2: Value-added Tax (VAT)

Example 2.62
For accounting purposes, Talita (Pty) Ltd wrote off R4 658 as bad debts. This amount com-
prises an amount of R2 875 owed by a local debtor and an amount of R1 783 owed by an
export sale debtor.
Provide the journal entry for the above in the books of Talita (Pty) Ltd.

Solution 2.62
R R
Dr Bad debts (SCI) 4 283 (R4 658 – R375)
Dr VAT Control Account: Input tax (SFP)
(Note) 375 (R2 875 × 15 / 115)
Cr Local debtor (SFP) 2 875
Cr Export debtor (SFP) 1 783
(Bad debts written off and corresponding VAT adjustment.)

Notes
1. The sale to the export debtor was a zero-rated supply. No adjustment to the VAT is
therefore allowed when the debt is subsequently written off.
2. One of the requirements to be able to deduct a bad debt for income tax purposes is
that the amount of the debt must have been included in the taxpayer’s income in ei-
ther the current or a previous year of assessment. As the output tax was never in-
cluded in Talita (Pty) Ltd’s income, only R4 658 (therefore excluding VAT) would
quality as a bad debt deduction (section 11(i) – refer to chapter 4).

If the debt is wholly or partially recovered, the tax attributable to the amount recov-
ered by the vendor is deemed to be tax charged by him in relation to a taxable supply
made during the tax period in which the debt is recovered and must be accounted for
as output tax (section 22(2)).
Creditors: claw-back of input tax deduction
When a debt is irrecoverable, the vendor (seller) is entitled to an amount of input
VAT. However, if a vendor does not pay his creditors, he is obliged to account for an
additional amount of output VAT. This is so because he claimed the input VAT initially,
when he incurred the expense. This additional output VAT arises when a vendor on
the invoice basis has:
• deducted input tax in respect of a taxable supply of goods or services made to him;
and
• not paid the full consideration for the supply within 12 months from the end of the
tax period in which the deduction was claimed.
The tax fraction (as determined at the time of deduction) of the unpaid portion of the
consideration must be accounted for as output tax (section 22(3)).
If a written agreement provides for payment to be made after the tax period in which
the deduction of the input tax was made, the period of 12 months is determined from

151
A Student’s Approach to Taxation in South Africa 2.32

the end of the month in which the consideration is payable (proviso (i) to sec-
tion 22(3)). For example, A and B may agree in writing that A will pay B only three
months after the date of the supply. If this is the case, the adjustment of the output tax
will arise only if A pays B after a period of 15 months (the original three months as
per the contract plus the additional period of 12 months).
This payment of additional output VAT is also applicable to a vendor who:
• has either voluntarily or compulsorily been sequestrated;
• has been declared insolvent;
• has entered into an arrangement;
• has entered a compromise with creditors (proviso (ii) to section 22(3)); or
• has ceased to be a vendor as contemplated in section 8(2) (refer to 2.12.1) (pro-
viso (ii) to section 22(3)).
The input tax may again be deducted if the vendor subsequently pays the considera-
tion in respect of the supply (section 22(4)).

REMEMBER

• When a vendor transfers an account receivable at face value on a non-recourse basis to

another person, there will be no adjustment to the input tax. However, an adjustment is
required to the extent that the amount received is less than the face value (first provi-
so (iv)(aa) to section 22(1)).
• Face value is defined as the amount of the account receivable at the time of its transfer,
less the amount written off by the seller (after adjustments for any debit and credit
notes as well as amounts that have already been written off as irrecoverable by the
vendor).
• If the person to whom the account receivable was transferred on a non-recourse basis
has written off any amount as irrecoverable, he could make an adjustment to input
VAT even though he did not originally account for the output VAT on the supply (sec-
tion 22(1A)). If an irrecoverable amount is ceded back to the vendor, who transferred
the account receivable on a recourse basis, such an adjustment to the input VAT should
be made by the vendor (first proviso (iv)(bb) to section 22(1)).
• When the vendor is registered on the payments basis, the output VAT will mostly arise
only when the recipient pays the outstanding debt. In such a case, no adjustment
should be made when there are any irrecoverable amounts (second proviso (ii) to sec-
tion 22(1)).

Intra-group debt
Group companies often do not have written agreements with one another for each
VAT transaction processed via loan account. Group companies also often operate
internal loan accounts for commercial reasons without clearing these accounts for
many years. Therefore, the 12-month unpaid creditor adjustment is unrealistic in a
group context. Debts between inter-group companies would not be subject to the 12-
month unpaid creditor adjustment (section 22(3A)). The creditor providing the sup-
ply to the indebted group company can also not claim an input deduction for a bad
debt written of (section 22(6)(a)). For applying this relief a group of company is
defined as in section 1 with the exception that the 70% shareholding should be
replaced with a 100% shareholding (section 22(6)(b)).

152
2.32–2.33 Chapter 2: Value-added Tax (VAT)

Example 2.63
Slow-Mo (Pty) Ltd owns 100% of the shares in Retro (Pty) Ltd. Retro (Pty) Ltd supplied
goods to the value of R750 000 to Slow-Mo (Pty) on a loan account. After 15 months the
amount in respect of the loan is still unpaid.
Discuss the VAT consequences of the following scenarios:
(a) Because Slow-Mo (Pty) Ltd had cash flow problems, Retro (Pty) Ltd decided to
write-off the debt owed as bad debt.
(b) 14 months after the date of the initial transaction Slow-Mo (Pty) Ltd sold 40% of its
shares in Retro (Pty) Ltd to an unconnected third party.

Solution 2.63
(a) As Slow-Mo (Pty) Ltd and Retro (Pty) Ltd are a group of companies for the purposes
of section 22(6) the 12-month unpaid creditor adjustment will not apply to Slow-Mo
(Pty) Ltd. Consequently Retro (Pty) Ltd will not be entitled to an input tax deduction
on the bad debt write-off.
(b) As the two companies are no longer a group of companies for the purposes of sec-
tion 22(6) the 12-month unpaid creditor adjustment will apply and Slow-Mo (Pty)
Ltd would have to account for output VAT for the supply of goods made to them. If
Retro (Pty) Ltd were to write-off the loan as bad debt, Retro (Pty) Ltd would be enti-
tled to an input tax deduction as the provisions of section 22(6) will no longer apply.

2.33 Tax rulings

All written VAT rulings issued prior to 1 January 2007 were withdrawn and may not
be relied upon any longer (unless the ruling was specifically confirmed by the Com-
missioner).

2.33.1 Chapter 7 of the Tax Administration Act: Advance Rulings

Chapter 7 of the Tax Administration Act attempts to promote clarity, consistency and
certainty regarding the interpretation and application of a tax Act by creating a
framework for the issuance of advance rulings. A binding ruling will provide a
taxpayer with clarity and certainty on how SARS will interpret and apply the various
tax laws to a proposed transaction. The ruling will be binding on SARS when a tax-
payer is assessed in connection with the proposed transaction, unless the taxpayer
has not disclosed all the facts in connection with the proposed transaction or has not
concluded the transaction as described in the taxpayer’s application.

2.33.2 Section 41B of the VAT Act: VAT rulings and VAT class
rulings
Section 41B of the VAT Act provides for the Commissioner to continue to issue bind-
ing VAT rulings in addition to rulings under the Advance Ruling system. VAT rul-
ings are issued under the provisions of ‘binding private rulings’ whereas ‘VAT class

153
A Student’s Approach to Taxation in South Africa 2.33–2.35

rulings are issued under the provisions of ‘binding class rulings’. It should also be
noted that some of the information required for tax rulings are not applicable to VAT
rulings and VAT class ruling (section 79(4)(f) and (k) of the Tax Administration Act.
The VAT rulings and VAT class rulings are also not subject to the application fees but
are still subject to the cost recovery fees (sections 79(6) and 81 of the Tax Administra-
tion Act).
The Commissioner has also published a list of aspects that would result in an applica-
tion for these types of rulings to be automatically rejected (GG 36119 read together
with section 80(2) of the Tax Administration Act.)

2.33.3 Section 72 of the VAT Act: Arrangements and decisions to

overcome difficulties
Apart from the ruling systems in Chapter 7 of the Tax Administration Act as well as
section 41B of the VAT Act, there is also another section in the VAT Act to provide for
arrangements and directions to overcome difficulties, anomalies or incongruities that
might arise with the application of any of the provisions to the VAT Act (section 72).

2.34 Tax avoidance (section 73 of the VAT Act and section 102
of the Tax Administration Act)
The Commissioner may determine a VAT liability in respect of certain schemes. This
is the case if a scheme has been entered or carried out and has resulted in a tax benefit
being granted to a person, and the scheme was entered into or carried out in a manner
that would not normally be employed for bona fide business purposes.
A scheme includes any transaction, operation, scheme or understanding, including all
steps and transactions by which it is carried into effect.
A tax benefit includes:
• any reduction of tax;
• an increase in an entitlement of a vendor;
• a reduction in the consideration payable by a person in respect of any supply of
goods or services; or
• any other avoidance or postponement of liability for the payment of any tax, duty
or levy imposed by the VAT Act or by any other law administered by the Commis-
sioner.

2.35 Unprofessional conduct (Chapter 18 of the Tax

Administration Act)
A SARS official may lodge a complaint with a ‘controlling body’ if a person who carries
on a profession governed by the controlling body, did or omitted to do anything with
respect to the affairs of a taxpayer, including that persons affairs, that in the opinion of
the official:
• was intended to assist the taxpayer in avoiding or unduly postponing the perform-
ance of an obligation imposed on the taxpayer under a tax Act; or

154
2.35–2.37 Chapter 2: Value-added Tax (VAT)

• by reason of negligence on the part of the person resulted in the avoidance or

undue postponement of the performance of an obligation referred to above; and
• constitutes a contravention of a rule or code of conduct for the profession which
may result in disciplinary action being taken against the ‘registered tax practi-
tioner’ or person by the body.

2.36 The influence of VAT on income tax calculations

VAT cannot be studied in isolation, because it influences the calculations involved in
income tax. For example, capital allowances are calculated on the cost price of an
asset. In certain cases, the cost price includes VAT, if the VAT was not claimed as an
input tax credit. In other cases, the cost excludes VAT, if VAT was claimed as an
input tax credit. Section 23C of the Income Tax Act (refer to chapter 4) provides that
input VAT must be excluded from the cost or value of an asset or expense in certain
circumstances.
The calculation of the taxable income of an enterprise that is registered for VAT
purposes must, where applicable, exclude VAT. It will include VAT where the input
tax was denied, for example, in the case of certain entertainment expenses. Further-
more, the output tax on fringe benefits (refer to 2.12.4) is deductible for income tax
purposes as it is regarded as an expenditure incurred in the carrying on of a trade,
during the year of assessment, in the production of income that is not of a capital
nature (refer to chapter 3 for further information regarding the general deduction
formula).

2.37 Summary
VAT is levied by vendors on all taxable supplies. Vendors who pay input tax may
claim the input tax against output tax on taxable supplies. The scope of the rules in
the VAT Act is, however, much more complicated. The VAT Act is indeed a compli-
cated rule-based document with many exceptions.
In respect of supplies made, great care must be taken to distinguish between stand-
ard-rated supplies, zero-rated supplies and exempt supplies.
In respect of input tax, VAT may only be claimed if VAT was levied on the supply,
except in the case of second-hand goods acquired from non-vendors.
In addition to these basic principles, cognisance must be taken of special rules in
respect of the change of use, exports, accommodation, financial services, sale of going
concerns, fringe benefits, indemnity payments, instalment credit agreements etc.
The next section contains several questions that may be completed in order to evalu-
ate your knowledge on VAT.

155
A Student’s Approach to Taxation in South Africa 2.38

2.38 Examination preparation

Question 2.1
Invoices (Pty) Ltd, a vendor registered for VAT purposes on the invoice basis, provides the
following information for the period May and June (all amounts include VAT at 15%
where applicable, and tax invoices have been issued for all supplies and, where applicable,
received from all suppliers):
Extracts from the cashbook:
R
Cash receipts
Cash sales in the Republic 68 400
Sales in Lesotho (delivery was made outside the Republic) 89 000
Sales in Namibia (delivery was made outside the Republic) 56 200
Receipts from debtors – South Africa (Note 1) 22 800
– Lesotho (Note 1) 14 000
– Namibia (Note 1) 20 520
Cash payments
Bank charges 2 280
Interest on bank overdraft 2 300
Fuel 5 400
Entertainment expenses 1 140
Stock purchases (Note 1) 28 500
Payments to creditors for stock purchases 31 920
Rent paid 9 120
Motor vehicle purchased (Note 2) 57 000
Delivery vehicle purchased (Note 3) 115 000
Short-term insurance premiums – fire and theft of stock 1 710
Notes
1. Debtors, creditors and stock
1 May 30 June
R R
Debtors – South Africa 45 600 74 100
– Lesotho 34 200 39 900
– Namibia 28 500 36 480
Creditors – purchase of stock 57 000 62 700
Stock on hand at cost (excluding VAT) 35 000 45 000

2. A motor car for use in the business was purchased from a vendor, and a second-hand
delivery vehicle was purchased from a person not registered for VAT, for use in the
business. The person confirmed in writing that the sale of the vehicle was not a taxable
supply. Invoices (Pty) Ltd is not a car dealer.
3. A new delivery vehicle was purchased and delivered on 1 June in terms of an instal-
ment credit agreement. The purchase price was R91 200 (including VAT at 15%). The
first instalment of R9 800 was payable on 1 July and includes interest amounting to
R500.

156
2.38 Chapter 2: Value-added Tax (VAT)

You are required to:

Calculate VAT payable to or refundable by, the Commissioner for the VAT period
ending 30 June.

Answer 2.1
Calculation of VAT payable or refundable R R
Output tax
Republic cash sales 68 400
Republic credit sales 51 300
Debtor receipts 22 800
Debtors outstanding 30 June 74 100
96 900
Less: Debtors outstanding 1 May (45 600)
Total Republic sales 119 700
Output VAT (R119 700 × 15 / 115) 15 613
Exports – zero rated (Note 1) nil
15 613
Less: Input tax
Bank charges (R2 280 × 15 / 115) 297
Interest on bank overdraft – exempt supply, financial service nil
Fuel – zero-rated supply (section 11(1)(h)) nil
Entertainment – not deductible (section 17(2)(a)) nil
Stock purchases R
Cash purchases 28 500
Credit purchases 37 620
Creditors – 30 June 62 700
Payments to creditors 31 920
94 620
Less: Creditors – 1 May (57 000)
Total stock purchases 66 120
Input VAT (R66 120 × 15 / 115) 8 624
Rent paid (R9 120 × 15 / 115) 1 190
Motor car – input tax denied (section 17(2)(c)) (Note 2) nil
Short-term insurance premiums (R1 710 × 15 / 115) 223
Delivery vehicle –
(R115 000 × 15 / 115) (Note 3) 15 000
Interest on credit agreement – exempt supply, financial services nil (25 334)
VAT refundable by the Commissioner (Note 4) (9 721)
Notes
1. The sales to Lesotho and Namibia are zero rated.
2. Even though the motor car is a second-hand vehicle and it was purchased from a non-
vendor, no notional (deemed) input tax credit may be claimed as it is a motor car (as
defined).
3. The delivery vehicle is not a motor car as defined and the input tax can be claimed
upfront as it was purchased in terms of an instalment credit agreement.
4. As the input tax exceeds the output tax, the difference represents the VAT refundable
by the Commissioner.

Additional questions for this chapter are available electronically at

www.myacademic.co.za/books

157
 3 Gross income

Gross Exempt Taxable Tax

– – Deductions =
income income income payable

General Specific Fringe

definition inclusions benefits

Page
3.1 Introduction ......................................................................................................... 160
3.2 Definition of ‘gross income’ (section 1) ............................................................ 160
3.3 Resident of the Republic ..................................................................................... 161
3.3.1 Ordinarily resident ................................................................................ 162
3.3.2 ‘Physical presence’ test.......................................................................... 165
3.4 Total amount in cash or otherwise.................................................................... 168
3.5 Received by or accrued to or in favour of ........................................................ 170
3.6 Year or period of assessment ............................................................................. 182
3.7 Receipts or accruals of a capital nature ............................................................ 182
3.7.1 Subjective tests ....................................................................................... 184
3.7.2 Objective factors ..................................................................................... 193
3.7.3 Specific types of transactions ............................................................... 198
3.8 Summary .............................................................................................................. 204
3.9 Examination preparation ................................................................................... 204

159
A Student’s Approach to Taxation in South Africa 3.1–3.2

3.1 Introduction
Gross income is one of the main building blocks of taxation. If you are given a pile of
documents relating to a taxpayer’s income, you will have to understand the concept
of ‘gross income’ to be able to decide which of the amounts constitute gross income
and are therefore subject to tax. An amount must be included in gross income before
it can be subject to tax. The determination of gross income is the starting point of the
taxpayer’s tax calculation.
An amount can be included in gross income either by complying with the general
definition thereof in the Act or by being included in gross income by means of one of
the special inclusions listed at the end of the definition.
This chapter discusses the different components of the gross income definition as well
as the special inclusions listed as part of the gross income definition.

Critical questions

When a person deals with the concept gross income, the following questions arise:
• What is meant by gross income?
• Does the definition of gross income apply to all persons whether they reside in South
Africa or not?
• When is an amount included in gross income?
• Can the taxpayer decide when such an amount may be included?
• What if an amount does not fall within the definition of gross income?

3.2 Definition of ‘gross income’ (section 1)

‘Gross income’ is defined in section 1 of the Act as follows:

Legislation:
Section 1: Interpretation
‘Gross income’, in relation to any year or period of assessment means –
(i) in the case of any resident, the total amount, in cash or otherwise, received by or
accrued to or in favour of such resident; or
(ii) in the case of any person other than a resident, the total amount, in cash or other-
wise, received by or accrued to or in favour of such person from a source within the
Republic, or
during such year or period of assessment, excluding receipts or accruals of a capital
nature, . . .;

The definition is divided into two sections, namely one applicable to residents and
the other to non-residents (refer to 7.2).
The components of the definition are as follows:
• resident (refer to 3.3);
• total amount (refer to 3.4);

160
3.2–3.3 Chapter 3: Gross income

• received by or accrued to or in favour of (refer to 3.5);

• year or period of assessment (refer to 3.6); and
• receipts or accruals of a capital nature (refer to 3.7).
Section 1 of the Act defines certain terms used in the gross income definition (see
bullets above), but not all the terms are defined and therefore the courts have been
called on to provide clarity on the meaning of some of these terms. In the paragraphs
that follow reference is made to court cases. In this book, reference is made in the
following way:
Natal Estates LTD v SIR 37 SATC 193. The name of the case is ‘Natal Estates LTD v SIR’.
The reference to ‘SATC’ depicts a publication of all the reported tax cases namely
‘South African Tax Cases’. In this example, the ‘37’ refers to the volume and the’193’ to
the page at which the court’s decision commences.
References are also made to income tax cases and these are indicated as follows:
ITC 1545 45 SATC 464. The ‘ITC’ means ‘Income Tax Case’.
When considering different tax case law it is important to know the hierarchy of the
different courts. The higher up in the hierarchy a court is, the more important its
decision is.
• Constitutional Court (the highest court)
• Supreme Court of Appeal
• Provincial High Courts
• Provincial Tax Courts (the lowest court)
A lower court must follow the rules set by the higher court. However, the decisions of
the tax courts are not binding on other courts. All tax courts and High Courts are
bound by the Supreme Court of Appeal. The Constitutional Court will only be
involved in tax matters if the Constitution as such is involved in the case.
Before the different components of the gross income definition are discussed, it is
important to determine whether a person is a resident of the Republic or not.

REMEMBER
• All the components of gross income must be present for an amount to constitute gross
income.

3.3 Resident of the Republic

From the definition it is clear that residents are taxed on receipts and accruals from
anywhere in the world and non-residents (refer to 7.2) are taxed only on receipts and
accruals derived from sources within or deemed to be within the Republic. It is there-
fore important to determine whether or not a person is a resident as that will deter-
mine which set of rules applies to their income.
The definition of a ‘resident’ in section 1 of the Act refers to natural persons and
persons other than natural persons. The definition of ‘person’ in section 1 of the Act
includes ‘an insolvent estate, the estate of a deceased person and any trust and a

161
A Student’s Approach to Taxation in South Africa 3.3

portfolio of collective investment schemes but excluding foreign partnerships’. This

chapter deals only with the part of the definition of a resident pertaining to a natural
person.

Determination of whether a natural person is a resident of the Republic

Step 1: Determine whether the person is exclusively a resident of another

country as a result of a double-tax agreement.
Yes: He/she is not a resident.
No: Go to Step 2.

Step 2: Determine whether the person is ordinarily resident in the Republic

(refer to 3.3.1).
Yes: He/she is a resident.
No: Go to Step 3.

Step 3: Determine whether the person complies with the ‘physical presence’
test as described in the Act (refer to 3.3.2).
Yes: He/she is a resident.
No: He/she is not a resident of the Republic (refer to 7.2).

3.3.1 Ordinarily resident

The term is not defined and has no special or technical meaning. The question whether
you are ordinarily resident in a country is one of fact. There are two important cases
dealing with ‘ordinarily resident’, namely the Cohen and Kuttel cases. These cases
should be used to determine where a person is ordinarily resident.

162
3.3 Chapter 3: Gross income

CASE:
Cohen v Commissioner for Inland Revenue
13 SATC 362
Facts: The taxpayer, who was domiciled in derived taxable South African dividends.
the Union of South Africa (now the Re- He claimed to be exempt from supertax as
public), was one of two directors of a com- the Act exempted individuals ‘not ordin-
pany carrying on business in South Africa. arily resident nor carrying on business in
He was requested by his company to go the Union’ from the tax.
overseas to act as the company’s buyer in Judgment: The question whether an indi-
view of the difficulty of obtaining merchan- vidual was in any one year of assessment
dise, caused by war conditions. He left South ordinarily resident in South Africa or else-
Africa in June 1940, accompanied by his where was not to be determined solely by
family. The permit authorising his depart- his actions during that year of assessment;
ure contained the words ‘duration 9 his conditions of ordinary residence during
months’. In October 1940, he arrived in the that year could be determined by evidence
USA and he and his family lived in an as to his mode of life outside the year of
apartment in New York, from where he assessment. Mere physical absence during
carried on the business operations which the whole of the year of assessment was
were the purpose of his visit. In 1941, the not decisive of the question of ‘ordinarily
taxpayer was granted an extension of resident’. On the facts, the taxpayer was
12 months in respect of his permit to re- found to be still ‘ordinarily resident’ in
main in the USA. From that date and up to South Africa. The judge stated that a per-
30 June 1942, neither the taxpayer nor his son’s ordinary residence was the country
family had returned to South Africa. In to which he would naturally and as a mat-
1939, the taxpayer had leased a flat in Jo- ter of course return from his wanderings,
hannesburg for a period of five years and his usual or principal residence and could
had furnished it. This flat had been sub-let, be described as his real home.
with the furniture, during the period he Principle: ‘Ordinarily resident’ refers to
was in the USA. During the year ended 30 the place where a person will return to
June 1942, the taxpayer had after his ‘wanderings’.

163
A Student’s Approach to Taxation in South Africa 3.3

CASE:
Commissioner for Inland Revenue v Kuttel
54 SATC 298
Facts: The taxpayer was taxed on interest wife were the sole shareholders. At no
and dividends he earned from a source in time was it let and consequently it was
the Republic in the 1984, 1985 and 1986 available whenever the taxpayer wanted to
years of assessments. He contended that he live in it. During 1985 he effected substan-
was not ordinarily resident in South Africa tial renovations and extensions to the
as required by the Act. In 1983, he and his house. He did so, according to his unchal-
wife emigrated to the USA where he had lenged testimony, because he wished por-
obtained a permanent resident’s permit to tion of his South African capital to be
open a business on behalf of a South Afri- invested in fixed property as a hedge
can company in which he held shares. He against the falling value of the rand in rela-
sold a large number of his South African tion to the United States dollar. The tax-
assets and invested the proceeds in Eskom payer also stated that had he not been
stock in order to secure the maximum per- prohibited by the South African exchange
sonal income transmissible to him in the control regulations from taking all his
USA. He decided to buy a home in Florida, assets out of the country, he would certain-
USA. He established church membership, ly have done so.
opened banking accounts, acquired an Judgment: A person is ordinarily resident
office, bought a car and registered with where his ordinary or main residence is,
social security. He also obtained a settling- i.e. what can be described as his real home.
in allowance from the South African ex- By applying this test, the taxpayer was not
change control authorities. ordinarily resident in the Republic during
the period under consideration. His normal
Since then, apart from visits to South Africa
or main residence, his real home, was in
and other countries, the taxpayer had lived
the USA. The fact that the taxpayer retain-
and worked in the USA. During the period
ed his home in Cape Town, was not at all
September 1983 to November 1985 the tax-
contrary to his usual home in the USA. The
payer made nine visits to South Africa, stay-
Commissioner agreed that the taxpayer
ing for up to two months at a time. The
was not trading in South Africa because he
visits were to attend to the continuing liquid-
was only earning dividends and interest
ation of his interests, to participate in
income.
yachting and personal boat-building activi-
ties and to attend to family matters. Of the Principle: A person is ordinarily resident
31-month period under review, the tax- where he has his usual or principal resi-
payer spent, on average, just over one third dence, that which may be described as his
of the time in South Africa, the duration of real home. A person may also have a sec-
his visits becoming shorter towards the ond home in, for example, South Africa
end of the period. During his visits to Cape but the South African home must not be
Town the taxpayer lived in a house owned seen to be the home to which he will return
by the company in which he and his to after his wanderings.

The principles developed over time by the courts to establish whether a person is
ordinarily resident in the Republic can be summarised as follows:
• If it is part of a person’s ordinary regular course of life to live in a particular place
with a degree of permanence, the person must be regarded as being ordinarily resi-
dent (Levene v IRC1928 AC).

164
3.3 Chapter 3: Gross income

• A person is ordinarily resident in the country to which they would naturally and
as a matter of course return from their wanderings and would, in contrast to other
countries, call home (Cohen v CIR 13 SATC 362).
• A person can be ordinarily resident even if they are physically absent throughout
the year of assessment in question. In determining residence, the person’s mode of
life outside that year of assessment must be considered (Cohen v CIR 13 SATC 362).
• The place of residence must be settled and certain, not temporary and casual
(Soldier v COT 1943 SR).
• A person is ordinarily resident where their permanent place of abode is situated,
where their belongings are stored which they left behind during temporary
absences and to which they regularly return after these absences (H v COT 1960
SR).
• The term ordinarily resident is narrower than the term resident. A person is ordi-
narily resident where they normally reside, apart from temporary and occasional
absences (CIR v Kuttel 1992 AR).
The taxpayer will be resident in the Republic from the date they became ordinarily
resident, therefore not necessarily for the full year of assessment. Before this event
occurs, they will be treated as a non-resident.
If during a year of assessment a taxpayer stops being ordinarily resident in the
Republic, they will be non-residents from the following day. The ‘physical presence’
test cannot be applied if a person was ordinarily resident in the Republic at any time
during the year of assessment.

3.3.2 ‘Physical presence’ test

A natural person who is not ordinarily resident in the Republic may be resident if
they are physically present in the Republic for certain periods.
The physical presence test is also known as the ‘day test’ or ‘time rule’ and is based
on the number of days during which a natural person is physically present in the
Republic during a year or years of assessment. The purpose or nature of the visit is
irrelevant.
The definition of resident includes a natural person who is not ordinarily resident in
the Republic but who was physically present in the Republic:
• for a period or periods exceeding 91 days in aggregate during the relevant year of
assessment; and
• for a period or periods exceeding 91 days in aggregate during each of the five years
of assessment preceding the current year of assessment (a person will be deemed
resident in the sixth year of assessment); and
• for a period or periods exceeding 915 days in aggregate during such five pre-
ceding years of assessment preceding the current year of assessment.
In order to determine the number of days during which a person is physically
present, a part of a day is included as a full day. This, however, excludes the days
that a person is in transit between two places outside the Republic and that person
has not yet formally entered the Republic through a port of entry or at any other
place authorised by the Minister of Home Affairs as defined by the Immigration Act
13 of 2002.

165
A Student’s Approach to Taxation in South Africa 3.3

Where a person who is resident in terms of these rules is physically absent from the
Republic for a continuous period of at least 330 full days immediately after the day
the person ceases to be physically present in the Republic, the person is deemed not
to have been resident from the day the person ceased to be physically present in the
Republic.
A person who becomes resident by virtue of the physical presence test will become a
resident from the first day of the year of assessment during which all the require-
ments of the test are met and will be taxed on their worldwide income for the full
year of assessment.

REMEMBER

• The determination of residency is important, as different rules regarding the inclusion

of amounts in gross income apply to residents and non-residents.
• A natural person is a resident either by being ordinarily resident or physically present
in the Republic.
• If a natural person is ordinarily resident in the Republic during the year of assessment
under review, the physical presence test is not applicable to that natural person during
that year of assessment.

The burden of proof in terms of section 102 of the Tax Administration Act, 2011 lies
with the taxpayer; therefore it is important that a person who could become resident
as a result of the physical presence test keep a detailed record of days present in and
outside of the Republic (as they will have to prove that they are not residents).

Example 3.1
Mr Sam Ntembo is a South African citizen who lives in the Republic. Sam was on holiday
in Spain for the last 92 days of the year of assessment.
You are required to determine whether Sam is a resident of the Republic.

Solution 3.1
Firstly determine whether the person is exclusively a resident of another country as a
result of a double-tax agreement: No.
Now determine whether the person is ordinarily resident in the Republic: Yes, Sam was
on holiday and his intention was to return to the Republic. Therefore he is a resident of
the Republic and ordinarily resident.

Why did we not count the days that he was in the Republic?

166
3.3 Chapter 3: Gross income

Example 3.2
Jay Kolapen is not a resident of the Republic. His employer in England sent him over to
South Africa to work here and gain experience in his field. The days he spent in South
Africa during the years of assessment were as follows:
2017: He spent 95 days in South Africa
2018: He spent 100 days in South Africa
2019: He spent 200 days in South Africa
2020: He spent 200 days in South Africa
2021: He spent 321 days in South Africa
2022: He spent 300 days in South Africa
2023: He spent 100 days in South Africa
He returned to England during 2023 and did not return to South Africa again. Ignore any
effect of a double-tax agreement between the two countries.
You are required to determine whether Jay will be classified as a resident for South Afri-
can income tax purposes for each of the years of assessment.

Solution 3.2
Firstly determine whether the person is exclusively a resident of another country as a
result of a double-tax agreement: No.
Next determine whether the person is ordinarily resident in the Republic: He is not ordin-
arily resident.
Now consider the physical presence rules:
2017: Jay is present for more than 91 days in this year, but not in each of the five
prior years of assessment. He is not a resident.
2018: Jay is present for more than 91 days in this year, and for the 2017 year, but
not for the four prior years. He is not a resident.
2019: Jay is present for more than 91 days in this year as well as for 2017 and
2018 years, but not for the three years prior to that (2014, 2015 and 2016).
He is not a resident.
2020: Jay is present for more than 91 days in this year, and for the 2017, 2018 and
2019 years, but not for the two prior years (2015 and 2016). He is not a res-
ident.
2021: Jay is present for more than 91 days in this year, and for the 2017, 2018,
2019 and 2020 years, but not for the prior year (2016). He is not a resident.
2022: Jay is present for more than 91 days in this current year as well as for each
of the five preceding years, and in aggregate, he is present for more than
915 (321 + 200 + 200 + 100 + 95 = 916) days in the five prior years. He is a
resident of South Africa from 1 March 2021.
2023 As in 2022 (he meets the requirements). He ceases to be a resident the
day he leaves South Africa, provided that he remains outside South Afri-
ca for a continuous period of 330 days immediately thereafter.
Note: In an exam or test you have to start with the current year because if they
are resident in Republic for 91 days or less in the current year you do not
need to go any further.

167
A Student’s Approach to Taxation in South Africa 3.4

3.4 Total amount in cash or otherwise

There must be an actual amount received or accrued before there can be any question
of gross income. The case of CIR v Butcher Bros (Pty) Ltd 13 SATC 21 established the
principle of how the value is determined.

CASE:
Commissioner for Inland Revenue v Butcher Bros (Pty) Ltd
13 SATC 21
Facts: The taxpayer owned land that was the year of assessment in which the build-
leased to a cinema company for a period of ing was completed. (It should be noted
50 years with a further option for another that paragraph (h) of the definition of ‘gross
period of 49 years. In terms of the contract, income’ now includes the value of improve-
the lessee was obliged to erect a cinema ments to leasehold properties in gross
building at its own expense. At the end of income.)
the contract the building would become
Principle: The onus is firstly on the Com-
the property of the lessors at no cost.
missioner to establish a method to be used
Judgment: The rights that accrued to the to value an asset received other than in
lessor could not be regarded as consti- cash. It is only after the Commissioner has
tuting an amount accrued to the lessor in established the amount that the burden
the year the building was completed, as it shifts onto the taxpayer, in terms of sec-
did not have an ascertainable money value tion 102 of the Tax Administration Act,
that the Commissioner could include in 2011, to show that the amount is incorrect.

The inclusion of ‘amounts received in cash or otherwise’ means that the value of
assets received in lieu of cash must also be included in gross income. A car dealer
may accept a trade-in of a customer’s old car as part of the selling price of a new car.
Both the cash received and the value of the car traded in will be included in the
dealer’s gross income.
In Lategan v CIR 2 SATC 16 the court held that the term ‘amount’ included not only
money, but also the value of every form of property the taxpayer earned.
When an asset other than money is received, it will have to be valued. The principle
has been established in several court decisions, for example ITC 932 24 SATC 341 and
Lace Proprietary Mines Ltd v CIR 9 SATC 349, that this value will normally be the
market value of the asset on the date the asset was received. A farmer may exchange
produce they have grown on their farms for an implement such as a plough at their
local co-operative. The value of the plough will be included in their gross income and
this value will be the selling price (market value) of the plough on the date they
received the plough. The value of the new item (exchanged item, in this case the
plough) and not the value of the ‘old’ item (in this case the produce) will be the
amount received.
In CIR v People’s Stores (Walvis Bay) (Pty) Ltd 52 SATC 9, Judge Hefer accepted as
correct the statement of Judge Watermeyer in Lategan v CIR 2 SATC 16 that the word
‘amount’ should be given a wider meaning and ‘include not only money, but the
value of every form of property earned by the taxpayer, whether corporeal or incor-
poreal, which has a money value’.

168
3.4 Chapter 3: Gross income

One of the problems associated with the valuation of receipts in a form other than
cash is the question whether the value so ascribed should be a subjective or objective
value (see Ochberg v CIR 5 SATC 93 and the Butcher Bros case).

Example 3.3
In return for services rendered, Mr Jayce Naidoo is granted the right to occupy his client’s
holiday flat in Cape Town free of charge for two weeks. The holiday flat is normally let to
the public at a rate of R5 000 a week. Jayce cannot make use of the benefit at the time it is
made available and does not have the right to grant the benefit to a third party in return
for cash.
You are required to determine the amount in terms of the gross income definition.

Solution 3.3
The objective valuation of this non-cash receipt would be R10 000.
The subjective value of this benefit to Jayce would be Rnil.
Burden of proof (in terms of section 102 of the Tax Administration Act, 2011) of the tax-
payer will be important in this instance regarding the value placed on the benefit.

The effect of the ‘cash or otherwise’ element of gross income is also that notional
amounts are not included in gross income. For example, if a person could have
earned R1 000 in interest on funds they had at their disposal had they invested these
funds, this ‘notional’ interest cannot be included in their gross income if they did not
in fact so invest it. However, in Brummeria, the court found that where something is
received that is connected to a transaction, this ‘notional amount’ can be included in
gross income.

169
A Student’s Approach to Taxation in South Africa 3.4–3.5

CASE:
Commissioner for South African Revenue Services v
Brummeria Renaissance
69 SATC 205
Facts: The taxpayers (developers) obtained the definition of ‘gross income’. The right
interest-free loans from future occupants to to obtain the loan capital without paying
finance the construction units in a retire- interest is linked to the taxpayer providing
ment village. Interest-free loans were made the lender with a ‘life right’. Therefore a
by occupants of the retirement villages. monetary value can be determined for this
The lenders (occupiers of units) made the right that accrued to the taxpayer. As these
interest-free loans and were granted a rights are of a non-capital nature and can
lifelong right to occupy a unit (called ‘life be valued in money they are included in
rights’). The developers retained owner- gross income.
ship of the units. When the lender died or
the agreement was cancelled, the deve- Principle: The court stated that where an
loper had to repay the loan. The developer interest-free loan is given to a person in
received the use of the interest-free loan in return for something (a quid pro quo), in
exchange for life rights. this instance ‘life rights’, then the notional
Judgment: The actual receipt of the loan interest on interest-free loans represents
did not result in a receipt for purposes of the total amount in cash or otherwise.

The general rule for establishing an amount in relation to assets received in a form
other than cash is set out above. Specific types of assets such as shares or insurance
policies have special rules relating to their valuation, and certain sections of the Act
provide for the valuation methods to be used in certain circumstances.

REMEMBER

• There must be an actual amount received or accrued before there can be any question of
gross income.
• Amount has a wide meaning which includes the value of any form of property earned
by the taxpayer and which has monetary value.

3.5 Received by or accrued to or in favour of

In many instances, the receipt and accrual of an amount will coincide but it is also
possible to receive an amount before it accrues or vice versa. This does not mean that
the taxpayer can be taxed on an amount when it is received and again when it
accrues, as this would be double taxation. This principle was established by the court
in CIR v Delfos 6 SATC 92. The case of SIR v Silverglen Investments (Pty) Ltd 30 SATC
199 established that the Secretary for Inland Revenue (now the Commissioner) does
not have the choice to include an amount either when it is received or when it
accrues. Whichever event occurs first will determine the date of inclusion of the
amount. In Kotze v KBI 54 SATC 149 it was held that if the taxpayer omitted to dis-
close an amount when it accrued, the Commissioner had the right to tax the amount
when it was received.

170
3.5 Chapter 3: Gross income

In financial statements prepared according to generally accepted accounting practice,

an amount is recognised as income only when it accrues, irrespective of when it is
received, giving rise to a timing difference between income recognition for account-
ing and tax purposes. An income statement (or profit and loss account) drawn up for
accounting purposes would usually have to be adjusted for the purposes of determin-
ing taxable income (or an assessed loss for tax purposes).

Receipts
The question of when an amount is deemed to have been received by a taxpayer was
determined in Geldenhuys v CIR.

CASE:
Geldenhuys v CIR
14 SATC 419
Facts: The taxpayer enjoyed a usufructuary Judgment: As the number of sheep on date
interest in a flock of sheep (that is to say she of the sale was smaller than the number
had the right to enjoy the fruits and income when the usufruct commenced, there was
of the asset (sheep)). Her children were the no surplus to which she was entitled; there-
owners of the bare dominium (actual sheep). fore the amount belonged to the children.
The taxpayer and her children decided Principle: The mere receipt of an amount
to give up farming and sell the sheep. The does not result in an inclusion in gross in-
proceeds were deposited in the taxpayer’s come. Although a taxpayer might receive
banking account. The question is: how an amount, it will only be included in
should she be taxed on the amount gross income if it is received on his or her
received? own behalf and for his or her own benefit.

Example 3.4
Jakes Attorney received R250 000 rental per month on behalf of his client Billy Rental.
Billy owns two warehouses that he leases to businesses. Jakes receives these rentals on a
monthly basis and pays it over to Billy.
You are required to determine in whose hands the R250 000 will be taxable.

Solution 3.4
The R250 000 rent received will form part of Billy’s gross income, since Jakes Attorney
had not received it on his own behalf and for his own benefit.
If a taxpayer receives an amount as an agent of someone else, the amount does not accrue
to the agent (C: SARS v Cape Consumers (Pty) Ltd 61 SATC 91).

171
A Student’s Approach to Taxation in South Africa 3.5

CASE:
A Company v Commissioner for the South African
Revenue Service
IT 24510
Facts: The taxpayer sold gift cards and Judgment: As the cards are considered
deposited monies received for it in a sepa- the property of the holder/beneficiary
rate bank account until the card is re- until they are presented to be redeemed
deemed or expired. They started with this it can not form part of the issuer of the
practice after the Consumer Protection Act cards (the taxpayer’s) gross income and
was introduced. They subsequently did cannot be taxed then. They have not
not include any receipts from the gift card yet received the monies for their own
in their gross income until the cards were benefit.
redeemed or they expired. SARS assessed Principle: The mere receipt of an amount
the taxpayer on the full amount of the does not result in an inclusion in gross
separate bank account’s receipts for the income. Although a taxpayer might receive
2013 year of assessment. an amount, it will only be included
The question is: Are the receipts received in gross income if it is received on his or
in terms of the gross income definition or her own behalf and for his or her own
can they be considered to be in a type of benefit.
trust for protection of the gift card holders?

Illegal receipts
In ITC 1624 59 SATC 373 the judge ruled that where an amount is received due to an
overcharge to a customer, it constitutes an amount received. This is due to the fact
that the amount is received and it is received by virtue of a contract between the two
parties.
In ITC 1545 54 SATC 464, the taxpayer was a dealer in stolen diamonds, knowing
them to be stolen. The court, without arguing the matter, stated that it was common
cause that the proceeds of the sales of the diamonds amounted to a ‘receipt or accrual’
for the purposes of the definition of gross income. The taxpayer receives an amount
on their own behalf and for their own benefit irrespective of the fact that the person is
engaged in illegal activities.
As can be seen in ITC 1545 and ITC 1624, the South African Court taxed the theft of
money as income. This principle was confirmed and extended in two other cases: CIR
v Delagoa Bay Cigarette Company and MP Finance Group CC (in liquidation) v C: SARS.

172
3.5 Chapter 3: Gross income

CASE:
Commissioner for Inland Revenue v
Delagoa Bay Cigarette Co, Ltd
32 SATC 47
Facts: The taxpayer company had adver- Judgment: The prizes were paid in terms
tised a scheme under which it sold packets of a contract of purchase and sale and the
of cigarettes at a discount, each such packet cost had been incurred in earning the
containing a numbered coupon. The then income. Accordingly it had not been a
company undertook to set aside two thirds distribution of profit. The court ruled that
of the amount received from such sales as the legality or otherwise of the business
a prize fund from which a monthly distri- was irrelevant and that income earned was
bution would be made to such purchasers taxable.
of the packets ‘as the directors of the com-
pany should in their discretion determine’.
Two monthly distributions to winners Principle: To decide if an amount is
were made. However, before the third dis- ‘income’ or not, no account must be taken
tribution took place, the scheme was stop- of the fact that the activity involved was
ped as it was considered to be a lottery and illegal, immoral or ultra vires. Expenditure
therefore illegal. The taxpayer argued that incurred in producing such income may
the prizes paid were incurred in the pro- qualify as a deductible expense, except
duction of the income, and that if the where the expenses are prohibited by sec-
scheme was illegal the Commissioner could tion 23(o), which prohibits the deduction of
not tax the profits. bribes, fines and penalties.

173
A Student’s Approach to Taxation in South Africa 3.5

CASE:
MP Finance Group CC (In Liquidation) v Commissioner for
South African Revenue Service
69 SATC 141
Facts: During the 2000, 2001 and 2002 Judgment: The relationship between
years of assessment, Prinsloo operated a investor and scheme and the relationship
pyramid scheme (an illegal and fraudulent between scheme and fiscus (the Commis-
investment enterprise). In terms of the sioner), was different. An illegal contract
scheme agents solicited and transmitted can have some legal and fiscal (taxation)
investors’ deposits in return for commis- consequences. For tax purposes the only
sion. Prinsloo controlled several entities question is if the amounts paid to the
which printed a range of convincing- scheme complied with the requirements of
looking documentation issued to investors the Income Tax Act and unquestionably it
when they made deposits. In schemes of did. The amounts paid to the scheme were
this nature, investors are promised irresist- accepted by the operators of the scheme
ible (but unsustainable) returns on their with the intention of using it for their own
investments and the scheme paid such benefit and notwithstanding that in law
returns before finally collapsing, owing they were immediately repayable, they
many millions to investors. During the constituted receipts and were taxable.
years of assessment under review the oper- Principle: There is a distinction to be drawn
ators of the scheme knew that it was insolv- in the relationship between contracting
ent, fraudulent and would not be able to parties (commercial relationship) and the
pay investors. The taxpayer contended that relationship that a taxpayer has with the
because the scheme was in law liable to fiscus. The tax consequences flow from the
immediately refund the deposits, there relationship with the fiscus rather than from
was no basis on which it could be said that the commercial relationship. Therefore illegal
the deposits were ‘received’ and that they receipts and ill-gotten gains are taxable.
were therefore not subject to tax.

Example 3.5
Jack Smith uses street vendors to sell pirated versions of well-known DVDs to the general
public. His income from these activities amounted to R150 000 for the current year of
assessment.
You are required to determine whether Jack Smith will be taxable on the income
received.

Solution 3.5
Jack will include the R150 000 in his gross income as this amount was received by him on
his own behalf and for his own benefit, irrespective of the fact that the sale of pirated
DVDs constitutes illegal activities. SARS does not distinguish between income from legal
activities and income from illegal activities.

174
3.5 Chapter 3: Gross income

Accrued to
In terms of the definition of gross income, amounts which accrue to a taxpayer which
they have not yet received will be included in their gross income. The first case deal-
ing with the meaning of the term ‘accrue’, namely Lategan v CIR, was heard in 1926.

CASE:
WH Lategan v Commissioner for Inland Revenue
2 SATC 16
Facts: The taxpayer, a wine farmer, entered the year of assessment in respect of the
into an agreement to sell his wine to a co- wine produced during the year of assess-
operative company. A portion of the selling ment formed part of the ‘gross income’ for
price was paid prior to the end of his year of that year. The court also held that the
assessment and the balance was to be paid future payments must be included at their
after the end of the year of assessment. discounted future value.
Judgment: ‘Accrued to’ means ‘become Principle: ‘Accrued to’ is the amount to
entitled to’ thus the instalments payable after which the taxpayer has become entitled.

The Lategan decision was followed by CIR v Delfos 6 SATC 92, where two of the
judges interpreted accrue to mean ‘due and payable’. This interpretation may result
in income being taxed in different years of assessment. An amount may be ‘due’ to a
taxpayer during the year of assessment, but only ‘payable’ during the following year
of assessment. In 1990 the appeal court gave its first ruling on the term accrual in CIR v
People’s Stores (Walvis Bay) (Pty) Ltd, thus effectively overruling the previous
decisions.

CASE:
Commissioner for Inland Revenue v People’s Stores
(Walvis Bay) (Pty) Ltd
52 SATC 9
Facts: The taxpayer was a retailer of cloth- during the year of assessment and to
ing, footwear etc., for cash and on credit. which a monetary value can be attached,
Most of the credit sales were made under forms part of the ‘gross income’, irrespec-
its so-called ‘6-months-to-pay’ revolving tive of whether it is immediately payable
credit scheme. In terms of this scheme (due and enforceable) or not. The value of
customers’ accounts were payable in six the instalments not yet payable had to be
equal monthly instalments. The instalment their market value.
reflected on the statement had to be paid After this decision an amendment was
before the next statement date. The enacted that subsequently included the
Commissioner taxed the full amount of ‘present value’ of any unpaid amounts.
the sale of the goods in the year of Principle: The court confirmed the mean-
assessment in which they were sold, but ing of ‘accrued to’ as applied in Lategan,
allowed a section 11(j) deduction (pro- has become ‘entitled’. Please note that
vision for bad debt). granting credit is not a condition. A con-
Judgment: An amount accrues to a taxpayer dition in a contract normally delays the
when he becomes entitled to the ‘amount’. transfer of ownership until the occurrence
Therefore any right that a taxpayer acquired of a specific event.

175
A Student’s Approach to Taxation in South Africa 3.5

SARS immediately counteracted this decision by introducing the provisos to the

definition of gross income in section 1 of the Act:
Provided that where during any year of assessment the taxpayer has become entitled
to any amount which is payable on a date or dates falling after the last day of such
year, there shall be deemed to have accrued to him during such year such amount.
The provisos:
• confirm the interpretation of the Lategan case that accrue means ‘become entitled
to’; and
• confirm that if the taxpayer becomes entitled to any amount during the year of
assessment, the full amount is included in that year and no present value can be used.

Example 3.6
Ms Norah Eyssel rendered services to Invest (Pty) Ltd on 15 January. Invest (Pty) Ltd
agrees to pay her R5 000 for the services rendered but the amount is only payable in five
years’ time. Assume that the present value of R5 000 in five years’ time is R1 500.
You are required to determine the amount that will be included in Norah’s gross
income.

Solution 3.6
The total value of the accrual is R5 000 and she will include the R5 000 in her gross
income for the current year of assessment.

Will she be taxed on the amount when she receives it after five years?

In Mooi v SIR 34 SATC 1 the accrual principle was further extended.

176
3.5 Chapter 3: Gross income

CASE:
Mooi v Secretary For Inland Revenue
34 SATC 1
Facts: The taxpayer received an option to Judgment: The true and real benefit con-
subscribe for (buy) shares in the company templated in the option offer was the right,
he was employed by but subject to the upon the due fulfilment of all the con-
following conditions: he must still be ditions, to obtain the shares at a set price.
employed by the company at the time the The relevant accrual of that benefit occurred
mine (at which he worked) came into when the option became exercisable upon
operation. Three years later the mine came those conditions being fulfilled some three
into operation and he exercised the option. years later; until the taxpayer had per-
The option price paid was far below the formed those services he did not become
market price of the shares. The Commis- ‘entitled to’ any right of option, nor was
sioner included the difference between the anything ‘due and payable’ to him. There-
option price paid and the market value of fore there was no accrual to the taxpayer
the shares at the time of exercising the until the conditions were fulfilled. The
option, in the taxpayer’s gross income. The court also found that when the taxpayer
inclusion was made on the basis that the was in the service of the company, there
amount had accrued to him in respect of existed the necessary causal relationship
services rendered. The taxpayer argued between the benefit acquired by the tax-
that the only amount, if any, which payer and his services to the company.
accrued to him in respect of services, was (Note that section 8C now allows for these
the right he had acquired three years earlier amounts to be taxed.)
(namely the right to exercise an option in
future when certain conditions had been Principle: An amount can only accrue if
met). Therefore the amount accrued when the person has ‘become unconditionally
the options were exercised was as a result entitled to’ it. Conditional entitlement
of the amount paid by the taxpayer for the would therefore not constitute an accrual
shares and not in respect of services ren- until the condition had been satisfied.
dered.

In practice, the date of accrual will depend on the terms of the contract giving rise to the
income. A rental agreement may provide for monthly, quarterly or annual rent pay-
ments. The amount accrues on the date it is due.

Example 3.7
A taxpayer carries on business as a furniture dealer. He sells an item of furniture for cash
during the year of assessment. He also sells and delivers furniture on 25 February 2023
but only receives payment on 25 March 2023.
You are required to determine the date of accrual.

177
A Student’s Approach to Taxation in South Africa 3.5

Solution 3.7
The selling price of the item sold for cash which he has received during the current year
of assessment is included in his gross income on the date of sale.
The selling price of the second sale accrues to him on 25 February 2023, even though pay-
ment is only received after the current year of assessment and will be included in his
gross income for the current year of assessment.

Blocked foreign funds (section 9A)

Where an amount is included in a person’s income but that person cannot bring the
money to South Africa, they will qualify for a section 9A special deduction equal to
the amount that cannot be remitted to South Africa.
Section 9A states that the deduction allowed in one year must be added back in the
next year and a new allowance must be calculated. The allowance can be claimed
every year there is a limitation on the amount that can be transferred to South Africa.

Example 3.8
Frederikus has an investment in a foreign country. During the current year of assessment,
interest amounting to R32 300 was credited to the account. According to the laws of the
foreign country, the interest earned on these types of accounts may only be remitted to
foreign residents after two years.
You are required to show the effect of the R32 300 interest earned on Frederikus’ taxable
income for the current and next two years, assuming that he earned no other investment
income.

Solution 3.8
Current year of assessment R
Gross income – Foreign interest earned 32 300
Section 9A deduction (32 300)
Effect on taxable income nil

2024 year of assessment

Gross income – section 9A inclusion 32 300
Section 9A deduction (32 300)
Effect on taxable income nil
As the amount has been included in income and once again it has not been
remitted to the Republic, it can be deducted in terms of section 9A.
2025 year of assessment
Gross income – section 9A inclusion 32 300
As the amount can now be remitted to the Republic in terms of the rules of the
foreign country, there will be no section 9A deduction.

continued

178
3.5 Chapter 3: Gross income

If you don’t take the money that you have earned out of a country
within that same year, and in the next year the country imposes a limi-
tation on the removal of the money, will you still be able to qualify for
this deduction?

REMEMBER

• The section 9A deduction is only allowed where, as a result of currency or other

restrictions or limitations imposed in terms of the laws of the foreign country where the
amount arose, the amount (or part of the amount) may not be remitted to the Republic.
• If the currency restrictions apply to a controlled foreign company, a section 9A deduc-
tion can be claimed for each foreign year of assessment in which the restrictions are in
place.
• As soon as the restrictions no longer apply, no deduction will be allowed in terms of
section 9A.

Deposits received
Advance payments received for work still to be performed, such as advance pay-
ments on building contracts, will be included in the taxpayer’s gross income although
the payment accrues to them only when the work has been performed. The principle
relating to deposits was set out in Pyott Ltd v CIR.

CASE:
Pyott Ltd v Commissioner for Inland Revenue
13 SATC 121
Facts: The taxpayer (Pyott) manufactured Judgment: The amount received for the
biscuits. The biscuits were packaged and containers was cash (not subject to any
sold in tin containers. A refundable deposit reduction or discounting) and must be
was charged for the tin container which included in the gross income of the tax-
was repaid when the tin was returned in payer at its full value. The provision made
good condition. Before the Second World to meet future claims for refunds is a re-
War between 25% and 30% of the tins were serve for a contingent liability, which was
so returned to the company. Due to a expressly forbidden (section 23(e)). The
shortage of tinplate in the war years, the court stated that if the moneys received as
deposit on the tins was tripled in an attempt deposits had been banked in a separate
to have more tins returned. This resulted trust account set up specifically for the
in 90% of the tins being returned for a deposits received, then such amounts
refund. The company provided for an deposited would not constitute ‘gross
allowance on tin containers returnable, an income’.
amount representing their liability for re-
funds, effectively resulting in the deposits Principle: Deposited moneys are included
received not being taxed. The Commis- in ‘gross income’ unless they are deposited
sioner refused to allow the provision for into a separate trust account set up speci-
refunds. fically for the deposits received.

179
A Student’s Approach to Taxation in South Africa 3.5

There have also been several other decisions relating to deposits received by a tax-
payer (Brookes-Lemos Ltd v CIR 14 SATC 295 and Greases SA Ltd v CIR 17 SATC 358)
that have indicated that once a taxpayer has received an amount as their own during
a year of assessment to be dealt with as they wish, it is included in their gross income
despite the fact that in terms of the contract they may have to repay the amount later
in certain circumstances.

Example 3.9
Grace Nkomo operates a bed and breakfast establishment in Soweto. She received a de-
posit of R10 000 on 1 April 2022 to reserve accommodation for a group of German tourists
who will visit Soweto during April 2023.
You are required to determine whether Grace will include the R10 000 in her gross in-
come for the current year of assessment.

Solution 3.9
Grace will include the deposit of R10 000 in the year of receipt (2023 year of assessment).
Even though the services will only be rendered in the 2024 year of assessment, she has
received the amount for her own benefit. It will not be included in her gross income again
in the 2024 year of assessment.

Or in favour of
The words ‘or in favour of’, which are included in the definition, mean that income
received by another person on behalf of the taxpayer will be included in the tax-
payer’s gross income. A letting agent may collect rent from the tenants in a block of
flats on behalf of the owner. The owner, not the agent, will include this rental income
in their gross income, because it was received or accrued in their favour.
An amount will be included in their gross income irrespective of how the taxpayer
applies it after it has accrued. Section 7(1) of the Act provides:
Income shall be deemed to have accrued to a person notwithstanding that such
income has been invested, accumulated or otherwise capitalised by him or that such
income has not been actually paid over to him but remains due and payable to him or
has been credited in account or reinvested or accumulated or capitalised or otherwise
dealt with in his name or on his behalf, and a complete statement of all such income
shall be included by any person in the returns rendered by him under this Act.
For example, where interest has been credited to the taxpayer’s savings account, it
will have accrued, even though it has not been paid out to them. The leading case
dealing with in favour of is CIR v Witwatersrand Association of Racing Clubs.

180
3.5 Chapter 3: Gross income

CASE:
Commissioner for Inland Revenue v Witwatersrand
Association of Racing Clubs
23 SATC 380
Facts: The taxpayer (a non-registered asso- it to distribute the proceeds to the charities
ciation of racing clubs) organised a race in accordance with its declared intention.
meeting on the Johannesburg Turf Club’s The Association acted as the principal in
race course, the proceeds of which were to holding the race meeting rather than as an
be divided between two non-profit char- agent.
ities. The proceeds of the meeting were
divided between the two charitable bodies Principle: Once an amount has been bene-
for whose benefit the meeting was stated to ficially received by or accrued to a taxpayer,
be held. The Commissioner included the he is taxed on such amount even though
amount received in the taxpayer’s ‘gross he may have an obligation to pay it over to
income’. some other person. If there is a principal
Judgment: The Association had, in holding agent relationship, the amount would be
the race meeting, embarked upon a scheme taxed in the principal’s name. In this case
of profit-making and was liable for tax the two non-profit charities could have
upon the proceeds of the meeting, not- acted as principals in which event they
withstanding the moral obligation upon would have been taxed.

Example 3.10
Sarah Msimang signs a stop order authorising the deduction of her car payment of R5 000
directly from her salary. She earns a gross salary of R18 000 a month.
You are required to determine the amount that will be included in gross income.

Solution 3.10
She will include her full salary of R18 000 in her gross income, irrespective of the fact that
she has not received the full amount.

A taxpayer may, however, divest themselves of the right to income which may accrue
to them in the future, prior to its accrual. The question whether taxpayers have
divested themselves from receiving income prior to its accrual is a difficult one. In
Cactus Investments (Pty) Ltd v CIR 1999 (1) SA 315 (SCA), it was ruled that interest on
investments that had been ceded in exchange for dividend income had accrued when
the investments were made and that this accrual was not affected by subsequent
cessions.
When a right to future income is disposed of, the future income will be taxable in the
hands of the recipient of that right. However, it must be noted that there are also
certain provisions in the Act, for example section 7, which prevent certain donations
of income and the right to income in order to limit the ability of taxpayers to divest
themselves of the right to future income.

181
A Student’s Approach to Taxation in South Africa 3.5–3.7

Example 3.11
Dave Right has legally ceded the income from a rent-producing property that he owns to
a friend for this year and the next four years. Dave’s friend lost his job and has no income.
During the current year of assessment, R50 000 rent was received on the property.
You are required to determine whether Dave or his friend will include the R50 000 in
their gross income.

Solution 3.11
As Dave disposed of his right to future income, he will not include the income in his
gross income. Dave’s friend, who is the recipient of the rent, will have to include the
R50 000 in his gross income. Note, however, that section 7(7) of the Act (an anti-avoidance
section) states that if an amount is transferred to another person for a specific period of
time with a donation, settlement or other disposition, the donor (Dave) (and not the per-
son receiving it) will be taxed on the income. So even though this was ceded Dave will
still be taxed on the rental.

REMEMBER

• ‘Received’ means that a taxpayer receives the amount for their own benefit and for
themselves.
• ‘Accrued’ means that the taxpayer has become unconditionally entitled to the amount.
• The time value of money is ignored.
• Income received by another person on behalf of a taxpayer will be included in the
taxpayer’s gross income.
• An amount is included in gross income either on the date of receipt or accrual, which-
ever event occurred first. You cannot be taxed twice on an amount received.
• Sections 7A and 7B have specific accrual times in respect of antedated and variable
remuneration, while sections 7C to 7E deal with accrual of certain interest and loans or
credits advanced to a trust by a connected person.

3.6 Year or period of assessment

Only an amount received or accrued in a particular year of assessment will be included
in gross income for that year of assessment. A natural person’s year of assessment
always ends on 28 or 29 February and a company’s year of assessment is the same as
its financial year.

3.7 Receipts or accruals of a capital nature

The Act does not define ‘receipts or accruals of a capital nature’. Capital income in
the hands of one taxpayer may be non-capital income to another. For example, a man
may sell their private car, and the proceeds would be capital. To a car dealer whose
business is selling cars, this income would be non-capital because it constitutes
trading stock.

182
3.7 Chapter 3: Gross income

Example 3.12
Sam Olivier sold his personal house, which he owned for 12 years, for R700 000 due to
personal circumstances.
You are required to determine whether Sam will include the R700 000 in his gross income
for the current year of assessment.

Solution 3.12
Sam will not include the R700 000 in gross income, as this transaction constitutes a sale of
an asset which is capital in nature.

It does not normally happen that one amount is partly capital and partly revenue.
However, in Tuck v CIR 50 SATC 98 it was held that the amount was received for two
reasons and therefore the amount was apportioned between capital and revenue
income. It is also impossible to have an amount which is neither capital nor revenue.
The basic test to determine whether an amount is of a capital or a revenue nature,
was set out in CIR v Visser.

CASE:
Commissioner for Inland Revenue v Visser
8 SATC 271
Facts: The taxpayer (an influential business- wits, energy and influence and as such was
man) acquired mining options for a period not a receipt of a capital nature, but income
of two years over certain properties which in nature. The court used the tree and fruit
were not renewed and had expired. Later,
analogy as a useful guide but cautioned
a third party negotiated with and offered
that what is the principal or tree in the
the taxpayer an interest in a company to
be formed if he would refrain from taking hands of one man may be interest or fruit
up options in competition with him and in the hands of another. For example, law
assist him to acquire the previously lapsed books in the hands of a lawyer are a capital
options. The taxpayer agreed to the pro- asset, while for a bookshop it is stock-in-
posal. The arrangement was confirmed in a trade (revenue). Adopting a profession is
letter which stated that the taxpayer had likened to a tree while the earnings from
been promised shares ‘in consideration of the profession is likened to the fruit of the
the services you have already rendered and tree.
will be rendering to me and my associates
in the venture that we are undertaking’. Principle: The ‘tree and fruit’ principle,
namely that the tree is capital in nature
Judgment: The amount in dispute had
and the fruit is revenue in nature.
accrued to the taxpayer as the product of his

Not all capital or revenue decisions are as clear as in the above. Over the years the
courts have identified a number of factors that can be used to determine if a receipt is
of a capital or revenue nature. The most important factors that can be considered will
be dealt with briefly.

183
A Student’s Approach to Taxation in South Africa 3.7

The test the courts developed to determine the difference between capital and reve-
nue receipts is the intention test. The test determines what the taxpayer's intention
was. If the intention was to receive a capital amount, it will not be taxable. This test,
however, is a subjective test and courts look at various objective factors to determine
whether the subjective test gives the correct answer.

3.7.1 Subjective tests

Although income derived from ‘an operation of business in carrying out a scheme of
profit-making’ will be characterised as revenue, it will usually be necessary to con-
sider the intention of the taxpayer to determine whether they are carrying on a
scheme of profit-making. The intention of a taxpayer is a subjective matter and the
courts have dealt with the problems relating to the subjective tests as follows.

Intention of the taxpayer

Whether a taxpayer has embarked on a profit-making scheme depends on their inten-
tion. One man may buy a block of flats with the intention of holding it as an invest-
ment to earn rental income. Should circumstances force them to sell the property later
the proceeds will be of a capital nature. Another man may buy the block of flats with
a speculative motive, intending to apply for sectional title rights and sell the flats
immediately at a profit. The proceeds of these sales will be revenue because they had
the intention of embarking on a scheme of profit-making.
In SIR v Trust Bank of Africa Ltd 37 SATC 87, it was held that the intention at the time
of acquisition is important, and in particular circumstances may be fundamental and
decisive. The question is what happens if a person acquires something (for example
shares) with the intention to keep it as a capital asset, and then decides to speculate
with it.

Change of intention
The intention at the time of acquisition of the property is not conclusive because an
intention to hold as an investment may change during the time the property is held
into an intention to engage in a profit-making scheme – refer to CIR v Richmond
Estates (Pty) Ltd.

184
3.7 Chapter 3: Gross income

CASE:
Commissioner for Inland Revenue v
Richmond Estates (Pty) Ltd
20 SATC 355
Facts: The taxpayer company was formed would make it impossible for the company
for the purpose of controlling the invest- to dispose of its plots to blacks, the share-
ments and savings of the sole beneficial holder decided that it would be better for
owner of the shares issued (who was also the company to dispose of all its holdings,
the director). The memorandum of associ- both improved and unimproved, in the
ation of the company empowered it to pur- township. The company thereafter dis-
chase land, deal in land, turn land to posed of 15 of its 18 plots in the township
account, develop land and lay out and at a substantial profit.
prepare land for building purposes. The
company carried on business as a land Judgment: The company had a change in
speculator and received rent from pro- its intention as regards the properties sold,
perties it let. A large part of the business of in that it was converted to a capital asset.
the company consisted of buying and sell- The sale at a profit as the result of a change
ing plots in a black township but after 1945 in conditions outside the company’s con-
it was no longer possible except with ap- trol did not per se make the resulting profit
proval of the appropriate Minister. In 1948, subject to tax. The fact that the change of
the shareholder decided that the company intention had taken place was not recorded
should cease selling its plots in the town- in a formal resolution of the company’s
ship and for the future develop its holding only director (who was also the sole bene-
of eighteen plots in the township as rent- ficial shareholder) but was evidenced from
producing properties. No formal resolu- the statements of the sole director and was
tion recording this decision appeared in the regarded as sufficient evidence for the
company’s records. By 1950, the Group Are- amount not to be taxed.
as Act had been passed and the intention
of the government was to remove the Principle: The intention of a company is
black inhabitants from the township in derived from both its formal acts (resolutions
which the company had its holding. As this of directors) and its informal acts.

It should be noted that the mere fact that the taxpayer decides to realise an asset is not
proof of a change of intention, nor the fact that they do so in such a way that they
realise it to the best advantage (refer to CIR v Stott).

185
A Student’s Approach to Taxation in South Africa 3.7

CASE:
Commissioner for Inland Revenue v Stott
3 SATC 253
Facts: Over the thirty years prior to the sale Judgment: Although the taxpayer’s pro-
of the properties in question, the taxpayer fession was one of a surveyor and archi-
(an architect and surveyor) had purchased tect, this aspect, on the facts, did not affect
various properties, some of which he held him adversely. The fact that he had dealt in
for a period of time to let or for private property previously was not taken into
purposes (seaside cottage) and later sold account because the court regarded them
them, sometimes having subdivided the as having taken place too long ago and too
property before selling. One of the pro- lacking in information. However, the
perties in question was a property which motives in relation to the properties in
the taxpayer purchased for residential pur- question were looked at closely to establish
poses. This property acquired was larger whether there was a scheme of profit-
than the taxpayer required for residential making or not. The court found that there
purposes, but the property was only for was no scheme of profit-making in regard
sale in one block. The taxpayer built a cot- to the property purchased to protect the
tage on the site and thereafter cut up about rights of the tenants and later sold to them.
half the property (property which he re- His father had been a missionary and the
garded as excess to his needs) into small purchase of the property was for philan-
lots, which he proceeded to sell and from thropic purposes, which by its very nature
which he derived substantial profits. A excluded a scheme of profit-making. The
further property was purchased for the pur- amounts realised constituted accruals of a
pose of assisting tenants who were living capital nature.
there and who feared that they would be
ejected. His father had been a missionary Principle: A person may realise his capital
and he felt it his duty to assist these people. asset to best advantage and the mere sub-
Part of the farm, after the purchase, was division of land does not constitute a trade.
subdivided and sold to the tenants at a The decision also lays down the principle
small profit. The third property in question that the taxpayer’s intention at the time the
was a small fruit farm which he purchased asset is purchased is decisive unless there
subject to a long lease. The tenant failed to is a subsequent change in intention and the
pay his rent and the subsequent tenant taxpayer ‘crosses the Rubicon’ by being
caused trouble. The farm was then put up involved in a scheme of profit-making.
for sale and was sold at a profit.

186
3.7 Chapter 3: Gross income

In Natal Estates Ltd v SIR and similarly in Berea West Estates (Pty) Ltd v SIR the courts
gave guidance as to when an asset is deemed to have been realised to its best
advantage as opposed to when it was being disposed of in a business venture.

CASE:
Natal Estates Ltd v Secretary for Inland Revenue
37 SATC 193
Facts: The taxpayer company (formed in 55% by the Anglo American Corporation
1920) acquired as a going concern the Ltd. This company purchased from the
whole of the assets of a company which taxpayer the La Lucia beachfront and
had for some 25 years been carrying on Umhlanga Lagoon areas en bloc for
business in Natal as a grower and miller of R1,4 million. Although the taxpayer con-
sugar. The assets acquired were mainly tinued for some time to effect sales directly
planted sugar cane and included areas to members of the public, by the latter half
north of Durban (now known as La Lucia of 1968 this had largely given way to bulk
and Umhlanga Rocks). The taxpayer con- sales. These bulk sales were all to com-
tinued the sugar cane business uninter- panies associated with the taxpayer, one a
rupted until the years 1965–70, when the subsidiary of the taxpayer and three others
taxpayer sold substantial areas of its land wherein the taxpayer’s parent company
at considerable profit but still retained held a 45% interest.
large portions of land. The Durban City Judgment: The original intention of the
Council pressurised the taxpayer to sell the taxpayer to hold an asset as an investment
land as Durban was expanding towards La is always an important factor but such
Lucia and Umhlanga Rocks. If the land intention is not necessarily decisive. There
was not sold voluntarily, it was likely to be was a change of intention considering the
expropriated. In 1963, consulting engineers manner or method of realisation which
and architects were appointed for the de- indicates that a scheme for profit-making
velopment. After the taxpayer became a was taking place and therefore the profits
wholly owned subsidiary of a parent com- derived from the sale of the asset were
pany (Huletts Corporation Ltd), the pro- subject to tax. The court also ruled that the
cess of selling the land picked up speed. By change of intention in regard to land in
April 1964, about 188 lots of the 2 350 Umhlanga Rocks and La Lucia also includ-
comprising the La Lucia township layout ed the areas sold in bulk as these trans-
had been sold. In 1965 the taxpayer formed actions also benefited (and were intended
a company, La Lucia Homes (Pty) Ltd, for to benefit) from the intensive business
the purpose of constructing houses in La activities primarily associated with the
Lucia. During 1968 a company, known preparation for, and promotion of the sale
as La Lucia Property Investment Ltd, of lots in township development, and all
was formed in which 45% of the equity the transactions formed part of the same
was held by Huletts Investments Ltd and scheme of profitable dealing in land.

continued

187
A Student’s Approach to Taxation in South Africa 3.7

To determine whether a taxpayer is real- owner’s statements of intention; the nature

ising a capital asset at best or is carrying on and extent of his marketing operations and
a business scheme of selling land for profit, the like; and the incidence of the burden
the facts of the case must be considered in imposed by section 102 of the Tax Admin-
their relation to the ordinary commercial istration Act, 2011.
concept of carrying on a business scheme Principle: The court looked at the intention
for profit. In any such enquiry important of the taxpayer and whether it had
considerations will include, inter alia, the changed its intention from holding onto
intention of the owner both when acquir- the land as a capital asset or to embark on
ing and selling the land; the objects of the a scheme of profit-making. The court ruled
owner, if a company; the owner’s activities that if a person ‘had crossed the Rubicon’
in relation to the land prior to his decision and started a ‘scheme of profit-making’ the
to sell, and the light thereby thrown upon the profits were of a revenue nature.

CASE:
Berea West Estates (Pty) Ltd v Secretary for
Inland Revenue
38 SATC 43 (A)
Facts: Mr K donated an undivided half- sale of the property. The taxpayer’s acti-
share in a property to his 13 children. The vities related to the development of one
other half was bequeathed to them in his area, selling the plots in that area, and then
will. After his death the property was sold to use the money to develop a further area.
piecemeal to cover costs in the estate. As a Some 40 years after the death of Mr K all
result of the financial and administration the land had been sold and the proceeds
problems, it was agreed to create a com- distributed.
pany that would acquire the remainder of
the property. The company will then sell Judgment: The taxpayer (company) was
the property to the best advantage and any the method used to realise the benefi-
balance left paying creditors, would be ciaries’ interests in the property. The total-
distributed to the beneficiaries according ity of the facts showed the taxpayer was a
to Mr K’s will and the company wound realisation company and that they had not
up. The shares in the company were allo- deviated from this purpose. The proceeds
cated to the heirs and beneficiaries in pro- on the sales were therefore of a capital
portion to their entitlement. The property nature.
was subsequently proclaimed as a town-
Principle: The use of a realisation com-
ship provided that the company arranged
for the infrastructure (roads, water supplies, pany does not relax the rules related to a
and surveys) to be installed. Except for taxpayer ‘crossing the Rubicon’. The for-
periodic investment of temporarily surplus mation of a realisation company can assist
funds, the taxpayer did not enter into any a taxpayer to discharge the burden of proof
trading activities that were not related to the that an amount is capital in nature.

188
3.7 Chapter 3: Gross income

In 2011 the Supreme Court of Appeal expanded the principles related to realisation
companies in the Founders Hill (Pty) Ltd case. The court found that the principles can
only be applied in limited cases.

CASE:
CSARS v Founders Hill (Pty) Ltd
(509/10) [2011] ZASCA 66
Facts: AECI Ltd erected an explosives fac- had ‘crossed the Rubicon’ to change the
tory in 1896, which was extended in 1937. property into stock-in-trade.
Much of the land on which the factory was
built was required as a buffer between the Judgment: The court found that Founders
factory and urban areas. AECI owned land Hill was not merely AECI’s alter ego; it
in Modderfontein, Johannesburg, for many was established with the sole aim of
decades. However as technology improved, acquiring the property, developing it and
the extent of the buffer was reduced. then selling it at a profit. The property was
Economic and social developments in therefore stock-in-trade. The judge pointed
Johannesburg led to more land being out that the taxpayer’s intention in acquir-
required for housing and industry. AECI ing the property was different from that
took steps to subdivide and applied for it which AECI had had, namely surplus land
to be rezoned. AECI wanted to develop the held as a capital investment. Founders
land for the purpose of selling it as land for Hill’s profits were gains ‘made by an
residential, business and light industrial operation of business in carrying out a
purposes. scheme for profit-making’ and therefore
Acting on legal advice, in 1993 AECI taxable.
formed Founders Hill as a ‘realisation
company’ with the express purpose of Principle: Once a taxpayer acquires assets
realising the land which AECI sold to it to for the purpose of selling them, it is trad-
‘best advantage’. It commenced doing so ing in those assets. There are exceptional
and engaged the services of another AECI cases where a realisation company or trust
subsidiary, Heartland Properties, to fur- is required in order to facilitate the sale of
ther develop and market the land. Both the assets (for example, where different people
Commissioner and Founders Hill agreed owned them, but to sell to best advantage
that the taxpayer acquired a capital asset the interposition of another entity is
from AECI. The question was if the company required).

It has been held that the onus of establishing a change in intention from revenue to
capital is a heavy burden (Yates Investments v CIR 20 SATC 355). The mere fact that the
taxpayer decides to wait before selling a capital asset does not represent a change in
intention; something more is required (John Bell & Co (Pty) Ltd v Secretary for Inland
Revenue 38 SATC 87).

189
A Student’s Approach to Taxation in South Africa 3.7

CASE:
John Bell & Co (Pty) Ltd v Secretary for Inland Revenue
38 SATC 87
Facts: In 1916 the taxpayer purchased, as a The taxpayer had at no time offered the pro-
going concern, the businesses of fruit mer- perty for sale − it was approached to sell it.
chants, exporters, importers and distribut- Judgment: That a mere decision to sell the
ors. The businesses were established in asset (previously kept as a capital asset)
Johannesburg and Cape Town. In 1924, it rather than keep it does not per se make the
purchased the property in which it conducted profit from the subsequent sale income in
its business. In 1956, the taxpayer’s control- nature. Something more is required in or-
ling shares were passed to new share- der to metamorphose the character of the
holders. The purpose of the new sharehold- asset and so render its proceeds gross in-
ers was to secure the property as premises come. The court said it could not reason-
for a new business they proposed to estab- ably be found that the taxpayer had in 1957
lish, but one of the shareholders appreciated embarked upon a new trade or profit-
the possibility of being able to sell the prop- making business of dealing in land. That
erty at a price well in excess of its book the taxpayer’s decision in 1957 to wait for a
value at some point in the future. In 1957 period of time with the object of selling the
and 1959, both the old and the new busi- property at a high profit when the market
nesses were discontinued. The property, for property in the area had risen sufficiently,
which, at that point, was admittedly held by by itself did not affect its character as a
the taxpayer as a capital asset, was no longer capital asset.
required for its original purposes and from Principle: Once a decision is made to sell a
1957 the taxpayer intended to retain the capital asset, it does not matter that the
property for the purpose of selling it at a taxpayer waits for a period of time until the
good profit when the market for property in value of the asset rises before he sells it.
the area had risen sufficiently. To this end, However, this is subject to the provision
the property was leased to a third party for that he does not in the interim embark on a
a period of ten years and thereafter sold. scheme of profit-making.

Mixed intentions
A taxpayer may even acquire an asset with mixed motives. In COT v Levy 18 SATC
127 the court ruled that the main purpose must be found and given effect to.

190
3.7 Chapter 3: Gross income

CASE:
Commissioner of Taxes Southern Rhodesia v Levy
18 SATC 127
Facts: The taxpayer disposed of his shares the property should not affect the issue, if
in a property-holding company at a profit. the dominant purpose of the acquisition
He had two purposes for originally pur- was clearly established.
chasing the shares, namely to acquire the Principle: Where there are two possible
shares as an income-earning investment motives at the time an asset is purchased,
while at the same time not excluding the the dominant motive (if there is one) pre-
possibility of a profitable resale of the shares. vails especially where an individual tax-
Judgment: The fact that the taxpayer at the payer is involved. If there is no dominant
time of purchasing the shares had in mind motive the revenue motive normally pre-
possible alternative methods of dealing with vails.

Where neither purpose can be said to dominate, the court held in COT v Glass
24 SATC 499 that there had been a dual purpose. This case concerned a company, but
there is no reason why it should not apply to individuals as well. The taxpayer
bought a property, planned to let it while it was more profitable, and sell it when
circumstances changed making it even more profitable. The taxpayer will be taxed on
the proceeds of the sale since they acquired the property with a dual purpose of
profit-making. In Commissioner for Inland Revenue v Nussbaum the court looked at the
dual intention of a natural person.

CASE:
Commissioner for Inland Revenue v Nussbaum
58 SATC 283
Facts: The taxpayer (a retired school- He also said that he had never bought a
teacher) inherited certain shares quoted on share merely for profitable resale. After his
the Johannesburg Stock Exchange some retirement, he began changing his share
35 years previously and, on that founda- portfolio. Many of the shares sold had
tion, with active and careful investment, been held for much longer than five years
had built up a substantial portfolio of and therefore profits were ‘inevitable’ but
quoted shares over the ensuing years. He some of the shares had been held for five
said in evidence that his investment deci- years or less. He added that in the prevail-
sions were always based on a ‘pattern of ing inflationary economic climate it was
expectations’ that a share would pay ‘ade- ‘almost impossible to make losses’. For the
quate’ dividends in the short term or ‘more three years in question, he made over
than adequate’ dividends later on and when R1 million in profits and the Com-
he bought shares he did so with the inten- missioner sought to tax him on these pro-
tion to produce a sound and increasing fits as being a scheme of profit-making.
dividend income and to protect the capital The Commissioner accepted that prior
thus invested from erosion by inflation. to this three-year period, the holding of the

continued

191
A Student’s Approach to Taxation in South Africa 3.7

shares by the taxpayer was on capital had been wholly consistent with his invest-
account but contended that he thereafter ment motive not to sell certain holdings
changed his intention or at the very least entirely and that 82%of the shares held at
had a dual or secondary intention. the beginning of the three-year period
were still held at the end of that period,
Judgment: The frequency of the taxpayer’s this share retention factor detracted in no
share transactions, viewed in isolation, measure from the force of all those cir-
provided evidence of continuity required cumstances that point to a subsidiary pro-
for the carrying on of a business. The tax- fit-making purpose. Although an investor
payer’s sales were almost without excep- buys shares ‘for keeps’ and generally adds
tion profitable – the taxpayer’s annual to his portfolio by employing surplus exist-
profits substantially exceeded his annual ing income, the taxpayer’s share trans-
dividend income and the profits increased actions enlarged the value of his portfolio
every year, which, in turn, resulted in a and, at the same time, generated very con-
decrease in dividend yield. Given the close siderable, annually increasing, funds, over
watch that the taxpayer kept on his port- and above his existing income. The
folio and on every shareholding within it, employment of his capital in this way con-
and bearing in mind his meticulous atten- stituted an additional method of earning
tion to detail, it was most likely that he income. The court found that the taxpayer
was aware of the profit implications in had a secondary, profit-making purpose
selling when the dividend yield had fallen. resulting in the income being taxable.
In the present case not only was a profit Principle: The court extended the prin-
inherent in the sale of shares of which the ciple, previously only applied to com-
dividend yield had dropped, but the tax- panies, that if an individual has a domin-
payer manifestly worked for it; he ‘farmed’ ant purpose, which is capital in nature,
his portfolio assiduously and the number, and a secondary purpose, which is reve-
frequency and profitability of sales, espe- nue in nature, the secondary purpose
cially of short-term shares, bear clear could result in profits being treated as
enough testimony to that. Although the revenue in nature because the two pur-
taxpayer was primarily an investor and it poses are pursued simultaneously.

Establishing a person’s true intention

It is not an easy task to establish a person’s true intention. The court will in the first
instance give due consideration to the taxpayer’s evidence concerning their motives
and will not lightly disregard their ipse dixit, that is to say what they state their inten-
tion to be (Malan v KBI 45 SATC 59). In evaluating the evidence, the court will place a
considerable value on the taxpayer’s credibility as a witness, but will also weigh up
his subjective evidence against the facts of the case (objective tests) which may either
support his testimony or refute it.
If the taxpayer states that their intention is of a revenue nature, it is not necessary to
consider the objective tests (refer to 3.7.2) as the amount will be taxable. If the taxpayer
states they have a capital intention the objective tests (refer to 3.7.2) must be considered.
The objective tests normally give an indication of the taxpayer’s true intention.
Note that in terms of section 102 of the Tax Administration Act, 2011, the burden of
proof that an amount is exempt from or not liable to tax, or is subject to deduction,
abatement or setoff, rests upon the person claiming such exemption, non-liability,
deduction, abatement or setoff. This burden of proof must be discharged on a balance

192
3.7 Chapter 3: Gross income

of probabilities. When considering the objective factors (refer to 3.7.2) some factors
might indicate that the person’s intentions are capital in nature and other objective
factors might indicate that their intentions are revenue in nature. The balance of proba-
bility means that when the taxpayer looks at all the objective facts and factors, the
majority of the factors indicate that their intention is capital or revenue in nature.

3.7.2 Objective factors

As previously stated, the court will weigh up a taxpayer’s evidence regarding their
intention by having regard to certain objective factors. Some of the objective factors
that have been considered by the courts include:

The manner of acquisition

When a taxpayer uses their own funds to buy property, it is more likely that this is an
investment transaction than if they had borrowed money that would have to be
repaid over a short period, especially when the property is unlikely to yield enough
revenue to enable them to repay the loan (Strathmore Holdings (Pty) Ltd v CIR 22 SATC
203). If a taxpayer inherits a property, this factor will support their contention that
their motive was investment.

The manner of disposal

The way in which the taxpayer disposes of an asset will also be taken into consider-
ation. A fortuitous offer to purchase, or a sale due to expropriation would support an
intention to invest (thus capital in nature). In ITC 1547 55 SATC 19, the fact that the
property was expropriated was not sufficient to prove that the original intention to
hold the property as trading stock had changed to an intention to hold it as a capital
asset. Repeated offers to sell the property, especially if accompanied by an extensive
advertising campaign, would indicate an operation of business (Natal Estates Ltd v
SIR).

The period for which the asset is held

When an asset is sold after being held for a very short period, it may be indicative of
a speculative motive, and vice versa. However, this will not necessarily be conclusive.
In ITC 862 22 SATC 301, the property had been held for more than 50 years but,
taking all the other circumstances into account, the proceeds of the sale were held to
be taxable (thus income in nature).

Continuity
The number of similar transactions undertaken by a taxpayer will be a factor to be
taken into account (CIR v Stott 3 SATC 253). A taxpayer who repeatedly buys and
sells homes, making a profit on each transaction, runs the risk of being taxed on the
proceeds of the sales because their actions indicate a business intention. This does not
mean that an isolated transaction will never be taxed. In Stephan v CIR 1919 WLD 1, it
was held that the profits from an isolated transaction of salvaging a wreck were of a
revenue nature because there was an intention to make a profit.

193
A Student’s Approach to Taxation in South Africa 3.7

Occupation of the taxpayer

An estate agent selling property would normally be carrying on a business, while a
salaried taxpayer who sells their house would in all likelihood merely be realising
their investment.

No change in ownership of the asset

Where the income derives from capital productively employed, without a change in
the ownership of the asset itself, the receipt will be of an income nature (CIR v
Booysens Estate Ltd 32 SATC 10). In Modderfontein B Gold Mining Co Ltd v CIR 32 SATC
202, the court held that the receipts were not of a capital nature due to their annual
nature and their closeness in character to rental payments, and in ITC 740 18 SATC
219, the use of water did not give rise to receipts for a capital asset but were periodi-
cal payments for a renewable resource of the farm (the fructus of the farm).

Nature of the asset disposed of

CASE:
Commissioner for Inland Revenue v George Forest Timber
Company Limited
1 SATC 20
Facts: The taxpayer company carried on a stock-in-trade. The balance of stock was
business as timber merchants and sawyers. acquired by purchase from other sources.
It acquired about 600 morgen of natural
Judgment: The total amount received for
forest for the purposes of its business. The
the sale of the stock-in-trade was in the
nature of the trees in the forest was such
course of the company’s business and
that they did not renew themselves, and
formed part of gross income.
for practical purposes the value of the land
without the timber was negligible. In the Principle: The sale of fixed capital assets is
course of its business the company felled a of a capital nature and the sale of floating
quantity of timber each year, which was capital is of a revenue nature. However,
sawn up in the mill and sold as part of its income from wasting assets is taxable.

Reason for the receipt

An example of this is amounts received for services rendered. Such amounts are
considered to be income even when disguised in the form of an inheritance, gift or
donation.

Legal nature of the transaction

Amounts received for granting the use of an asset to another person, for example
interest, rent, royalties etc., will be of an income nature (Vaculug (Pvt) Ltd v COT
25 SATC 201).

An operation of business in carrying out a scheme for profit-making

This test, which was referred to in Californian Copper Syndicate v IR (1904) 6F (Ct of
Session) 894; 41 Sc LR 691; 5 TC 159, has been adopted in many court decisions

194
3.7 Chapter 3: Gross income

including Overseas Trust Corporation Limited v CIR 2 SATC 71, where Judge Innes
stated:
When an asset is realised as a mere change of investment, there is no difference in
character between the amount of the enhancement and the balance of the proceeds.
But where the profit is ‘a gain made by an operation of business in carrying out a
scheme for profit-making’, then it becomes revenue derived from capital productively
employed, and must be income.
In CIR v Pick ’n Pay Employee Share Purchase Trust, the court considered ‘an operation
of business in carrying out a scheme of profit-making’.

CASE:
Commissioner for Inland Revenue v Pick ’n Pay Employee
Share Purchase Trust
54 SATC 271
Facts: The taxpayer was the Pick ’n Pay stock in the hope that the price would rise
Employee Share Purchase Trust that had in order to make a profit.
been established to administer a share pur- Judgment: Whether the taxpayer was car-
chase scheme for the benefit of employees rying on a business by trading in shares
of the group. The Trust contended that it must be determined by applying ordinary
was created and maintained to enable common sense and business standards.
employees to purchase shares in Pick ’n The court ruled that there was no intention
Pay, their employer company. It did not to conduct a business in shares; it was to
acquire shares with the intention of resel- operate as a conduit for the acquisition of
ling them in a scheme of profit-making. It shares by employees entitled to them in
purchased shares in order to make them terms of the scheme’s rules. While a profit
available to employees entitled to them in motive is not essential for the carrying on
terms of its rules and in terms of its consti- of a business, it may well indicate whether
tution was compelled to repurchase shares a business is being conducted.
from employees who were required to
forfeit their holdings. Whether a profit or The constraints placed upon the trustees in
loss resulted, was completely immaterial. dealing with the shares in question were
Moreover, the Trust had no control over foreign to commercial business, therefore
the time at which it may have to re- on a common sense approach, the trust
purchase a share, particularly when such was not carrying on a business by trading
shares are forfeited. It also had no control in shares. It was not the intention (pur-
over the market price of the share at that pose) that the trust should carry on busi-
time. ness by trading in shares for profit.
Any profit or loss was, therefore, purely Principle: There must be a scheme of profit-
fortuitous. This was evidenced by the making before the proceeds become tax-
profits and losses made on the purchase of able. The fact that the Memorandum of the
forfeited and other shares. The Trust had company permits it to trade does not auto-
never ‘stocked up’, that is to say buying matically mean that the sale of an asset
when the price was low or had bought constitutes trading.

195
A Student’s Approach to Taxation in South Africa 3.7

Other factors
• The age of the taxpayer: The age of the taxpayer may be indicative of their inten-
tion (Goodrick v CIR 23 SATC 1).
• The nature of the asset: A long lease period, entered into by the taxpayer, may be
indicative of the taxpayer’s intention (CIR v Stott). The fact that land may be ‘excess’
to a taxpayer’s needs or the fact that the land may be useless for the taxpayer’s pur-
poses may also give an indication of their intention (ITC 379 9 SATC 339).
• The taxpayer’s activities: The taxpayer’s activities prior to the acquisition of an
asset may be indicative of their intention (ITC 595 14 SATC 252). However, their
activities after disposing of the asset in question may also provide further evidence
of their intention. For example: Did they frequently transact similar deals after the
deal in question (ITC 1436 50 SATC 122)? How were the proceeds of the realisation
dealt with? Were the proceeds reinvested in a capital asset?
• Accounting treatment of the transaction: The way the transaction is disclosed for
accounting purposes may also provide some evidence of intention (T v COT 40
SATC 179).
• The purpose of a legal person: The courts will usually consider documents, such
as minutes of directors’ meetings and financial statements, to determine the inten-
tion of a company. The company as independent taxpayer’s intention should be
established separately from that of its shareholders. The courts view the action of
the directors as an indication of the intention of the company because they are in
control of the company's assets. In some cases, the courts will however also look at
the intention of the shareholders to determine the company’s true intention
(Elandsheuwel Farming (Edms) Bpk v Sekretaris van Binnelandse Inkomste 39 SATC
163).

CASE:
Elandsheuwel Farming (Edms) Bpk v Sekretaris van
Binnelandse Inkomste
39 SATC 163
Facts: The control of the company (the tax- the land for township development. The
payer) was acquired by a group of indi- new shareholders devised a scheme to de-
vidual land speculators who also became rive a substantial profit from that potential.
directors of the taxpayer. The taxpayer owned The scheme consisted of buying the tax-
farm land for several years which it leased payer’s shares at a price based upon the
out for farming purposes. After the change land’s value as agricultural land, and sell-
in shareholding, it was decided by the new ing the land to the municipality for town-
shareholders that the land be sold to a mu- ship development. The new shareholders
nicipality at a profit. had the intention to use the property as
Judgment: The taxpayer did originally trading stock, therefore the income is taxa-
acquire the land as a capital asset and con- ble.
tinued to hold and use it as such while the Principle: If a transaction might be con-
original shareholders were in control of the sidered to be part of a scheme of tax evasion
company The new shareholders were either and avoidance, then the courts can pierce
land speculators or prospective land specu- the ‘corporate veil’ to determine the true
lators who appreciated the potentialities of intention of the taxpayer.

196
3.7 Chapter 3: Gross income

Example 3.13
Miss Angie Baker is a very dynamic estate agent. She makes her living by selling 20 or
more houses per month. Angie has also owned her own beach cottage for over 20 years.
She decided to sell the cottage after hearing from a client that he was looking for a similar
cottage in the same area where her beach cottage was located. The sales agreement was
concluded on 30 January 2022 and the contract price of R570 000 was paid into Angie’s
bank account on 15 March 2022.
You are required to determine whether the R570 000 accrued is revenue or capital in
nature.

Solution 3.13
It must be determined whether the receipt is of a capital or revenue nature. The following
factors will be taken into account when considering the subjective tests:
• intention of the taxpayer;
• change of intention; and
• mixed intentions.
Angie’s intention would have to be determined. It should be determined what Angie’s
intentions were when she purchased the cottage. Did she decide to sell the cottage be-
cause she did not need it any more or because she could make a large profit on the sale?
Did she embark on a profit-making scheme? From the above information it appears that
Angie had no intention of selling the cottage prior to meeting this specific client and it
does not appear that she embarked on a scheme of profit-making. There may be mixed
intentions at the time of sale. Angie may have recognised the possibility of a good selling
price and profit even though she had not intended to sell the cottage. A taxpayer is
allowed to try to obtain the best price without undertaking a scheme of profit-making. A
scheme of profit-making may have occurred if Angie had auctioned the property or made
major improvements and then advertised the cottage in several newspapers and on the
Internet.
As Angie stated that her intention was capital in nature, the objective factors must be con-
sidered.
When considering the objective factors to determine whether the sale of the beach cot-
tage is of a capital or revenue nature, the following factors are considered:
• the manner of acquisition or disposal;
• the period for which the asset is held;
• continuity;
• occupation of the taxpayer;
• no change in ownership of the asset;
• nature of the asset disposed of;
• reason for the receipt;
• legal nature of the transaction; and
• an operation of business in carrying out a scheme of profit-making.

continued

197
A Student’s Approach to Taxation in South Africa 3.7

Angie’s occupation is selling houses. This would lead one to believe that the sale of the
cottage is of a revenue nature. She held this cottage for 20 years and if this was her first
personal sale, this would indicate that the cottage was an investment and therefore of a
capital nature.
On the balance of probabilities, the receipt would probably be of a capital nature and the
amount of R570 000 will not be included in Angie’s gross income.
It must be noted that if SARS decides that the amount is of a revenue nature, the onus of
proof will lie with Angie to prove otherwise.

1. When I advise a client should I only discuss the factors that indicate
that the amount will be capital in nature?
2. If an amount received is capital in nature would you pay tax on that
amount?

REMEMBER

• The nature of the receipt is determined by objective considerations, in other words the
taxpayer’s state of mind is not taken into consideration. The facts surrounding the
receipts are taken into account (refer to 3.7.2).
• The nature of the receipt is determined by subjective considerations, in other words the
intention of the taxpayer is taken into account (refer to 3.7.1).
• If a receipt is capital in nature, it is subject to capital gains tax.

3.7.3 Specific types of transactions

Finally, a few specific types of transactions and the norms for determining their
revenue or capital nature are referred to.
• Compensation or damages Whether income of this nature is taxable was first
considered in Burmah Steam Ship Co Ltd v IRC in 1930. The court decided that the
test to determine whether damages or compensation received is capital or revenue
in nature, is to test ‘which hole’ the compensation is intended to fill, and if revenue,
it is taxable.
If the compensation is paid to reimburse the taxpayer for trading profits lost, the
compensation will be taxable; if it was paid to replace a capital asset lost, it will
assume the nature of the asset lost and will therefore be of a capital nature. The
receipt of compensation from an insurance company in respect of a claim will be a
capital receipt if paid for a fixed asset that was destroyed and will be a revenue
receipt if paid for trading stock that was stolen or destroyed. This test was applied
in ITC 1547 55 SATC 19 where the following question was asked: Was the com-
pensation received from the sale of the property intended to fill a hole in the re-
cipient’s pocket or was it aimed at filling a hole in the recipient’s assets? Refer to
WJ Fourie Beleggings v Commissioner for South African Revenue Service (71 SATC 125)
and Stellenbosch Farmers’ Winery Ltd v Commissioner for South African Revenue Service
(74 SATC 235).

198
3.7 Chapter 3: Gross income

CASE:
WJ Fourie Beleggings v Commissioner for
South African Revenue Service
71 SATC 125
Facts: The taxpayer (an hotelier) entered Judgment: Unlike previous cases where the
into a long-term contract to provide ac- contract enabled the taxpayer to do busi-
commodation and meals for overseas ness, the taxpayer could operate the hotel
guests. Immediately after the 9/11 attacks without the contract. Therefore it was not
the guests left the hotel without any notice. part of the income producing structure of
This resulted in a breach of the accom- the business. The contract was part of the
modation agreement. The taxpayer lost a taxpayer’s business of providing accommo-
major source of income for the remainder dation i.e. its income-earning activities. The
of the contract period and the state of the compensation received was thus for the
rooms was so bad that considerable repairs loss of income and must be included in
had to be effected to return the rooms to a gross income.
condition in which they could be hired out
again. The taxpayer and the company Principle: The compensation received was
managed to settle the matter out of court to fill a hole in the taxpayer’s income and
with the taxpayer receiving R1 292 760 in not to compensate for the loss of a capital
full and final settlement of all claims it asset. The taxpayer’s capital asset was the
might have. The taxpayer claimed that the hotel and the contract was to provide
compensation so received was capital in rooms in the hotel and was thus the fruits
nature. of the tree.

CASE:
Stellenbosch Farmers’ Winery Ltd v Commissioner for
South African Revenue Service
74 SATC 235
Facts: The taxpayer is a producer and im- A termination agreement was concluded
porter of liquor products, as well as a whole- and the taxpayer received the sum of
saler of a range of spirits, wine and other R67 million as compensation for the early
liquor products, mainly to retailers. It entered termination of the exclusive distribution
into a distribution agreement with an entity agreement.
in the United Kingdom. In terms of the agree- Judgment: Although the value of the asset
ment the taxpayer acquired the exclusive for accounting purposes was determined by
right to distribute Bells’ whisky throughout considering the future inflow from the con-
South Africa for a period of 10 years. Here- tract, accounting treatment is not the deter-
after the agreement can be terminated with mining factor. The termination agreement
12 months’ notice (thus effectively a mini- referred to payment of full compensation for
mum period of 11 years). the closure of the taxpayer’s business relating
to the exercising of its exclusive distribution
As a result of corporate takeovers in Europe, rights (the asset). As the taxpayer is not in
the UK entity sought to terminate the distri- the business of buying and selling rights
bution agreement three years prematurely. to purchase and sell liquor products, the

continued

199
A Student’s Approach to Taxation in South Africa 3.7

contract is not part of a scheme of profit- the exclusive distribution right) or whether
making, therefore the receipt is capital in it was paid as compensation for a loss of
nature profits in the sales of the products (in this
Principle: When compensation is paid, it case the sale of the Bells’). If the com-
is important to determine if it is paid pensation is to fill a hole in the taxpayer’s
for the loss of a capital asset (in this case assets, it is of a capital nature.

• ‘Sterilisation’ of assets (prohibiting an asset to produce income): The English

case of The Glenboig Union Fireclay Co Ltd v IRC (1922) 12 TC 427 (HL) established
the principle that compensation paid for ‘sterilising’ an asset from which profit
might otherwise have been obtained, is of a capital nature. The capital asset need
not be corporeal property, but it may be a right. Payments made in restraint of
trade are therefore of a capital nature. An actor, who was paid an amount of money
for undertaking not to perform in a film for any other person, had received a
‘restraint of trade’ payment which was held to be of a capital nature (Higgs v
Olivier 1952). Refer to 3.8.3 where certain sterilisation payments received by tax-
payers are taxable.
• Gambling transactions, lotteries and prizes: Where a person makes a livelihood
from gambling, their gambling income may be of a revenue nature (Morrison v CIR
1950 (2) SA 449 (A); 16 SATC 377). The Commissioner will not tax an ordinary
punter on their winnings, but will tax owners and trainers who regularly place bets
(ITC 712 17 SATC 335) and bookmakers whose trade is that of betting. In the same
way, a lottery or prize that depends on an element of luck and is not a business
operation will be of a capital nature. However, a journalist or writer who wins a
prize in a literary competition will be taxed on the receipt (ITC 976 24 SATC 812),
as there is a close connection with their income-earning operations.
• Gifts and inheritances: Gifts and inheritances are fortuitous receipts unconnected
with business activities and are therefore of a capital nature. This does not mean
that, if the donee or heir sells the property, the proceeds are of a capital nature. The
ordinary tests will be applied.
• Kruger Rands: Conflicting decisions have been handed down in relation to the
proceeds of the sale of Kruger Rands (ITC 1355 44 SATC 132, ITC 1379 45 SATC
236, ITC 1525 54 SATC 209 and ITC 1526 54 SATC 216). The intrinsic problem is
that they do not produce income, are usually acquired with the intention to sell at a
higher price and are often held as a hedge against inflation. Because of this, it
could hardly be said that Kruger Rands are acquired as an investment. In ITC 1543
54 SATC 447, the court introduced a new factor into the question of the capital or
revenue nature of the proceeds of the sale of Kruger Rands, namely that of the
degree of permanence with which the coins were held. Therefore, if a taxpayer
acquires Kruger Rands with the intention of holding the coins for a long period,
this would indicate an investment intention and the coins would become part of
their fixed capital. The High Court decision in CIR v Nel provided binding princi-
ples on how the sale of Kruger Rands should be taxed.

200
3.7 Chapter 3: Gross income

CASE:
Commissioner for Inland Revenue v NEL
59 SATC 349
Facts: The taxpayer, over a period of three fact that he did not require the additional
years, purchased 250 Kruger Rands with funds at that time.
surplus cash that he had available from Judgment: The taxpayer was unwilling to
time to time, at an average price of R280 sell his Kruger Rands but was obliged to
per coin. His intention, when he purchased do so because he had no other available
the coins, was to hold them as a long-term means and a motor car was urgently and
investment as a hedge against inflation. He unexpectedly required by his wife and
did not plan to sell the Kruger Rands and therefore the evidence showed clearly that
thought that they would be inherited by the taxpayer’s purpose in selling the Kruger
his children. He did not purchase any fur- Rands was not to make a profit but to realise
ther Kruger Rands thereafter. The Kruger a capital asset in order to acquire another
Rands steadily escalated in value over the capital asset. In the transaction under review
years and although he had many oppor- the Kruger Rands were purchased for
tunities to sell them, he never did so and it ‘‘keeps’’ and the disposal of some of them
never entered his mind to do so. However, was due to ‘some unusual, unexpected, or
11 years later he urgently needed to buy a special circumstances’ which supervened.
car for his wife and he was advised by his It is not correct to say that an investor
auditor to exchange 80 of his Kruger Rands could only invest in Kruger Rands with a
for a car since he had no cash available to view to reselling them at a profit and in
do so. The 80 Kruger Rands were then sold several cases the taxpayers had sold Kruger
for cash, the taxpayer making a profit of Rands that had been bought originally as an
R67 000. The Commissioner, in assessing investment in order to pay for a pressing
the profit to tax, contended that the nature and unexpected debt which had arisen
of Kruger Rands was unique in the sense and in each case the court had held that
that they are not income-producing assets the proceeds of the sale were of a capital
other than that they can be worked into nature. Thus, the disposal of the Kruger
jewellery. They do not have any economic Rands constituted the realisation of a capital
utility save for being sold when cash is asset.
required. He also submitted that when a
taxpayer invests in Kruger Rands, he must Principle: For investments in Kruger
inevitably envisage a sale of this asset in Rands and the selling thereof, the same
due course and his failure to realise the principles and guidelines must be applied
investment over many years was due to the as with other assets when they are sold.

• Goodwill: In ITC 1542 54 SATC 417, the proceeds of the sale were considered to be
of goodwill and the court held that the sale of goodwill and payment for ‘know-
how’ are two different things. The former gives rise to a receipt or accrual of a capi-
tal nature and the latter, due to the passing of knowledge, skill or ingenuity
requires effort on the part of the seller, as it is of a revenue nature. It is important
that the contract provides for the sale of goodwill and not for the share of future
profits. In Deary v Deputy Commissioner of Inland Revenue 32 SATC 92, the contract
provided for a payment of goodwill to be partly settled as an annuity out of future
profits. The amounts so received were held to be of a revenue nature.

201
A Student’s Approach to Taxation in South Africa 3.7

Example 3.14
Jim Jacobs is a resident of the Republic who earns his income as a consulting geologist.
The following revenue transactions relate to his current year of assessment:
• He earned consultation fees of R800 000 for surveys carried out in the Republic during
the year of assessment.
• He was instructed by the chairman of a mining company in Johannesburg to carry out
a survey in Botswana at the site of a new coal mine. He carried out all the work in Bo-
tswana, returning to Johannesburg to type his final report. He was paid a fee of
R80 000.
• While he was in Botswana, he was approached by a farmer to carry out a survey of a new
borehole for water. In lieu of a fee, Jim, who also restores antique furniture as a part -
time occupation, accepted an antique yellow-wood suite which the farmer trans-
ported to Jim’s home in Johannesburg. Jim had the suite valued by a dealer in
Johannesburg, who set its value at R320 000.
• Jim also purchased debentures issued by a Namibian company. He telephoned his
bank manager in Johannesburg, instructing him to make the funds available to the
company at a bank in Windhoek in Namibia. He purchased 100 debentures of R100
each, paying interest quarterly at 18%. He received interest on 31 October and
31 January of the current year of assessment (R900 each quarter).
• Jim operates from a small factory in the garden of his home just outside Johannesburg.
The following sales of antique furniture were made by Jim during the year:
Sales to clients in the Republic R500 000
Sales to clients in Zimbabwe
(At the end of the current year of assessment, he had not yet
received this amount) R250 000
He received a deposit from a client in Pretoria for restoration work
to be done in May of the next year of assessment R50 000
He sold certain furniture that he had acquired many years ago and
used in his home as part of his personal assets R300 000
• He sold a house in Johannesburg, which he had originally acquired
with the intention of letting R1 980 000
Assume that no double-tax agreements are in force with Botswana or Namibia.
You are required to calculate Jim’s gross income.

202
3.7 Chapter 3: Gross income

Solution 3.14
R
Consultation fees earned in the Republic 800 000
Consultation fees earned in Botswana (Note 1) 80 000
Consultation fees earned from the Botswana farmer (Note 1) 320 000
Interest on the debentures in the Namibian company (Note 2) 1 800
Sales of antique furniture (Note 3)
• Clients in the Republic 500 000
• Clients in Zimbabwe 250 000
• Deposit from a client in Pretoria 50 000
• Furniture forming part of his personal assets nil
Sale of a house (Note 4) nil
Gross income 2 001 800

Notes
1. The amount of the fee to be included in Jim’s gross income will be determined by the
cash payment received, as well as the market value (R320 000) of the asset received in
lieu of the fee. This is as a result of the definition of gross income that includes the
total amount ‘in cash or otherwise’. Residents are taxed on their worldwide income.
2. The interest on the debentures issued by the Namibian company will be included in
Jim’s gross income, as he is taxed on his worldwide income, both active and passive.
In terms of section 24J, which provides detailed rules relating to the accrual (and
incurring) of interest, the calculation of the actual amount accruing to Jim could differ
from the interest received. This calculation has been ignored for the purposes of this
example.
3. Although the clients in Zimbabwe had not yet paid the amounts owing, they had
accrued during the year of assessment and are therefore included in his gross income.
In the case of the deposit received from his client in Pretoria, this amount had clearly
not yet accrued because the work would only start in May of the next year of assess-
ment. However, the amount was actually received during the year of assessment and
would be included in his gross income, which includes amounts received or accrued.
The sale of his personal furniture will give rise to a receipt of a capital nature because Jim
did not purchase the asset with the intention of selling it. His intention may have
changed, however, in which case his intention at the time of sale would determine the
capital or revenue nature of the proceeds. If, for example, he only sold this furniture
because he was replacing it with furniture that was more suitable or that he liked
more, the proceeds would be of a capital nature. The fact that he owned the furniture
for many years would support the contention that this was a receipt of a capital
nature, but the fact that he carries on the trade of restoring and selling antique furni-
ture, would go against this contention. On the balance of probabilities, the receipt
would probably be of a capital nature.
4. The sale of property purchased with the intention of holding it as a revenue pro-
ducing asset would give rise to a receipt of a capital nature, unless Jim had changed
his intention. If the asset was held for many years, it would support the capital nature of
the receipt and the fact that he does not carry on business as a property dealer would
also support it. However, if he had carried out several such transactions in the past
(the continuity test), SARS may consider the receipt to be of a revenue nature. The

continued

203
A Student’s Approach to Taxation in South Africa 3.7–3.9

mere fact that the taxpayer has decided to realise an asset and to realise it at the best
possible price would not be enough to categorise the proceeds as revenue. The way in
which the taxpayer goes about selling their property may also have a bearing on the
matter. Repeated attempts to sell, together with an extensive advertising campaign,
may support an intention of selling at a profit, whereas selling as a result of a fortuit-
ous offer would not. The sale of the house may have capital gains tax implications.

Will the same amounts be taxable if he is not a resident of the Republic?

3.8 Summary
The first building block of taxation is discussed in this chapter and this forms the
basis of the tax calculation. Before the different components of the definition are
applied, the residency of a person must be determined. A natural person can be a
resident of the Republic either by being ordinarily resident or by means of the physi-
cal presence test.
All the components of the gross income definition must be present before an amount
forms part of the gross income. As seen in this chapter, many of these concepts are
not defined in the Act and the principles and guidelines from court cases are used to
understand the components of the definition of gross income and to apply them to
the amount in question.
The gross income definition also lists items that are specifically included in the tax-
payer’s gross income, even though they would not have formed part of gross income
due to their capital nature.
In the questions to follow, the different components of the gross income definition
will be applied to real-life situations to determine whether amounts comply with the
requirements of the gross income definition and form part of the gross income of the
taxpayer.

3.9 Examination preparation

Question 3.1
Felix sells computer equipment and is objecting to an assessment received from SARS.
During the current year of assessment (28 February 2023), Felix donated second-hand
office equipment to a local radio station. In return, the radio station agreed to broadcast ‘spe-
cials’ that Felix had on certain computer products for the week.
SARS taxed the value of the office equipment donated to the radio station and stated that
the donation fell within the definition of gross income. Felix believes otherwise.

204
3.9 Chapter 3: Gross income

You are required to:

Discuss all the gross income requirements that Felix should bear in mind when prepar-
ing the objection of the assessment. (Assume that Felix is a resident of the Republic.)

Answer 3.1
Discussion of the gross income requirements
• An amount: A value must be placed on the free airtime. The value would be the
normal advertising fees charged by the radio station to its clients at the time of the
donation. Barter transactions would give rise to gross income as long as the ‘asset’
received (in this case the free airtime) is capable of being valued in monetary terms.
• In cash or otherwise: Felix did not receive cash since it was a donation to the radio
station but he did receive free airtime, which is an intangible consideration received. If
Felix did not receive something in return, this requirement would not be met, but it would
have to be proved that nothing was received in return, not even increased goodwill.
• Received by or accrued to: Felix became entitled to the airtime when the agreement
was made. The agreement need not have been in writing. Felix must include the
amount received at time of receipt or accrual, whichever occurs first. This would
depend on how the agreement was worded between the two represented parties. If
the agreement stated that from a specific date the radio station would start broadcasting
the specials, then that specific date would be the date of accrual. If the agreement did
not give a specific time, then the date that the broadcast actually occurred would be the
date of receipt.
• Year or period of assessment: Felix will be taxed in the year that the amount was
received or accrued to him, whichever occurs first. It must be noted that if the accrual
and receipt fall into different years of assessment, then it will only be included in one of
the years of assessment and not both. In this case it will be included in the current year
of assessment.
• Receipts of a capital or revenue nature: Felix’s intention will have to be considered.
Why did he donate the second-hand office equipment? Did he intend to enter into an
agreement for ‘free airtime’, or was it just a gesture of goodwill? Did he change his
intentions when the offer of free airtime was given to him? Felix most probably knew
how the broadcasting business worked. If you donate products, prizes or assets which
the radio station can use, normally some type of ‘free advertising’ is then made avail-
able to you. This free advertising would be part of a ‘scheme of profit-making’, since the
advertising would most definitely help profits increase in general.
• Note that Felix most probably purchased the office equipment to be used in the busi-
ness. The intention of the business appears to have been met as long as the equipment
was used for a period of time. If the equipment was donated because it was no longer of
use to the business, then the original intention would not have changed.
• Felix will find it very difficult to convince SARS that the equipment was not of a rev-
enue nature due to the intentions discussed above. Also, the time that the equipment
was held, the frequency of disposing of this type of equipment and how the equipment
was financed will also have to be considered.
• All the elements of the gross income definition appear to be met and therefore the value
of the free airtime received in lieu of the donation of the second-hand equipment will be
included in Felix’s gross income.

Additional questions for the chapters are available electronically at

www.myacademic.co.za/books

205
 4 Special inclusions

Gross Exempt Taxable Tax

– – Deductions =
income income income payable

General Specific
definition inclusions

Page
4.1 Introduction............................................................................................................ 208
4.2 Special inclusions (definition of ‘gross income’ (secion 1)) ............................. 208
4.2.1 Annuities (paragraph (a))........................................................................ 208
4.2.2 Alimony, allowances or maintenance (paragraph (b)) ........................ 210
4.2.3 Amounts received in respect of services rendered
(paragraph (c)) .......................................................................................... 210
4.2.4 Restraint of trade payment (paragraphs (cA) and (cB)) ...................... 212
4.2.5 Amounts received from termination of employment
(paragraph (d)).......................................................................................... 212
4.2.6 Retirement fund lump sum benefits or retirement fund
lump sum withdrawal benefits (paragraphs (e) and (eA)) ................. 212
4.2.7 Commutation of amounts due (paragraph (f)) .................................... 213
4.2.8 Lease premiums (paragraph (g)) ............................................................ 213
4.2.9 ‘Know-how’ payments (paragraph (gA)) ............................................. 213
4.2.10 Leasehold improvements (paragraph (h)) ............................................ 214
4.2.11 Fringe benefits (paragraph (i)) ............................................................... 215
4.2.12 Proceeds from the disposal of certain assets (paragraph (jA)) .......... 215
4.2.13 Dividends (paragraph (k)) ...................................................................... 216
4.2.14 Other amounts included in gross income ............................................ 216
4.3 Summary................................................................................................................. 216
4.4 Examination preparation ...................................................................................... 217

207
A Student’s Approach to Taxation in South Africa 4.1–4.2

4.1 Introduction
The definition of gross income was discussed in the previous chapter. However, the
definition of gross income also contains a list of income that is specifically included in
gross income. This chapter discusses the special inclusions listed as part of the gross
income definition.

4.2 Special inclusions (definition of ‘gross income’

(section 1))
‘Gross income’ is defined in section 1 of the Act as follows:

Legislation:
Section 1: Interpretation
‘Gross income’, in relation to any year or period of assessment means –
(i) in the case of any resident, the total amount, in cash or otherwise, received by or
accrued to or in favour of such resident; or
(ii) in the case of any person other than a resident, the total amount, in cash or other-
wise, received by or accrued to or in favour of such person from a source within the
Republic, or
during such year or period of assessment, excluding receipts or accruals of a capital
nature, but including, without in any way limiting the scope of this definition, such
amounts (whether of a capital nature or not) so received or accrued as are described
hereunder, namely …)

Paragraphs (a) to (n) of the definition of gross income include certain types of
income that would not necessarily be included if the general principles applying to
gross income were to be applied. The reason for the non-inclusion of these types of
income may be that they possess the characteristics of being capital in nature. Income
listed under paragraphs (a) to (n) should therefore be included in gross income, even if
they are of a capital nature.

REMEMBER

• The special inclusions listed in the definition of gross income are included in gross
income, even though they are of a capital nature.
• If the taxpayer is a non-resident, the special inclusion amounts should be included in
the gross income of that taxpayer only if they are from a South African source.

4.2.1 Annuities (paragraph (a))

This paragraph includes in the gross income:
• an amount received or accrued by way of an annuity; including
• a living annuity (as defined in section 1 of the Act); or

208
4.2 Chapter 4: Special inclusions

• an amount (revenue portion) payable by way of an annuity under an annuity

contract in terms of section 10A, and an amount payable in consequence of the
commutation or termination of such an annuity contract (excluding key man policy
payments).
The Act does not define an annuity, but in ITC 761 19 SATC 103, the Special Income
Tax Court stated that the main characteristics are that:
• it provides for a (fixed) annual payment even if it is divided into instalments;
• it is repetitive, that is to say payable from year to year for a certain period; and
• it is chargeable against some person.
The originating cause of the annuity is immaterial to its revenue nature. It may be
payable in terms of:
• the will of a deceased person;
• a contract;
• a deed of donation;
• a pension or retirement annuity fund; or
• the sale of the goodwill of a business.
Although an inheritance, donation or the sale of the goodwill of a business as such
may constitute a capital receipt (when expressed as an annuity) payable for a certain
period or for life, the receipt of this annuity constitutes gross income. This principle
was established in Kommissaris van Binnelandse Inkomste en ’n Ander v Hogan.

CASE:
Kommissaris van Binnelandse Inkomste en ’n Ander v Hogan
55 SATC 329
Facts: The taxpayer had been seriously obligation to compensate the taxpayer for
injured in a motor vehicle collision and his future loss of earnings was extinguish-
after settling with the Motor Vehicle Assu- ed and replaced by a contractual under-
rance Fund, had been compensated for loss taking to pay the monthly instalments
of future earnings, to be paid in monthly while the taxpayer was alive, without cre-
instalments. The taxpayer contended that ating a liquid or determinable debt capable
the payments were capital in nature and of being reduced by such instalments. In
not an annuity. the light of the above, read with the essen-
tial characteristics of an annuity, the
Judgment: Paragraph (a) of the definition monthly instalments could be regarded as
of ‘gross income’ includes ‘any amount annuities and were not capital in nature.
received or accrued by way of annuity’. It
does not matter whether the annuity is of a Principle: If a person gives up a right to be
capital nature or not. That although ‘annuity’ paid a capital amount that would not
is not defined in the Act, it appeared that an under normal circumstances be subject to
annuity had two essential characteristics ordinary tax in return for the payment of
(which are, however, in no way exhaust- an annuity, the capital status of the amount
ive); it was an annual (or periodical) pay- payable will be lost and the annuity will
ment and the beneficiary had the right become revenue in nature in terms of para-
to receive more than one such payment. It graph (a) of the definition of ‘gross
was significant that the payments expired income’.
on the death of the taxpayer and that the

209
A Student’s Approach to Taxation in South Africa 4.2

Note that the payment of a capital debt in instalments, however, is not an annuity. It
is often difficult to distinguish between the two but it has been said that periodic
payments in liquidation of a debt, even if the instalments may vary depending on the
circumstances, do not constitute an annuity. For example, an incoming partner in a
partnership may purchase goodwill from a retiring partner, the instalments being
dependent on the profits of the partnership. Provided the amount payable for good-
will is a fixed amount, these payments do not constitute an annuity. If the considera-
tion payable for the goodwill is expressed as an annuity for a certain period, or for
life, it is included in the gross income of the recipient.

Example 4.1
Ben Majoli (a resident of South Africa) sold his share in the goodwill of a partnership on
31 August. In return, he will receive a monthly amount for the next ten years, amounting
to the greater of R10 000 or 1% of the monthly turnover of the business. His actual income
amounted to R10 000 a month during the current year of assessment.
You are required to determine which amounts will be included in Ben’s gross income for
the current year of assessment.

Solution 4.1
The monthly amount of R10 000 (R60 000 for the current year of assessment) is included
in Ben’s gross income in terms of paragraph (a) of the definition. An amount received for
the sale of goodwill (a capital asset) by a partner in a partnership would normally be of a
capital nature. Due to the payment being expressed as a monthly amount over a period of
ten years, each monthly payment will constitute an annuity (being a fixed annual
payment divided into instalments, repetitive and chargeable against the purchaser of the
goodwill) and it will be included in Arthur’s gross income in terms of paragraph (a) of the
definition.

4.2.2 Alimony, allowances or maintenance (paragraph (b))

An amount payable to a taxpayer by a spouse or former spouse of that taxpayer
under a judicial order or written agreement of separation, or divorce order, by way of
alimony, allowance or maintenance of the taxpayer is included in the gross income of
the taxpayer. Where an amount is payable to a taxpayer in terms of a maintenance
order for the maintenance of a child, this amount is included in the gross income of
the taxpayer.

4.2.3 Amounts received in respect of services rendered

(paragraph (c))
This paragraph ensures that amounts received or accrued in respect of services ren-
dered, employment or holding an office are included in the gross income, irrespective
of the nature of the payment. The subsection ensures that gratuities that would nor-
mally be capital receipts are included in gross income (refer to Stevens v Commissioner
for SARS). Allowances, ‘fringe’ benefits and many other kinds of payments from the
employer are also included in gross income.

210
4.2 Chapter 4: Special inclusions

CASE:
Stevens v Commissioner for South African Revenue Service
32 SATC 54
Facts: The taxpayer, as part of his com- Judgment: The recipients of the ex gratia
pany’s share incentive scheme had payments were employees or ex-employees
acquired an option to buy its shares but who had enjoyed a benefit directly linked
before the option could be exercised, the to their employment, and who had lost
company announced that it would be vol- that benefit but were deserving in the par-
untarily liquidated rendering such options ticular circumstances of a substitute ex gratia
valueless. The company resolved to pay payment. Accordingly, the receipt fell with-
the taxpayer, as option holder, 75 cents per in the terms of paragraph (c) of the defini-
share ex gratia. The purpose of the incentive tion of ‘gross income’.
scheme had been to promote the retention of Principle: The ex gratia (voluntary)
employees of ability and expertise who payment was received as a direct result of
were primarily responsible for the profit- the incentive scheme entered into (para-
ability and continued growth of the com- graph (c) includes within its ambit voluntary
pany. The taxpayer contended that such ex payments). The share incentive scheme was
gratia payment was not aimed at compen- only offered to employees. It therefore
sating the option holders as employees or follows that the ex gratia payment was
ex-employees, but because their option received ‘by virtue of services rendered or
price was below the market value when the by virtue of any employment or the hold-
special dividend was declared and it was ing of any office’ as required by para-
they who were deprived of a contemplated graph (c) of the definition of ‘gross
profit. income’.

The words ‘in respect of’ used in these paragraphs require a causal connection be-
tween the amount received and the employment or office (De Villiers v CIR
4 SATC 86). Payments by an employer such as charitable donations, which are not
connected with services, do not necessarily fall within the ambit of these paragraphs.
Payments made to one person in respect of services rendered by another are also, in
terms of paragraph (c), included in the taxable income of the person rendering the
services. Amounts deducted from an employee’s salary and paid over to the third
person are therefore included in the employee’s gross income. In other words, the
employee’s gross salary is included in their gross income.
In C: SARS v Kotze 64 SATC 447, the respondent received a police reward for pro-
viding information regarding the illegal purchase of diamonds. The issue was wheth-
er the amount had been received for services rendered. The court held that he was
rewarded for having provided information that led to the arrest and conviction of
persons. If he had not provided the information, he would not have received the
reward. The court held the amount was received in respect of services rendered.

Example 4.2
Ms Jane Nell renders a service to Crax CC and in recognition of the services she rendered
to the CC, her brother receives R5 000 from Crax CC.
You are required to determine whether Jane will be taxed on this amount.

211
A Student’s Approach to Taxation in South Africa 4.2

Solution 4.2
In terms of paragraph (c) (ii) Jane will be taxed on the R5 000 as she was the person who
rendered the services.

4.2.4 Restraint of trade payments (paragraphs (cA) and (cB))

Restraint-of-trade payments made to employees terminating their services with the
employer making the payment would normally be of a capital nature. These pay-
ments limit the use by the recipient of their skills, knowledge or business contracts to
earn income for a specified number of years. Paragraph (cA) of the definition of gross
income includes in the gross income, amounts received or accrued to a company (for
example a personal service company or personal service trust) as consideration for
restraints of trade imposed on them. Paragraph (cB) also includes in the gross income
of a natural person restraints of trade amounts received or accrued to them in relation
to current, previous or future employment.

4.2.5 Amounts received from termination of employment

(paragraph (d))
Paragraph (d) includes an amount received due to loss of employment, proceeds from
a policy or the benefits from a policy being ceded to you, a dependent or your retire-
ment fund. The amount received from the policy can be paid to you directly or indi-
rectly via the company.

4.2.6 Retirement fund lump sum benefits or retirement fund lump

sum withdrawal benefits (paragraphs (e) and (eA))
The Second Schedule to the Act makes provision for the calculation of the taxable
portion of retirement fund lump sum benefits. Paragraphs (e) and (eA) of the
definition of gross income include the taxable amounts received or accrued in respect
of approved retirement funds including a retirement fund lump sum benefit in gross
income. These benefits are dealt with in detail in chapter 15.

Example 4.3
Arthur McArthur is a resident of South Africa. He only worked for one private sector
employer throughout his entire working life of 40 years. The following information
relates to his receipts and accruals for the current year of assessment:
• Arthur received a lump sum of R800 000 from his employer’s pension fund when he
retired on 30 June. This amount relates to all his years of service. The business’s
accountant has ascertained from SARS that, in terms of the Second Schedule of the Act,
the tax-free portion of this lump sum amounts to R300 000.
• When he retired, his employer paid him a gratuity, amounting to R100 000, in grati-
tude for his years of loyal service.
• At his retirement party, Arthur’s fellow workers presented him with a Persian carpet,
which cost R6 000.
You are required to determine which amounts will be included in Arthur’s gross income
for the current year of assessment.

212
4.2 Chapter 4: Special inclusions

Solution 4.3
• The taxable portion of a pension fund lump sum amounting to R500 000 (R800 000 –
R300 000) would be included in Arthur’s gross income in terms of paragraph (e) of the
definition.
• The gratuity, being a voluntary award received in respect of the termination of his
employment, is included in Arthur’s gross income in terms of paragraph (d) of the def-
inition.
• The value of the Persian carpet presented to Arthur by his fellow workers on his
retirement will not be included in his gross income. It was not received in respect of
services rendered from the employer but from fellow employees and represents a gra-
tuitous capital receipt.

Do I need to discuss the general gross income definition if the amount is

included as one of the special inclusions?

4.2.7 Commutation of amounts due (paragraph (f))

Paragraph (f) includes an amount received in commutation of amounts due under a
contract of employment or service.

4.2.8 Lease premiums (paragraph (g))

A lessee sometimes pays a premium or a similar consideration for the right to lease a
valuable asset. This premium is payable in addition to the rental consideration payable
at regular intervals. An example of this is the payment of an amount on signing the
lease by the lessee in order to lease a valuable corner shop. Paragraph (g) ensures that
these lump-sum premiums, which might otherwise be in the nature of capital re-
ceipts, are included in gross income. The paragraph makes provision for the inclusion
of premiums or like considerations for the use (or right of use) of:
• land or buildings;
• plants or machinery;
• motion picture films or films, video tapes or discs for television use or a sound
recording or advertising matter connected therewith; or
• patents, designs, trademarks or copyrights (as defined in the various Acts relating
to these assets) or any model, pattern, plan, formula or process or any other proper-
ty or right of a similar nature.

4.2.9 ‘Know-how’ payments (paragraph (gA))

This paragraph includes an amount received or accrued as consideration for impart-
ing or undertaking to impart a scientific, technical, industrial or commercial knowl-
edge or information, or for rendering or undertaking to render assistance or service in
connection with the application or utilisation of such knowledge or information

213
A Student’s Approach to Taxation in South Africa 4.2

in gross income. These know-how payments may, like lease premiums and improve-
ments, be in the nature of capital income, but are included in gross income in full in
terms of this paragraph.
Examples of such payments may include the sale of information, technical advisory
fees and the sale of operating manuals.

4.2.10 Leasehold improvements (paragraph (h))

Certain lease agreements make provision for the lessee to effect improvements to the
leasehold property that is owned by the lessor. Paragraph (h) applies in these situa-
tions and determines that the amount of the leasehold improvements made by the
lessee should be included in the gross income of the lessor.
Paragraph (h) applies when a right to have improvements effected on leasehold land
or buildings by a lessee, accrues to the lessor in terms of a lease agreement. General-
ly, the obligation to effect leasehold improvements is specified in the lease agreement
which is the same document that records the granting of the right of use or occupa-
tion of the land and buildings.
Paragraph (h) does not apply if the right to have such improvements effected does
not accrue to the lessor. Instances where this right does not accrue to the lessor are:
• Improvements effected voluntarily by a lessee do not result in a right to have
improvements effected accruing to the lessor and are not included in the lessor’s
gross income under paragraph (h).
• An agreement that gives a lessee the right but not the obligation to effect im-
provements does not fall within the ambit of paragraph (h) even if those improve-
ments are subject to the lessee obtaining the lessor’s approval or both parties
anticipate that improvements will be effected.
• If the lessee pays the lessor an amount of cash towards improvements that the
lessor will effect to the property, the amount is not gross income in terms of para-
graph (h), since it does not result in a right to have improvements effected for the
lessor.
The amount to be included in gross income is determined based on the following:
• If the value of the improvements or the amount to be expended on the improve-
ments is stipulated in the agreement:
– the amount stipulated is the amount which must be included in the lessor’s
gross income;
– the amount included in the lessor’s gross income is limited to the amount
stipulated in the agreement and is not increased if a lessee spends more than
the stipulated amount;
– the excess above the stipulated amount is voluntary expenditure which is not
part of the right to have improvements effected that accrued to the lessor under
paragraph (h);
– if the lessee spends less than the amount stipulated in the agreement, the
stipulated amount in the agreement must still be included in the lessor’s gross
income under paragraph (h); and

214
4.2 Chapter 4: Special inclusions

– if the lessee spends less than the amount stipulated in the agreement, the stipu-
lated amount must still be included in the lessor’s gross income since it is sub-
mitted that the lessor will probably sue the lessee for non-performance under
the agreement.
• If the value of the improvements or the amount to be expended on the improve-
ments is not stipulated in the agreement but the obligation is on the lessee to effect
specific improvements (even if that requires the lessee to incur costs which exceed
the stipulated minimum amount):
– the stipulated minimum amount is not considered to be an amount which has
been stipulated in an agreement and the fair and reasonable value of the spe-
cific improvements to be effected under the agreement must be included in the
lessor’s gross income. The fair and reasonable value is the actual cost incurred.
Leasehold improvements must be included in the lessor’s gross income on the date of
accrual. The right to have improvements effected generally accrues when the lessor
acquires the right to have the improvements effected.
• If the amount of the improvement is stipulated in the lease agreement, the
amount is generally included in the lessor’s gross income in the year of assessment
when the lease agreement is signed by all the parties.
• If the amount of the improvements is not stipulated in the lease agreement, the
date of completion of the improvement is generally regarded as the date of accrual
because the amount can only be determined at this point in time.
When a lessor has to include the value of leasehold improvements in his gross in-
come by virtue of paragraph (h) of the gross income definition, he is taxed on an
amount of which he won't get the benefit until the end of the lease agreement. This is
so because, for the duration of the lease agreement, the lessee and not the lessor has
the right to use the leased assets. In order to provide relief for lessors, section 11(h) of
the Act makes provision for the deduction of an allowance in respect of leasehold
improvements (refer to chapter 6). Such allowance must be an amount which seems
fair and reasonable to the Commissioner, taking into account circumstances such as
the duration of the lease agreement and the nature of the building or improvements
erected on the property. This allowance ensures that a person is not taxed on the value
of leasehold improvements at the date of the agreement which, by the date that the
lease agreement terminates, may have little or no value.

4.2.11 Fringe benefits (paragraph (i))

The cash equivalent of the value of a fringe benefit must be included in the gross
income of a taxpayer in term sof paragraph ( i). The cash equivalent is calculated by
using the rules provided for in the Seventh Schedule of the Income Tax Act (refer to
chapter 14).

4.2.12 Proceeds from the disposal of certain assets (paragraph (jA))

Paragraph ( jA) includes the amount received from the sale of an asset that was man-
ufactured, produced, contracted or assembled in gross income.

215
A Student’s Approach to Taxation in South Africa 4.2–4.3

Example 4.4
BMY Ltd manufactures vehicles. During the previous year of assessment, one of the manu-
factured vehicles (with a cost of R150 000) was used as a demonstration model. BMY Ltd
disposed of the vehicle in the current year of assessment for an amount of R220 000.
You are required to determine the effect of the above on the gross income of BMY Ltd for
the current year of assessment.

Solution 4.4
In terms of paragraph (jA) of the gross income definition, the vehicle will remain part of
the trading stock of BMY Ltd even though it was used as a capital asset. The full R220 000
will be included in gross income in the current year of assessment (similar to when trad-
ing stock was sold).

4.2.13 Dividends (paragraph (k))

This paragraph includes dividends or foreign dividends received or accrued in gross
income.

4.2.14 Other amounts included in gross income

(paragraphs (l), (m) and (n))
Paragraph (l ) includes grants or subsidies received or accrued in respect of soil ero-
sion works on farming property that is leased by the taxpayer, or for farm develop-
ment expenditure incurred by a farmer on their property in gross income.
Paragraph (m) includes amounts received from an insurance policy on the life of an
employee or director, including loans or advances, and policies for disability or ill-
ness in gross income. This paragraph is not applicable if the amount has already been
taxed.
Paragraph (n) includes an amount that is specifically required to be included in a
taxpayer’s income in terms of any other provision of the Act in gross income.

REMEMBER

• The special inclusions listed in the definition of gross income are included in gross
income, even though they are of a capital nature.

4.3 Summary
The special inclusions listed in the gross income definition are discussed in this
chapter. Both amount included in gross income in terms of the definition and the
specific inclusions forms the basis of the tax calculation.
Special inclusions are listed in the gross income definition and these are specifically
included in the taxpayer’s gross income, even though they would not have formed
part of gross income due to their capital nature.

216
4.4 Chapter 4: Special inclusions

4.4 Examination preparation

Question 4.1
Ignore VAT for purposes of this question.
Bantami (Pty) Ltd, a South African resident, has the following income for the 2022 year of
assessment:
R
Gross foreign dividends (foreign tax paid R600) 6 000
Gross foreign interest (foreign tax paid R3 800) 8 000
Local interest 9 000
Other foreign income (foreign tax paid R6 000) 20 000

Bantami (Pty) Ltd entered into a lease agreement with Promac Ltd (a non-connected third
party that is also a South African resident). The following are extracts from the agreement:
Commencement of the lease: 1 March 2022
Lease term 60 months
Asset leased to Promac Office building
Lease premium payable on 1 March 2022 R60 000
Monthly rental payment from 1 March 2022 R40 000
Value of improvements to be incurred by the lessee (Promac Ltd): R190 000
The improvements were completed on 30 June 2022 at a cost of R170 000. The lease premi-
um was paid on 1 March 2022. The building was used from 1 July 2022 by Promac Ltd.
No exemptions have been taken into account and the company paid non-refundable for-
eign tax on all the foreign income that it received.

You are required to:

Calculate Bantami (Pty) Ltd’s gross income for the year of assessment ended
28 February 2023.

Answer 4.1
Calculating Bantami (Pty) Ltd’s tax liability for the current year of assessment
R
Foreign dividend 6 000
Foreign interest 8 000
Local interest 9 000
Other foreign income 20 000

Lease premium (paragraph (g) ‘gross income’) 60 000

Monthly rental (R40 000 x 12) 480 000
Leasehold improvements (paragraph (h) ‘gross income’) 190 000
Gross income 773 000

Additional questions for this chapter are available electronically at

www.myacademic.co.za/books

217
 The taxation of
5 non-residents

Gross Exempt Taxable

– – Deductions = Tax payable
income income income

Adjustments
Non-
for tax
residents
avoidance

Page
5.1 Introduction............................................................................................................ 220
5.2 Non-residents (section 1) ...................................................................................... 220
5.3 From a source in the Republic ............................................................................. 220
5.3.1 Double-tax agreements ........................................................................... 221
5.3.2 Statutory source rules (section 9) ........................................................... 222
5.3.3 Common-law source principles ............................................................. 229
5.3.3.1 Services rendered .................................................................... 230
5.3.3.2 Sale of trading stock ................................................................ 230
5.3.3.3 Rental ........................................................................................ 230
5.4 Withholding taxes .................................................................................................. 232
5.4.1 Withholding tax on interest (sections 50A to 50H).............................. 232
5.4.2 Withholding tax on royalties (sections 49A to 49G) ............................ 233
5.4.3 Disposal of immovable property by a non-resident person
(section 35A) ............................................................................................. 233
5.4.4 Taxation of foreign entertainers and sports persons
(sections 47A to 47K) ............................................................................... 235
5.5 Summary................................................................................................................. 236
5.6 Examination preparation ...................................................................................... 237

219
A Student’s Approach to Taxation in South Africa 5.1–5.3

5.1 Introduction
Because of globalisation, the world has become a small place and people trade and
invest their money all over the world. Just as South Africans invest offshore, people
from other countries invest in South Africa. In this chapter, the income that is earned
by non-residents in the Republic is discussed. We also look at whether the amount
received by or accrued to the non-resident, is taxable in the Republic.
Where it must be determined whether a receipt or accrual of a non-resident is taxable
or not, it is important to determine if it is from a source within the Republic. The
definition of gross income determines that a non-resident has to include in gross
income receipts and accruals from a source within the Republic. After an amount is
included in gross income, it must then be determined whether or not any exemptions
are applicable.

5.2 Non-residents (section 1)

It is clear from the definition of ‘gross income’ (refer to chapter 3) that residents are
taxed on amounts received or accrued from anywhere in the world (subject to certain
exclusions and exemptions), while persons other than residents are taxed on amounts
received or accrued from a source in the Republic.
A non-resident is a person who is not considered a resident for income tax purposes.
Therefore, it is important to know the definition of resident in order to determine
who will be regarded as a resident and who will be regarded as a non-resident.

REMEMBER

• A ‘resident’ is a natural person who is ordinarily resident in the Republic, or

• is physically present in the Republic
– for a period or periods exceeding 91 days in aggregate during the relevant year of
assessment, as well as for a period or periods exceeding 91 days in aggregate during
each of the five years of assessment preceding such year of assessment; and
– for a period or periods exceeding 915 days in aggregate during such five preceding
years of assessment.

The principle of ‘residency’ and ‘ordinarily resident’ (determined from a number of

court cases) is discussed in more detail in paragraph 3.3 of chapter 3.

5.3 From a source in the Republic

From the definition of gross income, it is evident that normal tax can be levied based
on source or residence. The argument for using source as a basis for tax is that a
country is entitled to a share of the wealth created by the use of its natural resources
or the activities of its inhabitants. The argument for using residence as a basis for tax
is that a resident should be called on to contribute to the cost of the privilege and
protection of living in a country (Kergeulen Sealing & Whaling Co Ltd v CIR 10 SATC
363). In the Republic, tax is levied on residents based on residency, and for non-
residents on the source basis (as stated in the definition of gross income).

220
5.3 Chapter 5: The taxation of non-residents

REMEMBER

• Even though income is from a source in the Republic, it might be specifically exempted
in terms of section 10 of the Act.
• The Act defines the Republic as the Republic of South Africa and when used in a geo-
graphical sense, it includes the territorial seas thereof as well as any area outside the
territorial seas which has been or may be designated, under international law and the
laws of South Africa, as areas within which South Africa may exercise sovereign rights
or jurisdiction in regard to the exploration or exploitation of natural resources.

To determine whether the source of the income is in the Republic or not it must first
be determined if a double-tax agreement exists between the government of the Re-
public and of the other country. If there is no double-tax agreement, or if the double-
tax agreement does not determine the source of the income, section 9 of the Income
Tax Act needs to be considered. If the source is not addressed in section 9, case-law
principles must be applied to determine the source of the income. The following
diagram illustrates the process to follow in order to determine the source of income:

1. Double-tax 3. Case law

2. Section 9
agreement principles
(refer to 5.3.2)
(refer to 5.3.1) (refer to 5.3.3)

5.3.1 Double-tax agreements

The first step in determining whether a non-resident should be taxed on receipts and
accruals in the Republic is to consider the provisions of a double-tax agreement
entered into by the South African government with another country. A double-tax
agreement is an agreement that is entered into by the South African government and
governments of other countries for the prevention of double taxation. In such an
agreement, principles are set out that determine the circumstances in which, for
example, interest will be taxable in the Republic or in another country. Double-tax
agreements override any other legislation and must be applied first. Where there is
no double-tax agreement, the Act is applicable.

221
A Student’s Approach to Taxation in South Africa 5.3

REMEMBER

• Double-tax agreements are also sometimes referred to as tax treaties.

• If the source of the income is not in the Republic in terms of a double-tax agreement, the
income is not taxable income in the Republic. This is the case even if the source of the
income is the Republic in terms of section 9 since the provisions of a double-tax
agreement overrides the source provisions of the Act.
• Where the source of the income is from a source in the Republic, it may be specifically
exempted.

5.3.2 Statutory source rules (section 9)

After considering the provisions of a double-tax agreement, the second step is to
consider the source rules provided in section 9 of the Act. Section 9 was inserted in
the Act to clarify when specific types of income are from a source within the Repub-
lic.

Type of income SA source Exemption to consider

Dividends A dividend is from a source Section 10(1)(k) provides that
(section 9(2)(a)) within the Republic if: dividends from a source in the
• it is a ‘dividend’ that is re- Republic are exempt from tax.
ceived by or accrued to
that person. A dividend is
defined as a distribution by
a resident company. All
dividends declared by SA
companies are therefore
from a source within the
Republic.
Interest Interest is from a source within In terms of section 10(1)(h),
(section 9(2)(b)) the Republic if: any interest received by a non-
• the interest is attributable resident (entity or natural
to an amount incurred by a person) from a South African
person that is a resident, source is fully exempt, except
(if the interest is, however, where (in other words, in the
attributable to a permanent following instances the inter-
establishment which is sit- est is not be fully exempt):
uated outside the Republic, • it is a natural person who
the source is not within the was physically in the Re-
Republic but in that coun- public for a period of more
try where the permanent than 183 days during the
establishment is situated); 12-month period preced-
or ing the date on which the
interest is received or ac-
crued, or
continued

222
5.3 Chapter 5: The taxation of non-residents

Type of income SA source Exemption to consider

Interest • the interest is received in • the debt (from which the
(section 9(2)(b)) respect of the utilisation or interest arises) is effect-
application in the Repub- ively connected to a per-
lic of any funds or credit manent establishment of
obtained in terms of an in- that person (entity or natu-
terest-bearing arrangement. ral person) in the Republic.
The source is therefore deter- If the interest is not exempt in
mined by the residence of the terms of section 10(1)(h), the
debtor or the place where the interest is partially exempt for
funds are used. a natural person by applying
the basic section 10(1)(i) ex-
emption of R23 800 or R34 500
(refer to chapter 6).
Royalties A royalty is from a source In terms of section 10(1)(l), all
(section 9(2)(c) within the Republic if: royalties (as defined) that are
and (d)) • the royalty is attributable subject to withholding tax are
to an amount incurred by a exempt from income tax. The
person that is a resident withholding tax of 15% that is
(unless that royalty is attri- withheld is a final payment in
butable to a permanent es- respect of the tax owed on the
tablishment outside the amounts ( refer to 5.4).
Republic); or
• the intellectual property (as
defined in section 23I) is
used in the Republic.
The source is therefore deter-
mined by the residence of the
party paying the royalty or
where the intellectual property
is used.
Scientific, technical, The scientific, technical, indus- In terms of section 10(1)(l), all
industrial or trial or commercial knowledge royalties (as defined and in-
commercial is from a source within the cluding scientific, technical,
knowledge or Republic if: industrial or commercial
information • the expenditure is incurred knowledge or information in
(section 9(2)(e) by a person that is a resi- terms of section 49A) that are
and (f)) dent and is received or subject to withholding tax are
accrues in respect of the exempt from income tax. The
imparting of or the under- withholding tax of 15% that is
taking to impart scientific, withheld is a final payment in
technical, industrial or respect of the tax owed on the
commercial knowledge or amounts (refer to 5.4).
service (unless the amount
so received or accrued is
attributable to a permanent
establishment outside the
Republic); or
continued

223
A Student’s Approach to Taxation in South Africa 5.3

Type of income SA source Exemption to consider

Scientific, technical, • where the knowledge or
industrial or information is used in the
commercial Republic.
knowledge or The source is therefore deter-
information mined by the residence of the
(section 9(2)(e) party paying for the know-
and (f)) ledge or information or where
the knowledge or information
is used.
Public office and • Amounts received or ac- Section 10(1)(c) provides that
services rendered crued in respect of the the salary and remuneration
in the public sector holding of a public office is of an official of any other
(section 9(2)(g) from a source within the government that is stationed
and (h)) Republic if the person has in South African but that is
been appointed in terms of not ordinarily resident in the
an Act of Parliament. Republic, are exempt from tax.
• Amounts received or ac- This exemption does not
crued in respect of services apply if the employer of the
rendered to or on behalf of person is the South African
any of the following em- government.
ployers is from a source • The salaries of domestic
within the Republic: servants, workers or pri-
– an employer in the vate workers of such
national, provincial or officials of foreign govern-
local sphere of govern- ments, who are not citi-
ment of the Republic; zens of the Republic and
are not ordinarily resident
– an employer that is a
here, and the salaries of
constitutional
foreigners who are tem-
institution listed in the
porarily employed in the
Public Finance Man-
Republic, are all exempt
agement Act;
from tax.
– an employer that is a
Persons who are residents of
public entity listed in
the Republic and are em-
that Act; or
ployed by foreign govern-
– an employer that is a ments do not qualify for this
municipal entity. exemption.
The source is therefore the • Section 10(1)(p) provides
entity to whom the services are that an amount received
rendered. by or accrued to a non-
resident is exempt from
tax, where it is received for
services rendered or work
or labour done by him
outside the Republic for or
on behalf of an employer
continued

224
5.3 Chapter 5: The taxation of non-residents

Type of income SA source Exemption to consider

Public office and in the national or provin-
services rendered cial sphere of Government
in the public sector or a local authority in the
(section 9(2)(g) Republic or a national or
and (h)) provincial public entity
(where not less than 80%
of the expenditure of such
entity is defrayed directly
or indirectly by Parlia-
ment), and if such amount
is chargeable with income
tax in the country in which
the person is ordinarily
resident. The income tax
that he must pay must be
borne by himself and not
paid on his behalf by the
Government or the local
authority concerned or
such public entity.
Lump sums and Lumps sums and retirement
annuities annuities are from a source
(section 9(2)(i)) within the Republic if:
• the services in respect of
which the amount is re-
ceived or accrued were
rendered within the
Republic;
• if the services are rendered
partly within and partly
outside the Republic, only
the portion of the amount
(multiply the amount by
the period during which
the services were rendered
in SA divided by the total
period during which the
services were rendered)
must be regarded as hav-
ing been received or ac-
crued to the person from a
source within the Republic.
continued

225
A Student’s Approach to Taxation in South Africa 5.3

Type of income SA source Exemption to consider

Amounts received An amount received or ac-
or accrued in crued in respect of the disposal
respect of the of an asset is from a source
disposal of within the Republic if:
immovable • an amount is received or
property in accrued in respect of the
South Africa disposal of immovable pro-
(section 9(2)(j)) perty or any interest in
immovable property sit-
uated in the Republic.
The source is therefore the
place where the immovable
property is situated.
Amounts received An amount received or ac-
or accrued in crued in respect of the disposal
respect of the of movable assets is from a
disposal of source within the Republic if
movable assets the amount received is in re-
(section 9(2)(k)) spect of the disposal of an
asset by:
• a resident if the asset is not
effectively connected to a
permanent establishment
of the resident which is
situated outside the Re-
public and the proceeds
from the disposal is not
subject to any taxes on
income payable to a gov-
ernment of any other
country other than SA; or
• a non-resident if the asset
is effectively connected
with a permanent estab-
lishment of the non-resi-
dent which is situated in
the Republic.
The source is therefore deter-
mined by the residence of the
party disposing of the other
assets.
continued

226
5.3 Chapter 5: The taxation of non-residents

Type of income SA source Exemption to consider

Exchange An exchange difference is from
differences a source within the Republic if
(section 9(2)(l)) an exchange item is made by:
• a resident if that exchange
item is not attributable to a
permanent establishment
of the resident which is
situated outside the Re-
public and the amount is
not subject to any taxes on
income payable to any
government of any other
country other than South
Africa; or
• a non-resident if that ex-
change item is attributable
to a permanent establish-
ment of the non-resident
which is situated in the
Republic.

REMEMBER

• A permanent establishment is defined (in terms of the model tax treaty of the
Organisation for Economic Cooperation and Development (OECD)) as a fixed place of
business, for example a branch of a business or a factory.
• You only have to consider the source rules in section 9 if the double-tax agreement does
not determine the source of the income.
• Where the double-tax agreement does not determine the source of the income and the
source of the income is consequently determined in terms of the provisions of section 9,
you should not move to the third step (the common-law source principles in 5.3.3).
Section 9 overrides (that is to say is stronger than) the case-law source principles.

227
A Student’s Approach to Taxation in South Africa 5.3

Example 5.1
Zach Zachariah is ordinarily resident outside the Republic and does not carry on a trade
in the Republic. Zach received R50 000 royalties from a South African company for the
use of his patent that he developed in Holland.
You are required to calculate Zach’s tax liability in the Republic.

Solution 5.1
R
Taxable income (R50 000 – R50 000 (exempt)) nil
Income tax nil
The South African company must withhold the following tax:
Tax withheld on royalties (R50 000 × 15%) 7 500

If Zack was present in the Republic during the year of assessment, will
the South African company still be required to withhold withholding tax
on the royalty?

Example 5.2
Andries te Groen, a non-resident, earns a pension of R3 500 per month. Andries retired on
31 December 2022 and received a pension from 1 January 2023. He was employed by a
South African employer for 25 years. During this time, he was employed outside the
Republic from time to time for a total of 13 years.
You are required to calculate the taxable portion of Andries’ pension for the 2023 year of
assessment.

Solution 5.2
R
Total pension received for the current year of assessment
R3 500 × 12 months 42 000
Portion deemed to be from a source in the Republic (Note):
12
× R42 000 21 840
25
Note: Of the 25 years of service, only 12 years (25 years less 13 years) relate to years of ser-
vices rendered in the Republic. R21 840 is therefore from a source within the Republic and is
included in Andries’ South African taxable income for the 2023 year of assessment.

228
5.3 Chapter 5: The taxation of non-residents

5.3.3 Common-law source principles

If the source of a specific type of income is not addressed in a double-tax agreement
or section 9 of the Act, case law should be consulted to determine the source of the
income. The authority in South Africa for the determination of the source is found in
the following case:

CASE:
Commissioner for Inland Revenue v Lever Brothers &
Unilever Ltd
14 SATC 1 (1946 AD 441)
Facts: The court had to consider where the quarter whence they come, but the origi-
source and location of interest was for nating cause of their being received as
interest which was payable in respect of income and that this originating cause is
indebtedness assumed by a company the work which the taxpayer does to earn
which was resident in the Union. The court them, the quid pro quo which he gives in
considered whether the source of such return for which he receives them.
interest was the indebtedness or the
The work which he does may be a business
business operations of creditor company.
which he carries on, or an enterprise which
Judgment: ’The word “source” has several he undertakes, or an activity in which he
possible meanings. In this section it is used engages and it may take the form of per-
figuratively, and when so used in relation sonal exertion, mental or physical, or it
to the receipt of money one possible mean- may take the form of employment of cap-
ing is the originating cause of the receipt of ital either by using it to earn income or by
the money, another possible meaning is letting its use to someone else. Often the
the quarter from which it is received. A work is some combination of these’
series of decisions of this Court and of the (pp. 8–9).
Judicial Committee of the Privy Council
upon our Income Tax Acts and upon simi- Principle: To determine the source of
lar Acts elsewhere have dealt with the income, two questions must be answered:
meaning of the word “source” and the
1. What is the originating cause of the
inference, which, I think, should be drawn
income?
from those decisions is that the source of
receipts, received as income, is not the 2. Where is the originating cause located?

While the principles established by the Lever Brothers case will in the majority of
instances provide the correct answer to determine what the source of income is, the
most important other tests laid down by case law include:
• ascertaining source is a practical hard matter of fact;
• the place where the capital is employed determines the source;
• the activities test: The place where the business is carried on (the ‘activities test’)
was the determining factor in locating the source of income;
• the place where the contract is concluded determines the source of the income
arising from the contract, but only where the making of the contract is the essence
of the business carried on.

229
A Student’s Approach to Taxation in South Africa 5.3

The dominant source, the source of incidental income and multiple sources
The question of dominant source arises most often in relation to business activities
involving buying and selling, each activity being carried out at a different location. If
one of the activities can be said to be dominant, the place at which this activity is
carried out is the dominant source. The source of incidental income is located at the
source of the main activity (COT v Shein 22 SATC 12).
Where there are multiple sources of income and none of these sources can be said to
be dominant or incidental, the profits from each source may have to be dealt with
separately.

REMEMBER

• To determine the source of income by using case law, two questions must be answered:
1. What is the originating cause of the income?
2. Where is the originating cause located?
• If the originating cause is located in the Republic, the source of the income is from the
Republic and therefore taxable in the Republic.

5.3.3.1 Services rendered

The general rule is that the source of income for services rendered, either knowledge
or physical, is the place where the service is rendered or the work is carried out – the
‘activities test’ (refer also to COT (SR) v Shein 22 SATC 12).
It is accepted that director’s fees are earned at the head office of the company, unless
other circumstances exist that change the basic rule (ITC 77 3 SATC 72 and ITC 106 3
SATC 336). A director that is therefore a non-resident is taxed in the Republic on his
director’s remuneration where the directors meet in the Republic. If the director
renders other services to the company, in other words, he also renders the services of
a normal employee, the source of the remuneration is determined according to the
general rules.

Exemptions (section 10)

• Receipts or accruals as the owner or charterer of a ship or aircraft received by a
non-resident are exempt in terms of section 10(1)(cG), if the country where the per-
son is resident also has a similar exemption for similar types of income.
• Section 10(1)(o)(i) provides that the remuneration of a person as an officer or crew
member of a ship is exempt from tax where the ship is involved in the inter-
national transportation of passengers or goods for reward or if the ship is involved
in the prospecting for, or the mining of, minerals (including natural oils) from the
seabed outside the continental shelf of the Republic, where the officer or crew
member is employed on the ship solely for the purposes of the ‘passage’ of such
ship, and the person was outside the Republic for a period or periods of 183 full
days during the year of assessment.

230
5.3 Chapter 5: The taxation of non-residents

• Section 10(1)(o)(ii) makes provision for the exemption of the first R1,25 million of
remuneration that was received or accrued for services rendered outside the Re-
public. The exemption applies in respect of remuneration received by an employee
for services rendered outside the Republic on behalf of an employer, where the
employee was outside South Africa:
– for a period(s) exceeding 183 full days in total during a 12-month period that
commences or ends during the year of assessment; and
– for a continuous period exceeding 60 full days during that period of 12 months.
The period of 183 days does not need to be continuous. The 60 days, however,
must be continuous.
This exemption does not apply to remunerations derived in respect of the holding
of an office or from services rendered for or on behalf of the Government.
• Section 10(1)(lA) exempts all income received by visiting entertainers and sports
people if the income is subject to withholding tax (refer to 3.7.4.4).

REMEMBER

• Where the source was determined in section 9, the source rules of section 9 should be
adhered to and not that of the case law. This is for example the case where a person
holding a public office has been appointed in terms of an Act of Parliament or where
services are rendered to an employer in the national, provincial or local sphere of the
government of the Republic (refer to 3.7.2). As section 9(2)(g) and (h) provides the
specific source rules for these types of income, it overrides the case-law principles.

Example 5.3
Michael Mnguni, a South African citizen, is appointed by the government as ambassador
of the Republic in Switzerland and earns R800 000 per annum. Michael and his family live
in Switzerland and only come home for holidays in the Republic.
You are required to determine the source of the income that Michael received.

Solution 5.3
As Michael was appointed in terms of an Act of Parlement, the source of the income is
from the Republic (section 9(2)(g)).

5.3.3.2 Sale of trading stock

In the case of CIR v Epstein 19 SATC 221, the court held that the source of the income
was the taxpayer’s activities that were carried out in the Republic. It was these activi-
ties that led to the profit that was made and therefore it is taxable in the Republic.

5.3.3.3 Rental
The source of rent received from the renting of immovable property is usually the
place where the property is situated (Rhodesian Metals Ltd v COT 11 SATC 244).

231
A Student’s Approach to Taxation in South Africa 5.3–5.4

Where movable property is rented, the source is where the business of the lessor is
situated or where the movable property is used. The nature of the movable property
and length of the usage form a guideline to determine whether the source is the
location of the business of the lessor or where the property is used (COT v British
United Shoe Machinery (Pty) Ltd 26 SATC 163). If it is the nature of the business that
many movable assets are leased at different places (as in the case of a motor car rental
agent), the business and not the assets determine the source. If only one movable
asset is leased, the use of the asset usually determines the source of the income.

5.4 Withholding taxes

In some cases the obligation is on the resident taxpayer to withhold taxes on the
Republic source income paid to a non-resident.

5.4.1 Withholding tax on interest (sections 50A to 50H)

In terms of sections 50A to 50H a withholding tax on interest must be calculated at
the rate of 15% (or at a rate as the Minister may announce in the national budget) of
the amount of interest that is paid to the non-resident. Only amounts that is from a
source within the Republic in terms of section 9(2)(b) is subject to this withholding tax
(refer to 3.7.2).
This is a final tax and is payable by the non-resident. If the withholding tax was paid,
the interest should still be included in gross income, but the interest is then exempt in
terms of section 10(1)(h) since the taxpayer then meets the 183-day requirement of
section 10(1)(h).

Exemptions from the withholding tax on interest

The interest paid:
• by national, provincial or local government;
• by a bank; including banks such as the African Development Bank and World
Bank;
• by a headquarter company providing financial assistance in terms of section 31
provisions; or
• on listed debt or paid to a client as defined in the Financial Markets Act,
is exempt from withholding tax.
A non-resident natural person is exempt from withholding tax on interest if he was
present in the Republic of South Africa for more than 183 days in total during a 12-
month period preceding the date on which the interest is paid. If the taxpayer was
present for more than 183 days, the taxpayer does not qualify for the section 10(1)(h)
exemption. The interest is then taxed as part of taxable income by using the progres-
sive tax tables.
A non-resident is also exempt from withholding tax if the debt which gave rise to the
interest is connected to a permanent establishment of the person in the Republic.

232
5.4 Chapter 5: The taxation of non-residents

5.4.2 Withholding tax on royalties (sections 49A to 49G)

If, in terms of section 9, the royalty is from a South African source, it is subject to a
15% withholding tax (or a rate as the Minister may announce in the national budget).
Exemptions from the withholding tax on royalties
A foreign person is exempt from the withholding tax if:
• he or she is a natural person who was physically present in the Republic for more
than 183 days in total during the 12-month period before the royalty is paid; or
• the property is effectively connected with a permanent establishment of that for-
eign person in the Republic of South Africa if he or she is a registered taxpayer; or
• the royalty paid by a headquarted company for international property used as
defined in sections 23I and 31 does not apply; and the person makes a declaration
that he or she is not subject to the tax as he or she is a registered taxpayer.

Example 5.4
Zippy Zach (Pty) Ltd is effectively managed and carries on their trade in Switzerland and
is therefore not a resident of the Republic. The company received R50 000 royalties from a
South African company for the use of the company’s patent that was developed in Hol-
land.
You are required to calculate Zippy Zach (Pty) Ltd’s tax liability in the Republic.

Solution 5.4
R
Taxable income 50 000
Less: exemption: (50 000)
The royalties are from a source in the Republic as it was paid
by a South African resident
Income tax nil
The South African company must withhold the following tax:
Tax withheld on royalties (R50 000 × 15%) 7 500

5.4.3 Disposal of immovable property by a non-resident person

(section 35A)
Where a person acquires an immovable property or interest in an immovable proper-
ty in the Republic from a non-resident, a withholding tax must be deducted before
any payment may be made to the seller.
The withholding tax must be calculated on each payment made to the non-resident.
The withholding tax amount is determined by the status of the seller. The following
rates are applicable:
• If the seller is a natural person: 7,5%
• If the seller is a company: 10%
• If the seller is a trust: 15%

233
A Student’s Approach to Taxation in South Africa 5.4

REMEMBER

• If the amount owing is paid in instalments, the withholding tax must be deducted
before each payment to the non-resident.
• The withholding tax is a prepaid tax, not a final tax, and therefore the non-resident
must complete a tax return at the end of the year to calculate the correct amount due.

Normally, the amount paid to the seller is subject to the withholding tax. The seller
may apply for a directive from SARS to change the amount used. The request for a
directive to reduce the withholding tax or not to pay any withholding tax can only be
made in one of the following situations:
• if the seller provides adequate security for the tax due;
• if the seller has other assets in the Republic that can be used to recover outstanding
tax;
• if the seller is not subject to tax due to some other stipulation in the Act, for
example a double-tax agreement; and
• if the actual tax liability is less than the proposed withholding tax.
The withholding tax is not applicable if the total purchase price of the property is less
than R2 million.
If a deposit is paid to secure the transaction, the withholding tax is not deducted from
this deposit. The withholding tax becomes due when the amount is used as partial
payment of an amount due under the contract.

Payment of the withholding tax

If the purchaser is a resident, the withholding tax must be paid to SARS within 14
days after the amount was withheld. A non-resident must pay the amount to SARS
within 28 days. If the non-resident purchaser deducted the withholding tax based on
a contract in a foreign currency, the amount due must be translated at the spot rate of
the day it was withheld. All payments made to SARS must be accompanied by a
declaration on the prescribed form.

REMEMBER

• If the amount is not paid within the prescribed time, a penalty of 10% is levied and
interest is charged on the outstanding amount.

If the purchaser knows or should reasonably have known that the seller is a non-
resident, the purchaser is personally liable for the tax. If the person makes use of an
estate agent or conveyancer who failed to inform him in writing, before a payment is
made, of the fact that the seller is a non-resident, they are all jointly and separately
liable for the tax due. The estate agent and conveyancer’s liability is, however, limited
to the amount of remuneration or other income received.
The purchaser has a right of recovery for the withholding tax against the seller. Note
that he cannot recover any interest or penalties.

234
5.4 Chapter 5: The taxation of non-residents

5.4.4 Taxation of foreign entertainers and sports persons

(sections 47A to 47K)
This withholding tax is levied on income received or accrued to visiting non-resident
entertainers and sports people. These taxes are calculated on the gross payments
payable to the non-resident and are calculated at a rate of 15%. The tax is a final tax
and the amount is exempt from normal tax. If the entertainer or sports person is an
employee of an employer who is a resident or he is in the Republic for more than
183 days during a 12-month period, this tax is not applicable and the income is not
exempt from normal tax.
Where a resident pays the non-resident entertainer or sports person, he must with-
hold the tax from the payment. This amount, accompanied with the prescribed forms,
must be paid to SARS before the end of the month that follows the month in which
the amount was deducted. Where the payment takes place in a foreign currency, the
tax must be calculated by using the spot rate on the date the tax is deducted. A resi-
dent who fails to deduct the tax is personally responsible for the tax due. If the enter-
tainer or sports person received payment from a non-resident, he must pay the
amount due to SARS within 30 days.
The resident who is primarily responsible for founding, organising or facilitating the
entertainment or sport event or who receives payment for the founding, organising or
facilitating of the event, must notify the Commissioner within 14 days of signing the
contract of the event and must provide all prescribed information.

REMEMBER

• An entertainer is a person who receives a reward for performing an activity as a theatre,

motion picture, radio or television artiste or musician or takes part in an event that is
usually regarded as of an entertaining nature.
• A sports person is a person that takes part in any type of sport.

Example 5.5
Jason Donnie is ordinarily resident in the United Kingdom and does not carry on a trade
in the Republic. Jason performed in a music concert at the Sun City Superbowl and will
be paid R100 000 by a South African company for the performance.
You are required to calculate the withholding tax that is to be paid in the Republic.

235
A Student’s Approach to Taxation in South Africa 5.4–5.5

Solution 5.5
R
Total income 100 000
Withholding tax (R100 000 × 15%) 15 000
As Jason is a non-resident, he is subject to the withholding tax on foreign entertainers at a
rate of 15%. When calculating Jason’s taxable income, the full R100 000 will be included in
gross income and will then be exempt from income tax.
Therefore the South African company will pay Jason R85 000 and R15 000 directly to
SARS.

Example 5.6
Golden Boot is ordinarily resident in Italy and does not carry on a trade in the Republic.
Golden Boot is a soccer player who is on tour with his club in South Africa. He received
R200 000 for the matches he played in South Africa.
You are required to calculate the withholding tax that must be paid in the Republic.

Solution 5.6
R
Total income 200 000
Withholding tax (R200 000 × 15%) 30 000
As Golden Boot is a non-resident, he is subject to the withholding tax on foreign sports-
persons at a rate of 15%. When calculating Golden Boot’s taxable income, the full
R100 000 will be included in gross income and will then be exempt from income tax in
terms of section 10(1)(lA).

5.5 Summary
Where the taxability of any receipts or accruals of a non-resident must be determined,
one should first consider if any specific provisions of section 9, which deem the
income to be from a South African source, are applicable. If section 9 does not apply,
the true source of the income should be considered, taking into account decisions that
have been made by the courts (case law). Any exemptions that are applicable must be
carefully considered, as source rules might regard the income as being from a source
in the Republic, but it may be specifically exempted.
Double-tax agreements must also always be consulted as they take precedence over
the provisions contained in the Income Tax Act where trade takes place within the
borders of other countries.
The following question will test your knowledge of non-residents.

236
5.6 Chapter 5: The taxation of non-residents

5.6 Examination preparation

Question 5.1
Abel Sidinile is a resident of another African country. Abel is employed by the local gov-
ernment in his country. He also earns other income in his country. For a number of years
Abel has been investing money in South African investments, as he was concerned about
the political climate in his country. He has never visited South Africa for longer than a
month a year. He is also not carrying on any business in South Africa. Abel is 45 years old.
He earned the following income during the current year of assessment from a number of
different sources. You can accept that the rand equivalent of all the incomes has been cor-
rectly calculated.
Investment income: R
Dividends from a South African source (ignore dividends tax) 250 000
Dividends from an investment in his home country 125 000
(Assume that Abel does not have an interest of more than 10% in this
company and it is not listed on any stock exchange.)
Interest on fixed deposit from a South African bank 58 000
Interest on fixed deposit from a United Kingdom bank 205 000
Income from services rendered: R
From his home country – his salary as manager in their local government 920 000
Consulting fees from a local government in South Africa while he was on
holiday here (he was officially appointed in terms of an Act of Parliament of
the Republic). 325 000
Other income:
Abel completed his PhD on ‘Local government controls in Africa’ and this was
subsequently published by a South African publisher and sold in South Africa,
Africa and abroad
His royalties from the book accrued as follows during the current year of
assessment:
From sales in South Africa 146 000
From sales in his home country 220 000
From sales in Europe 320 000
Investment income:
He purchased a flat in Clifton, Cape Town, for his annual holiday. While he is
not in South Africa, he rents out the flat. Rental earned from this flat during
the current year of assessment 880 000
His monthly expenses for the flat amount to R56 000, which includes an
amount of R30 000 in respect of interest on his bond

237
A Student’s Approach to Taxation in South Africa 5.6

You are required to:

(a) Calculate all the South African taxes that are payable by Abel for the current year
of assessment. You can ignore any double-tax agreements that might exist.
(b) Briefly indicate to Abel how his South African taxes would change if he were to
leave his country to come and live in South Africa.

Answer 5.1
(a) Calculation of the taxes payable by Abel
As Abel is not a resident of South Africa, he will only be taxed on income that has a South
African source.
Gross income: R
Dividends from a South African company 250 000
Dividends from his home country – Not a source in the Republic, therefore
not taxable nil
Interest received on an investment in the Republic 58 000
Interest received from a UK bank – Not a source in the Republic, therefore
not taxable nil
Royalties for his book:
• Sales in South Africa 146 000
• Sales in his country (section 9(2)(c)) – the person paying the royalty is in
South Africa (printed and published here) 220 000
• Sales in Europe (section 9(2)(c)) – the person paying the royalty is in South
Africa (printed and published here) 320 000
Rent received 880 000
Services rendered in his home country – not taxable here as not from a
source in the Republic nil
Consultation work (Note) 325 000
Gross income 2 199 000
Less: Exemptions
Republic dividend exemption – section 10(1)(k) 250 000
Interest exemption – section 10(1)(h) 58 000
Less: Royalty incomes – section 10(1)(lA) 686 000
Income 1 205 000
Less: Deductions
Expenses in respect of rental income (R56 000 × 12) – section 11(a) 672 000
Taxable income 533 000
Calculation of net normal tax
Tax on ((R533 000 – R488 700) × 36%) + R115 762 131 710
Less: Primary rebate (16 425)
Tax payable 115 285

Withholding tax on royalties

Royalties received: (R146 000 + R220 000 + R320 000) = R686 000

continued

238
5.6 Chapter 5: The taxation of non-residents

Withholding tax at 15% = R686 000 × 15% = R102 900

Tax is withheld on all deemed royalties that are paid to non-residents. He cannot deduct
expenses in connection with royalties.
Note: A local government in the Republic forms part of the Republic and thus the consul-
tation work has a source in the Republic (section 9(2)(g)).

(b) Calculation of the taxes payable by Abel

Should Abel move to South Africa and become ordinarily resident here, he would be taxed
on his worldwide income. Therefore, all foreign income would also be taxed in South Afri-
ca and different exemptions would apply. A double-tax agreement might exist to avoid
double taxation and provide for tax credits in terms of section 6quat (all of these provisions
should, however, be ignored for purposes of this question).
Furthermore, there would be no withholding taxes on his royalties and he would be taxed
on royalties at a different tax rate depending on his final taxable income (see above – his
marginal rate was 36% but it could go as high as 45%).
Abel’s taxable income would therefore be:
Gross income: R
Dividends from a South African company 250 000
Dividends from African country 125 000
Interest received on an investment in the Republic 58 000
Interest received from investment in African country 205 000

Royalties for his book:

• Sales in South Africa 146 000
• Sales in African country (section 9(2)(c)) 220 000
• Sales in Europe (section 9(2)(c)) 320 000
Salary:
Presumably not from the African country anymore as he is now resident in
South Africa (Note) nil
Consultation work 320 000
Rent received 880 000
Gross income 2 524 000
Less: Exemptions
Dividend exemption – Republic Dividends – section 10(1)(k) (250 000)
– Foreign dividends section 10B(3) 25/45 × R125 000 (69 444)
Interest exemption – section 10(1)(i) – the first R23 800 (23 800)
Income 2 180 756
Less: Deductions – General deduction formula – rental expenses 672 000
Taxable income 1 508 756
Tax thereon would amount to ((R1 508 756 – R817 600) × 41% + R239 452) 522 826
Less: Rebate (16 425)
506 410

continued

239
A Student’s Approach to Taxation in South Africa 5.6

Note
It is assumed that he will not earn a salary in his country anymore, as he presumably
could not work there and be ordinarily resident in the Republic. However, if he should
still work there, he could still qualify for the section 10(1)(o) exemption on that salary.

Additional questions for this chapter are available electronically at

www.myacademic.co.za/books

240
 6 Income exempt from tax

Exempt Taxable Tax

Gross income – – Deductions =
income income payable

Page
6.1 Introduction............................................................................................................ 241
6.2 Exemptions resulting from the status of the taxpayer (section 10) ................. 242
6.3 Exemptions based on the nature of the income (section 10) ............................ 245
6.3.1 Pensions ..................................................................................................... 245
6.3.2 Benefits ...................................................................................................... 246
6.3.3 Amounts relating to employment ......................................................... 246
6.3.4 Investment income ................................................................................... 253
6.3.5 Other exemptions ..................................................................................... 263
6.4 Summary................................................................................................................. 264
6.5 Examination preparation ...................................................................................... 265

6.1 Introduction
If an amount complies with the definition of ‘gross income’, it is included in the
taxpayer’s gross income. In certain cases the Income Tax Act 58 of 1962 (the Act)
makes provision for certain types of income to be exempt (not subject to tax). In other
words, this income is free from normal tax. This income, which was included in gross
income, then has to be subtracted from a taxpayer’s gross income. Section 10 provides
for the list of the exempt income while section 10A provides for an exempt portion of
purchased annuities, section 10B for foreign dividends and headquarter companies
and section 12T for an exemption of interest earned on tax free investments. When
calculating taxable income, you have to be sure that you subtract the exempt income
from the gross income to determine the income. Allowable deductions are then also
subtracted from the income to determine the taxable income.

241
A Student’s Approach to Taxation in South Africa 6.1–6.2

Taxable income framework

R
Gross income (as defined in section 1) xxx
Less: Exempt income (sections 10, 10A, 10B and 12T) (xxx)
Income (as defined in section 1) xxx

6.2 Exemptions resulting from the status of the taxpayer

(section 10)
Certain taxpayers’ income is exempt from tax. In some instances, all receipts and
accruals are exempt, and in other cases only certain receipts and accruals are exempt.
The status or characteristics of the taxpayer is of importance. Section 10 of the Act
provides a list of tax exempt bodies and persons. These bodies or persons do not pay
normal tax on any of their receipts or accruals where applicable. Exempt bodies or
persons include
• the Government of the Republic – this includes national, provincial or local gov-
ernment (section 10(1)(a));
• foreign governments – this includes any sphere of a foreign government as well as
an institution or body established by a foreign government that is involved with
official development assistance, and a multinational organisation providing for-
eign donor funding in terms of an official development assistance agreement (sec-
tion 10(1)(bA));
• the receipts and accruals of certain international banks and monetary funds, namely:
– the African Development Bank;
– the World Bank (including the International Bank for Reconstruction and
Development and International Development Agency);
– the International Monetary Fund;
– the African Import and Export Bank;
– the European Investment Bank;
– the New Development Bank (section 10(1)(bB));
• an official of another government (for example foreign diplomats and ambassa-
dors) who is not a resident of the Republic, including servants of that official (sec-
tion 10(1)(c)(iii) and (iv));
• a salary and emoluments payable to a person of a foreign state who is tem-
porarily employed in the Republic. This exemption must be authorised by an
agreement between the government of the foreign state and the Republic. The
agreement must provide that the receipts and accruals of the institution or body
are exempt. This exemption is also applicable to an institution, body or multi-
national organisation established by a foreign government (section 10(1)(c)(v));
• an institution, board or body (other than a company), a cooperative, close corpora-
tion, trust or water services provider, and a black tribal authority, community

242
6.2 Chapter 6: Income exempt from tax

authority, black regional authority or black territorial authority established under

any law and which, as its sole or principal object,
– conducts scientific, technical or industrial research;
– provides necessary or useful commodities, amenities or services to the State
(including any provincial administration) or the general public; or
– carries on activities, including the rendering of financial assistance designed
to promote commerce, industry or agriculture or a branch thereof (sec-
tion 10(1)(cA));
• registered political parties (section 10(1)(cE));
• the owner or charterer of a ship or aircraft who is not a resident of the Republic if a
similar exemption is granted by the country (of which the person is a resident) to a
South African resident in similar circumstances (section 10(1)(cG));
• public benefit organisations (PBOs) (as defined in section 30). The PBO will, how-
ever, pay normal tax on business undertakings or trading activities which are not
approved public benefit activities. Certain non-trading activities and limited
trading activities are exempt. Public benefit organisations include: homes for
abandoned, abused or orphaned children, pre-primary schools offering approved
educare programmes, HIV organisations etc. (section 10(1)(cN));
• a recreational club approved by SARS in terms of section 30A and subject to certain
limitations (section 10(1)(cO));
• taxpayers whose principal object it is to rehabilitate the environment surrounding
mines, quarries etc. (section 10(1)(cP));
• the receipts and accruals of a small business funding entity (SBFE) are exempt from
tax to the extent that it is received from:
– a business undertaking or trading activity that is integral and directly related to
the sole object of the SBFE and is carried out on a basis directed towards the
recovery of cost; or
– occasional fundraising activities of the SBFE, undertaken on a voluntary basis
without compensation; or
– another undertaking or activity and the receipts and accruals do not exceed the
greater of:
* 5% of the total receipts and accruals of the SBFE for the relevant year of
assessment; or
* R200 000
(section 10(1)(cQ));
• pension funds, pension preservation funds, retirement annuity funds, provident
funds, provident preservation funds, benefit funds, trade unions, chambers of
commerce or industries, local publicity associations, mutual loan associations or a
fidelity or indemnity fund (section 10(1)(d));
• associations (as defined in section 30B). A company, society or association of per-
sons providing social and recreational amenities or facilities for its members or
promoting the common interests of members carrying on a particular kind of busi-
ness, profession or occupation (section 10(1)(d)(iv));

243
A Student’s Approach to Taxation in South Africa 6.2

• levies received by a body corporate established in terms of the Sectional Titles Act,
as well as the first R50 000 of other income received (section 10(1)(e)(i)(aa));
• levies received by share block companies, as defined in the Share Blocks Control
Act, as well as the first R50 000 of other income received (section 10(1)(e)(i)(bb));
• levies received by another association of persons (other than a company,
co-operative, close corporation and trust), including a non-profit company as
defined. Certain conditions must be met to the satisfaction of the Commissioner.
As with the previous two exemptions, the first R50 000 of other income received is
also exempt (section 10(1)(e)(i)(cc));
• foreign central banks that are not residents of the Republic (section 10(1)(j));
• the Council for Scientific and Industrial Research (section 10(1)(t)(i));
• the South African Inventions Development Corporation (section 10(1)(t)(ii));
• the South African National Roads Agency Limited (section 10(1)(t)(iii));
• the Armaments Corporation of South Africa Limited (Armscor) (section 10(1)(t)(v)) or
the income and accruals of a company during the period during which all the
issued shares are held by Armscor (section 10(1)(t)(vi));
• a traditional council or traditional community established or recognised in terms of
the Traditional Leadership and Governance Framework Act 2003 or a tribe as
defined in section 1 of the Act (section 10(1)(t)(vii));
• a water service provider (section 10(1)(t)(ix));
• the Development Bank of Southern Africa (section 10(1)(t)(x));
• the compensation fund established by the Compensation for Occupational Injuries
and Diseases Act (section 10(1)(t)(xvi)(aa));
• the reserve fund established by the Compensation for Occupational Injuries and
Diseases Act (section 10(1)(t)(xvi)(bb));
• a mutual association licensed in terms of the Compensation for Occupational
Injuries and Diseases Act, to carry on the business of insurance of employers
against their liabilities to employees (section 10(1)(t)(xvi)(cc));
• the National Housing Finance Corporation with effect from 1 April 2016 (sec-
tion 10(1)(t)(xvii));
• a subsidy or assistance payable by the State to the Small Business Development
Corporation Limited (section 10(1)(zE));
• an amount received by or accrued to in favour of a registered microbusiness (as
defined in the Sixth Schedule) from the carrying on of a business in the Republic,
but excluding investment income (as defined in paragraph 1 of the Sixth Schedule)
and remuneration (as defined in the Fourth Schedule) received by a natural person
(section 10(1)(zJ)); and
• an amount received by or accrued to in favour of a small, medium or micro-sized
enterprise from a small business funding entity (section 10(1)(zK).
An organisation is not exempt from tax merely because it is a non-profit organisation.
It must satisfy the provisions of section 10.

244
6.2–6.3 Chapter 6: Income exempt from tax

REMEMBER

• The listed organisations are exempt from normal tax in terms of section 10 and not
because they might be non-profit organisations.
• Some of the organisations or bodies only enjoy a partial exemption relating only to
certain income received.
• The provisions of section 10(1) only apply to normal tax.

6.3 Exemptions based on the nature of the income (section 10)

Certain types of income or portions of income are exempt from taxation as a result of
the nature of the income. The nature of the income, not the status of the taxpayer,
therefore determines whether this income is exempt from tax.

REMEMBER

• There is a difference between a deduction and an exemption. An exemption refers to

income that has been included in gross income in terms of the definition, but is not sub-
ject to tax because a specific paragraph of section 10 exempts it from being taxed. A
deduction is an amount that reduces taxable income. An exemption is limited to the
income received.
• A particular exemption can only be claimed by a taxpayer who actually earned that
particular type of income.

6.3.1 Pensions
War pensions and awards for diseases
In section 10(1)(g) provision is made for the exemption of an amount received as:
• a war pension; or
• compensation in respect of diseases contracted in mining operations.

Disability pensions and compensation

In terms of section 10(1)(gA) and (gB), the following are exempt from tax:
• a disability pension paid in terms of section 2 of the Social Assistance Act;
• a compensation paid in terms of the Workmen’s Compensation Act or the Com-
pensation for Occupational Injuries and Diseases Act;
• a pension paid with regard to the death or disability caused by any occupational
injury or disease contracted by an employee before 1 March 1994;
• compensation paid by an employer (over and above workmen’s compensation) in
respect of the death of an employee in the course of their employment. The exemp-
tion is limited to R300 000 (refer to chapter 14); and
• compensation paid in terms of the Road Accident Fund.

245
A Student’s Approach to Taxation in South Africa 6.3

6.3.2 Benefits
Funeral benefits
Section 10(1)(gD) exempts amounts received by or accrued to a resident who receives
a funeral benefit in terms of the Special Pensions Act 69 of 1996.

Unemployment insurance benefit funds

A benefit or allowance payable in terms of the Unemployment Insurance Act is
exempt in terms of section 10(1)(mB).

Insurance policies
An amount received or accrued in respect of an insurance policy that covers the
policyholder or an employee of the policyholder for:
• death;
• disability;
• illness; or
• unemployment,
is exempt in terms of section 10(1)(gI) so long as the benefits are not paid or payable
by a retirement fund.

Retirement fund benefits

Pensions, lump sums and annuities from any source are included in gross income.
Section 10(1)(gC) exempts amounts received by or accrued to any resident:
• under the social security system of another country; and
• a lump sum, pension or annuity from a source outside the Republic that is paid to
a taxpayer because of past employment outside the Republic.
Where the services on which the lump sum, pension or annuity is based, were per-
formed partly in South Africa and partly outside South Africa, the pension must be
apportioned based on the number of years’ service within South Africa to the total
number of years (section 9(2)(i)). The portion of the lump sum, pension or annuity
that relates to the services that were rendered in South Africa is from a South African
source and taxed in South Africa.

REMEMBER

• The apportionment of annuities (section 9(2)(i)) does not apply to retirement annuity
funds as their payment is not linked to employment.

6.3.3 Amounts relating to employment

Employer-owned insurance policies
All amounts received from employer-owned insurance policies are included in gross
income (refer to 3.8.7). In terms of section 10(gG) and (gH), the amount received may
be exempt from income tax, depending on the type of policy. The proceeds might also
be subject to capital gains tax (refer to chapter 9).

246
6.3 Chapter 6: Income exempt from tax

Amounts received by the employee

Where an employee receives an amount from an employer-owned policy, either directly
or indirectly (via the employer), the amount is included in gross income (refer to
chapter 13). However, the amount is exempt in terms of section 10(1)(gG) provided the
premiums paid by the employer was considered a taxable fringe benefit.

Pure risk policies

The amount received is exempt if the premiums have been paid by the employer and
have been included in the taxable income of the employee as a fringe benefit. The
amount received is not exempt if the premiums were deductible from tax in terms of
section 11(a).

Other policies
The amount received is exempt where an amount equal to all premiums paid has
been included in the income of the person receiving the amount as a fringe benefit
since the date that the policy was entered into.

REMEMBER

• If a dependant or nominee of an employee received the proceeds of an employer-owned

policy, the employee will be taxed on the amount.
• A risk policy is one that has no cash or surrender value.

Compensation plans
All premiums paid in respect of employer-owned investment policies (not pure risk)
for the benefit of employees must be included in the income of employees as a fringe
benefit. The result is that a cession or pay-out of the policy is exempt in the hands of
the employee, as long as ALL the premiums paid by the employer have been subjected
to tax as a fringe benefit in the hands of the employee.

Uniforms and uniform allowances

Section 10(1)(nA) provides that where an employee, as a condition of their employ-
ment,
• is required to wear a special uniform while on duty;
• which is clearly distinguishable from ordinary clothing,
the value of the uniform provided by the employer is exempt from taxation.
Examples of uniforms provided by the employer that qualify for this exemption are
those of security guards, nurses and police officers.
An allowance made by the employer to the employee in lieu of the uniform is also
exempt, provided the amount is reasonable (refer to 14.6.1).

247
A Student’s Approach to Taxation in South Africa 6.3

Example 6.1
Rose Turpin is employed by Blooming Gorgeous, a florist. Rose receives a uniform allow-
ance of R1 000 per month because she is only allowed to wear pink clothes to work.
During the year Rose spent R8 900 on pink clothes. She has all her receipts.
You are required to explain the income tax implications of the uniform allowance that
Rose received.

Solution 6.1
The uniform allowance of R12 000 (R1 000 × 12 months) will form part of Rose’s gross
income. It will not be exempt.

If uniforms and uniform allowances are exempt, why is Rose’s uniform

allowance subject to tax?

Relocation benefits
Section 10(1)(nB) determines that the benefit an employee receives, where their
employer paid the cost to relocate an employee from one place to another on the
appointment or termination of the employee’s employment, may be exempt from
tax. The following expenditure may qualify for the exemption:
• transporting the employee, their household and their personal possessions from
their previous place of residence to their new place of residence;
• the costs incurred by the employee in respect of the sale of their previous residence
and in settling in permanent residential accommodation at their new place of resi-
dence; or
• hiring residential accommodation in an hotel or elsewhere for the employee or
members of their household for a period ending 183 days after the transfer took
effect or after they took up appointment (if it was occupied temporarily).
The cost of these expenses must have been incurred by the employer or the employer
must have reimbursed the employee for them.
SARS allows the exemption of the following expenses in practice:
• cancellation of bond;
• agent’s commission on sale of previous residence.
Examples of settling in costs (as mentioned above) that qualify for the exemption are
• bond registration and legal fees;
• transfer duty;
• new school uniforms;
• replacement of curtains;
• motor vehicle registration fees; and
• telephone, water and electricity connections.

248
6.3 Chapter 6: Income exempt from tax

SARS will not allow for the deduction of a loss incurred by an employee on the sale of
their residence or architect’s fees relating to any alteration of a residence.

Example 6.2
XYZ Ltd transferred Anike Moody from Durban to Pretoria. Her basic salary is R8 700 per
month. XYZ Ltd paid for the transfer of her personal goods and made arrangements
for Anike and her family to stay in a hotel on their account for two months (61 days) dur-
ing which Anike had to wait for the previous owners to move out of the house that she
purchased.
Anike puts in a claim for the following expenses to XYZ Ltd:
Amount
Description R
1 New school uniforms purchased for her two children 2 180
2 Curtains made for her new house 12 800
3 Motor vehicle registration fees 480
4 Telephone, water and electricity connections 1 500
5 Loss on sale of previous residence 20 000
6 Agent’s fee on sale of previous residence 28 895
7 Transfer duty on new residence 30 000
95 855
You are required to indicate which portion of Anike’s claim will be exempt from tax.

Solution 6.2
The benefit Anike receives due to the fact that her employer paid for the transfer of her
personal goods as well as the hotel accommodation (in respect of herself and her family)
for two months qualifies for the exemption in terms of section 10(1)(nB).
Items 1 to 4 are considered to be settling-in costs and the amount that Anike is reim-
bursed is exempt from normal tax. Item 5 is a taxable benefit and if XYZ Ltd pays this
amount to Anike, it is taxable in full. Items 6 and 7 qualify again for the exemption in
respect of relocation.

REMEMBER

• Only actual expenses that were either incurred by the employer or reimbursed by the
employer to the employee will qualify for an exemption. Any allowance paid in respect
of relocation is fully taxable.

Fringe benefits
The provisions of section 10(1)(nC) (broad-based employee share plan), (nD) (equity
instruments), and (nE) (share incentive scheme), dealing with taxable fringe benefits,
are discussed in chapter 14.

249
A Student’s Approach to Taxation in South Africa 6.3

Employment outside the Republic

Officer or crew of a ship
Section 10(1)(o)(i) exempts any remuneration derived by a person as an officer or
crew member of a ship engaged in
• the international transportation for reward of passengers or goods; or
• prospecting, exploration or mining.
The remuneration is only exempt if the officer or crew member is employed solely for
the purpose of the passage of such ship and was outside the Republic for a period or
periods exceeding 183 full days in aggregate during the year of assessment.

Officer or crew of a South African ship

With effect from 1 April 2014, section 10(1)(o)(iA) exempts any remuneration derived
by a person as an officer or crew member of a South African ship (as defined in
section 12Q) that is mainly engaged in
• international shipping as defined in section 12Q; or
• fishing outside the Republic.

Foreign services
Section 10(1)(o)(ii) provides for the exemption of up to R1 250 000 in respect of
• salary, leave pay, wages, overtime pay, bonuses, gratuities, commissions, fees,
emoluments or allowances;
• including any fringe benefit as per the Seventh Schedule; and
• including any subsistence allowance, travel allowance, holder of public office
allowance;
• as well as any taxable amounts derived from broad-based employee share plans
(section 8B) and a taxable amount arising on the vesting of equity instruments (sec-
tion 8C),
derived by an employee in respect of services rendered outside the Republic for or on
behalf of an employer, if the employee was outside the Republic
• for a period or periods exceeding 183 full days in aggregate during any
12-month period commencing or ending during a year of assessment; and
• for a continuous period exceeding 60 full days during such period of 12 months.
This exemption does not apply to remuneration derived in respect of the holding of a
public office or from services rendered or work or labour performed for or on behalf
of an employer in government (national, provincial or local); or a constitutional
institution as listed in the Public Finance Management Act (Schedule 1); or a public
entity listed in Schedule 2 or 3 of the above Act; or a municipal entity as defined in
the Local Government: Municipal Systems Act.
A proviso to this section provides that, for the purposes of this section, where remu-
neration is received by or accrues to an employee during a year of assessment for
services that were rendered by them in more than one year of assessment, the remu-
neration is deemed to have accrued evenly over the period in which those services
were rendered.

250
6.3 Chapter 6: Income exempt from tax

A person in transit between two places outside the Republic who has not entered the
Republic through a port of entry as defined in the Immigrations Act 13 of 2002 is
deemed to be outside of the Republic.
Scholarships and bursaries
A bona fide scholarship or bursary granted to enable or assist a person to study at a
recognised educational or research institution is exempt from normal tax in terms of
section 10(1)(q). Section 10(1)(qA) exempts the same but for persons with a disability.
‘To study’ refers to the formal process whereby the person to whom the scholarship
or bursary has been granted gains or enhances their knowledge, intellect or expertise.
It is not a requirement that a degree, diploma or certificate be awarded on completion
of the course. Scholarships and bursaries awarded solely on merit are always ex-
empted (and not only for employees).
Interpretation Note No. 66, which deals with the taxation of scholarships and bursa-
ries, provides the following guidelines:
• Financial assistance provided in terms of a bona fide scholarship or bursary could
include the cost of:
– tuition fees;
– registration fees;
– examination fees;
– books;
– equipment relating to the studies;
– accommodation (other than at home);
– meals or vouchers; and
– transport.
• A direct payment of fees to an institution that is included in the value of the bur-
sary, which must be granted to study at a recognised educational or research insti-
tution, including a foreign research institution, if the qualification obtained is
recognised in South Africa.
Personal study loans obtained from financial institutions or employers are not
included in this exemption as they are not gross income.

REMEMBER

• Scholarships and bursaries granted to a relative of an employee who retired are subject
to the same conditions as bursaries granted to a relative of a current employee.
• Research is not considered to be studying and will not qualify for an exemption in
terms of this section.
• A scholarship or bursary that is granted subject to repayment if all the conditions
stipulated are not met will be treated as a bona fide bursary until non-compliance
occurs. In the year the non-compliance occurs, a taxable fringe benefit will arise.
• A reward or reimbursement to an employee for a qualification or for having successfully
completed a course or to assist in covering private study expenses is taxable remuneration.

Scholarships or bursaries paid to non-employees

These scholarships and bursaries are awarded based on merit and are not subject to
normal tax. These bursaries are not confined to employees or relatives of employees.

251
A Student’s Approach to Taxation in South Africa 6.3

Employers to employees
In terms of section 10(1)(q) and (qA), where the scholarship or bursary is granted by
an employer (or associated institution) to an employee, it will only be exempt where
the employee agrees to reimburse the employer if they fail to complete their studies
for reasons other than death, ill-health or injury.

Employers to relatives of employees

Persons without disabilities
Bursaries or scholarships granted to relatives of an employee are exempt up to an
amount of:
• R20 000 in respect of grade R to grade 12 (in terms of the South African Schools
Act) or a qualification to which an NQF level 1−4 has been allocated;
• R60 000 in respect of a qualification to which an NQF level 5 up to and including
10 has been allocated.

Persons with disabilities

Where the bursary or scholarship is granted to a person with a disability who is a
member of the family of the employee (in respect of whom the employee is liable for
family care and support), the bursary is exempt up to an amount of
• R30 000 in respect of grade R to grade 12 (in terms of the South African Schools
Act) or a qualification to which an NQF level 1−4 has been allocated;
• R90 000 in respect of a qualification to which an NQF level 5 up to and including
10 has been allocated.
‘Disability’ is defined in section 6B and
means a moderate to severe limitation of any person’s ability to function or perform
daily activities as a result of a physical, sensory, communication, intellectual or mental
impairment, if the limitation—
(a) has lasted or has a prognosis of lasting more than a year; and
(b) is diagnosed by a duly registered medical practitioner in accordance with criteria
prescribed by the Commissioner.
Where the employee has a remuneration proxy of more than R600 000, the full schol-
arship or bursary will be taxed.
‘Remuneration proxy’ is defined as the remuneration derived by the employee in the
previous year of assessment (excluding the cash equivalent of residential accommo-
dation).
If the employee was not employed for a full year in the previous year, the remunera-
tion proxy will have to be determined in the ratio that 365/366 days bears to the
period of employment.
With effect from the 2022 year of assessment, where the remuneration proxy is sub-
ject to a salary sacrifice the scholarship/bursary will be taxed.
A salary sacrifice occurs when an employee’s cash salary is reduced in exchange for a
non-cash benefit. Where remuneration is reduced because the employer grants the
scholarship/bursary, the receipt of the scholarship/bursary will not be exempt.

252
6.3 Chapter 6: Income exempt from tax

6.3.4 Investment income

South African interest
In terms of section 10(1)(i ), a taxpayer (only natural persons) under the age of 65 is
entitled to an exemption of up to R23 800 and a taxpayer over the age of 65 is entitled
to an exemption of up to R34 500 against interest accrued from a source in the Repub-
lic (excluding interest from tax free investments).

Interest and dividends received from tax free investments (section 12T)
Interest received or accrued from a tax free investment (as defined in section 12T) is
exempt from income tax.
A tax free investment must meet the following four requirements:
• It must be issued by:
– a bank;
– a long-term insurer;
– a portfolio of a collective investment scheme in property;
– a portfolio of a collective investment scheme in securities; or
– the government of the Republic (national sphere).
• It must be administered by:
– an authorised user; or
– an administrative FSP (financial service provider).
• It must be held by:
– a natural person;
– the deceased estate; or
– the insolvent estate of a person.
• It must meet the requirements of a tax free investment in accordance with either:
– the Policyholder Protection Rules under the Long-term Insurance Act; or
– the regulations contemplated in the Collective Investment Schemes Control Act.
An amount received or accrued from a tax free investment by a natural person is
exempt from normal tax. The disposal of a tax free investment will also not be subject
to capital gains tax.
The amount contributed to these investments (in total) is limited to R36 000 per year of assess-
ment and R500 000 in total (excluding reinvestment of interest). Where a person exceeds these
limits, a penalty of 40% on the excess contribution will be levied as deemed normal tax paya-
ble.

253
A Student’s Approach to Taxation in South Africa 6.3

Example 6.3
In each of the following case studies you are required to calculate the taxpayer’s ‘income’.
Taxpayer A B C D
Age 48 35 76 68
Foreign interest earned – R2 900 R3 000 R600
South African interest earned (not from
a tax free investment) R15 000 R24000 R27 000 R39 500
Interest received – tax free investment – – 1 900 –

Solution 6.3
A B C D
R R R R
Gross income
Foreign interest – 2 900 3 000 600
South African interest 15 000 24 000 27 000 39 500
Interest received – tax free investment – – 1 900 –
15 000 26 900 31 900 40 100
Less: Exempt income
Tax free investment interest (1 900)
South African interest (15 000) (23 800) (27 000) (34 500)
Income nil 3 100 3 000 5 600

Taxpayer A in the above question would like to know the following:

1. Why is my South African interest included in the gross income if it is
exempt?
2. A taxpayer is entitled to R23 800 exemption in respect of interest, why
did they only receive an exemption of R15 000?

2024 amendment
From 1 March 2022, where a person has a year of assessment of less than 12 months the
interest exemption will be applied pro rata.

Dividends (other than foreign dividends and headquarter company dividends)

The owners of a company are called ‘shareholders’ and the owners of a close corpor-
ation are called ‘members’. The Act refers to both as a ‘holder of shares’.
A company’s profits are distributed to the shareholders by means of dividends. For
tax purposes, a profit distributed by a close corporation to a member is also regarded

254
6.3 Chapter 6: Income exempt from tax

as a dividend. Paragraph (k) of the definition of ‘gross income’ in section 1 specifically

includes an amount received or accrued by way of dividends and foreign dividends.
Shareholders (who are normally the beneficial owners of the dividends) are also sub-
ject to dividends tax on the dividends paid to them by a company. The company is
responsible for withholding the dividends tax on the dividends paid.
Resident natural persons who receive dividend payments will receive an amount net
of dividends tax. The gross amount of the dividend that is received by or accrues to
that person must be included in gross income and declared in the person’s income tax
return (ITR12). Non-resident individuals may qualify for a reduced rate of dividends
tax in terms of the relevant DTA if the requirements are met.
In terms of section 10(1)(k), dividends (other than dividends paid or declared by a
headquarter company) received by or accrued to a taxpayer are exempt from normal
tax. Some dividends, however, are not exempt (remain taxable) according to this
section. The following dividends are not exempt:
• dividends that are part of an amount that is paid in the form of an annuity;
• a dividend (other than dividends paid to a non-resident or as consideration for the
acquisition of a share) declared by a real estate investment trust (REIT) or a con-
trolled company in respect of the REIT. A REIT is a resident company if its shares
are listed on the JSE. A controlled property company is a subsidiary of a REIT.
From 1 January 2019 a REIT could also be listed on one of the four new South Afri-
can stock exchanges if they meet certain requirements;
• a dividend from a restricted equity instrument (as defined in section 8C). Where
the restricted equity instrument constitutes an equity share or an equity instrument
(as defined) or an interest in a trust, the dividend is exempt. Excluded from this
provision are dividends that are derived from or constitute:
– an amount that the company used as consideration for a share in that company;
– an amount received or accrued in the course (or anticipation of) winding up,
liquidation, deregistration or final termination of a company; or
– an equity instrument that is not a restricted equity instrument (as defined in
section 8C) but will on vesting, become subject to section 8C;
• certain dividends received by companies.

Taxable dividends from a REIT (section 10(1)(k)(aa))

REITs and controlled companies are subject to a special tax regime under sec-
tion 25BB of the Act. For a company to qualify as a REIT it must be a resident compa-
ny of which the equity shares are listed on a South African exchange. The equity
shares of that company must further be listed as shares in a REIT as defined in terms
of the listing requirements of that exchange. A ‘controlled company’ is defined as a
company that is a subsidiary, as defined in IFRS, of a REIT.

REMEMBER

• To qualify as a REIT, the resident company’s equity shares must be listed on a South
African exchange. The mere listing of non-equity shares, for example preference shares,
will not be sufficient for that company to qualify as a REIT.

255
A Student’s Approach to Taxation in South Africa 6.3

Normal tax consequences for the REIT

A REIT or controlled company that is a resident may deduct the amount of any
‘qualifying distribution’ from its income.
‘Qualifying distributions’ are certain interest and dividend declarations determined
with reference to the financial results of the company as reflected in the financial
statements prepared for that year of assessment, if 75% or more of the gross income
of the company consisted of ‘rental income’ as defined in section 25BB(1). The 75% -
threshold must be met in the current year of assessment if it is the first year that the
company qualifies as a REIT. Thereafter, the 75%-threshold must be met in the year
preceding the current year of assessment.
A REIT or controlled company must further disregard any capital gains or losses on
the disposal of immovable property, a share or linked unit in a company that is a
REIT on the date of disposal and a share in a company that is a controlled company
on the date of disposal (section 25BB(5)).
A REIT or controlled company is not allowed to deduct the capital allowances in
terms of section 11(g), 13, 13bis, 13ter, 13quat, 13quin or 13sex (section 25BB(4)).
Where a foreign dividend is received by or accrues to a REIT or controlled company,
the participation exemption that applies where a person holds at least 10% of the
equity shares and voting rights in the company declaring the foreign dividend, (refer
to 11.14.5.3) will not apply.
Normal tax consequences for the holder of shares in a REIT
Dividends received from a REIT or controlled company are not exempt from normal
tax, unless the dividend is distributed to a non-resident or is distributed as considera-
tion for the acquisition of any share in the REIT or controlled company (sec-
tion 10(1)(k)(i)(aa)).
Any dividend paid by a REIT or controlled company (which is received or accrued
before 1 January 2014) is exempt from dividends tax to the extent that it does not
consist of a dividend in specie (section 64F(2)). Interest paid in respect of a linked unit
by a REIT or controlled company is deemed to be a dividend paid for dividends tax
purposes (section 25BB(6)(c)).

Example 6.4
Company A is a REIT as defined. For the current year of assessment, the company received
taxable rental income of R100 000. The full R100 000 was distributed to Company B, a resi-
dent, as a dividend.
You are required to explain the tax implications of the above in respect of the current year
of assessment.

256
6.3 Chapter 6: Income exempt from tax

Solution 6.4
R
Company A – REIT
Taxable rental income 100 000
Less: Distribution to shareholders (section 11(a) deduction) (100 000)
Taxable income nil
Company B
Taxable section 25BB dividend received 100 000
No exemption for the dividend in terms of section 10(1)(k)(i)(aa) as Company B
is not a non-resident. The dividend will therefore be subject to normal tax in the
hands of Company B. The dividend will be exempt from dividends tax under
section 64F(l) as the dividend constitutes income of the beneficial owner, Com-
pany B..

Taxable dividends received from collective investment schemes (section 10(1)(iB))

Dividends received or accrued from a collective investment scheme in securities are
taxable in the hands of the holder of the participatory interest in certain cases. When
income is received by or accrues to such a portfolio, the portfolio is treated as a con-
duit pipe and when amounts are then distributed to the holder, the income retains its
nature.
Holders can then use the available exemptions for the income based on the nature of
the income received. Therefore, if dividends are received, use section 10(1)(k) (local
dividends) or section 10B (foreign dividends) or if interest is received, use sec-
tion 10(1)(i) (local interest) or section 10(1)(h) (interest received by non-residents),
provided that the requirements for these exemptions are met.
The distribution by a portfolio of a collective investment scheme in securities to its
holders should be within 12 months after the amount has been received by or accrued
to the portfolio. If the amount is not distributed by the portfolio within the said
period, it is deemed to have accrued to that portfolio on the last day of the 12-month
period and the portfolio will be taxed on such revenue.
Any amount (other than an amount of a capital nature) distributed by a portfolio
after expiry of the 12-month period, which is deemed to have accrued to the portfolio
and was therefore subject to normal tax in the hands of the portfolio, will be exempt
from normal tax in the hands of the holder (section 10(1)(iB)).

Example 6.5
Suppose Company B in the previous example is a portfolio of a collective investment
scheme in securities and also received other South African dividends amounting to
R50 000 and taxable interest amounting to R30 000 during the current year of assessment.
During the current year of assessment, Company B distributes 40% of its current year’s
income to Mr Tjombe, who is 67 years old.
You are required to explain the income tax implications of the above for the current year of
assessment.

257
A Student’s Approach to Taxation in South Africa 6.3

Solution 6.5
R
Company B
Taxable section 25BB dividends received from Company A 100 000
South African dividends received 50 000
Interest income received 30 000
Less: Amount distributed to Mr Tjombe (distributed within 12 months after
received or accrued to the portfolio, therefore deemed to accrue directly
to the holder). (72 000)
- From taxable section 25BB dividend (R100 000 × 40% = R40 000)
- South African dividend (R50 000 × 40%= R20 000)
- Interest income (R30 000 × 40% = R12 000)
Undistributed income 108 000
Undistributed income 108 000
Less: Exempt local dividends – section 10(1)(k) (R50 000 – R20 000) (30 000)
Taxable income 78 000
Mr Tjombe’s taxable income:
Taxable section 25BB portion of distribution 40 000
South African dividend portion of distribution 20 000
Local dividend exemption – section 10(1)(k) (20 000)
Interest portion of distribution 12 000
Interest exemption – section 10((1)(i) (R34 500 limited to amount actually
accrued) (12 000)
Taxable income 40 000

Other taxable dividends (section 10(1)(k)(i)(dd) to (jj))

Any dividends received by or accrued to or in favour of a person are taxable where:
• that dividend was received or accrued in terms of a restricted equity instrument as
defined in section 8C, unless certain exceptions apply (section 10(1)(k)(i)(dd));
• the dividends was received by or accrued to a company in consequence of a ces-
sion of the right to that dividend or the exercise of the discretionary power of a
trustee of a trust unless the cession or exercise results in the holding by that com-
pany of all rights attaching to a share (section 10(1)(k)(i)(ee));
• the dividend was received by or accrued to a company in respect of borrowed
shares or shares that are identical to borrowed shares (section 10(1)(k)(i)(ff) and
(gg));
• any dividend received by or accrued to a company in respect of a share to the
extent that the aggregate of such dividends does not exceed the aggregate of any
deductible expenditure incurred by the company and the amount of such expendi-
ture was determined directly or indirectly with reference to the dividend in respect
of an identical share to that share (section 10(1)(k)(i)(hh));
• a dividend received by or accrued to a company in respect of services rendered or
to be rendered in respect of or by virtue of employment or the holding of an office,
other than a dividend received or accrued in respect of a section 8C restricted equi-
ty instrument (section 10(1)(k)(i) and (ii)), for example in the case of a personal ser-
vice provider (refer to 11.4.2); and

258
6.3 Chapter 6: Income exempt from tax

• notwithstanding the provisions of paragraphs (dd) and (ii), specific types of divi-
dends relating to a restricted equity instrument as defined in section 8C that was
acquired in the circumstances contemplated in section 8C (section 10(1)(k)(i)(jj) and
(kk)).
Foreign dividends and headquarter company dividends (sections 1 and 10B(1))
A foreign dividend is an amount paid by a company that is not a resident, in respect
of a share in that company. In terms of section 10B foreign dividends and dividends
paid or declared by head-quarter companies are subject to certain exemptions. A
reference to a foreign dividend includes a headquarter company dividend, as a head-
quarter company is treated as a foreign company for normal tax purposes.
A headquarter company is a resident company where:
• each of the shareholders holds at least 10% of the equity shares of the company;
• 80% or more of the assets of the company are attributable to an interest in the
equity shares of a foreign company;
• the company holds at least 10% of the equity shares of a foreign company; and
• more than 50% of the gross income must consist of rental, dividend interest, royal-
ties or service fees paid by a foreign company if the gross income of the company
exceeds R5 million.
Full exemptions (section 10B(2))
All foreign dividends are included in full in gross income. However, the following
dividends are exempt:
• Participation exemption (section 10B(2)(a)) – the foreign dividend is exempt if
received by a person who holds at least 10% of the equity share and voting rights
in the company declaring the foreign dividend. This exemption only applies when
the dividend is paid in respect of an equity share.
• Country-to-country participation exemption (section 10B(2)(b)) – a foreign company
is allowed to claim an exemption on a foreign dividend paid by another foreign
company which is in the same country. This exemption is only applicable to compa-
nies.
The participation exemption and the country-to-country participation exemption
do not apply to the foreign dividend to the extent that it is deductible by the for-
eign company in the determination of their taxable income in the country where
they have their place of effective management.
• Previously taxed exemption (section 10B(2)(c)) – foreign dividends that are
received by a resident from profits that have already been taxed in terms of sec-
tion 9D, are exempt.
• JSE-listed shares (section 10B(2)(d)) – foreign dividends (not dividends in specie)
paid by companies that are listed on the JSE are taxed in terms of dividends tax
and are therefore not subject to normal tax.

259
A Student’s Approach to Taxation in South Africa 6.3

REMEMBER

• An equity share is a share in a company, excluding a share that does not have the right
to participate beyond a specified amount in a distribution (of dividends or of capital).
This means that, in order to be an equity share, there must be an unlimited right to par-
ticipate in company distributions.

Partial exemption (section 10B(3))

The total amount of foreign dividends received or accrued during a year of assess-
ment not otherwise exempt, qualifies for further exemption in terms of this formula
in section 10B(3):
A =B × C where
A: the amount exempt for the year of assessment.
B: 25 / 45 (natural person, deceased estate, insolvent estate or trust) or otherwise
7 / 27 (in the case of a company).
C: the aggregate of all foreign dividends receive by or accrued to the person dur-
ing the year of assessment that is not exempt above.
The full and partial exemptions for foreign dividends do not apply to the following:
• Payments made out of foreign dividends received by or accrued to any person (section
10B(5) or foreign dividends paid in the form of an annuity (refer to 11.14.6).
• Foreign dividends received or accrued in respect of services rendered or to be rendered
or by virtue of employment or the holding of an office (section 10B(6)).
• Foreign dividends that are received by or accrued to a company in respect of a share,
to the extent that such foreign dividends do not in total exceed the deductible expendi-
ture incurred by that company. This only applies to deductible expenditure that is de-
termined directly or indirectly with reference to a foreign dividend in respect of an
identical share in relation to the share in that foreign company (section 10B(6A)).

REMEMBER

• The foreign dividend exemptions (discussed above) do not apply to an annuity or to

any amounts paid out of previously exempt dividends.

Example 6.6
Simon Tshabalala earned foreign dividends of R2 400. They are not subject to any of the
specific exemptions.
You are required to calculate the taxable portion of the foreign dividends.

260
6.3 Chapter 6: Income exempt from tax

Solution 6.6
R
Gross income: Foreign dividends received 2 400
Less: Section 10B(3) exemption (R2 400 × 25 / 45) (1 333)
Taxable portion 1 067

In terms of section 23(q), deductions in respect of expenditure incurred in the production

of income from foreign dividends are not allowed. Residents are also entitled to a rebate
or credit for direct foreign taxes paid in respect of foreign dividends (refer to chapter 12).
Taxable dividends received by way of annuity
Section 10(2)(b) provides that a dividend received by way of an annuity loses its
exemption in terms of section 10(1)(k). Similarly, section 10B(5) stipulates that the
foreign dividend exemptions under section 10B(2) and (3) does not apply in respect of
foreign dividends received by way of an annuity. All dividends received by a taxpay-
er by way of an annuity are therefore taxable in full.
Capital element of purchased annuity
The definition of gross income specifically includes the annuity amount calculated in
terms of section 10A(1) in the gross income of the purchaser.
This exemption ensures that the capital portion (that was already subject to tax) of a
purchased annuity is exempt from tax.
The capital portion is calculated in terms of the following formula:
A
Y = ×C
B
where:
Y is the capital element to be calculated;
A is the total cash price payable by the purchaser to the insurance company in
terms of the annuity contract;
B is the sum of all the expected returns over the term of the contract; and
C is the total receipt during the current year of assessment.
Once the capital portion has been calculated, it is deducted from the amount received
in terms of the annuity and the balance (or return on the amount that was invested) is
taxable.

Example 6.7
On 1 August 2021, when Chris Gray was 56 years old, he purchased an annuity from an
insurer. He paid R250 000 for the annuity and receives a monthly annuity of R2 000 from
1 September 2021 for the rest of his life. His life expectancy, according to the tables in
Appendix C, is 17,18 years (based on his age when the annuity contract was concluded).
You are required to calculate the taxable amount of the annuity received for the current
year of assessment.

261
A Student’s Approach to Taxation in South Africa 6.3

Solution 6.7
The total expected returns from the purchased annuity amount to
R2 000 × 12 months × 17,18 years = R412 320.
In the formula
A
Y= ×C
B
A = R250 000 (total cost price)
B = R412 320 (expected returns)
C = R2 000 × 12 months = R24 000 (receipts in current year)
R250 000
Y= × R24 000
R412 320
Y= R14 551,80
The taxable portion of the annuity is therefore:
Total amount received for the year – capital portion (as calculated)
= R24 000 – R14 551,80
= R9 448,20
Where the capital portion of the annuity is indicated in terms of section 10A(4) as a per-
centage, the percentage is
R250 000
× 100 = 60,63%
R412 320
Alternatively, the tax-free portion can be calculated as follows:
60,63% of R24 000 = R14 551,20
The portion of the annuity that will be included in Chris’ gross income for the current year
of assessment is R9 448,80 (R24 000 – R14 551,20).

Note
You may find small differences due to rounding.

Why is the current year of assessment’s taxable amount for the annuity not
reduced pro rata?

262
6.3 Chapter 6: Income exempt from tax

REMEMBER

Calculating the expected returns of an annuity:

• If the annuity is purchased for a fixed term, that is to say ten years, you must use ten
years when calculating the expected return.
• If the annuity is purchased for the rest of the purchaser’s life, you must use the pur-
chaser’s life expectancy according to the tables in Appendix C, based on his age when
the annuity contract was concluded.
• If the annuity is purchased in a foreign currency and the annuity is payable in a foreign
currency, the exempt capital portion of the annuity must first be determined in the
foreign currency. The exempt portion must then be converted to rand using the average
exchange rate.

6.3.5 Other exemptions

Alimony received
Section 10(1)(u) provides that an amount received by or accrued to a person from
their spouse or former spouse by way of alimony, allowance or maintenance for
themselves in terms of an order of judicial separation or divorce is exempt from
taxation if the proceedings were instituted after 21 March 1962 or in terms of an
agreement of separation entered into after that date.
In ITC 1584 56 SATC 63, it was held that the provisions of section 10(1)(u) also apply
to exempt amounts paid by the estate of a deceased former spouse in pursuance of an
obligation to pay maintenance.

Example 6.8
Ms Nkele Matuang (40 years of age), who is resident in the Republic, received the follow-
ing amounts during the year of assessment:
R
Compensation in terms of the Workmen’s Compensation Act for an injury suf-
fered while on duty 30 000
Unemployment Insurance Fund compensation for the period 1 July to
31 December while she was unemployed 13 900
Salary for the period 1 January to 28 February, as a trainee game ranger 25 600
Uniform allowance for the period 1 January to 28 February in respect of a dis-
tinctive uniform she was required to wear while on duty 1 600
During this period she received a scholarship from her employer to study for a
game ranger’s certificate on a part-time basis at the local University of Technol-
ogy (she has to pay the scholarship back if she does not pass the course) 15 000
When she was first employed, her employer paid the cost of transferring her
personal belongings to her place of employment, as well as the cost of her hotel
for the first month. The value of these amounted to 26 000
Taxable foreign dividends 3 800
Interest on a South African investment (not a tax free investment) 20 000
Nkele’s gross income amounts to 135 900
You are required to calculate Nkele’s income for the current year of assessment.

263
A Student’s Approach to Taxation in South Africa 6.3–6.4

Solution 6.8
The following amounts are exempt from normal tax:
R
Compensation in terms of the Workmen’s Compensation Act –
section 10(1)(gB) 30 000
Benefit in terms of the Unemployment Insurance Act 63 of 2001 –
section 10(1)(mB) 13 900
Uniform allowance for a special uniform to be worn while on duty –
section 10(1)(nA) 1 600
Bona fide scholarship to study at a recognised educational institution –
section 10(1)(q) 15 000
Cost of transfer paid by her employer, as well as the cost of temporary
accommodation (up to 183 days permitted) – section 10(1)(nB) 26 000
Foreign dividends (R3 800 × 25 / 45) – section 10B(3) 2 111
Interest – she is entitled to an exemption of up to R23 800 as she is
under 65 years of age – however, she only received R20 000, therefore the full
amount is exempt – section 10(1)(i) 20 000
108 611
Nkele’s income in terms of the definition in section 1 of the Act is
therefore determined as follows:
Gross income 135 900
Less: Exempt income (108 611)
Income 27 289

REMEMBER

• The list contains gross income that is exempt from taxation due to the nature or type of
income.
• In order to exempt an amount, it must have been included in gross income.
• You can never exempt more than taxpayers have included in their gross income.
• There is a difference between an exemption and a deduction in the sense that to be able
to claim an exemption you have to earn the particular type of income (as listed). By con-
trast, a deduction depends on the nature of the expense.

6.4 Summary
Although an amount is included in gross income in terms of the definition, in certain
cases, owing to its nature, it is exempt from taxation in terms of the specific provi-
sions discussed in this chapter. This chapter focuses mainly on the exemptions based
on the nature of the income, for example interest, dividends, bursaries, gratuities etc.
In terms of the Act, a taxpayer’s income is their gross income less exempt income. The
concept of income is important as the deduction of certain expenses depends on the
amount of the taxpayer’s income.
In the questions that follow, the principles as discussed in the chapter are highlighted.

264
6.5 Chapter 6: Income exempt from tax

6.5 Examination preparation

Question 6.1
The following taxpayers are uncertain whether or not the amounts listed below constitute
exempt income:
1. Simon Shabalala is a retired miner. During the current year of assessment he received
the following amounts:
R
Pension received for past services rendered 120 000
Pension received for a disease contracted during employment at the mine 60 000
The R60 000 is payable under law relating to the payment of compensation for diseases
contracted by persons employed in the mining industry.
2. Major Peter Sinclair received a war pension of R12 000 for the current year of assess-
ment.
3. Kirsh Naidoo (40 years old) received R24 800 interest from a bank investment
account and reinvested the full interest amount during the current year of assessment.
She also received interest of R800 from a tax free investment during the current year
of assessment.
4. During 2000, Pieter and Sandra Pietersen separated and divorced. Pieter pays alimony
to Sandra to finance her living costs. Pieter passed away on 31 July 2021. Prior to his
death, he had created a trust to ensure that Sandra would still receive alimony after
his death.
During the current year of assessment, she received the following amounts:
R
Alimony received from Pieter for the period before his death 40 000
Alimony received from the trust 56 000

You are required to:

Discuss whether the above amounts are exempt from normal tax.

265
A Student’s Approach to Taxation in South Africa 6.5

Answer 6.1
Discussion of whether the amounts are exempt from tax.
1. Simon Shabalala will be taxed on the pension received for past services rendered as it
is related to services rendered. The pension in respect of a disease contracted in
mining operations will be exempt in terms of section 10(1)(g).
2. In terms of section 10(1)(g), Major Peter Sinclair will not be taxed on the war pension
received, as this type of income is exempt from tax.
3. Kirsh Naidoo will be taxed on the interest received. In terms of section 10(1)(i), a
taxpayer under the age of 65 is entitled to an exemption of R23 800, thus Kirsh will be
taxed on R1 000 (R24 800 – R23 800) for the current year of assessment.
She will not be taxed on the interest from the tax free investment.
4. In terms of section 10(1)(u), the alimony received by Sandra Pietersen from her former
spouse and the trust (after his death) will be exempt from tax.

Additional questions for this chapter are available electronically

www.myacademic.co.za/books

266
 General deduction
7 formula

Gross Exempt Taxable Tax

– – Deductions =
income income income payable

General Deductions
Specific Capital
deduction for
deductions allowances
formula individuals

Page
7.1 Introduction............................................................................................................ 268
7.2 Carrying on a trade (section 1) ............................................................................ 268
7.2.1 General ...................................................................................................... 268
7.3 The general deduction formula (sections 11(a) and s 23(g)) ............................ 271
7.3.1 Expenditure and losses ........................................................................... 272
7.3.2 Actually incurred ..................................................................................... 273
7.3.3 Year of assessment ................................................................................... 277
7.3.4 In the production of income ................................................................... 278
7.3.5 Not of a capital nature ............................................................................. 287
7.3.6 Laid out or expended for the purposes of trade (section 23(g))......... 293
7.4 Prohibited deductions (section 23) ...................................................................... 293
7.4.1 Private maintenance expenditure (section 23(a)) ................................. 293
7.4.2 Domestic or private expenditure (section 23(b)) .................................. 293
7.4.3 Recoverable expenditure (section 23(c)) ............................................... 295
7.4.4 Interest, penalties and taxes (section 23(d)) .......................................... 295
7.4.5 Provisions and reserves (section 23(e)).................................................. 295
7.4.6 Expenditure incurred to produce exempt income (section 23(f)) ...... 295
7.4.7 Non-trade expenditure (section 23(g)) .................................................. 295
7.4.8 Notional interest (section 23(h)) ............................................................. 295
7.4.9 Deductions against fund lump sums (section 23(i)) ............................ 295

267
A Student’s Approach to Taxation in South Africa 7.1–7.2

Page
7.4.10 Expenditure incurred by labour brokers and personal
service providers (section 23(k)) ............................................................. 296
7.4.11 Restraint of trade (section 23(l)) ............................................................. 296
7.4.12 Expenditure relating to employment or holding of an office
(section 23(m)) ........................................................................................... 296
7.4.13 Unlawful activities (section 23(o)) .......................................................... 298
7.4.14 Cessation of policies of insurance (section 23(p)) ................................ 298
7.4.15 Expenditure incurred in the production of foreign dividends
(section 23(q)) ............................................................................................ 298
7.4.16 Premiums in respect of insurance policies (section 23(r)) .................. 298
7.5 Specific transactions .............................................................................................. 299
7.6 Summary................................................................................................................. 303
7.7 Examination preparation ...................................................................................... 303

7.1 Introduction
In the process of determining the taxable income, certain expenses incurred are
deducted from the income. If you are in the process of calculating a taxpayer’s taxable
income, you will have to know which amounts of the expenditure may be deducted,
as a taxpayer would like to be able to deduct as much of their expenses as possible.
Section 11 of the Act makes provision for the deduction of expenses from a taxpayer’s
taxable income. Section 11(a) contains the requirements for deductions of a general
nature, while section 11(c) to (x) makes provision for specific deductions. Before any
of the provisions contained in section 11 can be applied, the Act specifies that the
taxpayer must be carrying on a trade.

7.2 Carrying on a trade (section 1)

7.2.1 General
As stated above, for an amount to be deductible in terms of section 11 of the Act, the
taxpayer must be carrying on a trade.

Legislation:
Section 11: Preamble
for the purpose of determining the taxable income derived by any person from carrying on
any trade, there shall be allowed as deductions from the income of such person so derived
...

The deductions provided for in section 11 are restricted to expenditure incurred in

carrying on a trade. ‘Trade’ is defined in section 1 of the Act.

268
7.2 Chapter 7: General deduction formula

Legislation:
Section 1: Interpretation
‘Trade’ every profession, trade, business, employment, calling, occupation or venture,
including the letting of any property and the use of or the grant of permission to use any
patent . . . or any design . . . or any trade mark . . . or any copyright . . . or any other
property which is of a similar nature.

Although this definition is very wide, it does not include all forms of income-
producing activities. Passive investment activities are not considered to be trading
activities. For example, activities producing interest, dividends, annuities and pen-
sions are not included in the definition of trade. The extent of the activities might,
however, indicate that you are carrying on a trade. When a taxpayer speculates in
securities or shares, for instance, this constitutes carrying on a trade and even if the
scale of investment in securities or shares is not very extensive, it may amount to
carrying on a trade (ITC 770 (1953) 19 SATC 216).
The earning of interest by a taxpayer other than a moneylender does not constitute
‘carrying on a trade’. In theory, no deduction will be allowed for an expense incurred
in earning the interest income. In Practice Note No. 31, however, the Commissioner
indicated that they will allow the deduction of interest expenditure incurred in
earning the interest income, but limited to the amount of the interest income. The
interest expenditure cannot create a loss.
A taxpayer may also carry on several trades during the year of assessment, but, in
order to determine ‘taxable income’, the income or losses from each trade must be
aggregated. The insertion of section 20A limits the setting-off of losses of different
trades in certain circumstances of a natural person. This limitation only applies to
natural persons. This aspect is discussed in detail in chapter 12.
The definition of trade includes a ‘venture’, which has been held to be a transaction in
which a person risks something with the object of making a profit, for example
financial or commercial speculation (ITC 368 9 SATC 211).
There is some confusion concerning the question of whether a profit motive is neces-
sary before it can be said that a taxpayer is carrying on a trade. In ITC 1292 41 SATC
163, Judge Myburgh said that the test for deductibility of expenditure is ‘the real hope
to make a profit. Such hope must not be based on fanciful expectations but on
reasonable possibility’. In CIR v De Beers Holdings (Pty) Ltd 46 SATC 47, it was held
that ‘the absence of a profit does not necessarily exclude a transaction from being part
of a taxpayer’s trade’ and in ITC 1274 40 SATC 185, the court held that there is no
requirement in our Income Tax Act that the taxpayer concerned should be aiming at a
net profit in their trading operations. A trader may deliberately sell articles at a loss
‘for business purposes’.
In carrying on a trade, therefore, there should preferably be a profit or an expectation
of profit. If a transaction is entered into with the purpose of not making a profit or
in fact registering a loss, it must then be shown to have been so connected with the
pursuit of the taxpayer’s trade so as to justify the conclusion that, despite the lack
of profit motive, the moneys paid out under the transaction were wholly and
exclusively expended for the purposes of trade (CIR v De Beers Holdings). The court
will look at all the facts and circumstances in deciding the issue.

269
A Student’s Approach to Taxation in South Africa 7.2

In Burgess v Commissioner for Inland Revenue 55 SATC 185 the court provided some
guidelines for determining whether a person is busy with trading activities.

CASE:
Burgess v Commissioner for Inland Revenue
55 SATC 185
Facts: The taxpayer operated a scheme ruled that if the actions of a taxpayer,
where it borrowed money from a bank and when viewed in isolation, constitute the
invested in an insurance company for a carrying on of a trade, he would not cease
short period in a single-premium pure carrying on that trade merely because one
endowment policy. The stock market of his purposes, or even his main purpose,
crashed and the value of the fund plum- was to obtain some tax advantage. If he
meted, resulting in the accounts reflecting carries on a trade, his motive for doing so
a loss due to interest payable to the bank. is irrelevant. The definition of ‘trade’
The taxpayer had provided a bank guaran- should be given a wide interpretation and
tee and the cost thereof was the only includes a ‘venture’, being a transaction in
which a person risks something to make a
outlay on the part of the individual in-
profit. The taxpayer clearly undertook a
vestor. The policy was a non-standard pol-
venture in that he laid out the money
icy and the proceeds on maturity fell
required to obtain a bank guarantee and
within the investor’s gross income. One of
risked the amount of the guarantee in the
the selling points of the scheme was that it hope of making a profit – it was a specu-
provided certain tax advantages. No part lative enterprise par excellence. The invest-
of the structures could be described as ment in the insurance policy did not con-
artificial, as each one was designed for a stitute a capital asset – the scheme was a
commercial purpose. The taxpayer had short-term speculation with borrowed
testified that the tax savings generated by money and the intention was to surrender
the scheme did not play a substantial part the policy after a year or two so as to
in his decision to participate in the scheme realise the appreciation of its underlying
and that it was the prospect of profit as assets.
contained in the brochure’s profit forecasts
Principle: In order to claim an amount
that had attracted him.
under section 11, it is necessary for a tax-
Judgment: No part of the structures was payer to be ‘carrying on a trade’. The fact
artificial as each step was designed for a that there is no continuity, or there is a lack
commercial purpose. Although there was of a profit motive or risk, does not neces-
an expected benefit by reason of the tax sarily mean that a trade is not being
deferment (namely that interest became carried on. However, the taxpayer’s bur-
due before any profit was realised), it was den of proof increases when one or the
not contrived in an artificial way. The courts other element is not present.

While the ‘facts and circumstances’ test is generally appropriate, special concern
exists when taxpayers disguise private consumption. Private consumption can often
masquerade as a trade (that is to say it is in fact a hobby) so that individuals can set
off these expenditures and losses against other income (usually salary or professional
income) (refer to chapter 13).

270
7.2–7.3 Chapter 7: General deduction formula

REMEMBER

• Passive investment activities that produce interest and dividends do not form part of
carrying on of a trade. Interest and dividend income are, however, still included in
gross income since there is no ‘trade’ requirement for an amount to be included in gross
income.
• A profit motive is not a prerequisite for the carrying on of a trade.
• If no trade is carried on, there can be no deduction in terms of section 11.

7.3 The general deduction formula (sections 11(a) and 23)

Deductions of a general nature need to fulfil the requirements set out in section 11(a). This
section, when read with section 23, is referred to as the general deduction formula:
• section 11(a) sets out the requirements for what may be deducted (positive test); and
• section 23 stipulates what may not be deducted (negative test).

Legislation:
Section 11(a)
[f]or the purpose of determining the taxable income derived by any person from carrying
on any trade, there shall be allowed as deductions from the income of such person so
derived . . . expenditure and losses actually incurred in the production of the income, pro-
vided such expenditure and losses are not of a capital nature.

This so-called ‘general deduction formula’ will be broken down into its components,
each of which will be discussed briefly:
• carrying on a trade (refer to 7.2 and 7.3.6);
• expenditure and losses (refer to 7.3.1);
• actually incurred (refer to 7.3.2);
• during the year of assessment (refer to 7.3.3);
• in the production of income (refer to 7.3.4);
• not of a capital nature (refer to 7.3.5); and
• laid out or expended for the purposes of trade (refer to 7.3.6).

REMEMBER

• All the components of the general deduction formula must be present for an expense to
be deductible.

271
A Student’s Approach to Taxation in South Africa 7.3

7.3.1 Expenditure and losses

Section 11(a) contemplates the deduction of both expenditure and losses. The Act has
not defined the word ‘loss’, but, in Joffe & Co (Pty) Ltd v CIR 13 SATC 354, the court
held that the meaning in the context was ‘somewhat obscure’ and did not appear to
mean anything different from expenditure:
[T]he word is sometimes used to signify a deprivation suffered by the loser, usually an
involuntary deprivation, whereas expenditure usually means a voluntary payment of
money.
Deductible expenditure is not restricted to expenditure in cash, but includes the outlay
of amounts in a form other than cash. The cost to the taxpayer of the asset given instead
of cash is allowed as a deduction, but no value may be placed on the taxpayer’s own
labour where the asset was created by them. A taxpayer may, for example, exchange an
asset they have made for trading stock to be sold in their business operation. The cost of
the trading stock that may be deducted in terms of section 11(a) will be limited to the
cost of the components incorporated in the asset they have made and bartered, and no
deduction may be claimed in respect of their own labour, even though the market
value of the asset they have created may be substantially higher than this cost. Where
the taxpayer has acquired an asset as trading stock, other than by purchase, for
example by inheritance or donation, the value of the asset is allowed as a deduction.
The value is usually the fair market value of the asset on the date of acquisition by the
taxpayer.

Example 7.1
Grande Leather (Pty) Ltd manufactures leather purses. Due to cash flow constraints, the
company was unable to pay for the latest consignment of leather, costing R25 000. Grande
Leather (Pty) Ltd offered the supplier a delivery motorcycle with a market value of
R28 000 in settlement of the consignment of the leather.
You are required to discuss the deductibility of the amounts.

Solution 7.1
Grande Leather (Pty) would be able to deduct the market value of the delivery
motorcycle in respect of the purchase of the leather (R28 000). Expenses and losses do not
only include amounts payable in cash, as long as the consideration has a determinable
money value.

REMEMBER

• Expenses need not be in cash only. They can be in a form other than cash, for example a
trade-in of an asset as part of the payment of an expense incurred.

272
7.3 Chapter 7: General deduction formula

7.3.2 Actually incurred

Expenditure that may be deducted includes both amounts paid and amounts for
which the taxpayer has incurred a liability (Caltex Oil (SA) Ltd v SIR 37 SATC 1).
Therefore, a taxpayer may deduct expenses actually paid and amounts owing.
Expenditure actually incurred does not mean amounts that are due and payable. The
taxpayer may have incurred a liability, which is payable only after the end of the year
of assessment, and it would still be deductible. There are three specific cases that you
need to take note of when determining if an amount is actually incurred, namely
Nasionale Pers Bpk v Kommissaris van Binnelandse Inkomste 48 SATC 55, Edgars Stores
Ltd v Commissioner for Inland Revenue 50 SATC 81, and Commissioner for Inland Revenue
v Golden Dumps (Pty) Ltd 55 SATC 198.

CASE:
Nasionale Pers Bpk v
Kommissaris van Binnelandse Inkomste
48 SATC 55
Facts: The taxpayer claimed a provision of service, half the amount of the anticipated
one month’s salary for bonuses to be paid bonus payable on 30 September if then still
to staff. The financial year end of the tax- in the taxpayer’s employ.
payer was 31 March but the bonus would
only be paid on 30 September of that year. Judgment: The future uncertain event
The policy in regard to the bonus reads as (namely whether the employee would be
follows: ‘The annual holiday bonus is in the taxpayer’s employ on 31 October) to
equal to a full month’s salary for officials which the legal obligation to pay a holiday
who have completed a full year’s service bonus to an employee was made subject,
and pro rata less for officials who have was an event which fell outside the year of
completed less than a full year’s service. A assessment of the taxpayer. Therefore the
bonus will only be paid to officials who are question whether the taxpayer was in law
in service on 31 October. The full amount
obliged to pay a holiday bonus to an em-
of the bonus will be recovered from an
ployee could only be answered on 31 Octo-
official who after payment thereof gives
notice of termination of service and leaves ber, and not 31 March. The provision for
the service before 31 October.’ The tax- the bonus had, accordingly, not been actu-
payer accepted that the bonus – pro rata to ally incurred until that date.
length of service – was immediately pay- Principle: If a payment is conditional on the
able in the case of an employee whose happening of an event, whether suspensive
service terminated through retirement on (coming into effect immediately, but sus-
attaining retirement age, or by reason of
pended until the c ondition had been met) or
ill-health or upon re-organisation of the
taxpayer’s activities or, in the case of resolutive (not effective until the condition
female employees, by reason of pregnancy. has been met), the expense is only actually
In its accounts as at 31 March, the tax- incurred once the condition has been met.
payer’s practice was to include, in the case Until the condition has been met, it remains a
of an employee who already had six months’ contingent liability that is not tax deductible.

273
A Student’s Approach to Taxation in South Africa 7.3

This principle was confirmed in Edgars Stores Ltd v Commissioner for Inland Revenue.

CASE:
Edgars Stores Ltd v Commissioner for Inland Revenue
50 SATC 81
Facts: The taxpayer entered into several Judgment: The crucial issue was whether
lease agreements for premises on which it the conditions relating to the turnover
would conduct its businesses. The rental rental created a contingent obligation which
was determined as a ‘basic rental’ (paid was incurred, if at all, only at the end of
monthly) and a ‘turnover rental’ (to be the annual lease period or whether the
calculated if the annual turnover exceeded provisions of the lease gave rise to an
a specific amount). The ‘turnover rental’ unconditional obligation, the quantifica-
could only be ascertained subsequent to tion of which took place at the end of the
the last day of the taxpayer’s year of lease year. The court ruled that the obli-
assessment in many instances (where the gation to pay turnover rental is contingent
financial year end of the taxpayer was dif- until the turnover for the lease year is
ferent to the end of the lease year). The dis- determined; thus the expenditure was not
pute with the Commissioner only related actually incurred in a year of assessment
to those instances where the lease year that ended prior to the termination of the
ended after the taxpayer’s year of assess- lease year and therefore could not be
ment and the liability to pay turnover deducted in that tax year.
rental could not be determined before the Principle: Before an expense can be
end of the taxpayer’s tax year. Included in deducted in terms of section 11(a), it must
the rental expenses claimed for tax pur- be unconditional; that is to say the expense
poses were two amounts representing must not be contingent; the event must
genuine estimates (the accurate figures not have taken place. It does not matter that
being available yet) of the respective the condition imposed is resolutive (not
amounts by which the turnover rentals effective until the condition has been met) or
exceeded the basic rentals in the years in suspensive (coming into effect imme-
question. These estimated rentals were dis- diately, but suspended until the condition
allowed by the Commissioner. had been met).

274
7.3 Chapter 7: General deduction formula

In Commissioner for Inland Revenue v Golden Dumps (Pty) Ltd, the court ruled on when
a liability becomes unconditional in the event of a dispute.

CASE:
Commissioner for Inland Revenue v
Golden Dumps (Pty) Ltd
[2011] 55 SATC 198
Facts: A dispute arose between the tax- Only if the claim is admitted, or if it is
payer and a former employee which result- finally upheld by the decision of a court or
ed in the taxpayer withholding the deliv- arbitrator, will a liability arise. If at the end
ery of shares previously promised to the of a tax year the outcome of the dispute is
employee. The employee instituted legal undetermined, the liability has not been
proceedings to compel the delivery of the actually incurred and cannot be claimed.
shares promised. The legal proceedings At the end of the 1981 year of assessment,
were instituted in 1981 but the action was the outcome of the action instituted by the
only heard in 1983. The appeal by the employee was undetermined. The liability
employee to the Appellate Division was on the part of the taxpayer was then ‘no
upheld in 1985. The taxpayer was then more than impending, threatened, or
ordered to deliver the shares promised to expected’. The ultimate outcome was only
the employee. The taxpayer claimed the known upon the delivery of the Appellate
cost of the shares awarded as a deduction Division’s judgment, which lay four years
in terms of section 11(a). The Commis- in the future. Accordingly, the expenditure
sioner contended that the expenditure on in question was ‘actually incurred’ in 1985
the shares had been ‘actually incurred’ and not 1981.
during the 1981 year of assessment when
Principle: If the outcome of a bona fide
the action had been instituted. The tax-
legal dispute is unresolved by the end of
payer countered that the expenditure was
the year of assessment of a taxpayer, any
‘actually incurred’ only in 1985 when the
possible compensation payable is only
dispute was finally resolved.
incurred when the dispute is settled. If a
Judgment: A liability is only contingent in dispute goes to court, it is only when the
a case where there is a claim which is final court renders its decision that the
genuinely disputed and not vexatiously or expenditure is actually incurred (that is, the
frivolously made for the purposes of delay. decision is not taken on appeal).

In Port Elizabeth Electric Tramway Company v CIR 8 SATC 13, Acting Judge
Watermeyer stated the following about the meaning of ‘actually incurred’: ‘But
expenses actually incurred cannot mean ‘actually paid’. So long as the liability to pay
them actually has been incurred they may be deductible.’ In Ackermans Limited v the
Commissioner for the South African Revenue Services [2010] ZASCA 131, the court found
that contingent liabilities transferred to a purchaser were not costs incurred and were,
therefore, not deductible.
Before it may be said that expenditure has actually been incurred, there must be a
clear legal liability to pay at that particular time (ITC 1094 28 SATC 275). Where the
item of expenditure in question is the subject of a bona fide dispute, the court has
held (ITC 1499 53 SATC 266) that it lacks the degree of certainty and finality to render it
actually incurred. In C: SARS v Labat (2011), the Appeal Court considered the
implications of issuing shares.

275
A Student’s Approach to Taxation in South Africa 7.3

CASE:
Commissioner for South African Revenue Service v
Labat Africa Ltd
[2011] ZASCA 157
Facts: The company purchased a trade- Principle: The court found that the issue
mark from the seller and instead of paying of shares was not ‘expenditure actually
cash, the company entered a sale of busi- incurred’ and that the taxpayer cannot
ness agreement, in terms of which it issued deduct the cost. The court indicated if
a part of its own authorised share capital. two separate contracts existed, one to buy
Judgment: The question was whether the the trademark and a second to issue the
issue of authorised capital was an ‘expend- shares, the cost would have been
iture actually incurred’ for the purposes of deductible.
section 11(gA) of the Income Tax Act.

A distinction must also be made between expenditure that is subject to a contingency,

and expenditure that cannot be quantified but is estimated on the last day of the year of
assessment and quantified in a subsequent year. Expenditure is incurred when the
event giving rise to the liability occurs. The fact that the expenditure that will arise
from the event cannot be quantified with precision does not disqualify it as a deduc-
tion. Expenditure subject to contingency will not qualify as a deduction.
Where a person acquires an asset for an unquantifiable amount, section 24M provides
that the unquantifiable portion of the amount will be deemed to be incurred in the
year of assessment in which it can be quantified.
With regard to the date upon which an unconditional legal liability was incurred, the
contract relating to the particular transaction may determine that date. The deduct-
ibility of payments made in advance of the date on which the taxpayer has a legal
obligation to pay therefore presents a problem. Section 23H may, however, place a
limitation on the deduction of the amount that may be claimed for tax purposes in
respect of prepaid expenses.
Finally, it may be noted that the words actually incurred do not mean ‘necessarily
incurred’. It is not within the power of SARS to dictate how a taxpayer should
operate their business by determining whether it was necessary for an item of
expenditure to have been incurred. If the actual expenditure complies with all the
requirements of the general deduction formula, it cannot be disallowed on the
grounds that it was not ‘necessarily’ incurred. The meaning of actually incurred is
therefore wider than that of necessarily incurred.

Example 7.2
Jan Els has his own biltong retail outlet. His shop is situated in a shopping centre. He
pays a monthly rental of R10 000 on the 28th of each month. Apart from the R10 000, he
must also pay 2% rental based on his annual turnover for the period 1 April 2022 to
31 March 2023 if the annual turnover exceeds R500 000. His turnover for the period from
1 April 2022 to 31 March 2023 amounted to R580 000.
You are required to discuss the deductibility of the above amounts for the current year of
assessment ended 28 February 2023.

276
7.3 Chapter 7: General deduction formula

Solution 7.2
The monthly rental of R10 000 is actually incurred and will be deductible. The rental
based on annual turnover exceeding R500 000 depends on a condition and there is no
definite and absolute liability to pay this amount at the end of his year of assessment
(28 February 2023), therefore it has not been actually incurred yet and is not deductible in
the 2023 year of assessment.

REMEMBER

• ‘Incurred’ means an unconditional liability to pay the expense that was incurred.
• The actual payment of the expenditure is not essential for the deduction of the expend-
iture.

REMEMBER

• Specific sections have been added to the Act, resulting in the issuing of shares to
acquire assets (including stock) being seen as expenditure actually incurred.

7.3.3 Year of assessment

The accounting concept of ‘matching’ often requires expenditure to be carried
forward to a subsequent year, or back to an earlier year, for the purposes of financial
reporting. For income tax purposes, the courts have held that deductible expenditure
can be deducted only in the year of assessment in which it was incurred. If expend-
iture is not deducted in the year of assessment in which it was incurred, it can never
be claimed (COT v A Company 41 SATC 66).
For income tax purposes, the expenditure will be incurred and deductible during the
current year of assessment, while for accounting purposes, it might be dealt with as
‘prepaid expenditure’. There is one exception to this rule. This is where the provisions
of section 23H provide that the deduction of a prepaid expense must be spread over
the period to which the expense relates. Section 23H has very specific requirements
relating to the deductibility of prepaid expenditure. Prepaid expenditure is, for
example, where an insurance premium is paid up front for 18 months.

REMEMBER

• The general rule for income tax is that expenditure can be deducted only in the year of
assessment in which it was incurred. If it is not deducted, it cannot be claimed in a
future year of assessment, except where section 23H applies to prepaid expenses (refer
to chapter 8).

277
A Student’s Approach to Taxation in South Africa 7.3

7.3.4 In the production of income

In terms of section 11(a), deductible expenditure is restricted to expenses incurred ‘in
the production of income’. Income is arrived at by the deduction of exempt amounts
from gross income, while capital amounts are excluded from the definition of gross
income. Expenditure incurred in the production of exempt income or capital income
is therefore not allowed as a deduction. There has been a line of decisions by our
courts on whether an expense is incurred in the production of income. However, the
very first case to establish the basis of the rules developed over the years is Port
Elizabeth Electric Tramway Co Ltd v CIR 8 SATC 13.

CASE:
Port Elizabeth Electric Tramway Company Ltd v
Commissioner for Inland Revenue
8 SATC 13
Facts: The taxpayer company carried on the business of the company and the
business as a tramway transporter. A employment of drivers carried with it, as a
driver of one of its tram-cars lost control necessary consequence, a potential liability
while descending a steep gradient. He died to pay compensation if such drivers were
sometime afterwards as a result of the injured in the course of their employment,
injuries sustained in the accident. A claim the payment made by the company by way
for damages was lodged against the tax- of compensation was to be regarded as part
payer in terms of the Workman’s Compen- of the cost of the company’s operations for
sation Act. The Cape Provincial Division of the purpose of earning income and was
the Supreme Court compelled the taxpayer thus deductible. The legal costs incurred in
to pay an amount as compensation to the resisting the claim for compensation had
driver’s widow. In addition, the taxpayer not been expended in an operation entered
also incurred legal costs in resisting the upon for the purpose of earning income and
claim. The taxpayer claimed these two were not allowable as a deduction.
amounts as a deduction, but these claims Principle: The test (called the ‘inevitable
were disallowed by the Commissioner. concomitant’ or ‘closely connected’test)
Judgment: Section 11(a) permits the firstly required that the purpose (task per-
deduction of all expenses attached to the formed) of the expenditure must be estab-
performance of a business operation lished. Next, it should be determined
that is bona fide performed for the purpose whether the task was necessary and
of earning income regardless of whether whether an expected or foreseeable risk
such expenses are necessary for its perform- attached to that task. Thus, it should be
ance or attached to it by chance, provided asked whether the expense is so closely
they are so closely connected with it that connected with the income earned that it
they may be regarded as part of the cost of may be regarded as part of the cost of per-
performing it. As the employment of forming it. Note that the deductibility of
drivers was necessary for carrying on of legal costs is determined by section 11(c).

Over the years, this basic principle was developed further in Joffe & Co (Pty) Ltd v
Commissioner for Inland Revenue 13 SATC 354, Sub-Nigel Ltd v Commissioner for Inland
Revenue 15 SATC 381, Commissioner for South African Revenue Service v BP South Africa
(Pty) Ltd 68 SATC 229 and Commissioner for Inland Revenue v Drakensberg Garden Hotel
(Pty) Ltd.

278
7.3 Chapter 7: General deduction formula

CASE:
Joffe & Co (Pty) Ltd v Commissioner for Inland Revenue
13 SATC 354
Facts: The taxpayer company carried on Judgment: The expenditure had not been
business as engineers in reinforced con- incurred for the purpose of earning profits,
crete. A concrete hood (tower) for a power nor, as it had not been established that
station which they were supervising, col- negligent construction was a necessary
lapsed, and a workman employed by the concomitant of the trading operations of a
building contractor was killed by the fall- reinforced concrete engineer, had it been
ing material. In a delictual action, it was incurred for the purposes of the taxpayer’s
established that the taxpayer company had trade. The legal expenses were also not
been negligent in the performance of its deductible.
work and it was required to pay damages Principle: Compensation paid is dis-
to the relatives of the deceased workman. allowed as a deduction if the negligent
The Commissioner disallowed the claim action is not a necessary concomitant of the
for compensation as well as the legal costs trading operations.
incurred in defending the action.

CASE:
Sub-Nigel Ltd v Commissioner for Inland Revenue
15 SATC 381
Facts: The taxpayer company carried on Judgment: The expenditure upon premiums
the business of mining for gold. It made a was incurred for the purpose of earning
practice of taking out policies of insurance income in the event of certain happenings
against loss incurred by fire in respect of net and was not of a capital nature. As any
profits and standing charges. The insurance amount received under the policies would
against the loss of net profits was under- constitute a trading receipt, the expend-
taken in order to enable the company to iture on the premiums had been laid out or
maintain a steady rate of dividend to its expended for the purposes of the tax-
shareholders, notwithstanding a cessation payer’s trade. The premiums of the poli-
of operations in part or in whole by reason cies were admissible expenditure.
of fire. The insurance in respect of standing
Principle: Section 11(a) does not require
charges was designed to enable the com-
that claimable expenditure must have pro-
pany to carry on its essential services with-
duced income in the same year it was
out loss, notwithstanding any such cessation
incurred.
of mining operations. These insurance pre-
miums were claimed as a deduction by the
taxpayer although no insurance claims
were received during that year.

279
A Student’s Approach to Taxation in South Africa 7.3

CASE:
Commissioner for Inland Revenue v Drakensberg
Garden Hotel (Pty) Ltd
23 SATC 251 (A) – 1960
Facts: The taxpayer, a private company, shares and the production of the rental
leased a hotel from another private com- income were sufficiently closely connected
pany (known as the Stiebel company) for to allow a deduction of the interest paid.
4¼ years. It then sub-let the hotel to a part- Judgment: The court held that the tax-
nership who thereafter ran the hotel. A payer’s purpose in buying the shares was
farm on which there was a trading store, is not to secure dividend income, but to en-
surrounded by the hotel premises. The tax- sure the taxpayer’s control of its revenue-
payer leased the store initially from one of producing asset and thereby securing the
the Stiebel company’s two shareholders continuance of an increased income from
and then later from the Stiebel company his trading/business operations. Therefore
itself. So at this point in time the taxpayer the payment of interest and the production
held two leases from the Stiebel company. of income were sufficiently close to allow
The taxpayer then acquired all the shares the deduction.
in the Stiebel company for the purpose of Principle: Interest paid on a loan to
obtaining absolute control over the hotel acquire shares can be deductible, if the tax-
and store premises (thus to secure and payer’s purpose with the acquisition of the
preserve the two leases). Interest was shares is to ensure the continuance of his
payable on the outstanding balance of the business activities. The new section 24)
purchase price of the shares. The court had confirms and extends the principle in this
to decide whether the purchase of the case.

The principles developed several years ago were recently confirmed in Commissioner
for South African Revenue Service v BP South Africa (Pty) Ltd.

280
7.3 Chapter 7: General deduction formula

CASE:
Commissioner for South African Revenue Service v
BP South Africa (Pty) Ltd
68 SATC 229
Facts: The taxpayer company, being a mar- Judgment:
keter of petroleum products, was wholly
• In regard to the first claim, the loan
owned by a British parent company. Two
was not required to pay the dividend.
items of expenditure were at stake.
Therefore, the purpose of the loan was
• The first claim concerned interest paid to continue its income-producing activ-
on a loan from its parent company, ities. The interest paid on the loan was
which at the same time required that thus an expense incurred in order to
dividends be declared quarterly. The produce income.
company had sufficient funds to pay
the full dividends without any loan • In regard to the second claim, the lump
from the parent. However, the loan sum payments were more closely
was required for the purchase of related to the taxpayer’s income-earn-
capital equipment so that the business ing structure than its income-producing
could expand. If the dividends had not operations, as they were incurred not
been declared, the taxpayer could have to carry on the business of the tax-
funded the purchase out of its own payer, but to establish it. The nature of
funds. The obtaining of the long-term the advantage obtained, namely to en-
loan also enabled the company to make sure that the taxpayer’s products
additional local borrowings (local bor- would be sold from the leased prem-
rowings were restricted in the case of a ises for a substantial period, resulted in
foreign-owned company). the expenditure being of a capital na-
ture. Accordingly, expenses had to be
• The second claim concerned a lump
deducted in terms of section 11(f) –
sum ‘up front’ rental payment in re-
deduction of lease premiums.
spect of leases which endured for some
20 years. The purpose of the lump sum Principle: The principle established in PE
payments ‘up front’ was to secure sites Electric Tramways (that the purpose of the
from which the taxpayer’s petrol could expenditure must be looked at to deter-
be sold and from which income would mine whether such expenditure produces
be produced for 20 years. income as defined) is confirmed.

The purpose of the expenditure is an important consideration. If the purpose is to

earn a return that does not fall within the definition of income, or to preserve capital,
for example by preventing the partial or total extinction of the business from which the
taxpayer’s income was derived, the expenditure is not deductible (CIR v African
Greyhound Racing Association (Pty) Ltd 13 SATC 259). It is not necessary that the expense
produces the income in the current year of assessment for it to be deductible.
It is also possible that expenditure is incurred for more than one purpose. In a
number of reported cases, the main purpose was taken into account; in others,
apportionment was applied. The case that determined the principle to be applied
where expenditure is incurred with more than one purpose is Commissioner for Inland
Revenue v Nemojim (Pty) Ltd 45 SATC 241.

281
A Student’s Approach to Taxation in South Africa 7.3

CASE:
Commissioner for Inland Revenue v Nemojim (Pty) Ltd
45 SATC 241
Facts: The taxpayer company was a share- Judgment: The taxpayer had a dual pur-
dealing company, making profits from pose, namely the receipt of moneys on
buying and selling shares in dormant com- resale of the shares (which would consti-
panies holding cash reserves available tute income in its hands) and the receipt of
for distribution by way of dividends. a dividend after declaration thereof (exempt
In common terms, it carried on dividend- income in its hands). The expenditure in
stripping operations. When the company issue thus did not pass the dual test of
was so ‘stripped’, the taxpayer sold the sections 11(a) and 23(f) of the Act and
shares at a loss (because all the reserves therefore it would be appropriate to apply
had by that time been declared as divi- the principle of apportionment. Thus, only
dends). The dividends received by the a proportion of the expenditure on the
taxpayer were exempt from tax and the shares would qualify as a deduction.
whole loss on the sale of the shares was
Principle: Where expenditure is incurred
claimed as a deduction being offset against
for two purposes and only one of those
a bag-cleaning business operated by the
qualified for deduction, the expenditure
company. The Commissioner limited the
can be apportioned. Note that section 23(g)
loss on the sale of the shares to the
now allows apportionment where there is
proceeds received for the shares.
trade and non-trade or private-purpose
expenditure.

Example 7.3
Karin Marais operates a catering business from home. She does catering for office parties
and meetings. During June, she calculated that 80% (R50 000) of her grocery purchases
related to her catering business. During the same month, she paid her domestic worker an
extra R5 000 for her help in the preparation of the food.
You are required to discuss the deductibility of the above amounts for the current year of
assessment.

Solution 7.3
The R50 000 (80%) of her grocery purchases and the R5 000 paid to her domestic worker
are deductible in terms of section 11(a), as these expenses were incurred in the production
of her catering income. The 80% of the grocery purchases as well as the ‘wage’ of R5 000
relate to her trading activities.

With regard to the closeness of the connection, the court held, in CIR v Hickson
23 SATC 243, that expenditure would be regarded as part of the cost of performing
the income-earning operations if ‘it would be proper, natural or reasonable to regard
the expenses as part of the cost of performing the operation’.

282
7.3 Chapter 7: General deduction formula

Theft
In regard to losses resulting from theft or embezzlement, these are losses attached to
the business operations by chance. They will be deductible provided they are so
closely connected to the operation that they may be regarded as part of the cost of
performing it. Theft of trading stock by third parties in a supermarket, for example,
would fall into this category.
In relation to ‘employee theft’, the court held in COT v Rendle 26 SATC 326 that the
expenditure
was sufficiently closely connected with the firm’s business operations as to be
regarded as part of the cost of performing those operations.
In ITC 1221 36 SATC 233, it was confirmed that theft losses by a managing director, a
director or a manager in the position of a proprietor will not be deductible. In
ITC 1242 37 SATC 306, it was held that,
as a prerequisite to deductibility the taxpayer must establish that the risk of the loss
which he seeks to deduct from his income is inseparable from, or a necessary ingre-
dient of, the carrying on of the particular business.
This case also involved junior employees.
In ITC 1383 46 SATC 90, which dealt with defalcations by a senior employee of a
bank, it was held that the risk of theft is inherent in and an inseparable element of
such business and the loss in issue was therefore deductible.

Example 7.4
Fastway (Pty) Ltd has a takeaway outlet that only operates on a cash basis. During the
current year of assessment it came to their attention that the cashier stole money from the
cash register amounting to R10 000. During the year, the company was also robbed of
takings of the day during an armed robbery. The loss amounted to R7 500. Fastway (Pty)
Ltd was not insured for such losses.
You are required to discuss the deductibility of the above amounts for the current year of
assessment.

Solution 7.4
Fastway (Pty) Ltd will be able to deduct both amounts during the current year of
assessment as they are closely connected to the operation of a cash-based business and
the risk of theft can be regarded as part of the cost of performing such a business.

Social responsibility expenses

In Warner Lambert SA (Pty) Ltd v Commissioner for South African Revenue Service, the
court had to decide if costs incurred that related to social responsibility spending is
deductible for income tax purposes.

283
A Student’s Approach to Taxation in South Africa 7.3

CASE:
Warner Lambert SA (Pty) Ltd v Commissioner for South
African Revenue Service
65 SATC 346
Facts: The taxpayer, an American-owned a capital nature since the purpose of the
South African company operating in South expenditure was to protect the taxpayer’s
Africa during the height of the apartheid income-earning structure.
regime, had joined an association of local Judgment: The money spent by a taxpayer
signatories of the Sullivan Code in 1978. in order to advance the interests of the
Subsequently, the USA promulgated the group of companies to which it belonged
Comprehensive Anti-Apartheid Act 1986, was not regarded as expenditure in the pro-
which compelled American companies and duction of income. The link between the
their subsidiaries operating in South Africa expenditure and the production of income
to comply with the Sullivan Code principles. was too tenuous; moneys expended by a
If they did not comply, fines and even taxpayer from motives of pure liberality
imprisonment for the directors of the also failed to qualify as expenditure in the
American holding company could be im- production of income. The evidence on the
posed. The Sullivan Code principles pro- appellant’s behalf was to the effect that the
vided for the non-segregation of races in purpose of the Sullivan Code expenditure
the workplace, equal and fair employment was not merely to serve a social responsi-
for all employees, equal pay, the devel- bility but also to insure against the risk of
opment of training programmes, in- losing its treasured subsidiary status. It was
creasing the number of disadvantaged true that the link between the appellant’s
persons in management and supervisory trade and the social responsibility expend-
positions, and improving the quality of iture was not as close and obvious in the
employees’ lives outside the work environ- second category (social spending) as in the
ment. The social responsibility expenses first (increased wages), but that did not
incurred in complying with the Sullivan mean that the connection was too remote.
Code principles, namely the expenses If the appellant had lost its subsidiary
incurred in ‘Working to Eliminate Laws status, it might have directly brought
and Customs that Impede Social, Eco- about the loss of all kinds of trade advan-
nomic and Political Justice’, which was tages and it was therefore unthinkable that
the seventh principle of the Sullivan the appellant would not comply with the
Code, were claimed by the taxpayer as Sullivan Code. The Sullivan Code expenses
deductions. The taxpayer contended that it were therefore bona fide incurred for the
was instructed by its American parent to performance of its income-producing opera-
incur expenses that went with the perform- tion and formed part of the cost of per-
ance of its Code obligations and if it failed forming it, and therefore the social respon-
to do so, it would almost certainly have sibility expenditure was incurred for the
suffered a loss of income. Such expen- purposes of trade and for no other. The
diture included participation in national expenses incurred by the appellant were
conventions, peace initiatives, providing not of a capital nature, as no asset was cre-
information, technology support, adopting ated or improved. The appellant’s income-
schools and helping small businesses start earning structure had been erected long
up operations. The Commissioner dis- ago and it was now a question of protect-
allowed the social responsibility expenses ing its earnings. The periodic payments
claimed on the basis that the expenditure made were to preserve it from harm, or at
had not been incurred in the production of least to avert the risk of harm and therefore
taxpayer’s income and was expenditure of these payments were similar to

continued

284
7.3 Chapter 7: General deduction formula

insurance premiums and of a revenue the production of income. However, as the

nature. Accordingly, the expenditure in social responsibility expenditure reduced
issue was deductible in terms of section the risk that the appellant might lose its
11(a) read with section 23(g). subsidiary privileges and it was linked
Principle: Money spent by a taxpayer in closely enough to the company’s trading
order to advance the interests of the group activities, the court found that no capital
of companies to which it belongs, and asset was created or improved by the
money expended from motives of pure lib- expenditure, which was therefore deduct-
erality, are not regarded as expenditure in ible.

Recurrent expenses
There are certain recurrent expenses that are not incurred in the production of
income, such as accounting fees. Practice Note No. 37 provides for the deduction of
fees paid to accountants, bookkeepers and tax consultants for the completion of
income tax returns for taxpayers whose remuneration includes income such as
commission, or for taxpayers who earn income in the form of interest or dividends, as
well as administration fees charged by institutions administering the affairs of
pensioners. In the case of Commissioner for the South African Revenue Service v Mobile
Telephone Networks Holdings (Pty) Ltd the court considered whether these costs should
be apportioned where both taxable and exempt income is earned.

285
A Student’s Approach to Taxation in South Africa 7.3

CASE:
Commissioner for the South African Revenue Service
v Mobile Telephone Networks Holdings (Pty) Ltd
(966/12) [2014] ZASCA 4
Facts: The taxpayer, a holding company, Judgment: The Supreme Court held that in
has five subsidiaries and a number of order to determine whether moneys out-
indirectly held subsidiaries and joint ven- laid by a taxpayer constitute ‘expenditure
tures. The company is a wholly owned incurred in the production of the income’,
subsidiary of a listed entity and the collect- it is important to consider the purpose of
ive business of this group of companies is the expenditure and its underlying cause.
the provision of mobile telecommunication The court thus had to assess the closeness
networks and related services. The tax-
of the connection between the expenditure
payer’s business activities comprised the
and the taxpayer’s income-earning oper-
earning of dividends from the holding of
ations. It agreed with the Tax Court’s
shares in its subsidiaries, as well as the
provision of loans. The provision of loans, conclusion that ‘the auditing of financial
in turn, comprised loan funding to its sub- records is clearly a function which is
sidiaries (mainly interest-free) and loan “necessarily attached” to the performance
funding as part of a debenture scheme of the taxpayer company’s income-earning
arrangement whereby the taxpayer com- operations’. In this case the expenditure
pany borrowed funds (through the issue was incurred for a dual or mixed purpose,
of debentures) and then loaned the funds therefore an apportionment of such
to group companies at a higher interest expenditure should take place. The appor-
rate. The taxpayer thus had two sources of tionment that should be used is dependent
income, that is to say dividend income on the facts of each case, but must be fair
(exempt income) and interest income and reasonable. In this case the taxpayer
(taxable income). company’s value lay in its principal busi-
The taxpayer had claimed the deduction of ness as a holding company. It appears that
the audit fees incurred in respect of the the audit time spent specifically on divi-
annual statutory audit of the company’s dend and interest entries made up a rela-
financial statements for each of the 2001 to tively small component of the overall audit
2004 years of assessment. In addition, the time. The audit function involved the
taxpayer also claimed a professional fee auditing of the taxpayer company’s affairs
(training fee) incurred during its 2014 year as a whole, the major part of which con-
of assessment, for the ‘implementation, cerned the consolidation of the subsid-
adjustment, fine tuning and user operation iaries’ results into the taxpayer company’s
of a new accounting computer system’. results. Therefore the apportionment must
The Commissioner for SARS disallowed be heavily weighted in favour of the dis-
the professional fee deduction in full on allowance of the deduction given the pre-
the basis that the expense was capital in dominant role played by the taxpayer com-
nature. The Commissioner apportioned the pany’s equity and dividend operations as
deduction of the audit fees incurred for opposed to its far more limited income-
each year of assessment, on the basis of the earning operations.
ratio between the interest income and the
dividend income. Since the dividend The court then ruled that it would be fair
income comprised the bulk of the tax- and reasonable that only 10% of the audit
payer’s income each year, the bulk of the fees be allowed. As the taxpayer gave
audit fees was disallowed every year, inadequate evidence with regards to the
leaving a small percentage of between 2% professional fee, the court had to rule that
and 6% that was allowed as a deduction in the professional fee was disallowed in
each of the relevant years of assessment. full.

286
7.3 Chapter 7: General deduction formula

Ex gratia payments
A taxpayer who makes voluntary payments related to their trade still qualifies for a
deduction, as was the case in PROVIDER v Commissioner of Taxes, Southern Rhodesia
17 SATC 40.

CASE:
PROVIDER v Commissioner of Taxes, Southern Rhodesia
17 SATC 40
Facts: The taxpayer started two schemes Judgment: There are no clear distinctions
for the benefit of its employees – a ‘Life that could be drawn between the two sets
Assurance Scheme’ and a ‘Service Bonus of payments since both were clearly
Scheme’. Both schemes were non-con- designed by the taxpayer to induce its
tributory and could be withdrawn from employees to enter and remain in its ser-
at will by the company. In terms of vice. Both payments were validly deduct-
the schemes, the company undertook to ed as constituting expenditure actually
pay, firstly, a bonus on retirement to any incurred in the production of income.
employee who had been in the company’s
service for a certain period, and, secondly, Principle: To be incurred ‘in the produc-
a benefit to the dependants of men tion of income’ does not mean that a tax-
who died in the company’s service, the payer is legally obliged to incur the expen-
amount of the bonus or benefit, as the diture. Ex gratia payments made by an
case might be, being graduated for the employer to promote happy and content-
service of the employee and calculated ed staff may also qualify for a deduction
based on the length of employment. The under section 11(a) under certain con-
Commissioner allowed the deduction of ditions, namely if there is a contract in
the bonuses but not the benefits paid to existence with an employee for a deferred
their dependants. payment on retirement or if there is an
established policy to that effect.

REMEMBER

• Expenses must be incurred for the purpose of earning income.

• Expenses incurred in respect of exempt income, for example dividends, are not deductible.
• Expenses need not lead to income in order to be deductible.
• Expenses must be a necessary closely-connected risk of the business or trade carried on
in order to be deductible.

7.3.5 Not of a capital nature

Just as capital receipts are excluded from the definition of gross income, so too is
capital expenditure prohibited by section 11(a). It is very important to understand
that the tests to determine whether an amount from a gross income point of view is of
a capital nature or not (refer to chapter 2) are different from those used to determine
whether expenditure is of a capital or revenue nature. As in the case of capital
receipts, the Act does not define or explain what constitutes capital expenditure, and
it was said in Sub-Nigel Ltd v CIR 15 SATC 381 that it is impossible to give a definition
of what is expenditure of a non-capital nature which will act as a touchstone in
deciding all possible cases.

287
A Student’s Approach to Taxation in South Africa 7.3

The courts have, however, established certain tests or norms that are of assistance
when determining the capital or revenue nature of a specific type or class of expend-
iture. In New State Areas Ltd v CIR 14 SATC 155, Judge Watermeyer describes the first
of the tests that can be used.

CASE:
New State Areas Ltd v Commissioner for Inland Revenue
14 SATC 155
Facts: The taxpayer company carried on Judgment: The payments made in respect
the business of gold mining. The company of the internal sewers were of a capital
was legally required to install a system nature, being the payment of instalments
of water-borne sewerage and to link up towards the acquisition of an asset owned
with the local authority’s system. The by the company. The payments made in
system installed consisted of sewers and respect of the external connections, which
connections upon the company’s own pro- did not produce any permanent asset, con-
perty and sewers upon land outside the stituted a charge for the use of the local
company’s property linking the system authority’s system, which remained a
into the local authority’s main system. The recurrent business charge.
system was installed at the local authority’s Principle: Expenditure is to be regarded as
cost but this was recovered by way of part of the cost of performing income-
charges payable by the company over earning operations, or as part of the cost of
60 months for the cost of the system on its establishing or improving or adding to the
own property (which would become its income-earning structure, the so-called
own property) and over 180 months for the ‘operations vs structure’ test. The other
cost of the system which was not located tests used for assistance in deciding the
on the local authority’s property. When matter were the ‘fixed vs floating capital’
claimed as a deduction, the Commissioner test; the test to establish whether there was
disallowed all the monthly amounts any enduring benefit or permanent asset
payable to the local authority as being created by the expenditure, and even the
expenditure of a capital nature. recurrence test, which is not of much use.

Other tests that were established can be summarised as follows:

• The true nature of the transaction The true nature is a matter of fact and the pur-
pose of the expenditure is an important factor – if it is incurred for the purpose of
acquiring a capital asset for the business, it is capital expenditure, even if it is paid
in annual instalments.
• Closeness of the connection to the income-earning operations One of the matters
to be taken into consideration is the closeness of the connection of the expenditure
to the income-producing structure as against the closeness of the connection to the
income-earning operations. This test was amplified in CIR v Genn & Co (Pty) Ltd
20 SATC 113, where it was held that the court has to
assess the closeness of the connection between the expenditure and the income-
earning operations, having regard both to the purpose of the expenditure and to
what it actually effects.

288
7.3 Chapter 7: General deduction formula

In CIR v George Forest Timber Co Ltd 1 SATC 20 it was held that

money spent in creating or acquiring an income-producing concern must be capital
expenditure. It is invested to yield future profit; and while the outlay does not recur
the income does. There is a great difference between money spent in creating or
acquiring a source of profit, and money spent in working it. The one is capital
expenditure the other is not . . . in the one case it is spent to enable the concern to
yield profits in the future, in the other it is spent in working the concern for the
present production of profit.
In BPSA (Pty) Ltd v The Commissioner for SARS [2007] SCA 7 (RSA), 69 SATC 79, it
was held that recurrent rent paid for the use of another’s property was expenditure
incurred in the production of income and is of a non-capital nature.
In The Commissioner of South African Revenue Services v BP South Africa (Pty) Ltd
[2006] SCA 60 (RSA), 68 SATC 229, the deductibility of interest was considered and
it was held that where a loan is raised by a taxpayer to continue its income-
producing activities, the interest paid on the loan is an expense incurred in order to
produce income within the meaning of section 11(a).
• An asset or advantage for enduring benefit Another test the courts have devel-
oped is whether the expenditure was incurred in order to bring into existence an
asset or advantage for the enduring benefit of the trade. In COT v Rhodesia Congo
Border Timber Company Limited 24 SATC 602, the court held that the expenditure in
question was recurrent and not incurred for the purpose of bringing into existence
an asset for the enduring benefit of the company’s trade, but in working the source
of profit. It is neither conclusive nor essential that the expenditure should result in
the creation of a new asset or an addition to an existing asset for it to be expend-
iture of a capital nature. However, it will be a relevant factor to consider if no asset
has been acquired as a result of the payment (Palabora Mining Co Ltd v SIR 35 SATC
159). In British Insulated and Helsby Cables Ltd v Atherton (HM Inspector of Taxes)
(1926) AC 205; 10 TC 155, it was indicated that when an expenditure is incurred
not only once and for all but with a view to bringing into existence an asset or
advantage for the enduring benefit of the trade, that expenditure must, in the
absence of special circumstances leading to an opposite conclusion, be treated as an
expenditure of a capital nature. It was added that ‘enduring’ means ‘enduring in
the way that fixed capital endures’. The term ‘enduring benefit’ inevitably raises
problems concerning the length of time the asset or advantage should endure in
order to constitute a capital asset. In ITC 1063 27 SATC 57, a right was acquired for
three years with a right of renewal for a further two years and was considered to
be of an enduring benefit. The answer to this problem would obviously depend on
the circumstances of each case and each case is decided on its own merits.
In CIR v Manganese Metal Company (Pty) Ltd 58 SATC 1, it was held that:
it is not necessary to turn to the ‘enduring benefit’ test where you have a permanent
fixed capital asset. It is only when you are dealing with some other form of property
that you have to enquire whether it is a benefit or advantage which endures in the
way that fixed capital does.
In BP Southern Africa (Pty) Ltd v Commissioner for South African Revenue Services the
court had to decide whether or not payment of royalties for the use of intellectual
property (trade names etc.) provided an enduring benefit and is thus of a capital
nature.

289
A Student’s Approach to Taxation in South Africa 7.3

CASE:
BP Southern Africa (Pty) Ltd v Commissioner For South
African Revenue Services
2007 SATC 7
Facts: The taxpayer, BPSA, was the manu- Judgment: The annual royalty payments
facturer, supplier and marketer of fuel in incurred in consideration for the right to
South Africa. BPSA obtained the non- use intellectual property were not of a
exclusive right to use certain licensed capital nature and were accordingly
products and marketing material from its deductible. The court also reconfirmed the
offshore holding company and paid an principle that regard must principally
annual royalty, based on the quantity of be had to their agreement to determine
product supplied for these rights of use. the true rights and obligations between
The special court found that the royalty parties, unless it was a simulated trans-
expenditure incurred for the use of intel- action. As the royalty was paid in con-
lectual property (trademarks and other sideration for the use of, and not the
marketing material) was not comparable to ownership, of intellectual property, it is for
rentals paid for business premises, but that all intents and purposes indistinguishable
it rather resembled expenditure incurred in from recurrent rent paid for the use of
setting up a business (for example franchise another’s property.
fees). It found that the rights and obli-
gations between BPSA and its holding Principle: Royalty payments made in
company were of an enduring nature, terms of a licence agreement are revenue in
despite the fact that the parties had enjoyed nature and are therefore deductible in
a clear contractual right to terminate these terms of section 11(a).
obligations.

• Fixed or floating capital A further test that has been developed is whether the
expenditure relates to fixed or floating capital. This distinction was referred to in
the New State Areas case as follows:
[W]hen the capital employed in a business is frequently changing its form from
money to goods and vice versa (for example, the purchase and sale of stock by a
merchant or the purchase of raw material by a manufacturer for the purpose of
conversion to a manufactured article) and this is done for the purpose of making a
profit, then the capital so employed is floating capital. The expenditure of a capital
nature, the deduction of which is prohibited. . ., is expenditure of a fixed capital
nature, not expenditure of a floating capital nature, because expenditure which
constitutes the use of floating capital for the purpose of earning a profit, such as the
purchase price of stock-in-trade, must necessarily be deducted from the proceeds of
the sale of stock-in-trade in order to arrive at the taxable income derived by the
taxpayer from that trade.
In Stone v SIR 36 SATC 117, the issue considered was whether the loss of moneys
advanced was of a capital or revenue nature. The court used the test of fixed or
floating capital as follows: The capital was not consumed in the very process of
income production; it did not disappear to be replaced by something that, when
received by the taxpayer, forms part of their income.
In a business of banking or money lending, losses incurred as a result of irrecover-
able loans made in the course of that business are of a revenue nature and are
deductible.

290
7.3 Chapter 7: General deduction formula

• ‘Once and for all’ expenditure Another test referred to by the court was whether
the expenditure was once and for all expenditure. In Vallambrosa Rubber Company v
Farmer 1910 SC 519, the opinion was expressed that ‘in a rough way’ it was ‘not a
bad criterion that capital expenditure is a thing that is going to be spent once and
for all while income expenditure is a thing that is going to recur every year’. This
test can clearly not be of universal application, but should not be dismissed as
useless (British Insulated and Helsby Cables Ltd v Atherton).
• Nature of the business carried on The nature of the business a taxpayer is
engaged in may determine whether an expenditure or loss is deductible. In Rand
Mines (Mining and Services) Ltd v CIR 59 SATC 85, the type of business the taxpayer
carried on had an impact on the decision as to whether the expenditure was of a
capital or revenue nature.

CASE:
Rand Mines (Mining & Services) Ltd v
Commissioner or Inland Revenue
59 SATC 85
Facts: The taxpayer was a mine manage- purposes, the taxpayer had received, via
ment company and a member of a large management fees, the amount originally
group of mining companies. Its principal paid for the right to manage the mine.
function was the administration and man-
agement of 40 mines controlled by the Judgment: The expenditure in question
was made in order to acquire an asset
group. The group’s policy was to require
which was intended to provide an endur-
the taxpayer to manage all its mines as it
ing benefit for the taxpayer, as the
would ordinarily not invest in a mine contract was to endure for at least 20
unless it could be managed by the tax- years. Only on one other occasion did the
payer. After a mining company outside the taxpayer pay to acquire a management
group began to experience financial diffi- contract. It was not the taxpayer’s stock-in-
culties, the group acquired a controlling trade. The expenditure in question had
interest in the ailing company, on the con- been incurred to acquire an asset which
dition that it cancelled an existing manage- added to the income-earning structure of
ment agreement and concluded a new the business and was not expenditure
agreement with the taxpayer. The taxpayer routinely occurring in the running of the
had to pay a ‘management termination taxpayer’s business. The contracts per se
agreement’ amount of R30 million to the generated no income but they did provide
previous management company before it the taxpayer with the opportunity of
entered into a new management contract generating income by providing the man-
agement services for which payment
with the mine with a term of not less than
would be made. The contract was ‘a source
twenty years. When the price of platinum
of profit’ and the R30 million was spent to
dropped, the group elected to relinquish its
acquire it. Accordingly, the cost had been
controlling interests in the newly acquired of a capital nature.
company. As a consequence, the taxpayer
was obliged to terminate its management Principle: Expenditure that provides an
of that mine. The taxpayer, however, had ‘enduring benefit’ is capital in nature.
already received R30 million in manage- Expenditure more closely linked to the
ment fees (which had been taxed) by the income-earning structure than the income-
time it was obliged to terminate the manage- earning operations of the taxpayer is
ment agreement. Thus, for all intents and capital in nature.

291
A Student’s Approach to Taxation in South Africa 7.3

A taxpayer, whose business it was to insure farmers, was not granted a deduction in
respect of a loss incurred, as the court held that the taxpayer was not engaged in a
banking or money-lending business. As a result, the loss was of a capital nature
(Sentra-Oes Koöperatief Bpk v KBI 57 SATC 109).
• Halfway house between capital and income It has also been held that there is no
halfway house between capital and income. However, in Tuck v CIR 50 SATC 98,
the court sanctioned the apportionment of income between a capital and a non-
capital element. The apportionment of expenditure between capital and revenue
should therefore also be possible, but the matter is, as yet, not tested.
From the norms established by the courts, it is obvious that the purchase (other
than by a trader in these assets) of buildings, plant and machinery, which are fixed
assets, constitutes capital expenditure, while the purchase of trading stock
constitutes non-capital expenditure. The acquisition of the goodwill of a business,
which confers an enduring benefit, is a capital expense, while expenditure on a
continuing advertising campaign is of a revenue nature. The cost of improving or
adding to capital assets is a capital expense, but the cost of effecting necessary
repairs to the property is a revenue expense. Unfortunately, not all cap-
ital/revenue decisions are as clear cut as these and each case will have to be
decided on its own particular facts.

Example 7.5
During the current year of assessment, JJ Ltd purchased a piece of land adjoining his
business premises to use as parking for its clients. The cost of the land amounted to
R100 000 and was paid for in cash during August 2022.
You are required to discuss whether the above expense is of a capital nature.

Solution 7.5
The amount of R100 000 incurred to purchase the vacant land is an expense of capital
nature as the land forms part of the income-earning structure, is not connected to the
income-earning operations and was also incurred as part of the fixed capital of the
business, rather than the floating capital. The expense will not be deductible during the
current year of assessment.

Can I also use these tests to determine the intention of a taxpayer in

order to include an amount in gross income?

292
7.3–7.4 Chapter 7: General deduction formula

REMEMBER

• The true nature of each transaction must be examined in order to determine whether
the expenditure is of a capital or revenue nature.
• The purpose of the expenditure and whether it is connected to the income-producing
structure (capital nature) or the income-earning operations (revenue nature) is an
important norm.
• Generally, expenditure resulting in the creation of a new asset will be of a capital
nature.
• The relation of the expenditure to the fixed capital (fixed asset) or the floating capital
(trading stock) will determine whether the expenditure is of a capital or revenue nature.
• Generally, capital expenditure is spent once and for all and revenue expenditure is
recurrent in nature.

7.3.6 Laid out or expended for the purposes of trade (section 23(g))
Section 23(g), the negative part of the general deduction formula, must be read with
section 11(a) to determine whether a particular amount may be deducted from the
income.
Section 23(g) reads as follows, prohibiting the deduction of
any moneys, claimed as a deduction from income derived from trade, to the extent to
which such moneys were not laid out or expended for the purposes of trade.
Apportionment has therefore officially been sanctioned by the Act. In other words, if
a portion of the amount is not for purposes of trade, that portion may not be
deducted for tax purposes. In CIR v Nemojim (Pty) Ltd, Judge Corbett said that
in making such an apportionment the court considers what would be fair and
reasonable in all circumstances of the case.
Apportionment may be made in various ways, for example on a time basis, a piece-
work basis, on the basis of the capital employed etc., as long as it is fair.

7.4 Prohibited deductions (section 23)

In terms of section 23, certain deductions are prohibited despite them sometimes
complying with all of the requirements for deduction under section 11(a). These
prohibited deductions are discussed below.

7.4.1 Private maintenance expenditure (section 23(a))

The cost incurred in maintaining the taxpayer, their family or their establishment is
not deductible. Examples of these costs are food and clothes of the taxpayer or his
family and cost of keeping up the taxpayer’s establishment.

7.4.2 Domestic or private expenditure (section 23(b))

Domestic or private expenses, including the rent or cost of repairs of, or expenses in
connection with premises not occupied for the purposes of trade, or of a dwelling
house or domestic premises, is prohibited as a deduction.

293
A Student’s Approach to Taxation in South Africa 7.4

However, expenditure incurred in respect of that part of a dwelling which is

occupied for the purposes of trade, is allowed as a deduction if the following
requirements are met.
Three scenarios are distinguished depending on the taxpayer’s trade:
1 Occupied for purposes of the taxpayer’s trade (a trade other than employment)
A part of domestic property expenses will be deemed to have been incurred
for the purpose of the taxpayer’s trade only if that part of the property is
specifically equipped for purposes of the taxpayer’s trade and is regularly and
exclusively used for such purposes. If this is the case, then the expenses are
deductible.
2 Occupied for purposes of the taxpayer’s employment trade where the taxpayer earns
remuneration mainly in the form of commission
If the taxpayer’s income from employment is derived mainly from commission
or other variable payments based on their work performance, the taxpayer
will be able to claim the domestic expenses if:
– it (the home study or other domestic area) is specifically equipped for
purposes of the taxpayer’s trade and is regularly and exclusively used for
such purposes; and
– their duties are mainly performed (more than 50%) otherwise than in an
office provided to them by their employer.
3 Occupied for purposes of the taxpayer’s employment trade where the taxpayer does not
earn remuneration mainly in the form of commission
If the taxpayer’s trade relates to employment and the taxpayer does not
mainly derive income in the form of commission, the taxpayer will only be
able to claim a deduction for such domestic expenses if:
– it (the home study or other domestic area) is specifically equipped for
purposes of the taxpayer’s trade and is regularly and exclusively used for
such purposes; and
– their duties are mainly performed (more than 50%) in that part of the
domestic property.
For example, where a doctor has his consulting rooms at their home, or
another professional person or businessman conducts their business from their
home, they may, in terms of this subsection, be entitled to deduct a certain
proportion of their private expenses on their homes, usually in proportion to
the floor space used for business purposes. A proportion of expenses such as
interest on a mortgage bond, assessment rates, electricity, cleaning and
maintenance may be deducted. A person who has a normal place of business
(employment) but also uses part of their home, for example a study, will have
to show that they have used the room to produce income and do so regularly
and exclusively for that purpose. The room has to be specifically set aside and
equipped for this purpose; a desk in the corner of a living room will not
suffice;

294
7.4 Chapter 7: General deduction formula

7.4.3 Recoverable expenditure (section 23(c))

A loss or expense (the deduction of which would otherwise be allowable) is not
deductible to the extent to which it is recoverable under a contract of insurance,
guarantee, security or indemnity (paragraph (c)). For example: Where something is
stolen from a business, this loss is deductible in terms of section 11(a). However, if the
stolen goods are covered by an insurance policy and the taxpayer receives an amount
from the insurance, then the full loss cannot be deducted. Only the amount of the loss
that is not covered by the insurance is deductible;

7.4.4 Interest, penalties and taxes (section 23(d))

A tax, duty, levy, interest or penalty imposed under this Act, an additional tax
imposed in terms of the Value-added Tax Act, and an interest or penalty payable in
consequence of the late payment of a tax, duty or levy payable under an Act
administered by the Commissioner, the Skills Development Levies Act, and the
Unemployment Insurance Contributions Act, is not allowed as a deduction.

7.4.5 Provisions and reserves (section 23(e))

Income carried over to a reserve fund or capitalised in any way is not allowed as a
deduction for tax purposes. Examples are accounting provisions such as provision for
leave accrual.

7.4.6 Expenditure incurred to produce exempt income (section 23(f))

Expenses incurred in respect of income that are exempt from tax are not allowed as a
deduction. This is for example interest incurred on a loan to finance the purchase of
local shares. The shares will produce dividends that are not included in ‘income’
because of the available exemption for such income in section 10(1)(k).

7.4.7 Non-trade expenditure (section 23(g))

Section 23(g) contains the so-called ‘negative test’ of the general deduction formula
that should be read with section 11(a) to determine whether an expense may be
deducted from income. It provides that, to the extent that moneys were not laid out
or expended for purposes of trade, the expense is not deductible. It follows that, if an
expense were incurred for both trade and non-trade purposes, the expense will have
to be apportioned to only deduct that part that was incurred for purposes of trade.

7.4.8 Notional interest (section 23(h))

Interest that might have been made on a capital employed in trade (that is to say
notional interest) is not deductible.

7.4.9 Deductions against lump sum (section 23(i))

An expenditure, loss or allowance is not deductible to the extent that the expenditure,
loss or allowance is claimed as a deduction from a retirement fund lump sum benefit
or retirement fund lump sum withdrawal benefit (refer to chapter 15).

295
A Student’s Approach to Taxation in South Africa 7.4

7.4.10 Expenditure incurred by labour brokers and personal

service providers (section 23(k))
Expenses incurred by a labour broker (other than a labour broker to whom a certificate
of exemption has been issued) or a personal service provider is prohibited as a
deduction. The only deductions that a labour broker and personal service provider can
deduct are:
• any amounts paid or payable to any employees of the labour broker or personal
service provider for services rendered by the employees, which is, or will be, taken
into account in determining the employee’s taxable income;
• legal expenses (section 11(c)), bad debts (section 11(i)), contributions to funds on
behalf of employees (section 11(l)), an amount paid to an employee on which
he/she is taxed (section 11(nA)), and a refund of expenses paid by persons (sec-
tion 11(nB)); and
• operating expenses for business premises, including repairs, finance charges, fuel,
maintenance and insurance of assets if such premises and assets are used wholly
and exclusively for purposes of trade.

7.4.11 Restraint of trade (section 23(l))

An expense incurred in respect of the payment made for a restraint of trade is
prohibited unless it qualifies for a deduction provided for in section 11(cA) (refer to
chapter 8).

7.4.12 Expenditure relating to employment or holding of an office

(section 23(m))
Expenses, losses or allowances that relates to employment of or an office held by a
person that derives remuneration (as defined in the Fourth Schedule) is not
prohibited as deductions. In terms of paragraph (m) only the following expenses for
salaried persons can be deducted:
• contributions to pension, provident or retirement annuity funds in terms of
section 11F;
• legal expenses (section 11(c)),
• wear-and-tear allowances (section 11(e)),
• bad debts (section 11(i)),
• doubtful debt allowances (section 11(j)),
• an amount paid back by an employee on which they were taxed
(section 11(nA),
• restraint of trade payments in terms of paragraph (cA) of the gross income
definition paid back to the employer (section 11(nB)); and
• rent, repairs or expenses in connection with a dwelling house or domestic
premises. These expenses must qualify in terms of section 11(a) or (d) (repairs) to
the extent that the deduction is not prohibited under section 23(b) (private and
domestic expenses).

296
7.4 Chapter 7: General deduction formula

Example 7.6
Mr Rex Mtulu would like to deduct the cost of the clothes that he wears to work from his
taxable income. He feels that he would not have purchased these clothes if he did not go
to work. Rex is a professional businessman who purchased five suits at a cost of R15 000
each on one of his clothing store accounts. The account has not been settled at the end of
the current year of assessment.
You are required to determine, according to the general deduction formula, whether Rex
will be able to deduct the cost of his working clothes from his taxable income during the
current year of assessment.

Solution 7.6
Rex is carrying on a trade. He is a professional businessman and this falls under the
definition of ‘trade’.
An expense of R75 000 (R15 000 × 5) was incurred. Rex purchased the suits on credit to the
value of R75 000. The R75 000 expenditure was actually incurred. Rex did not pay cash for
the suits but by buying the suits on credit, the expense is also seen as actually incurred. It is a
fact that the purchase was made and therefore no contingency exists. The expense does not
have to be ‘actually paid’ for it to be ‘actually incurred’.
The purchase occurred in the year of assessment. Even though Rex will only pay the
clothing store account in the following year of assessment, the debt was incurred in the
current year of assessment, and can therefore be deducted in this year, if all the other
requirements of the general deduction formula are met.
In the production of income. The suits were purchased due to Rex’s profession. A
businessman normally wears suits. The questions to be answered, however, are: ‘How
closely connected is the purchase of the suits to the production of the income?’ and ‘Was
the expense a necessary concomitant of the business operation?’ Rex can argue that without
his suits, he would not look like a professional and would probably not produce the
income, since none of his clients would take him seriously and therefore the suits are
necessary to his income-earning operations.
Of a capital nature or not. What was the true nature of the transaction? It was to
purchase clothing, which will be worn when performing income-producing business
operations. Do the suits create an enduring benefit? The suits will create a benefit until
they become worn out and the next set of suits has to be purchased. Due to there being no
prescribed period for the term ‘enduring’, the period is very subjective and some may say
that the suits create an enduring benefit and others will differ.
Are the suits considered to be once and for all expenditure? No, due to the nature of
clothing, suits will be purchased every two to three years.
From the above discussion it seems that the expenditure is of a capital nature.

continued

297
A Student’s Approach to Taxation in South Africa 7.4

Laid out or expended for the purposes of trade. Were the suits only purchased due to
Rex’s trade? A suit is a type of clothing that can be worn on many different occasions. It is
not only limited to business hours. Suits are not like overalls or nurses’ outfits that
normally indicate what profession the wearer is a member of. Rex could have a dual
purpose for the suits, both business and private purposes. The expense can be appor-
tioned, but the apportionment will be difficult to determine.
There is also no specific deduction that covers this type of expense. Section 23(m)
prohibits deductions, except for certain listed deductions relating to a salaried person.
Section 23(a) also prohibits expenditure relating to the maintenance of the taxpayer.
The expense does not comply with all the requirements of the general deduction formula
(it could be seen to be of a capital nature). Even if one argued that the suits are not of a
capital nature and all the requirements of the general deduction formula are met, in terms
of section 23(m) and (a) the cost of the suits will not be deductible and the deduction of
the costs will not be allowed against his income.

7.4.13 Unlawful activities (section 23(o))

No deduction is allowed for fines, bribes, unlawful kickbacks or penalties due to
unlawful activities.

7.4.14 Cessation of insurance policies (section 23(p))

No deduction is allowed for the value of an insurance policy ceded to an employee,
director, their family or a retirement fund of which they are members.

7.4.15 Expenditure incurred in the production of foreign dividends

(section 23(q))
An expenditure incurred in the production of income in the form of foreign
dividends is prohibited as a deduction.

7.4.16 Premiums in respect of insurance policies (section 23(r))

No deduction is allowed for a premium paid by a person in terms of an insurance
policy if that policy covers that person against illness, injury, disability, unem-
ployment or death of that person (the so-called income protection policies).

REMEMBER

• The expenditure listed in section 23 are prohibited deductions for tax purposes, despite
them sometimes complying with section 11(a).

298
7.5 Chapter 7: General deduction formula

7.5 Specific transactions

By way of example, a few types of expenditure that do not qualify for a specific
deduction will be examined according to the general rules.
• Advertising Advertising expenditure incurred by an existing business will be
non-capital expenditure incurred in the production of income and allowable as a
deduction, but in certain circumstances an extensive advertising campaign may
create an asset of a permanent nature for the business or an enduring benefit and is
therefore expenditure of a capital nature.
• Damages and compensation Expenditure of this nature may hardly be said to
have been incurred in the production of income and will be allowed only if the
connection between the business carried on and the cause of the liability for
damages is very close, that is to say it is an inevitable concomitant of the trade.
• Donations Donations are gratuitous payments not made in the production of
income but rather as an appropriation of income that has already been earned.
• Education/Training Normally, expenditure incurred by a taxpayer in obtaining a
qualification or in improving their qualifications is of a capital nature and is not
deductible. Expenditure incurred in maintaining a level of knowledge or expertise
is of a non-capital nature and is therefore deductible.
• Entertainment An agent or representative (who earns more than 50% of their
remuneration (income from employer) in the form of commissions from sales) may
deduct all entertainment expenditure incurred in the production of income and not
of a capital nature, in terms of the general deduction formula (section 11(a)).
Deductions for entertainment expenditure incurred by an employee (or the holder
of an office) for which the employee derives ‘remuneration’ (as defined in the
Fourth Schedule), are prohibited in terms of section 23(m), unless they are agents
or representatives earning mainly commission based on their sales or the turnover
attributable to them.

Example 7.7
Samuel Gxagxa, a salesman, earned the following income during the year of assessment:
R
Salary 270 000
Commission on sales 125 000
Entertainment allowance 12 000
397 000
During the curent year, Samuel incurred business-related entertainment expenditure
amounting to R15 000 for meals of clients.
You are required to calculate the amount that Samuel may claim as a deduction in respect
of entertainment expenditure.

299
A Student’s Approach to Taxation in South Africa 7.5

Solution 7.7
As Samuel does not earn remuneration mainly (more than 50%) (R125 000 / R397 000 =
31%) by way of commission on sales, he may not claim a deduction in terms of sec-
tion 11(a) even though it was incurred for trade purposes.
If more than 50% of his remuneration had consisted of commission earnings, he would
have been able to claim the full amount of his entertainment expenditure in terms of
section 11(a) since it was incurred in the production of his income and was not of a capital
nature.

• Goodwill An amount payable for the goodwill of a business is capital expenditure

unless the taxpayer buys and sells businesses for profit, as goodwill gives rise to an
enduring benefit.
• Insurance SARS grants a deduction for all insurance premiums incurred in the course
of a taxpayer’s trade, although insurance expenses incurred in the protection of
capital assets may not necessarily qualify for deduction.
• Interest Interest incurred on loans used for business purposes is deductible.
Interest on a loan used to purchase assets that produce exempt income, interest on
a loan used to pay dividends (excluding taxable foreign dividends), or interest on a
loan used to pay taxes (which are not deductible expenses) is not deductible.
If SARS pays interest to a person, the person is taxed on that interest in terms of
section 7E. If that interest has to be repaid to SARS, the person can claim it as a
deduction in terms of section 7F. The amount of the deduction is, however, limited
to the amount of interest that was previously included in the taxable income of that
person.
• Salaries and wages Expenditure on salaries and wages is incurred in the
production of income and is therefore deductible. Christmas and other incentive
bonuses are incurred not only to reward employees for past services, but also to
provide incentives for future services. Certain gratuities paid to employees on
retirement cannot, however, be said to be incurred in the production of income as the
employees concerned will no longer be producing income. Where the retirement
gratuities are paid in terms of employment contracts, they will be allowed as a
deduction, being part of the cost of obtaining the services of the employees. Where
the retirement gratuities are paid in terms of an established policy for maintaining a
happy and contented staff, the expenditure will also be allowed as a deduction.
• Security expenses Expenditure incurred in securing business premises is normally
deductible if it is closely connected with the business operations since it is then
incurred in the production of income. However, some expenditure creates an
enduring benefit and is of a capital nature. Such costs are not deductible under
section 11(a) and create an asset for capital gains tax purposes. Examples of such
costs are the cost of installing an alarm system, putting up an electric fence and
acquisition of a guard dog (refer to Interpretation Note No. 45).
• Vacant or unproductive property Non-capital expenditure on vacant or unpro-
ductive property is not deductible because the expenditure is not incurred in the
production of income.

300
7.5 Chapter 7: General deduction formula

• Wasting assets Assets such as mines, quarries and forests are exhausted in the
course of their use. Nevertheless, expenditure incurred in the acquisition of these
assets is of a capital nature.

Example 7.8
Max Roper is a retired army officer. Since retirement he has been operating a security
business supplying guards and guard dogs. He seeks advice on whether the following
expenses and losses are deductible in terms of the general deduction formula:
1. One of Max’s guards was badly bitten by one of the guard dogs while on duty. The court
granted the guard compensation amounting to R25 000. Max paid the amount during
March 2023 after the court decision on 20 February 2023.
2. One of Max’s trucks, with a tax value of R50 000 on the date, was hijacked when the
driver was returning with the truck after having transported a team of guards to a
client’s premises. The truck was not insured.
3. Max erected a billboard on the pavement outside his business premises, advertising his
security business. The billboard cost R30 000. Max also paid R80 000 for advertisements
that appear in the local newspaper every Saturday, in which his security services are
advertised. The local municipality fined Max R10 000 for obstruction to pedestrians
caused by his billboard. Max also paid R2 000 to have the billboard moved inside the
boundary of his property.
4. Four of Max’s team leaders attended a two-day training seminar on the latest security
techniques, at a cost of R18 000 per person.
5. Max borrowed R100 000 on 1 March 2022 and paid interest on this loan amounting to
R12 000 for the current year of assessment. He used R50 000 to buy shares in his
brother’s private company, R30 000 to buy ammunition to be issued to his security
guards and R20 000 to pay the account for veterinary services that had been unpaid
since July 2020 when four of his guard dogs were injured in a dog fight.
You are required to determine whether the expenses and losses above are deductible in
terms of the general deduction formula.

301
A Student’s Approach to Taxation in South Africa 7.5

Solution 7.8
1. The question of whether Max will be able to deduct the amount of R25 000 in terms of
section 11(a) will depend on whether it is a non-capital expense actually incurred
during the year of assessment in the production of Max’s income. The expense is not of
a capital nature because it was not incurred to purchase or improve a capital asset or to
give rise to an enduring benefit. Although the payment was only made after the end of
the year of assessment, Max incurred an unconditional liability on 20 February 2020 to
pay the amount so that, if it is deductible, it will have to be deducted during the cur-
rent year of assessment. The essential problem to be addressed, however, is whether
this amount was incurred in the production of Max’s income. In Port Elizabeth Electric
Tramway Co Ltd v CIR 8 SATC 13, it was held that expenses are deductible provided
they are so closely connected to a business operation that they may be regarded as part
of the cost of performing it. In the case of fortuitous or chance expenditure arising from
an accidental injury, one must therefore examine the closeness of the connection. Was
the act leading to the expense ‘a necessary concomitant’ of the business operation (Joffe
& Co (Pty) Ltd v CIR 13 SATC 354)? It would appear that the type of business Max is
engaged in carries the risk of employees or the public being bitten by one of his guard
dogs. The expense of R25 000 should therefore be deductible in terms of section 11(a).
2. The loss of the truck is a loss of a capital nature as the truck formed part of the fixed
capital structure of Max’s business (CIR v George Forest Timber Co Ltd 1 SATC 20). The
loss of R50 000 is therefore not deductible in terms of the general deduction formula.
3. The cost of the billboard (R10 000) is an expense of a capital nature as it was
expended to create an enduring benefit for Max’s business and is also not an expense
that is closely connected to his income-producing operations (New State Areas Ltd v
CIR 14 SATC 155). The ongoing advertisements in the newspaper at a cost of R80 000
constitute recurring expenses of a non-capital nature. No single advertisement could
be said to create an enduring benefit. The fine of R10 000 is not an expense incurred in
the production of Max’s income, but a punishment for the contravention of a law. Sec-
tion 23(o) prohibits the deduction of fines. The expense of R2 000 incurred in moving
the billboard is also an expense of a capital nature as it is closely connected to the
income-producing structure, rather than the income-producing operations of his
business.
4. The cost of R72 000 (R18 000 × 4) incurred by Max in training his workers will be
deductible as it is an expense incurred in the production of his income (by training
them to perform their services more effectively). This is not of a capital nature.
5. The interest of R6 000 (R12 000 × R50 000/R100 000) incurred on R50 000 of the loan
will not be deductible in terms of the general deduction provisions as it is not an
expense which produces income as defined (section 23(f)). Dividends earned on the
shares are exempt from tax and therefore do not constitute income. Interest of R3 600
(R12 000 × R30 000 / R100 000) incurred on the purchase of ammunition is deductible
as the expense was closely connected with his income-producing operations. The
ammunition is not part of the capital structure of his business. The interest of R2 400
(R12 000 × R20 000/R100 000) incurred on the R20 000 used to pay the veterinary costs
for his dogs is an expense incurred in the production of Max’s income, as the risk of
dog fights and the attendant injuries are closely connected to his type of business. The
interest will therefore be deductible. The actual payment of R20 000 would not be de-
ductible in the current year of assessment as this expense was actually incurred in the
previous year of assessment. If Max did not claim it as a deduction in that year of
assessment, he may not deduct it in this year. His only recourse would be to object to
the 2021 assessment issued by SARS.

302
7.5–7.7 Chapter 7: General deduction formula

1. Interest is payable on a capital loan and is therefore not of a capital

nature. Will interest therefore always be deductible?
2. Can Max claim the legal cost incurred?
3. If I claim an expense and don’t have to pay it, do I have a tax saving?

7.6 Summary
In this chapter, the different components that make up the so-called ‘general deduc-
tion formula’ were discussed. All these components or requirements must be present
for an expense to be deductible.
The key requirements of the general deduction formula are that the taxpayer must be
carrying on a trade and that the expense must be in the production of income, not of a
capital nature and expended for the purpose of trade. These requirements are not all
defined in the Act and certain tests were laid down by the court. The deductibility of
an expense will have to be decided on its own facts and circumstances.
If the expense does not comply with all the requirements of the general deduction
formula, it will be necessary to determine whether a specific deduction in terms of the
Act might apply. The specific deductions are dealt with in chapter 8.
In the questions that follow, the requirements of the general deduction formula will
be illustrated.

7.7 Examination preparation

Question 7.1
Kyle is a South African resident, aged 36 years. He owns a bar in Bloemfontein. Due to the
good reputation and popularity of his business, Kyle needed to appoint two bouncers to
ensure the safety of his customers and to minimise fights.
During the 2023 year of assessment one customer had five drinks too many and started a
fight with another customer. One of the bouncers tried to control the issue and stop the
fight; however, he ended up having two of his ribs broken. The fight was eventually
stopped by the other bouncer. Kyle incurred costs amounting to R76 000 to cover the
medical expenditure of the bouncer who got injured.

You are required to:

Discuss whether the medical expenses of R76 000 would be deductible in Kyle’s
taxable income for the 2023 year of assessment. Refer to case law to support your
answer.

303
A Student’s Approach to Taxation in South Africa 7.7

Answer 7.1
Discussion of the deduction of medical expenses
For an expense to be deductible it has to comply with all the components of the general
deduction formula. The issue is whether the medical expense incurred by Kyle were
incurred in the production of income.
The medical expense was incurred in the production of income as one of Kyle’s bouncers
was injured during his employement.
Port Elizabeth Electric Tramway Company Ltd v Commissioner for Inland Revenue 8 SATC 13:
‘closely connected’ test
What action gave rise to the expenditure?
The medical expenses were incurred because a bouncer tried to stop a fight between
customers and was consequently injured. This is his job.
Is the action so closely linked to the income earned that it may be regarded as part of the cost of
performing it?
It might be necessary to incur such expense in order to produce income, as stopping fights
between customers are in the ordinary course of his business of operating a bar.
Conclusion: The medical expense incurred qualifies as a deduction as it is closely connected
to the business operation.

Additional questions for this chapter are available electronically at

www.myacademic.co.za/books

304
 Specific deductions and
8 allowances

Gross Exempt Taxable Tax

– – Deductions =
income income income payable

General
Specific Capital Deductions for
deduction
deductions allowances individuals
formula

Page
8.1 Introduction............................................................................................................ 306
8.2 Foreign exchange transactions (sections 1, 24I and 25D) ................................. 307
8.3 Trading stock (section 1) ....................................................................................... 315
8.3.1 Trading stock: Introduction (section 22) ............................................... 316
8.3.2 Closing stock (section 22(1)) ................................................................... 316
8.3.3 Opening stock (section 22(2)) ................................................................. 317
8.3.4 Deduction of stock purchased during the year (section 11(a)) .......... 318
8.3.5 Cost price of stock (section 22(3) and (5)) ............................................. 319
8.3.6 Trading stock acquired for no consideration (section 22(4)) .............. 321
8.3.7 Consumable stores ................................................................................... 322
8.3.8 Disposal of stock other than normal trading (section 22(8)) .............. 322
8.3.9 Trading stock: Year of assessment (section 22(6)) ............................... 324
8.3.10 Acquisition or disposal of trading stock (section 23F) ........................ 324
8.3.11 Debt reduction: Trading stock (section 19) ........................................... 325
8.3.12 Trading stock: Share dealers (sections 22 and 9C)............................... 326
8.4 Employee-related expenses .................................................................................. 329
8.4.1 Contributions to funds (section 11(l) and (a)) ...................................... 329
8.4.2 Annuities in respect of former employees (section 11(m)) ................. 330
8.4.3 Restraint of trade payments (section 11(cA)) ....................................... 330
8.4.4 Learnership agreements (section 12H) .................................................. 332

305
A Student’s Approach to Taxation in South Africa 8.1

Page
8.5 Deductions relating to trade debtors and similar matters ............................... 334
8.5.1 Bad debts (section 11(i)) .......................................................................... 334
8.5.2 Doubtful debts (section 11(j)) ................................................................. 335
8.5.3 Allowances on credit sales (debtors’ allowance) (section 24) ............ 338
8.6 Other expenses and deductions........................................................................... 340
8.6.1 Legal expenses (section 11(c)) ................................................................. 340
8.6.2 Donations (section 18A) .......................................................................... 341
8.6.3 Future expenditure on contracts (section 24C) .................................... 343
8.6.4 The accrual and incurral of interest (section 24J) ................................. 345
8.7 Double deductions (section 23B) ......................................................................... 345
8.8 Value-added tax (VAT) (section 23C) ................................................................. 346
8.9 Prepaid expenses (section 23H) ........................................................................... 347
8.10 Pre-trade expenditure (section 11A) ................................................................... 349
8.11 Assessed losses (section 20).................................................................................. 351
8.12 Calculating taxable income of a company ......................................................... 353
8.13 Summary................................................................................................................. 356
8.14 Examination preparation ...................................................................................... 356

8.1 Introduction
A taxpayer who carries on a business incurs expenses in respect of his business. Some
of the expenses are allowed under the general deduction formula in section 11(a),
while others are not allowed because they are of a capital nature or because they
cannot satisfy the restrictive test that the expenditure be incurred in the production of
income. These deductions are either permitted in terms of the special deductions
contained in the Income Tax Act 58 of 1962 (the Act) or they are not deductible
for income tax purposes. Section 11(x) also provides for the deduction of
amounts allowed to be deducted in terms of any provisions other than section 11;
these would include, for example, losses on foreign exchange transactions permitted
by section 24I.

REMEMBER

• The tax rate was reduced from 28% to 27% for a company or close corporation with a
year of assessment ending on or after 31 March 2023 (that is to say. where the year of
assessment of the company or close corporation commences on or after 1 April 2022).
The rate of 27% is used for purposes of this book, unless the year of assessment in an
example or question indicates otherwise.

306
8.2 Chapter 8: Specific deductions and allowances

8.2 Foreign exchange transactions (sections 1, 24I and 25D)

A taxpayer sometimes buys an asset or trading stock from an overseas supplier and
pays for it in foreign currency. The purchase sum must then be translated into South
African currency (Rands) to determine the purchase sum for normal tax purposes.
Each foreign exchange transaction consists of two parts, namely the underlying asset
or expense (the non-monetary item) and the exchange item (the monetary item). Each
of these parts must be investigated:

Underlying asset or expense purchased in foreign exchange (non-monetary item)

Trading stock Fixed asset

Section 25D Section 25D

(recorded at spot rate) (recorded at spot rate)

Foreign exchange liability (exchange item) (monetary item)

Is section 24I
applicable?
YES NO

Apply general rules in

Apply Par 43 of the
section 24I on the
Eighth Schedule on the
exchange item to
foreign exchange liability
calculate the exchange
(refer to chapter 10)
differences

Section 25D
The translation of the purchase sum must be made at the spot rate, since section 25D
determines that expenditure incurred in a foreign currency must be translated by
applying the spot rate on the transaction date. For purposes of section 25D the
transaction date is the date on which the expenditure or loss is actually incurred, in
other words, the date on which there is an unconditional liability to pay the
outstanding amount. In the case where goods are acquired in a foreign currency, the
date on which the expense is actually incurred is usually the date on which the risks
and rewards of ownership are transferred from the seller to the purchaser (that is to
say the taxpayer). A common accounting term used to indicate when the risks and
rewards of ownership are transferred, is ‘free-on-board’ (FOB). When goods are
delivered free-on-board at the port of departure, the risks and rewards associated

307
A Student’s Approach to Taxation in South Africa 8.2

with ownership are transferred to the purchaser on the delivery of the goods to the
port of departure.
A natural person or a trust (other than a trading trust) may elect that all transactions
be translated by applying the average exchange rate for the relevant year of
assessment.
The other category of taxpayers who can still use the average rate is taxpayers with
foreign permanent establishments. In that case, the taxable income must be
determined in the currency used by that permanent establishment for purposes of
financial reporting and the result must be translated into Rands using the average
rate. However, if that currency is not the currency used for financial reporting
purposes by the permanent establishment and that country has an official rate of
inflation of 100% or more throughout the year of assessment, the taxable income of
the permanent establishment is ignored, providing relief in the case of hyper-
inflationary currencies.
The calculation of the average exchange rate can be a very complex issue and can
vary greatly from taxpayer to taxpayer depending on the chosen method of
calculation. Fortunately, the average exchange rate is available on SARS’s website
and need not be calculated by the taxpayer himself.
It is important to note that section 25D does not determine the deductibility of an
amount actually incurred. This section sets out the rules to use to translate the foreign
currency amount to our local currency (Rands). The deductibility of expenditure is
determined in terms of the general deduction formula (refer to chapter 7) or, in the
case of capital assets, the provisions of the capital allowance sections, for example
section 12C (refer to chapter 9).

REMEMBER

• A company and trading trust will always translate underlying assets and expenses
acquired in foreign currency to rand by using the spot rate on the transaction date.
• Natural persons and non-trading trusts can elect to either use the spot rate on the
transaction date or the average exchange rate for the relevant year of assessment when
translating underlying assets and expenses acquired in foreign currency to rand.
Whichever option is chosen must be consistently used for that specific year of
assessment.
• The foreign permanent establishment (a fixed place of business) of a South African
resident must translate its taxable income using the average exchange rate for the
relevant year of assessment.

Section 24I
Section 24I requires that all gains and losses on foreign exchange transactions,
irrespective of whether realised or not and irrespective of whether of a capital nature
or not, be included in the determination of taxable income.

308
8.2 Chapter 8: Specific deductions and allowances

The provisions of section 24I apply in respect of

• a company (to all its foreign currency gains and losses, irrespective of whether they
arise from trade or not);
• a trust carrying on any trade; and
• a natural person who holds an ‘exchange item’ for the purposes of trade.

Definitions
‘Spot rate’ is the appropriate quoted exchange rate, at a specific time, by an
authorised dealer in foreign exchange for the delivery of currency.
‘Average exchange rate’ in relation to a year of assessment means the average,
determined by using the closing spot rate, at the end of the daily or monthly intervals
during the year of assessment, consistently applied.
‘Foreign exchange transactions’ are transactions involving foreign currencies, for
example:
• the sale of goods to a customer in a foreign country with payment in the currency
of that country; and
• the purchase of goods from a supplier in a foreign country to be paid for in the
currency of that country.
An ‘exchange difference’ is:
• the foreign exchange gain or loss;
• in respect of an exchange item;
• arising during a year of assessment; and
• determined by multiplying the exchange item by the difference between:
– the ruling rate at the payment date and the ruling rate at the transaction date if
the transaction arises and is settled in the same tax year;
– the ruling rate on the translation date (year-end) and the ruling rate at the
transaction date if the transaction arises in the current year and is settled in a
later year;
– the ruling rate at the previous translation date and the ruling rate at the current
translation date if the debt is not settled during the current year; and
– the ruling rate at realisation date and the ruling rate at the previous translation
date if the debt is settled in the current year of assessment but arose in a
previous year of assessment.
An ‘exchange item’ is the amount in a foreign currency:
• which constitutes a unit of currency acquired and not disposed of by that person;
• owing to a person in respect of a loan, advance or debt payable to the person by
another person;
• owing by or to a person in respect of a forward exchange contract; and
• in respect of which the person has the right or contingent obligation to buy or sell
in terms of a foreign currency option contract.
‘Foreign currency’ is a currency that is not a legal tender in the Republic.

309
A Student’s Approach to Taxation in South Africa 8.2

‘Local currency’ is:

• in the case of a permanent establishment outside South Africa, the functional
currency, unless the functional currency has a rate of inflation of 100% or more
throughout the relevant year of assessment. In that case, the exchange item must be
deemed not to be attributable to the permanent establishment;
• in the case of resident (other than a headquarter company, a domestic treasury
management company and an international shipping company), in respect of an
item not attributable to a permanent establishment, the currency of South Africa;
• in the case of a non-resident, in respect of an item that is attributable to a per-
manent establishment in South Africa, the local currency;
• in the case of a headquarter company in respect of an exchange item which is not
attributable to a permanent establishment outside the Republic, the functional
currency of that headquarter company;
• a domestic treasury management company in respect of an exchange item which is
not attributable to a permanent establishment outside the Republic, the functional
currency of that domestic treasury management company; or
• an international shipping company (as defined), in respect of an amount that is not
attributable to a permanent establishment outside the Republic, the functional
currency of that international shipping company.

Computation of exchange differences

To compute the foreign exchange, gain or loss that must be included or deducted
from income, the exchange item must be multiplied by the difference between the
ruling exchange rates on:
• the transaction date;
• the translation date (if the exchange item has not been settled at the end of the year
of assessment); and
• the realisation date.
The ‘translation date’ is the last day of a year of assessment on which an exchange
item is required to be translated.
A loan or advance or debt in a foreign currency is realised:
• when and to the extent to which payment is received or made in respect of the
loan, advance or debt; or
• when and to the extent to which the loan, advance or debt is settled or disposed of
in a manner.
The computation of an exchange difference depends on whether the exchange item
was:
• acquired and realised during the current year of assessment;
• acquired but not realised during the current year of assessment;
• acquired in an earlier year of assessment and realised during the current year of
assessment; and

310
8.2 Chapter 8: Specific deductions and allowances

• acquired in an earlier year of assessment but not realised during the current year of
assessment.

Exchange item acquired and Exchange difference =

realised during current year Exchange item × (Exchange rate on transaction date during
of assessment the current year – Exchange rate at which the exchange item
is realised during the current year)
Exchange item acquired but Exchange difference =
not realised during current Exchange item × (Exchange rate on transaction date during
year of assessment the current year – Exchange rate at which the exchange item
is translated at the end of the current year)
Exchange item acquired in Exchange difference =
previous year of assessment Exchange item × (Exchange rate at which the exchange item
and realised during current was translated at the end of the immediately preceding year
year of assessment – Exchange rate at which the exchange item is realised
during the current year)
Exchange item acquired in Exchange difference =
previous year of assessment Exchange item × (Exchange rate at which the exchange item
but not realised during was translated at the end of the immediately preceding year
current year of assessment – Exchange rate at which the exchange item is translated at
the end of the current year)

Acquisition of assets
Section 24I(7) provides that an exchange difference that relates to the acquisition of
certain assets must be deferred and included in taxable income in the year of
assessment during which the asset is brought into use for trade purposes.
The provisions of section 24I(7) apply to:
• an exchange difference arising from a loan, advance or debt;
• that has been used in the acquisition, installation, erection or construction;
• of any machinery, plant, implement, utensil, building or improvements to a
building; or
• the devising, developing, creation, production, acquisition or restoration of an
invention, patent, design, trademark, copyright or other similar property or
knowledge.
An exchange difference that arises before the asset is brought into use is deferred to
the tax year in which it is brought into use and a carry-back to the year in which it
was incurred is not allowed.

Proviso
If the Commissioner is satisfied that during a subsequent year of assessment:
• the loan, advance or debt to be obtained or incurred will no longer be obtained or
incurred;
• the loan, advance or debt has not been used as contemplated above; or

311
A Student’s Approach to Taxation in South Africa 8.2

• the asset, property or knowledge will no longer be brought into use for trade pur-
poses,
the exchange difference may no longer be carried forward but must be included in
the taxable income in that year of assessment.

Example 8.1
Avoca Ltd’s year of assessment ends on the last day of February. On 1 November 2022 the
company purchased a second-hand machine from a supplier in another country for a
foreign currency (FC) amount of FC100 000 (The machine was also shipped free on board
on 1 November 2022). The machine is delivered at the company’s premises on 15
February 2023 and is brought into use on 1 April 2023.
Avoca Ltd incurs the following costs in addition to the purchase price:
R
Freight and insurance 10 000
Import duty 45 000
VAT 57 120
The purchase consideration is settled in full on 31 May 2022.
Assume that the spot rates on the relevant dates are as follows:
1 November 2022 FC1 = R7,60
28 February 2023 FC1 = R7,74
31 May 2023 FC1 = R8,00
Assume that the average exchange rate for the 2023 year of assessment is as follows:
FC1 = R7,80.
You are required to calculate the exchange differences of Avoca Ltd for the 2023 and 2024
years of assessment. No forward exchange contract was entered into.

Solution 8.1
R
2023 year of assessment
Cost of machine
Purchase price (FC100 000 × R7,60) (section 25D) 760 000
Freight and insurance 10 000
Import duty 45 000
VAT – not included in cost of machine as claimed as input tax deduction nil
815 000
Exchange loss in respect of 2023 tax year
FC100 000 × (R7,74 – R7,60) (14 000)
Limited to (Note) nil
2024 year of assessment
Exchange loss in respect of 2024 tax year
FC100 000 × (R8,00 – R7,74) (26 000)
Total deduction in 2024 year of assessment (R26 000 + R14 000) (40 000)

continued

312
8.2 Chapter 8: Specific deductions and allowances

Note
Since the machine is only brought into use on 1 April 2023, the exchange loss is not
deductible in the 2023 year of assessment. The deduction is therefore deferred to the year
during which the machine is brought into use, namely, the 2024 year of assessment
(section 24I(7)).

Example 8.2
On 30 November 2022, Motsepe (Pty) Ltd purchased trading stock for US$100 000 from a
supplier in America. It also entered into a contract for manufacturing machinery costing
US$500 000 with the same supplier in America. The trading stock was sent by air (FOB on
30 November 2022) and was received by the taxpayer on 5 December 2022. Air freight
and customs and clearing expenses amounted to R10 000. The manufacturing machinery
was dispatched by ship (FOB on 30 November 2022) and was received and brought into
use by the taxpayer on 15 February 2023. At 28 February 2023, 80% of the trading stock
was still on hand and the cost of the trading stock and of the manufacturing machinery
was still unpaid. The total debt of US$600 000 was paid on 30 June 2023.
The spot rates were as follows:
30 November 2022 $1 = R6,90
5 December 2022 $1 = R6,96
15 February 2023 $1 = R6,98
28 February 2023 $1 = R7,03
30 June 2023 $1 = R6,82
The average exchange rate for the 2023 year of assessment was $1 = R6,95
You are required to calculate the tax consequences of these transactions for the 2023 and
2024 years of assessment (ending 29/28 February)

Solution 8.2
R
2023 year of assessment
Deduction in respect of the cost of trading stock (Note 1)
$100 000 at a spot rate of $1 = R6,90 (section 25D) (Note 2) (690 000)
Add: Cost of getting the stock into its present place and condition – air
freight, customs and clearing cost (10 000)
Section 11(a) deduction (700 000)
Section 24I: Deduction of unrealised foreign exchange loss
$600 000 × (R6,90 – R7,03) (exchange rate at 28 February 2023) (78 000)
Cost price of manufacturing machinery for tax allowances $500 000 × R6,90 =
R3 450 000 (section 25D)
Section 12C: Wear-and-tear: R3 450 000 × 40% (1 380 000)
Section 22: Closing stock on hand to be included in taxable income 80% of 560 000
R700 000

continued

313
A Student’s Approach to Taxation in South Africa 8.2

2024 year of assessment

Deduction in respect of opening stock on hand (section 22) (560 000)
Section 24I: Realised foreign exchange gain included in taxable income 126 000
$600 000 × (R7,03 – R6,82)
Section 12C: Wear-and-tear: R3 450 000 × 20% (690 000)

Notes
1. Section 22(3) provides for the valuation of trading stock, this value being:
• the cost incurred in acquiring the stock; plus
• any further costs incurred in getting the trading stock into its existing condition and
location but excluding foreign exchange differences.
2. The cost price of the manufacturing machinery and trading stock has been calculated
by applying the spot rate in terms of section 25D.
3. Section 24I applies because assets were acquired in foreign currency on credit (there is
debt that constitutes an exchange item as defined) and therefore all realised and
unrealised gains and losses, irrespective of whether it is of a capital nature or not, are
included in the determination of taxable income.

REMEMBER

• The foreign exchange differences on trading stock and other movable assets financed by
a loan, advance or debt in a foreign currency are included in the taxpayer’s taxable
income in terms of section 24I.
• If the amount of any foreign exchange gain relating to debt becomes bad and it was
included in taxable income in the current or a previous year of assessment, it must be
deducted from income. If the amount of a foreign exchange loss relating to debt
becomes bad and it was deducted from income in the current or a previous year of
assessment, it must be included in income.
• Section 24I only addresses the foreign exchange differences on the exchange items (the
underlying debt) and not the underlying asset. The conversion of the underlying asset
or expense is dealt with in terms of section 25D (converted into the local monetary unit
by using the spot rate on the transaction date). In certain cases, the average exchange
rate is used. The deductibility of the underlying asset or expense is determined in terms
of section 11(a) or the allowances relating to capital assets (refer to chapter 9).
• If a headquarter company received or paid an amount in a currency other than its
functional currency or the Rand, that amount must be determined in its functional
currency and must then be translated to Rand by applying the average exchange rate
for that year of assessment.

314
8.3 Chapter 8: Specific deductions and allowances

8.3 Trading stock (section 1)

‘Trading stock’ is defined in section 1 of the Act.

Legislation:
Section 1: Definitions: Trading stock
(a) includes:
(i) anything produced, manufactured, constructed, assembled, purchased or in any
other manner acquired by a taxpayer for the purposes of manufacture, sale or
exchange by the taxpayer or on behalf of the taxpayer;
(ii) anything the proceeds from the disposal of which forms or will form part of the
taxpayer’s gross income; but
(iii) any consumable stores and spare parts acquired by the taxpayer to be used or
consumed in the course of the taxpayer‘s trade; but
(b) does not include:
(i) a foreign currency option contract; or
(ii) a forward exchange contract, as defined in section 24I(1).

REMEMBER

• Trading stock can also be referred to as ‘inventory’.

• The definition of trading stock specifically includes consumable stores and spare parts
acquired by a taxpayer to be used for trade purposes.

In Ernst Bester Trust v Commissioner for South African Revenue Service the court had to
decide if sand on a farm can be trading stock.

CASE:
Ernst Bester Trust v Commissioner for South African
Revenue Service 70 SATC 151 (SCA)
Facts: A contractor obtained a mining Judgment: The income received from the
licence to mine sand on a farm from the sales of sand was made in the operation of
taxpayer. The taxpayer played no part in an on-going scheme of profit-making over
the extraction or disposal of the sand. The many years and is income in nature. The
taxpayer merely required due payment per agreement was similar to a mineral lease
cubic meter of sand removed as and when and that the rental or royalties were ‘the
it suited the contractor to exercise its product of capital productively employed’
rights. The taxpayer contended that the and therefore constituted income.
proceeds derived from the sales of sand Section 22 was not applicable to unsepa-
were capital in its hands or in the rated in situ (still in the ground) deposits of
alternative, if it is revenue in nature then sand. Accordingly, that the sand deposit
he can claim an opening stock deduction in could not fairly be described as trading
respect of the sand still in the ground at stock held by the taxpayer for the purposes
the beginning of each of the years of of section 22.
assessment valued at its market value.

315
A Student’s Approach to Taxation in South Africa 8.3

8.3.1 Trading stock: Introduction (section 22)

For accounting purposes, a business may deduct cost of sales from sales to calculate
the gross profit of the business. Cost of sales is calculated as follows:
Opening stock + Purchases – Closing stock
For taxation purposes, section 22 provides that closing stock be added to gross
income and opening stock and purchases be deducted from income together with the
other tax-deductible expenses. Expenditure on trading stock is expenditure incurred
in the production of income and is of a non-capital nature.

8.3.2 Closing stock (section 22(1))

Section 22(1) provides that where a person carries on a trade (other than farming), the
amount to be considered in respect of trading stock held and not disposed of at the
end of the year of assessment (closing stock) is:
• the cost price of the trading stock; less
• any amount that the Commissioner may consider just and reasonable as
representing the amount by which the value of the trading stock (other than
financial instruments) has been diminished because of
– damage;
– deterioration;
– change in fashion;
– decrease in the market value; or
– for any other reason as listed by the Commissioner.
When determining the diminished value of trading stock at year-end due to damage,
deterioration etc., it must be taken into account that some items held and not
disposed of by the taxpayer may exceed their cost price.
Practice Note 36 deals with the methods used by the taxpayers to write off slow-
moving and obsolete stock, without reference to the actual net realisable value, for
the purposes of section 22(1) and provides that:
• taxpayers be required to disclose in the annual return of income, the basis on
which stock is valued;
• where stock has not been valued at cost, but at a lower value, the fact must be
disclosed to SARS, giving reasons therefore and indicating how the lower value
was arrived at. If written off on a fixed, variable or any other basis not representing
the actual lower value, the write-off will not be accepted without reasonable
justification of the basis; and
• where a taxpayer has undervalued his stock and not revealed the fact, this is
viewed in a serious light and the imposition of a penalty in terms of the Tax
Administration Act is levied.

REMEMBER

• Closing stock is added to gross income in the calculation of taxable income.

316
8.3 Chapter 8: Specific deductions and allowances

In the Commissioner for South African Revenue Service v Volkswagen SA (Pty) Ltd the
court had to decide if the Commissioner could grant the taxpayer a reasonable
allowance for the diminished value of closing stock.

CASE:
Commissioner for South African Revenue Service v
Volkswagen South Africa (Pty) Ltd
Facts: The taxpayer holds a number of diminished value of the training stock at
unsold vehicles at the end of each tax year. the end of the year and also refused the
Some of them are manufactured while deduction claimed by the taxpayer. The
others are imported. The taxpayer calcul- court held that the difference between the
ated the value of its trading stock at year cost price and the NRV was not justifiable
end using its ‘net realisable value’ (NRV) to claim a deduction and the taxpayer had
in terms of IAS2. This yielded an amount to pay the additional tax levied. The value
less than the cost price of the trading stock of trading stock can only be reduced below
and the taxpayer claimed a deduction from cost price if the trading stock is worth less
the cost price that was represented by the due to damage, deterioration, change in
difference between the cost price and the fashion, decrease in market value or any
NRV. other reason accepted by the Commis-
Judgment: The Commissioner rejected the sioner in terms of section 22(1)(a) (but this
contention that the NRV represented the does not include future expenditure.

8.3.3 Opening stock (section 22(2))

Section 22(2) provides that the amount to be considered in respect of the value of
trading stock held and not disposed of at the beginning of the year of assessment
(opening stock) shall be:
• where the trading stock formed part of the trading stock at the end of the
immediately preceding year of assessment, the value considered at that date; or
• where it did not form part of the closing trading stock of the previous year of
assessment, the cost price of the trading stock.

317
A Student’s Approach to Taxation in South Africa 8.3

Example 8.3
Bailey (Pty) Ltd provides the following information in connection with stock on hand
and stock purchased:
Cost Market
price value
1 March 2022 R R
Completed products 200 000 800 000
Raw materials (purchased on 1 March 2022) 30 000 24 000
Packing material 54 000 14 000
Machinery spares 6 600 13 200
28 February 2023
Completed products 160 000 620 000
Raw materials 40 000 32 000
Packing material 3 000 1 000
Machinery spares 7 800 14 800

Note
The Commissioner accepts these market values as reasonable values.
You are required to calculate the value of the opening and closing stock of Bailey (Pty)
Ltd for the current year of assessment (ending 28/29 Feburary).

Solution 8.3
R
Completed products at cost price 200 000
Raw materials at cost price
(did not form part of closing stock from the previous year of assessment) 30 000
Packing material at market value 14 000
Machinery spares at cost price 6 600
Opening stock 250 600
Completed products at cost price 160 000
Raw materials at market value 32 000
Packing material at market value 1 000
Machinery spares at cost price 7 800
Closing stock 200 800

REMEMBER

• Opening stock is deducted from income in the calculation of taxable income.

8.3.4 Deduction of stock purchased during the year (section 11(a))

Expenditure incurred in acquiring trading stock is deductible in full in terms of
section 11(a), even if some trading stock remains unsold at the end of the year of
assessment.

318
8.3 Chapter 8: Specific deductions and allowances

Example 8.4
Gala (Pty) Ltd provided you with an extract from its Statement of profit or loss and other
comprehensive income for the current year of assessment:
R R
Sales 1 000 000
Less: Cost of sales (375 000)
Opening stock 150 000
Add: Purchases 350 000
500 000
Less: Closing stock (125 000)
Gross profit 625 000
You are required to calculate the effect of the cost of sales on Gala (Pty) Ltd’s taxable
income.

Solution 8.4
R R
Sales 1 000 000
Add: Closing stock (section 22(1)) 125 000
Gross income 1 125 000
Less: Expenditure
Opening stock (section 22(2)) 150 000
Purchases (section 11(a)) 350 000 (500 000)
Taxable income 625 000

8.3.5 Cost price of stock (section 22(3) and (5))

Section 22(3) provides that the cost price of trading stock is:
• the cost incurred (during the current or any previous year of assessment) in
acquiring the stock; plus
• any further costs incurred in getting the stock into its existing condition and
location (for example, import duties, transport, handling costs and other directly
attributable costs of acquisition less discounts, rebates and subsidies on purchases),
but excluding an exchange difference as defined in section 24I(1) (refer to 8.2); or
• If an asset is acquired during the year as a capital asset and is then converted to
trading stock, paragraph 12(2)(c) of the Eighth Schedule deems the asset to have
been acquired at market value at the date of change of intention.
Further costs referred to above are such costs as in terms of an IFRS (International
Financial Reporting Standard) approved by the Commissioner which must be
included in the valuation of trading stock.

319
A Student’s Approach to Taxation in South Africa 8.3

Where, for example, a taxpayer is a manufacturer, his stock-in-trade is valued in

terms of generally accepted accounting practice at:
• the cost of direct materials and labour incorporated into the product; plus
• a systematic allocation of production overhead costs, both fixed and variable, such
as indirect materials and labour, depreciation and maintenance of factory buildings
and equipment and the cost of factory management and administration, that relate
to putting the stock into its present location and condition (fixed production
overheads should be allocated on the capacity of the facilities and not the actual
level of output); plus
• overheads other than production overheads, only to the extent that they clearly
relate to putting the stock in its present location and condition. (These overheads
include the design costs of certain products for specific clients.)
The cost of stock is accounted for on the ‘first-in-first-out’ (FIFO) basis or the average
cost basis. In terms of the FIFO basis, stock items that were purchased first are
deemed to be sold first for valuation purposes. Stock items that are not normally
exchangeable or that were manufactured for a specific project are valued by assigning
the individual costs to the identified stock items.
Methods such as the standard-cost method may be used only if they closely
approximate historical cost and where the cost of by-products cannot be segregated,
they may be valued at the net realisable value, this value having been deducted from
the cost of the main product.
Section 22(5) provides that the ‘last-in-first-out’ (LIFO) method may not be used to
determine the cost price of trading stock.

Example 8.5
Gumbo (Pty) Ltd purchased stock for R50 000 (VAT excluded). The company also
incurred handling fees of R2 500 (VAT excluded) and paid a transporter R5 000 (VAT
excluded) to deliver the stock.
You are required to calculate the cost price of the stock for tax purposes for the current
year of assessment..

Solution 8.5
R
Purchase price 50 000
Add: Handling fees 2 500
Transport 5 000
Cost price 57 500

320
8.3 Chapter 8: Specific deductions and allowances

Will the answer differ if the company is not a registered VAT vendor?

8.3.6 Trading stock acquired for no consideration (section 22(4))

Section 22(4) provides that where trading stock has been acquired by a person for no
consideration (for example, by donation or inheritance) or for a consideration not
measurable in terms of money (other than a government grant in kind), it is deemed
to have been acquired at a cost equal to the current market price on the date of
acquisition. No deduction can be claimed in terms of section 11(a) regarding this
trading stock acquired for no consideration as no expenditure was actually incurred.
Any trading stock acquired for no consideration that is held and not disposed of at
the end of the year of assessment, is included in the closing stock of the taxpayer at
the market value at the date of acquisition. While section 22(4) also does not provide
for a deduction of the ‘cost’ of the trading stock acquired for no consideration, it is
SARS’s practice to allow a taxpayer to claim a deduction of the market value of the
trading stock in terms of section 22(2), as part of the taxpayer’s opening stock
deduction.

Example 8.6
Blue Hills (Pty) Ltd, a South African resident, acquired trading stock by way of an
inheritance on 1 March. The market value on the date of inheritance was R760 000 (VAT
excluded). The stock was not sold at year-end and the market value at year-end was
R780 000. Purchases of trading stock of R2 500 000 were acquired during the current year
of assessment and the opening stock and closing stock was R580 000 and R620 000,
excluding the trading stock acquired by inheritance above, respectively.
You are required to calculate the effect of the above transaction on the taxable income of
Blue Hills (Pty) Ltd, for the current year of assessment ended 28/29 February2.

Solution 8.6
R
Opening stock – section 22(2) (R580 000 + R760 000 SARS practice) (1 340 000)
Purchases – section 11(a) (2 500 000)
Closing stock – section 22(1) (R620 000 + R760 000) 1 380 000

321
A Student’s Approach to Taxation in South Africa 8.3

CASE:
Everyready (Pty) Ltd v Commissioner for South African
Revenue Service 74 SATC 185 (SCA)
Facts: A taxpayer company acquired a agreed between the parties. It was apparent
business as a going concern. The company from the subject matter of the sale that in
claimed a deduction for trading stock terms of the agreement the business as a
acquired for no consideration, at market whole was the subject of the sale, which
value according to section 22(4). The included payment for the purchase of
Commissioner disallowed the deduction in trading stock.
full, but only allowed a partial deduction
Section 22(4) was not applicable, and the
and levied section 89quat interest on the
trading stock was not acquired for no consi-
‘unpaid’ tax. The court had to decide if the
deration. The taxpayer therefore could not
amount could be claimed by the company.
deduct the market value of the trading stock
in terms of SARS practice, but had to allo-
Judgment: Whether the stock was acquired cate a reasonable portion of the actual
for no consideration depended on what was purchase consideration to trading stock.

8.3.7 Consumable stores

Consumable stores are those items that a business ‘consumes’ as part of its trade. It
includes, for example, stationary used in the office such as pens, pencils and ink
cartridges. Coffee, tea, sugar and milk that are used by staff during tea breaks are also
considered to be consumable stores. Consumable stores are specifically included in
the definition of trading stock and taxpayers must account for the opening and
closing stock in respect of these items. Packing materials must also be included in the
stock on hand of consumable stores.

8.3.8 Disposal of stock other than normal trading (section 22(8))

Section 22(8) also makes provision for the disposal of trading stock by a taxpayer:
• by applying it to his private or domestic use;
• by donating it;
• by disposing of it for a purpose other than disposal in the ordinary course of trade
for a consideration less than the market value;
• by a distribution in specie to a shareholder of that company;
• by applying it for a purpose other than disposal in the ordinary course of trade; or
• by no longer being held as trading stock.
Where the cost price of the stock was taken into account in a year of assessment in
determining his taxable income, it is deemed that an amount was recouped or
recovered by the taxpayer in terms of section 22(8).
In the case where the taxpayer has applied the trading stock to his private or
domestic use or consumption, he is deemed to have recovered or recouped an
amount equal to the cost price of the trading stock (as reduced in terms of sec-
tion 22(1) as a result of diminution in value) and this amount is included in his
taxable income for the year of assessment in which the trading stock was disposed of
in this manner. Where the cost price cannot readily be determined, the market value
of the stock is added to his taxable income.

322
8.3 Chapter 8: Specific deductions and allowances

REMEMBER

• Only a natural person can apply assets such as trading stock for private use or domestic
consumption.
• If a director of a company takes stock for private or domestic use or consumption, he or
she is effectively not the taxpayer and only an employee of the taxpayer (which is the
company) and therefore the stock will be recouped at market value.
• Non-natural persons, such as trusts and companies, cannot apply assets for private or
domestic purposes.

Where the taxpayer has applied the trading stock in any other manner as set out
above or has ceased to hold it as trading stock, he is deemed to have recouped the
market value of the stock (less any reduction in terms of section 22(1) as a result of a
decrease in value) and this amount is included in his taxable income in the year of
assessment in which the stock is so applied, or no longer held as trading stock.
Where the taxpayer has applied the trading stock for the purpose of making a
donation in respect of which the provisions of section 18A apply, he is deemed to
have recouped an amount equal to the amount that was taken into account for that
year of assessment in respect of the value of that trading stock (usually the cost price)
(refer to 8.7.2).
Where the asset was applied by the taxpayer for the purposes of his trade (for
example, withdrawn as trading stock but applied in the production process), the
amount recovered or recouped as above is deemed to be the expenditure incurred in
acquiring the asset for use in carrying on his trade. For example: A motor dealer who
withdraws a motor vehicle from stock to be used by one of his salesman for business
purposes, is deemed to have recouped an amount equal to the market value and is then
also deemed to have incurred expenditure equal to the market value of the vehicle and
will base his wear-and-tear allowance in terms of section 11(e) on the deemed price of
acquisition (refer to chapter 9).

Example 8.7
Trading stock, which cost the taxpayer (a natural person) R6 000, is removed by him for
private use. The market value of the trading stock on the date it was used was R8 000.
You are required to calculate the effect of the above transaction on taxable income.

Solution 8.7
R
Recoupment included in taxable income at cost price (section 22(8)(A)) 6 000

323
A Student’s Approach to Taxation in South Africa 8.3

Example 8.8
Refer to the information as set out in example 8.7. However, the taxpayer distributed the
trading stock as a dividend.
You are required to calculate the effect of the above transaction on taxable income.

Solution 8.8
R
Recoupment included in taxable income at market value (section 22(8)(B)) 8 000

Example 8.9
Refer to the information as set out in example 8.7. However, the taxpayer donated the
trading stock and the donation qualifies for the section 18A deduction.

Solution 8.9
R
Recoupment included in taxable income at cost price (section 22(8)(C)) 6 000

Note
If the donation did not qualify for the section 18A deduction, the recoupment would have
been included at the market value.

8.3.9 Trading stock: Year of assessment (section 22(6))

The beginning or end of a year of assessment includes a reference to the beginning or
end, as the case may be, of the period assessed where the period assessed is less than
12 months.

8.3.10 Acquisition or disposal of trading stock (section 23F)

Section 23F is an anti-avoidance provision aimed at the prevention of schemes where
taxpayers do not include closing trading stock in taxable income, but still claim a
deduction for the various expenses incurred in purchasing the trading stock in terms
of section 11(a).
Section 23F(1) provides for the situation where a taxpayer has incurred expenditure
during the year of assessment for the acquisition of trading stock which was:
• not disposed of during the year of assessment (for example, by sale, consumption
in the course of his undertaking, donated etc.); and
• not held by him at the end of the year of assessment (for example, because it had
not yet been received, the expenditure constituted a deposit, the agreement of
purchase was cancelled, the stock was lost or destroyed etc.).

324
8.3 Chapter 8: Specific deductions and allowances

A deduction which may be granted in terms of section 11(a) in respect of the ex-
penditure incurred is not granted in the year of assessment it was actually incurred,
but is deemed to have been incurred in the subsequent year of assessment in which:
• the trading stock is disposed of;
• the value of the trading stock is included in the closing stock on hand (in terms of
section 22(1)); or
• it is shown that, by reason of the loss or destruction of the trading stock or the
termination of the agreement in terms of which the stock was acquired or for any
other reason, the trading stock is neither disposed of nor included in the closing
stock,
to the extent that the expenditure has actually been paid.

REMEMBER

• Trading stock includes consumables and spare parts used in the course of trade.
• Closing stock is added to gross income.
• Opening stock is deducted from income.
• The cost price of trading stock includes the cost incurred in acquiring the stock plus any
further costs incurred in getting the stock into its existing condition and location.
• Trading stock purchases during the year are deductible in terms of section 11(a).
• Trading stock acquired for no consideration is deemed to be acquired at the market value.
• The amount included in the taxpayer’s income as a result of the disposal of trading
stock other than normal trading is reduced by the amount of consideration received by
or accrued for the disposal of the trading stock.
• Trading stock used or consumed for private use by the taxpayer (a natural person) is
deemed to have been recouped equal to the cost price of the trading stock by the
taxpayer.
• Where trading stock is donated in terms of section 18A, an amount equal to the section
11(a) deduction (cost price) of the trading stock is deemed to have been recouped by the
taxpayer making the donation.
• VAT incurred on the acquisition of trading stock is excluded from the cost price of the
stock if an input tax deduction was claimed.
• The purchase of trading inventory that qualifies as a deduction is limited to the amount
received or accrued as a result of that inventory during that year of assessment. This is
an anti-avoidance measure.

8.3.11 Debt reduction: Trading stock (section 19)

If a person incurs expenditure in respect of trading stock (for example the acquisition
of trading stock on credit) and later there is a debt benefit received by the taxpayer in
relation to that debt, section 19 is applicable.
If a person incurs expenditure in respect of trading stock and receives a debt benefit,
the deduction claimed in terms of section 11(a) or the value of the trading stock for
purposes of closing stock and opening stock (section 22(1) and (2)) must be reduced.

325
A Student’s Approach to Taxation in South Africa 8.3

If the amount of the reduction is greater than the amount claimed, the amount is a
recoupment in terms of section 8(4)(a) and must be added to the taxpayer’s gross
income.
Section 19 does not apply if the debt benefit in respect of a debt owed by a person:
• constitutes ‘property’ (as defined for estate duty purposes) in a deceased estate and
the debt is reduced in favour of an heir or legatee by virtue of a bequest from the
deceased (refer to chapter 18);
• qualifies as a donation in respect of which donations tax is payable (refer chapter
17); or
• stems from an employer-employee relationship and is regarded as a fringe benefit
(refer to chapter 14).

8.3.12 Trading stock: Share dealers (sections 22 and 9C)

Definition (section 1)
A share dealer is a taxpayer who deals in shares, options or futures, which constitute
his trading stock. When an investor sells shares, any profit on the sale of the shares is
of a capital nature, if that share had been held for a period of at least three years. The
difference between the cost price of the shares and the proceeds on the disposal of the
shares is of a capital nature and subject to capital gains tax (refer to chapter 10). When
an investor regularly buys and sells shares or futures or options which have shares as
the underlying asset, the Commissioner will seek to include the profits in his gross
income on the grounds that he has changed his intention to hold the assets as an
investment to that of trading in a profit-making scheme.

Trading stock (section 22)

The shares of a share dealer, being trading stock, are subject to the provisions of
section 22 of the Act. Section 22(1) provides for the valuation of trading stock at the
lower of cost or market value.
For share dealers, this write-down to market value is specifically prohibited. Certain
costs involved in acquiring the shares, such as broker’s fees or stamp duty, which
would be capital costs to an investor, may be added to the cost of the shares held as
trading stock by a share dealer and therefore deducted from the proceeds of the
eventual sale of the shares.
Section 22(4) provides that where a person has acquired trading stock for no
consideration or for a consideration not measurable in terms of money, he is deemed
to have acquired it at the current market price on the date of acquisition. This may
therefore apply to shares that a shareholder acquired by way of inheritance or
donation and that will form part of his trading stock (refer to 8.3.6).
Where a taxpayer has donated trading stock, section 22(8) provides that he is deemed
to have recovered or recouped the market value of the trading stock unless the
donation is deductible in terms of section 18A – the cost price would then be
recouped. This also applies to shares held as trading stock. The subsection also
provides that where trading stock has been distributed in specie to a shareholder of

326
8.3 Chapter 8: Specific deductions and allowances

the company (whether by way of a dividend, liquidation dividend, reduction of share

capital or redemption of redeemable preference shares), the market value of the
trading stock must be included in the company’s income. This also applies to a share-
dealing company (refer to 8.3.8).

Example 8.10
Monate (Pty) Ltd is a share dealer and a South African resident. The company bought
18 000 shares in another company, A Ltd, in the previous year of assessment at a total cost
of R10 000. Monate (Pty) Ltd sold 12 000 of these shares for R1 each.
You are required to calculate Monate (Pty) Ltd’s taxable income for the current year of
assessment on the disposal of the shares in company A Limited.

Solution 8.10
R
Gross income: Cash proceeds (12 000 x R1) 12 000
Less:Opening stock – 18 000 A Ltd shares (10 000)
Add:Closing stock – 6 000 A Ltd shares
6 000
× R10 000 3 333
18 000
Taxable income 5 333

Note
Capital gains tax is not applicable as the shares are disposed of by a share dealer as part of
his business activities and the shares were not held for more than three years. The profit is
therefore taxed as part of his normal business income.

Share disposals deemed to be capital (section 9C)

Although a share dealer is taxed on the proceeds of the sale of shares and can deduct
the cost of these shares in arriving at the taxable income from the transactions,
section 9C makes provision for circumstances in which the disposal of listed shares is
deemed to be a transaction of a capital nature.
An amount received or accrued by a taxpayer in relation to an equity share, other
than a dividend or foreign dividend, is regarded as being of a capital nature if the
period of ownership of the equity shares was at least three years.
An equity share refers to a share that
• includes a participatory interest in a portfolio of a collective investment scheme in
securities or participatory interest in a hedge fund collective investment scheme;
• has been disposed of or is deemed to have been disposed of for the purposes of
capital gains tax;
• the taxpayer has been the owner of the share for a continuous period of at least
three years prior to disposal, provided that the share is not:
– a share in a share block company;
– a share in an unlisted non-resident company; or
– a hybrid equity instrument as defined in section 8E.

327
A Student’s Approach to Taxation in South Africa 8.3

Note that if a taxpayer receives an amount in respect of the sale of shares in a

venture capital company as contemplated in section 12J(2) (other than an equity share
held for longer than five years) and the amount is recouped in terms of section 8(4)(a)
(because it was previously allowed as a deduction from income), the amount received
is not regarded as being of a capital nature.
This provision is not applicable, if at the time of the receipt or accrual of an amount of
the equity share the taxpayer was a connected person to the company that issued the
shares and:
• more than 50% of the market value of the equity shares of that company is
attributable to directly or indirectly to immovable property, other than:
– immovable property held directly or indirectly by a person who is not a connected
person in relation to the taxpayer, or
– immovable property held directly or indirectly for a period of at least three years
immediately prior to that receipt or accrual; or
• that company acquired an asset during the period of three years immediately prior
to that receipt or accrual and amounts were paid or were payable by a person other
than the company for the use of that asset while that asset was held by that
company.
Therefore, the provisions of section 9C do not take effect if the taxpayer is a connected
person and more than 50% of the market value of the share can be attributed directly
or indirectly to immovable property acquired within the period three years prior to
the receipt or accrual of the equity shares, or if assets were acquired during the three
years preceding the receipt or accrual and an amount was paid to a person other than
the company for the use of the assets (for example a bare dominium transaction).
A connected person refers to a connected person as defined in section 1 (refer to
chapter 9.2), provided in the case where a shareholder holds 20% of the share capital,
the expression ‘and no holder of shares holds the majority voting rights in the
company’ must be disregarded. In other words, for the purposes of this section a
person is a connected person if that person holds 20% or more of the share capital,
even if there is a majority shareholder.
Expenditure and losses, allowed as a deduction in terms of section 11, in current or
previous years of assessment, must be recouped in the year of receipt or accrual in
respect of the equity shares that is disposed of. No recoupment is available in terms
of the provisions of section 22(8) or to equity shares in a REIT or a controlled foreign
company that is a resident (except to the extent that such amount was taken into
account in determining the cost price or value of the trading stock) in respect of the
receipt or accrual of the equity share on or after the date that it has been held for a
period exceeding three years.
If the taxpayer holds shares (of the same class in the same company) that were
acquired by the taxpayer on different dates and the taxpayer has disposed of any of
those shares, the taxpayer must be deemed to have disposed of the shares held for the
longest period of time first (FIFO).

328
8.3–8.4 Chapter 8: Specific deductions and allowances

If a company issues shares as a substitute for previously owned shares because of a

subdivision, consolidation or a conversion (company to a closed corporation or
co-operative to a company (section 40A or 40B)), the substituted share is regarded as
the same as the previously held shares if:
• the participation rights and interests in that company remain unaltered; and
• no consideration passed for the issued shares.

Foreign equity instruments

If a taxpayer disposes of a foreign equity instrument (defined in section 1 of the Act)
which forms part of trading stock, the amount to be included in gross income is
determined by applying the spot rate on disposal of the foreign equity instrument.
The acquisition of the foreign equity is also determined by applying the spot rate.

REMEMBER

• Where the profit on the sale of shares by a share dealer is taxable, it is not subject to
capital gains tax as the proceeds would already have been included in gross income and
the cost of the shares claimed as a deducton in terms of the general deduction formula.
• Section 9C makes provision for circumstances in which the disposal of listed shares is
deemed to be a transaction of a capital nature that may give rise to capital gains tax.
• If an investor sells shares that has been held for a period of less than three years, it will
not automatically be seen as capital in nature and the intention of the taxpayer must be
investigated (refer to the gross income definition in chapter 3).

8.4 Employee-related expenses

The payment of salaries or wages of persons employed in the taxpayer’s business or
for the purposes of his trade qualifies for deduction in terms of section 11(a), being
expenditure incurred in the production of income. The Act also makes provision for
certain other employee-related expenses which might not normally qualify as a
deduction under section 11(a).

8.4.1 Contributions to funds (section 11(l ) and (a))

An employer can make monthly contributions to pension funds, provident funds and
retirement annuity funds to assist his employees in providing for their retirement. In
the same way, an employer can also assist his employees by making contributions to
their medical aid funds.
Section 11(l ) provides for the deduction of a sum contributed by an employer during
the year of assessment for the benefit of his employees to a pension, provident or
retirement annuity fund. There is no limitation on the deduction and the amount is
fully deductible in the current year of assessment.
The contributions that the employer made to the medical aid funds of the employees
will not qualify for a deduction under section 11(l). The employer can normally claim a
deduction for these contributions in terms of section 11(a) (the general deduction
formula) if he can prove that the contributions were made in the production of income.

329
A Student’s Approach to Taxation in South Africa 8.4

8.4.2 Annuities in respect of former employees (section 11(m))

Section 11(m) provides a deduction for annuities paid by a taxpayer to the following
persons:
• former employees;
• former partners of a partnership who have retired; and
• the dependants of deceased employees and partners, who were dependants
immediately prior to the death of the deceased employee or partner.
The deduction is subject to the following condition:
• the former employee must have retired because of old age, ill health or infirmity.
Additional conditions apply for the deduction in the case of former partners of a
partnership.
The annuity is deductible in full and there is no limitation to the deductible amount.

Example 8.11
During the current year of assessment, Matsaung (Pty) Ltd paid the following annuities to
former employees and their dependants:
R
Mrs Sarah Ntuli, the wife of an employee who died during the year 60 000
Jeffrey and Martha, the children of a retired employee, to each 20 000
Mr Thomas Mbeki, a retired employee on the grounds of old age 10 000
You are required to calculate the amounts that Matsaung (Pty) Ltd can claim as a
deduction in determining its taxable income for the current year of assessment.

Solution 8.11
R
Sarah 60 000
Jeffrey and Martha (R20 000 × 2) 40 000
Thomas 10 000
Deduction that can be claimed 110 000

8.4.3 Restraint of trade payments (section 11(cA))

When an employee works for a business, he learns certain skills and acquires certain
knowledge in respect of that business. He can then apply these skills and use the
knowledge to start a similar business of his own or to go and work for a competitor.
To restrain him from doing this, he may be paid a restraint of trade payment by the
employer whose service he is leaving.
Section 11(cA) deals with the deduction of restraint of trade payments. It provides an
allowance in respect of an amount actually incurred by a person in the course of the
carrying on of his trade, as compensation for a restraint of trade imposed on another
person who

330
8.4 Chapter 8: Specific deductions and allowances

• is a natural person;
• is or was a labour broker as defined in the Fourth Schedule to the Act; or
• is a personal service provider as defined in the Fourth Schedule; and
if it constitutes income in the hands of the recipient.
The amount to be deducted may not exceed, for a year of assessment, the lesser of:
• so much of the amount incurred as is equal to the amount divided by the number
of years or part thereof during which the restraint of trade applies; or
• one-third of the amount incurred.
In terms of section 23(l), an expense incurred in respect of the payment of a restraint
of trade is prohibited except as provided for in section 11(cA), to the extent that such
payment constitutes income of the person to whom it is paid. This prevents a
deduction in terms of section 11(a).

Example 8.12
Mickey Ltd made a restraint of trade payment of R160 000 to a retiring executive, Mr
Gavin Donald, on 1 March. Gavin was restrained from competing with the company for
four years from the date of the payment. Mickey Ltd’s financial year ends on the last day
of February. Gavin will be taxed on this amount.
You are required to calculate the amount that will be deductible for the current year of
assessment.

Solution 8.12
R
Amount paid 160 000
Current year of assessment
Deduction allowed
(the lesser of (R160 000 / 4) or (1 / 3 × R160 000)) 40 000

Note
The payment is deductible in equal instalments over the period to which it relates, four
years. Gavin is taxed on the full amount at date of receipt or accrual.

REMEMBER

• The deduction is only allowed to the extent that the amount incurred constitutes or will
constitute the income of the recipient.
• The minimum period for writing the payment off is three years.
• The deduction must not be apportioned for a part of the year, and the full deduction
calculated must be claimed by the taxpayer.

331
A Student’s Approach to Taxation in South Africa 8.4

8.4.4 Learnership agreements (section 12H)

Section 12H provides a deduction for employers that offer learnership programmes.
The allowance is an incentive for training employees in a regulated environment in
order to encourage skills development and job creation. It is available where:
• an employer has, during the year of assessment, entered into a registered
learnership agreement with a learner in the course of a trade carried on by him; or
• a learner has, during the year of assessment, completed a registered learnership
agreement entered into by that employer (or a company that forms part of the
same group of companies as that employer) during that year of assessment in the
course of a trade carried on by that employer.

Available deduction
In addition to any deductions allowable in terms of the Income Tax Act (for example
salaries), if a learner is a party to a registered learnership agreement with an
employer during the year of assessment, the employer will be able to claim an annual
as well as a completion allowance for the provisions as set out below.
The learnership agreement is deemed to be registered throughout the period of the
agreement as long as the learnership agreement is registered within six months after
the employer’s year of assessment.

Annual allowance on a registered learnership agreement (persons without a

disability as defined)
For a learner who holds a qualification of the National Qualifications Framework
(NQF) level 1 up to level 6, the annual allowance is an amount of R40 000, and a
learner who holds a qualification of the NQF level 7 up to level 10, the annual
allowance is an amount of R20 000 during a year of assessment during which the
learner is party to a registered learnership agreement. Therefore, the allowance is
R40 000 or R20 000 each year (a period of 12 months of the contract). The prior
qualifications of the learner entering into the learnership agreement determine the
value of the deduction.
Where the registered learnership agreement is valid for a portion of the current year
of assessment (that is to say for a period less than 12 months), the R40 000 or R20 000
must be pro-rated to the number of full months the learner was party to the
agreement.

On completion of a registered learnership agreement (persons without a disability

as defined)
If the period of the agreement is less than 24 months and the learner successfully
completes that learnership during the year of assessment, then the allowance in that
year is an amount of R40 000 or R20 000.
If the period of the agreement is equal to or more than 24 months and the learner
successfully completes that learnership during the year of assessment, then the
allowance in that year is an amount of R40 000 or R20 000 for each number of
consecutive 12-month periods within the duration of the agreement.

332
8.4 Chapter 8: Specific deductions and allowances

Annual allowance on a registered learnership agreement (persons with a disability

as defined)
A learner who holds the qualification of a NQF level 1 up to level 6 and has a
disability as defined, is allowed to claim an annual allowance of R60 000. A learner
who holds a qualification of the NQF level 7 up to level 10 and has a disability as
defined, is allowed to claim an annual allowance of R50 000.

On completion of a registered learnership agreement (persons with a disability as

defined)
If the period of the agreement is less than 24 months and the learner successfully
completes that learnership during the year of assessment, the allowance in that year
is an amount of R60 000 (NQF level 1 to 6) or R50 000 (NQF level 7 to 10).
If the period of the agreement is equal to or more than 24 months and the learner
successfully completes that learnership during the year of assessment, the allowance
in that year is an amount of R60 000 or R50 000 for each number of consecutive 12-
month periods within the duration of the agreement.
All of the above registered learnership agreements are effective if entered into on or
after 1 October 2016, but before 1 April 2024. It is important to note that the rules of
section 12H will still be applicable to all registered agreements entered into before
1 April 2024.

Example 8.13
On 1 February 2022 BCN (Pty) Ltd enters into a learnership agreement with an employee
with a NQF level 5 qualification for a 12-month period. The company’s year of assessment
ends on 31 January 2023. At the end of July 2022, the employee leaves the employment of
BCN (Pty) Ltd and on 1 August 2022 takes up employment with another employer,
MJ Productions (Pty) Ltd, where he continues with the original learnership agreement.
The employee successfully completes the learnership agreement six months later. The
employee does not have a disability as defined.
You are required to calculate allowances that will be claimed on the learnership
agreement for the 2023 year of assessment.

Solution 8.13
BCN (Pty) Ltd – 2023 year of assessment R
Annual allowance of R40 000 × 6 / 12 20 000
MJ Productions (Pty) Ltd – 2023 year of assessment
Annual allowance of R40 000 × 6 / 12 20 000
Completion allowance of R40 000 (full amount) 40 000
Note
BCN (Pty) Ltd is only entitled to the equivalent of six months of the annual allowance, as
the employee was only party to the agreement with BCN (Pty) Ltd for six months.
MJ Productions (Pty) Ltd is entitled to the annual allowance only for six months, as well
as the full completion allowance.

333
A Student’s Approach to Taxation in South Africa 8.4–8.5

Example 8.14
Apple Airlines (Pty) Ltd concludes a three-year learnership agreement with an employee
with a NQF level 8 qualification at the beginning of 1 January 2022. The employee
completes the learnership with Apple Airlines (Pty) Ltd on 31 December 2024. The
employee does not have a disability as defined.
You are required to calculate the learnership allowances that will be deductible by Apple
Airlines (Pty) Ltd who has a December year-end.

Solution 8.14
Apple Airlines (Pty) Ltd R
December 2022
Annual allowance 20 000
December 2023
Annual allowance of R20 000 20 000
1 April 2024
Annual allowance of R20 000 20 000
Completion allowance of R20 000 × 3 60 000
Note
The completion allowance of R20 000 is claimed in the year of completion for each
consecutive 12 months that are completed, R20 000 × 3 years (36 months) = R60 000.

REMEMBER
• The annual allowance is claimed in every year for the duration of the agreement,
whereas the completion allowance is claimed in the year that the agreement is
completed.
• An employer is not entitled to the allowances under the provisions of section 12H if a
learnership agreement is entered into and the employee was previously party to
another similarly registered learnership agreement with the same employer or associated
institution, but which they failed to complete.

8.5 Deductions relating to trade debtors and similar matters

8.5.1 Bad debts (section 11(i ))
If a taxpayer sells goods on credit, a debt arises in respect of that sale. If the debtor
then fails to pay that debt, the debt becomes bad, and is written off by the taxpayer.
Section 11(i) permits the deduction from income of the amount of a debt due to a
taxpayer to the extent to which it has become bad during the year of assessment,
provided that the amount was included in the taxpayer’s income in either the current
year or a previous year of assessment.
In terms of section 23(c), the Commissioner may disallow the deduction if the amount
is recoverable from another person under a guarantee or suretyship agreement.

334
8.5 Chapter 8: Specific deductions and allowances

Example 8.15
Furnish Ltd sells second-hand furniture on credit. The following information relates to
the current year of assessment:
R
Bad debts
• Trade debtors 20 400
• Loan owing by an employee 3 000
These amounts have proved to be irrecoverable.
You are required to calculate the amount that can be claimed as bad debts for the 2022
year of assessment.

Solution 8.15
R
Bad debts
• Trade debts 20 400
• Employee loan nil

Why can the R3 000 with regards to the employee loan not be claimed as
a bad debt deduction?

REMEMBER

• The debts must be trade debts which at some stage formed part of the taxpayer’s income;
irrecoverable staff loans would therefore not qualify unless the staff member borrowed
the money to buy trading stock from his employer.
• The debts also must be proved to be bad and the mere possibility that a debt may in the
future prove to be irrecoverable, does not suffice.
• If amounts allowed as irrecoverable are subsequently recovered, the amounts (excluding
VAT) form part of the gross income in the year of receipt in terms of paragraph (n) of the
gross income definition and section 8(4)(a).

8.5.2 Doubtful debts (section 11(j ))

If a taxpayer sells goods on credit, a debt arises in respect of that sale. If the debtor
then fails to pay that debt in good time, the debt becomes doubtful.
Section 11(j) authorises an allowance each year in respect of so much of a debt due to
the taxpayer that is considered doubtful according to criteria set out specifically in the
Act, provided that the debt would have been allowed as a deduction under another
provision of this Act, had it become bad.

335
A Student’s Approach to Taxation in South Africa 8.5

National Treasury appears to be trying to align the tax treatment of doubtful debts to
the accounting treatment when financial assets such as debtors (receivables) are
impaired for credit losses. Section 11(j) refers to IFRS 9, which is the International
Financial Reporting Standard that deals with financial instruments. It is still a
requirement that, for the allowance to be claimed, the debt must be deductible in
terms of the provisions of section 11(i) if it becomes bad. This means that the taxpayer
must be the owner of the debt and it must have been included in the income of the
taxpayer. Section 11(j) – Allowances for doubtful debt – provides for two scenarios:

Debt to which IFRS 9 is applied for financial reporting purposes (excluding lease
receivables):

The sum of:

• 40% of the aggregate of—
– the loss allowance relating to impairment that is measured at an amount equal
to the lifetime expected credit loss, as contemplated in IFRS 9 (excluding lease
receivables); and
– the amounts of debts disclosed as bad debt and written off for financial
reporting purposes, but that was not allowed as a deduction in terms of section
11(i) (the bad debt deduction).
Add:
• 25% of the loss allowance relating to impairment in terms of IFRS 9 (excluding
lease receivables and debt where the impairment is measured at an amount equal
to the lifetime expected credit losses).

Debt to which IFRS 9 is not applied for financial reporting purposes:

The sum of:
• 40% of the face value of doubtful debts that are in arrears for 120 days or more.
Add:
• 25% of the face value of doubtful debts that are in arrears for 60 days or more.
For taxpayers who do not apply IFRS 9 for financial reporting purposes, the amount
of doubtful debt must be reduced by any security that is available in respect of that
debt before the 25% and 40% are applied.
The Commissioner may, on application by a taxpayer, increase the 40% in the
calculations above to a percentage not exceeding 85%.

REMEMBER

• This allowance must be added to the income of the taxpayer in the following year,
when the new allowance is granted and deducted against the taxable income of the
taxpayer.

336
8.5 Chapter 8: Specific deductions and allowances

Example 8.16
Caz (Pty) Ltd owns a business that sells second-hand furniture. The company sells goods
for cash and on credit. The following information relates to the current and previous year
of assessment and the company does not apply IFRS 9:
Previous Current
year year
R R
List of doubtful debts (older than 60 days, but none older 30 000 60 000
than 120 days)
You are required to calculate the effect of the above amounts on the taxable income for
the current year of assessment.

Solution 8.16
The doubtful-debt allowance for the previous year must be added to taxable income:
25% × R30 000 = R7 500
The doubtful-debt allowance for the current year must be deducted from taxable
income:
25% × R60 000 = R15 000

Example 8.17
Blue Craze (Pty) Ltd owns a business that sells swimming pool equipment. The following
information relates to the current and previous year of assessment (the company does not
apply IFRS 9):
The debtors clerk indicated that the list of doubtful debts amounted to R2 500 000. 70% of
the list of doubtful debts as at year end are in arrears for more than 90 days, but less than
120 days. The doubtful debt allowance (correctly calculated) claimed in the previous year
of assessment amounted to R760 000.
You are required to calculate the effect of the above amounts on the taxable income for
the current year of assessment.

Solution 8.17
The doubtful-debt allowance for the previous year must be added to taxable income:
R760 000.
The doubtful-debt allowance for the current year must be deducted from taxable income:
R2 500 000 × 70% x 25% = R437 500.

337
A Student’s Approach to Taxation in South Africa 8.5

Example 8.18
Red Dot (Pty) Ltd owns a business that sells computer equipment. The company has a
July year end and applies IFRS 9 for financial reporting purposes.
At the end of the year, the company’s IFRS 9 loss allowance relating to impairment (equal
to its lifetime expected credit loss) was R45 000. Lease receivables were excluded from the
debt figures used in calculating the loss allowance.
You are required to calculate the effect of the above amounts on the taxable income for
the current year of assessment.

Solution 8.18
The doubtful-debt allowance for the current year must be deducted from taxable
income:
R45 000 × 40% = R18 000

8.5.3 Allowances on credit sales (debtors’ allowance) (section 24)

If a taxpayer sells an item in terms of a credit agreement, the whole of the amount,
excluding finance charges and VAT is, for tax purposes, deemed to have accrued to
the taxpayer on the day on which the agreement was entered into. The finance-charge
element must be dealt with under the provisions of section 24J; it is taxed in the
hands of the taxpayer over the period of the loan (refer to 8.6.4).
Section 24, in order to provide relief to taxpayers in respect of amounts that are
deemed to have accrued on the date of the agreement but have not been received at
the end of the year of assessment, provides for a debtors’ allowance which may be
summarised as follows:
• if there is an agreement;
• in terms of which ownership of the property passes upon, or after, the receipt by
the taxpayer of a portion of the price, or the whole price;
• the total contract price is included in the taxpayer’s gross income when the agree-
ment is concluded; and
• at least 25% of the contract price is payable on or after 12 months after the date of
the agreement, an allowance for amounts not yet received by the seller (after
adjusting for doubtful debts) is granted.
The debtors’ allowance is usually based on the seller’s gross profit percentage,
excluding finance charges and VAT.
In the case of a lay-by agreement, a taxpayer can claim an allowance against income
on all amounts which are deemed to have accrued but which have not become due
and payable to that taxpayer at the end of the taxpayer’s year of assessment, provided
that no doubtful debt in terms of section 11(j) was claimed. This is subject to a
condition that any allowance claimed in terms of section 24, must be included in the
taxpayer’s income in the following year of assessment.

338
8.5 Chapter 8: Specific deductions and allowances

Example 8.19
Molopi Ltd imports stationery that it sells for cash to wholesalers and to retailers in terms
of instalment credit agreements. These instalment credit agreements provide for the
payment of a deposit of 25% and the balance (including the finance charges) over a period of
18 months. The company applies IFRS 9 and the total doubtful debts amount relates to the
lifetime expected credit loss.
The following information relates to Molopi Ltd’s debtors in respect of instalment credit
agreements:
Current Previous
year year
R R
Debtors’ balances at 28/29 February – sales
(excluding finance charges) 320 000 360 000
Doubtful debts (included in the above amounts)
• debtors (excluding finance charges) 80 000 40 000
• finance charges accrued in terms of section 24J 64 000 32 000
Gross profit percentage 40% 40%
Molopi Ltd’s taxable income for the previous year of assessment amounted to R124 000
and to R318 000 for the current year of assessment, before taking any adjustments in
respect of debtors into account.
You are required to calculate Molopi Ltd’s taxable income for the previous and current
years of assessment.

Solution 8.19
R R
Previous year of assessment
Net profit (taxable income before debtor adjustments) 124 000
Less: Doubtful-debt allowance (Note 2)
(section 11(j) – 40% × (R40 000 + R32 000)) (28 800)
95 200
Less: Section 24 allowance
40% × (R360 000 – (40% × R40 000)) (137 600)
Limited to taxable income (Note 1) (95 200)
Taxable income nil
Current year of assessment
Taxable income before debtor adjustments 318 000
Add: Debtors’ allowances claimed in the previous year
to be added back in the current year of assessment
(R40 000 + R32000) x 40% 28 800
346 800
Less: Doubtful-debt allowance
(section 11(j)) – 40% × (R80 000 + R64 000)) (57 600)
289 200
Less: Section 24 allowance
40% × (R320 000 – (40% × R80 000)) (115 200)
Taxable income 174 000

continued

339
A Student’s Approach to Taxation in South Africa 8.5–8.6

Notes
1. The allowance granted in terms of section 24 is limited to the available income. In the
previous year of assessment, only R95 200 of the R137 600 (as calculated) could be
claimed. The balance is lost. In the current year of assessment, only the amount
claimed as a deduction, namely R95 200, is added to the taxable income before
debtors’ adjustments.
2. The doubtful-debt allowance would also be available in respect of any finance charges
that have accrued (in the present or any previous year of assessment) in terms of
section 24J and are included in the balances owing by debtors who are judged to be
doubtful.
3. The doubtful-debt allowance can create a loss but is calculated and deducted before
the section 24 allowances (the order of the sections in the Act).

REMEMBER

• This allowance cannot create or increase an assessed loss and must be added to the
income of the taxpayer in the following year, when a new allowance is granted.

8.6 Other expenses and deductions

8.6.1 Legal expenses (section 11(c))
The deduction of legal expenses has been provided for in section 11(c). The expenses
which qualify for deduction are specified and include:
• the fees of legal practitioners, witnesses, sheriffs and messengers;
• court fees; and
• other expenses of litigation.
The legal expenses must be incurred in respect of a claim, dispute or action at law
arising in the course of or by reason of the ordinary operations of the taxpayer in
carrying on his trade.
The deduction of legal expenses is subject to the following restrictions:
• capital expenses are not deductible;
• expenses incurred in respect of claims against the taxpayer for the payment of
damages or compensation is not allowed if the payment made in settlement of the
claim would not have ranked for a deduction in terms of section 11(a);
• expenses incurred in respect of claims by the taxpayer for the payment of an
amount is not allowed if the amount received would not constitute the taxpayer’s
income; and
• expenses incurred in relation to a dispute or action at law relating to the above
claims by or against the taxpayer is not allowed as a deduction unless the claims
rank for a deduction or are included in the income.

340
8.6 Chapter 8: Specific deductions and allowances

Examples
• Legal expenses in connection with the collection of trade debtors that are long
outstanding are allowed.
• Legal expenses incurred in drawing up a deed of lease by a lessor of property are
non-capital and are deductible as the taxpayer carries on business as a lessor of
property. To the lessee, this is a capital expense incurred in obtaining the use of an
asset and is therefore not deductible.
• Legal expenses incurred in an appeal against the imposition of tax would not have
been incurred in the production of income from trade and would therefore not be
deductible.
Each circumstance resulting in legal expenses would have to be decided on the facts
to determine the capital or revenue nature of the expense or its connection with the
taxpayer’s trade.

REMEMBER

• To be deductible, legal expenses need not be incurred in the production of income; a

causal connection with the taxpayer’s trade is sufficient.
• Where legal expenses are incurred for a dual purpose, one of which does not qualify for
deduction, a reasonable apportionment will be made.

8.6.2 Donations (section 18A)

A company may make donations in the ordinary course of trading as and when it
deems fit. Section 18A(1) permits the deduction in the determination of taxable
income of so much of the sum of a bona fide donation in cash or of property made in
kind by a taxpayer and that was actually paid or transferred during a year of
assessment to certain beneficiaries.
The deduction is limited to:
• 10% of the taxpayer’s taxable income.
An amount that is disallowed because the donation exceeds the 10% allowable
deduction, can be carried forward to the next year of assessment and is deemed to be
a donation actually paid in that year.
Section 18A(2) provides that a claim for a deduction under section 18A for a donation
is not allowed unless supported by a receipt issued by the PBO, institution, board,
body or agency, programme, fund, High Commissioner, office, entity or organisation
or the department concerned.
Section 18A(3) deals with donations in kind and states, that if, a deduction is claimed
by a taxpayer of a donation of property in kind, the amount of the deduction must be
determined as follows:
• when the property constitutes a financial instrument that is trading stock of the
taxpayer, the lower of its fair market value on the date of that donation or the
amount that has been considered for the purposes of section 22(8);

341
A Student’s Approach to Taxation in South Africa 8.6

• when the property constitutes another trading stock of the taxpayer, the amount is
the amount that has been considered for the purposes of section 22(8). This value is
the market value of the property, but section 22(8) brings this amount into account
only if the cost price of the trading stock has been considered in the determination
of the taxpayer’s taxable income for a year of assessment;
• when the property (but excluding trading stock) constitutes an asset used by the
taxpayer for trade purposes, the lower of its fair market value on the date of that
donation or its cost to the taxpayer less an allowance allowed to be deducted from
the taxpayer’s income;
• when the property does not constitute the taxpayer’s trading stock, or an asset
used by him for trade purposes, the lower of its fair market value on the date of
that donation or its cost to the taxpayer less, for moveable property that has de-
teriorated in condition by reason of use or other causes, a reducing-balance
depreciation allowance at the rate of 20% a year; or
• when the property is purchased, manufactured, erected, assembled, installed or
constructed by, or on behalf of, the taxpayer so as to form the subject of the donation,
the lower of its fair market value on the date of the donation or its cost to the taxpayer.
Section 18A(3A) provides that if immovable property of a capital nature, is donated
and the lower of market value or municipal value exceeds cost, the following formula
must be used:
A = B + (C × D) where:
A is the amount deductible;
B is the cost of the immovable property being donated;
C is the amount of a capital gain (if any); and
D is 60% in the case of a natural person or special trust or 20% in any other case.
The formula effectively takes the capital gains tax into account for donated property.
Section 18A(3B) provides that no deduction must be allowed for the donation of any
property in kind that constitutes, or is subject to a fiduciary right, usufruct or other
similar right, or that constitutes an intangible asset or financial instrument, unless
that financial instrument is:
• a share in a listed company; or
• issued by an eligible financial institution.

Example 8.20
Smile (Pty) Ltd made the following donations to a qualifying public-benefit organisation
and received the appropriate receipt for the 2023 year of assessment.
(a) The donation amounted to R1 600 and the taxable income before the donation
amounted to R50 000.
(b) The donation amounted to R600 and the taxable income before the donation
amounted to R5 000.
You are required to calculate the section 18A deduction allowed to Smile (Pty) Ltd in
each case.

342
8.6 Chapter 8: Specific deductions and allowances

Solution 8.20
(a) The section 18A deduction is limited to 10% of R50 000, R5 000. Therefore, the total
actual donation of R1 600 can be claimed as a section 18A deduction.
(b) The section 18A deduction is limited to 10% of R5 000, R500. Therefore, only R500 of
the actual donation of R600 can be claimed as a section 18A deduction; however, the
R100 that cannot be claimed as a deduction in the current year is carried forward to
the following year of assessment.

Example 8.21
Frown Ltd owns land with a base cost of R250 000. In 2020 Frown Ltd donated the land
with a municipal value of R3 million and a market value of R3.4 million. Frown Ltd has a
taxable income of R1 million for the current year of assessment.
You are required to calculate the section 18A deduction allowed to Frown Ltd. You can
assume that the municipal value can be used in calculating the capital gains tax.

Solution 8.21
The immovable property is donated and the lower of market value or municipal value
exceeds cost, therefore the following formula must be applied:
A = B + (C × D)
B = R250 000 base cost of land
C = Capital gain R2 750 000 (Municipal value of R3 000 000 – Base cost of R250 000)
D = 20%
A = R250 000 + (R2 750 000 x 20%) = R800 000.
The total potential deduction accordingly equals R800 000 (R250 000 + R550 000). This
amount is limited to R100 000 during the current year due to the 10% deductible donation
ceiling. The excess of R700 000 can be carried forward to future years.

REMEMBER

• The deduction is limited to 10% of the taxable income of the taxpayer, however the
amount that exceeds the 10% allowable deduction, can be carried forward to the next
year of assessment.
• A claim for a deduction is not allowed unless supported by a receipt issued by the
relevant body to which the donation was made.
• Special rules apply when a deduction is claimed of a donation of property in kind.

8.6.3 Future expenditure on contracts (section 24C)

A taxpayer engaged, for example, in the construction or manufacturing industry may
receive an advance payment before the commencement of the work under a contract

343
A Student’s Approach to Taxation in South Africa 8.6

to enable him to finance the acquisition of materials, equipment and other expenses
relating to the contract. Such a prepayment is included in the taxpayer’s gross
income.
Section 24C provides a deduction for the future expenditure that is incurred by the
taxpayer against the advance payment received, to alleviate the cash-flow problems
he may experience due to tax being paid on the prepayment, whereas the expenses
related to this prepayment will only be deductible for tax purposes in later years. The
section 24C allowance is available if:
• the taxpayer’s income in that year of assessment includes or consists of an amount
received by or accrued to him in terms of a contract; and
• the amount is used wholly or in part to finance future expenditure that will be
incurred by him in the performance of his obligations under the contract.
The future expenditure referred to must be such that it will be deductible from the
income in a subsequent year or for the acquisition of an asset for which any deduction
is allowed, for example, plant or machinery on which allowances are granted in terms
of section 11(e) or (o), 12B or 12C (refer to chapter 9).

Example 8.22
Easy Move (Pty) Ltd has a building contractor business. During the current year of
assessment, the company started on a large contract, the details of which are as follows:
R
Budgeted total income on the contract 2 000 000
Budgeted total expenditure 1 200 000
Budgeted total profit 800 000
During the year of assessment:
Income received 700 000
Actual expenditure (all tax deductible) 20 000
You are required to calculate Easy Move (Pty) Ltd’s taxable income for this contract
(assuming that this is his only contract during the current year) for the current year of
assessment.

Solution 8.22
R R R
Income received 700 000
Less: Actual expenditure (20 000)
Section 24C allowance:
Gross profit budgeted
R800 000 / R2 000 000 × 100 = 40%
Therefore, expenses are budgeted at 60% of income
Allowance:
60% of R700 000 420 000
Less:Actual expenditure (20 000) (400 000) (420 000)
Taxable income 280 000

344
8.6–8.7 Chapter 8: Specific deductions and allowances

REMEMBER
• The allowance must be added to income in the following year of assessment.
• The allowance may be deducted only to the extent necessary to reduce taxable income
to nil, any unclaimed balance of the allowance being lost.
• Actual expenditure incurred must be deducted from the section 24C allowance as calcu-
lated.

8.6.4 The accrual and incurral of interest (section 24J)

If a taxpayer needs funds to run his business activities, he can obtain a loan and will
incur interest on this loan. In the same way, if a taxpayer has excess funds available,
he can invest these funds and will earn interest on his investment. These loans and
investments are called ‘financial instruments’. Where interest is incurred or accrues
over a period of more than a year, or where the interest rate differs, section 24J
determines how much of the interest income or expenditure must be accounted for
each year. Section 24J provides for the interest to be spread over the term of the
financial instrument that gives rise to the interest on a daily basis. Where section 24J
applies, the interest calculated must be included in income for the lender (holder of
the financial instrument) and is deductible from income for the borrower (issuer of
the financial instrument).
In terms of section 24J(2), a taxpayer may deduct an amount of interest from the
income of that taxpayer derived from carrying on a trade, if that amount is incurred
in the production of income (as set out in the general deduction formula (section
11(a)). Whether or not the interest is seen as capital in nature will not form part of the
requirements to determine the deductibility of the interest according to section 24J. At
the same time, section 24J(3) determines that if a person is the holder of an
instrument, interest (calculated in terms of the provisions of section 24J) is deemed to
accrue to that person and must be included in gross income in the relevant year of
assessment, irrespective of the fact that it might be capital in nature.
This section is not applicable to the accrual of interest on the following instruments:
• saving accounts;
• call accounts; and
• fixed deposits with a term not exceeding one year.

REMEMBER

• The transferor of an interest-bearing instrument will realise an adjusted gain or

adjusted loss on the transfer of the instrument in terms of this section of the Act despite
transferring these instruments through transactions that could qualify for roll-over
relief in terms of the corporate rules.

8.7 Double deductions (section 23B)

Section 23B deals with the prohibition of double deductions. It provides that:
• where an amount qualifies or has qualified for a deduction or an allowance, or is
otherwise taken into account in determining taxable income under more than one

345
A Student’s Approach to Taxation in South Africa 8.7–8.8

provision in the Act, a deduction or allowance in respect of this amount, or any

portion of it, is not allowed or taken into account more than once in determining the
taxable income of a person unless the section under which the deduction or
allowance is provided for, expressly requires the expenditure to be deductible
under any other section as a prerequisite for deduction under such section; and
• no deduction is granted under section 11(a) in respect of expenditure for which a
deduction or allowance is granted in terms of another provision of the Act
(including long-term insurance policies, section 11(w)), even where such other
provision places a limit on the amount of the deduction or allowance or that
deduction or allowance in terms of that other provision may be granted in a
different year of assessment.

8.8 Value-added tax (VAT) (section 23C)

Section 23C deals with the exclusion from the cost or market value of certain assets
and expenses of the VAT component.
Where the taxpayer has incurred expenditure that is deductible for income tax
purposes and he is entitled to an input tax deduction in terms of the Value-Added
Tax Act 89 of 1991, of the VAT paid on the transaction, the amount of this VAT is
excluded from the amount of the expenditure (or the cost of an asset).
Since input tax is claimable once-off at the commencement of an instalment credit
agreement (as defined in the VAT Act; see chapter 2), the proviso to section 23C
provides that it needs to be determined how much of the total VAT paid in terms of
the agreement relates to the rental payments actually incurred during the current
year of assessment. Each rental payable must be reduced by a portion of the total
input tax claimed upfront in respect of such instalment credit agreement. The VAT
portion of the current year of assessment’s instalments that must be excluded from
the total rental payment are calculated as follows:

Total instalments payable during the

current year of assessment
x Total input VAT claimable upfront
Total instalments payable in terms of the
lease agreement
The amount calculated above is then used to reduce the total rental expense amount
that was actually incurred during the current year of assessment. The difference
between these two amounts, that is the net rental amount is then deductible in terms
of section 11(a) in the determination of the taxpayer’s taxable income.

REMEMBER

• Where a taxpayer pays for repairs to his delivery vehicle amounting to R863 (including
VAT of 15%), the expense which is deductible for normal tax purposes amounts to R750
(R863 less VAT amounting to R113). Where a taxpayer purchases trading stock for
R11 500 (including VAT amounting to R1 500), the cost of the trading stock for normal
tax purposes amounts to R10 000 (R11 500 less VAT amounting to R1 500).

346
8.9 Chapter 8: Specific deductions and allowances

8.9 Prepaid expenses (section 23H)

Section 23H deals with the limitation of certain deductions where a taxpayer actually
incurs an expenditure during a year of assessment:
• which is allowable as a deduction in terms of sections 11(a) (general deductions),
(c) (legal expenses), (d) (repairs), (w) (key-man policies), 11A (expenses incurred
prior to the commencement with trade), 11D(2) (research and development) or
28(2)(a) (insurance business expenses); and
• in respect of goods, services or another benefit, all of which are not supplied or
rendered to the person concerned during the year of assessment.
The amount of the expenditure allowable as a deduction in terms of the particular
subsection during that and a subsequent year of assessment is limited in terms of the
provisions of section 23H.
In the case of:
• goods to be supplied, the deduction is limited to so much of the expenditure as
relates to the goods actually supplied during the year of assessment;
• services to be rendered, the deduction is limited to an amount which bears to the
total amount of expenditure the same ratio as the number of months in the year of
assessment during which services are rendered bears to the total number of
months during which the services will be rendered; should the period during
which the services will be rendered not be determinable, the period that the
services will be likely rendered in; or
• any other benefit to which the person becomes entitled to, the deduction is limited
to an amount which bears to the total amount of the expenditure the same ratio as
the number of months in the year of assessment during which the person will be
entitled to the benefit bears to the total number of months during which the person
will be entitled to the benefit.
The provisions of the section do not apply:
• where all the goods or services are to be supplied or rendered within six months
after the end of the year of assessment during which the expenditure was incurred,
or where the person becomes entitled to the full benefit within that period, unless
the expenditure is allowable as a deduction in terms of section 11D(2);
• where the total of all amounts of expenditure incurred by the person, which would
otherwise be limited by the section, does not exceed R100 000;
• to an expenditure to which the provisions of section 24K or 24L apply (section 24K
regulates the accrual and incurral of amounts in respect of interest rate agreements
(generally referred to as interest rate swap agreements) and section 24L deals with
the incurral and accrual of amounts in respect of an option contract); or
• to an expenditure actually paid in respect of an unconditional liability to pay an
amount imposed by legislation.
Where the Commissioner is satisfied that the apportionment of expenditure in terms
of this section does not reasonably represent a fair apportionment, he may direct that
the apportionment be made in another manner that appears to him to be fair and
reasonable.

347
A Student’s Approach to Taxation in South Africa 8.9

Where, during any year of assessment, it is shown that:

• the goods or services for which expenditure has been incurred are never be
received by or rendered to the person; or
• the person will never become entitled to another benefit for which expenditure has
been incurred,
the expenditure is allowed as a deduction in the year in which it is actually paid.

Example 8.23
Tackle Ltd, a South African resident, paid an amount of R56 000 on 1 January 2023 to the
local municipality for municipal services (water and electricity). The services are to be
supplied within the period ending 31 July 2023. The expense qualifies for a deduction in
terms of section 11(a). Tackle Ltd has a February year-end.
You are required to calculate the amount which may be deducted in terms of section 23H
in the current year of assessment ended 28 February 2023.

Solution 8.23
The full amount may be deducted in the current year of assessment, as section 23H
determines that there is no limit on the deduction if the services are to be supplied within
six months after the end of the year during which the expenditure was incurred.

Example 8.24
PeeteeWhy (Pty) Ltd incurred the following expenditure during the 2023 year of
assessment:
R
1 December 2022 – Electricity for the period 1 December 2022
to 30 November 2023 52 000
1 December 2022 – Insurance premium for the period 1 December 2022
to 30 November 2023 58 000
1 February 2023 – Telephone expenses for the period 1 February 2023
to 31 January 2024. 22 000
You are required to calculate the amount that may be deducted in terms of section 23H in
the current year of assessment ended 28 February 2023.

348
8.9–8.10 Chapter 8: Specific deductions and allowances

Solution 8.24
Electricity
Current portion = R52 000 x 3 / 12 = R13 000
Prepaid portion = R52 000 x 9 / 12 = R39 000
Insurance premium
Current portion = R58 000 x 3 / 12 = R14 500
Prepaid portion = RR58 000 x 9 / 12 = R43 500
Telephone expenses
Current portion = R22 000 1 / 12 = R1 833
Prepaid portion = R22 000 x 11 / 12 = R20 167
Total amount current portion = R29 333
Total amount prepaid portion = R102 667
Section 23H does not apply to the current portion of each expense as it relates to the
current year of assessment. Consideration must be given to section 23H for the prepaid
portion of each expense.
None of the expenditure above is imposed by legislation and the prepaid portions need to
be tested against the next possible exclusion from section 23H.
For each expenditure, consider whether the services in relation to it will be rendered
within six months from year-end. All the services from the above-stated expenditure will
not be rendered within six months from year-end (each prepaid portion extends beyond
31 August 2023) and is not excluded from the provisions of section 23H.
Finally, if the aggregate of all the prepaid expenses does not exceed R100 000, section 23H
does not apply and the prepaid portions as well the current portions are deductible in the
current year of assessment. The total amount of the prepaid portions of R102 667 exceeds
the R100 000 threshold and therefore section 23H applies. Only the current year’s portions
amounting to R29 333 are deductible. The prepaid portions of R102 667 will only be
deductible in the 2024 year of assessment.

REMEMBER
• Prepaid expenses are fully deductible:
– if the obligation to pay an amount in advance is imposed by legislation; OR
– if the goods or services are supplied within six months after the end of the year of
assessment; OR
– the total amount of prepaid expenses incurred during the year of assessment does
not exceed R100 000.

8.10 Pre-trade expenditure (section 11A)

Expenditure and losses incurred by a taxpayer before commencement of a trade do
not qualify for the deduction under section 11(a). Section 11A provides for a taxpayer
investing in a new business venture with a special deduction for start-up costs
incurred before the commencement of trade. Costs that would have been allowed had
trade commenced are now deductible in the year trading has commenced,
irrespective of the year that the costs have been incurred in.

349
A Student’s Approach to Taxation in South Africa 8.10

In determining the taxable income derived during a year of assessment by a person

from carrying on a trade, section 11A(1) provides that an expenditure or loss may be
deducted from such trade income, provided it:
• was actually incurred by him prior to the commencement of, and in preparation of
carrying on that trade;
• would have been deductible in terms of section 11 (other than section 11(x)),
section 11D (research and development expenditure) or section 24J (interest) had
the expenditure or loss been incurred after that person commenced carrying on
that trade; and
• was not allowed as a deduction in that year or a previous year of assessment.

Example 8.25
Asmal (Pty) Ltd commenced with trade on 1 July 2022 and incurred the following
expenses before trade commenced:
R
Purchase of small storage area 50 000
Rates and taxes – 1 April 2022 – 30 June 2022 2 400
– 1 July 2023 – 28 February 2023 7 200
Other trading expenses (deductible for tax purposes) 40 000
You are required to calculate the taxable income for Asmal (Pty) Ltd for the current year
of assessment (ended 28 February 2023) if the trading income amounted to R75 000
during the trading period.

Solution 8.25
R R
Trading income 75 000
Less: Other trading expenses 40 000
Purchase of small storage area (Note) nil
Rates and taxes (R2 400 + R7 200) (Note) 9 600 (49 600)
Taxable income 25 400
Note
The purchase of the small storage area is not deductible because it is of a capital nature.
Section 11A does not allow for the deduction of capital expenses. The rates and taxes of
R2 400 were incurred before a trade was carried on and would have been deductible in
terms of section 11(a) and therefore the expense qualifies as a deduction in terms of
section 11A.

REMEMBER

• Only expenditure that would have been deductible if it was incurred after trade had
commenced is deductible in terms of section 11A.
• An assessed loss can never be created in terms of section 11A. However, if an assessed
loss arises it may be carried forward to the following year of assessment and may only
be set off against income from the same trade.

350
8.11 Chapter 8: Specific deductions and allowances

8.11 Assessed losses (section 20)

An assessed loss arises when the deductions allowed in terms of section 11 is more
than the total income for tax purposes.
Section 20 contains the provisions relating to assessed losses and may be summarised
as follows:
• The taxpayer must be carrying on a trade.
• The taxpayer may then deduct from such trade income in the current year:
– the balance of an assessed loss brought forward from a previous year;
– in the case of a company that is in a positive taxable income position (in other
words, the company has calculated a taxable income amount for the current
year of assessment), the balance of assessed loss that can be off-set against
taxable income is restricted to the higher of R1 million or 80% of the amount of
the current year taxable income (before taking any assessed loss into account).
Companies with a balance of assessed loss below R1 million will therefore not
be affected by this restriction and will be able to fully utilise the balance of their
assessed losses;
– companies who are in an assessed loss position in the relevant year of
assessment (in other words, whose deductions exceed income), will not be
subject to this restriction and will be able to set off their full balance of assessed
loss from a previous year of assessment against their current year assessed loss.
These companies will therefore increase the current year’s assessed loss with
the balance of the assessed loss from the previous year of assessment.
– the new off-setting rules apply to the years of assessment ending on or after
31 March 2023, which means for years of assessment starting from 1 April 2022
onwards and applies to assessed losses (and balance of assessed losses)
generated prior to, and after 1 April 2022.
– a person whose estate has been sequestrated is not entitled to carry forward the
assessed loss incurred prior to the date of sequestration (unless the order of
sequestration has been set aside); and
– an assessed loss incurred during the current year in another trade.
• The set-off is subject to certain provisos:
– an assessed loss incurred during the current year, or a balance of an assessed
loss from a previous year (with the limitation), from a trade carried on outside
South Africa, may not be set off against an income derived by a taxpayer from a
source within the Republic; and
– a balance of assessed loss or assessed loss (with the limitation) may not be set
off against a retirement fund lump sum benefit, retirement fund lump sum
withdrawal benefit or severance benefit included in taxable income.
• In the case of a taxpayer other than a company, an assessed loss may be set off
against non-trade income, while in the case of a company this may not be done
(subject to section 20A ring-fencing).
• In the case of a taxpayer other than a company, an assessed loss may be set off
against non-trade income, while in the case of a company this may not be done
(subject to section 20A ring-fencing for natural persons).

351
A Student’s Approach to Taxation in South Africa 8.11

• In the case of companies, income tax will now always be levied on 20% of the
taxable income for the year where the taxable income in the current year exceeds
R1 million, irrespective of the amounts of assessed loss balances brought forward.
• Companies will not forfeit the balance of the assessed loss not used in a year due to
the off-setting restrictions as mentioned above. The balance can be carried forward
to the next tax year and can be utilised in that year of assessment, provided that the
company earns trade income in the following year.
• A natural person taxpayer may carry forward his assessed loss even though he has
not carried on a trade during a year, while in the case of a company this may not be
done.
Section 20A deals with the ring-fencing of assessed losses from certain trades (refer to
chapter 13).

Example 8.26
Modise Ltd had a gross income of R2 200 000 and expenses of R4 100 000 for the year
ended 31 March 2022. For the 2023 year of assessment the company had gross income
of R2 240 000 and expenses of R1 200 000 and, in the 2024 year, gross income of
R3 380 000 and expenses of R2 240 000.
You are required to calculate the company’s taxable income or assessed loss for the 2022,
2023 and 2024 years of assessment.

Solution 8.26
2022 2023 2024
R R R
Gross income 2 200 000 2 240 000 3 380 000
Deductions (4 100 000) (1 200 000) (2 240 000)
Taxable income / Assessed loss (1 900 000) 1 040 000 1 140 000
Assessed loss brough forward nil (1 900 000) (900 000)
Utilisation of assessed loss b/f (1 000 000) (900 000)
(Higher of R1 million; or [(1 000 000) [(1 000 000)
80% of taxable income) (832 000)] (912 000)]
Taxable income (1 900 000) 40 000 240 000
Assessed loss carried forward (1 900 000) (900 000) nil

352
8.11–8.12 Chapter 8: Specific deductions and allowances

REMEMBER

• If a company engages in more than one trade, the assessed losses of the different trades
can be set off against the different trade income.
• Ring-fencing (limitation of the setting off, section 20A) of assessed losses only applies to
natural persons.
• An assessed loss (with the limitation) may not be carried forward if a company has not
carried on trade during a year.
• Assessed losses from foreign trades cannot be set off against the taxable income of
South African trades.
• The value of a compromise benefit made with creditors reduces the assessed loss of the
year in which the compromise took place. It does not reduce the previous year’s
assessed loss.

8.12 Calculating taxable income of a company

Different entities draw up a set of annual financial statements using their own unique
accounting policies as well as IFRS. These accounting policies and IFRS often differ from
income tax principles.
The statement of profit or loss and other comprehensive income of an undertaking
calculates the net profit (an accounting concept). For tax purposes, taxable income
needs to be calculated. This is done by applying the provisions of the Act.
In order to calculate the taxable income of a legal entity, that is to say a company and
a trust or the taxable business income of a sole proprietor or a partnership as is the
case with an individual, the tax calculation can commence with the accounting net
profit. When completing a tax return for a company, you are required to start with
the accounting net profit and adjust it according to the differences between the
accounting and income tax calculations.
The income for accounting purposes can differ from the income for income tax pur-
poses. Remember that income for income tax purposes is gross income less exempt
income. You therefore have to consider the gross income and exempt income rules
(refer to chapters 3, 4 and 6).
The expenses for accounting purposes can differ from the expenses for income tax
purposes. Remember that expenses for income tax purposes consist of deductions in
terms of the general deduction formula, the specific deduction rules and the capital
allowances (refer to chapters 7, 8 and 9).
The following example illustrates the above principles.

353
A Student’s Approach to Taxation in South Africa 8.12

Example 8.27
Mr Ben Baker is the sole shareholder of Betterbake (Pty) Ltd (Betterbake), a company that
sells bread.
Betterbake’s Statement of profit or loss and other comprehensive income for the current
year of assessment, ended on the last day of February, is as follows:
R
Income
Sales 750 000
Recoupment of bad debts (Note 1) 10 000
Doubtful-debt allowance – 2022 (Note 4) 2 000
Interest received on current account 3 000
Closing stock – 28 February 2023 140 000
905 000
Less: Expenses 609 500
Purchases 300 000
Opening stock – 1 March 2022 80 000
Sundry expenses – deductible for tax purposes 95 000
Rent paid (Note 2) 39 000
Employer contributions (Note 3) 7 500
Doubtful-debt allowance – 2023 (Note 4) 3 000
Restraint of trade payment (Note 5) 60 000
Net profit 270 500

Notes
1. The recoupment of bad debts is in respect of a debt written off in 2020.
2. A lease agreement was entered into on 1 January 2022 for the lease of shop premises
for five years at a monthly rental of R3 000. The rental for March 2023 was paid in
February 2023. The full amount was included as a deduction in the Statement of profit
or loss and other comprehensive income.
3. Betterbake contributes to a provident fund on behalf of its employees. Its annual
contribution to the provident fund amounts to R7 500.
4. Included in Betterbake’s outstanding debtors are doubtful debts of R30 000. The company
does not apply IFRS 9 and 50% of the list of doubtful debts as at 28 February 2023 have
been in arrears for more than 90 days, but less than 120 days. The other 50% of debtors
have been in arrears for less than 60 days. The previous year’s doubtful debts allowance
that was allowed as a deduction in terms of section 11(j) was 25% of R20 000, = R5 000.
Betterbake allows 10% of the doubtful debts as an allowance for accounting purposes.
5. On 1 July 2022 Betterbake paid an amount of R60 000 as compensation to one of its
former employees, as a restraint of trade payment. The restraining agreement is
effective for five years. Only R30 000 of the amount paid to the former employee was
taxable in his hands.
You are required to calculate the taxable income of Betterbake (Pty) Ltd for the current
year of assessment, starting with the net profit as per the Statement of profit or loss and
other comprehensive income.

354
8.12 Chapter 8: Specific deductions and allowances

Solution 8.27
R
Net profit as per Statement of profit or loss and other comprehensive
income 295 500
Sales (taxable – gross income) nil
Recoupment of bad debts (section 8(4)(a)) nil
Interest received on current account nil
Closing stock nil
Purchases nil
Opening stock nil
Sundry expenses nil
Rent paid (Note 1) nil
Employer contributions nil
Doubtful-debt allowance – 2022 (Note 2) 3 000
–2023 (Note 2) (750)
Restraint of trade payment (Note 3) 54 000
Taxable income 351 750

Notes
1. The rent for March 2023, which was paid in February 2023, is also claimed as a
deduction as it was actually incurred for tax purposes at the time of payment.
2. The doubtful-debt allowance for taxation purposes is calculated as follows:
2022: 25% × R20 000 = R5 000
2023: 25% × (50% x R30 000) = R3 750.
Therefore, as R2 000 has already been added back for accounting purposes, an
additional R3 000 must be added back in the current year of assessment. As R3 000 has
already been claimed as a doubtful debt allowance for accounting purposes, an
additional R750 should be accounted for to claim the total of R3 750 in terms of section
11(j) for the current year of assessment.
3. The allowance that can be claimed in respect of the restraint of trade payment is the
amount that was taxable in the former employee’s hands, but limited to the lesser of:
R30 000 / 5 years = R6 000; or
1 / 3 × R30 000 = R10 000.
R60 000 must be added back to income as R6 000 can only be claimed for tax purposes.

355
A Student’s Approach to Taxation in South Africa 8.13–8.14

8.13 Summary
In this chapter, certain business deductions are discussed for which special pro-
vision has been made in the Act. These expenses are those which would not qualify
for deduction in terms of section 11(a) because they are of a capital nature (such as
patent development expenditure and fixed assets used for scientific research) or have
not actually been incurred (such as provisions for doubtful debts and future
expenditure on contracts).
Section 11(x) provides for the deduction of ‘any amounts which in terms of any other
provision in this Part, are allowed to be deducted from the income of the taxpayer’.
It should be noted that the deductions provided for in section 11 of the Act are
restricted to the income from trade; the deductions in the other sections have no such
general restriction, but certain sections do specifically impose this restriction.
The next section contains questions to test your knowledge on specific deductions
and allowances.

8.14 Examination preparation

Question 8.1
Walk for Life (Pty) Ltd is a South African resident. It is a manufacturing business that
manufactures shoes. The different types of shoes manufactured include running and
walking shoes, as well as high heels and flip-flops. The company’s financial year ends on
31 March. Walk for Life (Pty) Ltd is a registered VAT vendor and the company does not
apply IFRS 9 for financial reporting purposes.
The following information is available to calculate the normal tax liability of Walk for Life
(Pty) Ltd for the year of assessment ended on 31 March 2023 (all amounts exclude VAT
unless otherwise stated):

Receipts and accruals Notes R

Sales 3 500 000
Dividend income 1 28 000
Expenditure and costs
Purchase of raw material on 1 June 2022 (including VAT) 985 000
Inventory 2 ?
Bad debts 46 200
Doubtful debts 3 ?
Employee expenses 4 806 000
Legal costs 5 157 000
Repairs and maintenance 6 25 000
Electricity 7 36 500
Restraint of trade 8 160 000

continued

356
8.14 Chapter 8: Specific deductions and allowances

Notes
1. A dividend of R28 000 accrued to Walk for Life (Pty) Ltd on 15 August 2022 from a
wholly owned South African subsidiary company.
2. The cost price of the opening stock was R310 000 and the market value was R285 000 as
on 1 April 2022. The cost price of the closing stock was R365 000 and the market value
was R425 000 on 31 March 2023.
3. The list of doubtful debts as at 31 March 2023 amounted to R69 000 and 72% of the total
amount has been in arrears for more than 120 days. The rest of the debtors have not
been in arrears for more than 60 days. The doubtful debt allowance allowed by the
Commissioner for the 2022 year of assessment, amounted to R18 750.
4. Salaries paid during the current year of assessment amounted to R750 000 and the
company also contributed R56 000 towards the provident fund on behalf of the
company’s employees.
5. Legal costs of R157 000 were incurred for the following: Drafting of all the lease
contracts for the company, R40 000. The collection of outstanding trade debtors,
R65 000 and court cases in respect of employee remuneration claims, R52 000.
6. An amount of R25 000 was incurred on painting the entire exterior of the
manufacturing building. The building was badly damaged due to excessive rainwater
filtering through the cracks.
7. The company paid an amount of R36 500 in respect of electricity for the period
1 March 2023 to 30 October 2023.
8. R160 000 was paid to the former financial manager on 1 March 2022 for agreeing not to
start a similar business in the Republic within a period of five years. Only R120 000
constituted income in the former employee’s hands.
9. The company brought forward an assessed loss of R1 250 000 from the previous year of
assessment.

You are required to:

Calculate Walk for Life (Pty) Ltd’s tax liability for the current year of assessment
ended on 31 March 2023.

Answer 8.1
Calculation of Walk for Life (Pty) Ltd’s income tax liability for the current year of
assessment ended on 31 March 2023.
R R
Sales 3 500 000
Add:
Dividend income (Note 1) nil
Closing stock (Note 2) 365 000
Doubtful debt allowance – 2022 (Note 3) 18 750
Income 3 883 750

continued

357
A Student’s Approach to Taxation in South Africa 8.14

Less:Expenses
Purchases of raw material (R985 000 × 100 / 115) (Note 3) (856 522)
Opening stock (Note 2) (285 000)
Bad debts (46 200)
2022 Doubtful-debt allowance (Note 4) (19 872)
Salaries and wages (750 000)
Contribution to provident fund (56 000)
Legal costs (Note 5) (117 000)
Painting of building (Note 6) (25 000)
Prepaid electricity – Current portion (4 563)
– Prepaid portion (Note 7) (31 937)
Restraint of trade (Note 8) (24 000) 2 216 094
Taxable income 1 667 656
Utilisation of assessed loss b/f (restricted to the higher of (1 250 000)
R1 million or 80% of taxable income (R1 334 125)
Taxable income 417 656
Income tax liability (R417 656 x 27%) 112 767

Notes
1. Dividends are exempt from tax as per section (section 10(1)(k)) and therefore they will
not be included in income.
2. Opening and closing stock are always stated at the lower of cost price or market value.
Opening stock is deducted from income and closing stock is added back to income.
3. VAT must be removed from the purchase price.
4. The full doubtful debt allowance of the 2022 year of assessment must be added back to
taxable income. 40% of 72% of the list of doubtful debts for the current year of
assessment must be deducted from income as they have been in arrears for more than
120 days (R69 000 × 72% x 40%).
5. The drafting of lease contracts is capital in nature and therefore not deductible in terms
of section 11(c). The legal costs relating to the collection of outstanding trade debtors
and court cases are deductible in terms of section 11(c) as they are not of a capital
nature.
6. The painting of the building constitutes a repair and is deductible as per section 11(d)
(refer to chapter 9).
7. The current portion of the prepaid electricity is R36 500 × 1 / 8, as only the first month
of the prepayment falls within the current year of assessment. The rest of the
prepayment amount relates to the following year of assessment and because it is more
than six months after year-end (seven months), but less than R100 000 in aggregate, the
prepaid portion will still be deductible within the current year of assessment.
8. The deductible portion is the portion that is regarded as income in the hands of the
former employee (R120 000). The deduction is limited to the lesser of R120 000 / 3 years
= R40 000; or R120 000 / 5 = R24 000; therefore, R24 000 is deductible.

Additional questions for this chapter are available electronically at

www.myacademic.co.za/books

358
 Expenditure and
9 allowances relating to
capital assets

Gross Exempt
– – Deductions = Taxable income Tax payable
income income

General
Specific Capital Deductions for
deduction
deductions allowances individuals
formula

Page
9.1 Introduction............................................................................................................ 360
9.2 Connected persons (section 1) ............................................................................. 363
9.3 Repairs and improvements (section 11(d))......................................................... 364
9.4 Process of manufacture ......................................................................................... 366
9.5 Cost of an asset ...................................................................................................... 367
9.6 Deduction in respect of improvements to assets not owned by the
taxpayer (section 12N) .......................................................................................... 369
9.7 Assets used by a small business corporation (section 12E) ............................. 370
9.7.1 Manufacturing plant and machinery .................................................... 370
9.7.2 Other assets ............................................................................................... 370
9.8 Assets used in a process of manufacture (section 12C) .................................... 372
9.8.1 Accelerated allowance for new and unused assets ............................. 373
9.8.2 Allowance for used assets ....................................................................... 374

359
A Student’s Approach to Taxation in South Africa 9.1

Page
9.9 Wear-and-tear allowances (section 11(e)) ........................................................... 376
9.10 Immovable assets................................................................................................... 378
9.10.1 Manufacturing building allowances (section 13)................................. 378
9.10.2 Commercial buildings (section 13quin) ................................................. 380
9.10.3 Residential units (section 13sex) ............................................................. 382
9.11 Disposal of assets ................................................................................................... 384
9.11.1 Allowance on the disposal of assets at a loss (section 11(o)) .............. 384
9.11.2 Recoupment on the sale of assets (section 8(4)(a)) ............................... 385
9.11.3 Replacement asset: Recoupment (section 8(4)(e)) ................................ 386
9.11.4 Donations and dividends: Recoupment (section 8(4)(k)).................... 389
9.12 Leased assets .......................................................................................................... 389
9.12.1 Rental paid (section 11(a)) ....................................................................... 389
9.12.2 Lease premiums (section 11(f )) .............................................................. 390
9.12.3 Leasehold improvements (section 11(g) and (h)) ................................. 391
9.13 Expenditure and allowances relating to intangible assets ............................... 393
9.13.1 Capital expenditure on patents, designs, trademarks
and copyright (section 11(gB) and (gC)) ............................................... 393
9.13.2 Prohibition of deduction of intellectual properties
(sections 11(gC)) ....................................................................................... 396
9.14 Summary................................................................................................................. 396
9.15 Examination preparation ...................................................................................... 397

9.1 Introduction
In terms of the general deduction formula (section 11(a)) which is dealt with in chap-
ter 7, expenditure of a capital nature is not deductible. In other words, if a person
buys an asset such as a computer, delivery vehicle or machinery for use in the per-
son’s business, the person is not allowed to deduct the cost of such an asset for tax
purposes. However, special allowances in the Income Tax Act 58 of 1962 (the Act)
provide that the costs of fixed assets can be deducted over a period of time. These
special allowances make provision for the fact that the value of an asset depreciates
over time.
In this chapter, certain general concepts relating to capital allowances are discussed.
The remainder of the chapter deals with the different allowances that can be claimed
on specific assets.
For tax purposes the costs that can be incurred relating to assets can be divided into
two main groups. Firstly, those costs incurred for assets that are owned and secondly
the costs incurred for assets that are leased by the taxpayer. The costs incurred relat-
ing to assets being leased have specific rules, depending on the type of cost incurred,
for example lease premiums and leasehold improvements.

360
9.1 Chapter 9: Expenditure and allowances relating to capital assets

The tax implications for the first group of assets are more complicated. The allowances
that can be claimed are not only dependent on the type of asset used, but also on the
status of the taxpayer that owns it. Remember these rules are mutually exclusive, and
it is important to ensure that you understand how to decide which rules to use before
studying the individual rules. The following structure will assist you in deciding
which allowances may be claimed (on assets other than intellectual property).

REMEMBER

• The tax rate was reduced from 28% to 27% for a company or close corporation with a
year of assessment ending on or after 31 March 2023 (that is to say, where the year of
assessment of the company or close corporation commences on or after 1 April 2022).
The rate of 27% is used for purposes of this book unless the year of assessment in an
example or question indicates otherwise.

361
A Student’s Approach to Taxation in South Africa 9.1

REMEMBER

• A person for tax purposes refers to natural persons, companies, trusts and estates
(insolvent or deceased estates).

Immovable assets
(e.g. buildings)

What kind of building did the

taxpayer acquire?

Manufacturing building Commercial building Residential building

section 13 section 13quin section 13sex
(paragraph 5.12.1) (paragraph 5.12.2) (paragraph 5.12.3)

Manufacturing Commercial building: Residential Low-cost residential

building: 5% for 20 years building: building:
5% for 20 years (after 1 April 2007) 5% for 20 years 10% for 10 years

Movable assets
(e.g. machinery)

What is the tax status

of the taxpayer?

Small business Manufacturing All other

corporation business businesses
section 12E section 12C section 11(e)
(paragraph 5.8) (paragraph 5.9) (paragraph 5.10)

Manufacturing Non-manufacturing Manufacturing assets: Other assets: All assets:

assets: 100% assets: New – 40:20:20:20 section 11(e) – section 11(e)
in year 1 50:30:20 used – 20:20:20:20:20 time based time based

REMEMBER

• In terms of section 11(e) the Commissioner must publish a list of the period over which
an asset must be written off. This list was published in Interpretation Note 47.

362
9.2 Chapter 9: Expenditure and allowances relating to capital assets

9.2 Connected persons (section 1)

In certain cases, special tax provisions apply when entering into transactions with
‘connected persons’. It is therefore important to identify whether a connected person
is a party to a transaction.
A ‘connected person’ is defined in section 1 of the Act.
In relation to a natural person, a connected person includes:
• a relative; and
• a trust (other than a portfolio of a collective investment scheme) of which such
natural person or such relative is a beneficiary.
In relation to a trust (other than a portfolio of a collective investment scheme), a
connected person includes:
• a beneficiary of the trust;
• a connected person in relation to a beneficiary; and
• another person who is a connected person in relation to the trust (other than a
collective investment scheme).
In the case of a partner of a partnership, a connected person is:
• another partner; and
• a connected person in relation to a partner.
A connected person in relation to a company includes:
• another company in the same group of companies.
– A ‘group of companies’ is defined as two or more companies in which one
company (controlling company) directly or indirectly holds shares in at least
one other company (controlled company), to the extent that:
* at least 50% of the equity shares or voting rights of each controlled group
company are directly held by the controlling group company, one or more
other controlled group companies or any combination thereof; and
* the controlling group company directly holds at least 50% of the equity shares
or voting rights in at least one controlled group company.
• a person who, alone or together with a connected person, holds, directly or indi-
rectly, at least 20% of the company’s equity share capital or voting rights;
• another company, if at least 20% of the equity share capital of the company is held
by the other company, and no holder of shares holds the majority voting rights in
the company; and
• another company, if that other company is managed or controlled by a person who
is a connected person in relation to such company, or a person who is a connected
person of the person managing or controlling the company.
In the case of a close corporation (CC), a connected person is:
• a member;
• a relative of a member;
• a trust (other than a portfolio of a collective investment scheme) that is a connected
person in relation to a member; and
• another close corporation or company that is a connected person in relation to the
member or a relative or trust who is a connected person of the member.

363
A Student’s Approach to Taxation in South Africa 9.2–9.3

REMEMBER

• Special rules apply, for example, the determination of the cost of an asset, when transac-
tions between connected persons take place.
• A relative, in relation to a person, refers to the spouse or anybody related to him to the
third degree, including the spouse of such a person.
• An adoptive child is considered to be related to the adoptive parents in the first degree.

9.3 Repairs and improvements (section 11(d))

Often a taxpayer is not sure whether the expenditure would be classified as a repair
or an improvement to that specific asset. If it is classified as a repair, it may be de-
ductible immediately in full during the current year of assessment. However, if it is
classified as an improvement it would be an expenditure of a capital nature and the
special provisions regarding capital allowances may apply.

Legislation:
Section 11(d)
For the purpose of determining the taxable income derived by any person from carrying
on any trade, there shall be allowed as deductions from the income of such person so de-
rived—
(d) expenditure actually incurred during the year of assessment on repairs of property
occupied for the purpose of trade or in respect of which income is receivable, includ-
ing any expenditure so incurred on the treatment against attack by beetles of any
timber forming part of such property and sums expended for the repair of machinery,
implements, utensils and other articles employed by the taxpayer for the purposes of
his trade;

An analysis of the section indicates that repair expenses may be claimed if:
• the expense is actually incurred;
• it is incurred during the year of assessment;
• it relates to property used for the purposes of trade or income is derived from it; and
• it relates to other assets, for example, machinery, implements etc., used for the
purposes of trade.

REMEMBER

• Repairs to domestic or household assets cannot be deducted.

• Repairs can be claimed whether you own or lease the asset provided the requirements
above are met.
• Repairs can include expenses incurred in the treatment of timber infested with beetles.

Many court cases have dealt with the issue regarding the differentiation between a
‘repair’ and an ‘improvement’. The two most important cases dealing with this aspect
was Flemming v Kommissaris van Binnelandse Inkomste and Commissioner for Inland
Revenue v African Products Manufacturing Co Ltd.

364
9.3 Chapter 9: Expenditure and allowances relating to capital assets

CASE:
Flemming v Kommissaris van Binnelandse Inkomste
57 SATC 73 (A)
Facts: Judgment:
Water was vital for farming activities of There was no evidence that anything
the taxpayer. Due to the fact that the went wrong with the borehole itself
existing borehole on the farm yielded less requiring its replacement. Expenditure
and less water to feed the existing dam, was therefore not incurred on the repair
the taxpayer drilled a new borehole, of the borehole as a subordinate and
erected a windmill for the borehole and inseparable part of the farm. The avail-
installed piping to feed water from the abiity of water from the original borehole
borehole to a newly constructed dam. The had decreased merely as a result of the
taxpayer contended that all these expenses fact that there was less water available
were repairs of property occupied for the underground at that place and on that
purpose of trade or in respect of which ground the new borehole could not be
income is receivable and claimed a sec- regarded as a repair by virtue of its
tion 11(d) deduction. The basis of his claim replacement of the original. It was simply
was that the borehole and windmill had to improving the water supply which had
be regarded as a subordinate part of the nothing to do with ‘repairs of property’.
farm and that repairs of property as used
in the section also included the replace-
ment of a subordinate portion of property.

CASE:
Commissioner for Inland Revenue v African Products
Manufacturing Co Ltd 13 SATC 164
Facts: Judgment:
The original roof of a factory was in a bad The taxpayer had restored the roof to its
state of repair. The timber roof trusses original condition and the use of material
had been damaged and could not be other than that originally used was not
replaced with the same timber as such for the purpose of improvement but in
timber was unprocurable owing to the order to restore the roof to its original
war. The local wood was unsuitable. A condition. The expenditure thus fell with-
new roof, made of reinforced concrete, in the term ‘repairs’.
was installed in its place.

The principles from various court cases can be summarised as follows:

• ‘Repair’ is restoration by renewal or replacement of subsidiary parts of a whole.
‘Renewal’ as distinguished from ‘repair’ is a reconstruction of the entirety (‘entire-
ty’ does not necessarily mean the whole, but substantially the whole).
• In the case of ‘repairs’ constituting ‘renewal’, it is not necessary that the materials
used are identical to the materials replaced.
• ‘Improvements’ increase income-earning capacity.
• ‘Repair’ restores the asset to its original condition.

365
A Student’s Approach to Taxation in South Africa 9.3–9.4

• ‘Improvements’ lead to an improved or better asset.

• Repair of inherent faults in the asset, for example, inferior construction, does not
constitute a ‘repair’.

Example 9.1
Marajash (Pty) Ltd incurred the following expenses during the current year of assessment
ended on 28 February.
R
Repairs to the shop’s roof which was leaking 6 000
Replacement of worn carpets in the shop, with tiles (the replacement of the
carpets would have cost R8 000) 12 000
Paving the area in front of the shop to prevent excess dust 22 000
Painting the shop interior, which was damaged due to the leaking roof 10 000
You are required to determine which expenses can be deducted as repairs.

Solution 9.1
R
Repairs to the roof (Note 1) 6 000
Replacement of carpets (Note 2) 12 000
Paving of the area (Note 3) nil
Painting the shop (Note 4) 10 000
Total expenses 28 000

Notes
1. The repair to the roof is the restoration of a part of the shop.
2. Although the cost of tiling exceeds the amount that would have been spent on replac-
ing the carpets, it is not necessary that the materials used be identical to the materials
replaced.
3. The cost of the paving is not deductible as it was an improvement to the asset.
4. The cost of painting is deductible as it is the restoration of a part of the shop to its
original condition.

9.4 Process of manufacture

Special rates apply in some sections (such as sections 12C (refer to 9.8) and 12E (refer to
9.7)) to assets used in a process of manufacture. The Act does not define what consti-
tutes a process of manufacture, but the courts have established guidelines that can be
used. A process of manufacture is characterised by the following:
• The end-product must be essentially different from what it was before undergoing
the process, in other words, there must be a change in the form, nature or utility of
the article and the process must be continuous (SIR v Hersamer (Pty) Ltd
29 SATC 53).

366
9.4–9.5 Chapter 9: Expenditure and allowances relating to capital assets

• The process need not produce the end-product as long as it contributes towards it
(COT v Processing Enterprises (Pvt) Ltd 3 SATC 109).
• A standardised product must be produced on a large scale by a continuous process
using human effort and specialised equipment in an organised manner (SIR v Saf-
ranmark (Pty) Ltd 43 SATC 235).
The South African Revenue Service (SARS) has issued Practice Note 42 which con-
tains lists of processes which have been accepted as being processes similar to a
process of manufacture and ‘direct’ manufacturing processes which are not exhaus-
tive as these processes do not require specific approval as well as a list of processes
considered not to be a direct process of manufacture or a similar process.

REMEMBER

• Beneficial rates apply to assets used in an ‘approved’ process of manufacture or similar

process compared with other assets not used in a manufacturing process.

9.5 Cost of an asset

The calculation of the allowance is based on the cost of a depreciable asset.

Legislation:
Section 1: Interpretation
‘depreciable asset’ means an asset as defined in paragraph 1 of the Eighth Schedule (other
than any trading stock and any debt), in respect of which a deduction or allowance deter-
mined wholly or partly with reference to the cost or value of that asset is allowable in terms
of this Act for purposes other than the determination of any capital gain or capital loss;

The actual cost of an asset includes:

• value-added tax (VAT) (only to the extent that the VAT could not be claimed as
input tax);
• customs and excise duty;
• improvements;
• installation and erection costs; and
• the cost of foundations and supporting structures,
but excludes
• VAT that is claimed as input tax; and
• finance charges.
The foundation must form part of the asset, in other words, the asset must be
mounted on the foundation and is expected to have the same useful life as the asset.
The costs incurred by the taxpayer in moving the assets from one location to another
also form part of the cost of the asset. The removal costs are written off over the re-
maining useful life of the asset if they are incurred after the asset was brought into
use.

367
A Student’s Approach to Taxation in South Africa 9.5

If a taxpayer acquires an asset without paying for it (only applicable to section 11(e)),
a reasonable value must be placed on the asset. For all other sections, the ‘cost’ must
be used. Certain sections (such as sections 12C, 12E, 13quin and 13sex), however,
provide that the cost of an asset is the lower of the actual cost or the market value of
the asset on the date of acquisition.

Example 9.2
Kompane (Pty) Ltd (a registered VAT vendor) purchased a second-hand machine in the
current year of assessment. The machine was brought into use in a process of manufac-
ture. The purchase price was made up as follows:
R
Cost price 125 400
Finance charges (R1 500 per month for 30 months) 45 000
Foundations (including VAT) 11 500
181 900
The machine was purchased from a person who is not registered as a vendor for VAT
purposes. However, the cost of the foundation was incurred from a person registered for
VAT purposes.
You are required to calculate the cost of the machine.

Solution 9.2
R
Cost price 125 400
Less: VAT (R125 400 × 15 /115) (Note 1) (16 357)
109 043
Add: Foundations excluding VAT (R11 500 × 100 /115) (Note 2) 10 000
Cost price of machine (Note 4) 119 043

Notes
1. The second-hand machine was purchased from a non-vendor and a deemed input tax
can be claimed. The alternative method of working out the cost price without the VAT
is R125 400 x 100/115 = R109 043.
2. The VAT payable on the foundation may be claimed as an input tax; therefore, it must
be excluded from the cost of the asset.
3. The finance charges may be claimed in terms of section 24J and therefore cannot be
included in the cost of the asset. Finance charges are an exempt supply for VAT pur-
poses and therefore have no VAT consequences.
4. The allowance is claimed in terms of section 12C since it is a machine used in a pro-
cess of manufacture. The cost for purposes of section 12C is the lower of the actual
cost incurred (R109 043) or the market value of the asset on the date of acquisition (not
provided in the question). The R10 000 foundation costs are added to either the cost or
the market value, depending on which is the lowest.

continued

368
9.5–9.6 Chapter 9: Expenditure and allowances relating to capital assets

Must the cost of the foundations always be multiplied by 100 / 115?

REMEMBER

• The determination of the cost of an asset for tax purposes differs from the cost of an
asset for accounting purposes.
• Certain sections (such as sections 12C, 12E, 13quin and 13sex) provide that the cost of an
asset is the lower of the actual cost or the market value of the asset on the date of acquisition.
• Shipping and delivery charges are included in the installation and erection cost and
form part of the cost of an asset.
• Foreign travel expenses incurred in order to buy the asset do not form part of the cost of
the asset.

9.6 Deduction in respect of improvements to assets not owned

by the taxpayer (section 12N)
Costs relating to improvements made to assets where the taxpayer is not the owner,
namely leasehold improvements, are sometimes incurred. This can occur when the
taxpayer has a contractual obligation under a lease agreement where leasehold im-
provements must be affected or the taxpayer may voluntarily embark on improve-
ments. The taxpayer (the lessee) does not have an asset to claim capital allowances on
since he is not the owner of the leasehold improvements. In the case where a lessee
effects improvements in terms of a contractual obligation, he is entitled to claim an
allowance in terms of section 11(g) on the cost of these leasehold improvements but
only if the lessor of the asset includes the leasehold improvements in his taxable
income (refer to 9.12.3). If the lessor is not a taxable entity (that is to say is not going
to be taxed on the value of the improvements) or in the case where voluntary im-
provements have been carried out, the lessee cannot claim an allowance in terms of
section 11(g). Furthermore, no allowances can be claimed on the improvement cost by
the lessee in terms of the provisions of sections 12C, 12B, 13quin and 13sex since the
lessee is not the owner of the underlying asset that was improved.
If the lessee is not the owner of the asset, the lessee can still claim an allowance on the
cost of improvements if:
• the lessee:
– holds a right of use or occupation to land or buildings; and
– effects an improvement to the land or the building in terms of:
* a Public Private Partnership; or
* an agreement in respect of land or buildings owned by the government of the
Republic (national, provincial or local sphere); or
* an agreement in respect of the land or buildings owned by certain exempt
parastatals, for example the CSIR or South African National Road Agency; or

369
A Student’s Approach to Taxation in South Africa 9.6–9.7

* the Independent Power Producer Procurement Program administered by the

Department of Energy.
• If the above requirements are met, the lessee is deemed to be the owner and can
claim an allowance in terms of the following sections discussed in this book on the
improvement costs incurred by the lessee:
– sections 11D (research and development cost), 12B (renewable energy producing
assets), 12C (assets used in a process of manufacture), 13 (manufacturing build-
ings), 13quin (commercial buildings) and 13sex (residential units).
When the right of use terminates, the taxpayer must be deemed to have disposed of
the improvement to the owner of the land or building on the later date when
• the right of use terminated; or
• the use of occupation ended.
Note that this allowance does not apply to banks, financial service providers or insur-
ance companies. It does also not apply if the taxpayer has sublet the property, unless:
• it is in the same group of companies; or
• the taxpayer retains the responsibility of maintaining the property and carries the
risk of destruction.

9.7 Assets used by a small business corporation (section 12E)

The allowances that can be claimed by a small business corporation depends on
whether the asset is used in a process of manufacture or not. A small business corpo-
ration is discussed in more detail in chapter 8.

9.7.1 Manufacturing plant and machinery

In terms of section 12E, the cost of new or used plant or machinery brought into use
after 1 April 2001 for purposes of trade (of which an asset contemplated in this sec-
tion is used) by a small business corporation, may be claimed in full in the year it was
brought into use. The allowance is claimed on the cost of the asset. The cost of the
asset is the lesser of the actual cost or the market value on the date of acquisition.
The requirements pertaining to ‘cost price’ (refer to 9.5) and ‘manufacturing process’
(refer to 9.4) are applicable to a small business corporation. The asset must also be
used for purposes of trade (excluding farming and mining) and the taxpayer must
own these assets or must have acquired these assets as a purchaser in terms of an
instalment credit agreement as defined in the Value-Added Tax Act 89 of 1991.

9.7.2 Other assets

Where any other asset not used in a process of manufacture is acquired by a small
business corporation on or after 1 April 2005 and that asset would have qualified for a
deduction under section 11(e), the taxpayer can elect to either:
• deduct the amount allowable in terms of section 11(e) (refer to 9.9); or
• deduct 50% of the cost of the asset in the year of assessment during which the asset
was brought into use for the first time; or

370
9.7 Chapter 9: Expenditure and allowances relating to capital assets

• 30% in the second year and 20% in the third year of assessment respectively.
The cost of the asset is the lesser of:
• the actual cost of the asset; or
• the cost of the asset under a cash transaction concluded at arm’s length.
The costs incurred by the taxpayer in moving the assets from one location to another
also form part of the cost of the asset. The removal costs are written off over the
remaining useful life of the asset if they are incurred after the asset was brought into
use.

REMEMBER

• This allowance is calculated for the full year (in other words, it will not be apportioned),
irrespective of the period it was in use during that year of assessment.
• The section 12E allowance does not apply to buildings.
• The allowance can be claimed on new and used assets as long as it is the first time that
that particular asset is brought into use by that particular taxpayer.

Example 9.3
Shoe Lace Ltd, a small business corporation as defined in the Income Tax Act 58 of 1962
and a VAT vendor, manufactures school shoes. On 6 April 2021, the corporation
purchased a new manufacturing machine to the value of R150 000 (excluding VAT) and it
was brought into use on the same date. Due to the expansion of the business, the
corporation purchased four new computers during September 2022 for use by the
administrative staff. The total cost of the four computers amounted to R65 000 (excluding
VAT). The computers were brought into use on 1 October 2022.
You are required to calculate the most advantageous capital allowance for the taxpayer to
claim in the current year of assessment ended on 28 February 2023.

Solution 9.3
R
Manufacturing machine
Cost (excluding VAT) 150 000
Allowance (100% × R150 000) 150 000
Four computers
Cost (excluding VAT) 65 000
Allowance (50% × R65 000) 32 500

continued

371
A Student’s Approach to Taxation in South Africa 9.7–9.8

Note
The taxpayer elected the 50:30:20 write-off, because that would be more advantageous than
the three-year write-off for personal computers allowed according to section 11(e) and
Interpretation Note No. 47 (refer to 9.9). The taxpayer will be able to deduct a greater
amount in the first year when he elects the 50:30:20 write off, which will reduce his tax-
able income.

9.8 Assets used in a process of manufacture (section 12C)

This section makes provision for a deduction in respect of new or used assets used by
manufacturers or hotelkeepers and in respect of aircrafts and ships or assets used for
storage and packing of agricultural products.
Asset Description
Machinery or plant/ • Used by taxpayer or lessee (if the trade is rental) for
Agricultural co-operative purposes of his trade (other than mining or farming).
machinery or plant • Storing of packing of pastoral, agricultural or other farm
products of its members or for subjecting such products to
a primary process.
• Used directly in process of manufacture/similar process.
• Asset must be owned by the taxpayer or acquired in
terms of an agreement contemplated in paragraph (a) of
the definition of instalment credit agreement of the VAT
Act (a suspensive sale agreement).
Aircraft and ships • Used by taxpayer for purposes of his/her trade.
• Asset must be owned by the taxpayer or acquired in
terms of an agreement contemplated in paragraph (a) of
the definition of instalment credit agreement of the VAT
Act (a suspensive sale agreement).
Improvements • Improvements to any of the above assets, except aircraft
and ships.

For the purposes of section 12C, the cost of the asset is the lesser of:
• the actual cost of the asset; or
• the cost of the asset under a cash transaction at the time of acquisition concluded at
arm’s length (therefore the market value on the date of acquisition).
The costs incurred by the taxpayer in moving the assets from one location to another
also form part of the cost of the asset. The removal costs are written off over the
remaining useful life of the asset if they are incurred after the asset was brought into
use. Finance charges are not included in the cost of the asset and can be claimed as a
deduction in terms of section 24J.
Section 12C also provides that:
• where an allowance can be claimed in respect of machinery or plant; and
• the machinery or plant was used by the taxpayer in a previous year of assessment
for the purposes of a trade of which the receipts and accruals were not included in
the income of the taxpayer;

372
9.8 Chapter 9: Expenditure and allowances relating to capital assets

– a deduction which could have been allowed during the previous year of assess-
ment;
– is deemed to have been allowed during the year of assessment concerned, as if
the receipts and accruals had been included in the taxpayer’s income.

9.8.1 Accelerated allowance for new and unused assets

Where a new or unused plant or machinery is acquired or improved by the taxpayer
and brought into use by the taxpayer in a manufacturing or similar process in the
course of the taxpayer’s business, this allowance can be claimed. The taxpayer must
own this plant or machinery or must have acquired these assets as a purchaser in
terms of an instalment agreement, on or after a March 2002. The taxpayer is entitled
to claim allowances on the ‘cost’ as follows:
• 40% in the year of assessment in which the plant or machinery is first brought into
use; and
• 20% in each of the following three years of assessment.
New or unused machinery used for research and development qualifies for the
section 11D allowance and must be applied from the year of assessment it is brought
into use.
If the taxpayer receives an allowance in terms of section 12E (refer to 9.7) he is not
entitled to an allowance in terms of this section since section 12E should then be
applied.

REMEMBER

• The accelerated allowance is calculated for the full year (in other words, it will not be
apportioned), irrespective of the period it was in use during that year of assessment.
• The accelerated allowance only applies to new or unused machinery and plant used in
a process of manufacture.
• This allowance may not be claimed on a used or second-hand machine or plant (the
20% allowance is then applicable).
• The taxpayer cannot use this allowance unless he has brought the asset into use for the
first time.
• If the asset is not used by the taxpayer (the owner) himself in a process of manufacture
but is leased to a lessee who uses it in a process of manufacture, the taxpayer cannot
claim this accelerated allowance. The taxpayer can, however, claim the allowance over a
five-year period (20% per annum as discussed below).

Example 9.4
Mahlare (Pty) Ltd (a registered VAT vendor) purchased a new machine on 1 August 2022
for a cash amount of R1 092 500 (VAT inclusive). The machine was brought into use on
the same date in a manufacturing process by Mahlare (Pty) Ltd.
You are required to calculate the capital allowance that can be claimed for the 2023 year
of assessment ended on 28 February 2023.

373
A Student’s Approach to Taxation in South Africa 9.8

Solution 9.4
R
Cost (R1 092 500 – (15 / 115 × R1 092 500)) or (R1 092 500 x 100 / 115) 950 000
Allowance (R950 000 × 40%) 380 000

Note
The allowance of 40% may be claimed as the asset is new and unused and is used by the
owner of the asset in a process of manufacture. If the asset was used by another person in
a process of manufacture (not by Mahlare (Pty) Ltd), the company can still claim an al-
lowance but at a rate of 20% per annum.

Should the allowance not be claimed only for the seven months it was
used? (Therefore R950 000 × 40% × 7 / 12?)

Example 9.5
Machine XT was used by Modisa (Pty) Ltd (a registered vendor) for the first time during the
current year of assessment to manufacture candles. It was previously used in manu-
facturing activities overseas of which the income did not form part of the company’s gross
income. The machine was purchased on 1 January 2021 for R150 000 (excluding VAT).
You are required to calculate the capital allowance that can be claimed for machine XT
for the 2023 year of assessment ended on 28 February 2023.

Solution 9.5
R
Cost 150 000
Allowance (20% × R150 000) 30 000

Note
The 40% and 20% allowances for the 2021 and 2022 years of assessment are deemed to have
been allowed in those two years of assessment and are not deductible in the current year
of assessment; only the current year’s allowance is deductible.

9.8.2 Allowance for used assets

The allowance that can be claimed by the owner of the asset is calculated as 20% in
the year of assessment in which the asset is brought into use and 20% in each of the
following four years of assessment in the following cases:
• If the plant or machinery is not new and unused and is used by the taxpayer in a
process of manufacture.

374
9.8 Chapter 9: Expenditure and allowances relating to capital assets

• If the taxpayer (owner of the asset) does not use the plant and machinery (which is
either new and unused or used) himself but leases it to a lessee who uses it in a
process of manufacture.
• For hotelkeepers, if the hotel is not new and unused and is used by the taxpayer in
the process of his/her trade.
• For aircrafts/ships used by the taxpayer in his/her trade, regardless of whether the
aircrafts/ships are new and unused or used.
In the case where the asset is used by the lessee, the taxpayer (lessor) can claim the
allowance, if:
• he/she carries on a trade;
• derives income from the use of the machinery or plant; aircrafts or ships (or de-
rives income from the taxpayer’s trade as a hotelkeeper) in his business; and
• the machinery or plant is used by the lessee directly in a process of manufacture
carried on by the lessee.

Example 9.6
On 1 January 2022, Nasmeen Manufacturers (Pty) Ltd (a registered VAT vendor) pur-
chased a second-hand machine for a cash amount of R230 000 (VAT inclusive). The
machine was brought into use on the same date in a process of manufacture. The
company moved the machine to another site on 1 February 2023 at a cost of R12 000.
You are required to calculate the capital allowance that can be claimed for the current
year of assessment ended on 28 / 29 February 2023.

Solution 9.6
R
Cost (R230 000 x 100 / 115 × R230 000) 200 000
Allowance
Allowance (20% x R200 000) 40 000
Allowance on removal costs (R12 000 / 4) 3 000
Total allowance 43 000

Note
The removal costs are deductible in equal instalments over the remaining years (in this
case four years since the first 20% allowance on the machine has been claimed in the 2023
year of assessment) over which the allowance on the machine can be claimed.

REMEMBER

• The allowance of 20% (section 12C) is calculated for the full year (in other word, it will
not be apportioned), irrespective of the period it was in use during the year of
assessment.

375
A Student’s Approach to Taxation in South Africa 9.9

9.9 Wear-and-tear allowances (section 11(e))

Legislation:
Section 11(e)

Section 11(e) provides for the deduction of:

such sum as the Commissioner may think just and reasonable as representing the
amount by which the value of any machinery, plant, implements, utensils and articles
(other than machinery, plant, implements, utensils and articles in respect of which a
deduction may be granted under section 12B, section 12C, section 12DA, section 12E or
37B) owned by the taxpayer or acquired by the taxpayer as purchaser in terms of an
agreement contemplated in paragraph (a) of the definition of ‘instalment credit
agreement’ in section 1 of the Value-Added Tax Act, 1991, and used by the taxpayer for
the purpose of his/her trade has been diminished by reason of wear and tear or
depreciation during the year of assessment.

Legislation:
Interpretation Note 47

Interpretation note 47 provides for an allowance on leased assets:

The allowance granted to a lessor must be based on the cost of the asset less any
residual value, as specified in the lease agreement. Many lease agreements, particularly
those involving vehicles, provide for a residual value. This residual value is what the
lessor expects the asset to be worth at the end of the lease. At the end of the lease the
lessor will usually sell the asset to recover the residual. A lessee who has not returned
an asset to the lessor in good condition or who has exceeded the agreed usage criteria
(for example, a restriction of 100 000 kilometres over 54 months in the case of a vehicle),
must often reimburse the lessor for a decline in the residual value. In this way the value
of the asset at the end of the lease is assured.

The wear-and-tear allowances may be used for assets which did not qualify for allow-
ances in any of the other capital allowance sections. The allowance will be granted as
long as the asset is used for purposes of the taxpayer’s trade. The wear-and-tear
allowance is applicable neither to buildings or structures of a permanent nature, nor
on assets received by a taxpayer with or as a government grant. The latter is only
applicable to companies or close corporations with the year of assessment ending on
or after 29 July 2022.
The allowance is claimed on the value of the asset and not on the cost of the asset, as
is the case with the other capital allowance sections discussed above. The implication
is that an allowance can be claimed on a qualifying asset even if the taxpayer did not
incur any expense in respect of the acquisition of the asset (for example if the asset
was inherited, donated or received as a dividend in specie). The taxpayer must be the
owner of the asset in order to claim this capital allowance.
If cost was actually incurred by the taxpayer in order to acquire the asset, the allowance
must, however, be claimed on the actual cost incurred in respect of the acquisition of
the asset and not on the value of asset. However, if cost was incurred but the asset

376
9.9 Chapter 9: Expenditure and allowances relating to capital assets

was purchased from a connected person, the value of the asset on the date of acquisi-
tion should always be used regardless of whether the value is more or less than the
actual cost incurred (Interpretation Note No. 47).
The costs incurred by the taxpayer in moving an asset from one location to another
also form part of the cost of the asset. The removal costs are written off over the
remaining useful life of the asset if they are incurred after the asset was brought into
use.
Interpretation Note No. 47 (Issue 3) ‘Wear-and-Tear or Depreciation Allowance’ was
published as a Binding General Ruling under section 89 of the Tax Administration
Act No. 28 of 2011. Portions of it were also reproduced in Binding General Ruling No.
7. These documents contain the period for which wear-and-tear allowances can be
claimed.
The wear-and-tear allowance can be calculated on the straight-line basis over the
specified write-off periods. The straight-line basis rather than the reducing-balance
method may be used if the taxpayer complies with the following requirements:
• the straight-line basis must apply to all assets of the same class;
• assets written off in full must be indicated at a residual value of R1;
• adequate records regarding cost, tax value, disposals, acquisitions, proceeds etc.,
must be kept; and
• the first year’s allowance must be reduced proportionately when it is brought into
use during the year of assessment.

Examples of acceptable write-off periods in terms of Interpretation Note No. 47

Years
Furniture and fittings 6
Office equipment – electronic 3
Office equipment – mechanical 5
Delivery vehicles 4
Trucks (other than heavy duty) 4
Computers (other than main frame) 3
Main frame computers 5
Textbooks used by professional people 3

The depreciation used for accounting purposes differs from the wear-and-tear allow-
ance because, for accounting purposes, assets are normally written off over their
useful life, which can lead to a different rate.
A taxpayer may apply to SARS to use a different write-off period from those provid-
ed in Interpretation Note No. 47. Interpretation Note No. 47 makes allowance for
small items costing less than R7 000 to be written off in full during the year of pur-
chase. The asset should, however, be used by the taxpayer and should not be used by
the lessee to qualify. A small item is regarded as an item that can function normally in
its own right and does not form part of a set.
Section 11(e) also provides that:
• where an allowance can be claimed in respect of an asset, and

377
A Student’s Approach to Taxation in South Africa 9.9–9.10

• the asset was used by the taxpayer in a previous year of assessment for the pur-
poses of a trade of which the receipts and accruals were not included in the income
of the taxpayer,
• a deduction which could have been allowed during the previous year of assess-
ment,
• is deemed to have been allowed during the year of assessment concerned, as if the
receipts and accruals had been included in the taxpayer’s income.

REMEMBER

• The allowance is calculated pro rata for the period the asset was in use during the year
of assessment.
• The asset must be owned or purchased in terms of an instalment credit agreement and
used by a taxpayer for the purposes of his trade.

Example 9.7
On 1 September 2022, JAY Manufacturers (Pty) Ltd purchased a delivery cycle for
R14 950 (including VAT) and brought it into use on the same date. In terms of
Interpretation Note No. 47, the write-off period for delivery vehicles is four years.
You are required to calculate the wear-and-tear allowance for the current year of assess-
ment ended on 28/29 February.

Solution 9.7
R
Cost (R14 950 x 100 / 115) 13 000
Wear-and-tear allowance (R13 000 / 4 years × 6 / 12) 1 625

What period should I use if the asset that I purchased is not on the
Interpretation Note No. 47 list?

9.10 Immovable assets

The cost of immovable assets may be written off at a certain rate, depending on the
date they were brought into use as well as the purpose that the asset is being used for.

9.10.1 Manufacturing building allowances (section 13)

Section 13 of the Act provides for the allowances relating to buildings used in a pro-
cess of manufacture or a similar process. In other words, a taxpayer can only claim an
allowance on a manufacturing building, for example, a factory.
This section does not require that the taxpayer has to be the owner of the building in
order to claim the allowance. The taxpayer that incurred the cost can claim the

378
9.10 Chapter 9: Expenditure and allowances relating to capital assets

allowance as long as the building (or the improvement) is being used in a process of
manufacture.
This section provides for the following deductions that are relevant to the current year
of assessment:
• erection or improvements commenced after 1 October 1999:
– building annual allowance 5%
• erection or improvements commenced between 1 July 1996 and
30 September 1999, provided that the buildings or improvements
were brought into use by 31 March 2000, qualifies for a 10% allowance.
These buildings therefore have a tax value of Rnil.
• erection or improvements commenced between 1 January 1989 and
30 June 1996.
– building annual allowance 5%
• erection or improvements commenced on or before 31 December 1988:
– building initial allowance 17,5%
– building annual allowance 2%
provided the building was brought into use or the improvements com-
pleted on or before 31 December 1989 (including building erected in terms
of a lease agreement, resulting in the lessee qualifying for the allowance).
The building annual allowance may be claimed in respect of buildings:
• purchased by the taxpayer, provided the person from whom it was purchased was
entitled to the allowance;
• erected by the taxpayer;
• purchased by the taxpayer from another person, where the building was never
used prior to its purchase,
and is:
• used wholly or mainly by the taxpayer (tenant or sub-tenant if the building is let)
for the purposes of carrying on a manufacturing or similar process;
• in the course of his trade.
The initial and annual allowances may be claimed in the year in which the building is
first used, or the improvements are completed, and are limited in total to their cost.
Cost of erection or improvements
The allowances are calculated on the cost of erection of the building or the cost of
improvements to the building. ‘Improvements’ are defined in the section as:
any extension, addition or improvements (other than repairs) to a building which is or
are effected for increasing or improving the industrial capacity of the building.
The cost of a building excludes the cost of preparatory work, such as the cost of
levelling the land. When a building is purchased, an apportionment has to be made
between the cost of the land and of the building. The erection of a building starts
when the foundations are laid, and improvements commence when the work is
started.
The cost must also be reduced, if applicable, by the initial allowance previously available.

379
A Student’s Approach to Taxation in South Africa 9.10

Note that a section 12N improvement qualifies for this allowance.

In certain circumstances, the cost of the building is adjusted because the taxpayer
may exercise a written option to set off the recoupment on a building sold against the
cost of another building, provided that the building is purchased or erected within 12
months after the occurrence of the event which gave rise to the recoupment or within
such period as specified by the Commissioner. Recoupments are dealt with in the
next chapter.
Section 13(1A) also provides that:
• where an allowance can be claimed in respect of a building, and
• the building was used by the taxpayer in a previous year of assessment for the
purposes of a trade of which the receipts and accruals were not included in the in-
come of the taxpayer,
• a deduction which could have been allowed during the previous year of assessment,
• is deemed to have been allowed during the year of assessment concerned, as if the
receipts and accruals had been included in the income of the taxpayer.

9.10.2 Commercial buildings (section 13quin)

A taxpayer is entitled to an allowance of 5% per year on the cost of a new or unused
commercial building, as well as any improvement to such a building that was con-
tracted on or after 1 April 2007, and the construction, erection or installation of which
commenced on or after 1 April 2007.
The building must be owned by the taxpayer and used in the production of income,
excluding the provisions for residential accommodation (allowances for these ex-
penses are available under section 13sex or 13sept).
The cost to the taxpayer of the building or improvement is the lesser of:
• the actual cost incurred by the taxpayer; or
• the cost of the asset under a cash transaction at the time of acquisition concluded at
arm’s length for the acquisition, erection or improvement of the building (therefore
the market value on the date of acquisition).
If part of the building was acquired on or after 21 October 2008 without the taxpayer
erecting or constructing it, the cost is:
• 55% of the acquisition price if a part is acquired; and
• 30% of the acquisition price if an improvement is acquired.
No deduction is allowed to the taxpayer if he qualifies for an allowance under any
other section of the Act. The allowance is limited to the actual cost of the building.
If the taxpayer could not deduct any allowances in any previous years due to the fact
that the income earned was exempt, the allowance would be deemed to have been
taken into account (section 13quin (3)).
No allowance can be claimed by the taxpayer in the year of assessment following the
sale of the building.
Note that a section 12N improvement (refer to 9.6) qualifies for this allowance.

380
9.10 Chapter 9: Expenditure and allowances relating to capital assets

Example 9.8
On 30 June 2020 Mountainview Properties Ltd concluded a contract with a developer to
build a new office park, to be used for the purposes of trade. The work commenced on
15 July 2020 and was completed and on 31 May 2022 at a cost of R3 000 000. On the same
day, the building was brought into use. Mountainview Properties Ltd has a December
year-end.
You are required to calculate the amount allowed as a deduction from income for the
2022 year of assessment.

Solution 9.8
2022 year of assessment ended 31 December 2022 R
Section 13quin allowance (R3 000 000 × 5%) 150 000

Note
The full allowance must be claimed, without any apportionment, even though the build-
ing was not used for the full year. The R3 000 000 is not multiplied with 55% since the
R3 000 000 consist only of the cost of the building and does not include the cost of the
land.

Example 9.9
On 30 June 2022 Lavender Properties Ltd purchased part of a new office block from a
developer at a cost of R1 million, to be used for the purposes of trade. The offices were
brought into use on 1 August 2022. Lavender Properties Ltd has a December year-end.
You are required to calculate the amount allowed as a deduction from income for the
2022 year of assessment.

Solution 9.9
Year of assessment ended 31 December 2022 R
Deemed cost R1 000 000 × 55% = R550 000
Section 13quin allowance R550 000 × 5% 27 500

Note
A part of a building was acquired after 21 October 2008, therefore the deemed cost of the
asset is 55% of the cost. Even if the entire building was aqcuired, the cost of the building
will still be multiplied by 55% of the total cost, since the total cost include the cost of the
land on which no allowance can be claimed.
The full allowance must be claimed, without any apportionment, even though the
building was not used for the full year.

381
A Student’s Approach to Taxation in South Africa 9.10

REMEMBER

• The building must be new, and unused by the taxpayer to qualify for the deduction.
• If the building was used by a previous owner, the allowance cannot be claimed.
• The allowance is only available to the owner of the building.

9.10.3 Residential units (section 13sex)

Section 13sex allows a taxpayer to claim an allowance on a residential unit or im-
provements to residential units. Section 13sex provides for the deduction of the al-
lowance if:
• the taxpayer owns a new or unused residential unit;
• the unit or improvements are solely used by the taxpayer for the purposes of a
trade;
• the unit is situated in the Republic; and
• the taxpayer owns at least five residential units in the Republic.
The allowance is:
• 5% per year on the cost of a new and unused residential unit (or improvement);
and
• an additional 5% of the cost if it is a low-cost residential unit as defined.

Legislation:
Section 1: Interpretation

‘residential unit’ means a building or self-contained apartment mainly used for residential
accommodation, unless the building or apartment is used by a person in carrying on a
trade as a hotel keeper;
‘low-cost residential unit’ means—
(a) an apartment qualifying as a residential unit in a building located within the Repub-
lic, where—
(i) the cost of the apartment does not exceed R350 000; and
(ii) the owner of the apartment does not charge a monthly rental in respect of that
apartment that exceeds one per cent of the cost; or
(b) a building qualifying as a residential unit located within the Republic, where—
(i) the cost of the building does not exceed R300 000; and
(ii) the owner of the building does not charge a monthly rental in respect of that
building that exceeds one per cent of the cost contemplated in subparagraph (i)
plus a proportionate share of the cost of the land and the bulk infrastructure:
Provided that for the purposes of paragraphs (a)(ii) and (b)(ii), the cost is deemed to be
increased by 10% in each year succeeding the year in which the apartment or building is
first brought into use;

382
9.10 Chapter 9: Expenditure and allowances relating to capital assets

REMEMBER

• The cost is deemed to be increased by 10% in each year succeeding the year in which
the apartment or building is first purchased.
• This section applies where the units were acquired, or the erection commenced on or
after 21 October 2008. Before 21 October 2008 section 13ter must be used.

The cost of a residential unit (or improvements) is the lesser of:

• the actual cost of the asset incurred by the taxpayer; or
• the cost of the asset under a cash transaction at the time of acquisition concluded at
arm’s length on the date on which the acquisition, erection or improvements were
concluded (therefore the market value on the date of acquisition).
If the taxpayer acquired a residential unit which is only a part of a building without
erecting that unit (or improvement), then the cost is deemed to be:
• 55% of the acquisition price if a part is acquired; and
• 30% of the acquisition price if an improvement part is acquired.
The full allowance is deductible, even if the residential unit is brought into use for
only part of the year of assessment.
Note that a section 12N improvement (refer to 9.6) qualifies for this allowance.

Example 9.10
On 1 February 2022 Contructo (Pty) Ltd bought seven new apartments in a residential
building situated in the center of Johannesburg at a cost of R750 000 each. All the apart-
ments were rented from 1 March 2022.
You are required to calculate the allowance on the apartments for the year of assessment
ended 31 December 2022.

Solution 9.10
Section 13sex allowance:
R750 000 × 7 × 55% = R2 887 500 × 5% = R144 375

Note
Section 13sex is applicable because the taxpayer owns at least five apartments, which are
used for purposes of trade (renting out) and are situated in South Africa.
The cost of the apartments is deemed to be 55% of the acquisition price because only a
part of a building was acquired and the acquisition cost of that part includes the cost of
the land on which no allowances can be claimed

383
A Student’s Approach to Taxation in South Africa 9.10–9.11

REMEMBER

• The section 13sex allowance is only available to the owner of the asset (therefore lessees
do not qualify for the deduction, except for section 12N assets).
• A residential unit purchased from a seller who previously used the building does not
qualify for this allowance, since the residential unit is not new or unused.
• The taxpayer must own at least five residential units in South Africa, and they must be
solely used for the purposes of carrying on a trade.
• The full allowance is deductible, even if the residential unit is brought into use for only
part of the year of assessment.

9.11 Disposal of assets

If depreciable assets (that were purchased by the taxpayer for trade purposes) are
sold, damaged beyond repair or become useless, certain allowances can be claimed or
certain amounts should be included in the taxpayer’s income.
A ‘depreciable asset’ is defined in section 1 of the Act as an asset other than trading
stock for which a capital deduction or allowance is calculated on the cost or value
(allowed in terms of the Act), for purposes other than capital gains tax in terms of
Schedule 8 of the Act.

9.11.1 Allowance on the disposal of assets at a loss (section 11(o))

Section 11(o) provides for an allowance at the election of the taxpayer, for the amount
that:
• the cost of the depreciable asset exceeds;
• the sum of the selling price from the alienation, loss or destruction and the amount
of the capital allowances allowed up to date of disposal.
The cost of the asset is the actual cost plus any costs of moving the asset from one
location to another.
The allowance does not apply if:
• the asset is sold to a connected person to the taxpayer; or
• the expected useful life of the asset for tax purposes exceeds ten years (as deter-
mined on the date of original acquisition).
This allowance is claimable on the following depreciable assets which qualified for an
allowance or deduction in terms of the listed sections below:
• implements, utensils and articles (section 11(e)) with a useful life not exceeding ten
years;
• research and development (section 11D);
• farming equipment (section 12B);
• plant and machinery (section 12C);
• rolling stock (section 12DA);
• small business corporation assets (section 12E); and
• environmental expenditure (section 37B).

384
9.11 Chapter 9: Expenditure and allowances relating to capital assets

This allowance does not apply to land and buildings.

Example 9.11
KZQ Limited (a registered VAT vendor) purchased a second-hand manufacturing
machine for R115 000 on 1 January 2021 (including VAT). The machine was sold on
30 November 2022 for an amount of R25 000 (VAT excluded) because it was outdated.
You are required to calculate the allowance on the sale of the machine for the 2023 year of
assessment ended on 28 February 2023. (KZQ Limited elected the deduction of this allow-
ance.)

Solution 9.11
R
Selling price 25 000
Capital allowances allowed up to date of sale
[(R100 000 x 100 / 115) × 20% × 3 years (2021, 2022 and 2023))] 60 000
Sum of the proceeds and capital allowances (R25 000 + R60 000) 85 000
Allowance (R100 000 – R85 000) 15 000

Note
The allowance can also be calculated as the difference between the selling price
(R25 000) and the tax value (R40 000). The tax value is the cost (R100 000) less the capital
allowances granted (R60 000).

REMEMBER

• The taxpayer must elect to have this allowance deducted from his income.
• This allowance can be claimed on the sale of depreciable assets with a useful life which
does not exceed ten years.
• When capital gains tax comes into the equation and a company elects to utilise the
section 11(o) allowance, and this allowance is claimed, the allowance must be deducted
from the base cost. If the allowance is not claimed, it will result in a capital loss

9.11.2 Recoupment on the sale of assets (section 8(4)(a))

Just as section 11(o) makes provision for an allowance in circumstances where an
asset is disposed of at a loss, section 8(4)(a) provides for the inclusion in the tax-
payer’s income of an amounts recovered or recouped during the year of assessment.
A recoupment is the amount recovered in excess of the ‘tax value’ of the asset, but
always limited to the cost of the asset.

385
A Student’s Approach to Taxation in South Africa 9.11

Example 9.12
Excon Limited (a registered VAT vendor) purchased machine P on 1 May 2019 for
R172 500 (including VAT). The machine was used from that date in a process not
regarded as a manufacturing process. This machine was sold on 31 January 2023 for
R161 000 (including VAT).
SARS granted a wear-and-tear allowance that is calculated according to the straight-line
method of 20% a year on this machinery and these allowances amounted to R120 000 up to
date of sale.
You are required to calculate the recoupment Excon Limited will have to add to income.

Solution 9.12
R
Cost R172 500 x 100/115 150 000
Less: Wear-and-tear allowances (given) (120 000)
Tax value 30 000
Selling price R161 000 x 100 / 115 140 000
Less: Tax value (30 000)
Recoupment 110 000

Note
The recoupment can never be more than the actual amounts claimed as deductions. In
this case, R120 000 was claimed and the full amount of R20 000 is therefore recouped.

REMEMBER

• The amount recouped for tax purposes may not exceed the amounts allowed as deduc-
tions in the previous years.
• The recoupment is added to the taxpayer’s income.
• The capital profit (the amount of the proceeds exceeding the original cost of the asset) is
subject to the rules of capital gains tax.

9.11.3 Replacement asset: Recoupment (section 8(4)(e))

Section 8(4)(e) extends a special concession to taxpayers in respect of machinery
or plant used in a manufacturing or similar process which has been damaged or des-
troyed.

Exclusion from income

This section provides that notwithstanding the general recoupment provision (refer
to 9.12.1), no recoupment or amount recovered in respect of the disposal of an asset
must be included in the taxpayer’s income if a person has elected paragraph 65 (in-
voluntary disposals) or paragraph 66 (replacement assets) of the Eighth Schedule .

386
9.11 Chapter 9: Expenditure and allowances relating to capital assets

Multiple replacement assets

Section 8(4)(eA) provides for the replacement of a single asset with multiple assets.
The amount recouped or recovered must be allocated to each newly acquired asset in
the same ratio as the amount spent on each new asset (cost of the new asset) in rela-
tion to the total amount received on the disposal of the old asset. This has the effect
that the recoupment is allocated to each replacement asset in proportion to each new
asset’s cost.
Replacement asset constitutes a depreciable asset
In this case, section 8(4)(eB) provides that the recoupment may be spread over the
same period as wear-and-tear allowances or capital allowances may be claimed for
the replacement asset.
Disposal of replacement asset
When the replacement asset is disposed of and a portion of the recoupment for the
original asset has not been included in the taxpayer’s income, it must be deemed to be
recovered or recouped in the year of assessment that the replacement asset is dis-
posed of. If an asset is not a depreciable asset, the full amount recovered or recouped
is held over and will be included when the replacement asset is disposed of (sec-
tion 8(4)(eC)).
Replacement asset ceases to be used in trade
In this situation, a portion of the recoupment allocated to this asset that is not yet
recouped or recovered must be deemed to be an amount recouped or recovered in the
year of assessment when it is not used in the person’s trade (section 8(4)(eD)).
Failure to meet the requirements
If a person fails to conclude a contract or fails to bring a replacement asset into use
within the prescribed periods, he must:
• deem the recoupment to be an amount recovered or recouped on the date that the
relevant period ends; and
• determine interest at the prescribed rate (refer to Annexure E) on the amount re-
covered or recouped from the date of disposal to the date that the relevant period
ends and deem this to be a recoupment on the date the relevant period ends (sec-
tion 8(4)(eE)).

Example 9.13
Wilcars Limited purchased a secondhand manufacturing machine on 1 August 2019 for
R150 000 (excluding VAT). This machine (Machine X) was used in a manufacturing
process from 1 September 2019. Machine X was replaced on 31 May 2022. The capital
allowances up to this date amounted to R120 000. Machine X was sold for R110 000
(excluding VAT). Machine S was purchased brand new on 31 August 2022 to replace
Machine X, and was brought into use on the same date. The cost of Machine S amounted
to R182 400 (excluding VAT). Wilcars Limited elects that the provisions of paragraph 66
of the Eighth Schedule apply.
You are required to calculate the allowances and recoupments for the 2023 year of assess-
ment.

387
A Student’s Approach to Taxation in South Africa 9.11

Solution 9.13
R
Cost 150 000
Less: Capital allowances (given) (120 000)
Tax value 30 000
Selling price 110 000
Recoupment (R110 000 – R30 000) 80 000
Recoupment must be deferred
Add to income portion of deferred recoupment
R80 000 × 40% 32 000
Capital allowance for Machine S - section 12C (R182 400 × 40%) (72 960)

REMEMBER

• Normally, a recoupment is immediately added to the taxpayer’s gross income, except

where it relates to a replacement asset. The recoupment will still be added to the
taxpayer’s gross income, but only a portion of it every year.
• Section 13(3) effectively also allows for the deferral of a recoupment on the disposal of a
building used in a process of manufacture. In terms of that section, the cost of the
replacement building should be reduced with the recoupment that arose on the
disposal of the original building. Therefore, if the deferral provisions of section 8(4)(e)
do not apply, the deferral of the recoupment can still be obtained if it is a building used
in a process of manufacture in the form of reduced capital allowances on the
replacement building.

Example 9.14
Cars (Pty) Ltd needed more space to manufacture motor vehicle parts which the company
sold to different motor vehichle dealers. The company disposed of their main factory
(Factory A) on 1 September 2022 for R6 440 000 (including VAT). The company purchased
a new factory (Factory B) to replace Factory A on 1 December 2022 for
R8 500 000 (excluding VAT). The factory was brought into use on the same date.
Factory A was purchased new on 1 February 2013 for R3 200 000 (excluding VAT). The
company has a March year end.
You are required to calculate the allowances and recoupments for the current year of
assessment ended 31 March 2023.

388
9.11–9.12 Chapter 9: Expenditure and allowances relating to capital assets

Solution 9.14
R
Cost of Factory A 3 200 000
Less: Capital allowances (R3 200 000 x 5% x 10) (1 600 000)
Tax value 1 600 000
Selling price (R6 440 000 x 100/115) 5 600 000
Less: Tax value (1 600 000)
Recoupment 4 000 000
Limited to allowances 1 600 000
Recoupment not included in income (Note)
Factory B – R8 500 000 – R1 600 000 = R6 900 000
Factory B - section 13 allowance (R6 900 000 x 5%) (345 000)

Note
The recoupment will not be deferred in terms of section 8(4)(e) as it does not meet the
requirements of paragraph 65 of the Eight Schedule as it is not an involuntary disposal.
Paragraph 66 of the Eight Schedule is also not applicable, as this relates to immovable
property, and therefore paragraph 13(3) will apply.

9.11.4 Donations and dividends: Recoupment (section 8(4)(k))

Section 8(4)(k) provides that where a taxpayer:
• donates an asset; or
• in the case of a company transfers it to a shareholder (for example a dividend in
specie); or
• disposed of an asset to a connected person; or
• commenced to hold any asset as trading stock that was previously not held as trad-
ing stock, and
a deduction or allowance was granted in the past in respect of the asset, the taxpayer
is deemed to have disposed of that asset for an amount equal to the market value of
that asset as at the date of that donation, transfer, disposal or commencement. This
means that the recoupment of section 8(4)(a) must be calculated by using the market
value of the asset on the date of disposal and not the actual selling price.
The total recoupment is, however, still limited to the deductions previously granted.

9.12 Leased assets

A taxpayer does not always own the land or buildings from where he conducts his
business activities. He can make use of premises owned by another taxpayer and pay
rental and other amounts for this privilege.

9.12.1 Rental paid (section 11(a))

Rent paid is deductible in terms of section 11(a) provided all the requirements of this
section are met. It is only deductible from the date on which the leased asset is
brought into use for tax purposes.

389
A Student’s Approach to Taxation in South Africa 9.12

9.12.2 Lease premiums (section 11(f))

Many lease agreements make provision for the payment of an initial lump sum
amount on signature of the contract.
Section 11(f) makes provision for the deduction of:
• a lease premium or similar consideration;
• paid by the taxpayer for the right of use or occupation of land, buildings, plant or
machinery; and
• used or occupied to produce income or from which income is derived.
This deduction is limited to an amount for each year of assessment, arrived at by
dividing the total lease premium by the number of years for which the taxpayer is
entitled to the use or occupation, but limited to a maximum of 25 years.
Where the right of use or occupation is for an indefinite period or where the taxpayer
has the right to renew or to extend the period, the premium is spread over such
period as the Commissioner considers represents its probable duration.
The taxpayer may not claim a deduction in terms of section 11(f), unless the lease
premium paid constitutes income of the lessor (and is taxable in his hands).
Lease premiums paid to exempt institutions like municipalities do not qualify for
deduction, as they do not constitute income of the person to whom they are paid.

Example 9.15
Thebe Manufacturers Ltd entered into a lease agreement with Kaqala Properties Ltd on
1 May 2022 to lease an administration building for 15 years from that date. In terms of the
lease agreement, Thebe must pay a lease premium of R60 000 before 31 May 2022 and a
monthly rental of R6 000 from that date.
You are required to calculate what amounts Thebe Manufacturers Ltd can claim for the
current year of assessment ended on the last day of February 2023.

Solution 9.15
R
Lease premium: R60 000 / 15 × 10 / 12 3 333
Rental: 10 × R6 000 60 000
Total deductions 63 333

Note
The lease premium is written off over the period of the lease agreement, that is to say 15
years. The deduction is reduced pro rata as the building is only let for ten months in the
current year of assessment. In the next 14 years of assessment, R4 000 is written off each
year and, in the last year of assessment, R4 000 × 2 / 12 = R667 is written off.

390
9.12 Chapter 9: Expenditure and allowances relating to capital assets

9.12.3 Leasehold improvements (section 11(g) and (h))

Lease agreements for fixed property frequently include an obligation imposed on the
lessee to effect improvements to the property either by erecting a building on the
property or by improvements to an existing building.
Section 11(g) makes provision for the deduction of:
• expenditure incurred in terms of such an obligation; and
• on land or buildings used or occupied for the production of income or from which
income is derived.
The deduction is limited to an amount for each year of assessment, arrived at by
dividing the total leasehold improvement by the number of years for which the
taxpayer is entitled to the use or occupation, calculated from the date of completion
of the improvements, up to a maximum period of 25 years. The requirements in
respect of an indefinite lease term are the same as in section 11(f ). If, however, during
a year of assessment, the lease agreement is terminated before the expiry of the lease
period to which the taxpayer was initially entitled, so much of the allowance that has
not yet been allowed as a deduction in that or a previous year of assessment, must be
allowed as a deduction in that year of assessment.
The total allowance in terms of section 11(g) is limited to the amount stipulated in the
lease agreement as the value of the improvements or the amount to be expended on
the improvements. Where no amount is stipulated, an amount representing the fair
and reasonable value of the improvements applies.
In certain circumstances, the excess of expenditure over the amount stipulated in the
lease agreement is deductible in terms of other sections of the Act, for example build-
ings used in a manufacturing process (section 13; refer to 9.10.1).
Where such a deduction does not apply, the excess expenditure, being of a capital
nature, does not qualify as a deduction at all. The total deductions in respect of any
improvements to fixed property allowable in terms of section 11(g) and other sec-
tions, may not exceed their cost. The taxpayer may not claim a deduction in terms of
section 11(g) unless the value of the improvements constitutes income of the lessor
and is subject to normal tax in his hands.

Example 9.16
On 1 May 2021 Mowbray Manufacturers entered into an agreement with Steven Moti for
the lease of land owned by him. The lease agreement provided the following:
• the term of the lease agreement was 20 years from 1 May 2021; and
• the lessees would erect a factory on the land at a cost of R1 000 000.
Building commenced on 1 October 2021 and the factory was completed and brought into
use on 1 October 2022 at a cost of R1 200 000.
You are required to calculate the amount Mowbray Manufacturers may claim in respect
of the leasehold improvements for the 2023 year of assessment ended on the last day of
February.

391
A Student’s Approach to Taxation in South Africa 9.12

Solution 9.16
R
Leasehold improvements R1 000 000 / 18 years 7 months × 5 / 12 (Note 1) 22 422
Annual building allowance 5% × (R1 200 000 – R1 000 000) (Note 2) 10 000
Total deduction that can be claimed 32 422

Notes
1. Mowbray Manufacturers must write the leasehold improvements off over the period
during which the building is in use, that is to say 20 years, less the 17 months it took
to complete the building from the date of agreement = 18 years and 7 months. It was
only in use for 5 months (1 October 2022 to 28 February 2023) in the current year of as-
sessment.
2. The contract value is written off over the useful life of the building and the annual
allowance is calculated on the difference between the actual cost (R1 200 000) and the
contract value (R1 000 000).

Lessor’s special allowance (section 11(h))

Section 11(h) provides a lessor with a deduction from the value of the improvements
to the leasehold property included in his income. It is the practice of the Commis-
sioner to grant an allowance as follows in terms of section 11(h):
R
Amount stipulated in the agreement (or the fair and reasonable value) xxxx
Less: The amount stipulated (or the fair and reasonable value)
capitalised at 6% over the period of the lease (xxx)
Allowance xxx

Example 9.17
On 1 September 2020, Moti (Pty) Ltd purchased a piece of land for R400 000. On
1 May 2021, the company entered into an agreement with Mowbray Manufacturers for
the lease of the land. The lease agreement provided the following:
• the terms of the lease agreement were 20 years from 1 May 2021; and
• the lessees would erect a factory on the land at a cost of R1 000 000.
Building commenced on 1 October 2021 and the factory was completed and brought into
use on 1 October 2022 at a cost of R1 200 000.
You are required to calculate what amounts Moti (Pty) Ltd must include in his income for
the 2023 year of assessment ended on the last day of February. (The discounting rate is
0,312.)

392
9.12–9.13 Chapter 9: Expenditure and allowances relating to capital assets

Solution 9.17
Gross income R
Value of leasehold improvements (Note) 1 000 000
Moti (Pty) Ltd can claim the following deduction: 688 000
Value of improvements included in income 1 000 000
Less: R1 000 000 discounted at 6% a year over the remaining period
of the lease, that is to say 18 years and seven months
(R1 000 000 × 0,312) (Note) (312 000)

Amount to be included in respect of leasehold improvements 312 000

Note
The value of the leasehold improvements included in the contract is included in Moti
(Pty) Ltd’s gross income in terms of paragraph (h)(i) of the definition of ‘gross income’,
thus, the amount of R1 000 000 and not the actual cost of R1 200 000. Although the
amount accrues on the date of the agreement, in practice it is included in gross income in
the year in which the improvements are completed.

REMEMBER

• The lease premium is claimed from the date the lessee has the right of use of the leased
asset and the asset is actually used in the production of income.
• The leasehold improvements are claimed from the date that the improvements are
brought into use.
• The allowance for both the lease premium and leasehold improvements is calculated
pro rata for the period the asset was in use during the year of assessment.
• A lessee is allowed to fully write off any remaining costs of buildings and improvements
on leased property if those costs have not been fully taken into account by the lease termi-
nation date (and would have otherwise been deductible had the lease continued).

9.13 Expenditure and allowances relating to intangible assets

Intangible assets are non-physical assets as reflected on a company’s balance sheet
that indicate the potential for future economic benefits. Intangible assets include
intellectual property that is discussed below.

9.13.1 Capital expenditure on patents, designs, trademarks

and copyright (section 11(gB) and (gC))
A taxpayer can incur expenditure to develop or acquire certain incorporeal property
like patents, trademarks, copyright etc. The tax deduction depends on the type of

393
A Student’s Approach to Taxation in South Africa 9.13

expense and the date the expense was incurred. The following is a summary of the
deductions:

Acquired property – Acquired property –

expenditure expenditure
less than R5 000 more than R5 000
After 1 January 2004 Section 11(gC): deductible in Section 11(gC) allowance:
full in year incurred • an invention, patent,
copyright – 5% of the
expenditure; and
• a design or property of a
similar nature – 10% of the
expenditure.

Acquisition cost (section 11(gC))

Section 11(gC) provides for an allowance for an expenditure actually incurred by the
taxpayer to acquire (otherwise than by way of devising, developing or creating)
• an invention or patent as defined in the Patents Act;
• a design as defined in the Designs Act;
• a copyright as defined in the Copyright Act;
• another property that is of a similar nature (other than trademarks as defined); or
• knowledge essential to the use of the patent, design, copyright or other property or
the right to have the knowledge imparted.
The allowance is available on only the acquisition of the ‘qualifying’ asset. It is not
available on the costs actually incurred on devising, developing or creating the ‘quali-
fying’ asset (deductible in terms of section 11D). It is also not available for the acqui-
sition of a trademark as defined in the Trade Marks Act.
The allowance is available during the year of assessment in which that invention,
patent, design, copyright, other property or knowledge is brought into use for the
first time by the taxpayer for trade purposes, as well as every year thereafter while it
is still in use.
If the expenditure actually incurred by the taxpayer exceeds R5 000, the allowance is
limited to
• 5% of the expenditure in respect of an invention, patent, copyright or other property of
a similar nature or any knowledge connected with the use of the invention, patent,
copyright or similar property or the right to have such knowledge imparted; or
• 10% of the expenditure in respect of a design or other property of a similar nature
or any knowledge connected with the use of the design or other property or the
right to have the knowledge imparted.
Expenditure of R5 000 or less is deductible in full in the year of assessment in which
the ‘qualifying’ asset is brought into use by the taxpayer for trade purposes.

394
9.13 Chapter 9: Expenditure and allowances relating to capital assets

Extension and renewal of the registration period (section 11(gB))

Section 11(gB) provides for the deduction in full of expenditure actually incurred by
a taxpayer in
• obtaining the grant, restoration or extension of term of a patent; or
• the registration or extension of the registration period for a design; or
• the registration of a trademark or renewal of the registration of a trademark.

Example 9.18
Aqua (Pty) Ltd owns a shop that sells water sport equipment. The company also designs
and manufactures surfboards.
The company incurred the following expenses in connection with patents and designs on
surfboards (all patents and designs having been developed in South Africa):
R
Expenses incurred in acquiring design E for a surfboard for children. 18 000
The design was registered on 31 July 2022.
Expenses incurred in acquiring patent F for a new type of shoe used by surfers. 4 500
The patent was registered on 31 October 2022.
You are required to calculate the allowances that Aqua (Pty) Ltd can claim
during the current year of assessment (ending 31 March 2023).

Solution 9.18
R
Current year of assessment
Design E: R18 000 × 10% 1 800
Patent F: (Note 1) 4 500
Allowances that Aqua (Pty) Ltd can claim 6 300

Note
The expenditure incurred in acquiring patent F is deductible in full in terms of sec-
tion 11(gC) as it does not exceed R5 000.

395
A Student’s Approach to Taxation in South Africa 9.13–9.14

REMEMBER

• Only acquisition costs can be claimed in terms of section 11(gC). The costs that relate to
the developing, devising or creating are claimed in terms of section 11D.
• Different rates apply depending on whether it is an invention, patent, copyright or a
design:
– 5% in the case of an invention, patent or copyright; or
– 10% in the case of a design.
• If the acquisition costs do not exceed R5 000, it can be claimed in full as a deduction.
• No allowance may be deducted if a trade mark is acquired from another person.
• These assets must be used in the production of income or income must be derived from
them.

9.13.2 Prohibition of deduction of intellectual properties

(sections 11(gC))
If expenditure was incurred for the acquisition of intellectual property, the provisions
of section 11(gC) states the following:
Intellectual property refers to a patent, design, trademark or copyright according to
South African law or a foreign law as well as any knowledge connected with the
intellectual property.
‘Affected intellectual property’ is defined as:
• intellectual property which was wholly or partly the property of the taxpayer or
resident; or
• intellectual property of which the whole or a material part was discovered, de-
vised, developed, created or produced during the current or previous years of as-
sessment by the taxpayer or a connected person to the taxpayer.
A deduction is allowed equal to one third of an expenditure incurred if tax is payable
in terms section 35 (income from royalties or similar payments), provided that the tax
payable is not at a rate of less than 10%.

REMEMBER

• Section 23I disallows the deduction of expenditure incurred in respect of affected intel-
lectual property to the extent that the expenditure is not income for another party, unless
the expenditure is incurred for the acquisition of intellectual property (section 11(gC)).

9.14 Summary
In this chapter, the allowances that a taxpayer may claim in connection with capital
assets used in the production of income or from which income is derived, are dis-
cussed in detail. The distinction between repairs and improvements are discussed.
Repairs can be claimed immediately in the year the expense was incurred.
The concepts of the ‘cost of the asset’ and a ‘process of manufacture’ are dealt with
separately as these apply to most assets. In the case of plant and machinery used in a
process of manufacture, the different rates depend on the date the plant or machinery

396
9.14–9.15 Chapter 9: Expenditure and allowances relating to capital assets

is brought into use. The allowance is claimed in full even if the asset was not brought
into use for the full year of assessment.
Assets not used in a process of manufacture (for example, computers, delivery vehi-
cles etc.) are written off over periods prescribed by SARS. These wear-and-tear allow-
ances may only be claimed for the period the assets were in use during that year of
assessment.
Buildings used in a process of manufacture are written off at specific rates, depending
on the date the erection or improvements commenced and the date they were
brought into use. In certain cases, buildings purchased by the taxpayer can also be
written off at a certain rate. The cost of land cannot be claimed as it constitutes a cost
of a capital nature and the Act makes no special provision for it.
This chapter also deals with the disposal of assets and the allowances relating thereto.
The loss on the sale of an asset can be claimed as a deduction or in the case of a re-
coupment, the amount is added to the taxpayer’s income except where it relates to a
replacement asset. In the case of a replacement asset, the recoupment is deferred, and
a portion of the recoupment is added to income every year.
In the questions that follow, the principles as discussed in the chapter are high-
lighted.

9.15 Examination preparation

Question 9.1
Paint Pot (Pty) Ltd is a manufacturing business that manufactures arts and crafts. The
company is not a small business corporation as defined in the Income Tax Act 58 of 1962
and its financial year ends on 31 March. Paint Pot (Pty) Ltd is a registered VAT vendor and
all amounts exclude VAT, unless stated otherwise.
1. Paint Pot (Pty) Ltd donated four office computers with a cost price of R12 000 each to a
local school (not a public benefit organisation) on 1 January 2023 for no consideration.
The market value of the office computers was R16 500 each on 1 January 2023. The
computers were originally purchased and brought into use on 1 August 2021. Binding
General Ruling No. 7 allows for a three-year write off period for computers.
2. The company purchased two machines on 16 September 2022 that were used in the
manufacturing process from that date. Machine X was purchased new at a cost of
R87 000 (including VAT) and machine Z was purchased second-hand from a
competitor for R56 000 (excluding VAT).
3. Paint Pot (Pty) Ltd decided to extend the manufacturing building to improve the
industrial capacity of the building. The extension commenced on 15 July 2022 and was
completed and brought into use on 1 October 2022. The cost of the improvement was
R1 100 000, including the architect’s fees of R125 000. The original manufacturing
building is fully written-off for income tax purposes.

continued

397
A Student’s Approach to Taxation in South Africa 9.15

4. In spite of the fact that the company extended the manufacturing building, it still
required extra space for manufacturing its best seller, the paint brush that lights up
when you paint. The company approached Steelworks (Pty) Ltd for additional
manufacturing space and signed a lease agreement to lease the building with effect
from 1 May 2022 for a period of six years, with the option to extend the lease for
another four years. A monthly rental amount of R12 500 was payable to Steelworks
(Pty) Ltd from 1 May 2022. A lease premium of R120 000 was payable on 1 May 2022.

You are required to:

Calculate Paint Pot (Pty) Ltd’s capital allowances, section 11(o) allowances and re-
coupments for the current year of assessment ending 31 March 2023.

Answer 9.1
Paint Pot (Pty) Ltd can claim the following allowances for the year ending 31 March 2022:
Office computers R R
Cost (R12 000 x 4) 48 000
Less: Section 11(e) allowance 2022 (R48 000 / 3 x 8 / 12) (10 667)
Less: Section 11(e) allowance 2023 (R48 000 / 3 x 9 / 12) (12 000) (12 000)
Tax value 25 333
Donation at market value (R16 500 x 4) (Deemed selling price) 66 000
(Note 1)
Recoupment (section 8(4)(k)) 40 667
Limited to previous allowances (R10 667 + R12 000) (Note 1) 22 667
Machine X – (R87 000 x 100 / 115 x 40%) – section 12C (30 261)
Machine Z – (R56 000 x 20%) – section 12C (11 200)
Extension to building (section 13) – (R1 100 000 - R125 000) x 5% (48 750)
Rental (R12 500 x 11) – section 11(a) (137 500)
Lease premium (R120 000 / (10 years x 12 months) x 11months) –
section 11(f) (Note 2) (11 000)
Notes
1. Remember that the recoupment can never exceed the previous allowances claimed. To
ensure that the recoupment does not exceed the allowances claimed, the proceeds can
also be limited to the cost price in the calculation, which is R48 000. The tax value is
deducted from the proceeds (R25 333) and this gives you the recoupment amount of
R22 667.
2. The calculation can also be done in years, R120 000 / 10 years x 11 / 12 months.

Additional questions for this chapter are available electronically at

www.myacademic.co.za/books

398
 10 Capital gains tax

Gross Exempt Taxable Tax

– – Deductions =
income income income payable

Taxable
capital
gain

Page
10.1 Introduction ......................................................................................................... 401
10.2 Application of capital gains tax (paragraphs 2 to 10) ..................................... 401
10.3 Determine whether capital gains tax is applicable (Step 1)
(paragraph 1 and section 1)................................................................................ 405
10.3.1 Definition of an asset (Step 1.1) ......................................................... 405
10.3.2 Nature of an asset (Step 1.2) ............................................................... 406
10.3.3 Disposals for capital gains tax purposes (Step 1.3)
(paragraphs 11 and 12) ....................................................................... 406
10.3.4 Timing of disposals (Step 1.4) (paragraph 13) ................................. 408
10.4 Capital gain or loss on the disposal of an asset (Step 2)
(paragraphs 3 and 4) ........................................................................................... 409
10.4.1 Capital gain on the disposal of an asset (paragraph 3) .................. 410
10.4.2 Capital loss on the disposal of an asset (paragraph 4) ................... 411
10.5 Proceeds from the disposal of an asset (Step 2.1) ........................................... 412
10.5.1 Proceeds (paragraph 35) ..................................................................... 412
10.5.2 Donations and transactions between related parties
(paragraph 38) ...................................................................................... 414
10.5.3 Disposals for proceeds not yet accrued (paragraph 39A) .............. 415
10.6 Base cost of an asset (Step 2.2) ........................................................................... 415
10.6.1 Cost included in the base cost of an asset (paragraph 20) ............. 416

399
A Student’s Approach to Taxation in South Africa

Page
10.6.2 Cost not included in the base cost of an asset (paragraph 20(2)
and (3)) and the limitation of expenditure (paragraph 21) ............ 418
10.6.3 Base cost calculation of a pre-valuation date asset ......................... 419
10.7 Market value of assets (paragraphs 29 and 31) ............................................... 420
10.8 Time-apportionment base cost (TAB) (paragraph 30).................................... 423
10.8.1 TAB: Cost only incurred before the valuation date ........................ 423
10.8.2 TAB: Cost incurred before and after the valuation date ................ 427
10.8.3 TAB: Depreciable assets...................................................................... 429
10.9 The 20% rule......................................................................................................... 433
10.10 Selecting the valuation date value (paragraphs 26 and 27) ........................... 434
10.11 Exclusions (Step 2.4) ........................................................................................... 439
10.11.1 Exclusion: Primary residence (paragraphs 44 to 51) ....................... 440
10.11.2 Exclusion: Personal-use assets (paragraph 53) ................................ 446
10.11.3 Exclusion: Disposal of small business assets (paragraph 57) ........ 447
10.11.4 Exclusions: Other ................................................................................. 449
10.11.4.1 Retirement benefits (paragraph 54)................................. 449
10.11.4.2 Long-term insurance (paragraph 55) .............................. 450
10.11.4.3 Compensation for personal injury, illness or
defamation (paragraph 59) ............................................... 451
10.11.4.4 Gambling, games and competitions (paragraph 60)..... 451
10.11.4.5 Exempt persons (paragraph 63)....................................... 452
10.11.4.6 Assets that produce exempt income (paragraph 64) .... 452
10.11.4.7 Donations and bequests to public benefit
organisations (paragraph 62) ........................................... 452
10.11.4.8 Public benefit organisations (paragraph 63A) ............... 452
10.11.5 Annual exclusion (paragraph 5) ........................................................ 453
10.12 Limitation of losses (paragraphs 15 to 19, 39, 56 and 83) ............................... 453
10.12.1 Non-personal use assets (paragraph 15) .......................................... 454
10.12.2 Intangible assets (paragraph 16) ........................................................ 454
10.12.3 Forfeited deposits (paragraph 17) ..................................................... 454
10.12.4 Options (paragraph 18) ....................................................................... 454
10.12.5 Shares disposed of at a loss following an extraordinary
dividend (paragraph 19) ..................................................................... 454
10.12.6 Assets disposed of to a connected person at a loss
(paragraph 39) ...................................................................................... 455
10.12.7 Waiving or cancelling of debt by a creditor (paragraph 56) .......... 456
10.13 Assessed capital loss carried forward (paragraphs 6 and 7) ......................... 456
10.14 Roll-overs ............................................................................................................. 457
10.14.1 Involuntary disposal of assets (paragraph 65)................................. 457
10.14.2 Reinvestment in replacement assets (paragraph 69) ...................... 459
10.14.3 Disposals to a spouse (section 9HB).................................................. 462
10.15 Inclusion rate (paragraphs 9 and 10) ................................................................ 464
10.16 Summary .............................................................................................................. 464
10.17 Examination preparation ................................................................................... 465

400
10.1–10.2 Chapter 10: Capital gains tax

10.1 Introduction
A gain or loss that is realised on the disposal of an asset can be of either a revenue
nature or a capital nature. In determining whether the disposal of a particular asset
will result in a capital gain, and therefore be subject to capital gains tax, it is first nec-
essary to determine whether the profit or loss is revenue in nature by applying the
basic principles of income tax. If it is determined that the disposal is revenue in na-
ture, the gain or loss will then be subject to normal income tax, not capital gains tax. If
it is determined that the disposal is not revenue in nature, the gain or loss will be sub-
ject to capital gains tax in terms of the Eighth Schedule of the Act. The Eighth Sched-
ule excludes capital gains on certain assets. Therefore, it is important to note which
assets are not subject to capital gains tax and which are only partly subject to capital
gains tax. References to paragraphs in this chapter are references to the paragraphs of
the Eighth Schedule.

10.2 Application of capital gains tax (paragraphs 2 to 10)

Capital gains tax is payable by a taxpayer when he sells an asset that is subject to the
capital gains tax regulations. From 1 October 2001 capital gains tax is levied on the
disposal of the following:
• any asset of a resident; or
• the following assets of a non-resident:
– immovable property situated in the Republic held by the person or any interest
or right in immovable property situated in the Republic; or
– any asset which is effectively connected with a permanent establishment
through which that non-resident carries on business in the Republic.
An interest in immovable property includes:
• equity shares held in a company;
• ownership or right to ownership in any other entity; or
• a vested interest in any assets of a trust,
if 80% or more of the market value of the above interest, at the time of disposal, is
directly or indirectly attributable to immovable property situated in the Republic. In
the case of an interest held through equity shares in a company or ownership or the
right of ownership of another entity, the non-resident (alone or together with con-
nected persons) must directly or indirectly hold at least 20% of the equity shares of
the company or 20% of the ownership of that other entity.
To determine whether the disposal of an asset is subject to capital gains tax, a fixed
process has to be followed. This process will determine the amount of tax that needs
to be paid on a taxable capital gain or the assessed capital loss to be carried forward
to the following year of assessment.

401
A Student’s Approach to Taxation in South Africa 10.2

Calculate the normal tax payable on the taxable capital gain or the assessed
capital loss to be carried forward to the following year of assessment

Step 1: Determine whether the transaction is subject to capital gains tax (refer
to 10.3).

Step 2: Calculate the capital gain or loss on the disposal of each asset (refer to
10.4).

Step 3: Calculate the sum (total) of all capital gains and losses for the year of
assessment by adding up the capital gains and losses on the different
assets disposed of.

Step 4: Calculate the aggregate capital gain or loss by:

• reducing the sum of all capital gains and losses by the annual ex-
clusion of R40 000. There is, however, no annual exclusion for per-
sons other than natural persons.
A 2023 amendment applies where a person’s year of assessment is less
than 12 months. It determines that the total annual exclusions for all
years of assessment during a 12-month period commencing on
1 March and ending on 28 February, must not exceed R40 000. This
amendment avoids an anomalous situation whereby a natural person
who had more than one year of assessment during a 12-month tax
period could claim R40 000 twice as that person is now limited to only
R40 000 in a 12-month tax period. This amendment applies in respect
of years of assessment commencing on or after 1 March 2023.

Step 5: Determine whether there is any assessed capital loss brought for-
ward from the previous year of assessment.

Step 6: Calculate the net capital gain or assessed capital loss for the year of
assessment by:
• reducing the aggregate capital gain (Step 4) by the assessed capital
loss (Step 5); or
• adding the aggregate capital loss (Step 4) to the assessed capital
loss (Step 5).

Step 7: Determine whether there is a net capital gain or an assessed capital

loss.
Net capital gain: Go to Step 8.
Assessed capital loss: The assessed capital loss is carried forward to
the next year of assessment. It cannot be set off against other taxable
income (refer to 10.15).

continued

402
10.2 Chapter 10: Capital gains tax

Step 8: Determine the inclusion rate applicable to the taxpayer, that is 80% for
persons other than natural persons and 40% for natural persons (refer
to 10.16).

Step 9: Calculate the taxable capital gain by multiplying the net capital gain
(Step 9) by the inclusion rate (Step 8).

Step 10: The taxable capital gain is added to other taxable income for the year
of assessment to calculate the total taxable income for the year. This
total taxable income is then used to calculate the tax liability.

REMEMBER

• If an assessed capital loss arises, the amount is carried forward to the next year of
assessment.
• An assessed capital loss cannot be set off against other taxable income (refer to 10.15).

Example 10.1
Quintal (Pty) Ltd has a net income from operations (before the sale of capital assets) of
R100 000 for the current year of assessment. Quintal CC sold two assets during the year.
The sale of the first asset realised a capital gain of R90 000. The sale of the second asset
resulted in a capital loss of R20 000. In the previous year of assessment, Quintal CC had
an assessed capital loss of R10 000.
You are required to
(a) calculate Quintal (Pty) Ltd’s taxable income for the current year of assessment;
(b) calculate Mr P Quintal’s taxable income for the current year of assessment if you
assume that Quintal (Pty) Ltd is a natural person, Mr P Quintal.

403
A Student’s Approach to Taxation in South Africa 10.2

Solution 10.1
As assets were sold during the year, capital gains tax is applicable.
(a) Quintal (Pty) Ltd: R
Capital gain on the sale of asset 1 90 000
Capital loss on the sale of asset 2 (20 000)
Sum of all capital gains and losses (R90 000 – R20 000) 70 000
Less: Annual exclusion (not a natural person) nil
Aggregate capital gain (R70 000 – Rnil) 70 000
Less: Assessed capital loss – previous year (10 000)
Net capital gain (R70 000 – R10 000) 60 000
Multiply: Inclusion rate – 80% (not a natural person) 80%
Taxable capital gain (R60 000 × 80%) 48 000
Total taxable income:
Other taxable income (net income from operations) 100 000
Taxable capital gain 48 000
Total taxable income (R100 000 + R48 000) 148 000

(b) P Quintal: R
Capital gain on the sale of asset 1 90 000
Capital loss on the sale of asset 2 (20 000)
Sum of all capital gains and losses (R90 000 – R20 000) 70 000
Less: Annual exclusion (40 000)
Aggregate capital gain (R70 000 – R40 000) 30 000
Less: Assessed capital loss – previous year (10 000)
Net capital gain (R30 000 – R10 000) 20 000
Multiply: Inclusion rate – 40% 40%
Taxable capital gain (R20 000 × 40%) 8 000
Total taxable income:
Other taxable income (net income from operations) 100 000
Taxable capital gain 8 000
Total taxable income (R100 000 + R8 000) 108 000

404
10.2–10.3 Chapter 10: Capital gains tax

REMEMBER

• If the result of Step 6 (net capital gain or assessed capital loss) represents an assessed
capital loss, the amount will be carried forward to the following year of assessment and
will not be deducted from the other taxable income.
• The taxable capital gain for individuals must be included in the calculation of taxable
income before the allowable deductions for retirement contributions and section 18A
donations.
• Only natural persons and paragraph (a) special trusts qualify for the annual exclusion
of R40 000.

10.3 Determine whether capital gains tax is applicable (Step 1)

(paragraph 1 and section 1)
Capital gains tax can only be imposed on a transaction involving an asset. The trans-
action must further be classified as a disposal or deemed disposal in terms of the
Eighth Schedule. The time of disposal is important to determine the year of assess-
ment in which the capital gains tax calculation needs to be performed. The ‘asset’ and
the ‘disposal’ are two important elements of the capital gains tax calculation and to-
gether with the ‘proceeds’ and the ‘base cost’ they constitute the four building blocks
of capital gains tax.

Determine whether capital gains tax needs to be calculated and in which

year of assessment it must be recognised

Step 1.1: Determine whether an asset as defined was involved in the

transaction (refer to 10.3.1).

Step 1.2: Determine the nature of the asset and whether the asset was subject to
income tax (refer to 10.3.2).

Step 1.3: Determine whether the transaction is a disposal or a deemed disposal

for capital gains tax purposes (refer to 10.3.3).

Step 1.4: Determine in which year of assessment the disposal should be

recognised for capital gains tax purposes (refer to 10.3.4).

10.3.1 Definition of an asset (Step 1.1)

The Act specifically includes the following:
• property of whatever nature, movable or immovable, corporeal or incorporeal,
excluding any currency, but including coins made mainly from gold or platinum;
and
• a right or interest of whatever nature to or in such property.

405
A Student’s Approach to Taxation in South Africa 10.3

10.3.2 Nature of an asset (Step 1.2)

If an amount is received by or accrued to a taxpayer as a result of a transaction in-
volving an asset that is not of a capital nature, the amount must be included in the
taxpayer’s gross income. Proceeds from disposals of assets of a capital nature are not
included in the gross income definition. Refer to case law on the gross income def-
inition to determine whether the proceeds are of a capital nature for income tax pur-
poses.
The definition of an asset for capital gains tax purposes includes both non-current
and current assets. Any amount already taken into account for income tax purposes is
excluded from the ‘proceeds’ (refer to 10.5) for capital gains tax purposes. As a result
of this exclusion, current assets already taken into account for normal income tax
purposes (for example trading stock) is excluded from the calculation of a capital
gain.

10.3.3 Disposals for capital gains tax purposes (Step 1.3)

(paragraphs 11 and 12)
The Act provides that transactions that qualify as disposals or deemed disposals are
subject to capital gains tax. The Act, however, also provides for a number of trans-
actions that are not disposals. It is important to determine whether a transaction is a
disposal or not, as capital gains tax cannot be levied on non-disposals.

Disposals (paragraph 11)

A disposal is any event, act, forbearance or operation of law, which results in the cre-
ation, variation, transfer or extinction of an asset and includes:
• the sale, donation, expropriation, conversion, grant, cession, exchange, or any other
alienation or transfer of ownership of an asset;
• the forfeiture, termination, redemption, cancellation, surrender, discharge, relin-
quishment, release, waiver, renunciation, expiry or abandonment of an asset;
• the scrapping, loss or destruction of an asset;
• the vesting of an interest in an asset of a trust in a beneficiary;
• the distribution of an asset by a company to a holder of shares;
• the granting, renewal, extension or exercise of an option; or
• the decrease in value of a person’s interest in a company, trust or partnership as a
result of a value-shifting arrangement.

Deemed disposals (paragraph 12)

A person is sometimes deemed to have disposed of an asset at market value and is
deemed to have immediately reacquired the asset at expenditure equal to that market
value. The expenditure (market value) at the time of reacquisition must be treated as
an amount actually incurred and paid. This expenditure is the base cost of the asset.
The following are deemed as disposals or acquisitions:
• Where a person commences to be a resident. This is not applicable to immovable
property or an interest in immovable property situated in South Africa and assets
of a permanent establishment in the Republic.

406
10.3 Chapter 10: Capital gains tax

• Where a person ceases to be a resident. Again, this is not applicable to immovable

property or an interest in immovable property situated in South Africa and assets
of a permanent establishment in the Republic. When a person ceases to be a resi-
dent, it triggers the so-called exit-charge under section 9H of the Act. Refer to chap-
ter 11 for a detailed discussion.
• An asset that becomes part of a non-resident’s permanent establishment (a fixed
place of business) in South Africa other than by way of acquisition.
• An asset that ceases to be part of a non-resident’s permanent establishment (a fixed
place of business) in South Africa other than by way of disposal of the asset.
• When a person commences to hold assets, other than trading stock, as trading stock.
• When a person commences to hold trading stock as a capital asset, such trading stock
is deemed to be disposed of at the cost price taken into account in the determination
of taxable income (section 22(8)). The person is then deemed to have acquired the as-
set at the same cost, which must be treated as the base cost incurred in terms of para-
graph 20. If the trading stock was manufactured, produced, constructed or assem-
bled by the taxpayer, it however remains part of his trading stock.
• An asset that ceases to be held by a person as a personal-use asset (refer to 10.12.3),
other than by way of a disposal.
• An asset that is held by a person, other than as a personal-use asset, when that as-
set commences being held as a personal-use asset.
• An asset transferred by an insurer (as contemplated in section 29A) from one fund
(as contemplated in section 29A(4)) to any other fund.

Non-disposals (paragraph 11)

The following are not regarded as disposals of assets for purposes of the Eighth
Schedule:
• the transfer of an asset as security for a debt or the transfer of the asset back to the
person upon the release of the security;
• the issue, cancellation or extinction of a share or a member’s interest or a debenture
in a company; or the granting of an option to acquire such a share, member’s inter-
est or debenture in the company;
• the issue of a participatory interest by a collective investment scheme or the grant-
ing of an option to acquire a participatory interest in the collective investment
scheme. Although there is no disposal by the collective investment scheme when it
issues the units, there is a disposal when the unit holder sells his units;
• the issue of any debt by or to a person;
• where a disposal is made to correct an error in the registration in the deeds registry
of immovable property in a person’s name;
• where any security or bond has been lent by a lender to a borrower in terms of a
securities lending arrangement;
• the vesting of a person’s asset in the Master or in a trustee in consequence of the
sequestration of the estate of the spouse of the person, or the subsequent release of
the asset;
• when the right to acquire a marketable security is ceded or released for con-
sideration that consists of or includes another right to acquire a marketable securi-
ty under section 8A(5);

407
A Student’s Approach to Taxation in South Africa 10.3

• in respect of shares held in a company, where that company:

– subdivides or consolidates those shares;
– converts shares of par value to no par value or of no par value to par value; or
– converts shares in terms of section 40A or 40B solely in substitution of the
shares held; and
– the proportionate participation rights and interests remain unaltered; and
– no other consideration passes in consequence of that subdivision, consolidation
or conversion;
• where a person exchanges a qualifying equity share for another qualifying equity
share as contemplated in section 8B(2);
• where a share or bond has been transferred in terms of a collateral arrangement; and
• where a person disposed of an asset to a person and reacquired that asset from the
same person in the same year of the disposal because of the cancellation or termi-
nation of the contract and both persons are restored to their former positions.

10.3.4 Timing of disposals (Step 1.4) (paragraph 13)

The timing of disposals is important as it determines in which year of assessment the
taxpayer has to include the taxable capital gain in his taxable income calculation.

Change of ownership
The time of the disposal of an asset by means of a change of ownership is, in the case of:
• an agreement subject to a suspensive condition:
– the date on which the condition is satisfied;
• agreement without a suspensive condition:
– the date of conclusion of the agreement;
• the distribution of an asset of a trust by a trustee to a beneficiary to the extent that
the beneficiary has a vested interest in the asset:
– the date on which the interest vests;
• where a section 8C equity instrument is granted to a beneficiary by a trust:
– the date that the equity instrument vests in that beneficiary in terms of section 8C;
• a donation of an asset:
– the date of compliance with all legal requirements for a valid donation;
• the expropriation of an asset:
– the date on which the person receives the full compensation agreed on or finally
determined by a competent tribunal or court;
• the conversion of an asset:
– the date on which the asset is converted;
• the granting, renewal or extension of an option:
– the date on which the option is granted, renewed or extended;
• the exercise of an option:
– the date on which the option is exercised;

408
10.3–10.4 Chapter 10: Capital gains tax

• the termination of an option granted by a company to a person to acquire a share,

participatory interest or debenture of the company:
– the date on which the option terminates;
• or in any other case:
– the date of change of ownership.

Assets involved in other transactions

The time of the disposal of an asset by means of other transactions is, in the case of:
• the extinction of an asset:
– the date of the extinction of the asset;
• the scrapping, loss or destruction of an asset:
– the date when the full compensation in respect of that scrapping, loss or destruc-
tion is received;
• the scrapping, loss or destruction of an asset if no compensation is payable:
– the later of:
* the date when the scrapping, loss or destruction is discovered; or
* the date on which it is established that no compensation is payable;
• the distribution of an asset (dividend in specie) by a company:
– the date on which the distribution is approved by the directors;
• the decrease of a person’s interest in a company, trust or partnership as a result of
a value-shifting arrangement:
– the date on which the value of the person’s interest decreases;
• the occurrence of an event, that is to say treated as a deemed disposal:
– the date immediately before the day on which the event occurs;
• the event where an asset is no longer a personal-use asset or when a debt benefit is
raised:
– the date on which the event occurs;
• the disposal of an interest in an asset of a partnership:
– the date that the proceeds accrue to individual partners.

REMEMBER

• The person acquiring the asset is deemed to have acquired the asset on the date of the
disposal.

10.4 Capital gain or loss on the disposal of an asset (Step 2)

(paragraphs 3 and 4)
If an asset is disposed of, the capital gain or loss on the disposal of that specific asset
is calculated by deducting the base cost from the proceeds. These four building blocks
(asset, disposal, base cost and proceeds) form the basis of capital gains tax and each
building block is defined in paragraph 1 of the Eighth Schedule. In order to

409
A Student’s Approach to Taxation in South Africa 10.4

determine the capital gain or capital loss on the disposal of an asset, the following
work method is recommended:

Calculate the capital gain or loss on the disposal of an asset

Step 2.1: Calculate the proceeds on the disposal of the asset (refer to 10.5).

Step 2.2: Calculate the base cost of the asset (refer to 10.6).

Step 2.3: Calculate the capital gain (refer to 10.4.1) or capital loss (refer to
10.4.2) on the disposal of the asset by deducting the base cost from
the proceeds.

Step 2.4: Determine whether any portion of the capital gain or loss is excluded
from capital gains tax in terms of the Act (refer to 10.11).

Step 2.5: Determine whether any part of the capital loss is limited by the Act
(refer to 10.12) or whether any roll-over relief exists (refer to 10.13).

10.4.1 Capital gain on the disposal of an asset (paragraph 3)

A capital gain exists where the proceeds from the disposal of an asset exceeds its base
cost. For example, we have a capital gain of R10 000 if an asset with a base cost of
R50 000 is sold for proceeds of R60 000.
Certain events that occur in subsequent years of assessment could require a recalcu-
lation of a capital gain in respect of the disposal of an asset. The way in which this
redetermined capital gain is treated, depends on whether the asset is a pre-valuation
date asset or an asset that was acquired on or after 1 October 2001.
If an asset (acquired on or after 1 October 2001) was disposed of in a previous year of
assessment and any of the following events occurred in the current year of assess-
ment, the ‘additional’ gain resulting from such events is simply recognised as a capi-
tal gain in the current year of assessment:
• if the proceeds from the disposal have increased (for example further proceeds ac-
crued to the taxpayer); or
• if the base cost of the asset has been decreased (for example if a portion of the as-
set’s base cost is recovered because of a repossession of the asset).
In the case of a pre-valuation date asset, the proceeds and base cost of the asset must
be recalculated using the rules contained in paragraph 25 of the Eight Schedule (not
dealt with in this book).
A recalculation also has to be done in respect of disposals in previous years of assess-
ment where the contract is cancelled in a subsequent year (the recalculation itself is
not dealt with in this book).

410
10.4 Chapter 10: Capital gains tax

10.4.2 Capital loss on the disposal of an asset (paragraph 4)

A capital loss exists where the base cost of an asset exceeds the proceeds from its dis-
posal. For example, we have a capital loss of R10 000 if an asset with a base cost of
R50 000 is sold for proceeds of R40 000.
Certain events that occur in subsequent years of assessment could require a recalcu-
lation of a capital loss in respect of the disposal of an asset. The way in which this re-
calculated capital loss is treated, depends on whether the asset is a pre-valuation date
asset or an asset that was acquired on or after 1 October 2001.
If an asset (acquired on or after 1 October 2001) was disposed of in a previous year of
assessment and any of the following events occurred in the current year of assess-
ment, the ‘additional’ loss resulting from such events simply is recognised as a capital
loss in the current year of assessment:
• if the proceeds from the disposal have been decreased (for example because the
contract was cancelled or amended); or
• if the base cost of the asset has been increased (for example additional expenditure
was incurred after the disposal of the asset and these costs were not originally an-
ticipated).
In the case of a pre-valuation date asset, the proceeds and base cost of the asset must
be recalculated using the rules contained in paragraph 25 of the Eight Schedule (not
dealt with in this book).
A recalculation also has to be done in respect of disposals in previous years of assess-
ment where the contract is cancelled in a subsequent year (the recalculation itself is
not dealt with in this book).

REMEMBER

• In certain situations, the capital gain or capital loss on the disposal of the asset must be
recalculated. For example, where further proceeds accrue in a subsequent year, follow-
ing the year of disposal, the additional proceeds are recognised as a capital gain in the
subsequent year.

Example 10.2
Zonke (Pty) Ltd sells the shares in its investment portfolio. The company acquired the
shares for a cost price of R850 000. The gross selling price was R500 000 and the commis-
sion amounted to R50 000, on the sale of the shares. In terms of a loss limitation rule,
R100 000 of the capital loss is limited. The company also earned other taxable income of
R200 000 during the same year of assessment. In the previous year of assessment, he had
an assessed capital loss of R40 000.
You are required to calculate the capital gain or loss to be included in taxable income for
the current year of assessment.

411
A Student’s Approach to Taxation in South Africa 10.4–10.5

Solution 10.2
As shares (an asset) was sold (a disposal) during the year of assessment, capital gains tax
is applicable.
Calculate the capital gain or capital loss on the disposal of the asset: R
Proceeds (selling price) 500 000
Less: Base cost (R850 000 + R50 000) (900 000)
Capital loss on the disposal of an asset (400 000)
Less: Capital loss limited in terms of a loss limitation rule 100 000
Capital loss on disposal of an asset (R400 000 – R100 000) (300 000)
Less: Assessed capital loss – previous year (40 000)
Assessed capital loss carried forward to following year of assessment (340 000)

Note
The assessed capital loss of R340 000 is not multiplied with the inclusion rate and it
cannot be set off against the other taxable income of R200 000. Instead, the assessed cap-
ital loss is carried forward and it can be set off against any future capital gain on the
disposal of an asset.

10.5 Proceeds from the disposal of an asset (Step 2.1)

10.5.1 Proceeds (paragraph 35)
Paragraph 35 states that proceeds are the amounts received by or accrued to in favour
of a person and includes
• the amount by which a debt owed by that person has been reduced or discharged
(a debt benefit has been raised);
• any amount received by or accrued to a lessee from the lessor of property for im-
provements effected to that property; and
The proceeds from the disposal of an asset must be reduced by:
• any amount included in the gross income or the taxable income of the person be-
fore the inclusion of any taxable capital gain (for example, the recoupment of wear-
and-tear in terms of section 8(4)(a) of the Act);
• any amount that has been repaid during that year of assessment to the buyer (for
example, the seller repays the buyer a part or all of the proceeds); or
• any reduction in the proceeds as a result of the cancellation, termination or varia-
tion of an agreement* or due to the prescription or waiver of a claim or release
from an obligation or any other event during that year of disposal (for example, if
the price of a disposed asset is reduced).
* Other than an agreement that results in the asset being reacquired by the seller.
Paragraph 35 states that if a person is entitled to any amount payable after year end,
it is deemed that the amount accrued to him in the current year of assessment.

412
10.5 Chapter 10: Capital gains tax

REMEMBER

• Where an amount was included in a person’s gross income, it cannot be included in the
proceeds. A person can therefore not be taxed twice on the same amount.
• The amount of wear-and-tear that is recouped for income tax purposes must be
excluded from the proceeds of the asset.
• Where a proceeds amount changes in a subsequent year of assessment, the Act provides
for the capital gain or loss to be recalculated in that subsequent year of assessment.

Example 10.3
Umar CC sold its holiday home in Cape Town during the current year of assessment. The
contract states that R500 000 will be paid on the signing of the contract. Another R400 000
will be payable 12 months after the signing of the contract. During the current year of
assessment, after the sale of the house, it was found that a part of the plumbing had to be
replaced. The contract made provision for the repayment of part of the initial payment if
any hidden faults were found. The cost of repairing the plumbing amounts to R75 000,
and Umar CC will repay the amount in the next year of assessment. Umar CC does not
speculate in houses.
You are required to calculate the proceeds on the sale of the asset.

Solution 10.3
R
Selling price received or accrued (Note 1) 500 000
Add: Amount payable after year end (Note 2) 400 000
Less: Amount repayable (Note 3) (75 000)
Proceeds 825 000

Notes
1. Any amount received by or accrued to the taxpayer that has not been included in
gross income must be included in the proceeds. As Umar CC is not a speculator in
houses, the house will be an asset of a capital nature.
2. Paragraph 35 states that the amount payable in future must be included in the pro-
ceeds if the seller is entitled to the payment of the amount.
3. If an amount will have to be repaid, the proceeds can be reduced by the amount of the
repayment.

What will the capital gains tax implications be if the fault in the plumb-
ing was only found in the next year of assessment?

413
A Student’s Approach to Taxation in South Africa 10.5

10.5.2 Donations and transactions between related parties

(paragraph 38)
Paragraph 38 determines that, if a person disposes of an asset:
• by means of a donation to anyone; or
• for a consideration not measurable in money; or
• to a connected person* for a consideration that does not equal an arm’s length price
(that is either higher or lower than open market value),
it is deemed that the asset is disposed of for an amount equal to its market value as
determined at the date of disposal. It is also deemed that the person who acquired the
asset had acquired it at a base cost equal to the same market value.
*Persons can be ‘connected persons’ immediately before or immediately after the
transaction.

These rules are not applicable if:

• the shares or instruments are taxable as part of a share incentive scheme; or
• the asset was obtained in exchange for shares issued; or
• assets in respect of which section 40CA applies; or
• any land from the date on which that land becomes declared land as defined in sec-
tion 37D(1) (land conservation in respect of nature reserves or national parks); or
• any asset transferred between spouses in terms of section 9HB.

Example 10.4
Joy Mogale is a resident of the Republic and 41 years old. She is unmarried and therefore
feels that she has a lot to give. During the 2023 year of assessment, she decided to donate
shares to her sister. The shares had a market value of R230 000 on the date of donation.
Joy had originally purchased the shares for R125 000 during the 2018 year of assessment.
Assume that there are no donations tax implications.
You are required to calculate the capital gain or loss for the 2023 year of assessment.

Solution 10.4

Because Joy donated an asset (which is less than market value) to a connected person,
paragraph 38 will apply.

Capital gain or capital loss for the current year of assessment (2023): R
Proceeds (proceeds deemed to be the market value) (note) 230 000
Less: Base cost (125 000)
Capital gain 105 000

Note
Joy’s sister is deemed to have acquired the shares at a base cost of R230 000 despite the
fact that she paid Rnil for the asset.

414
10.5–10.6 Chapter 10: Capital gains tax

10.5.3 Disposals for proceeds not yet accrued (paragraph 39A)

If a person disposes of an asset and all the proceeds from the disposal do not accrue
to him in that year, any resulting capital loss on the disposal must be disregarded for
that year of assessment.
Any accruals in the following years of assessment must be seen as proceeds from the
disposal of the asset. The loss that was disregarded in the year of disposal can be set off
against any capital gains determined in respect of that disposal in the following years. If
a person can show that no further proceeds will accrue to him/her from that disposal
and there is still a capital loss, the loss can be claimed in that year of assessment.

Example 10.5
Marc acquired a block of flats in December 2006 at a base cost of R250 000. In March 2021
he sold the block of flats to Jessica for R450 000. The contract determined that the
purchase price was payable in annual instalments over three years, with the first payment
due on 28 February 2023. Each instalment was payable only if the block of flats achieved a
net rental return of at least 10% during the specific year. The block of flats achieved the
net rental return of at least 10% during the first year and Jessica paid the first instalment
of R150 000 as required by the contract, on 28 February 2023.
You are required to calculate the capital gain or loss for the 2023 year of assessment.

Solution 10.5
The entire proceeds from the disposal of the block of flats do not accrue to Mark in the
2022 year of assessment. They accrue at the end of each year of assessment, as the
condition (net rental return of at least 10%) is met. In terms of paragraph 39A any
capital loss that arise in this situation is ring-fenced until sufficient proceeds have
accrued to Marc to absorb the capital loss.
Capital gain or capital loss for the current year of assessment (2023): R
Proceeds (only the amount that accrued unconditionally) (note 1) 150 000
Less: Base cost (250 000)
Capital loss (note 2) (100 000)

Notes
1. Further proceeds of R300 000 (R450 000 less R150 000) will be taxed in future years as
capital gains only when it accrues.
2. The capital loss of R100 000 is ring-fenced in terms of the provisions of par 39A and
cannot be set off against any other capital gains and losses of Marc. It can only be
carried forward and be set off against future proceeds from this transaction, taxed as
capital gains, when it accrues. If it becomes certain in future years that no further
proceeds will accrue, any previously ‘ring-fenced’ capital loss relating to that asset
may be taken into account for CGT purposes

10.6 Base cost of an asset (Step 2.2)

The base cost of an asset represents the expenditure the taxpayer incurred to acquire
and retain the asset. Paragraph 20 of the Eighth Schedule provides a list of costs that
must be included in the base cost as well as some expenditure that cannot be included.

415
A Student’s Approach to Taxation in South Africa 10.6

10.6.1 Cost included in the base cost of an asset (paragraph 20)

The Act allows the following costs as part of the base cost:
• expenditure actually incurred in order to acquire or create an asset;
• expenditure actually incurred in respect of the valuation of the asset for the pur-
pose of determining the capital gain or loss in respect of the asset;
• the following expenditure actually incurred and directly related to the acquisition
or disposal of an asset:
– the remuneration of a surveyor, valuer, auctioneer, accountant, broker, agent,
consultant or legal advisor for services rendered;
– transfer costs;
– stamp duty, transfer duty securities transfer tax or similar duty or tax;
– advertising costs to find a seller or a buyer;
– the cost of moving that asset from one location to another;
– installation costs, including the cost of foundations and supporting structures;
– donations tax paid by the donor: determined in accordance with paragraph 22;
– donations tax paid by the donee: as much of the donations tax that bears the
same ratio to the total donations tax as the capital gain of the donor bears to the
market value of the asset; and
– if the asset is acquired or disposed of as a result of the exercise of an option, the
cost actually incurred to acquire the option;
• expenditure actually incurred in establishing, maintaining or defending a legal title
or right in an asset;
• expenditure actually incurred to improve an asset or to enhance its value (the re-
quirement that the relevant improvement must still be reflected in the asset at the
time of disposal of the property was deleted from the Act);
• where the asset is acquired or disposed of on or after the valuation date by the ex-
ercise of an option acquired prior to the valuation date, the market value of the op-
tion on the valuation date must be treated as expenditure to acquire the asset.
Where the asset was acquired by the exercise of an option after the valuation date,
the expenditure actually incurred in acquiring the option is included in the cost;
• one-third of the interest (in terms of section 24J excluding any interest in terms of
section 24O) on money borrowed to finance expenditure in respect of shares listed
on a recognised exchange or a participatory interest in a portfolio of a collective in-
vestment scheme (including money borrowed to refinance those borrowings);
• in the case of:
– an equity instrument in respect of a share incentive scheme, the market value of
the marketable security or the equity instrument taken into account in deter-
mining the gain or loss for income tax purposes in terms of section 8A or 8C;
– any other asset:
* the amount that has been included in that person’s income in terms of a sec-
tion 8(5) recoupment (rental paid, which was deducted from the cost of the
asset upon acquisition); or

416
10.6 Chapter 10: Capital gains tax

* the amount included in a person’s gross income in terms of paragraph (i) of

the definition of gross income (the cash equivalent of a fringe benefit as
calculated in terms of the Seventh Schedule);
* the amount included in gross income in terms of paragraph (h) of the gross
income definition (leasehold improvements) reduced by the allowance grant-
ed in terms of section 11(h) (leasehold improvements); and
* the amount included in the person’s gross income in terms of paragraph (c)
of the definition of gross income;
– assets inherited from a non-resident: The base cost of assets inherited from the
estate of a non-resident is the sum of the market value of these assets immediately
before death and all costs incurred by the executor. This provision is not
applicable if the non-resident’s assets were subject to South African capital gains
tax.

Example 10.6
Mpho Malatse sold his holiday house on 1 December 2022. He originally bought the
house in January 2005 for R200 000. Mpho improved the house over the years. He in-
stalled a sauna at a cost of R50 000, as well as an alarm system at a cost of R10 000. He also
had to repair the kitchen cupboards at a cost of R20 000 as the cupboards were damaged.
During the 2021 year of assessment the sauna was damaged during a storm and, there-
fore, not used anymore.
You are required to calculate the base cost of the holiday house in the hands of Mpho on
1 December 2022.

Solution 10.6
R
Purchase price 200 000
Add: Improvements (R50 000 (sauna) and R10 000 (alarm system) - see note) 60 000
Base cost 260 000
Note
The repair cost to the kitchen cupboards of R20 000 are not considered improvements
but repairs and maintenance. The amount of R20 000 can therefore not be added to the
base cost. The sauna of R50 000 is an improvement and can be added to the base cost.
The fact that it has been damaged before date of sale does not make a difference.

417
A Student’s Approach to Taxation in South Africa 10.6

REMEMBER

• The cost of selling an asset, for example, the sales commission, is included in the base
cost of the asset.
• Only one-third of interest expenditure can be included in the base cost of listed shares
or an interest in a collective investment scheme (equity unit trust) regardless of whether
these assets were held as an investment or for trading purposes. The interest normally
qualifies as a deduction for income tax purposes when the shares are held for trading
purposes and would therefore not again be included in the base cost of the shares sold.
• Donations tax paid by the donor forms part of the base cost of the asset for the donor. If
the donee pays the donations tax, he is entitled to also include a portion of the
donations tax in his base cost.

10.6.2 Cost not included in the base cost of an asset

(paragraph 20(2) and (3)) and the limitation of expenditure
(paragraph 21)
The following costs cannot be included in the base cost of an asset:
• borrowing cost (interest as defined in section 24J) (other than the one-third in terms
of paragraph 20(1)(g)), raising fees, bond registration costs and bond cancellation
costs;
• repairs and maintenance;
• protection and insurance;
• rates and taxes; and
• other similar expenses.
The base cost must be reduced by:
• an amount that was allowable or is deemed to have been allowed as a deduction
for income tax purposes (for example capital allowances claimed);
• an amount that had originally been included but was later reduced or recovered or
became recoverable from or has been paid by someone else, except to the extent
that such amount was not:
– taken into account as a recoupment according to section 8(4)(a) and included in
the taxpayer’s gross income; or
– reduced in terms of section 12P (where an exempt government grant has been
received); or
– applied against an amount of trading stock as contemplated in section 19(3) or
any other asset as contemplated in paragraph 12A(3) (where there is a conces-
sion or compromise in respect of debt); or
– an amount received for the purchase of an asset that is exempt in terms of sec-
tion 10(1)(yA) (for example government incentive schemes etc.).
Costs cannot be claimed twice. If the amount was claimed as a deduction for income
tax purposes, it cannot be claimed again as part of the base cost of the asset. Also, no
expenditure that qualifies as allowance expenditure for CGT purposes may be taken
into account more than once in determining a capital gain or loss.

418
10.6 Chapter 10: Capital gains tax

Expenditure must be reduced with the foreign exchange gain or premiums received
as calculated in terms of section 24I. Similarly, the expenditure must be increased
with the amount of any foreign exchange loss or premiums paid. These changes to
expenditure can only be made if the taxpayer or another company in the group of
companies did not use these amounts in their income tax calculations.

Example 10.7
Small (Pty) Ltd sold its land and factory building during its 2023 year of assessment. The
company originally acquired the land for R57 000 (including VAT of R7 000) and the new
building for R228 000 (including VAT of R28 000), in the 2007 year of assessment, 15 years
earlier. Small (Pty) Ltd is a VAT vendor making 100% taxable supplies and claimed the
VAT on the original transaction as input tax. The company could not pay the building in
cash and acquired the building using a bond from the bank. Bond registration cost of
R5 000 was incurred. The interest on the bond over the past 15 years was R80 000 in total.
The company claimed a s 13(1) allowance of 5% per annum for 15 years which in total
amounts to R150 000.
You are required to calculate the base cost of the building in the hands of Small (Pty) Ltd.

Solution 10.7
R
Purchase price (R228 000 + R57 000) 285 000
Less: VAT (R28 000 + R7 000) (s 23C) (35 000)
Add: Interest and bond registration cost (note) -
Less: Allowances claimed for income tax purposes (150 000)
Base cost 100 000
Note
Borrowing cost (interest as defined in section 24J) (other than the one-third in terms of
paragraph 20(1)(g)) and bond registration costs cannot be included in base cost.

REMEMBER

• Section 23C of the Income Tax Act provides that VAT is excluded from the base cost of
an asset if it has been allowed as an input deduction.

10.6.3 Base cost calculation of a pre-valuation date asset

The base cost of a pre-valuation date asset consists of two components. The first com-
ponent refers to the value of the asset on 1 October 2001 when capital gains tax was
introduced. The second component is the cost incurred after the introduction of capi-
tal gains tax.
The base cost of an asset is therefore the valuation date value plus the cost incurred
on or after the valuation date (1 October 2001).
Therefore, the first component that needs to be determined is the valuation date val-
ue, which is the value of the asset on 1 October 2001.

419
A Student’s Approach to Taxation in South Africa 10.6–10.7

The Eighth Schedule provides three methods that can be used to determine the valua-
tion date value of an asset (on 1 October 2001):
• the market value of the asset on 1 October 2001 (refer to 10.7);
• the time-apportionment base cost of the asset (refer to 10.8); and
• the value according to the 20% rule (refer to 10.9).
Normally the highest value of the three is selected as the valuation date value. The
Act contains a number of special provisions that limit the amount of the valuation
date value (refer to 10.10).
These rules are not applicable to a person becoming a resident on or after 1 Octo-
ber 2001 or to assets that were acquired by South African residents on or after
1 October 2001.

Example 10.8
Tshego Moloi sold his holiday house for R2 100 000 on 1 March 2022. He bought the
house for R200 000 in November 1986. The property was valued on 1 October 2001 for
R1 700 000. The time-apportionment base cost of the asset is R816 667. In January 2006,
Mpho installed a sauna at a cost of R50 000.
You are required to calculate the base cost of the asset.

Solution 10.8
Calculating the base cost of a pre-valuation date asset consists of two components, the
valuation date value and the cost incurred on or after 1 October 2001, upon the introduc-
tion of capital gains tax.
Firstly, calculate the valuation date value of the asset:
• Market value on 1 October 2001 = R1 700 000;
• Time-apportionment base cost = R816 667; or
• 20% of proceeds = R420 000 (R2 100 000 × 20%).
Selected value (highest): R1 700 000
The valuation date value is therefore R1 700 000.
Secondly, add the cost incurred after 1 October 2001 in order to determine base cost.
Cost incurred on or after 1 October 2001: R50 000
Base cost: R1 700 000 + R50 000 = R1 750 000
The base cost of the asset is therefore R1 750 000 (the valuation date value plus the cost
incurred after the valuation date).

10.7 Market value of assets (paragraphs 29 and 31)

The Income Tax Act contains special rules to calculate the valuation date value of
specific assets and also a general rule to calculate the market value of assets in other
situations. The general rule is also used to calculate the proceeds of assets disposed of
in certain situations, for example where a taxpayer donates assets or where a taxpay-
er dies.

420
10.7 Chapter 10: Capital gains tax

Valuation date value rules (paragraph 29)

Where a person wants to use the market value on the valuation date as one of the op-
tions the property had to be valued within three years from the valuation date. The
valuation had to be performed between 1 October 2001 and 30 September 2004, alt-
hough it is important to note that the valuation must reflect the value of the property
as on 1 October 2001.
If a person who is exempt from income tax in terms of section 10 ceases to be exempt
after 1 October 2001, the date on which that person ceases to be exempt is the valua-
tion date.
SARS does not require the taxpayer to submit the valuation with his tax return in the
year of disposal. However, the taxpayer is still required to retain the valuation for
SARS audit purposes. The valuation of the following assets had to be submitted with
the 2005 year of assessment tax return:
• assets of which the market value exceeded R10 million;
• unlisted shares owned by the taxpayer of which the total value is more than
R10 million; and
• intangible assets (excluding financial instruments) of which the market value is
more than R1 million.
The following rules apply to specific assets when determining the market value on
the valuation date:
• Financial instruments listed on the JSE Ltd: The aggregate value of all trans-
actions in a financial instrument as traded on each of the five days of trading pre-
ceding the valuation date (Monday 24 September to Friday 28 September 2001) di-
vided by the total quantity of that financial instrument traded during these five
days. The prices were published by the Commissioner in the Government Gazette.
• Financial instruments listed on an exchange outside the Republic: The average of the
sale and purchase price at the end of the last business day before 1 October 2001.
• Collective investment scheme in equity shares and collective investment scheme
in property shares in the Republic: The price published by the Commissioner in
the Government Gazette, being the average of the price at which a participatory in-
terest could be sold to the management company of the scheme for the last five
trading days before the valuation date.
• Foreign collective investment scheme: The last price published before the valua-
tion date at which a participatory interest could be sold to the management com-
pany of the scheme or, if there is no management company, the price which could
have been obtained upon a sale of the asset between a willing buyer and a willing
seller dealing at arm’s length in an open market.

421
A Student’s Approach to Taxation in South Africa 10.7

REMEMBER

• Where a person’s valuation date is after 1 October 2001 the above-mentioned rules
cannot be used to determine the valuation date value. The market value must be
determined by using the rules discussed below.
• Where a person’s valuation date is after 1 October 2001 (for example, a tax-exempt body that
loses its exempt status), his assets, excluding listed assets, must be valued within two
years of the valuation date.

General valuation rules (paragraph 31)

General rule to determine the market value
The general rule that should be used to determine the market value of an asset, is the
price that would have been agreed upon by a willing seller and a willing buyer in an
open market.
Special rules to determine the market value
The market value of the following assets (in terms of paragraph 31) is:
• Financial instruments listed on a recognised exchange: The ruling price of the
financial instrument at the close of business on the last trading day on that ex-
change before the asset is disposed of.
• Long-term insurance policy: The greater of:
– the amount which would be payable upon surrender of the policy on that day (the
surrender value); or
– the fair market value according to the insurer should it run its remaining policy
term as determined on that day.
• Collective investment scheme in equity shares and collective investment scheme
in property shares: The price at which the participatory interest can be re-sold to
the management company on the date of the disposal.
• Foreign collective investment scheme: The price at which the participatory inter-
est can be re-sold to the management company; or where there is no management
company, the price which could have been obtained from the sale of the asset be-
tween a willing buyer and a willing seller dealing at arm’s length in an open market.
• A fiduciary, usufructuary or similar interest: An amount determined by capital-
ising at 12% (or any reasonable lower percentage agreed upon by the Commis-
sioner upon application by the taxpayer) the annual value of the right of enjoy-
ment, over the life expectancy of the person to whom that interest was granted; or,
if the right has been held for a period less than the life expectancy of the person, over
the lesser period. The life expectancy of a person is determined by using the person’s
age on his next birthday and then reading his life expectancy from the life expect-
ancy table (Appendix C). The life expectancy of persons other than natural persons is
50 years.

422
10.7–10.8 Chapter 10: Capital gains tax

• Property subject to a fiduciary, usufructuary or other similar interest: The fair

market value of full ownership of the property, less the value of the limited inter-
est as calculated above.
• Immovable farming property: One of the following:
– the fair market value less 30% (as defined in the Estate Duty Act 45 of 1955); or
– the price which could have been obtained upon a sale of the property between a
willing buyer and a willing seller dealing at arm’s length in an open market.
Where an asset (immovable farming property) is disposed of on the death of a per-
son or by donation or by a transaction not at arm’s length, the 30% below market
value may only be used if:
– market value less 30% or the Land Bank value was used for the purposes of par-
agraph 26 and paragraph 27 (refer to 10.10); or
– the person acquired the immovable property through a donation, inheritance or
a non-arm’s length transaction at market value less 30%.
• Unlisted shares: The selling price of a share obtained from a sale between a willing
buyer and a willing seller dealing at arm’s length in an open market, ignoring the
following conditions:
– restrictions on the transferability of the share; and
– under which method the value of the shares is to be determined.
If the person is entitled to a greater share in the assets upon winding up of the
company, the value must not be less than the amount to which the person would
have been entitled upon winding up.
• Any other asset: The price which could have been obtained upon a sale between a
willing buyer and a willing seller dealing at arm’s length in an open market.

REMEMBER

• When the taxpayer elects to use the market value as the valuation date value of an asset,
the loss limitation rules can limit the amount that can be used as the base cost (refer to
10.10).
• The Act does not indicate how the market value should be obtained. It therefore seems
unnecessary that the valuation should be done by a sworn valuer. It should always be
remembered that the burden of proof is on the taxpayer to prove the correctness of the
value.
• Where an asset is transferred from one spouse to another in terms of the roll-over rules
and the transferor spouse adopted or determined the market value, it is deemed that
the transferee spouse adopted or determined the said market value.

10.8 Time-apportionment base cost (TAB) (paragraph 30)

10.8.1 TAB: Cost only incurred before the valuation date
The time-apportionment base cost method spreads the growth in the value of the as-
set over the period the person owned the asset. The growth is divided between the

423
A Student’s Approach to Taxation in South Africa 10.8

periods before 1 October 2001 and on or after 1 October 2001. The TAB is the sum of
the expenditure incurred before 1 October 2001 plus the growth (percentage of profit)
of the asset before 1 October 2001.

Example 10.9
Twenty years after the valuation date, an asset with a historical cost of R100, is sold for
R700. This asset was originally acquired ten years before the valuation date. The capital
gain is R600 (R700 – R100). A portion of the gain of R600 refers to the pre-valuation date
period and is not subject to CGT, but a portion of this gain of R600 refers to the post-
valuation date period and is therefore subject to CGT.
You are required to discuss which portion of the R600 is subject to CGT by using the
principles underlying the TAB method.

Solution 10.9
The TAB cost method seeks to achieve a linear spread of the historical gain or loss be-
tween the pre- and post-valuation date periods. If the asset has been sold for a profit
based on historical cost of R600 (R700 – R100), the period before 1 October 2001, is ten
years and the period after 1 October 2001 is 20 years.
It follows that one third of the profit relates to the pre-CGT period, that is R600 × 10/30 =
R200. The valuation date value is determined by adding the gain relating to the pre-CGT
period to the original cost: R100 + (R600 × 1/3) = R300.
The capital gain will then be: R700 less R300 = R400 (that is, two-thirds of the profit relates
to the post-CGT period, that is R600 × 20/30).

The following diagram illustrates how the TAB method achieves a linear spread of
the gain or loss over the period:

This linear spread principle led to the introduction of two sets of formulas under the
TAB method:
(1) two standard TAB formulas (a standard apportionment formula and a standard
proceeds formula); and
(2) two depreciable asset TAB formulas (a depreciable asset apportionment formu-
la and depreciable asset proceeds formula);
In order to determine which formula to use, it must be determined when the expendi-
ture was incurred.

424
10.8 Chapter 10: Capital gains tax

All the expenditure was

incurred in the years of Use ONLY the standard
assessment before TAB formula
1 October 2001

Expenditure was incurred

Use the standard proceeds
in years of assessment
formula and the standard
before and on or after
TAB formula
1 October 2001

Where the asset qualified for capital allowances, the second set of formulas is used.
The left-hand column provides the three requirements that must be met before the
depreciable asset formulas can be applied. The depreciable asset TAB cost formula
and the depreciable asset proceeds formula must always be used together.

• Proceeds (not reduced by

recoupments) on the sale
of a depreciable asset ex-
ceeds the expenditure, and
• The costs were incurred in
the years of assessment be- Use the depreciable asset
fore and on or after TAB cost formula AND
1 October 2001, and the depreciable asset pro-
ceeds formula
• Any of the acquisition,
improvement or disposal
costs qualify for a deduc-
tion for income tax pur-
poses (such as capital al-
lowances)

The depreciable asset formulas are discussed in more detail in 10.8.3.

To determine the expenditure incurred before valuation date, proof of expenditure is
required. If such proof was not retained, the TAB cost formulas cannot be used and
one of the other methods should be used to determine the valuation date value. This
is either the market value of the asset on 1 October 2001 (refer to 10.7) or the value
according to the 20% rule (refer to 10.9).

425
A Student’s Approach to Taxation in South Africa 10.8

Calculate the TAB if all expenditure was incurred before 1 October 2001

In order to calculate the TAB of an asset, the following formula needs to be ap-
plied:
Y = B + ((P – B) × (N / (T + N)))
where:
B = the expenditure incurred before the valuation date (1 October 2001) in terms
of paragraph 20;
P = the proceeds on the disposal of an asset less certain selling costs;
N = the number of years (a part of a year is regarded as a full year) from the date
on which the asset was acquired to the day before the valuation date (until
30 September 2001). Where the allowable expenditure was incurred in more
than one year of assessment prior to the valuation date, the number of years
may not exceed 20;
T = the number of years during which the asset was held from the valuation
date (1 October 2001) until the date the asset was disposed of. A part of a
year is regarded as a full year; and
Y = the TAB.

REMEMBER

• Selling costs are all the costs that are directly incurred in order to dispose of the asset.
The selling costs includes also the valuation costs.
• For purposes of the TAB formula, the selling cost incurred on or after the valuation date
must be used to reduce the proceeds on the disposal of an asset. The cost is not to be
included in the post-valuation date costs (‘A’ in the TAB formula).

Example 10.10
Simon Dippenaar CC bought an office building on 1 October 1985 at a cost of R500 000. In
1996 certain improvements were made to the building at a total cost of R400 000. The
building was sold for R3 500 000 on 30 December 2022.
You are required to calculate the valuation date value of the building using the TAB.

426
10.8 Chapter 10: Capital gains tax

Solution 10.10
To calculate the TAB, the time-apportionment formula has to be used. It is not necessary
to use the proceeds formula as all the costs were incurred before 1 October 2001.
Y = B + ((P – B) × (N / (T + N)))
B = R500 000 + R400 000 = R900 000
P = R3 500 000
N = 16 years
T = 21 years
Y = R900 000 + {(R3 500 000 – R900 000) × (16 / (21 + 16))}
= R900 000 + R1 124 324
= R2 024 324
The valuation date value is therefore R2 024 324

10.8.2 TAB: Cost incurred before and after the valuation date
If expenditure was incurred in years of assessment before and on or after
1 October 2001, the TAB formula and the proceeds formula must be used to deter-
mine the TAB. The proceeds formula is used to divide the proceeds into two parts,
the first relating to the part of the asset for which the costs were incurred before
1 October 2001 and the rest to costs incurred on or after 1 October 2001. The portion
of the proceeds that relates to the cost incurred before 1 October 2001 is used in the
time-apportionment formula.

Calculate the TAB of an asset if the expenditure was incurred before and on
or after 1 October 2001

The first formula that needs to be applied is the proceeds formula, which is used
to determine the proceeds relating to the pre-valuation date costs:
P = R × B / (A + B)
where:
R = the total proceeds of the sale of the asset less certain selling costs;
A = the total costs incurred on or after the valuation date (excluding selling costs);
B = the costs incurred before the valuation date; and
P = the proceeds that relate to the cost incurred before 1 October 2001.

427
A Student’s Approach to Taxation in South Africa 10.8

REMEMBER

The proceeds formula is based on the premise that:

• post-valuation date expenditure generates only post-valuation date gains or losses,
while;
• pre-valuation date expenditure generates both pre- and post-valuation date gains or
losses.
The proceeds formula is used to determine the part of the proceeds that resulted from
qualifying expenditure incurred before 1 October 2001. Thereafter, the TAB formula is
applied to determine the valuation date value.
Where no expenditure was incurred on or after 1 October 2001, only the TAB formula is
used.

The next step is to apply the TAB formula:

Y = B + ((P – B) × (N / (T + N)))
where:
N = the number of years (a part of a year is regarded to be a full year) from the
date on which the asset was acquired to the day before the valuation date.
Where the allowable expenditure was incurred in more than one year of as-
sessment prior to the valuation date, the number of years may not exceed
20;
T = the number of years during which the asset was held from the valuation
date until the date the asset was disposed of. A part of a year is regarded as
a full year;
B = the allowable cost incurred before the valuation date in terms of para-
graph 20;
P = the answer of the proceeds formula; and
Y = the TAB.

Example 10.11
Kgogo Ltd bought an office building for R600 000 on 1 October 1995. In 2005 they made
improvements to the building at a total cost of R900 000. The building was sold for
R6 000 000 on 30 November 2022.
You are required to calculate the base cost of the building using the TAB.

428
10.8 Chapter 10: Capital gains tax

Solution 10.11
The costs were incurred before and after 1 October 2001. To calculate the TAB, the pro-
ceeds formula must be applied first.
Proceeds formula:
P = R × B / (A + B)
R = R6 000 000
A = R900 000
B = R600 000
P = R × B / (A + B)
= R6 000 000 × R600 000 / (R900 000 + R600 000)
= R2 400 000
The value of proceeds to be used in the time-apportionment formula is therefore
R2 400 000.
The time-apportionment formula:
Y = B + {(P – B) × (N / (T + N))}
B = R600 000
P = R2 400 000
N = 6 years
T = 22 years
Y = R600 000 + {(R2 400 000 – R600 000) × (6 / (22+ 6))}
= R600 000 + R385 714
= R985 714
The TAB of the building on the valuation date is therefore R985 714.
The total base cost of the building is R1 885 714 (R985 714 + R900 000 (cost after
1 October 2001 + valuation date value)).

REMEMBER

• When a taxpayer sells a depreciable asset, the wear-and-tear and capital allowances
claimed in respect of the asset and any recoupment or section 11(o) deduction must be
taken into account when calculating the proceeds and the base cost.

10.8.3 TAB: Depreciable assets

When the proceeds on the disposal of a depreciable asset:
• exceed the expenditure;
• the costs were incurred before and on or after 1 October 2001; and
• any of the costs in respect of the acquisition, improvement or disposal of the asset
qualify for a deduction for income tax purposes,
the depreciable asset TAB formula and the depreciable asset proceeds formula must
be used.
When a taxpayer sells a depreciable asset, the wear-and-tear and capital allowances
claimed in respect of the asset as well as any recoupments are excluded from the base
cost and the proceeds as the same amount cannot be taxed twice. This, however, results
in an uneven division of the growth before and after the valuation date. To ensure an
equitable calculation of the base cost of depreciable assets sold, special rules exist to
calculate the base cost.

429
A Student’s Approach to Taxation in South Africa 10.8

Calculate the TAB of depreciable assets acquired before 1 October 2001

The first formula that needs to be applied is the depreciable asset proceeds formu-
la which determines the proceeds relating to the pre-valuation date costs:
P1 = R1 × B1 / (A1 + B1)
The symbols in the formula are defined as follows:
R1 = the proceeds on the sale of the asset
plus any amount that has been recouped and included in gross income
less selling cost;
A1 = the cost incurred (in terms of paragraph 20) on or after the valuation date
(excluding selling cost) plus any wear and tear that has been claimed for in-
come tax purposes;
B1 = the cost (in terms of paragraph 20) incurred before the valuation date plus
any wear and tear that has been claimed for income tax purposes; and
P1 = the proceeds that relate to the cost incurred before 1 October 2001.
The next step is to apply the depreciable asset TAB formula:
Y = B + {(P1 – B1) × (N / (T + N))}
The symbols in the formula are defined as follows:
B = the cost incurred before the valuation date. Remember that the base cost of
the asset has to be reduced by the wear-and-tear claimed for income tax pur-
poses;
P1 = the answer of the depreciable asset proceeds formula;
B1 = the cost (in terms of paragraph 20) incurred before the valuation date plus
any wear-and-tear that has been claimed for income tax purposes;
N = the number of years (a part of a year is regarded to be a full year) from the
date on which the asset was acquired to the day before the valuation date.
Where the allowable expenditure was incurred in more than one year of as-
sessment prior to the valuation date, the number of years may not exceed
20; and
T = the number of years during which the asset was held from the valuation
date until the date the asset was disposed of. A part of a year is regarded as
a full year.

430
10.8 Chapter 10: Capital gains tax

Example 10.12
Siphum Ltd bought a used manufacturing asset on 2 October 2000 for R400 000. The asset
qualified for the section 12C allowance at 20%. On 2 November 2020 it made improve-
ments to the asset at a total cost of R600 000. These improvements qualify for their own
capital allowance of 20% in terms of section 12C. The asset was sold for R2 000 000 on
30 September 2023. The company’s financial year end is 31 December 2023.
You are required to calculate the capital gain on the disposal of the asset. The valuation
date value of the asset must be calculated using the TAB.

Solution 10.12
Tax value of asset on date of sale
Cost before valuation date: R
Cost incurred on 2 October 2000 400 000
Less: Section 12C allowance (2000–2004 years of assessment) (400 000)
Tax value of pre-valuation date cost on date of sale nil
Cost after valuation date:
Cost incurred on 2 November 2020 600 000
Less: Section 12C allowance (R600 000 × 20% × 4) (2020 – 2023) (480 000)
Tax value of post-valuation date cost on date of sale 120 000
Tax value of asset on date of sale:
R120 000 (Rnil + R120 000)
Recoupment for income tax purposes
Selling price of R2 000 000, limited to cost of R1 000 000
(R400 000 + R600 000) 1 000 000
Less: Tax value of asset sold (120 000)
Recoupment 880 000
Proceeds on disposal:
Selling price 2 000 000
Less: Recoupment (880 000)
Proceeds 1 120 000

continued

431
A Student’s Approach to Taxation in South Africa 10.8

Capital gains tax calculation

The depreciable asset proceeds formula:
P1 = (R1 × B1) / (A1 + B1)
R1 = R2 000 000 (selling price not reduced with recoupment)
B1 = R400 000 (qualifying expenditure not reduced with capital allowances)
A1 = R600 000 (qualifying expenditure not reduced with capital allowances)
P1 = R1 × B1 / (A1 + B1)
= R2 000 000 × R400 000 / (R600 000 + R400 000)
= R800 000
The proceeds to be used in the depreciable asset TAB formula is therefore R800 000.
The depreciable asset TAB formula:
Y = B + {(P1 – B1) × (N / (T + N))}
B = R400 000 – R400 000 = Rnil
(qualifying expenditure is reduced with capital allowances)
P1 = R800 000
B1 = R400 000
N = 1 year
T = 22 years
Y = Rnil + {(R800 000 – R400 000) × (1 / (22 + 1))}
= Rnil + R17 391
= R17 391
The TAB of the depreciable asset on the valuation date is therefore R18 182.
The total base cost of the asset: R
TAB 17 391
Add: Cost incurred after 1 October 2001 (excluding capital allowances) 120 000
Base cost 137 391
Capital gain on disposal:
Proceeds 1 120 000
Less: Base cost (137 391)
Capital gain on disposal 982 609

Do you need to do a capital gains tax calculation if a depreciable asset

is sold for less than the original cost?

REMEMBER

• When calculating the value of B, the wear-and-tear and capital allowances claimed until
the date of sale must be taken into account and not just until the valuation date.
• The recoupment for income tax purposes must be deducted from the proceeds.

432
10.9 Chapter 10: Capital gains tax

10.9 The 20% rule

The value is calculated as 20% of the proceeds from the disposal of the asset after de-
ducting the expenditure incurred on or after 1 October 2001.

How to apply the 20% rule in determining the valuation date value

Step 1: Determine the value to be used: The proceeds from the sale of the
asset less costs incurred on or after 1 October 2001.

Step 2: Multiply the value calculated in Step 1 by 20% to get the valuation
date value.

Example 10.13
Pat Apadile bought a house for R100 000 in 1960. She did not keep any records of the
purchase or the R150 000 for improvements made before the valuation date. In Decem-
ber 2006 she made improvements with a cost of R200 000 and kept records of these
improvements. The house was not valued on 1 October 2001. Pat sold the house on
20 February 2023 for R5 500 000.
You are required to calculate the valuation date value of the house.

Solution 10.13
Calculating the valuation date value:
• The property was not valued on 1 October 2001. Therefore, the market value cannot be
used as the valuation date value.
• As Pat did not keep record of the pre-valuation date costs, she cannot use the TAB cost
as an option to calculate the valuation date value.
• The only option that is available to calculate the valuation date value is the 20% rule.
R
The proceeds from sale 5 500 000
Costs incurred on or after 1 October 2001 200 000
Valuation date value = 20% × (R5 500 000 – R200 000) 1 060 000
The valuation date value of the asset is therefore R1 060 000.

433
A Student’s Approach to Taxation in South Africa 10.9–10.10

REMEMBER

• When calculating the value of the proceeds, amounts already taken into account for
income tax purposes (such as recoupments) must be deducted (refer to 10.5.1).
• When calculating the value of the costs incurred on or after 1 October 2001, amounts
already taken into account for income tax purposes (such as allowances claimed) must
be deducted (refer to 10.6.2).

10.10 Selecting the valuation date value (paragraphs 26 and 27)

Normally a taxpayer selects the option with the highest value as the valuation date
value. However, the Act contains a number of provisions that limit the amount that
can be used as the valuation date value. These provisions are normally applied if the
asset is sold for less than the market value on valuation date or the costs incurred.
The effect of these rules is that the profit or loss that is calculated is adjusted to limit
capital losses and also ensure that the capital gain or capital loss is adjusted to a more
realistic value.
Paragraphs 26 and 27 contain the rules that should be used. Paragraph 26 applies
where a historical gain is realised on the disposal and paragraph 27 applies where a
historical loss arises on the disposal of the valuation date asset. The historical gain or
loss arising from the disposal is determined using basic CGT rules whereby any in-
come tax amounts and VAT amounts are excluded from the selling price and the cost
price, if applicable.
Paragraphs 26 and 27 of the Eighth Schedule are summarised in the following dia-
grams:

434
10.10 Chapter 10: Capital gains tax

26. Valuation date value where proceeds exceed expenditure or where expenditure
in respect of an asset cannot be determined.–

Proceeds of disposal exceeds

20 expenditure incurred be-
par 20 expenditure incurred
fore, on or after 1 October 2001
before, on or after
1 October 2001

Does the market value on

valuation date equal
after 1 October 2001or
exceed the proceeds on
disposal?

No Yes

Can the expenditure Valuation date value is

incurred before valua- proceeds less the ex-
tion date in respect of a penditure allowable
pre-valuation date asset in terms of paragraph 20
be determined? incurred on or after the
valuation date

Yes No

Valuation date value is the Valuation date value is the

higher of: higher of:
• market value on • market value on
1 October 2001; or 1 October 2001; or
• (proceeds – after • (proceeds – after
1 October 2001 costs) × 1 October 2001 costs) ×
20%; or 20%.
• TAB amount.

435
A Student’s Approach to Taxation in South Africa 10.10

27. Valuation date value where proceeds do not exceed expenditure.–

Proceeds of disposal does

20 expenditure incurred be-
NOT exceed paragraph 20
fore, on or after 1 October 2001
expenditure incurred before,
on or after 1 October 2001

Has the market value

after 1 October
of the 2001
asset been
determined?

Yes No

Is the cost incurred be- Valuation date

fore the valuation date: value is the TAB
• equal to or more amount.
than the proceeds;
and
• more than the
market value?

Yes No

Valuation date value is the Valuation date value is the

higher of: lower of:
• market value; or • market value; or
• proceeds less the ex- • TAB amount.
penditure allowable in
terms of paragraph 20
incurred on or after the
valuation date.

436
10.10 Chapter 10: Capital gains tax

These paragraphs can also be summarised in the following steps:

Calculate the valuation date value

Step 1: Determine whether the proceeds (excluding VAT and income tax
amounts) exceed the total expenditure (incurred before and after
valuation date, excluding VAT and income tax amounts).
No: Continue with Step 2 if a historic loss (paragraph 27).
Yes: Continue with Step 4 if a historic gain (paragraph 26).

Step 2: Determine whether the market value on 1 October 2001 was determined.
Yes: Continue with Step 3 (paragraph 27(3)).
No:
The valuation date value is the TAB (paragraph 27(4)).

Step 3: Determine whether the expenditure incurred before 1 October 2001 is

equal to or exceeds the proceeds and is more than the market value.
Yes: In terms of paragraph 27(3)(a) the valuation date value is the
higher of:
• the market value on valuation date; or
• the proceeds less the cost incurred on or after the valuation date.
No: In terms of paragraph 27(3)(b) the valuation date value is the
lower of:
• the TAB; or
• the market value on the valuation date.

Step 4: Determine the valuation date value in terms of paragraph 26(1) as the
highest of:
• the TAB; or
• the market value on the valuation date; or
• 20% (of proceeds less costs incurred on or after 1 October
2001).
If the market value is adopted and market value exceeds the proceeds
on 1 October 2001, the valuation date value is:
• the proceeds less expenditure incurred on or after 1 October
2001.

437
A Student’s Approach to Taxation in South Africa 10.10

The application of the rules can best be illustrated by means of a couple of examples.

Example 10.14
Dala CC provides the following information relating to assets sold during the year of as-
sessment. The only cost incurred for these assets is the original purchase price.
Expense Market
Selling
Asset incurred before value on TAB
price
1 October 2001 1 October 2001
R R R R
A 100 85 94 90
B 100 Not determined 87 85
C 100 60 55 50
D 100 110 105 120
E 100 122 108 112
F 100 150 75 45
Assume no expenses were incurred after 1 October 2001.
You are required to calculate the capital gain or loss for each asset.

Solution 10.14
Asset A
Proceeds < Expenditure and Expenditure > Market value
This is a historic loss situation: market value has been determined and is less than ex-
penditure, therefore paragraph 27(3)(a) applies: The valuation date value is the higher of
• market value on 1 October 2001 = R85; or
• proceeds less expenses on or after 1 October 2001 = R90 – Rnil = R90
The valuation date value is therefore R90, resulting in a loss of Rnil (R90 – R90).
Asset B
Proceeds < Expenditure
This is a historic loss situation and as the market value has not been determined on
1 October 2001, paragraph 27(4) applies: The valuation date value is the TAB, that is to
say R87, resulting in a loss of R2 (R85 – R87).
Asset C
Proceeds < Expenditure and Expenditure > Market value
This is a historic loss situation, market value has been determined on 1 October 2001 and
is less than expenditure, therefore paragraph 27(3)(a) applies: The valuation date value is
the higher of
• market value on 1 October 2001 = R60; or
• proceeds less expenses on or after 1 October 2001 = R50 – Rnil = R50
The valuation date value is therefore R60, resulting in a loss of R10 (R50 – R60).

continued

438
10.10–10.11 Chapter 10: Capital gains tax

Asset D
Proceeds > Expenditure
This is a historic gain situation, market value has been determined and is less than pro-
ceeds, therefore paragraph 26(1) applies: The valuation date value is the highest of
• market value on 1 October 2001 = R110;
• time-apportionment base = R105; or
• 20% (proceeds less expenditure on or after 1 October 2001) = 20% × (R120 – Rnil) =
R24.
The market value is the highest but as the proceeds exceed the market value, the market
value can be used.
The valuation date value is therefore R110, resulting in a profit of R10 (R120 – R110).
Asset E
Proceeds > Expenditure
This is a historic gain situation, market value has been determined, but is more than pro-
ceeds, therefore paragraph 26(1) applies: The valuation date value is the highest of
• market value on 1 October 2001 = R122;
• time-apportionment base = R108; or
• 20% (proceeds less expenditure on or after 1 October 2001) = R112 × 20% = R22,40
The market value is therefore the highest and, as the market value is higher than the pro-
ceeds, paragraph 26(3) determines that the valuation date value is proceeds less the cost
on or after the valuation date = R112 – Rnil = R112.
The valuation date value is therefore R112, resulting in a loss of Rnil (R112 – R112).
Asset F
Proceeds < Expenditure and Expenditure > Proceeds but
Expenditure < Market value
This is a historic loss situation, market value has been determined but is more than ex-
penditure, therefore paragraph 27(3)(b) applies: The valuation date value is the lower of
• TAB = R75; or
• market value on valuation date = R150.
The valuation date value is therefore R75 resulting in a loss of R30 (R45 – R75).

10.11 Exclusions (Step 2.4)

Certain capital gains and losses are not taken into account in determining the capital
gains tax liability. The Act provides details of assets and amounts that can be exclud-
ed from the calculation.

439
A Student’s Approach to Taxation in South Africa 10.11

Capital gains and losses excluded from capital gains tax

Step 2.4.1: Determine whether the asset qualifies for one of the following
exclusions:
• primary residence (refer to 10.11.1);
• personal-use assets (refer to 10.11.2);
• disposal of small business assets (refer to 10.11.3);
• other exclusions (refer to 10.11.4).

Step 2.4.2: Determine which portion of the capital gain or loss is excluded for
capital gains tax purposes. Note that some exclusions are only
applicable to losses and that others only exclude a portion or
specific amount of the gain or loss.

10.11.1 Exclusion: Primary residence (paragraphs 44 to 51)

A natural person and a special trust must disregard certain capital gains and losses
on the disposal of a primary residence.
A ‘primary residence’ is defined in paragraph 44 and includes a residence
• in which a natural person or a special trust holds an interest; and
• which that person or a beneficiary of that trust or a spouse of that person or benefi-
ciary
– ordinarily resides or resided in as their main residence; and
– uses or used it mainly for domestic purposes.
An interest in a primary residence includes
• a real or statutory right;
• a share in a share block company or similar foreign entity; or
• a right of use or occupation (for example a 99-year lease), but excluding a right un-
der a mortgage bond or trust.
A ‘residence’ is defined in paragraph 44 as a structure, including a boat, caravan or
mobile home that is used as a place of residence by a natural person together with
any appurtenance belonging thereto and enjoyed therewith.
The following two exclusions are available:
1. The R2 million gross exclusion (paragraph 45(1)(b))
• Any capital gain on the disposal of a primary residence by a natural person or
special trust is disregarded if the proceeds from the disposal of that primary res-
idence do not exceed R2 million.
• This rule does not apply in the following scenarios:
– If the primary residence is sold for R2 million or less and a capital loss is re-
alised. The R2 million gain or loss exclusion (see below) may, however, still
be applied to the loss.

440
10.11 Chapter 10: Capital gains tax

– If the proceeds do not exceed R2 million on disposal, but that natural person
or a beneficiary of that special trust or a spouse of that person or beneficiary
* was not ordinarily resident in that residence throughout the period on or
after the valuation date (1 October 2001) during which that person or
special trust held that interest; or
* used that residence or a part thereof for the purposes of carrying on a
trade for any portion of the period on or after the valuation date during
which that person or special trust held that interest.
• The R2 million gain or loss exclusion (see below) may, however, still be applied,
but only the portion of the capital gain or loss that is attributable to a period on
or after the valuation date during which that person, beneficiary or spouse was
so ordinarily resident or to that part of the primary residence that was used for
domestic purposes as well as purposes other than the carrying on of a trade by
that person, beneficiary or spouse.
2. The R2 million gain or loss exclusion (paragraph 45(1)(a))
• Where a natural person or a special trust disposes of a primary residence, the
first R2 million of the capital gain or loss should be disregarded in the calculation
of the capital gain.

Example 10.15
Joe Soap sold his primary residence for R6 000 000 during the current year of assessment.
The base cost of the residence is R3 200 000.
You are required to
(a) calculate the capital gain on the disposal of the primary residence after the primary
residence exclusion;
(b) re-calculate the capital gain or loss on the disposal of the primary residence after the
primary residence exclusion if the primary residence is sold for R1 000 000.

Solution 10.15
(a) Where the primary residence is sold for R6 000 000: R
Proceeds 6 000 000
Less: Base cost (3 200 000)
Gain on disposal (R6 000 000 – R3 200 000) 2 800 000
Less: Primary residence exclusion (2 000 000)
Capital gain on the disposal of the asset (R2 800 000 – R2 000 000) 800 000
Since the proceeds on disposal is more than R2 million, the entire capital gain cannot be
disregarded (paragraph 45(1)(b) therefore does not apply). However, the first
R2 million of the gain should still be disregarded in terms of paragraph 45(1)(a).

continued

441
A Student’s Approach to Taxation in South Africa 10.11

(b) Where the primary residence is sold for R1 000 000: R

Proceeds 1 000 000
Less: Base cost (3 200 000)
Loss on disposal (R1 000 000 – R3 200 000) (2 200 000)
Less: Primary residence exclusion 2 000 000
Capital loss on the disposal of the asset (R2 200 000 – R2 000 000) (200 000)
Although the proceeds on disposal is less than R2 million, a capital loss is realised (para-
graph 45(1)(b) therefore does not apply). However, the first R2 million of the loss should
still be disregarded in terms of paragraph 45(1)(a).

If he pays agents commission on the sale of the property, how will it af-
fect the capital gains tax calculation?

The R2 million gain or loss exclusion is a per residence exclusion. Where more than
one natural person owns the property and uses it as their ordinary residence, the
R2 million gain or loss exclusion must be divided between the persons according to
their ownership. Where a person owns more than one residence, only one of the resi-
dences will qualify as a primary residence.
If the property is owned by a combination of natural persons and persons other than
natural persons, only the natural persons can claim their portion of the R2 million
gain or loss exclusion. Therefore, if one natural person and one or more companies
jointly hold the interest in the property, only the natural person will qualify for the
R2 million gain or loss exclusion. However, if two natural persons and one or more
companies hold the interest in the property, the natural persons will only qualify for
a R1 000 000 exclusion each.
Amounts excluded from the primary residence exclusion
The following does not qualify for the exclusion:
• Where a natural person or the beneficiary of a special trust or their spouse was not
ordinarily resident in the residence throughout the period on or after the valuation
date during which the person or special trust held the interest in that residence, the
exclusion cannot be claimed for the period during which they were not ordinarily
resident in that residence.
• Where a primary residence is disposed of together with the land on which it is sit-
uated, the exclusion of R2 million gain or loss exclusion applies to
– a maximum of two hectares of the gain relating to the land;
– land used mainly for domestic purposes together with that residence; and
– land which is disposed of at the same time and to the same person as the resi-
dence.
• The primary residence exclusion does not apply to non-residents.

442
10.11 Chapter 10: Capital gains tax

Example 10.16
Sid Naidoo sold his small holding which he used as a primary residence. The selling price
in the contract is as follows: R500 000 for the house and R3 000 000 for the ten hectares of
land on which the house is situated. The house and land were mainly used for domestic
purposes. The base cost of the house is R300 000 and the base cost of the land is
R1 000 000.
You are required to calculate the taxable capital gain on the sale of the residence.

Solution 10.16
House Land
R R
Proceeds 500 000 3 000 000
Base cost (300 000) (1 000 000)
Gain on disposal 200 000 2 000 000
Less: Amount that does not qualify for the exclusion (Note) nil (1 600 000)
Amount qualifying for the exclusion 200 000 400 000
The total amount qualifying for the exclusion is therefore R200 000 + R400 000 =
R600 000. The maximum amount of the exclusion is R2 000 000, thus the whole R600 000
is excluded.
The taxable portion is therefore: R
Total gain on disposal (R200 000 + R2 000 000) 2 200 000
Less: Primary residence exclusion (R200 000 + R400 000) (600 000)
Capital gain on the disposal of the asset 1 600 000
Note
The amount that does not qualify for the exclusion:
As the property is larger than two hectares, only the first two hectares qualify for the
primary residence exclusion.
The following amount does not qualify for the exclusion:
= R2 000 000 × 8 ha/10 ha
= R1 600 000

443
A Student’s Approach to Taxation in South Africa 10.11

Apportionment of the primary residence exclusion

Where a natural person or the beneficiary of a special trust (or a spouse of the natural
person or beneficiary) disposes of an interest in a primary residence and that resi-
dence was used for the purposes of carrying on a trade, the capital gain or loss must
be apportioned. The portion of the capital gain or loss to be excluded from the
R2 million gain or loss exclusion is determined for that portion of the house during
that period on or after the valuation date during which the residence was used for
trade purposes.
If the natural person, beneficiary or spouse did not stay in the residence for a period,
and when they stayed there, used a percentage for business purposes, the capital gain
or loss in respect of both absence and trade use must be excluded from the primary
residence exclusion.

Example 10.17
Thabo Zonke sold his primary residence for R2 200 000 during the current year of assess-
ment. The base cost of the house is R1 200 000. Thabo used a home study and claimed
10% of the running cost as a deduction for income tax purposes every year.
You are required to calculate the taxable capital gain on the sale of the residence.

Solution 10.17
R
Proceeds 2 200 000
Less: Base cost (1 200 000)
Gain on disposal (R2 200 000 – R1 200 000) 1 000 000
Less: Primary residence exclusion (Note) (900 000)
Capital gain on the sale of the residence (R1 000 000 – R900 000) 100 000
Note
The amount that does not qualify for the exclusion:
The portion of the property that is used for business purposes does not qualify for the
primary residence exclusion. Thabo claimed 10% of the running cost of the house as busi-
ness expenditure for income tax purposes; therefore, 10% of the gain on the disposal of
the property does not qualify for the exclusion.
The following amount does not qualify for the exclusion:
= R1 000 000 × 10%
= R100 000
The amount of the exclusion is therefore R1 000 000 – R100 000 = R900 000, which is less
than the maximum of R2 000 000, thus the whole R900 000 qualifies for the exclusion.

Must Thabo pay normal tax on the full R100 000?

444
10.11 Chapter 10: Capital gains tax

Period when the asset is not used as the primary residence

When a natural person, or the beneficiary of a special trust or their spouses, does not
reside in the primary residence, they only qualify for the R2 million gain or loss ex-
clusion for the period they resided in the primary residence.
A natural person or a beneficiary of a special trust or their spouses will, however, be
treated as having been ordinarily resident in a residence for a continuous period (not
exceeding two years), if that natural person, or beneficiary of a special trust or their
spouses, were not continuously resident because
• the residence had been offered for sale and vacated due to the acquisition or in-
tended acquisition of a new primary residence;
• the residence was being erected on land acquired for that purpose;
• the residence had been accidentally rendered uninhabitable; or
• the death of that natural person, beneficiary or spouse had occurred.
Only a maximum of two years will be deemed to have been used as a primary resi-
dence if the above applies. For example, if the residence was owned for 20 years be-
fore the date of disposal (of which it has been offered for sale for 5 years) it will be
deemed that the house was used as a primary residence for 17 years (20 – (5 + 2)).
When a person, their spouses, or a special trust lets a residence for a maximum con-
tinuous period of five years and
• the person, beneficiary of a special trust or spouse resided in that residence as a
primary residence for a continuous period of at least one year prior to and after the
period it was let;
• no other residence was treated as that person’s, beneficiary of a special trust’s or
spouse’s primary residence during this period; and
• the person, beneficiary of a special trust or spouse was
– temporarily absent from the Republic; or
– employed or engaged in carrying on business in the Republic at a location fur-
ther than 250 kilometres from the residence,
the residence is nevertheless deemed to have been a primary residence.
The five-year rule does not apply if the residence has been let for more than five
years.

REMEMBER

• A person is only allowed to have one primary residence at a time. The reason for the
rules listed above is that there can be an overlap of two years, resulting in a person
having two primary residences at the same time. The person can therefore claim the full
exclusion for both houses.

445
A Student’s Approach to Taxation in South Africa 10.11

10.11.2 Exclusion: Personal-use assets (paragraph 53)

Where a natural person or a special trust disposes of a personal-use asset, the
resulting capital gain or loss is ignored for the purposes of capital gains tax.
A personal-use asset is an asset of a natural person or a special trust that is used
mainly for purposes other than the carrying on of a trade.
Personal-use assets exclude
• a coin made mainly from gold or platinum of which the market value is mainly
attributable to the material from which it is minted or cast;
• immovable property;
• an aircraft, the empty mass of which exceeds 450 kilograms;
• a boat exceeding ten meters in length;
• a financial instrument;
• a fiduciary, usufructuary or other similar interest, the value of which decreases
over time;
• a contract in terms of which, in return for payment of a premium, the person is en-
titled to policy benefits upon the happening of certain events, excluding a short-
term policy;
• a short-term policy contemplated in the Short-term Insurance Act, to the extent
that it relates to an asset that is not a personal-use asset; and
• a right or interest of whatever nature to or in any of the above assets.

REMEMBER

• The gains and losses on the disposal of personal-use assets are disregarded for capital
gains tax purposes.
• If a person receives an allowance in respect of an asset used partly for business pur-
poses (for example a travel allowance or cell phone allowance), the asset must be
treated as being used mainly for purposes other than the carrying on of a trade.

Limiting of losses
If an asset that is excluded from the definition of a personal-use asset is disposed of, a
capital gain or loss should be calculated. Paragraph 15 of the Eighth Schedule states
that the capital loss attributable to that portion of the asset that is not used for carry-
ing on of a trade, cannot be claimed for the following assets:
• an aircraft with an empty mass exceeding 450 kilograms;
• a boat exceeding ten meters in length;
• a fiduciary, usufructuary or similar interest, the value of which decreases over
time;
• a lease of immovable property;
• a time-sharing interest or share in a share-block company with a fixed life of which
the value decreases over time; and
• a right or interest of whatever nature to or in an asset referred to above.

446
10.11 Chapter 10: Capital gains tax

REMEMBER

• If the disposal of one of the above assets results in a gain, the gain will be taxed but the
loss may not be claimed.

Example 10.18
Peter disposes of (none of which was used for purposes of trade)
1. a town house;
2. a motor vehicle for which Peter receives a travel allowance from his employer;
3. a boat 15 metres in length solely used by Peter for recreational purposes; and
4. a portfolio of shares listed on the Johannesburg Securities Exchange.
You are required to indicate which of the above assets will qualify as personal-use assets.

Solution 10.18
1. Town house – not a personal-use asset as immovable property is excluded (could
qualify for primary residence exclusion if Peter used it as his primary residence).
2. Motor vehicle – is a personal-use asset as it is a qualifying asset on which a business
allowance is paid.
3. Boat exceeding ten metres in length – not a personal-use asset as specifically excluded
(in terms of paragraph 15 any capital loss must be disregarded but a capital gain
must be included).
4. Portfolio of listed shares – not a personal-use asset as financial instruments are ex-
cluded.
Note
Because Peter is a natural person, some assets like the motor vehicle will be considered
personal-use assets and a capital gain or loss on the disposal thereof must be disregarded.
This would also be the case if the motor vehicle was sold by a special trust. If, however,
the same motor vehicle was sold by a company, it would not qualify as a personal-use as-
set and the capital gain or loss would not be disregarded.

10.11.3 Exclusion: Disposal of small business assets

(paragraph 57)
If a person disposes of a small business asset, the capital gains, to a maximum of
R1 800 000 (during a person’s lifetime), are disregarded in calculating the aggregate
capital gain or aggregate capital loss.
This exclusion is granted to a natural person:
• who is the owner or a partner in a small business; or
• who holds a direct interest in a company (at least 10% of the equity of the com-
pany) which qualifies as a small business.

447
A Student’s Approach to Taxation in South Africa 10.11

A small business is a business of which the market value of all its assets does not ex-
ceed R10 million at the date of disposal. The assets in the business must be active
business assets. An ‘active business asset’ is defined as immovable property, to the
extent that it is used for business purposes and other assets used wholly and exclu-
sively for business purposes. It excludes a financial instrument and an asset held in
the course of carrying on a business mainly to derive income in the form of an annui-
ty, rental income, a foreign exchange gain, royalty or similar income.
The exclusion applies only where the person:
• held the interest for a continuous period of at least five years prior to its disposal;
• was substantially involved in the operations of the business during the five-year
period; and
• has attained the age of 55 years; or
• has disposed of the interest as a consequence of ill-health, other infirmity, super-
annuation or death.
Paragraph 57 also provides that all qualifying capital gains on the disposal of assets
of the small business must be realised within 24 months from the date of the disposal
of the first qualifying asset in order to qualify for the exclusion.

Example 10.19
Labani Kompi, a sole proprietor, is 56 years old and owns a chain of small clothing shops
and a building which he rents out. Labane started the clothing business from scratch and
built it up over a period of 20 years. He decided to sell his chain of clothing shops to an
independent third party on 28 February 2023.
The parties agreed on a selling price of R1 200 000 which consists of:
Trading stock (clothing) (cost price of R980 000) R900 000
Goodwill (clothing business) R300 000
His building is not used in his clothing business and he conducted the clothing shops
only from rented premises. Labane also offered his building for sale but he has not
received any propositions yet. The building which originally cost R1 000 000 has a market
value of R3 400 000.
You are required to calculate the taxable capital gain on the sale of the chain of clothing
shops.

Solution 10.19
R
Proceeds (note 1) 300 000
Less: Base cost (note 2) (nil)
Capital Gain on disposal 300 000
Less: Small business asset exclusion (note 3) (300 000)
Capital gain on the sale of the chain of clothing shops nil

continued

448
10.11 Chapter 10: Capital gains tax

Notes
1. The proceeds of R900 000 relating to trading stock is excluded as it is already taxed in
terms of the gross income definition. Only the proceeds relating to the goodwill is in-
cluded.
2. The cost of R980 000 relating to trading stock is excluded as it is already deducted in
terms of the general deduction formula in section 11(a). The cost that relates to the
goodwill is Rnil as Labane had built the business from scratch. He did not acquire the
business from another person and, therefore, Rnil can be claimed as base cost as
Labane incurred Rnil cost in respect of the goodwill.
3. Labane qualifies for the R1 800 000 relief provided for in par 57 of the 8th Schedule lim-
ited to actual capital gain. The following requirements are met:
 The combined market value of all Labane’s assets (active and passive assets) is less
than R10 000 000:
- Building: R3 400 000
- Trading stock: R900 000
- Goodwill: R800 000
- Total: R5 100 000
 The disposal of his chain of clothing shops represents business assets of a sole
proprietor which is allowed in terms of par 57.
 Labane has held the small business for his own benefit for a continuous period of
at least five years prior to selling it.
 Labane has been substantially involved in the operations of the small business
during the period that he held the business.
 Labane has attained the age of 55 years
4. If Labane sells the building, he will not be entitled to claim the remainder of the
R1 800 000 exclusion as the building represents a passive asset (earns rental income
from it).

REMEMBER

• This exclusion does not apply if a person owns more than one business as sole proprie-
tor, partner or shareholder (with a direct interest of 10% or more) and the market value
of all the assets of all the businesses together with that person’s passive assets exceeds
R10 million.

10.11.4 Exclusions: Other

10.11.4.1 Retirement benefits (paragraph 54)
A capital gain or loss determined in respect of a disposal that resulted in a person
receiving
• a lump sum benefit as defined in the Second Schedule (that is to say lump sums
received on retirement, death or withdrawal from a pension, pension preservation,
provident, provident preservation or retirement annuity fund); and

449
A Student’s Approach to Taxation in South Africa 10.11

• a lump sum benefit paid for services rendered from a fund, arrangement or instru-
ment situated outside the Republic, which is similar to a pension, pension preser-
vation, provident, provident preservation or retirement annuity fund, is disregard-
ed for capital gains tax purposes.
To determine whether an amount is subject to the Second Schedule to the Act, refer to
chapter 15.

REMEMBER

• If an amount is taxed in terms of the income tax rules, the same amount cannot be sub-
ject to capital gains tax rules. Thus, the tax-free amount of retirement benefits calculated
in terms of the income tax rules cannot be subject to capital gains tax.

10.11.4.2 Long-term insurance (paragraph 55)

The capital gain or capital loss realised on the disposal of a policy (as defined in sec-
tion 1 of the Long-term Insurance Act 52 of 1998) is disregarded for the purpose of
capital gains tax if that person:
• is the beneficial owner of the policy (or one of the original beneficial owners);
• is the spouse, nominee, dependant or deceased estate of the beneficial owner and
no money was received due to the cessation of the policy to the person; or
• is the former spouse of the beneficial owner and the policy is ceded in terms of a
divorce order.
This provision also applies in respect of a policy taken out on the life of a current or
former employee or director (and the premiums were deducted in terms of sec-
tion 11(w)) and a policy taken out on the life of a current or former partner or co-
shareholder. It should, however, be noted that the person whose life is insured
should not have paid any premiums of the policy. Most of the payments made under
section 11(w) will be taxed either in the company or the estate of the employee.

REMEMBER

• This exclusion does not apply to the disposal of a long-term insurance policy abroad or
the disposal of a second-hand policy.
• On certain second-hand policies, the capital gains or losses may still be disregarded.
• All risk policies are specifically excluded from the application of capital gains tax. A
specific exemption from capital gains tax applies in respect of employer-owned long-
term insurance policies if the amount to be taxed is included in the gross income of a
person, regardless of whether that amount is subsequently exempted from gross in-
come. Therefore, when policy proceeds from an employer-owned insurance policy are
exempt from gross income, the exemption should not trigger an adverse capital gains
result. In effect, the exemptions should be broad enough to effectively exempt the pol-
icy proceeds from the income tax as well as from the capital gains tax regime.

450
10.11 Chapter 10: Capital gains tax

10.11.4.3 Compensation for personal injury, illness or defamation

(paragraph 59)
If a natural person or special trust receives compensation as a result of the personal
injury, illness or defamation of the natural person or a beneficiary of the special trust,
a capital gain or loss must be disregarded.

10.11.4.4 Gambling, games and competitions (paragraph 60)

A natural person must disregard any capital gains or losses related to any form of
gambling, game or competition authorised by or conducted in terms of the laws of the
Republic.

REMEMBER

• Only gains made in terms of South African laws are excluded; winnings from foreign
sources are subject to capital gains tax.
• All losses, whether from a local or foreign source, are disregarded for capital gains pur-
poses.
• All gains made by persons other than natural persons (for example companies) are
subject to capital gains tax.

Example 10.20
Isabelle Chase retired during the year of assessment and received a lump sum of
R3 200 000 million from her pension fund. She took the money in cash and started gam-
bling at the local casino. In the first three months after her retirement, she lost R3 000 000
on gambling bets. Her husband was so upset by his wife’s behaviour that he had a heart
attack. She rushed to hospital with her husband but due to the negligence of the medical
doctor at the emergency ward he died the following day. After his death, she received
R1 800 000 from his long-term life insurance. Isabelle was convinced that her husband
would still be alive had the medical doctor taken reasonable care. She claimed compensa-
tion from the hospital and was paid R2 000 000 compensation, following a settlement. Af-
ter receiving the money, she felt extremely lucky. Once again, she returned to the casino,
convinced that this time she will win. She won R5 500 000 at the roulette table.
You are required to calculate the aggregate capital gain or loss for Isabelle for the current
year of assessment.

451
A Student’s Approach to Taxation in South Africa 10.11

Solution 10.20
Calculate the aggregate capital gain or loss for the year of assessment: R
Capital gain from retirement benefit (R3 200 000 is excluded) nil
Capital losses from gambling bets (R3 000 000 is excluded) nil
Capital gain from long-term life insurance disposal (R1 800 000 is excluded) nil
Capital gain from compensation claim against hospital (R2 000 000 is excluded) nil
Capital gain from winnings at the casino (R5 500 000 is excluded) nil
Aggregate capital gain or loss for the year of assessment nil

10.11.4.5 Exempt persons (paragraph 63)

The capital gain or loss that arises from the disposal of an asset is exempt from capital
gains tax if all the receipts and accruals of the person disposing of the asset are ex-
empt from income tax in terms of section 10.

10.11.4.6 Assets that produce exempt income (paragraph 64)

A capital gain or loss that arises from the disposal of an asset used solely to produce
income, which is exempt from income tax in terms of section 10 or 12K, must be ex-
cluded when calculating the total capital gain. This provision is, however, not appli-
cable to the following exempt receipts and accruals:
• the annual interest exemption (section 10(1)(i));
• dividends on shares exempt in terms of section 10(1)(k);
• income of a public benefit organisation (section 10(1)(cN)); and
• income of a recreational club (section 10(1)(cO)).

10.11.4.7 Donations and bequests to public benefit organisations

(paragraph 62)
A capital gain or loss realised as a result of a donation or bequest of an asset to the
government, public benefit organisations, recreational clubs or other qualifying ex-
empt persons must be excluded from the calculation of a person’s aggregate capital
gain or loss for the year.

10.11.4.8 Public benefit organisations (paragraph 63A)

A capital gain or loss realised as a result of a disposal of an asset by an approved pub-
lic benefit organisation must be disregarded if
• the asset was not used for business purposes on or after the valuation date; or
• substantially the whole of the asset was used by that public benefit organisation on
and after valuation date for purposes other than the carrying on of a trade or
was used in carrying on a trade that complies with the requirements of sec-
tion 10(1)(cN).

452
10.11–10.12 Chapter 10: Capital gains tax

REMEMBER

• ‘Substantially the whole’ is regarded by SARS as being 90% or more but a percentage of
not less than 85% will also be accepted. The percentage usage is determined using a
method appropriate to the circumstances, which may be based on the time used or area.
• The valuation date of a public benefit organisation in existence on 1 April 2006 will be
the first day of its first year of assessment commencing on or after 1 April 2006.
• The public benefit organisation can determine the base cost of an asset on valuation
date using the same methods available for other assets as per paragraph 26 or 27. If the
market value is adopted, the public benefit organisation must determine the market
value of the asset within two years from the valuation date except for financial instru-
ments (where the market value will equal the ruling price on the last business day
before valuation date) and participatory interest in a local collective investment scheme
in securities of property (the price at which the participatory interest can be sold to the
management of the company of the scheme on valuation date). The weighted average
method is available for identical assets.

10.11.5 Annual exclusion (paragraph 5)

In the case of a natural person and a paragraph (a) special trust, the total capital gain
or loss from the disposal of assets is reduced by the annual exclusion of R40 000. The
annual exclusion increases to R300 000 in the year the person dies. There is no annual
exclusion for persons other than natural persons and paragraph (a) special trusts.
A 2023 amendment provides that where the year of assessment is less than a period
of 12 months, the total annual exclusions during the period of 12 months commenc-
ing in March and ending at the end of February, must not exceed R40 000. For exam-
ple, if a person emigrates it is deemed that his year of assessment has ended on the
date immediately before the day on which that person ceased to be a resident, and
that person’s subsequent tax year is deemed to commence on the day he ceased to be
a resident. This effectively creates 2 years of assessment during a single 12-month tax
period. This amendment avoids an anomalous situation whereby the natural person
could claim R40 000 twice as he is now limited to only R40 000 in a 12-month tax pe-
riod. This amendment comes into operation on 1 March 2023 and applies in respect of
years of assessment commencing on or after that date.

10.12 Limitation of losses (paragraphs 15 to 19, 39, 56 and 83)

Capital losses in respect of certain assets must be disregarded in determining the ag-
gregate capital gain or loss of a person.

10.12.1 Non-personal use assets (paragraph 15)

Certain non-personal-use assets (for example an aircraft with an empty mass exceed-
ing 450 kilograms or a boat exceeding ten metres in length). This means that a capital
loss on the disposal of these assets should be disregarded. A capital gain should,
however, be included. The capital loss is disregarded to the extent that these assets
are not used in carrying on a trade.

453
A Student’s Approach to Taxation in South Africa 10.12

10.12.2 Intangible assets (paragraph 16)

Intangible assets acquired prior to the valuation date (1 October 2001) that are dis-
posed of resulting in a capital loss if the:
– assets were acquired from a connected person; or
– assets were associated with a business taken over by this person or a connected
person.

10.12.3 Forfeited deposits (paragraph 17)

• A deposit is made for the purposes of acquiring an asset that is not intended for
use wholly and exclusively for business purposes and the deposit is then forfeited.
This paragraph does not apply to the following:
– gold or platinum coins of which the market value is determined by the under-
lying metal;
– immovable property, excluding primary residence;
– financial instruments; and
– any right to or interest in these assets.

10.12.4 Options (paragraph 18)

An option that can be exercised to:
(a) acquire an asset not intended for use wholly and exclusively for business pur-
poses; or
(b) dispose of an asset not used wholly and exclusively for business purposes;
and the option is abandoned, allowed to expire or disposed of in any manner other
than the exercise of the option.
This paragraph does not apply to the following:
– gold or platinum coins of which the market value is determined by the under-
lying metal;
– immovable property, excluding primary residence;
– financial instruments; and
any right to or interest in these assets.
(Paragraph 18.)

10.12.5 Shares disposed of at a loss following an extraordinary

dividend (paragraph 19)
Where a taxpayer realises a capital loss on the disposal of a share the loss can be limited
in two situations. Firstly, where the capital loss results as part of a share buyback or
the liquidation, winding-up or deregistration. The loss is disregarded to the extent
that ‘exempt dividends’ were received or accrued to the taxpayer within 18 months
prior or as part of that disposal. Secondly, the taxpayer must also disregard so much
of a capital loss resulting from the disposal of shares in other circumstances to the

454
10.12 Chapter 10: Capital gains tax

extent that ‘extraordinary exempt dividends’ were received or accrued 18 months

prior to the disposal of the shares.
‘Exempt dividends’ means dividends or foreign dividends not subject to a divi-
dend tax and exempt from normal tax in terms of section 10B(2)(a), (b) or (e).
‘Extraordinary exempt dividends’ is defined as the amount of the aggregate of
any exempt dividends (accruing within 18 months prior to disposal) which in total
exceeds 15% of the proceeds received or accrued from the disposal.

Example 10.21
Ace Ltd., a SA resident company who is not a share-dealer, owns shares in Bongo Ltd (a
JSE-listed SA resident company) which it acquired for R100 000 on 1 March 2006. On
31 May 2021 Bongo Ltd. buys back 10% of its shares from all its shareholders. The direc-
tors advise the shareholders that 75% of the consideration is a dividend while the remain-
ing 25% is a return of capital. Ace Ltd. receives R20 000 as consideration for the buy-back.
You are required to calculate Ace Ltd's capital gain or loss.

Solution 10.21
R
Proceeds (return of capital R20 000 × 25%) 5 000
Less: Base cost (R100 000 × 10%) (10 000)
Capital loss (5 000)
The dividend portion of the consideration of R15 000 (R20 000 × 75%) is an ‘exempt divi-
dend’ in terms of par 19 because it is not subject to normal tax or dividends tax. The capi-
tal loss is disregarded to the extent that any ‘exempt dividend’ is received by or accrues to
Ace Ltd as a result of the share buy-back.
R
Exempt dividend received or accrued as a result of the share buy-back 15 000
Capital loss disregarded (limited to R15 000 exempt dividend) 5 000
Capital loss allowed (R5 000 – R5 000) nil

REMEMBER

The practical effect of par 19 is that it will not apply to a natural person holding shares in a
resident company because these dividends are subject to dividends tax. It will, however,
apply to resident companies receiving dividends from resident companies because such
dividends are exempt from dividends tax under s 64F(a).

10.12.6 Assets disposed of to a connected person at a loss

(paragraph 39)
An asset disposed of to a connected person at a capital loss must be disregarded. The
capital loss on the disposal of an asset to a connected person is ‘clogged’ if the dis-
posal is to a person who is:
– a connected person immediately before the transaction; or

455
A Student’s Approach to Taxation in South Africa 10.12–10.13

– a member of the same group; or

– a trust with a beneficiary in the same group after the transaction.
A ‘clogged loss’ means that the loss can only be set off against a gain arising as a
result of a disposal to that connected person later in that year of assessment or in
later years of assessment, provided that that person is still a connected person. This
limitation does not apply where a share incentive trusts disposes of a right, a mar-
ketable security or equity instrument to the beneficiaries of the trust (in terms of
section 8A or 8C).
Where a company redeems its shares, the holder of those shares must be treated as
having disposed of the shares to that company. If the holder is a connected person
to the company immediately before the transaction and a capital loss arises, the
loss is clogged.

10.12.7 Waiving or cancelling of debt by a creditor (paragraph 56)

• Where the waiving or cancelling of debt owed to a connected person gives rise to a
capital loss, it must be disregarded by the creditor.
This capital loss is not disregarded by the creditor where:
– the base cost of the debtor’s asset was reduced;
– the debtor considered the amount to be a capital gain;
– the amount was included in the gross income of the person who acquired the
claim;
– the amount was included in the gross income of the debtor or reduced his bal-
ance of the assessed loss; or
– a capital gain which the creditor can prove to be or was included in the determi-
nation of the aggregate capital gain or loss of the acquirer of the claim.

10.13 Assessed capital loss carried forward

(paragraphs 6 and 7)
The amount of the assessed capital loss that can be carried forward to the next year of
assessment is calculated as follows:
• where a person has an aggregate capital gain for the year: the amount by which the per-
son’s assessed capital loss for the previous year of assessment exceeds the amount
of the aggregate capital gain for the year;
• where a person has an aggregate capital loss for the year: the sum of the person’s aggre-
gate capital loss for the year and the assessed capital loss brought forward from the
previous year; or
• where a person has neither an aggregate capital gain nor an aggregate capital loss for the
year: the amount of the assessed capital loss brought forward from the previous
year.
An assessed capital loss cannot be set off against other taxable income but is carried
forward to the next year.

456
10.13–10.14 Chapter 10: Capital gains tax

Example 10.22
Farah Sansodien realises a capital loss of R60 000 on the sale of her holiday home to her
sister and a capital loss of R10 000 on the sale of shares in her investment portfolio. She
also earned other taxable income of R200 000 during the same year of assessment. In the
previous year of assessment she had an assessed capital loss of R4 000.
You are required to calculate the assessed capital loss to be carried forward to the next
year of assessment.

Solution 10.22
R
Capital loss on the sale of her holiday home (note 1) nil
Capital loss on disposal of shares in her investment portfolio (10 000)
Assessed capital loss – previous year (4 000)
Assessed capital loss for the year (note 2) (14 000)

Notes
1. The capital loss on the holiday home is ring-fenced and cannot be added to the as-
sessed capital loss that is carried forward to the following year. It can only be set off
against future capital gains that arise from transactions with the same connected per-
son.
2. The assessed capital loss of the year of R14 000 is not multiplied with the inclusion
rate and it cannot be set off against the other taxable income of R200 000. Instead, the
assessed capital loss is carried forward and it can be set off against any future capital
gain on the disposal of an asset

10.14 Roll-overs
The Act makes provision for the postponement of the payment of capital gains tax
under certain circumstances, having the effect that the base cost of the asset before the
disposal is rolled over, and when the asset is finally disposed of, capital gains tax is
paid on the difference between the proceeds and the original base cost.

10.14.1 Involuntary disposal of assets (paragraph 65)

A taxpayer may elect that a capital gain determined in respect of a disposal of an as-
set (except a financial instrument) be disregarded when determining his aggregate
capital gain or loss for the year of assessment in which the asset is disposed of.
The following conditions must apply before the selection can be made:
• the asset is disposed of by way of operation of law, theft or destruction;
• proceeds accrue as compensation for the disposal;
• the proceeds are equal to or more than the base cost of that asset;

457
A Student’s Approach to Taxation in South Africa 10.14

• that asset is not deemed to have been disposed of and to have been reacquired by
that person;
• an amount at least equal to the receipts from the disposal has been or will be ex-
pended to acquire one or more replacement assets;
• all the replacement assets are from a source in the Republic, including an interest
in immovable property. An interest in immovable property includes a direct or in-
direct interest of at least 20% held by a non-resident (alone or together with con-
nected persons) of the equity share capital of a company or any other entity (where
80% or more of the market value of the net asset value of that company or entity, at
the time of disposal, is attributable to immovable property situated in the Repub-
lic);
• the contracts for the acquisition of the replacement asset or assets have all been or
will be concluded within 12 months after the date of the disposal of that asset; and
• the replacement asset or assets will all be brought into use within three years of the
disposal of the original asset.

REMEMBER

• The Commissioner may extend the period within which the contract must be concluded
or the asset is brought into use by no more than six months if all reasonable steps were
taken to conclude those contracts or bring those assets into use.
• If a taxpayer fails to comply with the periods as laid down:
– the capital gain should be recognised on the date on which the relevant period
ends;
– interest is calculated at the prescribed rate on that capital gain from the date of that
disposal until the date on which the relevant period ends; and
– the interest is deemed to be a capital gain on the date on which the relevant period
ends.
• This rule does not apply to personal-use assets or financial instruments.
• This rule is not applicable when there is a loss.

Where the taxpayer acquires more than one replacement asset, the capital gain must
be apportioned between the different assets. The following formula can be used to
apportion the gain per replacement asset:
Cost of the specific replacement asset
Capital gain per asset = Total gain ×
Total cost of all replacement assets
Where the new asset is a depreciable asset, the capital gain must be realised over the
same time period and in the same ratio that is used to calculate the wear-and-tear
allowances on the replacement asset. Therefore, if an asset qualifies for a 40% deduc-
tion in the first year of assessment it is used, 40% of the gain allocated to the asset
must be recognised as a gain during the first year of assessment. If the taxpayer sells
the replacement asset and there is still an amount of the capital gain allocated to the
original asset that has not been recognised, the full amount is recognised as a gain for
that year of assessment.

458
10.14 Chapter 10: Capital gains tax

Where the new asset is not a depreciable asset, the capital gain must be recognised in
the year of assessment when the taxpayer sells the new asset.

Example 10.23
Arson Ltd purchased a machine on 28 February 2019 at a cost of R100 000.
On 28 February 2020 the machine was destroyed in a fire. The company received
R120 000 from its insurer as compensation. Arson Ltd purchased and started using a
more advanced replacement machine on 30 June 2020 at a cost of R150 000. Arson Ltd.
has a 30 June year-end.
You are required to determine the capital gains for the 2020 to 2023 years of assessment.

Solution 10.23
The capital gain on disposal of the old machine amounts to R20 000. Under par 65 this
must be disregarded and spread over future years of assessment in proportion to the
capital allowances to be claimed on the replacement asset.
The capital allowances on the new machine will be as follows:
2020: R150 000 × 40% = R60 000
2021: R150 000 × 20% = R30 000
2022: R150 000 × 20% = R30 000
2023: R150 000 × 20% = R30 000
The capital gain of R20 000 must be recognised as follows:
2020: R20 000 × R60 000/R150 000 (40%) = R8 000
2021: R20 000 × R30 000/R150 000 (20%) = R4 000
2022: R20 000 × R30 000/R150 000 (20%) = R4 000
2023: R20 000 × R30 000/R150 000 (20%) = R4 000
Note
Had there been a recoupment (section 8(4)), it would have been taxed to the same extent
as the capital gain.

10.14.2 Reinvestment in replacement assets (paragraph 66)

A taxpayer may elect that a capital gain determined in respect of a disposal of an as-
set (except a financial instrument) be disregarded when determining his aggregate
capital gain or aggregate capital loss in the year of assessment when the asset is dis-
posed of.
The following conditions must apply before the selection can be made:
• the asset qualified for a capital deduction or allowance in terms of section 11(e),
11D, 12B, 12C, 12DA, 12E, 14, 14bis or 37B;
• the proceeds are equal to or more than the base cost of that asset;
• that asset is not deemed to have been disposed of and to have been reacquired by
that taxpayer;

459
A Student’s Approach to Taxation in South Africa 10.14

• an amount at least equal to the proceeds received from the disposal has been or
will be expended to acquire a replacement asset or assets and this asset or assets
will qualify for a capital deduction or allowance in terms of section 11(e), 11D, 12B,
12C, 12DA, 12E or 37B;
• all the replacement assets are from a source in the Republic, including an interest
in immovable property. This includes immovable property held by that person or
interest or right in immovable property of whatever nature of that person. An in-
terest in immovable property includes a direct or indirect interest of at least 20%
held by a non-resident (alone or together with connected persons) of the equity
share capital of a company or any other entity (where 80% or more of the market
value of the net asset value of that company or entity, at the time of disposal, is at-
tributable to immovable property);
• the contracts for the acquisition of the replacement asset or assets have all been or
will be concluded within 12 months after the date of the disposal of that asset; and
• the replacement asset or assets will all be brought into use within three years of the
disposal of the original asset.

Example 10.24
Choice (Pty) Ltd acquired a new machine for R100 000 from a local supplier (not a con-
nected person) on 1 October 2019. The machine was brought into use immediately and
qualified for the s 12C allowance.
Due to the rapid expansion of the operations of Choice (Pty) Ltd, it was decided to re-
place this machine with a technologically more advanced machine. On 1 November 2020
the old machine was sold for R150 000 and a new machine was purchased at a cost of
R450 000. The new machine was brought into use on 15 November 2020 and also qualifies
for the s 12C allowance. The company’s year-end is the last day of December each year.
You are required to calculate the normal tax implications for Choice (Pty) Ltd arising
from the above transactions, assuming that the company elects to apply the provisions of
par 66. (Assume that the company has no other capital gains or losses for the relevant tax
years.)

460
10.14 Chapter 10: Capital gains tax

Solution 10.24
R
Old machine:
Original cost 100 000
Less: Section 12C allowance (2019 tax year) (40% of R100 000) (40 000)
Section 12C allowance (2020 tax year) (20% of R100 000) (20 000)
Income tax value on date of sale 40 000
Recoupment on old machine:
Proceeds of R150 000 (limited to cost price of R100 000) 100 000
Less: Income tax value on date of sale (calculated above) (40 000)
Section 8(4)(a) recoupment 60 000
This recoupment is not fully included in income (for income tax purposes)
if the taxpayer has elected the provisions of par 66 (s 8(4)(e)). Instead,
the inclusion in the taxpayer’s income in the 2020 tax year will be
R60 000 × 40% 24 000
The inclusion in the 2021, 2022 and 2023 tax years will be R60 000 × 20% 12 000
New machine:
Original cost 450 000
Less: Section 12C allowance (2020 tax year) (40% of R450 000) (180 000)
Income tax value at end of year 270 000
Capital gain on disposal of old machine:
Proceeds on disposal 150 000
Less: Section 8(4)(a) recoupment (60 000)
90 000
Less: Base cost (income tax value calculated above) (40 000)
Capital gain 50 000
The capital gain of R50 000 on the old machine must be rolled over. The
company must account only for 40% of the capital gain of R50 000 in the
2020 year of assessment. This means 40% × R50 000 = R20 000 multiplied
with the inclusion rate of 80% should be included in taxable income
16 000
The inclusion in the 2021, 2022 and 2023 tax years will be
R50 000 × 20% × 80% 8 000
Note
If the company disposes of the new machine or ceases to use it for the purposes of its
trade in a year of assessment before the full capital gain has been brought into account,
it must treat the balance of the capital gain that has not yet been brought into account as
a capital gain in that year.

461
A Student’s Approach to Taxation in South Africa 10.14

REMEMBER

• On application by the taxpayer, the Commissioner may decide to extend the period
within which the contract must be concluded or the asset brought into use by no more
than six months if all reasonable steps were taken to conclude those contracts or to
bring those assets into use.
• If a taxpayer fails to comply with the period as laid down:
– the capital gain should be recognised on the date on which the relevant period ends;
– interest is calculated at the prescribed rate on that capital gain from the date of that
disposal until the date on which the relevant period ends; and
– the interest is deemed to be a capital gain on the date on which the relevant period
ends.

Where the taxpayer acquires more than one replacement asset, the capital gain must
be apportioned between the different assets. The following formula can be used to
apportion the gain per replacement asset:
Cost of the specific replacement asset
Capital gain per asset = Total gain ×
Total cost of all replacement assets
The capital gain must be realised over the same time period and in the same ratio as
the amount of any deduction or allowance allowed on the replacement asset in that
year in terms of section 11(e), 11D, 12B, 12C, 12DA, 12E or 37B.

REMEMBER

• If the taxpayer sells the replacement asset or stops using the asset in his trade and there
is still an amount of the capital gain that has not been recognised, the full amount is a
capital gain for that year of assessment.
• This rule is not applicable when there is a loss.

10.14.3 Disposals to a spouse (section 9HB)

Section 9HB provides a form of ‘roll-over relief’ with regard to disposals between
spouses. The transferor must disregard any capital gain or loss determined in respect
of the disposal of an asset to his or her spouse (transferee). The transferee is treated as
having:
• acquired the asset on the same date on which it was acquired by the transferor;
• acquired the asset for an amount equal to the base cost expenditure incurred by the
transferor prior to the disposal;
• incurred that expenditure on the same date and in the same currency that it was
incurred by the transferor;
• used the asset in the same manner that it was used by the transferor in the period
prior to the disposal; and

462
10.14 Chapter 10: Capital gains tax

• received an amount equal to an amount received by the transferor in respect of that

asset that would have constituted proceeds on disposal of that asset had that trans-
feror disposed of it to a person other than the transferee.
(section 9HB(1))
Therefore, if the transferee subsequently disposes of the asset, he or she will calculate
the capital gain or capital loss in the same way as the transferor would have calculat-
ed it. Also, if the transferee subsequently disposes of the asset, he or she will be treat-
ed as having used the asset in the same way as the transferor. For example, if the
transferor used the asset as a personal-use asset, it constitutes a personal-use asset in
the hands of the transferee regardless of the manner actually used by the transferee.
The transferee must therefore disregard any capital gain or loss on the disposal of
such an asset in terms of paragraph 53 of the Eighth Schedule even if the transferee
uses that asset 50% or more for purposes of carrying on a trade.

REMEMBER

• This relief is unavailable if the asset is disposed of to a spouse who is not a resident,
unless the asset is an asset that remains in the tax net for non-residents, for example,
immovable property situated in South Africa or assets of a permanent establishment in
South Africa.

A person must also be treated as having disposed of an asset to his or her spouse for
the purposes of this-roll over provision if the asset is transferred to the spouse:
• in settling an accrual claim of the deceased spouse against the surviving spouse
where an asset of the surviving spouse is transferred to the deceased estate; and
• in consequence of a divorce order or an agreement (dividing the assets) made in a
court order.
In settling an accrual claim of the deceased spouse, the surviving spouse is treated as
having disposed of the assets immediately before the death of the deceased spouse.
This means that the surviving spouse is not subject to normal tax on capital gains on
the transfer of the assets to the deceased estate in terms of the accrual claim.
(section 9HB(2)).

Example 10.25
Hans and Gretel Schoeman are both SA residents married out of community of property.
Hans transfers an asset with a market value of R200 000 and a base cost of R160 000 to his
wife during the year of assessment.
You are required to determine the capital gains tax consequences for both Hans and
Gretel.

463
A Student’s Approach to Taxation in South Africa 10.14–10.16

Solution 10.25
Determine the capital gains tax effect for Hans: R
Capital gain or loss for the year of assessment is excluded nil
Determine the capital gains tax effect for Gretel:
Gretel is treated as having acquired the asset on the same date on which it was acquired
by Hans; for an amount equal to the base cost expenditure incurred by the Hans, namely
R160 000; incurred that expenditure on the same date and in the same currency; and
used the asset in the same manner that it was used by Hans. In essence, Gretel steps into
the shoes of Hans with regard to the asset.

REMEMBER

• The roll-over relief is also available where the asset consists of trading stock that in-
cludes a farmer’s livestock.
• Where a spouse dies this relief only applies in respect of the settling of an accrual claim
of the deceased spouse. It does not apply if his or her surviving spouse inherits any
asset. In such an instance, section 9HA determines the roll over consequences for the
deceased spouse.

10.15 Inclusion rate (paragraphs 9 and 10)

A person’s taxable capital gain for the year of assessment is calculated as a percentage
of the net capital gain. The taxable capital gain is then added to the taxable income for
normal tax purposes, before the deduction for donations (in the case of natural per-
sons) are taken into account.
The percentages to be applied in arriving at the taxable capital gain are as follows:
• 40% for individuals and special trusts (as defined); and
• 80% for companies, close corporations and trusts.

REMEMBER

• The effective tax rate on a capital gain is therefore a maximum of 18% (40% × 45%)
for individuals and 21,6% (27% × 80%) for companies.

10.16 Summary
When calculating the capital gain on the disposal of an asset, you need to determine
four things, namely the proceeds on the disposal, the base cost of the asset, the
amount excluded from capital gains tax and whether there are any rules limiting the
losses on the disposal of the asset.

464
10.16–10.17 Chapter 10: Capital gains tax

Before starting to calculate the capital gain on the disposal, it first has to be deter-
mined whether any portion of the income is taxed as part of the taxpayer’s income
tax calculation, for example recoupments.
The proceeds on the disposal of the asset are normally the compensation received on
the disposal of the asset. This amount has to be adjusted for amounts included in tax-
able income for income tax purposes, as a person cannot be taxed twice on the same
amount.
The base cost of the asset is the valuation date value (on 1 October 2001) plus the ex-
penditure incurred on or after 1 October 2001. The Eighth Schedule of the Act allows
three methods that can be used to calculate the value of the asset on 1 October 2001,
namely:
• the market value;
• the time-apportionment base cost; and
• the 20% rule.
The capital gain or loss on the disposal of an asset is the proceeds from the disposal
less the base cost. The Act excludes the gains and/or losses on certain assets from the
calculation of the aggregate capital gain or loss for the year of assessment. Remember
that there is no annual exclusion for persons other than natural persons. The net capi-
tal gain for the year is then multiplied by the inclusion rate (80% for persons other
than natural persons) to calculate the taxable capital gain. The taxable capital gain is
not the amount of tax to be paid; it is included in the taxable income and the applica-
ble tax rate is then applied to calculate the tax payable.
The next section contains a number of questions that can be completed to evaluate
your knowledge on capital gains tax.

10.17 Examination preparation

Question 10.1
Green Finger Ltd is a company manufacturing pot plant holders and it is also a VAT
vendor. Due to the success of the company’s products, it had to acquire a bigger manufac-
turing plant. All amounts include VAT unless stated otherwise. The company’s year of
assessment ends on 31 July.
Old plant
The old plant (previously used) was purchased on 1 November 2020 from another manu-
facturing company (who was a registered VAT vendor) for 2 081 739 (excluding VAT).
Green Finger Ltd sold this plant for R5 244 000 on 1 February 2022.

New plant
A new plant (replacement asset, new and unused) was purchased for R6 100 000 on 1 July
2022. The plant was brought into use on 1 January 2023 after modifications costing
R350 000 were undertaken.
Assume that the only other disposal for the years of assessment ended 31 July 2022 and
31 July 2023 was on 1 November 2022, which created a capital loss of R15 000.

465
A Student’s Approach to Taxation in South Africa 10.17

You are required to:

Calculate the taxable capital gain for the years of assessment ended 31 July 2022 and
31 July 2023. The directors of the company elect any provision available in terms of
the Income Tax Act to defer its tax liability.

Answer 10.1
Calculation of the taxable capital gain of Green Finger Ltd for the year of assessment
ended 31 July 2022
R
Proceeds (Note 2) 3 727 304
Less: Base cost (Note 3) (1 249 043)
Capital gain 2 478 261
Less: Roll-over relief (Note 4) (2 478 261)
Taxable capital gain nil

Calculation of the taxable capital gain of Green Finger Ltd for the
year of assessment ended 31 July 2023
R
Capital gain – rolled over (R2 478 261 × 40%) (Note 5) 991 304
Less: Capital loss (given) (15 000)
Net capital gain 976 304
Multiplied by: Inclusion rate 80%
Taxable capital gain 781 043

Notes
1. Income tax calculations
Tax value
Cost 1 November 2020 2 081 739
Less: Section 12C allowance
2021: R2 081 739 × 20% (416 348)
2022: R2 081 739 × 20% (416 348)
Tax value on 1 February 2022 1 249 043

Recoupment
Selling price (R5 244 000 × 100 / 115) limited to cost 2 081 739
Less: Tax value (1 249 043)
Recoupment 832 696

2. Proceeds
Proceeds (R5 244 000 × 100 / 115) 4 560 000
Less: Recoupment (Note 1) (832 696)
Proceeds for capital gains tax purposes 3 727 304

continued

466
10.17 Chapter 10: Capital gains tax

3. Base cost
Original cost price (excluding VAT) 2 081 739
Less: Section 12C allowances claimed (832 696)
Base cost 1 249 043

4. Roll-over relief – 2022

Due to the plant being replaced and brought into use within one year of the original
plant being disposed of, there is a roll-over relief for capital gains tax purposes. No cap-
ital gain is declared for the year of assessment ended 31 July 2022, as the replacement
asset has not yet been brought into use.
5. Roll-over relief – 2023
Note that 40% of the capital gain from the sale of the plant is taken into account in the
year of assessment in which the replacing asset is brought into use and that the new
plant qualifies for a 40% capital allowance.

Question 10.2
Rent-a-lot Ltd (a VAT vendor) owns a fleet of hovercrafts which it rents out. The com-
pany’s year of assessment ends on the last day of February. On 30 November 2022 the
company sold two of its hovercrafts to purchasers who are not connected persons to Rent-
a-lot Ltd.
The following information relates to the sale:

Purchase price Sales price Market value on

(VAT included 1 October 2001
Hovercraft Purchase date (VAT included
at 15 and 1%, as
applicable) at 15%)

#1 1 July 2019 R149 500 R88 920 nil

#2 (Note) 31 March 2001 R109 440 R193 800 R2 000

Note
Hovercraft #2 had modifications done to it on 1 April 2005 which cost R59 280 (VAT in-
cluded at 14%).
SARS allows wear-and-tear to be written off over ten years for these hovercrafts.
All amounts include VAT.

You are required to:

Calculate the taxable capital gain or loss for the 2023 year of assessment. The directors
of the company elect to claim the section 11(o) deduction, if applicable.

467
A Student’s Approach to Taxation in South Africa 10.17

Answer 10.2
Calculation of the taxable capital gain or loss of Rent-a-Lot Ltd
R
Capital loss on disposal of hovercraft #1 (Note 1) nil
Add: Capital gain on disposal of hovercraft #2 (Note 2) 16 418
Aggregate capital gain for the year 16 418
The taxable capital gain is therefore 80% × R16 418 = R13 134
Notes
1. Capital loss on disposal of hovercraft #1
Proceeds 77 322
Less: Base cost (77 322)
Capital loss on disposal of hovercraft #1 nil
There is no capital loss because the whole amount is claimed as an
income tax deduction in terms of section 11(o).
2. Capital gain or loss on disposal of hovercraft #2
Proceeds 20 522
Less: Base cost (4 104)
Capital gain 16 418

The comprehensive answer to question 10.2 is available electronically

www.myacademic.co.za/books

Question 10.3
During the 2018 year of assessment, Daisy Ltd purchased ten used manufacturing
machines for R2 250 000. On 2 January 2019, the company sold all its manufacturing
machinery to Donald Ltd, which is not a connected person to Daisy Ltd. In terms of the
sales agreement, the selling price is equal to 10% of Donald Ltd’s profit for the next five
years. Donald Ltd’s profit for the next five years (ended 31 December) is as follows:
2019: R10 000 000
2020: R8 000 000
2021: R15 000 000
2022: R3 500 000 (loss)
2023: R5 000 000
All amounts exclude VAT. The company’s year of assessment ends 31 December.

You are required to:

Discuss the income tax implications of the transaction for Daisy Ltd for all the years
of assessment. The directors of the company elect to claim the section 11(o) deduction,
if applicable.

468
10.17 Chapter 10: Capital gains tax

Answer 10.3
1. 2018 year of assessment:
The company can claim a section 12C allowance:
R2 250 000 × 20% (used asset) = R450 000
2. 2019 year of assessment:
The company can claim a section 12C allowance:
R2 250 000 × 20% (used asset) = R450 000
The company can claim a section 11(o) deduction: R
Selling price (R10 000 000 × 10%) 1 000 000
Less: Tax value (R2 250 000 – R450 000 – R450 000) (1 350 000)
Possible section 11(o) deduction (350 000)
As the full proceeds did not accrue to the company in the first year,
the section 11(o) deduction must be disregarded (section 20B(1)).
Section 11(o) deduction nil
The total proceeds are less than the original cost and therefore
there is no capital gain for the year.
Capital loss for the current year:
Proceeds (R1 000 000 – Rnil (recoupment)) 1 000 000
Less: Base cost (R2 250 000 (cost) – R900 000 (section 12C allowance)) (1 350 000)
Capital loss (350 000)
Capital loss must be disregarded in the 2019 year of assessment (paragraph 39A(1)).
3. 2020 year of assessment:
R
An amount of R800 000 (R8 000 000 × 10%) accrued to the company.
A recoupment must be calculated for income tax purposes:
Total receipts (R1 000 000 + R800 000) 1 800 000
Less: Tax value (R2 250 000 – R450 000 – R450 000) (1 350 000)
Income tax recoupment 450 000

*The section 11(o) allowance of R350 000 that was disregarded in 2019
cannot be deducted in 2020 as the section 11(o) loss now becomes a re-
coupment and is no longer a loss.
Section 11(o) allowance –
Capital gain/loss for the current year:
Further proceeds (further amount accrued to company) 800 000
Further deduction in proceeds (recoupment) (450 000)
Capital gain for 2020 year of assessment 350 000
Capital loss from 2019 year of assessment (paragraph 39A(2)) (350 000)
Net capital gain/loss nil

continued

469
A Student’s Approach to Taxation in South Africa 10.17

4. 2021 year of assessment:

An amount of R1 500 000 (R15 000 000 × 10%) accrued to the company.
A recoupment must be calculated for income tax purposes:
Total receipts (R1 800 000 + R1 500 000) limited to cost price 2 250 000
Less: Tax value (R2 250 000 – R450 000 000 – R450 000) (1 350 000)
Potential recoupment 900 000
Less: Previous recoupment (450 000)
Recoupment for the current year 450 000
Capital gain/loss for the current year:
Further proceeds (further amount accrued to company) 1 500 000
Further deduction in proceeds (recoupment) (450 000)
Capital gain for 2021 year of assessment (par 3(b)) 1 050 000
Multiplied by: Inclusion rate 80%
Taxable capital gain for 2021 year of assessment 840 000
5. 2022 year of assessment:
No income accrued to the company and therefore there are no income
tax consequences.
6. 2023 year of assessment:
An amount of R500 000 (R5 000 000 × 10%) accrued to the company.
The full income tax recoupment was already taken into account.
Capital gain for the current year:
Further proceeds (further amount accrued to company) 500 000
Further deduction in proceeds (recoupment) nil
Capital gain for 2023 year of assessment (paragraph 3(b)) 500 000
Multiplied by: Inclusion rate 80%
Taxable capital gain for 2023 year of assessment 400 000

Question 10.4
You are a tax consultant at a local firm. During the year you received the query from a cli-
ent:
Hunter Ltd, who is not a share-dealer, purchased a share in Coco (Pty) Ltd on 1 March
2022 for R550 000. On 30 April 2023 Hunter Ltd receives a dividend of R400 000. Hunter
Ltd sells the shares on 1 May 2023 for R100 000.
All amounts exclude VAT. The company’s year of assessment ends 31 July.
Calculate Hunter Ltd’s capital gains or losses for the year of assessment assuming these
were the only transactions with CGT consequences.

470
10.17 Chapter 10: Capital gains tax

Answer 10.4
Query 1:
Calculation of the taxable capital gain or loss of Hunter Ltd for the year of assessment
ended 31 July 2023
R
Proceeds R100 000
Less: Base cost (550 000)
Capital loss (R450 000)
The capital loss is disregarded to the extent that any extraordinary exempt
dividend is received by or accrues to Hunter Ltd within 18 months prior to or
as part of the disposal (refer to 10.12.5).
Extraordinary exempt dividend:
Dividend received or accrued within 18 months before date of disposal R400 000
Less: 15% of proceeds (15% × R100 000) 15 000
Capital loss disregarded R385 000
Capital loss allowed (R450 000 – R385 000) R65 000

Additional questions for this chapter are available electronically at

www.myacademic.co.za/books

471
 Taxation of
11 companies and
company distributions

Gross Exempt Taxable Tax

income – income – Deductions = income payable

Adjustments
Partnerships Companies Trusts for tax
avoidance

Page
11.1 Introduction ......................................................................................................... 474
11.2 The nature of a company (section 1) ................................................................. 475
11.3 Tax implications for a company ........................................................................ 477
11.4 Small business corporations and personal service providers ....................... 479
11.4.1 Small business corporations (section 12E) .......................................... 479
11.4.2 Personal service providers.................................................................... 482
11.5 Non-resident companies .................................................................................... 484
11.6 Collection of tax due by a company (Fourth Schedule of the Act) ............... 484
11.7 Classification of companies................................................................................ 487
11.8 Tax implications of company distributions ..................................................... 488

473
A Student’s Approach to Taxation in South Africa 11.1

Page
11.9 Dividends tax (sections 1 and 64D to 64N).................................................... 488
11.9.1 Definition of a dividend (sections 1 and 64D) ............................... 488
11.9.2 Definition of contributed tax capital (section 1) ............................ 490
11.9.3 Levying of dividends tax on a dividend paid in cash
(sections 64E and 64EA) ................................................................... 495
11.9.4 Levying of dividends tax on a dividend in specie
(sections 64E and 64EA) ................................................................... 495
11.9.5 Dividends tax for foreign companies (sections 64E and 64EA) ... 497
11.9.6 Exemptions from dividends tax (section 64F) ............................... 497
11.9.7 Exemption from and reduction of dividends tax in respect
of dividends in specie (section 64FA)............................................... 500
11.9.8 Deemed beneficial owner of a dividend (section 64EB)............... 502
11.10 Withholding of dividends tax (section 64G) ................................................. 503
11.11 Refund of dividends tax (sections 64L) .......................................................... 505
11.12 Payment and recovery of dividends tax (section 64K) ................................ 506
11.13 Dividends tax: Summary ................................................................................. 507
11.14 Summary ............................................................................................................ 508
11.15 Examination preparation ................................................................................. 508

11.1 Introduction
Lillian Mtombe decided that she wanted to start her own business. She wants to bake
rusks and sell it to different entities. She knows that she will incur certain expenses
and that she is going to earn income from the sale of the rusks. She is unsure of what
she has to do and heard from a friend that she needs to choose a certain form of
enterprise in which she will operate her business. Lillian decided on a company as
her form of enterprise.
A company is a fictitious separate person or entity that has been clothed with a legal
personality. It is not a building that can be seen. It is just a form or legal entity within
which activities take place and are regulated. For income tax purposes, a company is
also treated as a separate person and a separate tax calculation must be prepared for
the company itself, over and above that of its owners (shareholders) and managers
(directors).
If Lillian Mtombe therefore chooses a company as her form of enterprise, she will
undertake all her trading activities within the company and at the end of the year of
assessment she will summarise the activities and prepare a tax calculation for the
company. She will also have to prepare a tax calculation in her own name, but it will
not include the trading activities of the company; just possibly a salary that she re-
ceived for services rendered to the company, as well as dividends on any shares that
she may hold in the company.

474
11.1–11.2 Chapter 11: Taxation of companies and company distributions

If one has specifically decided upon a company or close corporation (CC) as a form of
enterprise, after studying this chapter one should understand the tax implications of
this form of enterprise.

11.2 The nature of a company (section 1)

A ‘company’ is defined in section 1 of the Income Tax Act 58 of 1962 (the Act) and
includes:
• any association, corporation or company (other than a close corporation) incor-
porated (or deemed to be incorporated) by or under any law in force or previously
in force in the Republic or in any part thereof, or any body corporate formed or
established (or deemed to be formed or established) by or under any such law;
• any association, corporation or company incorporated under the law of another
country or a body corporate formed or established under such law;
• any co-operative;
• any association (other than a company or a close corporation) formed in the Re-
public to serve a specified purpose, beneficial to the public or a section of the public;
• a portfolio in certain collective investment schemes carried on outside the Repub-
lic;
• any portfolio of a collective investment scheme in property that qualifies as a REIT
(real estate investment trust) as defined in the listing requirements of an exchange
approved under the Financial Markets Act 19 of 2012 (the Financial Markets Act);
and
• a close corporation.
This definition is very wide and includes just about every association of persons.
However, it specifically excludes a foreign partnership, which is defined in section 1
of the Act as a partnership, association, body of persons or entity formed or estab-
lished under the laws of any country other than the Republic. Companies are gov-
erned by the Companies Act 71 of 2008 (the Companies Act) which came into
operation on 1 May 2011 and close corporations are governed by the Close Corpora-
tions Act 69 of 1984 and Schedule 3 of the Companies Act. In terms of the Act a close
corporation is treated the same as a private company. The top management of a com-
pany are usually called directors. A director of a company appointed in terms of the
Companies Act, is usually easily identifiable, since proper documentation has to be
completed in this regard. Thus, at no stage should there be any uncertainty as to who
the directors of a company are, because they should all be duly appointed as such.
With regard to a close corporation, however, it is not as easy. For this reason, sec-
tion 1 of the Act specifically defines a ‘director’ of a close corporation as follows:
in relation to a close corporation, means any person who in respect of such close cor-
poration holds any office or performs any functions similar to the office or functions of
a director of a company other than a close corporation.

REMEMBER

• Any reference hereafter to a company refers to the definition in terms of the Act and
includes, among others, a close corporation.

475
A Student’s Approach to Taxation in South Africa 11.2

A ‘group of companies’ is defined in section 1 of the Act as two or more companies in

which one company (the controlling group company) directly or indirectly holds
shares in at least one other company (the controlled group company), to the extent
that:
• at least 70% of the equity shares in each controlled group company are directly
held by the controlling group company, one or more other controlled group com-
panies or any combination thereof; and
• the controlling group company directly holds at least 70% of the equity shares in at
least one controlled group company.

Example 11.1
50%
A

D 70%

25% B

80%

The diagram sets out the percentages held in the equity shares of Companies B, C and D.
From the diagram it is clear that all the companies form part of the same group of compa-
nies.
Company A is the controlling group company. Since Company A directly holds at least
70% of the equity shares in Company B (controlled group company), Companies A and B
form part of the same group of companies.
Company C also forms part of the group of companies. Although the effective interest of
Company A in the equity shares of Company C is only 56% (70% × 80%), it is not the effect-
ive interest that is relevant. Since Company B (controlled group company) directly holds at
least 70% of the equity shares in Company C (that is 80%) and Company A (controlling
group company) directly holds at least 70% of the equity shares in Company B, Compa-
nies A, B and C form part of the same group of companies.
Company D also forms part of the group of companies. Company A (controlling group
company) directly holds at least 70% of the equity shares in Company B (controlled group
company). Since Company A (controlling group company) and Company B (controlled
group company) directly hold at least 70% of the equity shares in Company D (that is 50%
by Company A plus 25% by Company B), Company D forms part of the same group of
companies.

The general definition of a group of companies as per section 1 is narrowed by the

provisions of section 41 of the Act and in terms of this section certain types of entities
are excluded from the definition of a group of companies. The exclusions are:
• any co-operative;
• any association formed in the Republic (other than a company or close corporation)
to serve a specified purpose, beneficial to the public or a section of the public;

476
11.2–11.3 Chapter 11: Taxation of companies and company distributions

• a portfolio of certain collective investment schemes carried on outside the Repub-

lic;
• a non-profit company as defined in section 1 of the Companies Act;
• a company of which the gross income is exempt from normal tax under section 10
of the Act;
• a public benefit organisation or recreational club approved by the Commissioner;
• a company incorporated under the law of another country, unless it has its place of
effective management in South Africa; or
• any company that has its place of effective management outside the Republic.

REMEMBER
• The definition of ‘group of companies’ differs from the definition of ‘connected person’
(refer to chapter 9). A company will be a connected person to another company if, for
example, at least 50% of the equity shares are directly held in that other company, not
70%.

11.3 Tax implications for a company

The framework for the calculation of taxable income , also applies to a company and
close corporation:

Gross income

Less: Exempt income Includes taxable

capital gain in
terms of the
Equals: Income Eighth Schedule

Less: Permissible deductions

Equals: Taxable income

Therefore, when a company’s taxable income is calculated, basically the same pro-
cedure is used as applied for natural persons. The normal tax liability of a natural
person is calculated on a sliding scale by means of the tax tables. Companies, howev-
er, pay normal tax at a fixed rate. The normal tax rate for companies has been reduced
from 28% to 27% in respect of years of assessment ending on or after 31 March 2023.
Every year the tax rates for the following year of assessment are announced in the
budget speech. The tax rate announced in the budget of February 2022 for individuals
applies to the year of assessment of 1 March 2022 to 28 February 2023.
For companies, it applies to years of assessment that end on any date during the
South African fiscal year from 1 April 2022 to 31 March 2023. It is therefore possible
that a company with a 30 April 2022 year end will only be informed in February 2022

477
A Student’s Approach to Taxation in South Africa 11.3

during the budget speech that it will have to pay tax at a higher or lower rate for the
2023 year of assessment.
The rate for companies (small business corporations excluded) has been fixed at 27%
of taxable income (taxable income for the current year, less the balance of an assessed
loss incurred in a previous year that has been carried forward from the preceding
year of assessment) (section 20(1)(a)).
A company’s normal tax calculation is done for its year of assessment. This is the
financial year of the company that ends during the relevant fiscal year. It is not neces-
sarily a period of 12 months, but may be changed with the approval of the Com-
missioner. In this manner, a company with a financial year that ends on 31 March
may be incorporated, for example, on 1 October 2022. The first year of assessment
will then be from 1 October 2022 up to and including 31 March 2023. If the company
then changes its financial year end on 15 April 2023 to 31 December, the second year
of assessment will extend from 1 April 2023 to 31 December 2023, subject to the
Commissioner’s approval. The third year of assessment will then extend from
1 January 2024 to 31 December 2024.

Example 11.2
ABC (Pty) Ltd had taxable income of R100 000 for the current year of assessment ended
31 January. The company is not a small business corporation as contemplated in section
12E(4) (refer to 11.4.1).
You are required to calculate the normal tax due by ABC (Pty) Ltd in respect of the year of
assessment ended 31 May 2023.

Solution 11.2
R100 000 × 27% = R27 000 normal tax due.

If a company did not carry on a trade in the Republic during a year of assessment, the
benefit of an assessed loss is not carried forward and it is lost. This principle was
confirmed in SA Bazaars (Pty) Ltd v CIR 18 SATC 240. The expression ‘carrying on of a
trade’ does not include the earning of passive income such as dividends and interest.
Hence, unless a company carries on the business of a moneylender, an assessed loss
cannot be carried forward from a year that the company solely derived interest in-
come and did not carry on any other trade. In order to carry forward an assessed loss,
it is further required that a company must derive income from a trade. However, the
Commissioner does not enforce this principle very strictly and allows for an assessed
loss to be carried forward if the company has carried on a trade, even if no income
was derived from that trade.
A company is also obliged to withhold (or pay) 20% dividends tax (refer to 11.9) in
respect of cash dividends or dividends in specie declared by the company.
The normal tax for gold-mining companies and insurance companies is calculated in
a different manner, but is not discussed in this text as it is considered to be specialist
in nature.

478
11.3–11.4 Chapter 11: Taxation of companies and company distributions

REMEMBER
• The tax rate was reduced from 28% to 27% for a company or close corporation (other
than a small business corporation) with a year of assessment ending on or after
31 March 2023 (that is to say where the year of assessment of the company or close
corporation commences on or after 1 April 2022). The rate of 27% is used for purposes
of this book unless the year of assessment in an example or question indicates
otherwise.
• A company's year of assessment is the same as its financial year.
• A company is not entitled to the primary, secondary and tertiary rebates.
• The basic interest exemption (section 10(1)(i)) is only available to individuals and not to
companies.
• According to section 10(1)(k) both companies and individuals are entitled to the local
dividend exemption.
• According to section 10B both companies and individuals are entitled to the foreign
dividend exemptions.
• The exemption with regards to the capital portion of a purchased annuity (section 10A)
as well as the exemption of amounts received or accrued in respect of tax-free invest-
ments (section 12T) do not apply to companies.
• In terms of section 6quat, a resident company is entitled to a rebate or deduction for
foreign tax paid, provided that the requirements of this section are met.

11.4 Small business corporations and personal service

providers
11.4.1 Small business corporations (section 12E)
A ‘small business corporation’ is defined in section 12E(4) as any close corporation,
co-operative, private company or personal liability company in terms of the Com-
panies Act, all the holders of shares of which are at all times during the year of assess-
ment natural persons, where:
• the gross income for the year of assessment does not exceed R20 million. If the
entity carries on a trade for less than 12 months of the year, the R20 million limit on
the gross income must also be calculated proportionally. For purposes of this cal-
culation, a portion of a month is deemed to be a full month;
• none of the holders of shares or members, at any time during the year of assess-
ment, holds any shares or has any interest in the equity of any other company as
defined in section 1 of the Act, other than:
– a company listed on a South African exchange;
– a portfolio of certain collective investment schemes carried on outside the
Republic;
– a portfolio of a collective investment scheme in property that qualifies as a REIT;
– a body corporate;
– a share block company;
– a non-profit company that had been formed solely for the purpose of managing
the collective interests common to all its members;

479
A Student’s Approach to Taxation in South Africa 11.4

– a less than 5% interest in a social or consumer co-operative or co-operative

burial society;
– any friendly society;
– a less than 5% interest in a primary savings co-operative bank or primary sav-
ings and loans co-operative bank; or
– a venture capital company;
– any company, co-operative or close corporation in the process of liquidation, wind-
ing up or deregistration; or
– any company, close corporation or co-operative that has not during any year of
assessment:
* carried on any trade; and
* owned assets with a total market value of more than R5 000;
• such a company is not a personal service provider as defined in the Fourth Sched-
ule (refer to 11.4.2); and
• not more than 20% of all the receipts and accruals (other than those of a capital
nature) and all the capital gains of the company, close corporation or co-operative
consist collectively of investment income and income from the rendering of a per-
sonal service.
‘Investment income’ is passive income and is defined as:
• any income in the form of dividends, foreign dividends, royalties, rental derived in
respect of immovable property, annuities or income of a similar nature;
• any interest as contemplated in section 24J (interest earned on instruments other
than interest received by or accrued to an co-operative bank), an amount con-
templated in section 24K (interest on interest rate agreements) and any other income
which is in terms of the Acts of the Republic administered by the Commissioner sub-
ject to the same treatment as income from money lent; and
• any proceeds derived from investment or trading in financial instruments (includ-
ing futures, options and other derivatives), marketable securities or immovable
property.
‘Personal service’ means any service in the field of accounting, actuarial science,
architecture, auctioneering, auditing, broadcasting, consulting, draftsmanship, educa-
tion, engineering, financial services broking, health, information technology, journa-
lism, law, management, real estate broking, research, sport, surveying, translation,
valuation or veterinary science, if:
• that service is performed personally by a person who holds an interest in that
company, co-operative or close corporation or by a connected person in relation to
a person holding such an interest; and
• that company, co-operative or close corporation throughout the year of assessment
does not employ at least three or more full-time employees who are on a full-time
basis engaged in the business of that entity of rendering that service. These full-
time employees are employees other than an employee who is a shareholder of the

480
11.4 Chapter 11: Taxation of companies and company distributions

company or a member of the co-operative or close corporation, or a connected

person to such a shareholder or member.
Companies that qualify as small business corporations pay tax as follows:
• 0% on taxable income not exceeding R91 250;
• 7% on taxable income exceeding R91 250, but not exceeding R365 000;
• R19 163 plus 21% of taxable income exceeding R365 000, but not exceeding
R550 000; and
• R58 013 plus 27% of taxable income exceeding R550 000.
The tax rate on taxable income exceeding R550 000 for small business corporations
within the highest tax bracket was reduced from 28% to 27% for years of assessment
ending on or after 31 March 2023 (that is to say where the year of assessment of the
small business corporation commences on or after 1 April 2022). The rate of 27% is
used for purposes of this book unless the year of assessment in an example or ques-
tion indicates otherwise.Dividends paid by a company that is a small business corpo-
ration is still subject to dividends tax (refer to 11.9).
Section 12E provides a special dispensation for small business corporations to claim
accelerated capital allowances in respect of qualifying moveable assets (refer to
chapter 9).

REMEMBER

• Only close corporations, co-operatives, private companies and personal liability com-
panies may qualify as small business corporations. It is important to note that when it
must be determined for these purposes whether the company is a private or personal li-
ability company, reference is made to the Companies Act only and not to the require-
ments as set out in the Act.

Example 11.3
ABC (Pty) Ltd, a small business corporation in terms of section 12E of the Act, supplies
goods that it manufactures to private institutions. The Commissioner has approved the
company’s manufacturing process as a ‘process of manufacture’. The following repre-
sents a summary of income and expenditure for the current year of assessment ended
31 May:
R
Gross income for goods supplied 4 000 000
Interest income 800 000
Purchase of machine for manufacturing process (brought into use immediately
and for the first time by ABC (Pty) Ltd) 300 000
Office equipment purchased and brought into use immediately 6 000 000
You are required to calculate the normal tax due by ABC (Pty) Ltd in respect of the current
year ended 31 May 2023. The taxpayer prefers the most preferential capital allowance.

481
A Student’s Approach to Taxation in South Africa 11.4

Solution 11.3
R
Gross income for goods supplied 4 000 000
Interest income (Note 1) 800 000
Less: Purchase of machine (section 12E(1) – 100% capital allowance) (300 000)
Office equipment purchased and brought into use (Note 2) (3 000 000)
Taxable income 1 500 000

Normal tax due on this:

On R550 000 58 013
Portion exceeding R550 000 ((R1 500 000 - R550 000) × 27%) 256 500
Total normal tax due 314 513

Notes
1. Although investment income in the form of interest income was earned, it only represents
16,67% (R800 000 / R4 800 000 (R4 000 000 + R800 000)) of the total gross income. The
investment income is therefore less than the 20% limit and ABC (Pty) Ltd still quali-
fies as a small business corporation.
2. In terms of Interpretation Note No. 47, office equipment qualifies to be written off
over five years for purposes of section 11(e). Therefore, it would be more beneficial for
the taxpayer to elect section 12E rates, namely R6 000 000 × 50%.

11.4.2 Personal service providers

A ‘personal service provider’ means a company or trust where a service rendered on
behalf of such company or trust to a client of such company or trust is rendered
personally by a person who is a connected person in relation to such company or
trust, and:
• such person would be regarded as an employee of the client if such service was
rendered by such person directly to such client, other than on behalf of such com-
pany or trust;
• where those duties must be performed mainly at the premises of the client, such
person or such company or trust is subject to the control or supervision of the cli-
ent as to the manner in which the duties are performed or are to be performed in
rendering such service; or
• where more than 80% of the income of such company or trust during the year of
assessment, from services rendered, consists of or is likely to consist of amounts
received directly or indirectly from any one client of such company or trust, or any
associated institution in relation to such client,
except where such company or trust, throughout the year of assessment, employs
three or more full-time employees who are on a full-time basis engaged in the busi-
ness of such company or trust of rendering any such service, other than an employee
who is a shareholder of the company or a settlor or beneficiary of the trust or is a
connected person in relation to such person.
(Definition of ‘personal service provider’ in paragraph 1 of the Fourth Schedule.)

482
11.4 Chapter 11: Taxation of companies and company distributions

A company cannot be a small business corporation if it is a personal service provider

(refer to 11.4.1).
A personal service provider company pays tax at a rate of 27% of taxable income. In
the case of a personal service provider that is a trust, the rate is 45%.
The permissible deductions of a personal service provider are limited in terms of
section 23(k) (refer to chapter 7).
A personal service provider that is a company must withhold dividends tax on cash
dividends paid (refer to 11.9).
In terms of the Fourth Schedule, a personal service provider is included in the def-
inition of ‘employee’ and when payments are made to such companies, employees’
tax (at a rate of 27% for a company or 45% for a trust) must be withheld from such
payments. These amounts may then be applied as credit when the income tax liability
of the personal service provider is calculated.

REMEMBER

• A personal service provider can never be classified as a small business corporation –

refer to the specific exclusion in the definition. It is therefore important to first test for
the application of a personal service provider and, should it not be applicable, one must
test whether the relevant company could be classified as a small business corporation.

Example 11.4
XYZ (Pty) Ltd is classified as a personal service provider and for the current year of as-
sessment ended 31 March, the following applies:
R
Gross income for services rendered 6 000 000
Employees’ tax withheld on this (R6 million × 27%) 1 620 000
Remuneration paid to employees 4 030 000
Bad debts 70 000
Other expenses in respect of assets not used wholly and exclusively for trade
purposes. 200 000
You are required to calculate the normal tax due by or to XYZ (Pty) Ltd, in respect of the
current year of assessment.

483
A Student’s Approach to Taxation in South Africa 11.4–11.6

Solution 11.4
R
Gross income for services rendered 6 000 000
Less: Remuneration paid to employees (4 030 000)
Bad debts
(no other expenses are deductible in terms of section 23(k)) (70 000)
Taxable income 1 900 000
Normal tax due on this (R1 900 000 × 27%) 513 000
Less: Employees’ tax paid by XYZ (Pty) Ltd (1 620 000)
Refund owed to XYZ (Pty) Ltd by SARS (1 107 000)

11.5 Non-resident companies

For a company that is not a ‘resident’ and therefore a ‘foreign company’ as defined in
section 1, the following points are applicable:
• its taxable income only includes income from a South African source;
• it will pay normal tax at a rate of 27% of taxable income (taxable income obtained
from gold mining or long-term insurance business excluded); and
• these companies are not subject to dividends tax referred to in 11.9, except if a cash
dividend is paid in respect of a share listed on a South African exchange, for ex-
ample the JSE and the 4AX and A2X Markets (refer to 11.9.1). There is therefore no
additional tax cost when such companies allocate profits to their head offices
abroad.
A company is regarded as a resident if the company was incorporated, established or
formed in the Republic or has its place of effective management in the Republic.
Although a company could fulfil this definition, it is deemed not to be a resident if,
by means of the application of a double taxation agreement (DTA), it is deemed to be
a resident of another country.

REMEMBER

• When a resident company becomes a non-resident company, all assets (with certain
exceptions) are deemed to have been disposed of by the company at market value on
the day immediately before the company becomes a non-resident.

11.6 Collection of tax due by a company

(Fourth Schedule of the Act)
A company itself cannot be responsible for the completion of tax returns and pay-
ment of tax, therefore a representative taxpayer is appointed. For a company, this
person is its public officer and the public officer is responsible for duly completing
and submitting all returns and paying tax on time.

484
11.6 Chapter 11: Taxation of companies and company distributions

In terms of paragraph 1 of the Fourth Schedule, a company is included in the defi-

nition of ‘provisional taxpayer’ and is therefore obliged to register as such. The com-
pany is obliged to make a first, second and/or third provisional tax payment.
Besides the provisional tax payments made by a company, a company may some-
times also be liable for employees’ tax. The reference to employees’ tax in this context is
not the tax that a company withholds when it pays remuneration to its employees,
because the company then only acts as an agent and any amount withheld is paid over
to SARS. The employees’ tax referred to here is when persons, who make payments to
the company, withhold employees’ tax at a rate of 28% of such payments. This usually
applies to companies classified as ‘personal service providers’ (refer to 11.5.2). This
employees’ tax is therefore a tax that the company prepays on its income received, and
is deductible from the calculation of any provisional tax or assessed tax due.
The first provisional tax payment usually represents half of the tax on the basic
amount. The basic amount is the most recent taxable income (excluding any taxable
capital gain) that was assessed by SARS not less than 14 days before the date on
which the provisional tax estimate is submitted to SARS. If the most recent assess-
ment relates to a year of assessment that ended more than 18 months before the date
on which the provisional tax estimate is due, then the basic amount is increased by
8% a year. The provisional tax payment must be made within the period ending six
months after the beginning of the year of assessment and may be reduced by any
employees’ tax paid during that period (for example, where the company is a person-
al service provider, as defined (refer to 11.5.2)) and any foreign tax rebate claimable
under section 6quat of the Act.
The second provisional tax payment is the difference between:
• the total amount of tax due on the minimum amount (refer below); and
• the first provisional payment, any 6quat foreign tax rebate claimable plus any
employees’ tax paid for the year.

Minimum amount
Taxpayers are divided into two groups when determining the minimum amount:
• taxpayers with taxable income of R1 million or less for the current year of assess-
ment; and
• taxpayers with taxable income of more than R1 million for the current year of
assessment.

Taxpayers with taxable income of R1 million or less

For taxpayers with taxable income R1 million or less for the current year of assess-
ment, an estimate does not attract an underestimation penalty where it is equal or
more than the lesser of:
• the basic amount (that is to say the taxable income excluding any taxable capital
gain) as assessed by SARS for the latest preceding year of assessment and for
which a notice of assessment has been issued not less than 14 days before the date
of submission of the provisional tax estimate; or
• 90% of the actual taxable income for the year of assessment.

485
A Student’s Approach to Taxation in South Africa 11.6

Where the estimate for the second provisional tax payment is less than 90% of the
actual taxable income and also less than the basic amount, SARS will raise an auto-
matic underestimation penalty of 20% on the shortfall in normal tax.

Taxpayers with taxable income of more than R1 million

The second provisional tax payment must be based on an estimate of the taxpayer’s
taxable income for the year of assessment. Where this estimated amount is less than
80% of the actual assessed taxable income, an underestimation penalty is raised by
SARS of 20% on the shortfall in normal tax.
The second provisional tax payment is payable before or on the last day of the year of
assessment. If the company failed to submit an estimate for the second provisional tax
period, it is regarded for the purpose of calculating this penalty that an estimate of
zero had been submitted and the penalty is calculated accordingly.
When the provisional payments are incorrect or not paid on time, fines and interest
are sometimes payable (refer to chapter 12).
The third provisional tax payment is not compulsory, but a taxpayer may elect to
make an additional payment and thereby escape interest on any unpaid amount. If
the taxable income of a company exceeds R20 000, interest is leviable from the effec-
tive date up to the date when the final tax payment is made (section 89quat(2)(a)). For
a company with a February year end, the effective date is 30 September of that year.
For any other company, the effective date is six months after the last day of the year
of assessment. Interest is levied at the prescribed rate applicable for the period (refer
to Appendix E).
At the end of the year of assessment, the normal tax calculation for the year is pre-
pared and the information is declared on the ITR14 return. SARS processes the in-
come tax return and sends the company an income tax assessment. The normal tax
due in respect of the normal tax calculation for the year is provided on this assess-
ment. The tax payments that have already been made for the year (which include the
first, second and third provisional tax payments as well as any employees’ tax, if
applicable) are deducted from the calculated assessed tax. The difference represents
an additional amount that must be paid to SARS or an amount that is owed to the
taxpayer by SARS as a refund.

Example 11.5
The year of assessment of Casa Mia CC, a personal service provider as defined, ends on
30 June. The company’s tax assessment in respect of the 2021 year of assessment was
issued on 15 July 2022 and reflects taxable income of R102 593. Included in this taxable
income is a taxable capital gain of R10 000.
The company’s income tax assessment in respect of the 2022 year of assessment, which
indicates a taxable income of R80 000, was issued in the current year of assessment on 20
January 2023.
During the 2023 year of assessment, employees’ tax of R25 000 (R10 000 up to and
including 31 December) was withheld on payments received from other persons.

continued

486
11.6–11.7 Chapter 11: Taxation of companies and company distributions

On 31 July 2023, Casa Mia CC’s financial director prepared the tax calculation for the
2023 year of assessment which indicated a taxable income of R200 000. Included in this
taxable income is a taxable capital gain of R20 000.
You are required to calculate the provisional tax payments made by Casa Mia CC in
respect of the 2023 year of assessment. You may assume that all payments were correct
and were made on time, and that Casa Mia CC paid no interest.

Solution 11.5
R
First provisional tax payment – 31 December 2022
Basic amount (R102 593 – R10 000 (taxable capital gain)) 92 593
Normal tax on this (R92 593 × 27%) (Note 1) 25 000
Half applicable to first provisional tax payment (R25 000 × 50%) 12 500
Less: Employees’ tax paid (up to 31 December) (10 000)
First provisional tax payment 2 500
Second provisional tax payment – 30 June 2023
Basic amount 80 000
Tax on this (R80 000 × 27%) 21 600
Less: First provisional tax payment (2 500)
Less: Total employees’ tax (25 000)
(5 900)

Second provisional tax payment (Note 2) nil

Third provisional tax payment – 31 December 2023
Actual taxable income (including taxable capital gain) 200 000
Tax on this (R200 000 × 27%) 54 000
Less: First provisional tax payment (2 500)
Less: Second provisional tax payment nil
Less: Total employees’ tax (25 000)
Third provisional tax payment 26 500

Notes
1. Casa Mia CC is a personal service provider and therefore pays tax at 27%.
2. Although the calculation result in a negative answer, there will not be a refund from
SARS and the second provisional tax payment is taken as Rnil only.
3. If the actual third provisional tax payment only amounted to R20 000, the difference of
R6 500 (R26 500 – R20 000) would have been payable on assessment. If the date of the
assessment was after 31 December 2023, interest on the R6 500 would have been calcu-
lated at the prescribed rate from 1 January 2024 up to the date of the assessment.

11.7 Classification of companies

In terms of section 38 of the Act, companies are classified for tax purposes as private
or public companies. This classification differs from the classification in terms of the
Companies Act. It is important to know whether a company is a public or private

487
A Student’s Approach to Taxation in South Africa 11.7–11.9

company, since donations made by a public company are exempt from the payment
of donations tax. Donations made by a private company are subject to the donations
tax provisions.
In terms of section 38, the Commissioner must, upon the request of a company,
inform that company whether it is recognised as a public or private company. In
terms of section 39, the Commissioner may re-determine the classification if circum-
stances change. The re-determination of a company’s status cannot be retroactive, but
must apply from a future date as determined by the Commissioner.
When a close corporation is converted to a company in terms of the Companies Act,
such a company is, for the purposes of the Act, deemed to be and to have been one
and the same company. An assessed loss may therefore be carried over from the close
corporation to the company, assets retain their tax values, tax allowances are carried
over and the year of assessment for tax purposes is the same.

11.8 Tax implications of company distributions

A company distributes its profits by means of dividends to its shareholders (owners).
The distribution of dividends to shareholders may result in an obligation for the
company to withhold dividends tax, on behalf of shareholders, on any cash divi-
dends paid or an obligation to pay dividends tax in respect of the distribution of a
dividend in specie. The payment of a dividend is not deductible for tax purposes by a
company, since it is not an expense in the production of income, but merely repre-
sents a distribution of profits to shareholders.

REMEMBER

• The definition of a company includes a close corporation and therefore distributions of

profits to members of a close corporation also constitute a dividend as defined.

11.9 Dividends tax (sections 1 and 64D to 64N)

Secondary Tax on Companies (STC) was replaced by dividends tax on 1 April 2012,
also referred to as the effective date. Dividends tax is levied at a rate of 20% on the
dividends paid by a company. The provisions that specifically deal with dividends
tax are contained within sections 64D to 64N of the Act.

11.9.1 Definition of a dividend (sections 1 and 64D)

A ‘dividend’ is defined in section 1 of the Act and it means any amount, other than a
distribution of an asset in specie declared and paid as contemplated in section 31(3),
transferred or applied by a company that is a resident for the benefit or on behalf of
any person in respect of any share in that company, whether that amount is trans-
ferred or applied:
• by way of a distribution made by that company; or
• as consideration for the acquisition of any share in that company (for example a
share buyback by a company).

488
11.9 Chapter 11: Taxation of companies and company distributions

The following do not constitute a dividend as defined:

• the repayment of contributed tax capital (‘CTC’) (refer to 11.9.2);
• the distribution of shares in the company (such as capitalisation shares); or
• the acquisition by a company of its own securities by way of a general repurchase
in terms of the JSE listings requirements or the listings requirements of any other
exchange licenced under the Financial Markets Act that are substantially similar to
the JSE listings requirements.
A dividend is defined in section 64D for the purposes of dividends tax as any divi-
dend or foreign dividend (refer to chapter 6) as defined in section 1, including any
amount contemplated in section 31(3)(i) that is paid by either:
• a resident company; or
• a foreign company if the share in respect of which that foreign dividend is paid is a
listed share (that is a share listed on a South African exchange such as the JSE) and
to the extent that that foreign dividend does not consists of a distribution of an as-
set in specie (definition of ‘dividend’ – section 64D), that is to say a cash dividend.

REMEMBER

• The term ‘amount’ includes money as well as the value of every property earned by the
taxpayer, whether corporeal or incorporeal, which has a monetary value (Lategan v
CIR). Therefore a dividend includes money, as well as a dividend in specie, which is a
distribution of assets to a holder of shares.
• A share means, in relation to a company, a unit into which the proprietary interest in
that company is divided.
• A dividend refers to amounts transferrred or applied ‘in respect of’ a share. Therefore, it
does not matter if the amount is paid to a person who is not the owner of the share. A
dividend is an amount transferred or applied because of the particular shareholding.
Dividends do not include an amount transferred or applied for purposes other than in
respect of a share, for example, for services rendered by a shareholder to the company.
• The transfer pricing provisions in section 31 of the Act aim to ensure that resident and
non-resident connected persons transact on an arm’s length basis where the relevant
transaction results in a ‘tax benefit’ (that is to say the reduction, avoidance or post-
ponement of tax) for a party to such a transaction. Failure to transact on an arm’s length
basis firstly triggers a primary adjustment under section 31(2) whereby the taxable in-
come of each party obtaining a tax benefit must be determined as if the transaction had
been entered into at arm’s length terms and conditions. In addition, the secondary ad-
justment under section 31(3)(i) provides that such a primary adjustment to taxable in-
come must be treated as a deemed dividend in specie declared and paid by the resident
if that person is a company. Alternatively, section 31(3)(ii) regards the primary adjust-
ment as a deemed donation for donations tax purposes made by the resident if that per-
son is not a company.
• For purposes of section 1, the concept ‘dividend’ specifically excludes a dividend in
specie resulting from a secondary transfer pricing adjustment in terms of section 31(3)(i).
Nevertheless, such a dividend in specie falls within the ambit of a dividend as defined in
section 64D which therefore attracts dividends tax at a rate of 20%. This exclusion aims
to block any tax treaty relief (such as a reduction in the rate of dividends tax) that
would otherwise have applied in respect of such a dividend in specie.

489
A Student’s Approach to Taxation in South Africa 11.9

11.9.2 Definition of contributed tax capital (section 1)

The definition of a ‘dividend’ (refer to 11.9.1) specifically excludes any amount trans-
ferred or applied for the benefit or on behalf of a person to the extent that the amount
so transferred or applied results in a reduction of contributed tax capital. ‘Contribut-
ed tax capital’ is defined in section 1.
In essence it refers to the contributions that are received by or accrue to a company as
consideration for the issue of shares in the company as well as consideration received
or accrued for the conversion of shares. The consideration can include cash, assets or
services rendered to the company. Contributed tax capital is calculated separately for
every class of shares issued by a company.

How to calculate contributed tax capital for a class of shares

Step 1: Add stated capital or share capital and share premium immediately
before 1 January 2011.

Step 2: Subtract the amount included in stated capital or share capital and
share premium that would be classified as a dividend (that is to say
capitalised profits) as per the previous dividend definition (the divi-
dend definition before 1 January 2011).
(Note: For a foreign company that became a resident on or after
1 January 2011 the market value of all the shares in a class
immediately before the date that the company became a resident is the
starting point of your calculation (that is to say Step 1 and Step 2).

Step 3: Add any consideration received by or accrued to the company for the
issue or conversion of shares (including cash, assets, loan reduction or
services received).

Step 4: Subtract any amount transferred from contributed tax capital for the
benefit of shareholders on or after 1 January 2011. The directors of the
company must have determined that the amount was transferred from
contributed tax capital. The transfer of contributed tax capital must be
proportionate in relation to the shares held in that class.

Step 5: Subtract so much of the contributed tax capital that is attributable to

shares which have been converted to another class of shares. This
figure is calculated as the balance of contributed tax capital imme-
diately prior to that conversion multiplied with the ratio that the
number of shares converted bears to the total number of shares in that
class immediately prior to that conversion.

490
11.9 Chapter 11: Taxation of companies and company distributions

PLEASE NOTE

With effect from 1 January 2023, an amount is only allowed as a transfer from contributed
tax capital if all shareholders in the relevant class of shares participate in the transfer in the
same manner and are allocated an amount of contributed tax capital based on their
proportional shareholding in that class of shares. Hence, if a company makes a
distribution to only one of the shareholders in a particular class of shares, that distribution
cannot be funded from contributed tax capital and would therefore constitute a dividend
that may have dividends tax implications.
This requirement is not applicable to the acquisition by a company of its own securities by
way of a general repurchase in terms of the JSE listings requirements or the listings
requirements of any other exchange licenced under the Financial Markets Act that are
substantially similar to the JSE listings requirements.

If contributed tax capital is transferred to shareholders, the income tax consequences

for the shareholder, particularly paragraph 76B of the Eighth Schedule, must be
considered. The income tax consequences for the shareholder in respect of the trans-
fer of contributed tax capital would depend on whether the shares are held as trading
stock or as capital assets.

Example 11.6
On 28 February 2023, Omni Ltd made a cash distribution to all Class A ordinary
shareholders in accordance with their proportionate shareholding in the Class A ordinary
shares of the company. Shareholder A has a 40% interest in the Class A ordinary shares of
Omni Ltd and is paid a distribution of R150 000. The directors of Omni Ltd issued a
resolution stipulating that the distribution to the Class A ordinary shareholders is made
from contributed tax capital. Omni Ltd issued 100 000 Class A ordinary shares at R1 each
on 1 March 2021 and has a Class A share premium of R50 000. No prior distribution has
been made from contributed tax capital.
You are required to determine the amount of the distribution to Shareholder A that
represents a dividend as defined. You can assume that Shareholder A holds the shares in
Omni Ltd as capital assets.

491
A Student’s Approach to Taxation in South Africa 11.9

Solution 11.6
The amount transferred to Shareholder A may be funded proportionally from the
contributed tax capital attributable to the Class A ordinary shares based on Shareholder
A’s interest in the Class A ordinary shares.
The contributed tax capital attributable to the Class A ordinary shares immediately before
the distribution on 28 February 2023 is determined as follows:
R
Consideration received by or accrued to Omni Ltd for issuing the Class A
ordinary shares (100 000 x R1) 100 000
Class A ordinary share premium 50 000
Less: amount transferred from contributed tax capital to Class A ordinary
shareholders on or after 1 January 2011. Rnil
Balance of contributed tax capital attributable to Class A ordinary shares 150 000

An amount transferred from contributed tax capital is excluded from the definition of a
dividend. Any reduction in contributed tax capital is determined pro rata for all
shareholders in the relevant class based on the number of shares held in that class.
R
Distribution paid to Shareholder A 150 000
Less: Shareholder A’s portion of contributed tax capital (R150 000 × 40%) (60 000)
Distribution that represents a dividend for Shareholder A 90 000

Since the shares in Omni Ltd is held as capital assets, the distribution received as
contributed tax capital would reduce the base cost of the Omni Ltd shares in the hands
of Shareholder A in terms of paragrpah 76B of the Eighth Schdule.

Where shares are issued by one company to another company, the provisions of
section 8G can apply. Section 8G seeks to combat schemes whereby South African
subsidiaries artificially increase their contributed tax capital, which is then applied to
fund capital distributions to their foreign shareholders. Targeted transactions typically
involve the issue of shares by a resident company to a non-resident shareholder com-
pany in exchange for consideration consisting of shares in another resident company
(the ‘target company’). This often creates a permanent loss to the fiscus since distribu-
tions from contributed tax capital do not constitute a ‘dividend’ and won’t result in
any dividends tax liability. Moreover, there are no capital gains tax consequences for
the foreign shareholder on the disposal of its shares in the target company if those
shares fall outside the South African CGT net (refer to chapter 10). In order to address
this tax loophole, section 8G limits the contributed tax capital in the hands of the
issuing company in such transactions.

492
11.9 Chapter 11: Taxation of companies and company distributions

REMEMBER
• A distribution of an amount classified as contributed tax capital will not result in
dividends tax.
• Should a company have different classes of shares, the contributed tax capital must be
calculated separately for each class of shares.
• The repurchase by a company of its own shares can result in a dividend to the extent
that it does not represent a reduction of contributed tax capital.

Example 11.7
Adi Ltd made the following distributions
31 May 2022: General repurchase of shares, in compliance with the listings requirements
of the JSE to the amount of R50 000. The repurchase was entirely funded by a share
premium (contributed tax capital) per the directors’ resolutions.
15 June 2022: R2,50 distribution per share. The company has 750 000 shares issued. R1 of
the distribution represent a reduction in contributed tax capital.
20 July 2022: Gratutious distribution to a trust in respect of its shareholding in the
company to the amount of R50 000.
30 September 2022: Distribution of trading stock with a market value of R30 000 to a
shareholder. The cost price of the trading stock was R20 000.
30 November 2022: Payment to Thabo Ndou, a shareholder to the amount of R15 000 for
services rendered to the company.
You are required to determine whether the distributions are a dividend as defined.

Solution 11.7
31 May 2022
The general repurchase of shares in terms of the JSE listings requirements are specifically
excluded from the definition of a dividend. The payment is made from contributed tax
capital which is also excluded from the definition of a dividend.
15 June 2022
A total amount of R1 875 000 (R2,50 × 750 000 shares) was distributed to shareholders
(any person holding a share in Adi Ltd). R750 000 (R1 × 750 000 shares) of the amount
represents contributed tax capital, which is excluded from the definition of a dividend.
The amount distributed to shareholders of R1 125 000 out of profits represents an amount
transferred for the benefit of shareholders of the company in respect of shares they held
in the company. As such it represents a dividend.

continued

493
A Student’s Approach to Taxation in South Africa 11.9

20 July 2022
The distribution to the trust of R50 000 is in respect of the trust’s shareholding in the
company. The amount represents a dividend.
30 September 2022
A dividend is any amount transferred or applied by a company in respect of any share
in that company. An amount can be in cash or otherwise (Lategan). The distribution of
trading stock thus represents an amount distributed to shareholders other than cash,
namely a dividend in specie of R30 000, being the market value of the trading stock.
30 November 2022
The amount paid to Thabo Ndou is for services rendered. Even though he is a share-
holder, it should be noted that the amount was distributed not in respect of any share in
the company. The amount of R15 000 is therefore not a dividend.

Example 11.8
Vuzi (Pty) Ltd is a South African resident company. All of Vuzi (Pty) Ltd’s shareholders
are natural persons. There has not been a movement in the equity of the company since
the effective date. Equity consists of:
R
Ordinary shares 280 000
Share premium 60 000
Retained profits 150 000
490 000
Peter Janse received 500 shares in exchange for services rendered. The value of the ser-
vices rendered amounted to R80 000.
You are required to calculate the value of contributed tax capital after the above-men-
tioned transaction.

Solution 11.8
Calculation of contributed tax capital:
R
Ordinary shares 280 000
Share premium 60 000
Services rendered 80 000
Contributed tax capital 420 000

494
11.9 Chapter 11: Taxation of companies and company distributions

11.9.3 Levying of dividends tax on a dividend paid in cash

(sections 64E and 64EA)
Dividends tax of 20% is imposed on the amount of any dividend paid by a resident
company (other than a headquarter company) or a cash dividend paid by a foreign
company listed on a South African exchange if the beneficial owner of the dividend
is not exempt from dividends tax. The beneficial owner is the person entitled to the
benefit of the dividend attached to a share.
The liability for dividends tax falls on the beneficial owner in the case of a cash divi-
dend. The company must withhold the dividends tax on behalf of the beneficial
owner and the net amount (dividend declared less 20% dividends tax) will be paid to
the beneficial owner. The dividends tax withheld must be paid over to SARS by the
company, on behalf of the beneficial owner.
The date that the liability for dividends tax is triggered will not necessarily coincide
with the date that the dividend is declared. Dividends tax, in the case of a cash divi-
dend, is triggered:
• for a listed company, when the dividend is paid; and
• for an unlisted company, the earlier of the date on which the dividend is paid or
becomes due and payable.

11.9.4 Levying of dividends tax on a dividend in specie

(sections 64E and 64EA)
In terms of a distribution in specie (distribution that does not represent cash) the
distributing company is liable to pay the dividends tax, not the beneficial owner. A
dividend in specie is deemed to have been paid on the earlier of the date on which the
dividend is paid or becomes due and payable. The amount of a dividend in specie is:
• for the distribution of a listed financial instrument, the ruling price of the financial
instrument on the stock exchange at close of business on the last business day be-
fore the date that the dividend is deemed to have been paid; otherwise
• the market value of the asset on the date that the dividend is deemed to have been
paid (section 64E(3)).
The withholding mechanism is not applicable to a dividend in specie. Due to its na-
ture, there is no cash that can be withheld and the company is liable for the dividends
tax resulting from such distributions (section 64EA).

Example 11.9
Encor Ltd, a resident company listed on the JSE declares a cash dividend on 1 June. The
last day to register for the dividend is 15 June when the dividend becomes due and
payable. The date of payment is 1 July.
You are required to state when the dividends are deemed to be paid for dividends tax
purposes (that is to say when the liability for dividends tax will be triggered).

495
A Student’s Approach to Taxation in South Africa 11.9

Solution 11.9
As the company is a listed company, the dividend is deemed to be paid on the date that it
is actually paid, namely 1 July.

Note
If the company had declared a dividend in specie, the dividend would have been deemed
to have been paid on the earlier of when it became due and payable or when it was
actually paid. The dividends tax liability would therefore have been triggered on 15 June.

Example 11.10
A dividend amounting to R250 000, was paid by a resident company to holders of shares
who are not exempt from dividends tax.
You are required to calculate the dividends tax to be paid over to SARS as well as the
amount of dividends that the holders of shares will receive.

Solution 11.10
The dividends tax liability will amount to R50 000 (R250 000 × 20%). The beneficial
owners will receive a dividend of R200 000, and R50 000 dividends tax will be paid over
to SARS by the resident company on behalf of the beneficial owners. For normal tax
purposes, the beneficial owners must include the gross dividend (instead of the amount
net of dividends tax that was actually received) in their gross income.

REMEMBER
• Dividends tax is a separate tax from normal tax and will be charged regardless of
whether or not the individual is in an assessed loss position for normal tax purposes.
• A dividend in specie is a distribution of a dividend other than cash. A resident company
paying a dividend in specie will be liable for dividends tax on the distribution, not the
beneficial owner, as in the case of a cash dividend.

Example 11.11
ZNM Ltd is a resident listed company. The company declared a distribution of shares in
their subsidiary company, NIK Ltd (also a listed company), to its shareholders (all natural
persons). The ruling price of the NIK Ltd shares on the relevant stock exchange at close of
business on the last business day before the day that the distribution was approved by the
directors amounted to R17 per share. The ruling price of the NIK Ltd shares at close of
business on the day that the distribution was approved by the directors, was R15 per
share. A total number of 100 000 shares in NIK Ltd were distributed by ZNM Ltd.
The directors of ZNM Ltd determined that the NIK Ltd shares were to be transferred to
its shareholders on the date that the distribution was approved by the directors. The
actual transfer of the shares only took place after the date that the distribution was
approved when the ruling price of the shares was R20 per share.
You are required to calculate the dividends tax liability of the distribution in specie.

496
11.9 Chapter 11: Taxation of companies and company distributions

Solution 11.11
Since the distribution constitutes a dividend in specie, dividends tax has to be levied at
20% on the earlier of the date that the dividend is paid (that is the date that the shares are
actually transferred) or the date that the dividend becomes due and payable (that is the
date that the distribution was approved by the directors). In the present scenario, the
dividends are therefore deemed to be paid on the date that the distribution was approved
by the directors.
The assets in this case are financial instruments listed on a stock exchange (that is the
listed shares in NIK Ltd). The amount of the dividend is thus R17 per share (this is the
ruling price of the NIK Ltd shares at close of business on the last business day before the
date that the dividend is deemed to be paid) × 100 000 = R1 700 000. The dividends tax
liability will be R340 000 (R1 700 000 × 20%).

Note
Should NIK Ltd have been an unlisted company, the value of the dividend in specie would
have been the market value on the day that the distribution was approved by the
directors (that is to say when it became due and payable).

How will the answer differ if NIK Ltd was an unlisted company?

11.9.5 Dividends tax for foreign companies

(sections 64E and 64EA)
Dividends paid by foreign companies do not attract dividends tax, unless it iscash
dividends paid in respect of shares listed on a South African exchange, for example
JSE listed shares. A dividend in specie paid by a foreign company will not attract
dividends tax, because such a distribution is specifically excluded from the definition
of a ‘dividend’ for dividends tax purposes in terms of section 64D.

11.9.6 Exemptions from dividends tax (section 64F)

Any dividend other than a dividend in specie paid by a resident company or a cash
dividend paid by a foreign company listed on a South African exchange is exempt
from dividends tax, if the beneficial owner of the dividend is one of the following
persons (section 64F):
• a South African resident company (including a close corporation);
• a natural person or a deceased or an insolvent estate of that person where divi-
dends are paid in respect of a tax free investment (section 12T);
• the Government of South Africa in the national, provincial or local sphere;
• a section 30(3) public benefit organisation (PBO) approved by the Commissioner;
• a section 37A closure environmental rehabilitation trust;
• an institution or board contemplated in section 10(1)(cA);
• a pension fund, pension preservation fund, provident fund, provident preserv-
ation fund, retirement annuity fund, beneficiary fund or benefit fund;

497
A Student’s Approach to Taxation in South Africa 11.9

• the Council for Scientific and Industrial Research, the South African Inventions
Development Corporation or the South African National Roads Agency Limited
and other qualifying entities as referred to in section 10(1)(t);
• a holder of shares in a registered micro business, to the extent that the aggregate
amount of dividends paid during a year of assessment does not exceed R200 000;
• a person who is not a resident if the dividend is paid by a foreign company in
respect of a South African listed share;
• any person to the extent that the dividend constitutes income of that person (for
example, a dividend or foreign dividend that is not exempt from normal tax in
terms of section 10(1)(k)(i) or 10B);
• any person to the extent that the dividend was subject to secondary tax on com-
panies;
• any fidelity or indemnity fund contemplated in section 10(1)(d)(iii); or
• a small business funding entity.

REMEMBER

A company is not automatically exempt from its obligation to withhold dividends tax if
the provisions of section 64F apply. In order to qualify for these exemptions, the person to
whom the payment is made must provide the company with the prescribed declarations
and written undertakings before the dividend is paid (section 64G). This does not apply if
the beneficial owner forms part of the same group of companies (as defined in section 41)
as the company or if the payment is made to a regulated intermediary.

How to calculate dividends tax (dividend other than a dividend paid in

specie)

Step 1: Determine if the amount is a dividend as defined in section 64D for

dividends tax purposes, which includes any amount contemplated in
section 31(3)(i) and foreign dividends paid in cash by a foreign com-
pany listed on a South African exchange. This definition excludes:
• the distribution of shares in the company (for example capitalisa-
tion shares);
• the repayment of contributed tax capital (if applicable); and
• a dividend in specie for foreign companies listed on a South African
exchange such as the JSE.

Step 2: Establish whether the beneficial owner of the dividend is exempt from
dividends tax.

Step 3: Multiply the dividend paid that is not exempt from dividends tax by
20%.

498
11.9 Chapter 11: Taxation of companies and company distributions

Example 11.12
Roderick Ltd, a resident company, declared a dividend as defined in section 64D of
R65 000. The dividend was paid to the following shareholders (that did not form part of
the same group of companies as Roderick Ltd) according to their interest in Roderick Ltd:
• PTS (Pty) Ltd, a resident company with a 25% interest (Note 1);
• DeCo Ltd, a locally listed resident company with a 15% interest (Note 2);
• MacNaught Ltd, an approved PBO with a 20% interest; and
• Mr Joe Rodderick, a resident with a 40% interest.
Notes
1. PTS (Pty) Ltd proceeded to declare the full dividend received from Roderick Ltd to its
shareholders. PTS (Pty) Ltd is a registered micro business, and this is the first dividend
that it has declared for this year of assessment.
2. DeCo Ltd declared the full dividend received from Roderick Ltd to its shareholders,
who are all natural persons.
You are required to calculate the amount of dividends tax that Roderick Ltd, PTS (Pty)
Ltd and DeCo Ltd is required to withhold in respect of each of the dividends paid.

Solution 11.12
Roderick Ltd
• No dividends tax will be withheld on the dividend declared to PTS (Pty) Ltd.
Dividends paid to a resident company are exempt from dividends tax (Note 1).
• No dividends tax will be withheld on the dividends declared to DeCo Ltd. Dividends
paid to a resident company are exempt from dividends tax (Note 1).
• No dividends tax will be withheld on the dividends declared to MacNaught Ltd, as it
is an approved public benefit organisation that is exempt from dividends tax (Note 1).
• Dividends tax of R5 200 (R65 000 × 40% × 20%) will be withheld by Roderick Ltd on
behalf of Mr Joe Roderick.
Note 1
The exemptions from dividends tax in terms of section 64F are not automatic exemptions.
In each of these cases, the person to whom the dividend is paid (for example, resident
companies and approved PBOs) should submit the prescribed declaration and written
undertaking to Roderick Ltd before the dividend is paid. A declaration should be made
by the beneficial owner of the dividend that the dividend is exempt from dividends tax in
terms of section 64F(1). The declaration should be accompanied by a written undertaking
to, going forward, inform Roderick Ltd should the circumstances affecting the exemption
change or should the beneficial owner cease to be the beneficial owner of the dividend.
PTS (Pty) Ltd
The dividend declared to the shareholders of PTS (Pty) Ltd will be exempt from divi-
dends tax, as a holder of a share in a registered micro business is exempt from dividends
tax to the extent that the aggregate dividends paid by that micro business to all holders of
shares do not exceed R200 000 for the year of assessment.
DeCo Ltd
The full dividend paid by DeCo Ltd to its shareholders will be subject to dividends tax of
R1 950 (R65 000 × 15% × 20%).

499
A Student’s Approach to Taxation in South Africa 11.9

REMEMBER

• The beneficial owner is the person who is entitled to the benefit of the dividend attaching
to a share and is not necessarily the registered owner of that share (section 64D).

11.9.7 Exemption from and reduction of dividends tax in respect

of dividends in specie (section 64FA)
If a company declares and pays a dividend in specie (a distribution of an asset), then
that dividend is exempt from dividends tax if:
• the person to whom the payment is made has, before the dividend is paid,
submitted to the company:
– a declaration by the beneficial owner in the form prescribed by the Commis-
sioner stating that, had it not constituted a dividend in specie (refer to 11.9.6), the
distribution would have been exempt from dividends tax in terms of section
64F or a DTA; and
– a written undertaking in the form prescribed by the Commissioner to, going
forward, inform the company in writing should the circumstances affecting the
exemption change, or the beneficial owner of the dividend cease to be the
benefical owner;
• the beneficial owner forms part of the same group of companies, as defined in
section 41, as the company;
• the holder of shares is a natural person and the dividend constitutes the transfer of an
interest in a residence contemplated in paragraph 51A of the Eighth Schedule. Para-
graph 51A of the Eighth Schedule provided for a window period during which an in-
terest in a residence can be transferred out of a company or a trust and qualify for a
base cost rollover that effectively defers the capital gains or losses; or
• a natural person that holds a share in a share block company, as defined in the
Share Blocks Control Act 59 of 1980 paying dividend if the dividend constitutes a
disposal as contemplated in paragraph 67B(2) of the Eighth Schedule.
A distribution of an asset in specie is subject to dividends tax at a reduced rate if the
person to whom the payment is made submits the following to the company before
the dividend is paid:
• a declaration by the beneficial owner in the form prescribed by the Commissioner
stating that the distribution is subject to a reduced rate as a result of the application
of a DTA; and
• a written undertaking in the form prescribed by the Commissioner, to, going
forward, inform the company in writing should the circumstances affecting the
reduced rate change, or if the beneficial owner of the dividend ceases to be a
beneficial owner.
The prescribed declaration and written undertaking that a company is required to
obtain from a person in order to account for dividends tax of Rnil (or at a reduced
rate) is only valid for a period of five years following the date of such declaration or
written undertaking.

500
11.9 Chapter 11: Taxation of companies and company distributions

REMEMBER

• If a taxpayer enters into a transaction in a foreign country, they may experience the
problem of being taxed in both their country of residence and the foreign country. A
DTA is a means through which a taxpayer can obtain relief in the case of double taxation.

How to calculate dividends tax on a dividend paid in specie

Step 1: Establish whether the beneficial owner of the dividend is exempt from
dividends tax in terms of section 64F or a DTA and whether the pre-
scribed declaration and written undertaking have been received from
the person to whom the payment is made, if required.

Step 2: Determine if the amount is a dividend as defined in section 64D for

dividends tax purposes which includes any amount contemplated in
section 31(3)(i) but excludes:
• the distribution of shares in the company;
• the repayment of contributed tax capital (if applicable); and
• a dividend in specie declared by a foreign company regardless of
whether that company is listed on a South African exchange.

Step 3: Determine the amount of the dividend distributed as a dividend in

specie. The market value must be determined on the earlier of the date
that the dividend is paid or becomes due and payable unless it is a
listed financial instrument, then the amount of the dividend must be
determined as the ruling price at close of business on the last business
day before the dividend is deemed to be paid.

Step 4: Multiply the amount of the dividend (step 3) that is not exempt from
dividends tax by 20%.

Example 11.13
• On 1 June 2022, Roderick Ltd, a resident company, distributed unlisted shares with a
market value of R100 000, which it held as an investment, to some of its shareholders.
These shareholders are all resident companies and do not form part of the same group
of companies as Roderick Ltd.
• On 1 July 2022, Roderick Ltd made a further distribution of 1 000 of its own shares
(which has a market value of R5 each) to all of its registered shareholders who are
natural persons.
• On 1 August 2022, the company distributed a laptop with a market value of R7 000 to a
shareholder who is a natural person.

continued

501
A Student’s Approach to Taxation in South Africa 11.9

Note
You can assume that Roderick Ltd has timeously obtained all the prescribed declarations
and written undertakings from the persons to whom the dividends were paid, where
applicable. All dividends were paid on the date of distribution.
You are required to discuss the dividends tax implications that will result from each of
the aforementioned transactions.

Solution 11.13
• The distribution of shares held as investments constitutes a dividend in specie and
Roderick Ltd will be liable for the dividends tax. However, since the beneficial owners
are resident companies that would have been exempt from dividends tax in terms of
section 64F if the dividends did not consist of a dividend in specie and since Roderick
Ltd has obtained the prescribed declarations and written undertakings from the
persons to whom the dividends were paid, the dividends will be exempt from
dividends tax in terms of section 64FA.
• Roderick Ltd is not liable for dividends tax on the distribution of 1 000 of its own
shares as the latter does not constitute a dividend as defined (refer to paragraph (ii) of
the definition of ‘dividend’ in section 1).
• The distribution of a laptop constitutes a dividend in specie and Roderick Ltd will be
liable for the dividends tax. Since the shareholder is a natural person which does not
qualify for any of the exemptions listed in section 64F, the dividend would not be
exempt from dividends tax. The company is therefore liable for dividends tax of
R1 400 (R7 000 × 20%). Since the dividend was paid on 1 August 2022, the dividends
tax must be paid over by Roderick Ltd to SARS on or before 30 September 2022,
namely the last day of the month following the month during which the dividend was
paid by the company.
The distribution of the laptop will trigger a recoupment for Roderick Ltd under sec-
tion 22(8)(b)(iii) if the laptop was held as trading stock or, if the laptop was held as a
capital asset, it will trigger a recoupment under section 8(4)(k). In terms of para-
graph 75 of the Eighth Schedule, Roderick Ltd will be deemed to have disposed of the
laptop at market value on the date that the distribution becomes due and payable,
which could result in a possible capital gain or loss for the company. The shareholder
would further be deemed to have immediately acquired this asset for the same market
value, which will constitute the base cost of the laptop in the shareholder’s hands.

11.9.8 Deemed beneficial owner of a dividend (section 64EB)

The following provisions are anti-avoidance measures where in certain cases the
beneficial owner of the dividend (which is exempt from dividends tax under section
64F) is deemed not to be the beneficial owner of that dividend.
The first provision applies where a beneficial owner that is exempt for purposes of
dividends tax acquires the right to a dividend (including a dividend that has not yet
been declared or accrued) by way of a cession and an amount in respect of that divi-
dend is received by or accrues to that person. The entire amount that is so received or
accrued is deemed to be the dividend of the person who ceded this right. This anti-
avoidance provision is, however, not applicable if the person to whom the right to the
dividend is ceded holds all the rights attaching to that share after the cession (section
64EB(1)).

502
11.9–11.10 Chapter 11: Taxation of companies and company distributions

The second anti-avoidance provision applies if an exempt beneficial owner borrows

from another person or acquires a share in terms of a collateral agreement with another
person. In such a situation, that other person could be deemed as the beneficial owner
of any dividend that is received by or accrues to the exempt beneficial owner in respect
of that share (or any amount determined with reference to a dividend in respect of that
share). Such a deemed dividend will only arise for that other person to the extent that
an amount paid by that exempt beneficial owner, to the other person, does not exceed
the dividend that was so received or accrued in respect of that share (or any amount
determined with reference to a dividend in respect of that share) (section 64EB(2)).
The third anti-avoidance provision applies if an exempt beneficial owner acquires a
listed share or the right in respect of a listed share from another person as part of a
resale agreement between the purchaser (the exempt beneficial owner) of the share
and the seller of the share (or a company forming part of the same group of compa-
nies as the seller). If a dividend in respect of that share is received by or accrues to the
purchaser, that seller (or a company forming part of the same group of companies) is
deemed to be the beneficial owner of that dividend (section 64EB(3)).

Example 11.14
Non-Resident Plc, a non-resident company, owns shares in Rota (Pty) Ltd. Non-Resident
Plc ceded the rights to all future dividends in respect of its shares in Rota (Pty) Ltd to a
resident company, Republico Ltd, in exchange for R90 000. After such cession, Rota (Pty)
Ltd declared and paid a dividend of R100 000 to Republico Ltd. Republico Ltd’s rights in
the shares of Rota (Pty) Ltd is limited to the right to receive dividends in respect of such
shares. The applicable DTA between South Africa and Non-Resident Plc’s country
specifies a 5% dividends tax.
Your are required to calculate the dividends tax effect of the dividend declaration.

Solution 11.14
Non-Resident Plc R
Dividend 100 000
Dividends tax at 5% payable by Non-Resident Plc 5 000

Note
Since Republico Ltd, which is exempt from dividends tax in terms of section 64F,
acquired a right to a dividend by way of cession and then received an amount in respect
of such a dividend, the provisions of section 64EB(1) must be applied. Non-Resident Plc
will therefore be deemed to be the beneficial owner of the dividend amounting to R100
000.

11.10 Withholding of dividends tax (section 64G)

The company that declares and pays a dividend, other than a dividend in specie, must
generally withhold dividends tax at a rate of 20% on the amount of the dividend
declared to the beneficial owner (section 64G(1)).

503
A Student’s Approach to Taxation in South Africa 11.10

The dividends tax must then be paid to SARS by the last day of the month following
the month during which the dividend was deemed to have been paid (section
64K(1)). In addition, a dividends tax return must be submitted to SARS by the same
date that the payment of the dividends tax is due to SARS.
A company must not withhold any dividends tax from the payment of a dividend if
(section 64G(2)):
• the dividend is exempt from dividends tax in terms of section 64F or a DTA and
the person to whom the dividend is paid has submitted the prescribed declaration
and written undertaking to the company before the date that the dividend is paid
(as determined under section 64E(2)(a));
• the beneficial owner is part of the same group of companies as more narrowly
defined in section 41 (refer to 11.2); or
• the payment is made to a regulated intermediary.
A company must withhold dividends tax at a reduced rate if:
• the dividend is subject to dividends tax at a reduced rate as a result of the applica-
tion of a DTA and the person to whom the dividend is paid submitted the pre-
scribed declaration and written undertaking (section 64G(3)).

Example 11.15
Julie Lily is a non-resident shareholder of Timber Ltd, a resident listed company. A
dividend was declared to shareholders by Timber Ltd and Julie Lily received R20 000. She
submitted the prescribed declaration and written undertaking to Timber Ltd that,
according to the DTA, South Africa is limited to withhold dividends tax at 5% on
dividends declared.
You are required to calculate the dividends tax to be withheld.

Solution 11.15
Timber Ltd will be allowed to withhold R1 000 (R20 000 × 5%) dividends tax from the
dividend paid to Julie Lily.

If a company pays a dividend and withholds dividends tax, the company would be
deemed to have paid the amount so withheld to the person who received the divi-
dend. The gross amount of the dividend (that is to say before reducing it with the
dividends tax withheld) must therefore be included in the gross income of the benefi-
cial owner.

504
11.10–11.11 Chapter 11: Taxation of companies and company distributions

REMEMBER
• For a dividend to be exempt from dividends tax or for dividends tax to be withheld at a
reduced rate, the person to whom the dividend is paid must submit the prescribed dec-
laration by the beneficial owner to the company declaring the dividend. The declaration
must be submitted in the form prescribed by the Commissioner before the dividend is
paid. The person receiving the dividend must also submit a written undertaking in the
form prescribed by the Commissioner to, going forward, inform the company in writ-
ing should the circumstances affecting the exemption change or the beneficial owner
cease to be the beneficial owner.
• A declaration and written undertaking are not required when a dividend is paid within
a group of companies contemplated in section 41 or where the dividend is paid to a
regulated intermediary.
• No declarations or written undertakings are required when a dividend is paid within a
group of companies contemplated in section 41 or where the dividend is paid to a regu-
lated intermediary.
• The prescribed declaration and written undertaking that a company is required to
obtain from a person in order to withhold dividends tax of Rnil or at a reduced rate is
only valid if it is not older than five years.

11.11 Refund of dividends tax (sections 64L)

Refunds by companies (section 64L)
Notwithstanding the provisions of the Tax Administration Act 28 of 2011 (the TAA)
in terms of refunds, the person to whom a dividend was paid is entitled to obtain a
refund, if dividends tax was withheld at 20% on dividends declared by a company to
a beneficial owner who is:
• either exempt from dividends tax or subject to dividends tax that must be withheld
at a reduced rate due to a DTA; and
• the prescribed declaration and written undertaking were not submitted to the
company before the dividend was paid.
The prescribed declaration by the beneficial owner stipulating that the dividend is
either exempt from dividends tax or that the dividend is subject to dividends tax at a
reduced rate as well as the written undertaking expressing that the person to whom
the payment is made will, going forward, inform the company in writing should the
circumstances affecting the exemption or reduced rate applicable change or should
the beneficial owner cease to be the beneficial owner, must be submitted to the com-
pany within three years after the date the dividend is paid (as determined under
section 64E(2)(a)).
The company must refund the person to whom the dividend was paid within one
year after the date on which the declaration was submitted or, if the refund exceeds
the dividends tax withheld during the one-year period, a refund must be obtained
from the Commissioner. No refunds can be obtained from the Commissioner after
four years from the date that the dividend is paid.

505
A Student’s Approach to Taxation in South Africa 11.11–11.12

REMEMBER
• A person to whom a dividend was paid is entitled to obtain a refund of dividends tax
withheld should the beneficial owner be exempt from dividends tax or if dividends tax
should have been withheld at a reduced rate and the prescribed declaration and written
undertaking were not timeously submitted. The prescribed declaration and written un-
dertaking must be submitted within three years after the date of paying the dividend in
order to qualify for the refund.

11.12 Payment and recovery of dividends tax (section 64K)

A company or regulated intermediary is responsible to withhold dividends tax from
the payment of a dividend, unless an exemption from dividends tax applies, and to
pay the dividends tax over to SARS. However, the liability for the dividends tax rests
with the beneficial owner. The beneficial owner of the dividend is responsible to pay
the dividends tax in respect of that dividend, unless the amount was paid by another
person (section 64K(1)(a)). Dividends tax must be paid over to the Commissioner by
the last day of the month following the month during which the dividend is paid.
For a dividend in specie, the company is liable for the dividends tax, which is due to
the Commissioner on the last day of the month following the month during which the
dividend was paid by the company (section 64K(1)(b)). The dividends tax payable by
the company must be reduced by an amount refundable in terms of section 64L
(companies) or section 64M (regulated intermediaries) (section 64K(1)(c)).
The person who has paid a dividend is required to submit a return to the Commission-
er no later than the last day of the month following the month during which the
dividend was paid (section 64K(1)(1A)).
Should the person responsible for withholding the dividends tax neglect to do so, or
fail to pay over the dividends tax withheld over to SARS, they are held liable for that
amount, unless another person paid the dividends tax (section 157 of the TAA).
If a cash dividend or a dividend in specie was exempt from dividends tax in terms of
section 64F or 64FA or in terms of the application of a DTA or if a reduced rate of
dividends tax applied in terms of a DTA, the prescribed declaration received in
support of such a dividend being exempt or subject to dividends tax at a reduced rate
must be submitted to the Commissioner in the manner and within the timeframe
prescribed by the Commissioner (section 64K(4)). No late payment penalties apply in
respect of the late payment of dividends tax.
The Commissioner can estimate an unpaid amount of dividends tax and may issue an
assessment for dividends tax outstanding to the person responsible for the dividends
tax (section 95 of the TAA). Interest is levied at the prescribed rate on any dividends
tax outstanding after payment was due (section 187(1) of the TAA).
The withholding agent (person who must withhold an amount of tax and pay it over
to SARS) is held personally liable for tax withheld and not paid or which should have
been withheld and was not (TAA, section 157).

506
11.12–11.13 Chapter 11: Taxation of companies and company distributions

REMEMBER
• The payment of dividends tax to SARS is due on the last day of the month following the
month during which the dividend was deemed to have been paid.
• Should the payment be late, interest is charged at the prescribed rate. No late payment
penalties apply.

11.13 Dividends tax: Summary

In order to calculate the amount on which dividends tax must be paid, a number of
calculations must to be performed. The following method is recommended:

How to calculate dividends tax for local dividends (in cash and in specie) as
well as on foreign dividends (cash only) declared by South African listed
companies

Step 1: Determine if the amount paid as a dividend would be subject to divi-

dends tax (refer to 11.9.4 if the distribution is a dividend in specie). All
dividend distributions made by a resident company are subject to
dividends tax, unless it is a headquarter company. A dividend ex-
cludes contributed tax capital, shares in that company (that is to say
capitalisation shares) and a foreign dividend paid by a company listed
on a South African exchange (such as the JSE) if the distribution is an
asset in specie. Refer to 11.9.2 to calculate contributed tax capital.

Step 2: Examine all the beneficial owners to determine who will be exempt
from dividends tax (refer to 11.9.6 and 11.9.7).

Step 3: Calculate dividends tax on the amount of dividends (after step 2) for
all beneficial owners that are not exempt from dividends tax by multi-
plying the amount of the dividend by 20%.
For a cash dividend only:
The net amount of the dividend remaining after subtracting the divi-
dends tax liability (if applicable) must be paid to the beneficial owner(s),
as the liability for dividends tax falls on the beneficial owner.

Step 4: The company must pay over the dividends tax withheld to SARS by
the last day of the month following the month in which the dividend
is deemed to be paid (refer to 11.10 for the withholding of dividends
tax and 11.12 for payment). The company is responsible to pay the
dividends tax on a dividend in specie, as the liability rests with the
company, on the last day of the month following the month in which
the dividend is deemed to be paid.

Shareholders (who are normally the beneficial owners of the dividends) are also
subject to dividends tax on the dividends paid to them by a company. The company
is responsible for withholding the dividends tax on the dividends paid.

507
A Student’s Approach to Taxation in South Africa 11.13–11.15

Resident natural persons who receive dividend payments will receive an amount net
of dividends tax. The gross amount of the dividend that is received by or accrues to
that person must be included in gross income and declared in the person’s income tax
return (ITR12). Non-resident individuals may qualify for a reduced rate of dividends
tax in terms of the relevant DTA if the requirements are met.

11.14 Summary
In this chapter, the tax principles applicable to companies were examined. It was
found that the calculation of the taxable income for companies does not differ materi-
ally from the calculation of the taxable income for natural persons. Companies
(except small business corporations, personal service providers and foreign branches)
pay tax at a fixed rate and not on a sliding scale.
Companies are liable to withhold a separate tax on the declaration of dividends at a
rate of 20%. Dividends tax is withheld on local cash dividends as well as foreign cash
dividends declared by foreign listed companies. In terms of a dividend in specie
declared by a local company, the company declaring the dividend is responsible to
pay the dividends tax.
The following section contains a number of practical questions that the student may
use to test his knowledge of the taxation of companies.

11.15 Examination preparation

Question 11.1
Transworld Ltd is an unlisted company incorporated in the Republic with a year of assess-
ment that ends on the last day of February of each year. Transworld Ltd only has one class
of shares in issue. A dividend of R500 000 was declared to all shareholders of Transworld
Ltd on 30 June during the current year of assessment. The directors of the company stated
that the distribution represents a reduction in contributed tax capital of R100 000.
Transworld Ltd’s shareholders consists of the following:
• ADM Ltd – a JSE listed resident company (50%) (Note 1)
• Dwayne Barnacle – a South African resident (24%)
• Barnacle Family Trust – (20%). The beneficiaries of the trust have a vested right to
income and consists of Dwayne’s two major children (Mary and John) who share
equally in income accruing to the trust.
EduBooks – (6%), an approved public benefit organisations in terms of section 30 (Note).
Note:
You can assume that all the prescribed declarations and written undertakings are in place.

You are required to:

Calculate the amount of dividends tax that must be withheld by Transworld Ltd on
the dividend declaration of R500 000. Show how the amount of dividends tax due
will be split between the different beneficial owners.

508
11.15 Chapter 11: Taxation of companies and company distributions

Answer 11.1
Amount subject to dividends tax: R
Dividend declared 500 000
Less: Portion contributed tax capital (100 000)
Share capital 75 000
Share premium 25 000
Amount classified as a dividend 400 000
Shareholders
ADM Ltd (Listed resident company – exempt) 50%
Dwanye (Not exempt) 24%
Edubooks (Approved public benefit organisation – exempt) 6%
Barnacle Family Trust (Not exempt) 20%
100%
Dividend tax liability
ADM Ltd
Dividend accrued: (R400 000 × 50%) 200 000
No dividends tax, ADM Ltd is exempt
Dwayne
Dividend accrued (R400 000 × 24%) 96 000
Dividends tax liability (R96 000 × 20%) 19 200
Edubooks
Dividend accrued (R400 000 × 6%) 24 000
No dividends tax, PBO is exempt
Barnicle Family Trust
• Dividend accrued (R400 000 × 20%) 80 000
• Mary (R80 000 / 2) 40 000
• Dividends tax (R40 000 × 20%) 8 000
• John (R80 000 / 2) 40 000
• Dividends tax (R40 000 × 20%) 8 000

Additional questions for this chapter are available electronically

www.myacademic.co.za/books

509
 12 Prepaid taxes
12
Gross Exempt
– – Deductions = Taxable income Tax payable
income income

Tax per Rebates and Net normal Net tax due/

– = – Prepaid taxes =
table tax credits tax payable (refundable)

Page
12.1 Introduction............................................................................................................ 512
12.2 Employees’ tax (paragraphs 1 to 11A) ................................................................ 512
12.3 Calculation of employees’ tax (paragraphs 1 to 11A) ....................................... 513
12.3.1 Employee................................................................................................... 514
12.3.2 Remuneration ........................................................................................... 514
12.3.3 Balance of remuneration ........................................................................ 516
12.3.4 Employees’ tax.......................................................................................... 517
12.3.5 Annual amounts received (including variable
remuneration) (section 7B)...................................................................... 519
12.4 Identifying the correct employees’ tax rate ........................................................ 523
12.4.1 Process for identifying correct rate to use ............................................ 525
12.4.2 Personal service provider ....................................................................... 526
12.4.3 Independent contractor ........................................................................... 527
12.4.4 Labour broker ........................................................................................... 529
12.4.5 Employees’ tax for directors of private companies and
members of close corporations ............................................................... 530
12.4.6 Employees’ tax for directors of public companies............................... 530
12.4.7 Seasonal workers...................................................................................... 531
12.4.8 Awards by the CCMA and the Labour Court ...................................... 531
12.5 Administration of employees’ tax (paragraphs 13 to 15) ................................. 531

511
A Student’s Approach to Taxation in South Africa 12.1–12.2

Page
12.6 Provisional tax (paragraphs 17 to 27) ................................................................. 531
12.6.1 Persons liable for provisional tax ........................................................... 532
12.6.2 First provisional payment ....................................................................... 534
12.6.3 Second provisional payment .................................................................. 539
12.6.4 Third provisional payment ..................................................................... 541
12.6.5 Penalties and interest ............................................................................... 543
12.7 Summary................................................................................................................. 545
12.8 Examination preparation ...................................................................................... 545

12.1 Introduction
There are three main ways that SARS collects the income tax that is due to them: Pay-
as-you-earn (PAYE), provisional tax and tax due on assessment. Both PAYE and
provisional tax are collected during the year and are referred to as prepaid taxes.
PAYE is the tax withheld by an employer from the remuneration that that employer
paid to their employee. Such tax is referred to as employees’ tax and is paid over to
SARS on behalf of the employee. This tax is not an addition to normal income tax. It is
a prepayment of the employee’s income tax due at the end of the year of assessment.
It is therefore merely a method SARS uses to collect the normal income tax due for
that year.
Where a taxpayer is a company or an individual who earns other income, which is
not from employment, such as interest, royalties, rental or income from a trade other
than employment, SARS uses another method to collect the tax that is due to it from
such non-employment income. This other method of collection is called provisional
tax. It is, however, important to realise that provisional tax is also not a new or addi-
tional tax that is being levied. It, again, is only a method of collecting the normal
income tax that is due to SARS for the year of assessment. Employees’ tax is a method
of collecting the tax on remuneration (such as salaries) monthly whereas provisional
tax is a method of collecting the tax on other income on a six-monthly basis. All
companies, but not all individuals, are provisional taxpayers .

12.2 Employees’ tax (paragraphs 1 to 11A)

Note that all references to paragraphs in this section refer to paragraphs in the Fourth
Schedule to the Income Tax Act 58 of 1962 (the Act): Amounts to be deducted or withheld
by employers and provisional payments in respect of normal tax.
Employees’ tax refers to the tax that the employer withholds from what they pay
their employees at the end of each month. The tax is calculated on the annual amount
(equivalent) of the monthly income (balance of remuneration) of each employee. The
annual equivalent is the monthly balance of remuneration converted to an annual
amount. Tax on this annual amount is then calculated in accordance with the pro-
gressive tax tables (Appendix A). The tax that is calculated represents the total
amount of tax to be withheld by the employer for that year. The monthly tax that the
employer must deduct from the employee’s remuneration is calculated by simply

512
12.2–12.3 Chapter 12: Prepaid taxes

dividing the annual tax amount by 12. This monthly amount is withheld by the em-
ployer from the remuneration paid to the employee and is then paid over to SARS on
a monthly basis on behalf of the employee.
The explanation above gives a simplified view of how employees’ tax is calculated.
Depending on how the taxpayer is categorised as an employee, there are different
rules for the calculation of the tax that should be deducted and withheld by the
employer. These rules have been extended to combat specific tax avoidance schemes.
It is therefore important to first identify which category the employee falls into in
order to calculate employees’ tax. Most employees are permanent employees and the
normal tax table would be used.

REMEMBER
• Before employees’ tax can be calculated, there must be an employee/employer relation-
ship. ‘Employee’ and ‘employer’ are defined in the Fourth Schedule.
• Employees’ tax is not different from income tax; it is just a method of collecting the
annual tax that is owed by a taxpayer to SARS.
• The employer withholds employees’ tax on behalf of SARS and acts as an agent for
SARS in this regard.
• Income received on normal investments and other trades, for example interest on a
savings account or rental received, will not be subject to employees’ tax as it is not an
amount received from an employer (that is to say not remuneration).

12.3 Calculation of employees’ tax (paragraphs 1 to 11A)

When a person receives remuneration from their employer, the employer must with-
hold employees’ tax from the remuneration in terms of the Fourth Schedule. The
following steps can be used to calculate the employees’ tax that must be withheld and
paid over to SARS.

Calculating the employees’ tax on the monthly remuneration

Step 1: Determine whether the taxpayer is an employee (refer to 12.3.1).

Step 2: Identify whether the amount received is remuneration (refer to 12.3.2).

Step 3: Calculate the employee’s balance of remuneration (refer to 12.3.3).

Step 4: Calculate the annual equivalent balance of remuneration amount, if

necessary.

Step 5: Calculate the tax on the annual equivalent balance of remuneration

according to the tax table (remember to deduct the rebates and
medical tax credits).

Step 6: Calculate the tax for the period of employment (answer of Step 5 / 12
months, if for one month).

513
A Student’s Approach to Taxation in South Africa 12.3

Employees earning remuneration must pay employees’ tax on the balance of remu-
neration received from an employer. Before the calculation can be done, the require-
ments as set out in the steps above must be complied with. In order to comply with
the requirements, a number of definitions as set out in the Act must be met.

REMEMBER

• The taxpayer’s age at the end of the year of assessment (28/29 February) should be
used in order to determine the amount of the rebates (primary, secondary and tertiary
rebates as well as the medical tax credits (where applicable)) when calculating the tax
due for the year.

12.3.1 Employee
An ‘employee’ is defined in paragraph 1 of the Fourth Schedule as:
• a person (other than a company) who receives remuneration or to whom remuner-
ation accrues;
• a person who receives remuneration or to whom remuneration accrues by reason of
services rendered by such person to or on behalf of a labour broker;
• a labour broker (refer to 12.4.4);
• a person (or class or category of person) whom the Minister of Finance by
notice in the Government Gazette declares to be an employee for the purposes
of this definition; or
• a personal service provider (refer to 12.4.2).

12.3.2 Remuneration
‘Remuneration’ is defined in paragraph 1 of the Fourth Schedule and includes income
received whether in cash or otherwise and whether or not in respect of services
rendered, including:
• salary;
• leave pay;
• wage;
• overtime pay;
• bonus;
• gratuity;
• commission;
• fee;
• emolument;
• pension;
• superannuation allowance;
• retiring allowance;
• stipend;

514
12.3 Chapter 12: Prepaid taxes

• annuity;
• an amount paid that can be linked to services rendered or to be rendered;
• voluntary awards in respect of employment;
• an amount received by or accrued to a labour broker;
• an amount received by or accrued to a personal service provider or personal ser-
vice company or personal service trust;
• restraint of trade payments;
• amount received or accrued in respect of relinquishment, termination, loss, repu-
diation, cancellation or variation of an office or employment or appointment;
• retirement fund lump sum benefits;
• retirement fund lump sum withdrawal benefits;
• lump sum payments from employers;
• payments made in commutation of amounts due under a contract of employment
or service;
• fringe benefits (excluding right of use of motor vehicle);
• the first 80% of gross travel allowance except where the employer is satisfied that
the motor vehicle will be used at least 80% of the time for business purposes, then
the amount included in remuneration is only 20%;
• 50% of the gross allowance paid to a holder of a public office (section 8);
• first 80% of the taxable benefit for the right of use of a motor vehicle (except where
the employer is satisfied that the motor vehicle will be used for business purposes
at least 80% of the time during the current year of assessment, then the amount
included in remuneration will only be 20% of the fringe benefit);
• a reimbursive travel allowance based on actual kilometres travelled, as exceeds the
prescribed rate per kilometre;
• any other allowance;
• any gain on qualifying equity shares of a broad-based employee share plan
referred to in section 8B;
• an amount from equity instruments that is required to be included in taxable
income in terms of section 8C;
• amounts withdrawn by the member from retirements funds in terms of a mainten-
ance order contemplated in section 7(11); and
• certain dividends received after 1 March 2017 relating to section 8C equity shares.
Remuneration excludes:
• payment for services to a person who carries on an independent trade (refer to
12.4.3) other than
– payments made to a person who receives remuneration or to whom remunera-
tion accrues by reason of services rendered by such person to or on behalf of a
labour broker; a labour broker or person (or class or category of person),

515
A Student’s Approach to Taxation in South Africa 12.3

– whom the Minister of Finance by notice in the Gazette declares to be an em-

ployee for the purposes of this definition and a personal service trust and per-
sonal service company);
• state pensions paid to old-age pensioners, blind persons, disabled persons and
grants in terms of the Child Care Act;
• reimbursive payments to employees for business expenses; and
• annuities payable in terms of a divorce order or separation agreement.
Remuneration therefore includes many forms of income from employment and retire-
ment funds in addition to conventional salaries and wages.

REMEMBER
• The current rate per kilometre fixed by the Minister of Finance (for purposes of the
provisions of a reimbursive travel allowance) is R4.18 per kilometre.
• If a person receives a subsistence allowance because they are required to be away from
home for at least one night for business purposes, the allowance will not form part of
remuneration in the month they receive it. If, by the end of the following month they
have not been away from home on business, this amount is deemed to be paid for
services rendered and included in remuneration for that month.

12.3.3 Balance of remuneration

PAYE or employees tax is calculated on the balance of remuneration. The balance of
remuneration is calculated as follows:
Remuneration (as determined in 12.3.2) less:
• contributions made by the employee to a pension or provident fund which the
employer is entitled or required to deduct from that remuneration (limited to the
maximum provided for in section 11F based on the remuneration for the period);
• (at the option of the employer) contributions made by the employee to a retire-
ment annuity fund (limited to the maximum provided for in section 11F based on
the remuneration for the period) for which proof of payment has been furnished
to the employer;
• contributions made by the employer for the benefit of the employee to a retirement
fund (limited to the maximum provided for in section 11F based on the remunera-
tion for the period); and
• donations made by the employer on behalf of the employee to a public benefit
association:
– this deduction may not exceed 5% of the remuneration after deducting all the
above-mentioned amounts; and
– the employer must be issued a section 18A receipt in respect of the donation.

516
12.3 Chapter 12: Prepaid taxes

REMEMBER
• The employer’s contribution to a retirement fund (pension, provident and retirement
annuity fund) is a taxable fringe benefit and it will be a deemed contribuion in the
hands of the employee. Both the employer and employee contributions should therefore
be taken into account in order to calculate the section 11F deduction.

12.3.4 Employees’ tax

Employees’ tax is calculated on the balance of remuneration using the tax tables. As
the tax tables are in respect of annual amounts, the monthly balance of remuneration
should be converted to an annual amount before applying the tables. In practice most
employers simply uses the PAYE monthly tax deduction tables provided by SARS to
lookup the annual equivalent and monthly tax that must be withheld.
The employees’ tax calculated can be reduced by
• rebates (section 6);
• a medical schemes tax credit (section 6A); and
• where the employee is 65 or older on the last day of the year of assessment – an
additional medical expenses tax credit (section 6B);
– if the employer makes the payment; or
– if the employer does not make the payment, the deduction is at the option of
the employer, if proof of payment of the amounts paid is furnished to them.

Example 12.1
Peter Ntho (53 years of age) is employed by Gert Ltd. Peter earns the following from
Gert Ltd: a salary of R9 000 per month, an entertainment allowance of R500 per month
and a travelling allowance of R5 000 per month. He contributes R400 per month to a
retirement annuity fund, which his employer has agreed to take into account when
calculating employees’ tax since he provided proof of payment thereof to his employer.
Peter incurred entertainment expenses amounting to R350 per month during the
current year of assessment. He is not a member of a pension fund.
You are required to calculate the monthly employees’ tax that Gert Ltd must deduct during
the current year of assessment.

517
A Student’s Approach to Taxation in South Africa 12.3

Solution 12.1
Peter is employed by Gert Ltd, therefore he is an employee R
Remuneration:
Salary received 9 000
Entertainment allowance received 500
Travel allowance received (R5 000 × 80%) 4 000
Remuneration 13 500
Less:
Retirement fund contributions (Note) (400)
Entertainment expenses – not deductible (section 23(m)) nil
Balance of remuneration 13 100
Annual equivalent remuneration (R13 100 × 12 months) 157 200
Tax per tax table (R157 200 × 18%) 28 296
Less: Rebate (16 425)
Tax for the year 11 871
Employees’ tax per month (R12 582/ 12 months) 989
Note
The retirement annuity fund contribution is limited to the lesser of
• R350 000 / 12 = R29 167; or
• 27,5% of the higher of remuneration (R13 500) or taxable income (the employer will
not know about other taxable income and therefore the employer will base this deduc-
tion on remuneration only for purposes of calculating employees’ tax) therefore 27,5%
× R13 500 = R3 713; or
• taxable income before this deduction and taxable capital gain (the employer will not
have this information available and therefore this limitation will not be applicable in
calculating employees’ tax).
Therefore, the limitation is R3 713 per month.
The actual contribution is less, therefore the R400 per month can be deducted in full.

1. Why is the full travel allowance not included in the remuneration?

2. Why did the employer not deduct a medical fees tax credit when calcu-
lating the employees’ tax?
3. Why is the employees’ tax calculated on R157 200 when their balance of
remuneration is R13 100 for the month?

518
12.3 Chapter 12: Prepaid taxes

REMEMBER

• The section 11F deduction will be re-calculated on assessment as the ‘taxable income’
limitation can change due to income and deductions being included in the calculation
of taxable income from sources other than employment.
• If the balance of remuneration was calculated for only a month, it must be multiplied by
12 in order to calculate the annual equivalent. If, however, the balance of remuneration
was for a period of, for example, 7 months, the balance of remuneration calculated for
the 7 months must first be divided by 7 to get to a monthly average amount and must
then be multiplied by 12 to get to the annual equivalent.
• If an employee receives a fringe benefit, the value of the benefit must be determined
according to the rules of the Seventh Schedule (chapter 6). The value of the fringe bene-
fit must be included in the remuneration.
• If an employee works for more than one employer during the year of assessment, each
employer will perform their own employees’ tax calculation. The separate amounts
received by the employee are only added together when their tax return is completed at
the end of the year of assessment.
• In the examples, months are used to calculate the tax period. In practice, the annual
equivalent and the PAYE payable are calculated by using the number of days in the tax
period in relation to a total of 365/366 days or the number of weeks in relation to 52
weeks.

12.3.5 Annual amounts received (including variable remuneration)

section 7B
In some circumstances employees receive an annual payment, for example a birthday
bonus, Christmas bonus or performance bonus. As these amounts, are paid by the
employer and included in remuneration as defined, they are subject to employees’
tax. A salary is received on a monthly basis and the employees’ tax is withheld on a
monthly basis. The important difference between a normal salary and a bonus is that
the bonus is received once a year and therefore the whole amount of tax relating to
the bonus must be withheld in the month that the bonus is received.
Bonuses are a form of variable remuneration, which means that it changes each year.
In terms of section 7B variable remuneration includes:
• overtime pay, bonus or commission;
• an allowance or advance paid in respect of transport expenses; and
• payment for accumulated leave days;
• a night shift or standby allowance.
This section provides that the amount of variable remuneration accrues to the
employee and constitutes expenditure incurred by the employer, on the date on
which the amount is paid to the employee by the employer. Therefore, section 7B
overrides the normal incurral and accrual rules for the specific types of payments
referred to above. The employee will only be taxed on the variable remuneration
amounts when the actual payment is received and consequently the employees’ tax
will also only be calculated on the amount once it is received.

519
A Student’s Approach to Taxation in South Africa 12.3

Calculating the total employees’ tax payable on an annual payment received

Step 1: Calculate the net normal tax on the annual equivalent of the balance of
remuneration, excluding the annual payment (refer to 12.3.4).

Step 2: Calculate the net normal tax on the total annual equivalent (including
the annual payments) of the balance of remuneration. Total annual
equivalent is calculated by adding the annual remuneration amount(s)
received to the annual equivalent of the balance of remuneration (as
calculated in Step 1).

Step 3: Calculate employees’ tax on the annual amount by deducting the net
normal tax on the annual equivalent of the balance of remuneration
from the net normal tax on the total annual equivalent (Step 2 to Step 1).

REMEMBER
• The taxable portion of a bursary is regarded as an annual payment.
• The bonus is already an annual amount and should not also be multiplied by 12 in
order to calculate the annual equivalent.

2024 amendment
• From the 2024 year of assessment, section 7B will also apply to any amount of ‘re-
muneration’ as defined in paragraph 1 of the Fourth Schedule (other than a bonus)
that is determined based on the employee’s work performance.
• Where an employee dies during the year of assessment, before the date of payment,
the amount subject to section 7B will be included in the income of the taxpayer (and
deducted from the employer’s income) on the day prior to the date of death of the
employee.

Example 12.2
Joe Dlamini (66 years old, unmarried) is employed on a full-time basis at Dirk Ltd. Dur-
ing the current year of assessment, Joe earned a salary of R18 000 per month and a travel
allowance of R3 000 per month. At the end of December, Joe also received the following
amounts from his employer: taxable bursary of R3 000 and a bonus of R15 000. He paid
pension fund contributions of R500 per month and medical aid contributions of R400
per month (his employer did not contribute to these funds, but Joe provide proof of
these payments to his employer). Joe paid R3 000 in qualifying medical costs that were
not refunded by his medical aid but did not supply the proof of this to his employer.
You are required to calculate the employees’ tax that will be withheld on Joe’s bonus
and bursary payment.

520
12.3 Chapter 12: Prepaid taxes

Solution 12.2
R
Salary received 18 000
Travel allowance received (Note 1) 2 400
Remuneration 20 400
Less:
Retirement fund contributions (Note 2)
Limited to the lesser of R350 000 / 12 = R29 167 or (500)
27,5 % × remuneration (R20 400) = R5 610 per month, therefore the limit is
R5 610 so the contributions can be allowed in full
Balance of remuneration excluding annual amounts 19 900
Annual equivalent balance of remuneration excluding annual amounts
(Note 3) 238 800
Tax on R238 800 per tax table
((R238 800 – R226 000) × 26% + R40 680) 44 008
Less: Primary and secondary rebate (R16 425 + R9 000) (25 425)
Less: Medical scheme fees tax credit (R347 × 12 months) (4 164)
Employees’ tax on annual equivalent remuneration
(excluding annual amounts) 14 419

Annual equivalent balance of remuneration 238 800

Add: Annual amounts received (Note 4)
Taxable bursary 3 000
Bonus received 15 000
Total annual equivalent remuneration (including annual amounts) 256 800

Tax on R256 800 per tax table ((R256 800 – R226 000) × 26% + R40 680) 48 688
Less: Primary and secondary rebate (as above) (25 425)
Less: Medical scheme fees tax credit (as above) (4 164)
Employees’ tax on total remuneration 19 099
Tax payable on bonus and bursary payment
Employees’ tax on total remuneration (including annual amounts) 19 099
Less: Employees’ tax on annual equivalent balance of remuneration
(excluding annual amounts) (14 419)
Employees’ tax on bonus and bursary 4 680

continued

521
A Student’s Approach to Taxation in South Africa 12.3

Notes
1. The definition of remuneration states that 80% of the gross travel allowance
received is included in remuneration.
2. When calculating employees’ tax, the only deductions that are allowed are retirement
fund contributions and donations made by the employer on behalf of the employee.
The retirement fund contributions remain subject to the limitations of section 11F as
set out in chapter 5.
3. The annual equivalent remuneration is calculated as the actual monthly remuneration
received up until that point in time (for example for 10 months) divided by 10 (to get
the average) and then multiplied by 12 months to calculate the annual equivalent.
Since the actual remuneration was the same for each of the first 10 months, the calcu-
lation is therefore: (R19 900 × 10) / 10 × 12 = R238 800.
4. The annual amounts received must comply with the requirements of remuneration
before they can be included in the calculation.

REMEMBER

• The tax rate increases as a taxpayer’s income increases; therefore, the marginal tax rate
at which the bonus is taxed could be higher than the tax on the salary, even if the
amounts are the same.
• The bonus (or any annual payment) is added to the annual equivalent for the month in
which it is paid and not to the monthly remuneration. The bonus is therefore taxed at
the marginal rate of tax. The bonus is only included in the calculation of annual
equivalent in the month in which it is received.
• The steps for calculating tax on an annual amount may be applied in more than one
month if an employee receives an annual payment in more than one month. In such
case, remember that the amounts that were previously used as annual amounts must
also be included in the calculation of the total annual equivalent remuneration for the
month that the new annual payment is then received. For example, if a person receives
a bonus in September and in December, both months will have an annual equivalent
calculation. The December calculation must also include the annual amount received in
September since the annual equivalent must always be calculated by taking the actual
remuneration that was received up to that stage into account.

Example 12.3
Charles Tjale (35 years old) has been employed on a full-time basis by Sarel Ltd since
1 April of the current year of assessment. Charles earned a salary of R122 000 per month.
During December he received a performance bonus of R50 000.
You are required to calculate the total employees’ tax payable by Charles for the year of
assessment.

522
12.3–12.4 Chapter 12: Prepaid taxes

Solution 12.3
Remuneration: R
Salary received 122 000
Balance of remuneration 122 000
Annual equivalent balance of remuneration (R122 000 × 12) 1 464 000
Tax per tax table ((R1 464 000 – R817 600) × 41% + R239 452) 504 476
Less: Rebate (16 425)
Employees’ tax on the monthly balance of remuneration annual equivalent 488 051
Employees’ tax for the period on monthly income (R488 051 / 12 × 11) 447 380
Annual equivalent balance of remuneration 1 464 000
Add: Annual amounts received
Bonus received 50 000
Total annual equivalent remuneration received 1 514 000

Remuneration: R
Tax per tax table ((R1 514 000 – R817 600) × 41% + R239 452) 524 976
Less: Rebate (16 425)
Employees’ tax for the year on total remuneration 508 551
Less: Employees’ tax for the year on annual equivalent remuneration (488 051)
Employees’ tax on bonus (annual amount) 20 500
Total employees’ tax:
Employees’ tax on monthly income (April – February) 447 380
Add: Employees’ tax on bonus 20 500
Total employees’ tax for the period 467 880

12.4 Identifying the correct employees’ tax rate

Not all persons rendering services to an enterprise are necessarily in the full-time
employment of the enterprise. There are specific rules for deducting the employees’
tax from persons not employed on a full-time basis. The Act also identifies some
specific classes of workers (refer to 12.4.2–12.4.6) and rules were introduced to com-
bat specific tax avoidance schemes. Depending on how a worker is classified will
affect how employees’ tax is deducted or in some cases not deducted. Other than
these rules, SARS can also issue a tax directive which instructs the employer how to
deduct employees’ tax from a specific employee’s income.
The Income Tax Act identifies personal service providers, labour brokers, independ-
ent contractors and seasonal workers as workers who are subject to different rules
regarding the deduction of employees’ tax.

523
A Student’s Approach to Taxation in South Africa 12.4

Tax directives (paragraph 9 and 11)

A tax directive is an official instruction from SARS to the employer or a fund man-
ager to deduct tax at a set rate, determined by SARS for a specific taxpayer. The tax
directive may instruct that employees’ tax be withheld based either as a fixed amount
or a fixed percentage. Employers must apply the percentage of employees’ tax as
indicated on the directive prior to taking any allowable deductions for employee’s tax
purposes, into account. The directive is valid for one tax year only or for the period
stipulated on the directive. It should be noted that a tax directive is not an assess-
ment; therefore, the taxpayer will still have to complete a tax return at the end of the
year of assessment that will be assessed by SARS according to the normal tax rules.
This assessment will result either in the taxpayer/employee having to pay more to
SARS or getting back tax, as the rate of tax applied on assessment will probably differ
from the amount or percentage estimated in terms of the directive.
Tax directives may be issued in the following situations:
• gratuities paid by an employer on termination or impending termination of ser-
vice, or retrenchment (leave pay does not form part of severance benefits as it is a
payment in respect of services rendered);
• to correct an employees’ tax calculation;
• remuneration received by a personal service provider;
• remuneration classified as commission;
• hardship not in the control of the employee;
• gains regarding rights to acquire marketable securities;
• expenses incurred in the production of income, which will exceed 1% of remuner-
ation;
• temporary employees who are frequently employed;
• arbitration awards;
• retirement fund lump sum benefits;
• retirement fund withdrawal benefits; and
• directors of private companies or members of close corporations where remuner-
ation couldn’t be determined by the prescribed formula.

REMEMBER
• The tax directive is valid for only one tax year or for the period stipulated on the certifi-
cate.
• Tax directives issued to electronic clients via the SARS interface are valid directives.
• The tax directive can also be given to an employer who is a private company and who is
experiencing financial difficulty; this directive will determine how the amount due
must be paid.
• If the tax directive is for a fixed percentage, it must be applied to the amount received
before deducting retirement fund contributions.

524
12.4 Chapter 12: Prepaid taxes

12.4.1 Process for identifying correct rate to use

The following steps should be followed to identify the correct amount of employees’
tax to be calculated. Each special type of taxpayer referred to below is discussed in
detail in separate sections.

Steps for identifying the correct employees’ tax deduction rate

Step 1: Is the worker a director of a private company or member of a close

corporation?
Yes: Apply the tax tables for remuneration.
If the amount is variable remuneration, it will only accrue to the
director on the date that it is paid.
No: Go to Step 2

Step 2: Determine whether the worker is a personal service provider (refer to

12.4.2).
Yes: Withhold employees’ tax at 28% if a company and 45% if a trust.
No: Go to Step 3.

Step 3: Determine whether the worker is an independent contractor deemed

to be an employee by the Fourth Schedule (refer to 12.4.3).
Yes: Employee has tax directive: Deduct employees tax per tax
directive.
No: Employee does not have tax directive: Deduct employees tax per
tax tables.
Go to Step 4.

Step 4: Determine whether the person is a labour broker (refer to 12.4.4) with
one of the following:
• an exemption certificate (refer to 12.4.4): No employees’ tax is
Yes: deducted.
• a tax directive: Deduct employees’ tax as per the directive.
No: • no exemption certificate or tax directive: Go to Step 5.

Step 5: Determine whether the person:

• works less than 22 hours a week and earns less than the annual tax
threshold (R91 250 < 65 years old; R141 250 if 65 years or older;
R157 900 if 75 years or older);

continued

525
A Student’s Approach to Taxation in South Africa 12.4

• is required to work at least five hours per day for less than R366 per
day.
Yes: Do not deduct any employees’ tax.
No: Go to Step 6.

Step 6: Determine whether the person falls into one of the following cate-
gories:
No: • Is the person in possession of a valid tax directive?
Calculate the employees’ tax in accordance with the instructions
provided by SARS in the tax directive.
• Does the person do seasonal work?
Calculate the employees’ tax in accordance with the guidelines for
seasonal workers (refer to 12.4.6).
• Is the person in standard employment?
Standard employment is when
– the person works at least 22 hours per complete week; or
– the person is prohibited from working for another employer; or
– the persons have declared that they are not working for an
employer.
The person is in standard employment and therefore the
Yes:
employees’ tax must be calculated in accordance with the
standard rules as set out in 12.2 and 12.3.
No: The person is not in standard employment and therefore the
employees’ tax must be calculated at a rate of 25% for natural
persons or 28% for companies.

REMEMBER

• The tax rate was reduced from 28% to 27% for a company or close corporation with a
year of assessment ending on or after 31 March 2023 (that is to say, where the year of
assessment of the company or close corporation commences on or after 1 April 2022).

12.4.2 Personal service provider

A personal service provider is a company or trust where a person (who is a connected
person in relation to the company or trust) personally renders a service to a client on
behalf of the provider, and
• such person would be regarded as an employee of the client if the service was
rendered directly to the client;
• such person (or the company or trust) is subject to the control and supervision of
the client in relation to the manner in which the duties are to be performed and are
mainly performed at the premises of the client; or

526
12.4 Chapter 12: Prepaid taxes

• where more than 80% of the income of the company or trust during the year of
assessment, from services rendered, consists of (or is likely to consist of) amounts
received directly or indirectly from any one client or associated institution in relation
to the client,
except where, throughout the year of assessment, the provider employs three or more
full-time employees on a full-time basis to render such services (other than employees
who are shareholders or members of the company or connected persons in relation to
the shareholders or the trust).
These definitions give a wider meaning to the term employee than is normally under-
stood and were introduced to combat certain schemes to avoid the deduction of
employees’ tax by providing services through a company, close corporation or trust.
Payments for services provided by shareholders or members are subject to the deduc-
tion of employees’ tax.
If a company or a trust earns more than 80% of its income from one employer, that
employer must consider the company or trust to be a personal service provider
(except where the company or trust that renders the service employs three or more
employees on a full-time basis for the full year of assessment). If a person meets the
requirements of a personal service provider, the client paying for the services must
withhold employees’ tax at the higher rate (28%/45%). In cases where the person
provides the employer with an affidavit or solemn declaration, the employer can act
in good faith and need not withhold employees’ tax.

REMEMBER

• Employees’ tax is calculated at 28% on personal service providers that are companies
and 45% on personal service providers that are trusts. The rate of 28% decreased to 27%
for companies for years of assessment ending on or after 31 March 2023.
• Even if all of the other requirements of a ‘personal service provider’ are met, the com-
pany or trust will not be a personal service provider for tax purposes if the company or
trust employed three or more employees (not connected to the company or trust) who
are engaged in the business of such company or trust on a full-time basis.

12.4.3 Independent contractor

It is important for an employer to determine if a worker is an employee or an inde-
pendent contractor for the purposes of deducting employees’ tax from the amounts
paid to the worker. An independent contractor is not employed by the person to
whom the services are rendered nor are they under their supervision. The Act ex-
cludes amounts paid to independent contractors from the definition of remuneration
provided they are resident in South Africa. An independent contractor (unless it is a
labour broker or personal service provider) is therefore not subject to employees’ tax.
In Interpretation Note No. 17, SARS lays out the tests in order to determine if a per-
son is an independent contractor. The statutory tests and the common-law dominant-
impression test are referred to. Regardless of the statutory test and the common-law

527
A Student’s Approach to Taxation in South Africa 12.4

dominant-impression test, the person will be deemed to be an independent contractor

if the following requirements are met:
• the independent contractor employed three or more employees who are not con-
nected persons to the taxpayer;
• the people employed were employed for the full year of assessment; and
• the employees render services that are directly related to the taxpayer’s (that is the
independent contractor’s) business.
If the above exception does not apply, the statutory tests need to be applied to deter-
mine if the person is an independent contractor for purposes of calculating employ-
ees’ tax.
Statutory test
Where the following is complied with, the person will not be an independent contrac-
tor and would be subject to employee’s tax:
Are the services or duties required to be performed mainly at the premises of the
client? AND
• Is the worker subject to the control of a person as to how their duties are
performed or as to the hours of work? OR
• Is the worker subject to the supervision of a person as to how their duties
are performed or as to the hours of work?
Where the first requirement as well as either control or supervision are positive, it is
not necessary to carry out the common-law dominant-impression test. The person
will not be regarded as an independent contractor for purposes of the Fourth Sched-
ule and consequently employees’ tax will need to be withheld from the amounts paid
to such person.
If the person is an independent contractor based on the statutory test, the person can
still be deemed not to be an independent contractor based on the common-law domi-
nant-impression test.
Common-law dominant-impression test
This test uses a number of indicators that can be applied. Not all of these indicators
are discussed here. See Interpretation Note No. 17 (latest issue) for the full set of
common-law dominant-impression indicators.
To determine whether a person is an independent contractor, the following examples
of indicators can be used:
1. Does the contract of employment entitle the ‘employer’ to use the services of the
person (that is to say the productive capacity and not the fruits of the productive
capacity)?
Yes: The person is not an independent contractor.
No: The person is an independent contractor.
2. Does the contract of employment entitle the employer to a specific product or the
completion of a specific service?
Yes: The person is an independent contractor.
No: The person is not an independent contractor.

528
12.4 Chapter 12: Prepaid taxes

3. Does the contract of employment bind the ‘employed’ to perform specified work
or produce a specified result within a time fixed by the contract or within a rea-
sonable time where no time has been fixed?
Yes: The person is an independent contractor.
No: The person is not an independent contractor.
4. Is the person required to perform the services mainly at the premises of the
person to whom the services are rendered/at the premises of the persons by
whom the amount for the services is paid?
Yes: The person is not an independent contractor.
No: The person is an independent contractor.

REMEMBER

• If an employer incorrectly determines that a worker is an independent contractor, the

employer will be liable for the employee’s tax that should have been deducted, as well
as any penalties and interest. The employer has the right to recover the tax paid on the
employee’s behalf from the employee.
• An independent contractor who is deemed not to be an independent contractor for
purposes of the Fourth Schedule (that is to say for purposes of calculating employees’
tax) is not, however, deemed to be an employee. This means that, when calculating the
final taxable income for the year of assessment, the independent contractor will not be
affected by the provisions of section 23(m) and will still be taxed as a sole trader.

12.4.4 Labour broker

A ‘labour broker’, by definition, is
any natural person who conducts or carries on any business where he, for reward,
provides a client of the business with other persons (other than any person who quali-
fies as a labour broker under this definition) to render a service or perform work for
that client, or procures other persons for the client, for which services or work the
other persons are remunerated by such person.
A labour broker agreement usually involves three parties: the client who requires the
workers, the labour broker who provides their own workers or finds workers for the
client and pays the workers, and the workers who perform the required work of the
client.
An example of a labour broker is a person who provides temporary secretarial or
typing personnel to another business.

REMEMBER

• Only a natural person can be a labour broker as defined for tax purposes.
• A labour broker provides workers to other businesses and does not provide services to
other business.
• The labour broker will issue an invoice to the other businesses for the workers that were
supplied.
• The labour broker pays the workers; the workers are not paid by the other business
directly.

529
A Student’s Approach to Taxation in South Africa 12.4

Exemption certificate (paragraph 2(5))

The Commissioner may (based on an annual request) issue a labour broker or a
person classified as an employee with an exemption certificate if:
• the person carries on an independent trade and is registered as a provisional
taxpayer;
• the labour broker is registered as an employer; and
• all returns required in terms of the Act have been submitted (subject to any exten-
sions granted).
This exemption certificate must be obtained annually.
An employer will not be required to withhold or deduct employees’ tax from remu-
neration paid or payable to a person who presents a valid certificate of exemption.
The Commissioner will not issue a certificate of exemption if
• more than 80% of the gross income of the labour broker, or other person classified
as an employee, during the year of assessment consists of, or is likely to consist of,
amounts received from one client or associated person in relation to the client. This
applies unless the person is a labour broker who had three or more full-time
employees throughout the year. (The employees are not allowed to be connected
persons and must be engaged in the business on a full-time basis.);
• the labour broker provides the services of another labour broker to its client; or
• the labour broker is contractually obliged to provide a specified employee to render
a service to a client.

12.4.5 Employees’ tax for directors of private companies and

members of close corporations
With effect from 1 March 2019 directors of private companies and members of close
corporations are no longer considered to be employees in terms of the definition of
employee in the Fourth Schedule. The result is that amounts received by a director in
terms of director’s fees are not subject to employee’s tax.

REMEMBER

• A ‘director’, in respect of a close corporation, is defined as somebody who holds any

office or performs any functions similar to the functions of a director of a company. The
director of a company is someone appointed as a director and is duly registered.

12.4.6 Employees’ tax for directors of public companies

Directors of public companies are considered employees and are included in the
definition of employee. Employees’ tax is withheld on the monthly remuneration of
executive directors.
Where the director is a non-executive director, SARS considers them not to be in-
volved in the daily running of the company and amounts paid to them will generally
not be remuneration (unless the ‘premises’ test and ‘control or supervision’ test are
satisfied). An exception is a non-resident non-executive director who is always an
employee for employees’ tax purposes.

530
12.4–12.5 Chapter 12: Prepaid taxes

12.4.7 Seasonal workers

A seasonal worker is a person who is only employed during a peak period for a
specific period, for example
• persons employed on a fruit farm during picking season to pick and pack fruit;
• persons employed on a sheep farm to assist with either the lambing or shearing;
• persons employed as additional help during the canning season in factories.
The tax that should be withheld from the employee will depend on the contractual
agreement between the employer and the employee.
If the employee is appointed at the beginning of the season and dismissed at the end
of the season and has no tax directive, they will be taxed in the normal manner as a
full-time employee (refer to 12.3).
If the employee is employed on a continuous basis from one season to another,
although the employee does not work for the employer during the closed season and
has no tax directive, one of the following situations will exist:
• If the employee renders services to another employer during the period when they
do not work for the relevant employer, the remuneration is not regarded as from
standard employment and 25% tax (PAYE) must be deducted.
• If the employee declares in writing that they will not render services to another
employer during the period when not working for the relevant employer, their
remuneration will be regarded as from standard employment and taxed according
to the rules set out in 12.3.

12.4.8 Awards by the CCMA and the Labour Court

If an employee is dissatisfied with regard to something that happened while they
were working, for example an unfair dismissal or unreasonable working conditions,
they have the right to take their cases to the CCMA to be heard. If the parties cannot
reach an agreement, the matter can be referred to the Labour Court for a ruling. The
question is whether an amount awarded to the employee either by the CCMA or the
Labour Court will be taxable.
In terms of Interpretation Note No. 26 issued by SARS, an amount received by the
employee will be taxable in terms of one of the following:
• paragraph (c) of the definition of gross income as they are payment for services
rendered; or
• paragraphs (d ) and (f ) of the definition of gross income– lump sum payments to
employees or payments for the termination of a service contract.
The employer must apply for a tax directive to determine the amount of employees’
tax to be deducted in respect of the amount payable to the employee.

12.5 Administration of employees’ tax (paragraphs 13 to 15)

Employees’ tax is calculated by the employer and withheld from the remuneration
payable to the employee. As the employer is merely acting as an agent on behalf of
SARS, the amount must be paid over to SARS within seven days after the end of the

531
A Student’s Approach to Taxation in South Africa 12.5–12.6

month. If the amount is not paid over in time, there is a 10% penalty for late payment.
When making the payment, the employer must also submit their EMP201 form. The
EMP201 form provides SARS with the details of the payment. This form is also used
to pay the monthly SDL and UIF. This process is done online via SARS e-Filing.
Within 60 days after the end of the year of assessment (or 14 days after the date the
employee ceases to be an employee), the employer must issue an employee’s tax
certificate (IRP5) to each employee, showing the total remuneration earned by the
employee during the period and the total employee’s tax deducted. Before IRP5s can
be issued to employees, the employer must complete and submit an employee’s tax
reconciliation (EMP501) and only once this has been approved by SARS may the
IRP5s be issued to employees. This process is also done online and IRP5s are sub-
mitted electronically to SARS so that the employees’ tax returns (ITR12s) can be pre-
populated by SARS. Where an employer fails to submit an EMP501, a 10% penalty
based on the total amount of employees’ tax withheld, will be levied.
Employees’ tax reconciliations must be submitted biannually to SARS (1 March to
31 August and 1 September until 28/29 February). These biannual reconciliations
must be submitted by the date announced by the Commissioner.

REMEMBER

• An employer might also be subject to fixed administrative penalties for non-

compliance.

If an employee has not received a tax certificate within the specified period, the onus
is on them to apply immediately to the employer for it. They may also be issued with
a duplicate tax certificate if they lose the original.

12.6 Provisional tax (paragraphs 17 to 27)

All companies and persons earning income that is not classified as remuneration are
normally required to pay provisional tax. Provisional tax, like employees’ tax, is a
method employed by SARS for the collection of normal income tax that is due to
them for the year. If a taxpayer earns income that is remuneration (for example sala-
ry), the tax due is collected by the employer on a monthly basis and is referred to as
PAYE, as discussed above. If the taxpayer, however, is a company or earns income
that is not remuneration (for example interest, rent or earns income from a trade as a
sole trader), they will be required to pay the tax due to SARS on a six-monthly basis.
This method of collecting tax is called provisional tax. Provisional tax payments are
calculated on estimated taxable income for a particular year of assessment. These
estimates of taxable income are submitted to SARS on an IRP6 return. There are rules
for calculating the estimates of taxable income for provisional tax purposes. SARS
will impose penalties and interest if the estimates are inaccurate or if the submission
of estimates or the payment of provisional tax is late.
The first provisional tax payment for a natural person (including a sole trader) must
be made within the first six months of the year of assessment (that is on or before
31 August). The second payment must be made on or before the last day of the year

532
12.6 Chapter 12: Prepaid taxes

of the assessment (that is 28/29 February). The taxpayer has the option of making
a third provisional payment before the end of September after the end of the year of
assessment.
Where the duration of the year of assessment of the taxpayer is not more than six
months (for example because the person ceased to be a resident for tax purposes),
the first payment is not required to be made. Furthermore, no estimate is required
to be made in respect of the period ending on the date of death of that person.
Therefore, no provisional tax return should be submitted and no payment should
be made by the executor of the estate of the deceased person.

12.6.1 Persons liable for provisional tax

A ‘provisional taxpayer’ is defined in paragraph 1 of the Fourth Schedule as
• a person (other than a company) who derives income that is:
– remuneration from an employer who is not a registered employer;
– an amount not defined as remuneration; or
– not an allowance or advance contemplated in section 8(1);
• a company; and
• persons who are notified by the Commissioner that they are provisional taxpayers;
but excluding
• certain public benefit organisations (approved by SARS), recreation clubs (ap-
proved by SARS), body corporates, foreign ship or aircraft operators, small busi-
ness funding entity and deceased estate; and
• a natural person who does not carry on a business; and
– the taxable income does not exceed the threshold; or
– the taxable income for the year of assessment is derived from interest, foreign
dividends and rental from letting of fixed property which will not exceed
R30 000.
There is no requirement to register as a provisional taxpayer. A taxpayer who is a
provisional taxpayer as defined must request an IRP6 provisional tax return on
eFiling, and submit it with payment within the required periods.

533
A Student’s Approach to Taxation in South Africa 12.6

REMEMBER

• Tax threshold depends on the age of the taxpayer and for the 2023 year of assessment
the thresholds were
– below 65 years of age: R91 50 (that is to say the primary rebate of R16 425 divided by
the minimum tax rate of 18%);
– older than 65 and younger than 75 years: R141 250 (that is to say the total of the
primary and secondary rebates (R25 425) divided by the minimum tax rate of 18%);
– older than 75 years of age: R157 900 (that is to say the total of the primary, second-
ary and tertiary rebates (R28 422) divided by the minimum tax rate of 18%).
• Directors of private companies are regarded as employees and are not required to
automatically be registered as provisional taxpayers unless they have other business
income.

The IRP6 tax returns

If a taxpayer is liable for provisional tax, they may request an IRP6 return electro-
nically. The IRP6 is pre-populated by SARS with:
• taxpayer details;
• the year in which the taxpayer was last assessed;
• the taxable income in respect of that year;
• the employees’ tax for the period;
• the applicable basic amount;
• the year of assessment to which the form applies;
• whether it is for the first, second or third payment; and
• payment detail.
There is a section which allows taxpayers to insert their own estimate which is then
used to calculate the total amount payable.

12.6.2 First provisional payment

The first provisional payment must be made before or on the last day of the first six
months of the year of assessment (this will be 31 August for individuals). Provisional
taxpayers must submit an estimate of the total taxable income that they will derive in
respect of the year of assessment (including any taxable portion of a capital gain). The
estimate must exclude a retirement fund lump sum benefit, retirement fund lump
sum withdrawal benefit or a severance benefit received during that year.
The first payment is based on half of the normal tax payable on the total estimated
taxable income (which is normally the basic amount), less employees tax deducted by
the taxpayer’s employer and tax proved to be payable to the government of another
country that qualifies for a rebate under section 6quat.
The estimate submitted may not be less than the basic amount (unless there are
circumstances to justify it).

534
12.6 Chapter 12: Prepaid taxes

Basic amount
The basic amount is the taxpayer’s taxable income assessed by the Commissioner for
the latest preceding year of assessment less:
• a taxable capital gain;
• the taxable portion of a retirement fund lump sum or withdrawal benefit or sever-
ance benefit; and
• an amount received in terms of paragraph (d) of the gross income definition
(amounts in respect of relinquishment, termination, loss, repudiation, cancellation
or variation of any office or employment or any appointment) that was included in
such assessed taxable income.
The latest preceding year’s assessment must be an assessment that has been issued
more than 14 days prior to the date of the estimate.
The basic amount must be increased by 8% per year if the year of assessment of the
basic amount that is used, is more than 18 months prior to the date of the provisional
tax payment. For example, if the basic amount of the first provisional tax payment of
31 August 2022 needs to be determined and the latest preceding year of assessment is
2021, the basic amount (the taxable income of 2021) will not have to be increased. This
is because from the end of 2021 until 31 August 2022 is exactly 18 months and not
more than 18 months. If the second provisional tax payment had to be determined,
the taxable income of 2021 will have to be adjusted with 16% since there are more
than 18 months between the end of 2021 and 28 February 2023.
The 18-month test can be tricky to apply. It is therefore advisable to draw a timeline
and compare the various dates. The timeline should stretch to the latest preceding
year of assessment. The 18-month test refers to ‘more than’ 18 months after the end of
that year of assessment.

28 February 2021 28 February 2022 28 February 2023

31 August 2022
1st payment - estimate

Compare 31 August 2022 with the end of the latest year assessed. Remember you
need to exclude an assessment if it was received less than 14 days before 31 August
2022.

535
A Student’s Approach to Taxation in South Africa 12.6

Example 12.4
Case A:
The notice of assessment (ITA34) for the 2022 tax year of assessment was issued on
15 August 2022 indicating a taxable income of R180 000.
The notice of assessment (ITA34) for the 2022 tax year of assessment was issued on
1 February 2022 indicating a taxable income of R150 000.
Case B:
The notice of assessment for the 2022 tax year assessment was issued on 19 August 2022
indicating a taxable income of R180 0000.
The notice of assessment for the 2021 tax year of assessment was issued on 1 February
2022 indicating a taxable income of R150 000.
Case C:
The notice of assessment for the 2022 tax year assessment was issued on 25 August 2022
indicating a taxable income of R180 000.
The notice of assessment for the 2021 tax year of assessment has not been issued yet.
The notice of assessment for the 2020 year of assessment was issued on 1 January 2021,
indicating a taxable income amount of R100 000.
You are required to determine whether the basic amount will be increased in respect of
the 18-month rule for the taxpayer’s first provisional tax payment in respect of the 2023
year of assessment for each of the above cases.

Solution 12.4
Case A:
The deadline for submitting the first provisional tax return for 2023 is 31 August 2022.
• The assessment for 2022 was issued 16 days prior to the submission of the provisional
tax estimate. Since this meets the 14-day criterion, the latest assessed preceding year is
the 2022 tax year.
• The estimate is not made more than 18 months after the end of the latest preceding
year.
Compare 31 August 2022 with 28 February 2022.
• Therefore, the basic amount adjustment of 8% will not be taken into account when
determining the basic amount for the first provisional payment for 2023.
Case B:
• The deadline for submitting the first provisional tax return for 2023 is 31 August 2022.
• The 2022 year of assessment was issued 12 days prior to the date on which the provi-
sional tax estimate was submitted. Therefore, as the 2022 assessment does not meet the
14-day criterion, the latest assessed preceding year of assessment is the 2021 tax year of
assessment.

continued

536
12.6 Chapter 12: Prepaid taxes

• The estimate is not made more than 18 months after the end of the latest preceding
year.
Compare 31 August 2022 with 28 February 2021 (exactly 18 months).
• Therefore, the basic amount adjustment of 8% will not be applied.
Case C:
• The deadline for submitting the first provisional tax return for 2023 is 31 August 2022.
• The 2022 year of assessment was issued six days prior to the date on which the provi-
sional tax estimate was submitted. Therefore, the 2022 assessment does not meet the
14-day criterion and the 2022 assessment can’t be used as the basic amount. As the
2021 year of assessment had not been issued yet, the latest assessed preceding year of
assessment is the 2020 tax year of assessment.
• The estimate is made more than 18 months after the end of the latest preceding year.
 Compare 31 August 2022 with 28 February 2020.
• Therefore, the basic amount increase of 8% will apply.
• The basic amount is adjusted by 8% for each year from the end of the year of assess-
ment of the latest preceding year up to the end of the year of assessment of the year
for which the estimate is being made.
• The 2020 taxable income will increase by 24% in total (that is to say 8% for each of 2021,
2022 and 2023).
• Basic amount = R100 000 + (R100 000 × 8%) + (R100 000 × 8%) + (R100 000 × 8%) =
R124 000 (alternative calculation is R100 000 × 1.24).

Calculating the first provisional payment

Step 1: Determine the estimate amount to be used (normally the basic

amount).

Step 2: Calculate the tax for the full year, that is to say tax according to the tax
table less rebates, medical scheme fees credit and additional medical
expenses tax credit (refer to chapter 12).

Step 3: Calculate the tax for the first provisional payment, that is to say tax for
the full year (Step 2) divided by two.

Step 4: Deduct the employees’ tax actually paid in the first six months of the
current year of assessment.

Step 5: Calculate the amount due for the first provisional tax payment,
namely the tax due for the period (Step 3)
less the employees’ tax paid (Step 4)
less any foreign tax paid (section 6quat).

537
A Student’s Approach to Taxation in South Africa 12.6

Example 12.5
Puledi Black (51 years old) requested his IRP6 from SARS. The return indicated that the
latest year of assessment was 2020. The taxable income indicated on the IRP6 is R220 000
and the basic amount R255 200. Puledi accepts the basic amount. Puledi estimates his
taxable income for the current year of assessment to be R230 000. His employer deducted
employees’ tax amounting to R14 500 from his salary for the first six months of the year.
Puledi did not belong to a medical aid fund.
You are required to calculate the amount Puledi has to pay as his first provisional pay-
ment.

Solution 12.5
R
Basic amount (estimate is lower than basic amount so use basic amount) 255 200
Tax on taxable income ((R255 200 – R226 000) × 26% + R40 680) 48 272
Less: Primary rebate (16 425)
Total tax for the full year 31 847
Tax for the period (R31 847 / 2) 15 924
Less: Prepaid tax (14 500)
Employees’ tax in respect of the first six months 14 500
Foreign tax paid nil

Provisional tax payable for the period 1 424

REMEMBER

• The first provisional payment is only for the first half of the year; therefore, only half of
the total tax for the year is payable.
• The first payment for the 2023 year of assessment is due on or before 31 August 2021 for
individuals.
• If the year of assessment of the taxpayer is for a period of not more than six months (for
example because of the death of the person or the person ceased to be a South African
tax resident), the first payment is not required to be made.
• Although the taxable income amount is based on the taxable income of the previous
year, the employees’ tax paid for the current year can be used in the calculation.
• If the employees’ tax paid exceeds the amount due for the first payment, the amount
due is Rnil (no amount is payable to SARS).
• If a person does not make a first provisional payment or pays less than the required
amount or does not hand in their provisional tax return, penalties can be charged (refer
to 12.6.5).
• If the taxpayer does not have a basic amount, an estimation of the income for the year
has to be made.

538
12.6 Chapter 12: Prepaid taxes

12.6.3 Second provisional payment

The second provisional payment is due on the last day of the year of assessment. The
taxpayer is not obliged to use a specific amount as their estimated taxable income, but
if it is underestimated they carry the risk of penalties and interest. Subject to the
application of the penalties, taxpayers can make use of a minimum amount on which
to base this payment.

Calculating the second provisional payment

Step 1: Determine the estimated taxable income for the year (that is to say the
minimum amount – see below).

Step 2: Calculate the tax for the second provisional payment (that is to say for
the full year of assessment being the tax according to the tax tables
less rebates, medical scheme fees tax credit and additional medical
expenses tax credit).

Step 3: Determine the employees’ tax paid for the current year of assessment.

Step 4: Determine the amount paid as a first provisional tax payment.

Step 5: Calculate the amount due for the second provisional tax payment,
namely the tax due for the period (Step 2) less the employees’ tax paid
(Step 3) less the foreign tax paid (section 6quat) less the first
provisional tax payment (Step 4).

Minimum amount
When determining the minimum amount, taxpayers can be classified into one of the
following two groups:
• taxpayers with taxable income of R1 million or less for the current year of assess-
ment; and
• taxpayers with taxable income of more than R1 million for the current year of
assessment.

Taxpayers with taxable income of less than R1 million

For taxpayers with a final assessed taxable income of less than R1 million (including
taxable capital gains) for the current year of assessment, an estimate will not attract a
penalty where the estimate used is equal to at least the lesser of
• the basic amount reflected on the return for the payment of provisional tax issued
by the Commissioner (IRP6). This amount will be the taxable income of the last
assessed year of income (it must have been assessed at least 14 days prior to the due
date). The basic amount is the latest assessed taxable income, but excludes certain
lump sum benefits and taxable capital gains. Where the latest assessment is more
than one year old and the estimate is made more than 18 months after the end of

539
A Student’s Approach to Taxation in South Africa 12.6

the year of assessment, the basic amount is adjusted by 8% per annum for each
year since the assessed year of assessment; or
• 90% of the actual taxable income for the year of assessment.
Where an estimate is used as the basis for calculating the second provisional tax
payment, and it is less than 90% of the actual taxable income and the basic amount,
SARS will impose an automatic penalty of 20% of the shortfall. According to SARS,
the taxpayer may approach them for a full or partial reduction of the penalty if the
taxpayer can prove that the estimate was ‘not deliberately or negligently understated
and was seriously calculated with due regard to the factors having a bearing thereon’.

Example 12.6
Puledi Black (51 years old) requested his IRP6 from SARS for the second provisional
payment. The return indicated that the latest year of assessment was 2021. The taxable
income indicated on the IRP6 and the basic amount is R255 200. Puledi accepts the
amount as his basic amount. Puledi’s estimated taxable income for the current year of
assessment is R260 000. His employer deducted employees’ tax amounting to R30 000
from his salary for the current year of assessment. Puledi paid foreign tax that qualified
for a foreign taxed rebate of R500. Puledi made a first provisional payment of R2 171.
You are required to calculate the amount Puledi has to pay as his second provisional pay-
ment.

Solution 12.6
R
Taxable income amount (Note) 255 200
Tax on taxable income ((R255 200 – R226 000) × 26% + R40 680) 48 272
Less: Primary rebate (16 425)
Total tax for the full year 31 847
Less: Prepaid tax (32 671)
Employees’ tax in respect of this tax year 30 000
Foreign tax paid 500
First provisional payment 2 171

Second provisional tax payment payable nil

Note
Penalties will not apply provided Puledi bases his payment on the basic amount or 90%
of his taxable income for the year, whichever is the lowest, R234 000 (90% × R260 000).
The question specifically stated that he elected to use the basic amount for his assess-
ment.

540
12.6 Chapter 12: Prepaid taxes

Taxpayers with taxable income of more than R1 million

The second provisional tax payment must be based on an estimate of the taxpayer’s
taxable income for the year of assessment. Where this estimated amount is less than
80% of the actual assessed taxable income (including any taxable capital gains),
underestimation penalties will be raised by SARS. According to SARS, they may
impose a penalty of up to 20% of the shortfall if they are not satisfied that the estimate
was ‘seriously calculated with due regard to the factors having a bearing thereon or
was not deliberately or negligently understated’. In other words, this penalty will be
of a discretionary nature.

REMEMBER

• The second provisional payment is for the full year of assessment, and a first payment
made must be deducted from the amount due for the year.
• The second payment for the 2023 year of assessment is due on or before 28 Feb-
ruary 2023 for individuals.
• The second payment for the 2023 year of assessment for a company is due on or before
the last day of the company’s financial year end.
• Where the basic amount used is for a year of assessment that closed more than a year
before the provisional tax estimate is due, the basic amount must be increased by 8%
per year.
• Although the estimated taxable income is based on a previous year’s taxable income,
the employees’ tax paid for the current year must be used in the calculation.
• If the taxpayer pays less than the minimum amount or does not file their provisional tax
return, penalties, additional tax and interest can be charged (refer to 12.6.5).

12.6.4 Third provisional payment

The third provisional payment is a voluntary payment, and this payment is made by
the taxpayer to prevent the levying of interest by SARS. This payment is based on the
actual taxable income for the relevant year of assessment. For individuals and com-
panies with a 28/29 February year end, this payment is to be made within seven
months after the end of the year of assessment. For all other companies, the payment
must be within six months after the end of the year of assessment. Where a difference
arises because the taxpayer, on reasonable grounds, excluded an amount which they
believed was not taxable or claimed a deduction for the same reason, the Commissioner
may direct that the interest charge will not apply (unless section 80A – the tax-
avoidance section – has been invoked by the Commissioner).
The third payment does not require the submission of a return. If a provisional tax-
payer does not make a sufficient third provisional tax payment, interest will be levied
at the official rate from (seven months after the end of the year of assessment) up to
the date of assessment. The interest will be levied on the outstanding tax for the year
of assessment. The interest will only be levied on companies whose taxable income is
more than R20 000 per year of assessment and individuals who are provisional tax-
payers and whose taxable income is more than R50 000 per year of assessment.

541
A Student’s Approach to Taxation in South Africa 12.6

The amount that is used to calculate the taxable income for the year of assessment
includes the taxable capital gain for the year. For the purpose of the first two pro-
visional tax payments, the taxable capital gain is not taken into consideration if such
payments were determined by using the basic amount as the estimated amount for
those payments. If the taxpayer pays more provisional tax than the tax due for the
year, SARS will pay interest on the amount overpaid from the due date until the date
the amount is repaid. The interest will be paid at the prescribed rate.

Calculating the third provisional payment

Step 1: Determine the taxable income for the year of assessment (remember
that the taxable capital gain must be included in this amount).

Step 2: Calculate the tax for the third provisional payment, that is to say tax
according to the tax table less the rebates and medical tax credits.

Step 3: Determine the employees’ tax paid (the employees’ tax for the current
year of assessment).

Step 4: Determine the amount paid as a first provisional tax payment.

Step 5: Determine the amount paid as a second provisional tax payment.

Step 6: Calculate the amount due for the third provisional tax payment,
namely the tax due for the period (Step 2) less the employees’ tax paid
(Step 3) less the foreign tax paid (section 6quat) less the first pro-
visional tax payment (Step 4) less the second provisional tax payment
(Step 5).

REMEMBER

• Where the basic amount is used for the first and/or the second payment, such taxable
income (estimate) must exclude taxable capital gains as well as any retirement fund
lump sum benefit, retirement fund lump sum withdrawal benefit and severance benefit.
• Wherever an estimate other than the basic amount is used, such taxable income (esti-
mate) must include taxable capital gains but must still exclude any retirement fund
lump sum benefit, retirement fund lump sum withdrawal benefit and severance benefit.

542
12.6 Chapter 12: Prepaid taxes

Example 12.7
Peter Black’s (48 years old) latest assessed year of assessment for which he was assessed is
the 2022 year of assessment. The taxable income on the IRP6 and the basic amount is
R371 200. Peter calculated his taxable income for the current year of assessment to be
R380 000. His employer deducted employees’ tax amounting to R58 895 from his salary
for the current year of assessment. Peter paid foreign tax amounting to R250. Peter made
a first provisional payment of R4 564 and a second provisional payment of R1 064.
You are required to calculate the amount Peter has to pay as his third provisional pay-
ment if he does not want to pay any interest.

Solution 12.7
R
Taxable income 380 000
Tax on taxable income ((R380 000 – R353 100) × 31% + R73 726) 82 065
Less: Tax rebate (16 425)
Total tax for the full year 65 640
Less: Prepaid taxes (64 773)
Employees’ tax in respect of this tax year 58 895
Foreign tax paid 250
First provisional payment 4 564
Second provisional payment 1 064

Third provisional tax payment due 867

12.6.5 Penalties and interest

Underestimation penalty (paragraph 20)
There is no additional tax for the underestimation of the first provisional payment.
However, an underestimation penalty is levied if the second payment was underes-
timated.
Taxpayers with taxable income of less than R1 million
If the taxpayer pays less than the minimum amount for the second provisional pay-
ment, they are liable for an underestimation penalty of 20% of the difference between
the minimum amount of tax that should have been paid and the amount of tax that
was actually paid by the end of the year of assessment. The Commissioner may remit
the additional tax if they are convinced that the taxpayer could not have estimated
the correct amount of the assessment based on the information available on the date
the estimation was made.
Taxpayers with taxable income of R1 million or more
If the taxpayer bases their second payment on an estimate that ends up being less
than 80% of their actual taxable income, SARS has the discretion to raise an under

543
A Student’s Approach to Taxation in South Africa 12.6

estimation penalty of 20% of the difference between the tax that should have been
paid and the amount of tax that was actually paid by the end of the year of assess-
ment.
The third provisional payment is a voluntary payment and no underestimation
additional tax exists.
If a taxpayer completely fails to submit an estimate of a provisional tax payment and
the estimate is still not yet received by the last day of a period of four months after
the last day of the year of assessment (therefore by 30 June for a natural person), it
will be deemed that an estimate of Rnil taxable income was submitted. The 20%
penalty will then be calculated on the difference between the tax that should have
been paid and the amount of tax that was actually paid by the end of the year of
assessment which is Rnil. If this payment was also made late (and the 10% late pay-
ment penalty has been levied), the amount of the 20% underestimation penalty
should be reduced with the amount of the late payment penalty. The Commissioner
may remit the penalty in certain circumstances (paragraph 20(2) and (2C).

Late-payment penalty (paragraph 27)

If the taxpayer does not pay an amount of provisional tax for which the person is
liable within the period allowed for payment thereof, the Commissioner must impose
a percentage-based penalty. This penalty is 10% of the amount not paid.

Interest on overdue payments (section 89bis)

If an amount of tax remains unpaid after the due date, the Commissioner can charge
interest at the prescribed rate on the outstanding amount at the prescribed rate from
the first day following the due date.
• The due date for the first provisional payment is six months after the commence-
ment of the year of assessment (which is 31 August for natural persons).
• The due date for the second provisional payment is on the last day of the year of
assessment (28/29 February for natural persons).
• For the third voluntary payment, the due date is the ‘effective date’. The effective
date, in the case of a natural person and companies with a February year-end, is
seven months after the end of the year of assessment (that is to say 30 September).
In all other cases, the ‘effective date’ is six months after the end of the year of as-
sessment.

Interest on underpayments or overpayments of provisional tax (section 89quat)

Where a taxpayer underpaid provisional tax (for example where an underestimation
of taxable income was made), interest is levied at the prescribed rate. This is in addi-
tion to the underpayment penalty that might have been levied (see paragraph 20
above).
The interest is calculated from the day after the effective date to the date the amount
is paid. The effective date, in the case of a natural person and companies with a
February year-end, is seven months after the end of the year of assessment (that is to
say 30 September). In all other cases, the ‘effective date’ is six months after the end of
the year of assessment.

544
12.6–12.8 Chapter 12: Prepaid taxes

The interest is levied where the normal tax exceeds the credit amount and only if the
individual or trust has a taxable income exceeding R50 000 (R20 000 in the case of
companies).
• The normal tax includes the underestimation penalty that was levied in terms of
paragraph 20.
• The ’credit amount’ is the sum of all provisional tax payments made (first, second
and third payments), amounts of employees tax withheld by the employer and the
amount of any foreign taxes paid by the taxpayer in the year of assessment in terms
of section 6quat.
Where the credit amount exceeds the normal tax payable, interest will be payable to
the taxpayer by SARS and the prescribed rate on the difference between the credit
amount and such normal tax from the effective date until the date on which such
difference is refunded to the taxpayer. This is only the case where the difference
between the two amounts (that is to say the excess) is more than R10 000 or where the
taxable income is more than R50 000 for a natural person and R20 000 for a company.

12.7 Summary
In this chapter the different methods used by SARS to collect the tax due to them for a
year of assessment are discussed. If a person receives remuneration, they will pay
employees’ tax on a monthly basis. If a person receives income that is not remuner-
ation, they are required to pay provisional tax on a six-monthly basis. If a person
receives remuneration from their employer, they will pay employees’ tax, but if they
also receive other income, for example interest, they will also pay provisional tax.
The responsibility of calculating, withholding and paying employees’ tax over to
SARS is that of the employer. The responsibility of calculating and paying provisional
tax over to SARS lies with the taxpayers themselves. Employees’ tax and provisional
tax are not additional taxes being levied; they are merely methods used to pay the
income tax that is due to SARS for a year of assessment.
The next section contains questions that allow you to test your knowledge on prepaid
taxes.

12.8 Examination preparation

Question 12.1
Tinni Kekana is 52 years old. She is married to Toby. Both their children are full-time uni-
versity students. Tinni gives you the available information of what happened and also
supplies the dates when it happened as indicated below:
31 January 2022 Received the assessment for the 2021 year of assessment:
Figures from the ITA34:
• Taxable income: R1 050 732
• PAYE: R307 808,12
• Provisional tax credits: R9 000

continued

545
A Student’s Approach to Taxation in South Africa 12.8

31 August 2022 Estimated taxable income: R1 100 000

Employees’ tax paid (1 March 2022 – 31 August 2022): R125 782,60
30 September 2022 Actual taxable income for 2022: R989 552
31 January 2023 Submitted the return (and was assessed on 17 February 2023) for 2022
year of assessment.
Figures from ITA34:
• Taxable income: R989 552
• PAYE: R272 529,20
• Provisional tax credits: R10 943,84
28 February 2023 Estimated taxable income R1 108 368
Employees’ tax paid for the 2023 year of assessment: R263 659
Medical fund contributions: As from 1 January 2023 – R10 889 per
month for herself, her husband and two children
Taxable capital gain: R118 459 on sale of shares on 31 January 2023
(included in estimated taxable income)
31 August 2023 Estimated taxable income: R1 100 752
Employees’ tax paid (1 March 2023 – 31 August 2023): R299 562,12
30 September 2023 Actual taxable income for 2023: R1 356 553
Employees’ tax paid September 2023: R63 520

You are required to:

Calculate Tinni’s provisional tax liabilities for the 2023 year of assessment, clearly
indicating the relevant dates. Tinni does not want to pay any penalties or interest but
wants to pay the least amount of tax payable with each payment.

546
12.8 Chapter 12: Prepaid taxes

Answer 12.1
Calculation of Tinni’s provisional tax liabilities for the 2023 year of assessment:
R
First provisional tax payment – 31 August 2022
Estimated taxable income is R1 100 000; however, this payment can be
based on the basic amount (2021 assessed taxable income since it was
assessed more than 14 days before 31 August 2022). No adjustment is nec-
essary since there is not more than 18 months between 28 February 2021
and 31 August 2022. 1 050 732
Normal tax (R1 050 732 – R817 600) × 41% + R239 452) 335 036,12
Less: Primary rebate (16 425,00)
Net normal tax 318 611,12
× 50% for first 6 months 159 305.56
Less: Actual PAYE for the period (125 782,60)
First provisional tax payment for 2022 33 522,96

Second provisional tax payment – 28 February 2023

Estimated taxable income is R1 108 638 and must be used as the tax-
payer has a taxable income above R1 million (the taxpayer will incur a
penalty if the estimate used is less than 80% of actual taxable income
(which is not known at this stage, so use the estimate therefore)) 1 108 638,00
Normal tax (R1 108 638 – R817 600) × 41% + R239 452) 358 777,58
Less: Primary rebate (16 425,00)
Less: Medical fees tax credit (R347 + R347 + R234 + R234) × 2 months (2 324,00)
Less: Additional medical expenses tax credit: 25% of
Contributions 21 778
Less: 4 × R2 324 (9 296)
12 482
Less: 7,5% x taxable income (83 147) (nil)
Less: PAYE (263 659,00)
76 369,58
Less: First provisional tax payment (33 522,96)
Second provisional tax payment 42 846,62

continued

547
A Student’s Approach to Taxation in South Africa 12.8

R R
Third provisional tax payment – 30 September 2023
Actual taxable income 1 356 553,00

Tax on R1 356 553 (R1 356 553 – R817 600) × 41% + R239 452) 460 422,73
Less: Primary rebate (16 425,00)
Medical scheme fees tax credit (as above) (2 324,00)
Additional medical cost tax credit
Medical aid contributions – (4 × medical scheme fees tax
credit)
= (R21 778) – (4 × R2 324) 12 482
Other qualifying medical expenses nil
12 482
Less: Limitation (7,5% × R1 356 553) (101 742)
nil
Multiply: Deduction rate (25%) (nil)
Net normal tax 441 673,73
Less: Prepaid taxes
• First provisional tax payment (33 522,96)
• Second provisional tax payment (42 846,62)
• Employees’ tax paid for the 2023 year of
assessment (263 659,00)
Top up provisional tax due 101 645,15

Additional questions for this chapter are available electronically

www.myacademic.co.za/books

548
 13 Individuals

Gross Exempt Taxable Tax

_ – Deductions =
income income income payable

General Deductions
Specific Capital
deduction for
deductions allowances
formula individuals

Page
13.1 Introduction ......................................................................................................... 550
13.2 Calculation of taxable income of an individual (section 5) ........................... 551
13.3 Specific income .................................................................................................... 556
13.3.1 South African income (section 1 – definition of ‘gross income’) ..... 557
13.3.1.1 South African dividends (section 10(1)(k)........................... 557
13.3.1.2 South African interest exemption (section 10(1)(i)) ........... 557
13.3.1.3 Interest and dividends from tax free investments
(section 12T) ............................................................................ 558
13.3.2 Foreign income ....................................................................................... 558
13.3.2.1 Foreign dividends (paragraph (k) of ‘gross income’
and section 10B) and headquarter company dividends ... 558
13.3.2.2 Other foreign income ............................................................. 560
13.4 Specific deductions ............................................................................................. 562
13.4.1 Expenses and allowances deductible by salaried taxpayers
(section 23(m)) ........................................................................................ 564
13.4.2 Contributions to retirement funds (section 11F)................................ 567
13.4.3 Donations to public benefit organisations
(section 18A and the Ninth Schedule)................................................. 572

549
A Student’s Approach to Taxation in South Africa 13.1

Page
13.5 Calculation of final normal tax liability (sections 6, 6A, 6B and 6quat) ........ 575
13.5.1 Year or period of assessment (section 1)............................................. 576
13.5.2 Normal tax (section 5) ........................................................................... 577
13.5.3 Normal tax rebates for natural persons (section 6) ........................... 578
13.5.4 Medical scheme fees tax credit (MTC) (section 6A) .......................... 580
13.5.5 Additional medical expenses tax credit (AMTC) (section 6B) ......... 582
13.5.6 Rebate in respect of foreign taxes on income (section 6quat) ........... 586
13.5.7 Prepaid taxes .......................................................................................... 591
13.6 Limiting losses when calculating taxable income (section 20 and 20A) ...... 592
13.6.1 Suspect trades ......................................................................................... 594
13.6.2 The exclusion rule .................................................................................. 594
13.7 Tax returns, assessments and objections .......................................................... 595
13.8 Summary .............................................................................................................. 596
13.9 Examination preparation ................................................................................... 598

13.1 Introduction
In this chapter, we look at the taxation of individuals. This will include discussing
the earning of investment income as well as the deductions that can be claimed, for
income tax purposes, by a person earning a salary. At the end of the chapter the
calculation of normal tax and net normal tax for individuals is discussed.
After a person starts working and earning an income, they can eventually start saving
some of the income that they earn. This income can then be invested in different
assets, for example shares, fixed deposits or even business ventures. The aim of
investment is to generate additional income. Remember that the gross income def-
inition includes all income received by residents of South Africa. South Africans can
also invest their money offshore (in overseas countries). The income earned on these
foreign investments is also subject to tax in South Africa, but there are special rules
that need to be considered when dealing with this type of income.
Apart from earning income over and above their salary, a person earning a salary will
also have expenses that they would like to deduct for tax purposes. In terms of the
general deduction formula (section 11(a)) read with section 23, a taxpayer may not
deduct any private or domestic expenditure (chapter 6). The Income Tax Act 58 of
1962 (the Act) does however contain a number of provisions where the taxpayer is
allowed to deduct certain private or domestic expenses. In terms of section 23(m) a
person earning only a salary may deduct only the expenses listed in the section. The
same section prohibits all other deductions for this ‘type’ of taxpayer.

550
13.1–13.2 Chapter 13: Individuals

Tax statistics

According to the 2021 tax statistics South Africa had 20 million registered individual
taxpayers. Some interesting facts are
• There were 22.9 million registered taxpayers.
• 37,2% of taxpayers are registered in Gauteng.
• 26,2% of assessed taxpayers were 35 to 44 years old.
• 46.4% of assessed taxpayers were female.
• Travel allowances were the largest allowance for individuals: 23,1% of total allowances
assessed.
• Retirement fund contributions paid on behalf of employees was the largest fringe
benefit (59,2% of the total fringe benefits assessed).
• Contributions to retirement funding was the largest deduction (85,5% of all deductions
granted).

13.2 Calculation of taxable income of an individual (section 5)

Section 5(1) of the Act makes provision for the payment of income tax (which is
referred to as normal tax) on the taxable income received by or accrued to or in
favour of a person during the year of assessment.
In order to determine how much tax a person should pay, that person’s taxable
income must first be established. The Act has a number of definitions that must be
used to determine a person’s taxable income. Section 1 of the Act provides the fol-
lowing definition of taxable income:
[T]he aggregate of –
(a) the amount remaining after deducting from the income of any person all the
amounts allowed under Part I of Chapter II to be deducted from or set off against
such income; and
(b) all amounts to be included or deemed to be included in the taxable income of any
person in terms of this Act.
It is clear from the above that in order to calculate a person’s taxable income, the
income for the year and the expenditure allowed for the year need to be determined.
The expenditure is set out in Part I of Chapter II of the Act. The amount of the
expenditure that is allowed as a deduction will depend on the kind of expenditure
and the date of the expenditure. The term ‘income’ is also defined in section 1 of the
Act, which reads as follows:
[T]he amount remaining of the gross income of any person . . . after deducting there-
from any amounts exempt from normal tax.
A list of income that is exempt from tax is provided in section 10 of the Act and is
discussed in chapter 5.
Examples of exempt income for individuals are dividends and interest received. For
example, local dividends received are exempt from income tax but only a portion of
foreign dividends are exempt from tax. All income (for example interest, dividends
and capital gains) received on a tax-free investment is exempt from income tax. Only
accounts that meet specific criteria are classified as tax-free investments, these in-
vestments must be identified as such in the name of the investment.

551
A Student’s Approach to Taxation in South Africa 13.2

REMEMBER

• Exempt income is deducted from gross income; therefore, an amount can only be exempt
income if it is already included in gross income.

The next step is to determine which amounts are included in gross income (chapters 2
and 3). A salary received is an example of an amount to be included in gross income
in terms of the general rule as it complies with all the requirements of the definition.
Remember that it is not required that a person must receive an amount before it is
included in gross income, that is to say where an amount accrues to the taxpayer, it
will also be taxable even though they have not physically received it. For example, if
a person invests in a unit trust (also known as a collective investment scheme) and
elects to reinvest the annual interest and dividend earned, they will never receive
these amounts in cash. The income is however reinvested for their benefit and is
therefore included in their gross income as it accrues to them.
As from 1 October 2001 all capital gains are also subject to normal tax. The taxable
portion of the capital gain must be added to the taxable income from the revenue
activities to calculate the total taxable income for the year. The calculation of the
taxable capital gain is discussed in chapter 9.

Framework for the calculation of taxable income for an individual

The definitions discussed above provide a fixed structure that should be used to cal-
culate an individual’s taxable income. This sequence may be set out as in the follow-
ing framework:

Taxable income framework

R
Gross income (as defined in section 1) xxx
Less: Exempt income (sections 10, 10A and 12T) (xxx)
Income (as defined in section 1) xxx
Less: Deductions section 11 – but see below; subject to section 23(m) and (xxx)
assessed loss (section 20)
Add: Taxable portion of allowances (section 8 – such as travel and subsistence
allowances) xxx
Taxable income before taxable capital gain xxx
Add: Taxable capital gain (section 26A) xxx
Taxable income before retirement fund deduction xxx
Less: Retirement fund deduction (section 11F) (xxx)
Taxable income before donations deduction xxx
Less: Donations deduction (section 18A) (xxx)
Taxable income (as defined in section 1) xxx

552
13.2 Chapter 13: Individuals

It is important to remember when calculating the taxable income of an individual, that

certain deductions must be deducted in a specific order in terms of the Act. The last
items of a calculation of taxable income must be in the following order:
• assessed loss brought forward from the previous years of assessment;
• inclusion of taxable capital gain;
• contributions to retirement funds; and
• donations to public benefit organisations.

Calculating taxable income

Step 1: Identify amounts that comply with the ‘gross income’ definition (chap-
ters 2 and 3).

Step 2: Identify amounts included in gross income that are exempt in terms of
the Act (chapter 5).

Step 3: Identify amounts that can be deducted for tax purposes (chapters 6
and 12).

Step 4: Calculate the taxable income (before taxable capital gain and dona-
tions) by deducting the exempt income (Step 2) and the deductions
(Step 3) from the gross income (Step 1).

Step 5: Calculate the taxable capital gain (chapter 9).

Step 6: Calculate the total taxable income by adding the taxable income (before
taxable capital gain and donations) (Step 4) to the taxable capital
gain (Step 5) and, thereafter, deducting the allowable deductions for
donations.

REMEMBER

• Exempt income can only be exempted if it has been included in gross income.
• Taxable income may be a negative amount which is called ‘an assessed loss’.
• A person is anybody who receives ‘income’. Therefore even a minor (person younger
than 18) who receives income is a taxpayer and pays tax in their own name. In some
cases the parent of a minor can be taxed on the income of the child, but then specific
requirements must be met.

553
A Student’s Approach to Taxation in South Africa 13.2

Example 13.1
Robert Roberts is a 40-year-old resident of South Africa. During the current year of
assessment he received a salary of R300 000. He owns shares in Sam Ltd (a South African
company) and received a dividend of R4 000 during the current year. Robert contributed
R6 000 to his employer’s pension fund (the total amount is deductible for income tax pur-
poses). Robert made a taxable capital gain of R1 000.
You are required to calculate Robert’s taxable income for the current year of assessment.

Solution 13.1
R
Gross income
Salary received 300 000
Dividends received 4 000
304 000
Less: Exempt income
Dividends received (4 000)
Income 300 000
Add: Taxable capital gains 1 000
301 000
Less: Deductions
Retirement fund contributions (6 000)
Taxable income 295 000

1. Why are the dividends received included in gross income if they are
an exempt income?
2. Must taxable capital gains be included last or can it be added to
gross income?

Married in community of property

Income received or accrued from carrying on a trade (excluding the letting of fixed
property) is taxed in the hands of the spouse who is carrying on the trade, for exam-
ple if the wife earns a salary or profit from business activities, she will be taxed on the
amount earned. On the other hand, if a couple is married in community of property
and either of them earns any passive income (that is to say income other than trade
income, for example dividend or interest income), it is deemed to have accrued
equally to each spouse. Where a spouse’s income is deemed to be the income of the
other spouse, the deduction or allowance relating to that income is allowed in the
same proportion as that in which the income is taxed.

554
13.2 Chapter 13: Individuals

REMEMBER

• Income derived from a trade will only be taxed in the hands of the spouse who is carry-
ing on the trade.
• Income that will be split where spouses are married in community of property therefore
includes –
– local and foreign interest;
– local and foreign dividends;
– income from letting of fixed property.
• Income that will NOT be split where spouses are married in community of property
therefore include –
– a benefit paid by a pension, provident or retirement annuity fund;
– income specifically excluded from the joint estate; and
– a purchased annuity.

Calculating taxable income – married in community of property

Step 1: Add both spouses’ passive income together to get a total passive
income, for example total interest received.

Step 2: Divide the total passive income equally between the two spouses.
Include in each spouse’s calculation half of the total passive income,
and add it to the individual’s gross income.

Example 13.2
John (59 years old) and Jane (66 years old) Naidoo are married in community of property.
John received a salary of R150 000 during the current year of assessment. John also
received R60 000 interest on his savings account. Jane did not receive any income during
the current year of assessment.
You are required to calculate John and Jane’s taxable income for the current year of
assessment.

555
A Student’s Approach to Taxation in South Africa 13.2–13.3

Solution 13.2
John R
Gross income
Salary received 150 000
Interest received (Note) 30 000
180 000
Less: Interest exemption – R23 800 maximum (23 800)
Taxable income 156 200
Jane
Gross income
Interest received (Note) 30 000
Less Interest exemption – R34 500 maximum but limited to amount received (30 000)
Taxable income nil
Note
As John and Jane are married in community of property, it is deemed that the interest was
received in equal shares by each spouse. Therefore they each include R60 000 / 2 = R30 000
in their gross income.

1. Why is R30 000 interest exempt for Jane and only R23 800 for John?
2. As Jane is over 65 years old, why did she not get an interest exemp-
tion of R34 500?

REMEMBER

• Where persons are married in community of property, each spouse qualifies for their
full interest exemption on half of the gross interest received. An exemption can never
exceed the amount received.

13.3 Specific income

Certain types of income are included in a taxpayer’s taxable income in terms of the
general definition of gross income (chapter 2). Income that otherwise would not have
been included by the general definition, is specifically included in gross income in
terms of the specific inclusions listed at the end of the general definition of gross
income (chapter 3).
In this chapter, selected specific inclusions (and not the general definition of gross
income) as they relate to the calculation of a resident (individual) taxpayer’s taxable
income are discussed. Some income is exempt from tax, for example, certain divi-
dends and interest as dealt with in chapter 3. The specific deductions available to an
individual are also discussed.

556
13.3 Chapter 13: Individuals

13.3.1 South African income (section 1 – definition of

‘gross income’)
A person defined as a ‘resident’ of South Africa will be taxed on all income earned in
South Africa, for example salary, interest received and rental received, subject to the
definition of gross income.

13.3.1.1 South African dividends (section 10(1)(k))

All dividends received from South African companies that are subject to dividends
tax, are exempt from normal tax.

13.3.1.2 South African interest exemption (section 10(1)(i))

Where a taxpayer receives South African interest, the interest is subject to an exemp-
tion. The amount that is exempt depends on the age of the taxpayer.
Where the taxpayer is 65 years or older on the last day of the year of assessment, the
first R34 500 of the interest income received is exempt from tax. Where the taxpayer is
younger than 65 years of age on the last day of the year of assessment, the first
R23 800 of interest income received or accrued is exempt from tax.

Example 13.3
Chris Canele (66 years old) and his wife (55 years old), who are married out of community
of property and are both South African residents, earned the following investment income
during the current year of assessment:
Chris R
Interest from local investments (not tax free investments) 37 000
Wife
Interest from local investments (not tax free investments) 21 500
You are required to calculate Chris and his wife’s taxable income for the current year of
assessment.

Solution 13.3
Chris R R
Interest from local investments 37 000
Less: Interest exemption (34 500) 2 500
Taxable income 2 500
Wife
Interest from local investment 21 500
Less: Interest exemption – R23 800, therefore the full
amount is exempt (21 500) nil
Taxable income nil

557
A Student’s Approach to Taxation in South Africa 13.3

REMEMBER

• The interest exemption available to natural persons will be left unchanged from 2015
onwards. Investments in approved tax free investments will not be subject to income tax.

13.3.1.3 Interest and dividends from tax free investments (section 12T)
Interest and dividends received from tax free investments are fully exempt from
taxation (refer to chapter 5).

13.3.2 Foreign income

South African residents are also taxed on foreign income. This section discusses the
following types of foreign income that can be earned by a South African taxpayer:
• foreign dividends; and
• other foreign income (earned directly by the taxpayer).
Note that section 9D of the Act contains provisions relating to the taxation of income
from controlled foreign companies, but this falls outside the scope of this book.
In this chapter, we also discuss exemptions and rebates in respect of foreign income.

REMEMBER

• Should a double-tax agreement exist between South Africa and another country, all foreign
income derived by South African residents could be subject to that double-tax agree-
ment. The double-tax agreement overrides the general taxation provisions of the Act. If
a double-tax agreement exists between South Africa and a specific country, one must
first consult the double-tax agreement to see which country has the right to tax the spe-
cific type of income in question. The country that has the taxing right will then apply
the provisions of its Income Tax Act. If no double-tax agreement exists, the Act’s provi-
sions must be applied.
A double-tax agreement is entered into by the revenue authorities of two countries that
often trade with each other in order to determine who has taxing rights, that is to say
who may tax certain types of income. As a result, certain types of income are only taxa-
ble in one of the two countries. South Africa has comprehensive double-tax agreements
with about 85 countries.

13.3.2.1 Foreign dividends (paragraph (k) of ‘gross income’ and

section 10B) and headquarter company dividends
In terms of paragraph (k), foreign dividends are specifically included in gross income.
This section includes the gross amount of the foreign dividend (before the deduction
of any withholding tax) in gross income. It is important to note that foreign dividends
are not subject to dividends tax, except for dividends that are paid by dual-listed
companies (refer to 5.4.4).

558
13.3 Chapter 13: Individuals

Example 13.4
Wiley Wonders earned the following investment income during the current year of
assessment:
R
Taxable foreign dividends 26 200
Interest from foreign investments 900
You are required to calculate how much foreign income will be included in Wiley’s
taxable income for the current year of assessment.

Solution 13.4
Wiley R R
Foreign dividends (gross income special inclusion) 26 200
Less: Exempt (section 10B) (R26 200 × 25 / 45) (14 556) 11 644
Interest from foreign investments (gross income and no exemption) 900
Included in taxable income 12 544

In terms of section 23(q), deductions in respect of expenditure incurred in the pro-

duction of income from foreign dividends are not allowed. Residents will be entitled to
a rebate or credit for direct foreign taxes paid in respect of foreign dividends. The
rebate is limited to the amount of foreign tax levied on the dividends.

Example 13.5
Joseph Malema, a South African resident, pays income tax at the marginal rate of 41%.
Joseph holds 3% of the total equity share and voting rights in a foreign company. He
receives a foreign dividend of R50 000 on shares, which is subject to a dividend withhold-
ing tax of 10%. Joseph incurred interest expenditure of R2 000 on a loan which he used to
purchase the shares in respect of which the dividend was received.
You are required to calculate how much tax is payable by Joseph in relation to the for-
eign dividends for the current year of assessment.

559
A Student’s Approach to Taxation in South Africa 13.3

Solution 13.5 R
Foreign dividends (gross income special inclusion) 50 000
Expenditure in the production of income – prohibited in terms
of section 23(q) nil
Less: Exempt (section 10B(3)) (R50 000 × 25 / 45) (Note) (27 778)
Included in taxable income 22 222
Additional tax at 41% 9 111
Less: Foreign tax rebate [Lesser of (R50 000 × 10%) or (R22 222 × 41%)] (5 000)
South African tax payable on foreign dividends 4 111
Note
None of the full exemptions in terms of section 10B(2) applies to these foreign dividends.

Collective investment schemes – foreign dividends (section 25BA)

Where an amount is distributed by the portfolio within 12 months of the date of
receipt of the portfolio the amount is deemed to have accrued directly to the holder of
the participatory interest (on the date of distribution). Where an amount (that is not
distributed by the portfolio within 12 months of its accrual to the portfolio), is subse-
quently distributed the amount is exempt in the hands of the holder of the interest (in
terms of section 10(1)(iB), so long at the amount was subject to normal tax in the
portfolio’s hands. So if the amount distributed represents foreign dividends the tax
treatment can be summarised as follows:

Distributed within 12 Deemed to accrue directly Included in the gross income

months from its accrual to the holder. of the holder (could be exempt
in terms of section 10B).
Distributed after 12 Accrues to the portfolio Amount is exempt in the
months (could be exempt under holder’s hands.
section 10B).

13.3.2.2 Other foreign income

A South African resident is taxed on all forms of foreign income (that is to say their
worldwide income). Where foreign income is taxed in the foreign country and is
included in South African taxable income, the amount will have been subject to tax
twice. In this case, the South African resident is entitled to claim a rebate (reduction)
against their South African tax. This foreign tax rebate is contained in section 6quat of
the Act (refer 13.5). The rules cannot be dealt with yet as this rebate takes into
account the specific deductions that the taxpayer can claim, therefore it is dealt with
later in the chapter.

560
13.3 Chapter 13: Individuals

REMEMBER

• All other foreign income, such as royalties, rental, trade income etc., must also be
included in the gross income of a South African resident.
• Only South African residents can claim the foreign tax rebate (section 6quat). This is a
rebate to reduce the South African tax payable; it is not a deduction from taxable income.

Example 13.6
Sam Shoba (66 years old) and his wife (Sindy, 55 years old), who are married out of com-
munity of property and are both South African residents, earned the following investment
income during the current year of assessment:
Sam R
Taxable foreign dividends 14 200
Interest from foreign investments 11 000
Interest from local investments (not tax free investments) 38 500
Sindy
Taxable foreign dividends 400
Interest from foreign investments 1 500
Interest from local investments (not tax free investments) 24 000
You are required to calculate Sam and Sindy’s taxable income for the current year of
assessment.

Solution 13.6
Sam R R
Foreign dividends 14 200
Less: Exemption (R14 200 × 25 / 45) (7 889) 6311
Interest from foreign investments (fully taxable) 11 000
Interest from local investments 38 500
Less: Interest exemption – R34 500 (34 500) 4 000
Taxable income 21 311
Sindy
Foreign dividends 400
Less: Exemption (R400 × 25 / 45) (222) 178
Interest from foreign investments 1 500
Interest from local investment 24 000
Less: Interest exemption – R23 800 (23 800) 200
Taxable income 1 878

561
A Student’s Approach to Taxation in South Africa 13.4

13.4 Specific deductions

The cost incurred by a taxpayer in terms of their maintenance or that of their family
or establishment are prohibited as deductions in terms of section 23(a). Private or
domestic expenses do not qualify for a tax deduction in terms of the general deduc-
tion formula (section 11(a)) as they are not incurred in the production of income.
Their deduction is also specifically prohibited by section 23(b).
Furthermore, section 23(m) prohibits deductions in terms of section 11 that relate to
employment by a person who derives remuneration except for the following deduc-
tions (provided the expenses are related to employment):
• contributions to pension funds, provident funds or retirement annuity funds (sec-
tion 11F);
• legal expenses (section 11(c));
• depreciation allowance (wear-and-tear) (section 11(e));
• bad debts allowance (section 11(i));
• provision for bad debts allowance (section 11(j));
• refund of an amount for services rendered or a refund in respect of a restraint of
trade, where either amount had been included in gross income (section 11(nA) and
(nB)); and
• rent, repairs or expenses (section 11(a) and (d)) to the extent that they are not pri-
vate and domestic expenses (home study expenses).
Remuneration for the purposes of this section is remuneration as defined in para-
graph 1 of the Fourth Schedule. A person who is an agent or representative whose
remuneration is normally derived mainly (more than 50%) in the form of commission
based on sales will not be subject to section 23(m) prohibition and may deduct ex-
penses in terms of section 11.
‘Remuneration’ includes income received whether in cash or otherwise and whether
or not in respect of services rendered, including:
• a salary;
• wage;
• bonus;
• commission;
• emolument;
• superannuation allowance;
• stipend;
• voluntary awards in respect of employment;
• payments made in commutation of amounts due under any contract of employment
or service;
• restraint-of-trade payments;
• fringe benefits;
• gain on qualifying equity shares (refer to chapter 13);

562
13.4 Chapter 13: Individuals

• an amount from equity instruments that is required to be included in taxable

income in terms of section 8C (from 1 March 2016);
• transfer of amounts from pension to provident fund;
• leave pay;
• overtime pay;
• gratuity;
• fee;
• pension;
• retiring allowance;
• annuity;
• retirement fund lump sum benefits;
• retirement fund lump sum withdrawal benefits;
• the first 80% of travel allowance (taxable benefit) except where the employer is
satisfied that the motor vehicle will be used at least 80% of the time for business
purposes, then the amount included in remuneration is only 20%;
• any other allowance, except in the case of the holder of a public office (in terms of
section 8) will be 50%;
• the first 80% of the taxable benefit for the right of use of a motor vehicle (except
where the employer is satisfied that the motor vehicle will be used at least 80% of
the time for business purposes during the current year of assessment, then the
amount included in remuneration will only be 20% of the fringe benefit);
• an amount paid that can be linked to services rendered or to be rendered; and
• lump sum payments by employers.
Remuneration excludes:
• state pensions paid to old-age pensioners, blind persons, disabled persons and
grants in terms of the Children’s Act;
• payment for services to a person who carries on an independent trade (refer to
11.6.2) other than:
– payments made to a person who receives remuneration; or
– to whom any remuneration accrues by reason of any services rendered by such
person to or on behalf of a labour broker or person (or class or category of person);
– whom the Minister of Finance by notice in the Gazette declares to be an
employee for the purposes of this definition; and
– a personal service trust and personal service company;
• reimbursive payments to employees for business expenses; and
• annuities payable in terms of a divorce order or separation agreement.
These expenses are now discussed in the order that they are deducted when calcu-
lating taxable income.

563
A Student’s Approach to Taxation in South Africa 13.4

13.4.1 Expenses and allowances deductible by salaried taxpayers

(section 23(m))
The following expenses may be deducted by a salaried taxpayer, but only to the
extent that they relate to the taxpayer’s employment.

Legal expenses (section 11(c))

Legal expenses include fees for the services of legal practitioners, expenses incurred
in getting evidence or expert advice, court fees, witness fees and expenses, taxing
fees, the fees and expenses of sheriffs or messengers of the court and other expenses
of litigation that are of a similar nature to any of these expenses.
These expenses may only be deducted where the taxpayer actually incurs legal
expenses regarding a claim, dispute or action arising in the course of the ordinary
operations (employment) undertaken by the taxpayer. Legal fees may not be capital
in nature.

Depreciation of an asset (section 11(e))

A wear-and-tear allowance represents the amount by which an asset owned by the
taxpayer has diminished in value. This deduction may only be claimed in respect of
an asset used for the purposes of earning salary income. The Act refers to write-off
periods that are listed for this purpose in a public notice issued by the Commissioner.
Currently the write-off period of assets is supplied by the Commissioner in terms of
Binding General Ruling No. 7.

Bad debts (section 11(i))

Bad debts may only be claimed in respect of a salary that has not been paid, if the
taxpayer can prove that the employer will never pay the amount and that it has
already been included in taxable income in the current or a previous year of assess-
ment.

Provision for doubtful debts (section 11(j))

Where an employee can prove that there is a strong likelihood that an employer is not
going to pay a salary that has already been included in the taxpayer’s taxable income,
and it is outstanding for 90 days or more, the taxpayer is entitled to claim a provision
equal to 25% of the debt as a deduction. This provision must however be included in
income in the following year of assessment.

Entertainment expenses (section 11(a))

Entertainment expenses may only be deducted by an agent or representative who
earns more than 50% of their remuneration (income from employment) in the form of
commission from sales. The expenses must be incurred in the production of income
and not of a capital nature, in terms of the general deduction formula (section 11(a)).
Entertainment expenditure is not defined in the Act. It was previously described as
expenditure incurred in the provision of hospitality of any kind, which specifically
included:
• food, drink or accommodation;

564
13.4 Chapter 13: Individuals

• a ticket or voucher entitling a person to admission to a theatre, exhibition or club,

to attend a show, display or performance or to use or enjoy a sporting, recreational
or other facility;
• a gift of goods intended for the personal use or enjoyment of a person;
• travel facility; and
• a voucher entitling the recipient or a holder of the voucher to exchange it for food,
drink or accommodation or for a ticket, voucher, gift, or travel facility as described
above.
Deductions cannot be made in terms of section 11(a) for entertainment expenditure
incurred by an employee (or the holder of an office) for which the employee derives
remuneration (as defined in the Fourth Schedule), unless they are agents or repre-
sentatives normally earning commissions based on their sales or the turnover
attributable to them.
An agent or representative who earns more than 50% of their remuneration (amount
paid by employer) in the form of commission can claim all the entertainment costs
they incur in the production of income not of a capital nature in terms of the general
deduction formula (section 11(a)).

REMEMBER

• Only a taxpayer who earns commission that is more than 50% of their total remunera-
tion may deduct entertainment expenses.
• For entertainment expenses to be deductible in these circumstances, they must comply
with all the requirements of section 11(a).

Example 13.7
Samuel Gxagxa, a salesman, earned the following income during the year of assessment:
R
Salary 30 000
Commission on sales 25 000
Annual prize for the highest sales for the year 3 000
Entertainment allowance 1 200
59 200

During the year, Samuel incurred entertainment expenditure amounting to R1 500.

You are required to calculate the amount that Samuel may claim as a deduction in respect
of entertainment expenditure.

565
A Student’s Approach to Taxation in South Africa 13.4

Solution 13.7
As Samuel does not earn remuneration mainly (more than 50%, (R25 000/R59 200 = 42%))
in the form of commission on sales, he may not claim a deduction in terms of sec-
tion 11(a). If more than 50% of his remuneration had consisted of commission earnings,
he would have been able to claim the full amount of his entertainment expenditure in
terms of section 11(a) if it were incurred in the production of his income and not of a capital
nature.
Note that the winning of a prize would, in certain circumstances, constitute a receipt of a
capital nature. In the above circumstances, however, it is earned by virtue of the tax-
payer’s trading activities (his employment) and will therefore be taxable.

REMEMBER

• An entertainment allowance is always included, in full, in gross income.

Home office expenses (sections 11(a), (d), 23(b) and 23(m))

A taxpayer who is forced by their employer to bear the cost of maintaining a home
office as their central business location may deduct legitimate expenses that comply
with the requirements of section 11(a), or repairs in terms of section 11(d). This deduc-
tion will be particularly relevant for those who had to work from home during the
Covid-19 pandemic. The deduction may be for costs such as rental, repairs or ex-
penses relating to the office. Section 23(b) disallows any portion of these expenses if
they are not expended for the purposes of trade.
The office expenses can only be claimed where:
• the part of the house used as a home office is specifically equipped for purposes of
the employee’s trade;
• the part is regularly and exclusively used for the employee’s trade; and
• the employee’s duties are mainly performed in that home office.
It is important to note that the ‘exclusivity’ requirement means that the part that is
used for trade may not be used for any purpose other than the taxpayer’s trade. If the
trade is employment, section 23(b) imposes further limitations on claiming a deduc-
tion. For employees who do not earn mainly commission, their duties must be per-
formed mainly (>50%) in the part of the private premises occupied for the purpose of
trade.

Calculating the deduction

Permitted expenditure
The expenses are limited in terms of section 23(b), which is rent, cost of repairs or
expenses in connection with any premises occupied for the purposes of trade. Ex-
penses in connection with the premises could include interest on a home loan, rates
and taxes, levies, electricity and cleaning costs. Communication costs, for example
internet or fibre, are not deductible as they are not in connection with the premises or

566
13.4 Chapter 13: Individuals

repairs. Section 23(m) further permits an employee to deduct wear and tear. An
employee is also permitted to a deduction or a section 11(e) allowance on office
equipment and furniture.
Apportionment
An expense relating to the premises need to be apportioned. SARS accepts that ex-
penses relating to the part of the premises occupied for trade can be based on the
proportion of the floor area to the total floor area of all the buildings on the property
(including the home office and out buildings).
Payments related to employment that are refunded (section 11(nA) and (nB))
Where a taxpayer receives an amount, including voluntary awards, for services
rendered or in respect of employment, or a restraint of trade payment, an amount
repaid by the taxpayer may be deducted.

13.4.2 Contributions to retirement funds (section 11F)

Section 11F is applicable to all amounts that have been contributed to any pension,
provident or retirement annuity funds. Before the deduction is discussed a brief
discussion on pension, provident and retirement annuity funds is included for those
who do not know the difference between them.
Pension and provident funds
Pension and provident funds are linked to employment. Contributions made to a
pension fund or provident fund are a type of forced saving. Every month employers
set aside a prescribed amount of each employee’s income from employment and
contribute it to a pension or provident fund. In most instances, the employer will also
contribute an amount on behalf of each employee. When an employee retires, the
fund will pay out all the contributions made to the fund by the employer and em-
ployee, plus interest earned over the years. Therefore, when an employee retires and
is no longer earning a salary, they will receive a monthly pension instead, based on
the amount that was contributed during their working years. In practice, employees
are compelled to join the employer’s pension or provident fund, if the employer has
one.
Each month a percentage of the employee’s salary is deducted by the employer and
paid over to the pension or provident fund. The employer also considers these con-
tributions when they determine the amount of employees’ tax to be withheld from
the employee’s salary or wage. In most cases, an employer will also make a monthly
contribution to the fund on behalf of the employee. The contributions to the fund are
made by the employee and the employer.

Retirement annuity fund contributions

Where taxpayers do not contribute to a pension or provident fund or where they
would like to supplement their retirement earnings, they can contribute to a retire-
ment annuity fund.
Membership of a retirement annuity fund is voluntary and contracts are entered into
independently between a person and the desired fund. This means that, unlike pension
funds or provident funds, retirement annuity funds are not linked to employment.

567
A Student’s Approach to Taxation in South Africa 13.4

REMEMBER

• A retirement annuity fund is not the same as retirement funds.

‘Retirement funds’ is used to describe all funds for retirement savings, namely pension
fund, provident fund and retirement annuity fund.

Contributions disallowed in previous years

Contributions made in previous years that were not allowed because they exceeded
the limitation (referred to as ‘unclaimed balance of contributions’) are deemed to be
contributed in the next year. This unclaimed balance of contributions at the end of the
2022 year of assessment is only deemed to be contributed in the 2023 year of assess-
ment for the purposes of section 11F if it was not previously:
• allowed as a deduction (in terms of section 11F) in any year of assessment (up to
the end of the 2022 year of assessment)
• taken into account in terms of paragraph 5(1)(a) or 6(1)(b)(i) of the Second Schedule
(up to the end of the 2023 year of assessment), or
• taken into account in determining amounts exempt under s section 10C (up to the
end of the 2023 year of assessment).
This means that any unclaimed balance of contributions at the end of the 2022 year of
assessment is used in the following sequence in the 2023 year of assessment.
• as a deduction in terms of paragraph 5(1)(a) or 6(1)(b)(i) of the Second Schedule,
when the taxpayer receives a retirement fund lump sum benefit or a retirement
fund withdrawal benefit in the 2023 year of assessment (refer to chapter 14);
• as an exemption in terms of section 10C against any qualifying annuities received
during the 2023 year of assessment; and
• any remaining unclaimed balance is added to the current contributions made to
any retirement fund during the 2023 year of assessment and is referred to as actual
contributions.
Current contributions not allowed to be deducted in terms of the section 11F deduc-
tion will never form part of the current year’s unclaimed balance of contributions.
Contributions to provident funds were not allowed as deductions before 1 March
2016, therefore the rollover of unclaimed balance of contributions to provident funds
will only be effective from the 2017 year of assessment for amounts disallowed in the
2017 year of assessment. The rollover is not applicable to amounts disallowed before
1 March 2016.

Contributions made by the employer

An amount contributed by an employer is deemed to be a current contribution to the
extent that it has been included in the income of the person as a fringe benefit. A
partner in a partnership is deemed to be an employee for the purposes of this deduc-
tion.

568
13.4 Chapter 13: Individuals

Deduction of contributions
With effect from 1 March 2016, all contributions to retirement funds are deductible
under section 11F, limited to the provisions of the section. Contributions to provident
funds were not allowable as a deduction before 1 March 2016.

REMEMBER

• A limit means that you cannot deduct more than that amount from taxable income. This
means that if you contributed R10 000 and the limit is R8 000, you are only entitled to
deduct R8 000; however, if you wish to deduct R5 000 and the limit is R8 000, you are
entitled to deduct the full R5 000 as it is less than the limit.
• You can never deduct more than the taxpayer actually paid.

Contributions made to pension, provident and retirement annuity funds during a

year of assessment and any unclaimed balance of contributions are added together
and in total are limited to a deduction of the lesser of
• R350 000 (this amount is never apportioned for this deduction); or
• 27,5% of the higher of
– ‘remuneration’ as defined in paragraph 1 of the Fourth Schedule (refer to 13.4)
(excluding retirement fund lump sum benefits, retirement fund withdrawal
benefits and severance benefits); or
– ‘taxable income’ (excluding retirement fund lump sum benefits, retirement fund
withdrawal benefits and severance benefits) before this deduction and a section
18A deduction (donations to public benefit organisations – refer to 13.4.3). Taxa-
ble income, for the purpose of calculating the 27,5%, includes any capital gains
inclusion for the purposes of this part of calculating the limitation for this de-
duction; or
• taxable income (excluding retirement fund lump sum benefits, retirement fund
withdrawal benefits and severance benefits) before this deduction and section 18A
deduction and before the inclusion of any taxable capital gain.
The inclusion of the third leg of the limitation, namely taxable income, in effect means
that the deduction of retirement fund contributions can never create a loss.

REMEMBER

• For the purposes of section 11F, retirement fund deduction ‘remuneration’ excludes
– a retirement fund lump sum benefit;
– a retirement fund lump sum withdrawal benefit; and
– a severance benefit.
• Contributions consist of all contributions made by the taxpayer to pension, provident
and retirement annuity funds plus contributions made by the employer on which the
taxpayer has been taxed and any unclaimed balance of contributions.
• Allowable contributions to retirement funds are deducted after the inclusion of a
taxable capital gain but before the deduction for donations to public benefit organisa-
tions.

569
A Student’s Approach to Taxation in South Africa 13.4

Example 13.8
Harry Hadebe earns a salary of R442 000 and a non-pensionable bonus of R5 000. He is a
member of his employer’s pension fund. He contributes R35 000 per annum in respect of
current contributions and R2 000 per annum in respect of ‘past period’ contributions. His
employer did not contribute to the fund. His remuneration amounts to R447 000 and his
taxable income before this deduction is R600 000.
Hilda Hadebe (his wife) is a teacher employed in a government school. She earns a salary
of R235 000 a year and makes an annual contribution of R15 000 to the government pen-
sion fund. Her employer also contributes R15 000 per annum to the fund on her behalf
and this has been included in her taxable income as a fringe benefit. Her remuneration
amounts to R250 000 and her taxable income before this deduction is also R250 000.
You are required to calculate the amount that Harry and Hilda will be able to deduct in
respect of pension fund contributions.

Solution 13.8
Harry
Contributions to retirement fund (R35 000 + R2 000 = R37 000)
Deduction limited to the lesser of
• R350 000; or
• 27,5% × the higher of
remuneration (R447 000) or taxable income (R600 000)
Therefore 27,5% × R600 000 = R165 000; or
• R600 000
R165 000 is less than R350 000 and R600 000 therefore the limit is R165 000
Harry can therefore deduct the full amount of his contributions of R37 000 as they are
less than the limit.
Hilda
Contributions to retirement fund (R15 000 (Hilda) + R15 000 (employer) = R30 000)
Deduction limited to the lesser of
• R350 000; or
• 27,5% × the higher of
remuneration (R250 000) or taxable income (R250 000)
Therefore 27,5% × R250 000 = R68 750; or
• R250 000
R68 750 is less than R350 000 and R250 000 therefore limit is R68 750.
Hilda can therefore deduct the full amount of her contributions of R30 000 as it is less
than the limit.

What would happen If Hilda’s contributions were R70 000 in total (assuming
that her remuneration and taxable income was R250 000)?

570
13.4 Chapter 13: Individuals

Example 13.9
For the current year of assessment, William Wonfor had a taxable income of R225 000 (he
did not receive any retirement fund lump sum benefits during the year), before deducting
any retirement fund contributions. His taxable income is derived from the profits of a
small hardware shop that he owns. Wanda Wonfor, his wife, earned a salary of R85 000
during the year of assessment. From that amount, current pension fund contributions
were deducted by her employer. During the year, William and Wanda made the follow-
ing contributions to retirement funds:
William: Retirement annuity fund contributions R40 000
Wanda: Pension fund contributions (her employer did not contribute) R 3 000
Retirement annuity fund contributions R10 500
Reinstatement retirement annuity fund contributions R2 000
You are required to calculate the amount that William and Wanda will be able to deduct
in respect of retirement annuity fund contributions. Neither of them had any other income
or deductions.

Solution 13.9
William
Contributions to retirement fund – R40 000
Limited to the lesser of
• R350 000; or
• 27,5% of the higher of
remuneration (R0) or taxable income (R225 000)
Therefore 27,5% × R225 000 = R61 875; or
• R225 000
R61 875 is less than R350 000 and R225 000 therefore the limit is R61 875.
William can therefore deduct the amount of his contributions of R40 000 in full as they
are less than the limit.
Wanda
Contributions to retirement funds – R3 000 + R10 500 + R2 000 = R15 500
Limited to the lesser of
• R350 000; or
• 27,5% of remuneration (R85 000) or taxable income (R85 000)
Therefore 27,5% × R85 000 = R23 375; or
• R85 000
R23 375 is less than R350 000 and R85 000 therefore the limit is R23 375.
Hilda can therefore deduct the amount of her contributions of R15 500 in full as they
are less than the limit.

571
A Student’s Approach to Taxation in South Africa 13.4

13.4.3 Donations to public benefit organisations

(section 18A and the Ninth Schedule)
Section 18A allows a taxpayer to deduct an amount of bona fide donations by that
taxpayer in cash or property made in kind, that were actually paid or transferred
during the year of assessment. The deductible donations must be made to:
• a public benefit organisation that has been approved by SARS in terms of sec-
tion 30; or
• an institution, board or body as defined in section 10(1)(cA)(i) that hosts public
benefit activities in South Africa or complies with additional requirements pre-
scribed by the Minister.
Part II of the Ninth Schedule provides that certain public benefit activities may be
classified as approved public benefit activities.
Once it has been established whether or not an amount donated by a taxpayer is an
approved donation for tax purposes, the total of all allowable donations made during
the year of assessment are then subject to a limitation of:
• 10% × taxable income before this deduction (excluding any retirement fund lump
sum benefit, retirement fund lump sum withdrawal benefit and severance benefit).
An amount that exceeds the limit is carried forward to the following year of assess-
ment and can be claimed as a donation made in that year.

Example 13.10
Gift Mabija (45 years old) had a taxable income of R300 000 during the current year of
assessment before donating the following amounts:
R
Donation to Natal University 800
Donation to AIDS crisis centre (public benefit organisation) 600
Donation to Trees for Africa (not a public benefit organisation) 500
You are required to calculate the deduction in terms of donations that Gift will be able to
deduct for income tax purposes. You can assume that where applicable all official receipts
were obtained and that Gift did not receive any retirement fund lump sum benefits dur-
ing the year.

Solution 13.10
Qualifying donations R
Donation to Natal University – allowable 800
Donation to AIDS crisis centre (public benefit organisation) – allowable 600
Donation to Trees for Africa (not a public benefit organisation) nil
1 400
Limited to 10% × R300 000 = R30 000
Gift only donated R1 400 of allowable donations and can therefore deduct R1 400 in full
because it is less than the limit.

572
13.4 Chapter 13: Individuals

REMEMBER

• A donation may only be claimed in respect of section 18A where a receipt, as prescribed
by the Act, has been received.

Example 13.11
The following information relates to Sam Jacombe (30 years old, unmarried) for the cur-
rent year of assessment:
R
Salary 270 000
Bonus (non-pensionable) 6 000
South African interest (not tax free investments) 33 800
Medical fund contributions made by Sam (40%) 24 000
His employer pays 60% of the contributions to the fund
Retirement annuity fund contributions – current 4 200
Pension fund contributions – current 8% of salary
Sam pays 100% of his contributions to all retirement funds
Donation to public benefit organisations – official receipt received 800
Donation to non-public benefit organisations – receipt received 300
Medical expenses not covered by the fund 5 340
You are required to calculate Sam’s taxable income for the current year of assessment.

Solution 13.11
Calculation of Sam’s taxable income for the current year of assessment
R R
Salary 270 000
Bonus 6 000
Interest 33 800
Less: Exemption (23 800) 10 000
Medical fringe benefit – employer’s contribution
(R24 000 / 40% × 60%) 36 000
Taxable income before retirement fund deduction 322 000

continued

573
A Student’s Approach to Taxation in South Africa 13.4

Less: Retirement fund contributions

(8% × R270 000 = R21 600 + R4 200 = R25 800)
Limited to the lesser of
• R350 000; or
• 27,5% × the higher of
Remuneration (R270 000 + R6 000 + R36 000 = R312 000) or
Taxable income (R322 000)
Therefore 27,5% × R322 000 = R88 550; or
• R322 000
R88 550 is less than R350 000 and R322 000 and is
therefore the limit
Therefore allow R25 800 in full (25 800)
Taxable income before donations deduction 296 200
Less: Donations to public benefit organisations 800
Donations to non-public benefit organisations nil
800
Limited to 10% × R296 200 = R29 620; thus deduct in full (800)
Taxable income 295 400

Example 13.12
Joe Mashishi is 54 years old; he is married and has three children, all under 18 years of
age. Joe had the following income and expenses for the current year of assessment:
R
Salary 150 000
Bonus 15 000
Contributions to retirement annuity fund (Note 1) 3 600
Donations (Note 2) 1 600
Contributions to pension fund (Note 3) 12 000
Notes
1. Joe contributed R300 per month to a retirement annuity fund.
A total of R1 300 was not deducted at the end of the previous year of assessment.
2. He made the following donations during the year:
donation to Natal University 500
donation to AIDS crisis centre (public benefit organisation) 600
donation to Trees for Africa (not a public benefit organisation) 500
3. Joe contributed 8% of his salary to the pension fund and his employer contributed
R500 a month.
You are required to calculate Joe’s taxable income for the current year of assessment. You
can assume that, where applicable, all official receipts were obtained.

574
13.4–13.5 Chapter 13: Individuals

Solution 13.12
R
Calculation of taxable income
Salary 150 000
Bonus 15 000
Employer’s contribution to pension fund (R500 × 12 months) 6 000
Income 171 000
Less: Contributions to retirement funds
(8% × R150 000 = R12 000 + R6 000 + R3 600 + R1 300 = R22 900)
Limited to the lesser of
• R350 000; or
• 27,5% × the higher of
Remuneration (R171 000); or
Taxable income (R171 000)
Therefore 27,5% × R171 000 = R47 025; or
• R171 000
R47 025 is less than R350 000 and R171 000, therefore limit
is R47 025
Allow contributions in full (22 900)
Taxable income before donations deduction 148 100
Less: Donations R R
Donation to Natal University – allowable 500
Donation to AIDS crisis centre – allowable 600
Donation to Trees for Africa – not allowable nil
1 100
Limited to 10% × R148 100 = R14 810 therefore can deduct full amount (1 100)
Taxable income 147 000

13.5 Calculation of final normal tax liability

(sections 6, 6A, 6B and 6quat)
After a person’s taxable income has been determined this amount is used to calculate
their normal tax liability for a year or period of assessment.

R
Normal tax calculated based on the tax tables xxx
Less: Annual rebates (section 6) (xxx)
Less: Medical tax credits (sections 6A and 6B) (xxx)
Normal tax liability for the year xxx
Less: PAYE and provisional tax (prepaid taxes) (xxx)
Normal tax due by or to the taxpayer xxx
Add: Withholding taxes xxx
Final tax liability of natural person xxx

575
A Student’s Approach to Taxation in South Africa 13.5

Calculating final normal tax liability

Steps 1–6: Calculate the total taxable income for the year of assessment as dis-
cussed previously.

Step 7: Calculate normal tax by using the tax table (paragraph 1.5.2).

Step 8: Determine the age of the taxpayer on 28/29 February of the current
year of assessment. Determine whether the taxpayer qualifies for the
full rebate for the current year of assessment, if not pro rata the
rebate (paragraph 1.5.3).

Step 9: Calculate the medical scheme fees tax credit and the additional
medical expenses tax credit (paragraphs 1.5.4 and 1.5.5).

Step 10: Calculate tax credits for specific transactions (if any) (paragraph 1.5.6).

Step 11: Calculate normal tax liability: normal tax for the year (Step 7)
minus
• rebates (Step 8);
• medical credits (Step 9);
• tax credits for specific transactions (Step 10).

Step 12: Calculate prepaid taxes (PAYE and provisional tax) (paragraph 1.5.7).

Step 13: Calculate final normal tax liability

= Normal tax liability (Step 11) minus prepaid taxes (Step 12).

13.5.1 Year or period of assessment (section 1)

The following guidelines can be used to determine the year or period of assessment:
• In the case of a person other than a company, the year of assessment ends on 28 or
29 February.
• When a taxpayer dies, the period of assessment will run from 1 March up to and
including the date of death.
• When a baby is born and they are entitled to income, their year of assessment is
from the date of birth (including this day) until the end of February.
• A taxpayer who is declared insolvent will have a period of assessment from
1 March up to and including the date of insolvency.
• A taxpayer who emigrates will have a year of assessment from 1 March up to the
day preceding the day that they ceased to be a resident.
• A taxpayer who earns income for the first time, however, will have a period of
assessment of 12 months irrespective of the date of employment or of commencing
to earn income.

576
13.5 Chapter 13: Individuals

• A company’s year of assessment is the financial year of the company ending dur-
ing the calendar year in question.

REMEMBER

• Where the period of assessment is less than a full year, rebates will be apportioned by
the total number of days of the period as part of the full year of assessment.

Current year of assessment

The current year of assessment for natural persons starts on 1 March 2021 and ends
on 28 February 2022. For the purposes of this book and examples, if a transaction
takes place on 31 August in the current year of assessment, it means that the transac-
tion took place on 31 August 2021.
The ‘current year of assessment’ in terms of this book will be the 2022 year of assess-
ment, which ends on 28 February 2022. If an amount is carried over to the next year of
assessment, that is to say the 2023 year of assessment, it is carried over to 1 March
2022 (the beginning of the following year of assessment). The same principle applies
to amounts carried forward from the previous year of assessment (2021 year of as-
sessment). These amounts are available for deduction on 1 March 2021.

13.5.2 Normal tax (section 5)

In terms of section 5(2) of the Act, the applicable rates of tax are determined annually
by Parliament. Each year, a Revenue Laws Amendment Act, which contains the
normal tax tables that must be used during that particular year of assessment, is
approved by Parliament.
The tax tables applicable to the current year of assessment are given in Appendix A
(at the back of this book) and are used to illustrate the calculation of normal tax on
taxable income.

Example 13.13
Gershane Yosh has a taxable income of R543 000 for the current year of assessment.
Vershi Yosh has a taxable income of R350 000 for the current year of assessment.
You are required to calculate Gershane and Vershi’s normal tax for the current year of
assessment.

577
A Student’s Approach to Taxation in South Africa 13.5

Solution 13.13
R
Gershane (taxable income = R543 000)
On R488 700 (per the tax tables) 115 762
Add: 36% of R54 300
(the amount in excess of R488 700 thus R543 000 – R488 700) 19 548
Normal tax 135 310
Vershi (taxable income = R350 000)
On R226 000 (per the tax tables) 40 680
Add: 26% of R124 000
(the amount in excess of R226 000 thus R350 000 – R226 000) 32 240
Normal tax 72 920

Why is there a difference in the tax percentage used in the two calcula-
tions?

The example given here illustrates the calculation of normal tax on taxable income,
but can also be used to explain the two concepts often referred to in tax literature,
namely the marginal and the average rate of tax.
• Marginal rate of tax This rate of tax applies to an additional R1 of taxable income
earned. Referring to Example 13.13, the marginal rate of income tax is 31% because
if Gershane earned R1 more of taxable income, she would have to pay 31% tax on
this R1. Marginal tax rate is before applicable rebates and medical tax credits, it’s
the highest tax rate that can be applied to a portion of your income (not all of it).
• Average rate of tax This is the rate of tax applying to the total taxable income.
Gershane’s average rate of tax is
R137 919
× 100, therefore the average rate is 25,4%.
R543 000
The average tax rate is applied before rebates and tax credits. You will observe that
the marginal rate of tax is high but the average rate of tax is much lower. For natural
persons, the maximum marginal tax rate of 45% comes into operation on taxable
income in excess of R1 731 600.

REMEMBER

• When you evaluate the tax implications of a specific transaction, you always refer to the
marginal tax rate.

13.5.3 Normal tax rebates for natural persons (section 6)

Section 6 of the Act prescribes certain normal tax rebates to be deducted from the normal
tax payable by natural persons. Natural persons qualify for the following three rebates:
• primary rebate (all natural persons) – R16 425;

578
13.5 Chapter 13: Individuals

• secondary rebate (natural persons over 65 years of age) – R9 000; and

• tertiary rebate (natural persons over 75 years of age) – R2 997.
The total rebates can be summarised as follows:

Age of the taxpayer Total rebates

Under 65 years of age R16 425
65 years but less than 75 years of age R25 425 (R16 425 + R9 000)
75 years and older R28 422 (R16 425 + R9 000 + R2 997)

Normal tax rebate rules

• To qualify for the secondary rebate (over 65 rebate), the taxpayer must be 65 years
of age or older on the last day of the year of assessment (or would have been had
they lived to that day). The same applies to the tertiary rebate.
• When the taxpayer’s year of assessment is less than 12 months (for example where
the taxpayer dies or the date of insolvency is before 28/29 February), all three of
the above-mentioned rebates will be reduced proportionally.
• If the normal tax rebates exceed the normal tax, these rebates only reduce the
amount of normal tax liability to zero and do not create a tax refund.

Calculation of net normal tax

Step 1–6: Calculate the total taxable income for the year, as explained earlier.

Step 7: Calculate the normal tax by using the tax table.

Step 8: Determine the age of the taxpayer at 28/29 February of the current year
of assessment. Determine if the taxpayer will qualify for the full rebate in
the year of assessment. If not, the rebate should be reduced pro rata.

Step 9: The normal tax liability will be the normal tax (Step 7) for the year
minus rebates (Step 8).

Example 13.14
Victoria Dlamini was 83 years old when she died on 31 August 2022. She earned a taxable
income of R160 000 from 1 March 2022 to 31 August 2022.
You are required to calculate Victoria’s normal tax liability for the current year of assess-
ment.

579
A Student’s Approach to Taxation in South Africa 13.5

Solution 13.14
R R
Taxable income (given) 160 000
Normal tax on R160 000 @ 18% 28 800
Less: Normal tax rebates: 83 years of age
• Primary rebate (natural person) 16 425
• Secondary rebate (over 65) 9 000
• Tertiary rebate (over 75) 2 997
28 422
Reduced pro rata (Note)
184 days / 365 days × R28 422 (14 328)
Normal tax liability 14 472

Note
Due to the fact that the taxpayer died during the year of assessment, the tax period is less
than 12 months; therefore the rebate should be reduced on a pro rata basis.

Do the rebates remain the same for every year?

REMEMBER

• If the tax less the rebate results in a negative amount, the answer is limited to nil.
• If a person starts to work during the year, they will still qualify for the full annual
rebate, as their tax year is for a period of 12 months although they only worked for a
couple of months.
• The rebate must be deducted from normal tax and not from taxable income.

13.5.4 Medical scheme fees tax credit (MTC) (section 6A)

Section 6A of the Act allows deduction of a medical scheme fees tax credits. The tax
credit applies to contributions made to registered medical schemes. The medical
scheme fees tax credit is calculated as follows:
• R347 in respect of benefits to the person;
• R694 in respect of benefits to the person and one dependant; or
• R694 in respect of benefits to the person and one dependant, plus R234 in respect
of benefits to each additional dependant, for each month in which those fees are
paid.

580
13.5 Chapter 13: Individuals

Where more than one person pays fees to a medical scheme, the medical tax credits
listed above must be apportioned between the people paying in the same proportion
as their payment is to the total payment.

REMEMBER

For the purposes of the tax credit a dependant is

• the spouse, partner, dependent children or other members of the taxpayer’s immediate
family. The taxpayer must be responsible for their care and support; or
• any other person who in terms of the rules of the medical scheme to which the taxpayer
belongs, is recognised as a dependant and eligible for benefits.
A ‘child’ is defined as the taxpayer’s child or a child of their spouses.
Children, for the purposes of this section, must have been alive during any portion of the
year of assessment and must be unmarried on the last day of the year of assessment and:
(a) not (or, had they lived, would not have been) over the age of 18; or
(b) wholly or partially dependent for their maintenance on the taxpayer and not liable
for the payment of normal tax in the year of assessment concerned and not (or, had
they lived, would not have been) over the age of 21; or
(c) wholly or partially dependent for their maintenance on the taxpayer and not liable
for the payment of normal tax in the year of assessment concerned, and, to the Com-
missioner’s satisfaction, a full-time student at an educational institution of a public
character, and not (or, had they lived, would not have been) over the age of 26; or
(d) due to physical or mental infirmity, was unable to maintain themselves and was
wholly or partially dependent for their maintenance on the taxpayer and was not
liable for the payment of normal tax.

Example 13.15
Joseph Roos is 35 years old and married to Refilwe (34 years old). They have one child,
Susan (seven years old). None of them have any disabilities. Joseph’s taxable income for
the current year of assessment is R250 000. Joseph is the main member of the medical
fund.
You are required to
(a) calculate Joseph’s normal tax liability for the current year of assessment assuming
that Joseph makes the full medical aid payment in respect of himself, his wife and
child;
(b) calculate the amount that Refilwe can claim as a medical tax credit if the full medical
aid payment that Joseph is required to make R3 000 per month and she pays R1 000
of the payment.

581
A Student’s Approach to Taxation in South Africa 13.5

Solution 13.15
(a) Joseph’s normal tax liability
Calculation of normal tax liability: R
Normal tax (R40 680 + (26% × (R250 000 – R226 000))) 46 920
Less:Primary rebate (16 425)
Less: Medical scheme fees tax credit (R694 (Joseph + Refilwe) + R234
(Susan)) × 12 months = R11 136 (11 136)
Normal tax liability 19 359
Normal tax (R40 680 + (26% × (R250 000 – R226 000))) 46 920
(b) Refilwe’s medical tax credit
MTC calculated as above – R10 656
Apportioned for Refilwe’s payment – R11 136 x R12 000 / R36 000 3 712
Note
In this case Joseph’s MTC would also be apportioned and he would be able to deduct a tax
credit of R7 424.

13.5.5 Additional medical expenses tax credit (AMTC) (section 6B)

There will be an additional medical expenses tax credit (additional medical tax credit)
for medical expenses. The Act provides for the following qualifying medical expenses
to be considered for an additional medical tax credit:
(1) Amounts (that have not been recovered from the medical scheme) that were paid
by the taxpayer during the year of assessment to
(a) a medical practitioner, dentist, optometrist, homeopath, naturopath, osteo-
path, herbalist, physiotherapist, chiropractor or orthopaedist for professional
services rendered or medicines supplied to the taxpayer or their spouse or
child, or a dependant of the taxpayer if the taxpayer was a member of a
scheme or fund and the dependant was, at the time the amounts were paid,
admitted as a dependant of the taxpayer in terms of the fund;
(b) a nursing home or hospital or a nurse, midwife or nursing assistant or to a
nursing agency for the services of such a nurse, midwife or nursing assistant
because of the illness or confinement of the taxpayer or their spouse or child
or a dependant as contemplated in item (a); or
(c) a pharmacist for medicines supplied on the prescription of a person men-
tioned in item (a) above for the taxpayer or their spouse or child.
(2) Amounts (that have not been recovered from the medical scheme) that were paid or
contributed by the taxpayer during the year of assessment for expenditure incurred
outside the Republic on services rendered or medicines supplied to the taxpayer
or their spouse or child that are substantially similar to the services and medi-
cines for which a deduction may be made under item (a), (b) or (c) above.
(3) Expenditure (that has not been recovered from the medical scheme) necessarily
incurred and paid by the taxpayer in consequence of a disability suffered by the
taxpayer or their spouse or child or a dependant as contemplated in item 2(a).

582
13.5 Chapter 13: Individuals

REMEMBER

• The medical scheme and all practitioners and nurses referred to above have to be regis-
tered with their respective controlling bodies and in terms of certain Acts.

Taxpayers 65 and over

All contributions and expenses will be converted into medical tax credits. A taxpayer 65 and
over the age of 65 will be entitled to the following credits:
• the standard monthly medical scheme fees tax credit in respect of any contribu-
tions paid to a medical scheme – same as all other taxpayers (section 6A);
• a 33,3% credit for any contributions paid that exceed three times the medical tax
credit (as calculated in the first bullet above); and
• a 33,3% additional medical tax credit based on all qualifying medical expenses not
refunded by medical scheme (excluding contributions).

Example 13.16
David Hess is 66 years old. For the year of assessment commencing 1 March 2022, he
made contributions of R3 000 per month to a medical scheme on behalf of himself and his
wife. He paid R23 500 qualifying medical expenses for the year. David earned a salary of
R340 000.
You are required to calculate David’s medical tax credits for the 2023 year of assessment.

Solution 13.16
R
Medical scheme fees tax credit (R694 × 12 months) (8 328)
Excess medical scheme fees credit
(R36 000 (monthly contributions) − (3 × R8 328)) × 33,3% (3 668)
Additional medical expenses tax credit (R23 500 × 33,3%) (7 826)
Total medical tax credits that will reduce his normal tax (19 822)

Taxpayers with a disability

Where the taxpayer is not yet 65 years old and the taxpayer, spouse and/or child is a
person with a disability, they will be entitled to the following credits against normal
tax:
• the standard monthly medical tax credit in respect of any contributions paid to a
medical scheme – same as all other taxpayers;
• a 33,3% credit for any contributions paid that exceed three times the tax credit (as
calculated in the first bullet above); and
• a 33,3% additional medical tax credit based on all qualifying medical expenses not
refunded by medical scheme (excluding contributions).

583
A Student’s Approach to Taxation in South Africa 13.5

Example 13.17
Lisa Sharpe is 35 years old. For the year of assessment commencing 1 March 2022, she
made contributions of R2 000 per month to a medical scheme on behalf of herself and her
two children. She paid R23 500 qualifying medical expenses for the year. Her employer
contributed R15 000 to the medical scheme during the year. Lisa earned a salary of
R275 000. Lisa’s son has a disability.
You are required to calculate Lisa’s medical tax credits for the 2023 year of assessment.

Solution 13.17
R
Medical scheme fees tax credit (R694 + R234) × 12 months (11 136)
Excess medical scheme fees credit (R24 000 (own contributions) + R15 000
(fringe benefit employer contributions) – (3 × R11 136)) × 33,3% (1 862)
Additional medical tax credit (R23 500 × 33,3%) (7 826)
Total tax credits (20 824)

Taxpayers not yet 65 years old

These taxpayers will be entitled to the following credits that will reduce normal tax:
• the standard monthly medical tax credit in respect of any contributions paid to a
medical scheme – same as all other taxpayers;
• an additional medical tax credit equal to 25% of the sum of:
– any contributions paid that exceed four times the tax credit (as calculated in the
first bullet above); and
– qualifying medical expenses

that exceed 7,5% of the taxpayer’s taxable income.

Example 13.18
Joe Blunt is 35 years old. For the year of assessment commencing 1 March 2022, he made
contributions of R6 000 per month to a medical scheme on behalf of himself, his wife and
a child. He paid R50 000 qualifying medical expenses for the year. His employer contrib-
uted R40 000 to the medical scheme during the year. Joe earned a salary of R500 000.
You are required to calculate Joe’s medical tax credits for the 2023 year of assessment.

584
13.5 Chapter 13: Individuals

Solution 13.18
R
Medical scheme fees tax credit (R694 + R234) × 12 months (11 136)
Additional medical expenses tax credit: 25% of:
Excess contributions (R6 000 × 12 + R40 000) – (4 × R11 136) R67 456
Add: Qualifying expenses R50 000
Less: 7,5% × taxable income (R540 000) (Note) (R40 500)
R76 956
Therefore: R76 956 × 25% (19 239)

Note
Calculation of taxable income
Salary 500 000
Medical fringe benefit (employer’s contributions) 40 000
540 000

REMEMBER

For the purposes of the tax credit a dependant is

• the spouse, partner, dependent children or other members of the taxpayer’s immediate
family. The taxpayer must be responsible for their care and support; or
• any other person who in terms of the rules of the medical scheme to which the taxpayer
belongs, is recognised as a dependant and eligible for benefits.
A ‘child’ is defined as the taxpayer’s child or a child of their spouses.
Children, for the purposes of this section, must have been alive during any portion of the
year of assessment and must be unmarried on the last day of the year of assessment and:
(a) not (or, had they lived, would not have been) over the age of 18; or
(b) wholly or partially dependent for their maintenance upon the taxpayer and not liable
for the payment of normal tax in the year of assessment concerned and not (or, had
they lived, would not have been) over the age of 21; or
(c) wholly or partially dependent for their maintenance on the taxpayer and not liable for
the payment of normal tax in the year of assessment concerned, and, to the Commis-
sioner’s satisfaction, a full-time student at an educational institution of a public character,
and not (or, had they lived, would not have been) over the age of 26; or
(d) due to physical or mental infirmity, was unable to maintain themselves and was
wholly or partially dependent for their maintenance on the taxpayer and was not lia-
ble for the payment of normal tax.

585
A Student’s Approach to Taxation in South Africa 13.5

13.5.6 Rebate in respect of foreign taxes on income

(section 6quat)
The Act provides for a tax rebate that can be deducted from the normal tax payable.
Where foreign income is included in a resident’s taxable income, it has often been
subject to tax in the foreign country and subsequently is subject to double tax (where
there is no double-tax agreement with South Africa and that country) as it is included
in gross income for South African income tax purposes.
In such case, the Act makes provision for a rebate in respect of foreign taxes paid. A
resident who earns South African sourced income from a trade that attracts foreign
tax, might qualify for a deduction (rather than a rebate) in terms of section
6quat(1C)(a). This deduction is similar to the rebate and is beyond the scope of this
chapter.
This rebate is deducted from South African normal tax. The section 6quat rebate only
applies to residents who have the following included in their taxable income:
• an income received from a source outside the Republic;
• an income included in taxable income because of the provisions of section 9D
(controlled foreign entities);
• a taxable capital gain in respect of an asset situated outside South Africa;
• an amount (received from a source outside South Africa or the proportional
amount in terms of section 9D) which is deemed to accrue to a resident in terms of
section 7;
• a capital gain that is attributed to a resident in terms of the special attribution rules
in the Eighth Schedule; or
• an amount that represents the capital of a trust in respect of which a resident
acquires a vested right.
Other countries sometimes tax income received by South African residents from a
South African source as if the income fell under their jurisdiction, for example if a
capital asset that is situated in another country, is sold.

Calculation of the rebate

The rebate is in respect of foreign taxes paid. For instance, where a South African resi-
dent has paid foreign tax with no right of recovery (that is to say the South African
resident will not be refunded any amount of tax paid) to a foreign government, and
the income on which the tax was paid has also been included in their South African
taxable income, the taxpayer will become entitled to a rebate on the foreign tax paid.
However, the rebate cannot exceed the South African normal tax that has been levied
on that foreign income.
The rebate is thus the lesser of:
• the sum of all (total) foreign taxes paid in respect of the above-mentioned income;
or
• the portion of South African normal tax that relates to foreign income.

586
13.5 Chapter 13: Individuals

The portion of South African normal tax that relates to foreign income is calculated as
follows:
Taxable portion of foreign income
(after deductions and exemptions) × SA normal tax
Sum of all (total) taxable income

REMEMBER

• When calculating South African normal tax related to foreign income, tax before the
deduction of rebates must be used.

Where the sum of the foreign taxes is more than the rebate/deduction that is allowed
(that is to say the rebate is limited to the South African normal tax), the excess
amount of foreign taxes is then carried forward to the following year of assessment
and is added to the foreign taxes paid in that year. The excess foreign taxes carried
forward will exclude any foreign tax that has been paid in respect of exempt income.

Example 13.19
Joe Jackson (55 years old) received the following income for the current year of assessment:
R
Gross foreign interest (foreign tax paid R 2 800) 12 000
Local interest (not tax free investments) 24 700
Other gross foreign income (foreign tax paid R6 000) 15 000
South African income 145 500
No exemptions have been taken into account. He paid non-refundable foreign tax on all the
foreign income he received.
You are required to calculate Joe’s tax liability for the current year of assessment.

587
A Student’s Approach to Taxation in South Africa 13.5

Solution 13.19
R R
Foreign interest 12 000
Local interest 24 700
Less: Investment exemption (23 800) 900
Other foreign income 15 000
South African income 145 500
Taxable income 173 400
Normal tax payable 31 212
Less: Primary rebate (16 425)
14 787
Less: Section 6quat rebate (Note) (4 860)
Net normal tax payable 9 927

Note
Total taxable income from foreign sources:
Foreign interest 12 000
Other foreign income 15 000
27 000

Calculation of foreign taxes payable in respect of taxable R

foreign income that qualifies for the rebate:
Foreign taxes paid in respect of all foreign income (R2 800 + R6 000) 8 800
Calculation of section 6quat rebate:
Amount of foreign taxes that qualifies for the rebate 8 800
Limited to
Taxable income derived from all foreign sources
= × Normal tax payable
Total taxable income derived from all sources
R27 000
= × R31 212
R173 400
= R4 860 (And it is less than the R8 800 paid overseas.)
R8 800 – R4 860 = R3 940 will be carried forward to the following year of assessment to
be added to any foreign taxes paid during that year.

Foreign tax carried forward exception

Where the foreign tax paid is in respect of:
• a taxable capital gain from an asset situated outside South Africa that is not attrib-
utable to a permanent establishment; or
• income that is included in the resident’s taxable income in terms of section 9D(2),
the Act provides that an amount of foreign tax paid that is more than the South
African normal tax on that gain or income will not be carried forward.

588
13.5 Chapter 13: Individuals

Example and Solution 13.20

Erin Dart sold a house situated in Zimbabwe. An equivalent of R1 000 in foreign tax was
paid. If the South African normal tax in respect of the sale of this house is calculated at
R900, then Erin will be able to reduce her South African normal tax by R900. The R100
(R1 000 – R900) will be forfeited.

Where the person claiming the section 6quat rebate has contributions to retirement
funds or has donated to public benefit organisations (refer to 13.4.3) that have been
deducted from their taxable income, these deductions must then be apportioned be-
tween South African-sourced income and foreign income. This is best explained with
an example.

Example 13.21
During the current year of assessment, Martha Mhlanga (30 years old) earned a pension-
able salary of R100 000 from a South African source, from which an amount of R4 920 was
withheld in respect of employees’ tax.
In addition, she received the following gross investment income:
R
South African source
Dividends (not tax free investments) 50 000
Interest (not tax free investments) 28 500
Foreign source
Interest (including R3 600 withholding tax) 45 000
In terms of her conditions of employment, she is obliged to contribute 8% of her monthly
salary to a pension fund. She made a qualifying donation of R6 000. She does not belong
to a medical aid fund.
You are required to calculate Martha’s tax liability for the current year of assessment.

Solution 13.21
R
Salary income 100 000
Dividend income – exempt nil
Foreign interest 45 000
South African interest income
(R28 500 – R23 800) 4 700
Income 149 700
Less:
Retirement fund contributions – R8 000

continued

589
A Student’s Approach to Taxation in South Africa 13.5

R
Limited to the lesser of
• R350 000; or
• 27,5% × the higher of
– R100 000 or
– R149 700
Therefore R149 700 × 27,5% = R41 168; or
• R149 700
The limitation is therefore R41 168 – contributions will be allowed in full (8 000)
141 700
Less:
Donation – R6 000
Limited to 10% × R141 700 = R14 170, therefore allow full donation (6 000)
Taxable income 135 700
Calculation of normal tax payable before rebates
Normal tax payable 24 426
Calculation of foreign taxes payable in respect of taxable
foreign income
Foreign taxes payable in respect of foreign income 3 600
Calculation of the section 6quat rebate
Amount of foreign taxes that qualifies for the rebate limited to 3 600
Taxable income derived from all foreign sources
= × Normal tax payable
Total taxable income derived from all sources
R40 791 (Note)
= × R24 426 = R7 342
R135 700

Note
R40 791 is calculated as follows: R R
Salary income nil
Dividend income nil
Foreign interest income 45 000
Gross income and income 45 000
Less: Retirement fund contributions –
R8 000 x R45 000 / R149 700 (2 405)
42 595
Less: Donation (as calculated) (6 000)
Apportionment of R6 000: (R42 595 / R141 700 × R6 000) (1 804)
Foreign taxable income 40 791

continued

590
13.5 Chapter 13: Individuals

Calculation of the normal tax payable after taking rebates into account
R
Normal tax payable before rebates 24 426
Less: Primary rebate (16 425)
Less: Medical tax credit (none as she did not contribute to a medical scheme) (nil)
Less: Section 6quat rebate R3 600 is less than R7 342 (3 600)
Less: Employees’ tax (4 920)
Amount payable or (refundable) (519)

No foreign taxes will be carried forward, as the taxpayer was able to deduct the full
amount of foreign tax paid as a rebate.

13.5.7 Prepaid taxes

The final step in calculating a person’s final tax liability is to reduce normal tax liabil-
ity by any prepayments of tax made during the year of assessment. Prepayments of
tax would normally consist of one or more of the following payments:
• employees’ tax deducted by the employer during the year of assessment from a
wage, salary or similar earnings (also known as Pay as You Earn (PAYE)) (chap-
ter 11);
• provisional tax paid by the taxpayer during the year of assessment (chapter 11).
Where a taxpayer owes an amount of tax and has not paid the amount by the due
date (second date), interest is added to the normal tax liability . If a taxpayer has
overpaid an amount of tax owing, (under certain circumstances) interest is credited.
These interest rates are determined by SARS from time to time (refer to Annexure F).
If a taxpayer still owes an amount of normal tax at the end of the year, it is referred to
as a net debit. If, however, the taxpayer paid more than the tax due, they have a net
credit, which will be refunded to them.

Example 13.22
Mpho Zuma is 44 years old and her normal tax payable (after rebates and credits) for the
current year of assessment amounts to R25 250. Her employer deducted R20 000 employ-
ees’ tax from her monthly salary. She is also registered as a provisional taxpayer and paid
R8 500 provisional tax during the current year of assessment.
You are required to calculate how much Mpho still owes SARS or how much she will be
refunded for the current year of assessment.

591
A Student’s Approach to Taxation in South Africa 13.5–13.6

Solution 13.22
R
Normal tax liability 25 250
Less: Prepaid taxes:
Employees’ tax (20 000)
Provisional tax (8 500)
Net credit (amount due to Mpho) (3 250)

REMEMBER

• If the net amount due is negative (net credit), taxpayers are entitled to a refund of the
amount they overpaid during the year of assessment.
• If a refund is due, SARS will first refund the provisional tax paid and then the PAYE.

13.6 Limiting losses when calculating taxable income

(sections 20 and 20A)
An assessed loss is created when the deductions in terms of section 11(but limited by
section 23) exceed the income of a taxpayer. This means that the taxable income of a
taxpayer is negative for a year of assessment. A natural person can set off an assessed
loss from the previous year of assessment in the current year of assessment.
There are a number of limitations with respect to an assessed loss:
Foreign assessed losses These are ‘ring-fenced’ and cannot be set off against any
taxable income from a South African source. This limit only disallows foreign as-
sessed losses from being set off against South African income. South African assessed
losses can therefore be set off against foreign income.
Retirement fund lump sum benefit, retirement fund withdrawal benefit and sever-
ance benefit These amounts, although gross income, are kept separate from other
taxable income and an assessed loss cannot be off set against this income.
Suspect trades If a natural person suffers a loss from operating a trade (for example
the letting of property), they may not claim this loss against income from another
trade (for example salary received) under certain circumstances. Some trades are
what are referred to as suspect trades such as hobby activities, where the taxpayer
might enter into the activities in order to reduce taxable income.
There are a number of requirements before the limitations will be applied to suspect
trades.
• The taxpayer must be paying tax at the maximum rate
• The trade in question meets the requirements of the suspect trade list.

592
13.6 Chapter 13: Individuals

If these requirements are met, the taxpayer is prohibited from setting off the assessed
loss from that specific trade against income derived during the same year of assess-
ment from another trade or a non-trading activity.

Determine whether the loss from the operating of a trade is limited when
calculating the taxable income for a year of assessment

Step 1: Would the person have paid tax at the maximum marginal rate (tax-
able income (including an assessed loss and balance of assessed loss
brought forward) of R1 731000 for the 2023 year of assessment) if they
did not have this loss?
Yes: Step 2
No: The loss can be used when calculating the taxable income for the
current year of assessment – section 20A is not applicable.

Step 2: Is the trade classified as a suspect trade by SARS (refer to 13.6.1) or did
the person make a loss from this trade in any three of the last five years
(including the current year)?
Yes: Step 3
No: The loss can be used when calculating the taxable income for the
current year of assessment.

Step 3: Does the trade qualify for the exclusion rule (refer to 13.6.2)?
Yes: Step 4
No: The loss cannot be used in the calculation of the taxable income
for the current year of assessment and must be carried forward to
the next year of assessment where it can be set off against income
from the same trade.

Step 4: Did the trade (excluding farming activities) have a loss for six of the
last ten years?
Yes: The exclusion cannot be used, therefore the loss cannot be used in
the current year’s calculation. The loss must be carried forward to
the next year of assessment where it can be set off against income
from the same trade.
No: The exclusion can be used and the loss can be set off against
income from other trades in the current year of assessment.

593
A Student’s Approach to Taxation in South Africa 13.6

REMEMBER

• To determine whether a loss is incurred from the trade in a specific year of assessment,
the loss carried forward from the previous year is not included.
• The income from the trade includes recoupments in terms of section 8(4) and capital
gains on disposal of assets used in the trade.
• The income from different farming activities (for example livestock and plantation
farming) is added together for the purposes of these rules in order to determine farming
income.
• If a person is subject to the limitation rules or might be subject to the rules, they must
provide full details of the trade in their tax return.
• These rules are only applicable to individuals.

13.6.1 Suspect trades

SARS considers the following trades to be suspect trades, and losses can therefore
not be included in the calculation of taxable income unless the exclusion rule is
applicable:
• a sport practised by the person or a relative;
• dealing in collectibles by the person or relative;
• rental of residential accommodation, unless at least 80% is used by persons who
are not relatives and they lease the property for at least half of the year;
• the rental of vehicles, aircraft or boats, unless at least 80% of the asset is used by
persons who are not relatives and they lease it for at least half of the year;
• animal showing by that person or a relative;
• farming or animal breeding, unless that person carries on farming, animal breed-
ing or activities of a similar nature on a full-time basis;
• a form of performing or creative arts practised by that person or a relative;
• a form of gambling or betting practised by that person or a relative; or
• the acquisition or disposal of a cryptocurrency (with effect from 17 January 2019).

13.6.2 The exclusion rule

If a person carries on a trade that is a business in respect of which there is, within a
reasonable period of time, a reasonable prospect of deriving taxable income (other
than taxable capital gain), the limitation will not be applied. The person will therefore
be able to deduct the loss from the trade against other income.
The following factors must be considered to determine whether the business qualifies
for the exclusion:
• the proportion of the gross income to the amount of the allowable deductions;
• the amount spent on or the activities related to advertising and promotions;
• the commercial manner in which the trade is carried on, taking into account:
– the number of full-time employees (other than persons employed to provide
services of a domestic or private nature);

594
13.6–13.7 Chapter 13: Individuals

– the commercial setting of the premises;

– the extent of the equipment used exclusively for purposes of carrying on that
trade; and
– the time that the person spends on the premises;
• the number of years of assessment during which losses occurred in relation to the
period from the date the person commenced with the trade and taking into account:
– an unexpected event giving rise to any of those losses; and
– the nature of the business involved;
• the business plans and any changes thereto to ensure that taxable income is
derived in the future; and
• the extent to which a trade asset is used, or is available for use for recreational
purposes or personal consumption.

13.7 Tax returns, assessments and objections

Persons earning a monthly salary receive a salary slip (or a salary advice) at the end
of each month indicating how much they have earned, what deductions were made
and how much tax has been deducted by the employer. Shortly after the end of the
year of assessment the employer must prepare an IRP5 for each employee.
The IRP5 shows the total remuneration paid during the year, certain deductions
made by the employer, such as retirement fund and medical aid fund contributions,
and the total employees’ tax deducted during the year, as well as other information.
The employer submits the IRP5 information to SARS. SARS then includes all this
information in a taxpayer’s tax return (ITR12).
If a person earns income from sources other than employment, they prepay their tax
by means of provisional tax. The taxpayer must complete an IRP6 form to calculate
the amount of provisional tax due.
SARS has introduced a fully electronic filing system (eFiling) for the submission of
income tax returns. Where a taxpayer is required to submit an annual tax return, they
need to request the return to be issued on SARS eFiling. In the case of individuals, the
form is an ITR12 (which includes the information discussed above) and an ITR14 in
the case of companies. After the taxpayer has completed the tax return on the eFiling
system and submits it electronically to SARS, SARS uses the information to calculate
the normal tax liability for the year of assessment. Some taxpayers who fulfil certain
requirements are auto assessed by SARS. This means that their return is pre-
populated and submitted on the system. The taxpayer only needs to edit the return if
they do not agree with the entries in the return.
Where an ITR12 is pre-populated but not subject to auto assessment, the taxpayer
must provide details of other income and expenditure to calculate the normal tax
payable. Persons who derive income from business are also required to prepare a
statement of assets and liabilities. This section assists SARS in identifying undeclared
income and possible tax evasion practices.
After receiving the tax return, SARS processes the return and issues a tax assessment
(recorded on an ITA34) to each taxpayer. The ITA34 shows:
• the total taxable income for the year of assessment;

595
A Student’s Approach to Taxation in South Africa 13.7–13.8

• the net normal tax on this taxable income;

• a sub-total after the deduction of rebates (which this book refers to as normal tax
liability);
• the provisional tax paid for the year;
• employees’ tax in respect of the year;
• the net debit or credit;
• any balance of tax or interest owing from a previous year of assessment; and
• the final net debit or credit for the year of assessment.
The assessment has a Date of Assessment, a Payment Due Date and an Interest-Free
Period/Grace Period Until Date. The payment of any outstanding taxes must be
made electronically or at a branch of specified banking institutions.
Sometimes, the assessment issued by SARS does not agree with the taxpayer’s own
calculation. In these situations, the Act allows the taxpayer to object to their assess-
ment. The objection has to be in writing (on the prescribed form (ADR1) via eFiling),
setting out the reasons for the objection, and must be submitted electronically to SARS
within the prescribed period (usually 21 business days).
SARS will consider the taxpayer’s objection and either issue a revised assessment or
confirm the assessment issued. If the taxpayer is not satisfied with the reasons given
for the assessment or partially changed assessment, they have the right to appeal
against the assessment in a court of law.

13.8 Summary
In this chapter the taxable income framework for individuals was discussed. This was
followed by a discussion how to calculate a taxpayer’s tax liability for the year of
assessment.

R
Gross income (as defined in section 1) xxx
Less: Exempt income (sections 10, 10A and 12T) (xxx)
Income (as defined in section 1) xxx
Less: Deductions (section 11 – but see below; subject to section 23(m) and
assessed loss (sections 20 and 20A) (xxx)
Add: Taxable portion of allowances
(section 8 - such as travel and subsistence allowances) xxx
Taxable income before taxable capital gain xxx
Add: Taxable capital gain (section 26A) xxx
Taxable income before retirement fund deduction xxx
Less: Retirement fund deduction (section 11F) (xxx)
Taxable income before donations deduction xxx
Less: Donations deduction (section 18A) (xxx)
Taxable income (as defined in section 1) xxx

continued

596
13.8 Chapter 13: Individuals

Normal tax calculated based on the tax tables xxx

Less: Annual rebates (section 6) (xxx)
Less: Medical tax credits (sections 6A and 6B) (xxx)
Normal tax liability for the year xxx
Less: PAYE and provisional tax (pre-paid taxes) (xxx)
Normal tax due by or to the taxpayer xxx
Add: Withholding taxes xxx
Final tax liability of natural person xxx

As part of the framework certain deductions are allowed for an individual. These
need to be deducted in a specific order.

Order of taxable income including deductions and limitations

Gross income
Less: Exempt income
Equals: Income
Less: Assessed loss from a previous year
Add: Other amounts included in taxable income
Add: Taxable capital gains
Less: Retirement fund contributions

Contributions to retirement fund (current year + amounts not deducted in previous years)
Deduction limited to the lesser of
• R350 000; or
• 27,5% × the higher of
– remuneration; or
– taxable income (excluding lumpsum benefits but including taxable capital gain); or
• taxable income before this deduction
Less: Donations to public benefit organisations

Limited to 10% × taxable income before this deduction (excluding any retirement fund
lump sum benefit and retirement fund lump sum withdrawal benefit)

Questions that test your knowledge on specific income and deductions for individuals
follow.

597
A Student’s Approach to Taxation in South Africa 13.9

13.9 Examination preparation

Question 13.1
Patricia Lilly is 34 years old and unmarried. She provides you with the following infor-
mation for the current year of assessment:
1. Income and deductions related to employment
She received the following income and incurred the following expenses:
R
Salary 190 000
Bonus (non-pensionable) 13 000
Pension fund contributions 15 200
Retirement annuity fund contributions 1 400
Medical aid fund contributions – this represents 50% of the contribution 12 000
2. Dividends received
Red Limited
This is a South African company and Patricia holds 10% of the shares.
She received dividends amounting to R4 000.
Blue Plc
This is a British company, defined as a ‘small company’. Patricia holds
8% of the shares. She received R46 900 dividends after the deduction of
R4 813 withholding tax.
3. Interest received
French savings account (this amount is before the withholding tax of R800) 8 000
South African savings account (not tax free investments) 900
4. Royalties received
Patricia designed a patent for a manufacturing process. This patent is used
in South Africa as well as in other countries. Her royalty income from the
patent was as follows:
South Africa 40 000
Other countries (before foreign tax of R34 000 was deducted) 170 000
5. Donations
Patricia made the following donations during the year:
Natal University 2 300
Public benefit organisations 500
Non-public benefit organisations 800
Where applicable, the official receipts were obtained.
6. Medical expenses
Patricia had to have cosmetic surgery during the year. The operation cost R90 567. The
medical aid paid R70 000 of this amount. Patricia has a disability as defined.
7. Retirement annuity fund contributions
The unclaimed balance of retirement fund contributions at the end of the previous
year of assessment amounted to R100.

598
13.9 Chapter 13: Individuals

You are required to:

Calculate Patricia’s normal tax liability for the current year of assessment.

Answer 13.1
Calculation of Patricia’s taxable income for the current year of assessment:
R R
Salary 190 000
Bonus 13 000
Dividends – Red Limited 4 000
Local dividend exemption (4 000) nil
Foreign dividends
Blue Plc (R46 900 + R4 813) 51 713
Less: Exemption (R51 713 × 25/45) (28 729) 22 984
Foreign interest 8 000
South African interest 900
Less: Investment exemption (R23 800), limited to amount
actually received (900) nil
Medical fringe benefit 12 000
Royalties received (R40 000 + R170 000) 210 000
455 984
Less: Retirement fund contributions – R15 200 + R1 400 + R100
= R16 700
Limited to the lesser of
• R350 000 or
• 27,5% x the higher of
(R190 000+R13 000+R12 000) = R215 000 or R455 984
Therefore 27,5% × R455 984 = R125 396
• R455 984
R125 396 is the limit therefore allow contributions in full (16 700)
439 284
Less: Donations to public benefit organisations
Natal University 2 300
Public benefit organisations 500
Non-public benefit organisations nil
2 800
Limited to 10% × R439 284 = R43 928, allow in full (2 800)
Taxable income 436 484

R
Normal tax (R73 726 + (31% × (R436 484 – R353 100)) 99 575
Less: Primary rebate (16 425)
Less: Medical scheme fees tax credit (R347 × 12 months) (4 164)
Less: Excess scheme fees tax credit
(33,3% × (R24 000 – (3 × R4 164)) (3 832)

continued

599
A Student’s Approach to Taxation in South Africa 13.9

R
Less: Medical expenses tax credit (R90 567 – R70 000 = R20 567 (6 849)
× 33,3%)
Less: Section 6quat rebate (calculation) (39 613)
Normal tax liability 30 952
Calculation:
Calculation of the section 6quat rebate
Total foreign taxes (R800 + R4 813 + R34 000) 39 613
Limited to:

Taxable income derived from foreign source

= × Normal tax payable
Total taxable income derived from all sources

= R228 249 (note)

× R99 575 = R52 070
R436 484

Therefore, use lesser of qualifying foreign tax (R39 613) or South African tax on
foreign income (R52 070).

Note
R228 249 foreign income is calculated as follows: R
Salary income – not foreign income nil
Foreign interest 8 000
Royalties received 170 000
Foreign dividend income – section 10B(3) partial inclusion is ignored for
the purposes of section 6quat (R46 900 + R 4 813) 51 713
Gross income 229 713
Less: Donations
(R229 713/R439 284 × R2 800) (1 464)
Foreign taxable income 228 249

Note
Royalties received from South Africa do not qualify for the section 6quat rebate as this is
not from a South African service as a result of section 9.

600
 14 Fringe benefits

Gross Exempt Taxable Tax

– – Deductions =
income income income payable

General Specific Fringe Taxable Taxable

definition inclusions benefits capital gain allowances

Page
14.1 Introduction ......................................................................................................... 601
14.2 Classification of employment benefits ............................................................. 604
14.3 Fringe benefits in terms of the Seventh Schedule ........................................... 605
14.3.1 General .................................................................................................... 605
14.3.2 Acquisition of an asset at less than the actual value
(paragraph 5) .......................................................................................... 607
14.3.3 Right of use of an asset (excluding a motor vehicle
and accommodation) (paragraph 6) .................................................... 610
14.3.4 Right of use of a motor vehicle (paragraph 7) ................................... 612
14.3.5 Meals, refreshments, and meal and refreshment vouchers
(paragraph 8) .......................................................................................... 622
14.3.6 Accommodation (paragraph 9) ............................................................ 623
14.3.6.1 Residential accommodation ................................................. 623
14.3.6.2 Holiday accommodation ....................................................... 626
14.3.7 Free or cheap services (paragraph 10) ............................................... 628
14.3.8 Benefits in respect of interest on debt (paragraph 11) ..................... 630
14.3.9 Subsidies in respect of loans (paragraph 12)..................................... 633
14.3.10 Medical fund contributions paid on behalf of an employee
(paragraph 12A) .................................................................................... 635

601
A Student’s Approach to Taxation in South Africa 14.1

Page
14.3.11 Costs incurred for medical services (paragraph 12B) ...................... 637
14.3.12 Benefit in respect of employer-owned insurance policies
(paragraph 12C) .................................................................................... 639
14.3.13 Payment of contribution on behalf of employee to a pension,
provident or retirement annuity fund (paragraph 12D) ................. 640
14.3.14 A contribution to a bargaining council (paragraph 12E) ................ 641
14.3.15 Payment of employee’s debt or the release of the employee
from the obligation to pay a debt (paragraph 13) ............................ 641
14.4 Allowances and advances .................................................................................. 643
14.4.1 Travel allowance (section 8(1)(b)) ........................................................ 644
14.4.2 Subsistence allowance (section 8(1)(c)) ............................................... 649
14.4.3 Other allowances ................................................................................... 652
14.4.4 Employees’ tax implications regarding the receipt of allowances .... 652
14.5 Exemptions from tax in an employer/employee relationship
(section 10)............................................................................................................ 653
14.5.1 Special uniforms (section 10(1)(nA)) ................................................... 653
14.5.2 Transfer costs (section 10(1)(nB)) ......................................................... 653
14.5.3 Scholarships and bursaries (section 10(1)(q) and (qB)) ..................... 654
14.6 Summary .............................................................................................................. 655
14.7 Examination preparation ................................................................................... 655

14.1 Introduction
James has just started working at Botha and King (Pty) Ltd. It is his first job. In add-
ition to his salary every month, he is entitled to use one of the company’s vehicles. He
can take the vehicle home and use it over weekends for his own private purposes. On
resigning from the company, he will have to return the vehicle to the company.
On his salary slip, at the end of each month, he saw that over and above the cash
salary he receives there is an additional entry: ‘Fringe benefit – company vehicle’. He
is, therefore, taxed not only on his cash salary, but also on the value of the benefit he
receives from his employer.
There are, however, certain other benefits which employers can give to their employees
that are not taxable, for example if the employer provides meals in a canteen where
the canteen is situated on the employer’s business premises.
In this chapter, we investigate which benefits are taxable fringe benefits and how the
value of such a benefit is determined.

602
14.1 Chapter 14: Fringe benefits

Critical questions

In this chapter, the following questions are discussed:

• When is a benefit a fringe benefit?
• How is the value of such benefit calculated?
• Are there any exemptions from tax in an employer-employee relationship?
• What is the tax implication on an allowance received by an employee from an employer?
• Are there any tax implications on gains made by employees or directors in respect of
rights to acquire equity instruments in their employers?

Tax statistics
According to the latest available tax statistics (Tax Statistics 2021):
The travel expenses claimed against the allowance continue to be the largest for
individuals at 23.13% of all expenses of R29.7 billion. The largest fringe benefit at
R116,2 billion was retirement benefits paid by employers on behalf of employees (59.2%).

Taxable income framework

R
Gross income (as defined in section 1) xxx
• as per definition of gross income
• special inclusion – paragraph (i) fringe benefits
(Seventh Schedule)
Less: Exempt income (sections 10, 10A and 12T) (xxx)
Income (as defined in section 1) xxx
Less: Deductions section 11 – but subject to section 23(m) and assessed loss
(section 20) (xxx)
Add: Taxable portion of allowances (section 8 – such as travel and subsistence
allowances) xxx
Add: Taxable capital gain (section 26A) xxx
Taxable income before retirement fund deduction xxx
Less: Retirement fund deduction (section 11F) (xxx)
Taxable income before donation deduction xxx
Less: Donations deduction (section 18A) (xxx)
Taxable income (as defined in section 1) xxx

603
A Student’s Approach to Taxation in South Africa 14.2

14.2 Classification of employment benefits

The benefits received from employment are dealt with under different sections and
parts of the Income Tax Act 58 of 1962 (the Act).
An employee can receive benefits in the form of cash or other benefits. In general,
fringe benefits refer to benefits received by an employee from an employer in a form
other than a cash salary. The inclusion of the benefit/amount received by an employee
in their taxable income can be determined as follows:
• In the chapter on gross income, it is mentioned that the Act also has certain special
inclusions. Paragraph (c) of the ‘gross income’ definition in section 1 of the Act
includes, specifically, an amount (including a voluntary award) received or
accrued in respect of services rendered or the holding of an office (refer to 2.8.3).
Paragraph (c) also determines that when person A receives an amount in respect of
services that person B must render to an employer, the amount is deemed to be
received by person B and he is therefore taxed on it.
• In addition, paragraph (i) of the gross income definition in section 1 of the Act
includes the cash equivalent of a benefit granted in respect of employment in terms
of the Seventh Schedule. The Seventh Schedule of the Act sets out when a benefit is
a taxable benefit and how the cash equivalent (the value of the taxable benefit)
should be calculated.
• Section 8 of the Act stipulates that the unexpended portion of an allowance
received must be included in the taxable income of a taxpayer. This means that a
portion of an allowance actually expended by that recipient on business must first
be excluded. There are also other exclusions that we investigate later in this chapter.
• Section 8B of the Act provides the rules relating to what should be included in
taxable income in terms of shares acquired in terms of a broad-based employee
share plan and are discussed in detail later in this chapter.
• Section 8C of the Act specifies that gains made by employees or directors of com-
panies regarding the vesting of an equity instrument must be included in their tax-
able income.
There are also sections that will allow for a deduction or exclusion of a benefit or one
of the above inclusions.
In this chapter, the various inclusions grouped under the following headings are
discussed:
• fringe benefits granted by employers in terms of the Seventh Schedule to the Act
(paragraph (i) of the definition of gross income) (refer to 14.3); and
• allowances and advances granted by employers (section 8) (refer to 14.4).
In addition, we also discuss:
• exemptions from tax in an employer/employee relationship (section 10(1)(nA) to
(nE) and (1)(q)) (refer to 6.7); and
• all the administrative provisions relating to fringe benefits that apply to all
employers (paragraphs 16–18 in the Fourth Schedule) (refer to 6.8).

604
14.3 Chapter 14: Fringe benefits

14.3 Fringe benefits in terms of the Seventh Schedule

14.3.1 General
There is an obligation on each employer to determine the cash equivalent of the value
of a taxable benefit granted to an employee if in a form other than cash. The South
African Revenue Service (SARS) may, on assessment for normal tax, re-determine the
cash equivalent of the taxable benefit if it is considered that the determination is
incorrect.
An ‘employer’ is a person who pays another person an amount by way of remu-
neration, and includes a company, close corporation and the government.
An ‘employee’ is a person who receives remuneration or to whom remuneration
accrues. Included in this definition are a personal service provider and a labour
broker, as well as a director of a company. Previous directors and previous employ-
ees of a company are also included in the definition of an employee, if the previous
director or previous employee is or was the sole shareholder or one of the controlling
shareholders in such company. The definition excludes persons who retired before
1 March 1992. Consequently, persons who retired on or after 1 March 1992 are subject
to tax in full in respect of a benefit that they continue to receive, or which is granted
after retirement. A partner in a partnership is also included as an employee of the
partnership for the purposes of calculating fringe benefits.
Note that a non-executive director who receives a taxable benefit is also considered to
be an employee for the purposes of the Seventh Schedule.
A taxable benefit also arises when an associated institution of the employer pro-
vides an employee with the benefit. The employer must include the cash equivalent
of the taxable benefit given by the associated institution in the employee’s tax calcula-
tion.
An ‘associated institution’ in relation to an employer includes and means:
• if the employer is a company, another company that is managed or controlled
directly or indirectly by substantially the same persons;
• if the employer is not a company,
– a company managed or controlled directly or indirectly by the employer or any
partnership of which the employer is a member; and
– a fund established mainly for providing benefits for employees or former
employees of the employer or an associated institution (excluding funds estab-
lished by trade unions and industrial councils, and funds established for post-
graduate research not financed by the employer).

605
A Student’s Approach to Taxation in South Africa 14.3

REMEMBER

A taxable benefit excludes:

• a benefit that is specifically exempt in terms of section 10 (refer to 14.5);
• a benefit provided by a benefit fund in respect of medical, dental and similar services,
hospital and nursing services, and medicines;
• a benefit or privilege received by or accrued to a person stationed outside the Republic,
which is attributable to that person’s services rendered outside the Republic, if the ser-
vices rendered by such a person are:
– in the national or provincial sphere of government; or
– in a municipality in the Republic; or
– in a national or provincial public entity if not less than 80% of the expenditure of
such entity is defrayed directly or indirectly from funds voted by Parliament; or
– due to the holding of a public office to which such a person has been appointed in
terms of an Act of Parliament;
• an interest benefit in terms of paragraph 11 (refer to 14.3.8) on loans granted to sub-
sidise the purchase of shares by an employee in terms of a share-based employee share
plan; and
• a severance benefit (refer to chapter 9).

The Seventh Schedule lists the following taxable benefits:

• acquisition of an asset at less than the actual value (paragraph 5 – refer to 14.3.2);
• right of use of an asset, other than a motor vehicle (paragraph 6 – refer to 14.3.3);
• right of use of a motor vehicle (paragraph 7 – refer to 14.3.4);
• meals, refreshments or vouchers that entitle an employee to a meal or refreshment
(paragraph 8 – refer to 14.3.5);
• free or cheap accommodation (paragraph 9 – refer to 14.3.6);
• free or cheap services (paragraph 10 – refer to 14.3.7);
• in respect of interest on debt (low-interest or interest-free loans) (paragraph 11 –
refer to 14.3.8);
• subsidies in respect of loans (paragraph 12 – refer to 14.3.9);
• medical aid fund contributions paid on behalf of an employee (paragraph 12A –
refer to 14.3.10);
• costs incurred for medical services (paragraph 12B – refer to 14.3.11);
• payment to an insurer under an insurance policy directly or indirectly for the bene-
fit of the employee (paragraph 12C – refer to 14.3.12);
• payment for the benefit or on behalf of an employee to a pension fund, provident
fund or retirement annuity fund (paragraph 12D – refer to 14.3.13);
• payment for the benefit or on behalf of an employee to a bargaining council (para-
graph 12E – refer to 14.3.14)
• payment of an employee’s debt or the release of the employee from the obligation
to pay a debt (paragraph 13 – refer to 14.3.15).

606
14.3 Chapter 14: Fringe benefits

Each of the above-mentioned taxable benefits is discussed individually. Firstly, the

meaning of the benefit is explained; then the calculation of the cash equivalent of the
benefit (including the exceptions and exclusions in respect of the specific benefit, if
applicable) is discussed. Finally, several examples are given.

REMEMBER

• The general rule of the Seventh Schedule is that the amount to be included in gross
income is the cash equivalent of a fringe benefit. This is the value of the benefit in terms
of the Seventh Schedule less any amount paid by the employee.

14.3.2 Acquisition of an asset at less than the actual value

(paragraph 5)
Meaning of the benefit
Any asset consisting of any goods, commodities, financial instruments or property of
any nature (other than money) acquired by an employee from the employer, for no
consideration or for a consideration less than the value of the asset, is a taxable bene-
fit in the hands of the employee.
Cash equivalent of the benefit
The cash equivalent of the taxable benefit is the difference between the market value
of the asset at the time the employee acquired the asset and the consideration given
(if any) by the employee.
Exceptions
There are two exceptions to the general valuation rule, namely where:
• the asset concerned is movable property (other than marketable securities or an
asset which the employer had the use of prior to acquiring ownership thereof)
acquired by the employer with the purpose of disposing of it to the employee – the
asset is valued at the cost to the employer; and
• the asset concerned is trading stock of the employer – the value to be placed on the
asset is the lesser of the cost to the employer or the market value.
Exclusions
• Where assets are presented to the employee as an award for bravery or for long
service, the value determined is reduced by the lesser of the cost to the employer of
all such assets so awarded to the relevant employee during the year of assessment,
or R5 000.
• In respect of properties bought on or after 1 March 2014, no value is placed on
immovable property for residential purposes acquired by an employee from an
employer or related institution if the remuneration proxy of that employee (not a
connected person) is R250 000 or less for that year of assessment and the market
value of the immovable property is R450 000 or less and the employee is not a con-
nected person in relation to the employer.
This exemption in respect of long service or bravery awards is also applicable to
paragraphs 6(4) (use of an asset granted) and 10(2) (free or cheap services granted)
and the R5 000 limit is applied to all these situations in total.

607
A Student’s Approach to Taxation in South Africa 14.3

REMEMBER

• Long service means an initial unbroken period of service of not less than 15 years, or
any subsequent unbroken period of service of not less than 10 years.
• Awards granted for outstanding performance or for any reason other than long service
or bravery do not qualify for the R5 000 reductions in value.
• If an employee receives the first long service award after, for example, 20 years (not 15)
the following available reduction in value would only be after another 10 years – that is
to say after 30 years’ service.
• ‘Unbroken period of service’ is interpreted to mean a continuous employment with a
single employer without a lawful termination of the contract.
• Gift vouchers are seen as a form of property and therefore regarded as an asset – but a
voucher for a meal, for example, would be excluded and therefore taxable.
• Remuneration proxy is the remuneration earned by the employee in the previous year
of assessment

Example 14.1
Alida Groenewald is employed by Pharma Pills Ltd (a manufacturer of pharmaceutical
products). During the current year of assessment, she purchased pharmaceutical products
from her employer for R800. The cost price of these products was R1 700 and the market
value was R2 100.
You are required to calculate the cash equivalent of the benefit for inclusion in Alida’s
current year of assessment.

Solution 14.1
R
Value of the benefit – cost price of the asset 1 700
Less: Consideration paid by Alida (800)
Cash equivalent of the benefit 900
Because the products constitute trading stock of the employer, the cash equivalent is cal-
culated using the lesser of the cost price or market value of the asset.

Example 14.2
Manie du Plessis received an asset with a market value of R5 600 on 31 December of the
current year of assessment, after rendering 20 years’ service to ABC Ltd. The asset cost
the employer R5 200. The initial intention was not to acquire the asset to dispose of it to
the employee.
You are required to calculate the cash equivalent of the benefit for the current year of
assessment.

608
14.3 Chapter 14: Fringe benefits

Solution 14.2
R
Value of the benefit – market value of the asset at the time the employee
acquired the asset 5 600
Less: Exemption in terms of a long-service award (5 000)
Less: Consideration paid by Manie (nil)
Cash equivalent of the benefit 600
The long-service award exemption of up to R5 000 is available in respect of an initial
unbroken period of service of not less than 15 years or any subsequent unbroken period of
service of not less than ten years.
Notes
1. If the asset cost the employer R4 500, the cash equivalent of the benefit would have
been R1 100 (R5 600 – R4 500). The amount to be excluded could never exceed the cost
for the employer. For long-service awards, the amount to be excluded is therefore
always the lower of the cost for the employer or R5 000.
2. If Manie received the R5 600 in cash, the full amount must be included in his taxable
income as the exemption applies only to an asset and not to a cash award.

Example 14.3
Sarie Smit received a number of gift vouchers in recognition of 15 years’ continuous
service with her employer:
1. A voucher for dinner for two at the local gourmet restaurant to a maximum of R1 000.
Sarie’s employer is a regular visitor to the restaurant and gets 10% discount on his
meals there – he therefore only paid R900 for the voucher.
2. A gift voucher for a full-day treatment at Feather Hill Spa that cost the employer
R1 500.
3. A gift voucher for the local book and media store to the value of R2 000 (cost to the
employer as well).
Sarie had to pay R150 for each voucher.
You are required to calculate the cash equivalent of the benefit for the current year of
assessment.

609
A Student’s Approach to Taxation in South Africa 14.3

Solution 14.3
Value of the benefit
The voucher for the restaurant is a voucher for a meal and is specifically excluded from
paragraph 2(a) (long-service awards) and taxable in terms of paragraph 2(c) (meals or
refreshment). R
Cost to the employer 900
Less: Paid by Sarie (150)
Cash equivalent of the taxable benefit 750

The spa voucher and the book store voucher fall within the scope of paragraph 2(a) as
Sarie acquires them at less than actual value.
R
Cost to employer of the vouchers 3 500
Less: Long-service award reduction (cost of the assets is less than R5 000) (3 500)
Value of the taxable benefit nil
Less: Consideration paid (R150 for each voucher) (300)
Cash equivalent – cannot be less than zero nil

Therefore Sarie must include a total of R750 in gross income.

14.3.3 Right of use of an asset (excluding a motor vehicle and

accommodation) (paragraph 6)
Meaning of the benefit
Where an employee has been granted the right to use an asset for private or domestic
purposes, either for free or for a consideration less than the actual value of such asset,
a taxable benefit will arise. (The right of use of residential accommodation, household
goods that go with it and motor vehicles is calculated in terms of other paragraphs –
refer to 14.3.6 and 14.3.4).

Cash equivalent of the benefit

The cash equivalent of the taxable benefit is the difference between the value of the
private use of the asset and the consideration given by the employee (if any) or the
amount spent by the employee to maintain or repair the asset. The cash equivalent of
the taxable benefit must be apportioned and is deemed to have accrued on a monthly
or weekly basis.

610
14.3 Chapter 14: Fringe benefits

The value of private use of the asset is as follows:

Where Value of taxable benefit

the asset is leased by the employer, rental payable by the employer for the
period that the employee has the use of the
asset.
the asset is owned by the employer, 15% per annum × the lesser of the cost of
the asset or the market value on the date
the use was granted.
the sole right of use of the asset is given to the cost of the asset to the employer on the
the employee, date that the right of use was granted and
included in gross income on that date.

Exclusions
No value will be placed on the taxable benefit if:
• the private use is incidental to the use of the asset for the employer’s business (as
of 1 March 2018 this excludes the right of use of clothing);
• the asset is provided as an amenity to be enjoyed by the employee at their place of
work or for recreational purposes at that place or a place for recreation provided
by the employer for the use of their employees in general, for example gym facili-
ties (as of 1 March 2018 this excludes the right of use of clothing);
• the asset is any equipment or machine which the employer allows their employees in
general to use from time to time for short periods and the value of the private use
does not exceed an amount as set out in a public notice issued by the Commissioner;
• the asset consists of telephone or computer equipment which the employee uses
mainly for the purposes of the employer’s business. This includes modems on
fixed lines of all kinds, removable storage of all kinds (that is to say memory
sticks), printers, office-related software (MSOffice, operating systems, development
and management tools) and telephone line rentals and subscriptions for internet
access; or
• the asset is a book, literature, recording or a work of art.

Example 14.4
Daniel Mamabola has had the use of his employer’s cell phone for the past two years. He
must constantly be available for business purposes and the private use of the cell phone is
only incidental. The cost of the cell phone was R3 000. The market value on the date when
he acquired the use of the cell phone was R1 200.
You are required to calculate the cash equivalent of the benefit to be included in Daniel’s
taxable income.

Solution 14.4
No value is placed on this benefit, as the cell phone is used mainly for the employer’s
business.

611
A Student’s Approach to Taxation in South Africa 14.3

Example 14.5
Ernst Gray’s employer granted him the right of use of a computer for private purposes for
five months from 1 October of the current year of assessment. On that date, the market
value of the computer was R12 000. His employer purchased the computer two years
earlier for R15 000.
You are required to calculate the cash equivalent of the benefit for the current year of
assessment.

Solution 14.5
As this computer is not used for the employer’s business, the exemption does R
not apply.
15% of R12 000 (market value is lower than cost of the asset) × 5 / 12 750
Less: Consideration given for the right of use (nil)
Cash equivalent of the benefit 750

REMEMBER

• The value of the taxable benefit must be apportioned and is deemed to have accrued on
a monthly or weekly basis.

14.3.4 Right of use of a motor vehicle (paragraph 7)

Meaning of the benefit
The value of the private use by an employee of a motor vehicle allocated to them by
the employer is a taxable benefit. The private use of the vehicle includes travelling
between the employee’s place of employment and place of residence and any other
travelling done for their private or domestic purposes.

REMEMBER

• The employer is also deemed to have granted their employee the right to use a motor
vehicle if they have hired the motor vehicle under a lease and have transferred their
rights and obligations under the lease to the employee. The employee’s deemed right of
use then extends to the remainder of the lease. The rentals payable by the employee
under the lease will in time be deemed a consideration to be paid by them for the right
of use of the motor vehicle, and the ‘determined value’ of the vehicle is the retail market
value at the time when the employer first obtained the right of use of the vehicle, or the
cash value (excluding finance charges) where the lease is a financial lease.
• Where the lease is an operating lease concluded by parties who are not connected
persons and are transacting at arm’s length, the cash value is the actual cost to the
employer incurred under the operating lease as well as the cost of fuel for that vehicle if
the employer pays the fuel.

612
14.3 Chapter 14: Fringe benefits

Cash equivalent of the benefit

The cash equivalent of the taxable benefit is the difference between the value of the
private use of the motor vehicle and the consideration given by the employee (if any
– excluding a consideration given for the cost of licences, insurance, maintenance or
fuel).

Cash equivalent = value of private use less amount paid by employee

It is assumed that all travel is private travel and that the employer bears all costs
relating to the vehicle and the travel with it.
The value of the private use is calculated as follows:
• For each month during which the employee is entitled to use the vehicle for pri-
vate purposes, the value of the taxable benefit is 3,5% per month of the determined
value of the motor vehicle.
• Where the vehicle (at acquisition by the employer) is the subject of a maintenance
plan, the value of the taxable benefit is 3,25% per month of the determined value of
the motor vehicle.

Value of private use = determined value × 3,5% (3,25%) per month

• Where the employer holds the vehicle under an operating lease, the value of the
taxable benefit is the actual cost of the lease and the cost of fuel for the vehicle.

Value of private use (operating lease) = (monthly lease payments × number of months
used during the year of assessment) plus cost of fuel for the year

• When the employee uses the vehicle for a period shorter than a full month, the
value is reduced according to the ratio of the number of days in the period to the
number of days in the month. The purpose of the reduction is to provide for the
right of use of the motor vehicle commencing in the middle of a month. No reduc-
tion in the value determined must be made by reason of the fact that the vehicle in
question was during any period (for any reason) temporarily not used by the em-
ployee for private purposes. For example: If an employee receives the vehicle on 10
May, the calculation for May is:

Value of private use = determined value × 3,5% × 21 / 31 days

613
A Student’s Approach to Taxation in South Africa 14.3

REMEMBER

• A ‘maintenance plan’ is defined as a contractual obligation undertaken by a provider in

the ordinary course of trade with the general public to underwrite the costs of all
maintenance of that motor vehicle, other than the costs related to top-up fluids, tyres or
abuse of the motor vehicle, for at least a period of not less than three years and a dis-
tance travelled by the motor vehicle of not less than 60 000 km from the date that the pro-
vider undertakes the contractual obligation: Provided that the contractual obligation may
terminate at the earlier of the end of the period of three years; or the date on which the
distance of 60 000 km is travelled by that motor vehicle.
• The maintenance plan must commence at the same time that the motor vehicle is
acquired by the employer.
• A top-up or add-on plan taken out after acquisition of the motor vehicle does not
qualify for the 3,25% rate.
• This percentage (3,25%) will still be applicable for calculating the value of the vehicle
even after the period the motor plan is active, has expired.
• These percentages (3,5% or 3,25%) are applicable to each motor vehicle that the
employee has the use of from their employer.

The determined value of a motor vehicle is the retail market value as determined by
Regulation R.362 excluding finance charges and interest payable (paragraph 7).
Note that the rules are different depending on when the vehicle was acquired.
The following table summarises retail market value and the respective dates which in
turn show the determined value:

Type of employer Dates Retail market value

Manufacturer or motor vehi- 1 March 2015– The dealer billing price
cle importers 29 February 2016 excluding VAT less 10%
New or demo vehicles
1 March 2016– The dealer billing price
28 February 2017 excluding VAT less 5%
1 March 2017– The dealer billing price
28 February 2018 excluding VAT
From 1 March 2018 The dealer billing price plus
VAT
Manufacturer or motor vehicle Before 1 March 2018 Cost to employer no VAT etc.
importer
Pre-owned vehicles
If vehicle obtained for no cost
then market value plus cost of
repairs
After 1 March 2018 Cost plus VAT
continued

614
14.3 Chapter 14: Fringe benefits

Type of employer Dates Retail market value

Dealers and rental companies 1 March 2015– Dealer billing price no VAT
New or demonstration vehi- 28 February 2018
cles
After 1 March 2018 Dealer billing price plus VAT
Dealers and rental companies Before 1 March 2018 Cost to the employer exclud-
Pre-owned vehicles ing VAT
If vehicle acquired at no cost:
Market value plus cost of
repairs incurred
From 1 March 2018 Cost to employer plus VAT
If vehicle obtained at no cost:
Market value plus repairs
In cases other than vehicle The price paid by the employer
manufacturers, importers, on acquisition plus VAT
dealers or rental companies

REMEMBER

• The dealer billing price is the selling price determined by a manufacturer or importer
thereof in the Republic in respect of selling a vehicle to dealers and rental companies.
• Both the retail market value and the dealer billing price should be supplied to you in
questions and the examinations.
• The examples in this book refer to cost price of a vehicle including or excluding VAT.
You should use these values unless reference is specifically made to manufacturers,
exporters, dealers or rental companies.

Example 14.6
The employer purchased a motor vehicle for R200 000 plus R30 000 VAT plus R35 000
finance charges. The determined value will differ depending on how the vehicle is
acquired:
• If the employer purchases the vehicle, the determined value is R230 000.
• If the employer is a motor vehicle manufacturer, the determined value is the market
value of R200 000 (VAT excluded, if VAT input was claimed) or the average cost of all
their stock which is available to employees, for example R150 000.
• If the vehicle is obtained in terms of an instalment credit agreement, the determined
value is the cash value of R200 000 (add VAT if it cannot be claimed).
• If the employer leases the vehicle and obtained it at the end of the lease, the retail
market value when the employer obtained the right of use of the vehicle is the market
value, that is to say R200 000 (add VAT if it cannot be claimed).

615
A Student’s Approach to Taxation in South Africa 14.3

REMEMBER

• Where the employer has granted an employee the right of use of a motor vehicle and a
limit was placed on the value of such vehicle by the employer, and the employee makes
a contribution towards the purchase price of a more expensive vehicle, the contribution
made by the employee must be deducted from the cost price (or cost to the employer) of
the more expensive vehicle. (For example: The employer gave a R230 000 (VAT included)
motor vehicle to Mr Ryk to use. Mr Ryk, however, wants a more expensive vehicle and
he pays R57 500 to obtain a R287 500 (VAT included) vehicle. The determined value is
R287 500 – R57 500 = R230 000.)
• The cost includes add-on items such as tow bars, smash-and-grab window tinting, air
conditioning etc., but not the cost of insurance products such as monthly vehicle track-
ing service fees.
• The value must include VAT even if it was acquired before 1 March 2011 when VAT
was specifically excluded from the determined value of the vehicle. If, however, the
employer was entitled to a deduction of VAT input tax, for example if the employer is a
car dealer, the VAT must be excluded.
• Where more than one employee has the right to a specific vehicle, they would all be
taxable in terms of this paragraph on the same vehicle.
• Where an employee obtains the use of an employer vehicle and then moves to an
associated institution and the institution provides them with the same vehicle, the
determined value is the original value to the first employer.

The ‘determined value’ of a motor vehicle must be reduced if:

• the employee was granted the right of use of the vehicle 12 months or more after
the employer acquired the vehicle. In this case, a depreciation allowance must be
deducted from the determined value as determined above before the monthly per-
centage is used. The depreciation allowance is calculated at 15% on the reducing
balance method for each completed period of 12 months, calculated from the date
on which the employer first obtained such vehicle or the right of use thereof to the
date on which the employee was first granted the use of the vehicle. For example,
if an employee obtains the use of a vehicle (market value on date of purchase
18 months before was R230 000 – VAT included) on 1 March of the current year of
assessment, then the determined value = R230 000 × 85% × 3,5% × 12 months.
The value of the monthly taxable benefit must be reduced if:
• the employee pays an amount to the employer for the use of that vehicle. The tax-
able benefit is not reduced where the payment is in respect of the cost of the
licence, insurance, maintenance or fuel for that vehicle, made by the employee.
The value of the taxable benefit (value of private use) is reduced on assessment
where
• the employee proves that accurate records of distances travelled for business pur-
poses in such vehicle are kept. The benefit is then reduced pro rata with the ratio of
kilometres driven for business purposes to the total number of kilometres driven;
and

616
14.3 Chapter 14: Fringe benefits

• the employee proves that accurate records for the distances travelled for private
purposes are kept and that the employee pays the full amount for fuel for private
purposes. This reduction is also calculated on assessment and is calculated on the
number of kilometres travelled for private purposes and the rate per kilometre as
announced for the use of the travel allowance (paragraph 7(8)(b)).

Example 14.7
If an employee does not receive a travel allowance but has the private use of a company
vehicle with a purchase price of R287 500 (including VAT), and the employee:
• is responsible for bearing all the costs of maintenance (R45 000) with regard to the
vehicle (the company bears all fuel expenses);
• has accurate records of distances travelled for private purposes and she travelled
25 000 km of her total 40 000 km for private purposes.
You are required to calculate the cash equivalent of the benefit for the current year of
assessment.

Solution 14.7
R
The private travel is taxed
The fringe benefit for the year is calculated as follows
(adjusted on assessment for private kilometres):
R287 500 × 3,5% × (25 000 km/40 000 km) × 12 months 75 469
Less: cost paid for private use (R45 000 × (25 000 km/40 000 km)) (28 125)
Taxable value 47 344
Note
Only private travel is taxed.
The full amount will be taxed monthly. No adjustment for private travel is made on a
monthly basis. The deductions and adjustment will only be made by SARS on assess-
ment as the total kilometres travelled would only be available then.

Exclusions
There is no taxable benefit
• where the vehicle is available to and is used by employees in general, the private use
of the vehicle by the employee is infrequent or merely incidental to the business use,
and the vehicle is not normally kept at or near the residence of the employee
concerned when not in use outside of business hours (for example pool vehicles); or
• when the nature of the employee’s duties are such that they are regularly required
to use the vehicle for the performance of these duties outside their normal hours of
work, the private use of the vehicle by the employee is infrequent or merely
incidental to the business use and they are not permitted to use the vehicle for pri-
vate purposes other than travelling between their places of residence and their
places of work (for example police vehicles).

617
A Student’s Approach to Taxation in South Africa 14.3

The calculation of the taxable benefit in respect of the right of use of a motor vehicle
can be summarised as follows:

Right of use of a motor vehicle – paragraph 7

How to calculate the taxable benefit

Determined value
(retail market value = cost
including VAT but
excluding finance
charges)

Value of private use

3,5% or 3,25%
per month of the
determined
value

On assessment
Deduction for
business use if a record is
kept of kilometres
travelled for private use
and business use

Bears all the fuel cost pro rata Bears all the maintenance costs
deduction for business use pro rata reduction for
(Kilometres x fuel rate per table) business use

Receives a travel allowance for same vehicle?

Yes No

Deduct consideration paid by employee

Taxable benefit

618
14.3 Chapter 14: Fringe benefits

Right of use of more than one motor vehicle

Where an employee receives the right to use more than one motor vehicle at the
same time and the Commissioner agrees that each vehicle is used during the year of
assessment primarily for business purposes, the value of the private use of all the
vehicles will be determined using the value of the vehicle having the highest deter-
mined value (unless the Commissioner directs otherwise).

REMEMBER

• ‘Primarily for business use’ means that more than 50% of kilometres travelled must be
for business purposes.

Where the employee has the right of use of more than one vehicle, no further
reductions on assessment is available. This means that there will be no apportion-
ment of value and no claim in respect of actual expenses incurred in respect of the
licence, insurance, fuel or maintenance. The SARS EMP 10 Guide ‘Guidelines for
employers’ states that, in all cases, the fact that more than one vehicle is made availa-
ble to an employee at the same time must be reported to SARS and only in those cases
where the Commissioner so directs after application by the taxpayer, may the deter-
mined value of only one vehicle be used. Full details of the reasons why it is neces-
sary to make more than one vehicle available to the employee must be submitted
when application for such concession is made.

Special dispensation for judges

If the employee receiving the right to use a motor vehicle is a judge or a Constitu-
tional Court judge and they keep accurate records for distances travelled, the kilome-
tres travelled between the judge’s place of residence and the court over which they
preside is deemed to be kilometres travelled for business purposes and not for pri-
vate purposes.

Example 14.8
Ronel de Witt was granted the use of a company vehicle from 1 March of the current year
of assessment. In addition, the company (her employer) bears the full cost of fuel used for
both business and private travelling, as well as the full cost of maintaining the vehicle.
The vehicle, which was purchased by the company on 30 June two years ago, cost
R278 280. The cost price included VAT amounting to R28 280 and finance charges of
R48 000. Ronel pays R200 a month to the company for the use of the vehicle.
You are required to calculate the cash equivalent of the benefit for the current year of
assessment.

619
A Student’s Approach to Taxation in South Africa 14.3

Solution 14.8
R
Determined value of the vehicle
Cost price (R278 280 excluding finance charges (R48 000)) 230 280
Less: Depreciation for one period (15% on R230 280) (34 542)
Determined value (R230 380 x 85%) 195 738
Taxable benefit:
3,5% per month of R195 738 (value of private use) 6 851
Less: Amount paid by Ronel (200)
6 651
Cash equivalent of benefit for the current year of assessment
(R6 651 × 12 months) 79 812

Why is the determined value only reduced by 15% if the vehicle has been
used by someone else for longer than a year?

Example 14.9
Assume the same facts as in Example 14.8 above, except that Ronel de Witt kept accurate
records (to the satisfaction of the Commissioner) of private kilometres travelled during
the current year of assessment. She travelled 8 000 of the total 20 000 km during the year
of assessment for private purposes.
You are required to calculate the cash equivalent of the benefit for the current year of
assessment.

Solution 14.9
R
Value for private use
Taxable benefit as calculated above
3,5% per month of R195 738 6 851
R6 851 per month × 12 months 82 212
On assessment: Reduction as a result of business use
(20 000 – 8 000)
km × R82 212 (49 327)
20 000
32 885
Less: Consideration given (R200 × 12 months) (2 400)
Cash equivalent of the benefit 30 485

620
14.3 Chapter 14: Fringe benefits

Example 14.10
Jan has the use of a company car from 1 March of the current year of assessment. His
employer purchased the vehicle on 1 March (that same day) for R345 000 (VAT included)
and he pays R200 per month for the use of the vehicle.
You are required to calculate the cash equivalent of the benefit of the company car which
has to be included in Jan’s taxable income for the year of assessment if:
1. Jan did not keep records and did not pay any costs of the vehicle himself. Also indi-
cate the amount subject to PAYE.
2. Jan did not keep records and did not pay any of the vehicle costs, what is the annual
amount on assessment?
3. Jan kept record of his business travel. 10 000 km of the total 40 000 km was for busi-
ness travel.
4. Jan records his business kilometres as in 3. above and he paid the following costs
himself:
R
Licence of the vehicle 200
Insurance 12 000
Maintenance 25 000
Fuel 26 000
5. The vehicle was purchased with a three-year/60 000 km maintenance plan; it cost
R399 000 (VAT included) and he did not keep any records or pay any expenses of the
vehicle.

REMEMBER

Unless it is proven otherwise with the use of an employer-owned motor vehicle, it is

deemed that:
• all travel is private travel;
• all costs are paid by the employer;
• adjustments for deductions are only done on assessment; and
• VAT is included in the determined value.

Solution 14.10
1. Monthly value is 3,5% × R345 000 = R12 075 less his payment of R200 = R11 875
Monthly inclusion (remuneration) for PAYE is 80% × R11 875 = R9 500
2. Annual amount on assessment is 3,5% × R345 000 × 12 months = R144 900 less
(R200 × 12 months) = R142 500

continued

621
A Student’s Approach to Taxation in South Africa 14.3

3. Taxable amount
R R
Annual amount 3,5% × R345 000 × 12 months = 144 900
Less: Portion travelled for business purposes
R144 900× 10 000km /40 000km = (36 225)
Annual amount 108 675
Less: Paid by Jan – R200 × 12 months (2 400)
Cash equivalent of the benefit 106 275

4. Annual amount (as per 3 above) 108 675

Less: Private costs
Licence 200
Insurance 12 000
Maintenance 25 000
37 200
× 30 000km/40 000km (calculation of private travel portion) (27 900)
Fuel – per table
30 000km × 171.8 cents (51 540)
Annual amount 29 235
Less: Paid by Jan – R200 × 12 months (2 400)
Cash equivalent of the benefit 26 835
5. 3,25% × R399 000 × 12 months = R155 610 less consider-
ation paid R2 400 = R153 210

14.3.5 Meals, refreshments, and meal and refreshment vouchers

(paragraph 8)
Meaning of the benefit
Meals, refreshments and vouchers provided by the employer that entitle the employee
to meals and refreshments free of charge or for an insufficient consideration are
regarded as a taxable benefit.

Cash equivalent of the benefit

The cash equivalent of the taxable benefit is the cost of the meal, refreshment or
voucher to the employer, less any consideration paid by the employee.

Exclusions
No value is placed on:
• a meal or refreshment supplied by an employer to their employees in a canteen,
cafeteria or dining room operated by or on behalf of the employer and used wholly
or mainly by their employees;
• a meal or refreshment supplied by an employer to their employees on the employ-
er’s business premises;

622
14.3 Chapter 14: Fringe benefits

• a meal or refreshment supplied by an employer to any employee during business

hours or extended working hours or special occasions;
• a meal or refreshment enjoyed by an employee while entertaining someone (for
example a client) on behalf of the employer; and
• meals provided with accommodation (these meals are not taxed separately as they
are dealt with as part of the accommodation benefit).

Example 14.11
The partners and managers of Top Auditing Firm all eat together, free of charge, in the
auditorium every afternoon. The cost per person amounts to R35 per day for the employer.
You are required to calculate the cash equivalent of the benefit for the current year of
assessment.

Solution 14.11
No value is placed on the benefit as a meal or refreshment supplied by an employer to
their employees in a canteen, cafeteria or dining room operated by or on behalf of the
employer and used wholly or mainly by their employees is excluded.

14.3.6 Accommodation (paragraph 9)

14.3.6.1 Residential accommodation
Meaning of the benefit
Residential accommodation supplied by an employer to an employee at either a low
or no rental is regarded as a taxable benefit.
Cash equivalent of the benefit
1. Where the employer owns the accommodation or if the employer does not own
the accommodation but it vests in the employer or an associated institution, the
value of the taxable benefit in respect of this residential accommodation is calcu-
lated using the following formula:
(A – B) × C/100 × D/12
In the above formula:
A = remuneration proxy
‘Remuneration proxy’ is defined as the remuneration derived by the
employee in the previous year of assessment (excluding the cash equivalent of
residential accommodation).
If the employee was not employed for a full year in the previous year, the
remuneration proxy must be determined in the ratio that 365/366 days bears
to the period of employment.

623
A Student’s Approach to Taxation in South Africa 14.3

If the employee was not employed at all by the employer during the
previous year of assessment, the remuneration is determined by the remu-
neration earned in the first month of employment in the current year of as-
sessment in the ratio of 365/366 days to the number of days in the first
month employed.
B = R91 250. This is a reduction that is available to every employee except if the
employee or their spouse has a direct or indirect controlling interest in the
employer (private company) or the employee, their spouse or minor child
may become the owner of the accommodation. If the employee has control
over the employer or right of option to the property, B is Rnil. (This amount
is the tax threshold discussed in chapter 1 – that is to say, the current primary
rebate of R16 425 18% (the first rate of tax for individuals)).
C = a quantity of 17; or
18 where such accommodation consists of a house, flat or apartment consist-
ing of at least four rooms and such accommodation is either furnished or
power or fuel is supplied by the employer; or
19 where the accommodation consists of a house, flat or apartment consist-
ing of at least four rooms, such accommodation is furnished, and the
employer supplies power or fuel.
D = number of months that the employee was entitled to the accommodation
during the current year of assessment.
2. When an employee has an interest in the accommodation, use the formula.
3. Where the employer does not own the property and they rent it in an arms-
length transaction from a person who is not a connected person, the value of the
taxable benefit in respect of the residential accommodation is the lower of:
• an amount determined as calculated using the formula:
(A – B) × C/100 × D/12
as described above; or
• an amount equal to the rental paid by the employer together with any other
expenditure incurred and paid by the employer.
An employee is deemed to have an interest in the accommodation if:
• such accommodation is owned by the employee or a connected person in rela-
tion to such an employee;
• an increase in the value of the accommodation accrues directly or indirectly to
the benefit of such employee or a connected person in relation to such
employee; or
• such employee or connected person has a right to acquire the accommodation
from their employer.
4. Paragraph 9(9) determines that where the employee has an interest in the accom-
modation and the accommodation has been let to the employer, the value of the
benefit is calculated according to the formula. The rental concerned is deemed
not to be received by or accrued to the employee or a connected person in rela-
tion to them. This means that the owner of the accommodation cannot deduct
any expenses, for example interest incurred, municipal rates and electricity
expenses, in terms of section 11(a).

624
14.3 Chapter 14: Fringe benefits

The cash equivalent of the taxable benefit is the difference between the value of
the private use of the accommodation and the consideration given by the
employee (if any).
Under certain circumstances, a benefit granted by an employer under a housing
scheme constitutes a loan and the provision of a low-interest or interest-free loan
applies in terms of paragraph 10A (refer to 14.3.8).

Exclusions
• No value is placed on the accommodation benefit where the employer provides
accommodation to the employee while they are temporarily absent from their
usual place of residence in the Republic in the course of performing their duties of
employment (paragraph 9(7)).
• No value is placed on an accommodation benefit provided by an employer to an
employee away from their usual place of residence outside the Republic for pur-
poses of the employee performing their duties if the employee is physically present
in the Republic for a period of less than 90 days in that year (paragraph 9(7A)(b)).
• No value is placed on an accommodation benefit provided by an employer to an
employee away from their usual place of residence outside the Republic for pur-
poses of the employee performing their duties if the employee is away from their
usual place of residence for a period not exceeding two years from the date of
arrival of that employee in the Republic, but if:
– that employee was present in the Republic for a period exceeding 90 days
during the year of assessment immediately before their arrival in the Republic to
commence their duties; or
– to the extent that the cash equivalent of the value of the taxable benefit derived
from the occupation of the residential accommodation exceeds an amount of
R25 000 multiplied by the number of months during which the benefit is granted
(paragraph 9(7A)(a) and (7B)), a taxable benefit arises.

REMEMBER

• Where residential accommodation is supplied by the employer and the employee, their
spouse or minor child can (according to an agreement) obtain that accommodation in
future at an amount mentioned in the agreement, and the rental paid by the employee is
calculated as a percentage of the purchase price, then the accommodation is taxed as a
loan (refer to deemed loans paragraph 10A, Seventh Schedule and 14.3.8).
• Where more than one residential accommodation which they are entitled to occupy
from time to time while performing their duties have been made available to the
employees, the amount of the value of the unit with the highest rental value over the
full period during which the employee was entitled to occupy more than one unit must
be included in their gross income. (paragraph 9(6)).
• Where the Commissioner is satisfied that the rental value is less than the rental value
determined in accordance with the above-mentioned rules, he/she may reduce the
value to a lower amount which he/she considers fair and reasonable.

continued

625
A Student’s Approach to Taxation in South Africa 14.3

• If an employee has a usual place of residence outside the Republic and they:
(i) are physically present in the Republic for less than 90 days in that year, no value
is to be placed on accommodation given to them; and
(ii) are performing their duties for a period not exceeding two years from date of
arrival in the Republic, no value is to be placed on the accommodation given to
them provided:
– they did not spend more than 90 days in the Republic in the year of assess-
ment immediately before they arrived here to commence the two-year period;
and
– the accommodation provided to them does not cost more than R25 000 per
month.

14.3.6.2 Holiday accommodation

Meaning of the benefit
Holiday accommodation supplied by an employer to an employee at either a low or
no rental is regarded as a taxable benefit.

Cash equivalent of the benefit

The value of the taxable benefit in respect of holiday accommodation depends on
whether
• the holiday accommodation is hired by the employer:
The value of the taxable benefit is the sum of the rental payable and amounts
chargeable in respect of meals, refreshments or any other services borne by the
employer.
• the accommodation is owned by the employer or associated institution:
The value of the taxable benefit is an amount calculated at the prevailing rate per
day at which such accommodation could normally be let to a person other than an
employee.
The cash equivalent of the taxable benefit is the difference between the value of the
private use of the accommodation and the consideration given by the employee (if
any).

Exclusions
No exclusions are applicable to the holiday accommodation benefit.

626
14.3 Chapter 14: Fringe benefits

Example 14.12
His employer granted Elmo de Bruyn, who earned remuneration of R270 000 (excluding a
housing benefit) during the previous year of assessment, the use of an unfurnished town-
house with more than four rooms, as from 1 March in the current year of assessment. The
employer owns the townhouse. The company pays all the costs of electricity, water,
sewerage and municipal rates. In addition, Elmo was given the use of a beachfront flat on
the South Coast for his 21 days’ annual holiday, at no cost. The company also owns this
block of flats. Elmo, his wife and two children made use of this benefit during December
of the current year of assessment. The company usually rents out the flat at R250 a day
per person to independent third parties.
You are required to calculate the cash equivalent of the benefit for the current year of
assessment.

Solution 14.12
Townhouse
C D 18 12
(A – B) × × = (R270 000 – R91 250) × × = R32 886
100 12 100 12
Holiday flat
R250 × 21 days × 4 = R21 000
Total benefit: R32 886 + R21 000 = R53 886

Example 14.13
During the previous year of assessment, Abraham Tayob only worked three months
(December to February) and received remuneration amounting to R100 000 in total
(excluding a housing benefit) from Barlows (Pty) Ltd. R15 200 of this remuneration repre-
sents 80% of a travel allowance. Barlows (Pty) Ltd allows Abraham to stay free of charge
in a fully furnished three-bedroom house with a separate kitchen. Barlows (Pty) Ltd owns
the house. Barlows (Pty) Ltd is also responsible for the payment of the water and electrici-
ty accounts every month. Abraham received this accommodation benefit for the whole cur-
rent year of assessment.
You are required to calculate the cash equivalent of the benefit to be included in
Abraham’s taxable income for the current year of assessment.

627
A Student’s Approach to Taxation in South Africa 14.3

Solution 14.13
Remuneration factor – Abraham worked three months during the preceding R
year of assessment
Remuneration proxy 100 000
Apportion in respect of number of days employed during the previous year
of assessment (R100 000 / 90 (Note) × 365) 405 556
From 1 March to 28 February of the current year of assessment
Accommodation benefit
(A – B) × C/100 × D/12
= (R405 556 – R91 250 87 300) × 19 (Note)/100 × 12 / 12
Cash equivalent of the benefit for the current year of assessment 59 718
60 469

Note
90 = December (31 days) + January (31 days) + February (28 days)
C = 19 because a three-bedroom house with a separate kitchen represents at least four
rooms and because the employer supplies both furniture and power.

REMEMBER

• Where an employee resides in a house of the employer and they can obtain the house
later according to a contract and the rental is calculated as a percentage of the purchase
value, then it is not a service but a loan, except when the purchase contract was concluded
at market value (refer to paragraph 10A, Seventh Schedule and 14.3.8).

14.3.7 Free or cheap services (paragraph 10)

Meaning of the benefit
A taxable benefit arises when a service has been rendered to the employee (either by
the employer or by some other person) and the employer paid for the service. The
service must have been for private or domestic purposes and no consideration or an
inadequate consideration was paid by the employee to the employer.

Cash equivalent of the benefit

The cash equivalent of the taxable benefit is the cost to the employer of rendering
such service or having such service rendered, less any amount paid by the employee.
Where the employer is in the travel business of transporting passengers for reward by
sea or air and the employee makes use of this to travel outside the Republic for pri-
vate purposes, the employee is taxed on the value of the lowest fare.
If the employer is an educational institution that provides free or cheap tuition to the
children of personnel, the value of the taxable benefit is the marginal cost involved in
the tuition of one additional person. In practice it is often very difficult to ascertain
this marginal cost and there is no fringe benefit.

628
14.3 Chapter 14: Fringe benefits

Exclusions
There is no taxable benefit on:
• a travel facility granted by an employer who is engaged in the business of trans-
porting passengers for reward, to enable an employee, their spouses or minor chil-
dren to travel to:
– a destination in the Republic or overland to a destination outside the Republic; or
– a destination outside the Republic if such travel was undertaken on a flight or
voyage in the ordinary course of the employer’s business and such employee,
spouse or minor child was not permitted to make a firm advance booking (for
example trips undertaken by airline staff on a standby basis);
• a transport service rendered to employees in general for the transport of such
employees from their home to the place of their employment and vice versa;
• a communication service provided to an employee if the service is mainly used for
purposes of the employer’s business (for example telephone services);
• a service rendered by an employer to their employees at their place of work for the
better performance of their duties, or as a benefit to be enjoyed by them at that
place of work, or for recreational purposes at that place or a place of recreation
provided by the employer for the use of his employees in general (for example,
provision of parking for motor vehicles at the place of work); and
• a travel facility granted by an employer to the spouse or a minor child of an
employee if:
– that employee is stationed for purposes of the business of that employer at a
specific place in the Republic further than 250 km away from their usual place of
residence in the Republic for the duration of the term of their employment;
– that employee is required to spend more than 183 days during the relevant year
of assessment at that specific place for purposes of the business of that
employer; and
– that facility is granted in respect of travel between that employee’s usual place
of residence in the Republic and that specific place where the employee is so
stationed.

Example 14.14
Every morning, Park Supermarket’s minibus picks up all the employees and drives them
to their place of employment. The cost per capita amounts to R8 per day for the employer.
You are required to calculate the cash equivalent of the benefit to be included in the tax-
able income for the employees.

Solution 14.14
No value is placed on this benefit, as a transport service rendered to employees in general
for the conveyance of such employees from their home to the place of their employment,
and vice versa, is excluded.

629
A Student’s Approach to Taxation in South Africa 14.3

Example 14.15
Velvet Ltd incurred a cost of R400 000 to erect a gym at the place of employment where
employees can go and exercise during lunch and after work. The cost per capita amounts
to R180 per month for the employer.
You are required to calculate the cash equivalent of the benefit to be included in the tax-
able income for the employees.

Solution 14.15
No value is placed on this benefit, as a service rendered at the place of work for better
performance of their duties, or as a benefit to be enjoyed by them at the place of work, or
for recreational purposes at work is excluded.

14.3.8 Benefits in respect of interest on debt (paragraph 11)

Meaning of the benefit
A taxable benefit arises when a debt is owed by an employee to their employer and
either no interest is payable or interest is payable by the employee at a rate less than
the official rate.

Cash equivalent of the benefit

The cash equivalent of the taxable benefit is the amount of interest that would have
been paid on the debt during the year of assessment if interest had been paid at the
official rate less the amount of interest (if any) actually paid by the employee during
the year.
If no interest is payable by the employee on the debt, or if interest is payable at irreg-
ular intervals, a portion of the cash equivalent is deemed to have accrued to the
employee on the last day of each period in the year of assessment for which a cash
remuneration becomes payable by the employer to them (usually monthly). There-
fore, the fringe benefit in respect of the debt is taxed on a regular basis although the
interest on the loan is not raised regularly.
When interest is payable by the employee at regular intervals, a portion of the cash
equivalent is deemed to have accrued to the employee on each date during the year
of assessment on which the interest becomes payable by them for a part of the year
(for example quarterly or half-yearly).
If the taxpayer applies, the Commissioner may approve a different method of calcula-
tion of the cash equivalent of the debt.
The official rate is described as
• in the case of a loan in Rands, a rate of interest equal to the South African repur-
chase rate (REPO rate) plus 100 basis points; or
• in the case of a loan in another currency, the repurchase rate applicable to that
currency plus 100 basis points.

630
14.3 Chapter 14: Fringe benefits

The repurchase rate changed as follows:

From 25 July 2020 to 1 November 2021 ..............................................................................3,50%
From 20 November 2021 to 28 January 2022......................................................................3.75%
From 28 January 2022 to 25 March 2022 .............................................................................4.00%
From 25 March 2022 to 20 May 2022 ...................................................................................4.25%
From 20 May 2022 to 22 July 2022 ......................................................................................4.75%
From 22 July 2022 to 23 September 2022 ...........................................................................5.50%
From 23 September 2022 to 11 November 2022 ................................................................... 6.25
Since 1 November until change in repo rate* ....................................................................6.25%
The official interest rate is then 100 basis points more and is adjusted at the beginning of the
month following the month during which the Reserve Bank changes the repurchase rate:
From 1 August 2020 to 30 November 2021 ........................................................................4,50%
From1 December 2021 to 31 January 2022..........................................................................4.75%
From 1 February 2022 to 31 March 2022 .............................................................................5.00%
From 1 April 2022 to 31 May 2022 .......................................................................................5.25%
From June 2022 to 31 July 2022.............................................................................................5.75%
From 1 August 2022 to 30 September 2022 ..........................................................................6.5%
From 1 October 2022 until change in repo rate* ................................................................7.25%
Note: These rates could still change again for the 2023 year of assessment but at time of
going to print with this book, these were the rates.

The new repurchase rate or equivalent rate must be applied from the first day of the
month following the date on which that new repurchase rate or equivalent rate came
into operation. The repurchase rate can be found on the Reserve Bank website
www.resbank.co.za. You have to check the rates as they can change during the year
of assessment.

Exclusions
There is no taxable benefit on:
• casual loans granted by an employer to their employee if the debt or all the debts to
that employee are not more than R3 000 at a time. The loans have to be short-term
loans at irregular intervals. Not all debt will qualify for this exclusion merely because it
is less than R3 000. It is important to note that when a debt amounts to R5 000, it does
not mean that the first R3 000 will qualify for the exclusion. The exclusion will only
apply if the debt does not exceed R3 000 and not to the first R3 000 of a debt; and
• loans granted to employees to enable them to further their studies
• From 1 March 2019 no value is to be placed on interest on a loan that does not
exceed R450 000 for the purchase of immovable property for residential purposes
with a market value of R450 000 or less: Provided the employee’s remuneration
proxy does not exceed R250 000 during the year the loan was granted.

REMEMBER

• Where the employee uses a loan from an employer to produce income (as defined), the
cash equivalent of the taxable benefit is deemed to be interest actually paid by them and
allowed as a possible deduction in terms of section 11(a).

631
A Student’s Approach to Taxation in South Africa 14.3

Example 14.16
On 1 March of the current year of assessment, Jaco de Swart’s employer granted him a
loan at a rate of 3% per annum (payable monthly), to enable him to buy a new car. The
debt amounted to R200 000 and would be repaid in full at the end of a period of five years
from the date of the agreement.
You are required to calculate the cash equivalent of the benefit to be included in Jaco’s
taxable income in respect of the current year of assessment. Assume that the official rate
of interest is 4,5% from 1 August of the current year of assessment and 4,75% before that.

Solution 14.16
R
Interest at the official rate of interest:

4,75% on R200 000 × 153 / 365 days 3 831

4,5% on R200 000 × 212 / 365 5 227

9 058
Less: Interest paid (3% on R200 000 for 12 months) (6 000)
Cash equivalent of the benefit 3 058
Taxable benefit for the year 3 058

Deemed loans
Paragraph 10A deems a benefit granted by an employer under a housing scheme to
constitute a loan where:
• an employee has been granted the right to occupy residential accommodation
owned by their employer or by an associated institution in relation to their
employer;
• the employee, their spouse or minor child is entitled or obliged to acquire the
house, either on termination of their service or after the expiration of a fixed period
at a price stated in such an agreement; and
• the employee is granted the right to occupy the house and as a consideration in
respect of their occupation, pays rent to the employer, which is calculated as a giv-
en percentage of the price used in the agreement above.
This scheme is identical to the granting by the employer of a low-interest housing
loan and is deemed to be treated as such. These schemes are not taxed as an accom-
modation/housing benefit (refer to 14.3.6.1).
The subsequent acquisition of the property is not treated as an asset acquired at less
than the actual value if the property is acquired at a price that is not lower than the
market value on the date on which the agreement is concluded. This means by impli-
cation that when the agreed price in terms of an agreement amounts to R500 000 and
the house is acquired at a later stage (when the market value is R800 000) for the set
amount (R500 000), no taxable benefit in respect of the acquisition of an asset at less
than the actual value will arise.

632
14.3 Chapter 14: Fringe benefits

Example 14.17
Marlene Mills arranges for her employer to purchase a house in Groenkloof, Pretoria,
where she and her family will live. Marlene and her employer enter into an agreement in
terms of which Marlene will be entitled to acquire the property in five years’ time for
R1 750 000 (its current market value).
In terms of the agreement, Marlene is required to pay a monthly rental 0,5% of the agreed
purchase price. The agreement was entered into on 1 June of the current year of
assessment.
You are required to calculate the cash equivalent of the benefit to be included in
Marlene’s taxable income in respect of the current year of assessment. You can assume
that the official rate of interest is as per the table above.

Solution 14.17
R
Interest at the official rate of interest:
From 1 June 2022 to 31 July 2022 at 5.75% on R1 750 000 for 2 months 16 771
From 1 August 2022 to 30 September 2022 at 6.5% for 2 months 18 958
From 1 October 2022 to 28 February 2023 at 7.25% for 5 months 52 865
Less: Rent paid
0,5% × R1 750 000 for 12 months (8 750)
Cash equivalent of the benefit 79 844
Taxable benefit for the year 79 844

14.3.9 Subsidies in respect of loans (paragraph 12)

Meaning of the benefit
A taxable benefit arises whenever an employer has paid a subsidy in respect of capi-
tal or interest on a loan due by the employee. In addition, the payment of an amount
by the employer to a third party in respect of the granting by that third party of a
low-interest or interest-free loan to an employee of the employer is deemed to be a
subsidy, if the amount paid by the employer together with the interest paid by the
employee exceeds the amount of interest on the loan calculated at the official rate of
interest.

Cash equivalent of the benefit

The full amount of the subsidy is the cash equivalent of the taxable benefit.

633
A Student’s Approach to Taxation in South Africa 14.3

Example 14.18
James Ndlovu was employed on 1 March of the current year of assessment with a basic
monthly salary of R8 500. He also receives a housing subsidy of R3 500 per month in terms of
his employer’s housing scheme.
You are required to calculate the cash equivalent of the housing benefit received by James
regarding the current year of assessment.

Solution 14.18
R
Taxable portion of the housing subsidy (R3 500 × 12 months) 42 000

Example 14.19
Letta Sepeng obtains a R200 000 loan from Abstec Bank on 1 March of the current year of
assessment and is required to pay interest thereon at 2%. The reason for the low interest
rate is that her employer has arranged to compensate the financial institution for the loss
of interest on the difference between 2% and the normal rate of interest charged of 12%.
Assume that the official rate of interest is 6% for the year.
You are required to calculate the cash equivalent of the subsidy received by Letta in
respect of the current year of assessment.

Solution 14.19
%
Interest paid by the employee 2
Payment by the employer 10
Interest actually received by the financial institution 12
As the interest paid by the employee and the payment made by the employer
exceed the official rate of 6%, the payment is deemed to be a subsidy subject to
tax.

R
Taxable portion of the housing subsidy (10% (12% – 2%) × R200 000) 20 000

continued

634
14.3 Chapter 14: Fringe benefits

Note
If the official rate of interest had to change to 13%, the interest paid by the employee (2%)
together with the payment made by the employer (10%) does not exceed the amount of
interest which would have been paid had interest been charged at the official rate of
interest, and the benefit granted is taxed according to the provisions of a low or interest-
free loan:
R
Interest at the official rate (13% × R200 000) 26 000
Less: Interest payable (2% × R200 000) (4 000)
Cash equivalent of benefit 22 000

Example 14.20
A company has employed Anne Brown for several years. On 1 August of the current year
of assessment the company granted her a loan of R200 000 to enable her to buy the flat she
lives in. The company’s housing scheme provides for housing loans at an interest rate of 2%
per annum, repayment of the capital portion of the loan only becoming due when the
employee leaves the company’s employment for any reason whatsoever. During the current
year of assessment Anne earned a salary of R240 000.
You are required to calculate the cash equivalent of the benefit to be included in Anne’s
taxable income in respect of the current year of assessment. You can assume that the offi-
cial rate of interest is 7% for the year.

Solution 14.20
R
Interest at official rate:
7% on R200 000 for seven months (7 / 12) 8 167
Less: Interest payable (2% on R200 000 for seven months) (2 333)
Cash equivalent of the benefit 5 834
No subsidy has been paid by Anne’s employer in respect of the capital or interest on the
loan and therefore it is treated as a low-interest or interest-free loan and not as a housing
subsidy.

14.3.10 Medical fund contributions paid on behalf of an employee

(paragraph 12A)
Meaning of the benefit
A taxable benefit arises where the employer contributes, directly or indirectly, to a
medical scheme on behalf of an employee.

635
A Student’s Approach to Taxation in South Africa 14.3

Cash equivalent of the benefit

The cash equivalent of the benefit is the amount of the employer’s contribution to
such fund or payment to a medical fund (for any period to the advantage of any
employee or dependants of such employee) in relation to such employee or depend-
ants of such employee.

Exceptions
If the contribution or payment to the fund is such that an appropriate portion cannot
be attributed to the employee or their dependants for whose benefit it is made, the
amount of that contribution or payment in relation to a specific employee and their
dependants is deemed to be the total contribution or payment by the employer to the
fund in respect of all employees and their dependants divided by the number of
employees in respect of whom the contribution or payment is made.
If the apportionment of the contribution or payment among all the employees of a
fund as described in the paragraph above does not reasonably represent a fair appor-
tionment of that contribution or payment among the employees, the Commissioner
may decide (after application by the taxpayer) that such apportionment be made in
such other manner as appears fair and reasonable.

Exclusions
The benefit is not regarded as a taxable benefit if the payment by the employer is
made on behalf of:
• a pensioner (persons who have retired from service due to old age, poor health or
other disability);
• the dependants of a person, after such person’s death, if such person was in the
employ of such employer on the date of death;
• the dependants of a pensioner, after such person’s death, if such person retired from
service by reason of age, poor health or other disability.

Example 14.21
Ferramax Ltd has its own medical aid fund registered in terms of the Medical Schemes Act.
For the current year of assessment, Ferramax Ltd made the following contributions to the
fund on behalf of the following employees, none of whom contributed to the fund:
R
Mario Fernando (Note 1) 24 000
Other employees and their dependants (Note 2) 3 600 000
Abel Alexander (Note 3) 33 600

continued

636
14.3 Chapter 14: Fringe benefits

Notes
1. Mario Fernando is the managing director. He earns a salary of R680 000 a year. The
contributions were only made for the benefit of Mario as he does not have any
dependants.
2. The company employs 250 other employees. Mary Daneel is one of these other
employees. She has one dependant.
3. Abel Alexander receives a pension from the company’s pension fund, amounting to
R72 000. Abel retired due to old age in 2013.
You are required to calculate the cash equivalent for the current year of assessment of the
taxable benefits arising from the company’s contributions to the medical aid fund in
respect of all the taxpayers referred to above.

Solution 14.21
R
Mario Fernando
Total contribution by the company = fringe benefit 24 000
Mary Daneel
Mary’s taxable benefit is calculated as follows:
R3 600 000 (the total employer contributions in respect of all employees and
dependants) divided by 250 (being the number of employees)
= R14 400
This R14 400 thus represents the deemed contribution made by the company in
respect of the benefits of Mary and her one dependant
Total contribution by the company = fringe benefit 14 400
Abel Alexander
Taxable benefit (he has retired and receives a pension) nil

14.3.11 Costs incurred for medical services (paragraph 12B)

Meaning of the benefit
A taxable benefit arises when an employer incurs expenses, whether directly or
indirectly, in respect of a medical, dental or similar service, hospital service, nursing
service or medicine in respect of an employee, their spouse, child or other relative or
dependants.
In order to assist low-income earners and their family members who cannot afford
even the most basic medical scheme package but are entitled to employer-provided
medical care in the form of prescribed minimum benefits, paragraph 12B provides for
programmes or schemes offered by employers where this benefit is not taxed in the
hands of the employee.

Cash equivalent of the benefit

The cash equivalent of the value of the taxable benefit is the amount incurred by the
employer during a month.

637
A Student’s Approach to Taxation in South Africa 14.3

Exceptions
If the payment for the medical services, as described above, is such that an appropri-
ate portion cannot be attributed to the relevant employee and their spouse, children,
relatives and dependants, the amount of the payment in relation to the relevant
employee and their spouse, children, relatives and dependants is deemed to be an
amount equal to the total amount incurred by the employer in respect of the medical
services divided by the number of employees who are entitled to make use of those
services.

Exclusions
The benefit is not regarded as a taxable benefit if the payment by the employer is
made in respect of the following medical services:
• Medical treatment listed in a category of the prescribed minimum benefits deter-
mined by the Minister of Health in terms of the Medical Schemes Act 131 of 1998,
which is provided to the employee or their spouse or children in terms of a scheme
or programme of that employer,
– which constitutes the carrying on of the business of a medical scheme, but the
scheme is exempt from the requirement of the Medical Schemes Act; or
– which does not constitute the carrying on of the business of a medical scheme, if
that employee, their spouse and children are not beneficiaries of a registered
medical aid scheme or they are beneficiaries of such a medical aid scheme, and
the total cost of that treatment is recovered from that scheme.
• Medical services rendered or medicines supplied for purposes of complying with
any law of the Republic.
• Medical services received from an employer by:
– a person who retired from the employment of the employer as a result of super-
annuation, ill-health or other infirmity;
– the dependants of a person after that person’s death, if that person was in the
employ of that employer on the date of death;
– the dependants of a person after that person’s death, if that person retired from
the employ of that employer by reason of superannuation, ill-health or other
infirmity; or
– a person who is entitled to the secondary rebate, that is to say the person will be
65 years or older on the last day of the relevant year of assessment.
• Where the services are rendered by the employer to its employees in general at
their place of work for the better performance of their duties.

638
14.3 Chapter 14: Fringe benefits

Example 14.22
Reubosch Ltd does not have its own medical aid fund registered in terms of the Medical
Schemes Act 131 of 1998. Reubosch Ltd has a policy in respect of which the company
pays for all medical and other related services in respect of employees, their spouses,
children and relatives. For the current year of assessment, Reubosch Ltd made the follow-
ing payments regarding medical and other related services on behalf of the following
employees, spouses, children and/or relatives. None of the employees paid anything
themselves.
R
• The company received a bill from the local hospital. The costs relate to
immunisations. All employees, their spouses, children and/or rela-
tives could obtain the immunisations. A nurse from the hospital was
available during lunchtime for a week to give the immunisation. Karen
Neveu went for the injections. In total, 800 employees went for the in-
jections. 40 000
• The company pays R500 per month to the local doctor in order for
Avashnee Moola to receive medical services. Avashnee is the widow
of Abdullah Moola, who was in the employ of the company on the
date of his death during the current year of assessment. 6 000
You are required to calculate the cash equivalent of the taxable benefits arising from the
company’s payments in respect of medical and other related services provided to
employees, their spouses, children and/or relatives for all the taxpayers referred to
above.

Solution 14.22
R
Karen Neveu
As the services are rendered by the employer to its employees in general at
their place of work for the better performance of their duties, no taxable benefit
arises. nil
Avashnee Moola
No value is placed on the amount of R500 per month paid to the local doctor in
order for Avashnee Moola to receive medical services as Avashnee is a depend-
ant of her late husband, who died while in the employ of the company. nil

14.3.12 Benefit in respect of employer-owned insurance policies

(paragraph 12C)
The cash equivalent of the value of a taxable benefit for insurance policy premiums
paid by the employer is the amount of an expenditure incurred by an employer
during a year of assessment in respect of any premiums payable under a policy of
insurance directly or indirectly for the benefit of an employee or their spouses, child,
dependant or nominee.

639
A Student’s Approach to Taxation in South Africa 14.3

14.3.13 Payment of contribution on behalf of employee to a

pension, provident or retirement annuity fund
(paragraph 12D)
All employer contributions to retirement funds on behalf of employees must be
included in taxable income as a fringe benefit of the employee. These contributions
are however deductible (subject to limitations) in the hands of the employees. This
excludes the transfer of any surplus funds to the retirement fund (from 1 March
2017). From 1 March 2019 this includes the value of a contribution or payment made
by an employer on behalf of an employee to a bargaining council established in terms
of the Labour Relations Act, 1995 (section 27).

Cash equivalent of the benefit

(i) If the contributions are made to a defined contribution fund, the contribution
allocated to the employee are included as a fringe benefit for that employee as at
the cash value of the contribution; or
(ii) If the contributions are made to a defined benefit fund, the value of the fringe
benefit is determined by means of a formula. The value of the amount is deter-
mined in accordance with the following formula:
X = (A × B) – C where:
X = amount to be determined;
A = fund member category factor in respect of the fund member
category of which the employee is a member;
B = the amount of the retirement funding income of the employee;
C = the sum of the amounts contributed to the fund by the em-
ployee excluding any voluntary contributions made by the
employee as well as buy-back in respect of that year of as-
sessment.
The Minister determines further details by way of regulation.

Exclusions
No value is placed on the taxable fringe benefit obtained:
• from a contribution made by an employer to the benefit of an employee who
retired from service; or
• in respect of the dependants or nominees of a deceased member of the fund.

REMEMBER

• A defined contribution fund means the member eventually gets all contributions made
for their benefit back, plus capital growth, less the costs. A defined benefit fund means
the member would be entitled to a specific pension/retirement benefit determined not
on their contributions but on the benefit they should get. Therefore, an involved for-
mula is required to determine the employer’s specific contribution to one person’s
retirement benefits.

640
14.3 Chapter 14: Fringe benefits

Example 14.23
Douggies Ltd pays the retirement annuity fund contributions amounting to R20 000 on
behalf of one of its directors, Dewald van Jaarsveld.
You are required to calculate the cash equivalent of the benefit to be included in
Dewald’s taxable income in respect of the current year of assessment.

Solution 14.23
The value of the taxable benefit in respect of the retirement annuity fund contributions is
R20 000, to be included in Dewald’s taxable income in respect of the current year of
assessment. The amount of R20 000 can qualify as a deduction in terms of section 11F
when calculating Dewald’s taxable income.

14.3.14 Payment of contribution on behalf of employee to a

bargaining council (paragraph 12E)
Meaning of the benefit
The cash equivalent of the value of the taxable benefit paid by the employer on behalf
of an employee directly or indirectly to any bargaining council established under
section 27 of the Labour Relations Act in respect of a scheme or fund other than a
pension or benefit fund.
The cash equivalent of the benefit
The cash equivalent is the amount paid for a specific employee or if that could not be
established the amount paid by the employer divided by the number of employees he
paid it for.

14.3.15 Payment of employee’s debt or the release of the employee

from the obligation to pay a debt (paragraph 13)
Meaning of the benefit
A taxable benefit is deemed to have been granted to an employee if the employer has
paid an amount owing by the employee to a third party without requiring the
employee to make any payment for the amount paid.
In addition, a taxable benefit arises when the employer releases the employee from an
obligation to pay an amount owing by the employee to the employer.

REMEMBER

This benefit does not include amounts paid by the employer as:
• medical fund contributions (paragraph 12A);
• incurral of cost relating to medical services (paragraph 12B); or
• premiums paid on employer-owned insurance policies (paragraph 12C).

641
A Student’s Approach to Taxation in South Africa 14.3

Cash equivalent of the benefit

The cash equivalent of the taxable benefit is the amount paid by the employer or the
amount of the debt from which the employee has been released.

Exclusions
No value is placed on a taxable benefit in terms of this paragraph, if the employer pays:
• subscriptions on behalf of the employee to a professional body if membership of
the body is a condition of the employee’s employment;
• insurance premiums indemnifying an employee solely against claims arising from
negligent acts or omissions on the part of the employee in rendering services to the
employer;
• a portion of the value of a benefit that is payable by a former member of a non-
statutory force or service as defined in the Government Employees Pension Law of
1996 to the Government Employee’s Pension Fund as contemplated in
Rule 10(6)(d) or (e) of the Rules of the Government Employees Pension Fund con-
tained in Schedule 1 to that Proclamation; and
• on behalf of a new employee, an amount to a previous employer in respect of a
study loan or bursary obligation still owing to the previous employer due to the
fact that the previous employer required the employee to work for a fixed period
after obtaining the qualification and the period has not expired. The employee is
consequently liable to work for the new employer for a period not shorter than the
remaining period which they should still have worked for the previous employer.

Example 14.24
Ine-Lize Steyn receives a study loan from her employer on 1 March of the current year of
assessment to enable her to enrol for a certificate programme at a university. At the end of
the calendar year (December), when the results were made available, Ine-Lize was
announced as being the top student of the programme. Her employer waived her debt
and she did not have to repay the loan.
You are required to discuss whether the above-mentioned will result in any cash equiva-
lent of the benefit to be included in Ine-lize’s taxable income in respect of the current year
of assessment.

Solution 14.24
The value of the loan will be included in Ine-Lize’s taxable income, as a taxable benefit
will arise when the employer releases the employee from an obligation to pay an amount
owing by the employee to the employer. If her employer paid her the amount owed as a
bona fide study bursary and made the bursary subject to a condition that Ine-Lize has to
repay the bursary if she abandons her studies or fails to complete them within a certain
period, no taxable benefit will arise as the bursary will qualify as being exempt income in
terms of section 10(1)(q) (refer to 14.5.6).

642
14.3–14.4 Chapter 14: Fringe benefits

REMEMBER

• It is important to note that the cash equivalent of all the above-mentioned fringe benefits
will not only be used to calculate the annual taxable income of an employee but also
when the employer calculates employees’ tax on a monthly basis. The right of use of a
motor vehicle, however, is calculated at 80% for employees’ tax purposes, unless the
employer is satisfied that the vehicle is used 80% for business purposes. In that case,
only 20% is included.

14.4 Allowances and advances

In terms of section 8 of the Act, a person who receives an allowance or advance
paid by a principal must include it in their taxable income. A ‘principal’ is an
employer, authority, company or body in relation to which an office is held and an
associated institution in relation to that employer.
Where the employee is instructed to spend an amount by the principal in the further-
ance of the principal’s business and the employee is requested to produce proof that
the amount was spent for that purpose, this allowance is not included in an employ-
ee’s taxable income. This allowance is known as a ‘reimbursive’ allowance.
A reimbursive allowance relates to expenses actually incurred on behalf of the
employer, for example when an employee takes a client out to lunch on behalf of
their employer in the furtherance of the employer’s business. The employee keeps the
bill and presents it as proof to substantiate their claim. The company refunds the
employee for the expense and no taxable benefit arises.
In contrast to a reimbursive allowance, an employer can pay the employee an
amount they can use as they wish. For example, an employer pays an employee an
amount they can use to entertain clients. The employees are under no obligation
and can choose whether they actually want to entertain the clients. The employees
also do not need to provide proof to the employer that they actually did use the
allowance to entertain clients. Such an allowance is a taxable allowance.
Taxable allowances include a travel, subsistence, home study, cell phone or any other
allowance.
Certain allowances are exceptions and are not taxable benefits when paid to a person
employed in:
• the national or provincial sphere of government;
• a municipality in the Republic; or
• a national or provincial public entity, if not less than 80% of the expenditure of
such entity is defrayed directly or indirectly from funds voted by Parliament.
The above is applicable where the person is stationed outside the Republic and the
allowance is attributable to that person’s services rendered outside the Republic. This
allowance must not be included in the taxable income of the applicable employee.

643
A Student’s Approach to Taxation in South Africa 14.4

14.4.1 Travel allowance (section 8(1)(b))

Where an employee receives a travel allowance they must include any amount of this
allowance that is spent on private travelling in respect of the year of assessment in
their taxable income. The portion of the allowance that is expended for business
purposes is effectively tax free.
The portion to be included in taxable income is calculated as follows:

R
Travel allowance received xxx
Less: Portion expended for business purposes (xxx)
Taxable allowance to be included in the taxable income of the employee
(the portion associated with private use) xxx

The portion of the travel allowance that is used to fund travelling for business pur-
poses needs to be calculated, as this will reduce the travel allowance to be included in
gross income.
In order to calculate the cost of travelling for business purposes, information is
required regarding the kilometres travelled during the year in total and the kilome-
tres travelled relating to business travelling. The cost per kilometre must also be
determined.
Cost of business travel = business kilometres × cost per kilometre
Business kilometres can only be ascertained by keeping accurate records of kilo-
metres travelled in a logbook. Travelling between the taxpayer’s place of residence
and their place of business or employment is considered to be private travelling. The
employee also needs to keep record of the total kilometres travelled during the year.
Cost per kilometre can be determined by either keeping accurate records of expenses
or using the tables or deemed cost provided in the Income Tax Act.
• Actual expenses are determined where the taxpayer keeps accurate records of
expenses incurred in order to substantiate the business use of a travel allowance.
Proof can be kept of the following expenses in order to calculate the actual cost per
kilometre:
– Where the vehicle is owned by the employee, they can claim wear and tear on
the vehicle as part of the actual expenses. This wear and tear must be deter-
mined over a period of seven years from the date of the original acquisition by
the recipient and the cost of the vehicle for this purpose must be limited to a
maximum of R665 000.
– Where the vehicle is being leased, the total amount of payments in respect of
that lease may be claimed. The amount claimed may not exceed an amount of
the fixed cost determined by the Minister of Finance in the deemed cost table in
a year of assessment (refer to Appendix B).
– Finance charges in respect of a debt incurred regarding the purchase of that
vehicle can also be claimed but must be limited to an amount that would have
been incurred had the original debt been R665 000.
– All other expenses incurred in the running and maintenance of the vehicle, for
example the cost of licences, insurance, maintenance and tyres, might also be
taken into account.

644
14.4 Chapter 14: Fringe benefits

Once all the actual expenses are added up, these expenses must be divided by the
total number of kilometres travelled by the taxpayer during the year of assessment to
calculate the actual cost per kilometre.
• Deemed cost per kilometre
– The deemed cost per kilometre is determined by the Minister of Finance and
made available by notice in the Government Gazette. The employee can use the
table if the taxpayer did not keep an accurate record of expenses (refer to the
2022 table in Appendix B ).
– In order to make use of this table, the employee must use the determined value
of the vehicle in respect of which the travel allowance was granted.
The determined value of a vehicle is:
• If the vehicle was acquired under a bona fide agreement of sale,
– the original cost price of the vehicle (including VAT but excluding finance
charges or interest payable).
• If the vehicle was acquired under a financial lease,
– the cash value of the vehicle (including VAT).
• In any other case,
– the market value of the vehicle at the time when the recipient (employee) first
obtained the vehicle or right of use thereof, plus VAT that would have been
payable on that value on that date.
By using the determined value, the employer is able to read an appropriate fixed cost,
fuel cost and maintenance cost from the table. These amounts are added together in
order to calculate a deemed cost per kilometre.

Fixed cost from the table

In order to obtain a cost per kilometre, the fixed cost must be divided by the total
kilometres travelled during the year of assessment (in respect of both private and
business purposes) to arrive at the fixed cost per kilometre.

REMEMBER

• The fixed cost on the table is given in Rands and the fuel and maintenance rates are given
in cents per kilometre, so they cannot be added together. You must either convert the
fixed cost per kilometre that you calculated to cents per kilometre (by multiplying by 100)
or you must convert the fuel and maintenance rates to rand (by dividing by 100).
• The fixed cost per the table is an annual cost, so where the employee receives a travel
allowance for less than the full year during the current year of assessment, the fixed cost
must be reduced pro rata in the same proportion as the time the allowance was received.

When calculating the portion relating to business travel, an employee may use the
greater of actual expenses per kilometre or deemed cost per kilometre. Where records
have not been kept, the employee must use the deemed cost per kilometre.

645
A Student’s Approach to Taxation in South Africa 14.4

Note that where a taxpayer receives an allowance based on the actual distance trav-
elled by the recipient using a motor vehicle for business purposes (therefore excluding
private travelling) or the distance is proved to the Commissioner, the amount ex-
pended by the recipient on such business travelling is not taxed up to a rate of 382
cents per kilometre (regardless of the value of the vehicle). No employees’ tax is
deducted on such an allowance. For example: If an employee travels 5 000 business
kilometres during the year of assessment, the employer can pay a reimbursive allow-
ance of R19 100 (5 000 business km × 418 cents) as a non-taxable reimbursive allow-
ance if the employee does not receive a fixed travel allowance.

Example 14.25
Yosuf Naidoo receives a travel allowance of R8 000 per month from his employer and uses a
Mercedes Benz and a Hilux bakkie interchangeably for business purposes. During the
current year, he travelled 28 000 km with the Mercedes Benz and 35 000 km with the
Hilux bakkie. Both the Mercedes Benz and the Hilux bakkie are therefore used for busi-
ness purposes interchangeably for the full 12 months.
You are required to calculate the business cost that can be claimed against Yosuf’s travel
allowance.

Solution 14.25
The taxpayer did not keep accurate records; therefore, all the travelling is deemed to be
private and he will be taxed on R8 000 x 12 for the year of assessment. He cannot deduct
any cost. If, however, he kept accurate records of business kilometres travelled and the
Commissioner is satisfied that he uses both vehicles primarily for business purposes, he
will be taxed on the allowance, but allowed to deduct the business travel.

REMEMBER
• According to the SARS PAYE-GEN-01-G03 ‘Guidelines for employers’, no employees’
tax must be deducted from a reimbursive travel allowance unless the allowance exceeds
3,82 cents per kilometre). Where an employee receives a fixed monthly travel allowance
and additionally is also reimbursed per kilometre for actual business kilometres trav-
elled, employees’ tax must only be deducted from the fixed monthly travel allowance
unless the reimbursive allowance exceeds the 418 cents/km.
• The belief that an employee must own the vehicle before the reduction in respect of
business use will apply is wrong. The employee must use the vehicle in respect of
which the allowance is received for business purposes. The total kilometres travelled
with the vehicle is used in the calculation of the above-mentioned reduction against the
travel allowance received by the employee.
• Where an employee is granted the use of a company vehicle in addition to the receipt of
a travel allowance in respect of the same vehicle, the deemed cost per kilometre cannot
be used in determining the business portion claimable against the travel allowance.
• Where the employee receives a travel allowance and has the use of a company car as
per paragraph 7 of the Seventh Schedule, no reduction of the travel allowance can be
calculated for business travel in terms of section 8. The full allowance is taxable. The
business travel would be deductible against the value of the company car as calculated.

646
14.4 Chapter 14: Fringe benefits

Example 14.26
Mia Swanepoel owns a vehicle with a cost of R145 000 (including VAT) and receives a travel
allowance of R4 500 per month in respect of the whole year of assessment. Mia travelled
29 000 km during the year of assessment and recorded her business travel as being 11 000 km.
You are required to calculate the taxable portion of the travel allowance to be included in
Mia’s taxable income.

Solution 14.26
R R
Travel allowance received: R4 500 × 12 months 54 000
Calculate the deemed costs and actual kilometres
Value of the car 145 000
Fixed cost determined from the table 52 889

Fixed cost per kilometre (R52 889/29 000km × 100) 182,38 cents
Fuel cost per kilometre (from the table) 147,00 cents
Maintenance cost per kilometre (from the table) 51,10 cents
Total cost per kilometre 380,48 cents

Business kilometres travelled 11 000

Business travels:
(11 000 km × 380.48 cents per kilometre / 100) (41 853)
Taxable portion of the allowance 12 147

Example 14.27
Gordon Heuser uses his private car for business travel on behalf of his employer and for
this he receives a travel allowance of R120 000 per year. On 1 March of the previous year
of assessment, he purchased a new motor vehicle, the cost being as follows:
R
Cost price 450 000
VAT 63 000
513 000

continued

647
A Student’s Approach to Taxation in South Africa 14.4

Gordon kept accurate records of the expenses incurred in respect of the current year of
assessment:
R
Finance charges 87 210
Fuel cost 28 000
Maintenance cost 12 000
Insurance premiums and licence fees 9 600
Gordon travelled a total of 28 000 km during the current year of assessment, of which
18 000 was for private purposes.
You are required to calculate the taxable portion of the travel allowance to be included in
Gordon’s taxable income.

Solution 6.27
R R
Travel allowance received 120 000
Compare the deemed and actual costs to select the highest
Deemed cost per kilometre:
Value of the vehicle (R450 000 + R63 000) 513 000
Fixed cost determined from the table 137 735

Fixed cost per kilometre (R137 735 / 28 000 km × 100) 491,91 cents
Fuel cost per kilometre (from the table) 210,8 cents
Maintenance cost per kilometre (from the table) 84,9 cents
Total cost per kilometre 787,61 cents

Actual cost per kilometre:

Depreciation (wear and tear) R513 000 over seven years
in terms of section 8(1) (R513 000 / 7 years) 73 286
Financing cost 87 210
Fuel cost 28 000
Maintenance cost 12 000
Insurance premiums and licence fees 9 600
Total vehicle expenses for the year 210 096
Cost per kilometre (R210 096 / 28 000km × 100) 750,3 cents

continued

648
14.4 Chapter 14: Fringe benefits

The deemed cost per kilometre is selected as this is the highest.

Business kilometres travelled: R R
Total kilometres travelled 28 000
Less: Private kilometres travelled (18 000)
Business kilometres travelled 10 000

Cost of business travel:

10 000 km × 787.61 cents per kilometre
(higher of deemed or actual cost per kilometre) / 100 (78 761)
Taxable portion of the allowance 41 239

What would the actual cost per kilometre rate be if Gordon’s vehicle
had a cost of R750 000?

Where an employee, their spouse or child owns or leases a motor vehicle, whether
directly or indirectly, by virtue of an interest in a company or trust or otherwise, and
the vehicle is let to the employer or associated institution in relation to the employer,
• the sum of the rentals paid (plus any expenditure in respect of the vehicle that was
borne by the employer) is deemed to be a travel allowance;
• the rental is deemed not to have been received by or to have accrued to the lessor
of the motor vehicle concerned; and
• the employee is deemed not to have been granted the right to use the motor
vehicle.
The employee is deemed to have received a travel allowance and therefore does not
qualify for any deductions (except for the business portion applicable to a travel
allowance).

14.4.2 Subsistence allowance (section 8(1)(c))

The unexpended portion of an amount received in terms of a subsistence allowance,
where an employee needs to spend at least one night away from their usual place
of residence by reason of their duties, is included in the taxable income of such
employee.

R
Subsistence allowance received xxx
Less: Portion expended for business purposes (xxx)
Taxable allowance to be included in the taxable income of the employee xxx

649
A Student’s Approach to Taxation in South Africa 14.4

For the purposes of determining the taxable portion of the allowance, the employee
has the option to use the following as the portion expended for business purposes:

Actual figures
The amount actually incurred in respect of accommodation, meals and other inciden-
tal costs, if proved to the Commissioner.

Deemed figures
Where the employee has not provided proof of actual expenditure, the exclusion for
each day or part of a day that the employee is away from their usual place of residence
is an amount per day in respect of meals and other incidental costs, or incidental
costs only as determined by the Commissioner, for a country or region, by way of
notice in the Government Gazette.
• Where the accommodation to which the allowance or advance relates is in the
Republic, an amount equal to:
– R152 if the allowance or advance is paid or granted to defray the cost of inci-
dental subsistence expenses only; or
– R493 if that allowance or advance is paid or granted to defray the cost of meals
and incidental subsistence expenses.
• Where the accommodation to which the allowance or advance relates is outside the
Republic, an amount per country as determined in a foreign travel subsistence
allowance schedule (refer to Annexure I). For example, in the United States of
America US$146 and in Greece €134 would be granted. The allowance is not
always given in the currency of the specific country, for example, Namibia is given
in South African R950, Kenya is given as United States $138 and for countries not
on the list one must use United States $215.
The amount in respect of travelling abroad applies only in respect of continuous
periods not exceeding six weeks spent outside the Republic.

REMEMBER

• Incidental expenses refer to beverages (including alcoholic beverages), private telephone

calls, gratuities and room service.
• Where an allowance is paid in respect of meals and incidental costs, or incidental costs
only, the amount deemed to have been actually expended by the recipient must be
reduced where a portion of the expenditure is borne by the employer. Where the allow-
ance paid by the employer does not exceed the deemed expense, the deemed expenses must
be reduced by that portion of the actual expenditure borne by the employer, or, where the
allowance paid exceeds the deemed expense, the deemed expenses must be proportionally
reduced.
• Where the accommodation does not have a separate tariff for breakfast, it is the practice
of SARS to regard the breakfast as part of the cost of accommodation.

650
14.4 Chapter 14: Fringe benefits

An employer must pay a subsistence allowance to an employee over and above the
normal remuneration payable to the employee and cannot amend the cash portion of
an employee’s salary by the amount of the subsistence allowance.
If a subsistence allowance or advance is paid to an employee during a month in
respect of a night away from their usual place of residence and that employee has not
either spent the night away or refunded that amount to the employer by the last day
of the following month, the allowance or advance is deemed to become payable to the
employee in the following month in respect of services rendered.

Example 14.28
Maria Mhlangu is obliged to spend four days away from her usual place of residence in
the Republic for business purposes. She receives an allowance of R2 000 from her
employer. Maria is able to prove that she incurred expenses of R970 on meals and inci-
dental expenditure.
You are required to calculate the taxable portion of the allowance to be included in
Maria’s taxable income.

Solution 14.28
R
Subsistence allowance received 2 000
Less: Deemed amount of R493 per day amounting to R1 808 (R493 × 4 days).
This amount is higher than the actual expenses (R970) incurred. (1 972)
Taxable allowance to be included in the taxable income of the employee 28

Example 14.29
Brian Swart is sent to France by his employer to market a product for the company. He is
absent from his house for a total period of three weeks. The employer pays the actual cost
of Brian’s lodging and furthermore pays the employee an allowance of €210 per day for
meals and incidental costs.
You are required to calculate the taxable portion to be included in Brian’s taxable
income in respect of the allowance received. You can accept that the approved amount
of the subsistence allowance for visits to France is €128 per day.

Solution 14.29
The allowance is taxable as it exceeds €128 per day. For example: If the approved
amount is €217 per day, Brian cannot claim a deduction of €7 (€217 less €210) against
his taxable income, as the deduction is always limited to the allowance received. If Brian
spent seven weeks (longer than six weeks) in France, the full allowance paid by the
employer is included in Brian’s taxable income and Brian can deduct actual costs
incurred.

651
A Student’s Approach to Taxation in South Africa 14.4

14.4.3 Other allowances

An amount paid by an employer as an allowance or advance must be included in the
taxable income of the employee (refer to 13.4).
Section 23(m) limits the deductions that can be allowed for income tax purposes for
salaried taxpayers and therefore no deduction against these allowances is allowed.
However, section 23(m) allows the deduction of certain specific costs, for example
wear-and-tear expenses in terms of section 11(e) on a capital asset. It is important to
note that these deductions are permitted even if an allowance is not received, for
example wear and tear on a computer might be claimable against a computer used
for business purposes, whether or not the computer was purchased using a computer
allowance. The allowance received must always be included in taxable income.
Exceptions
Section 23(m) does not apply to agents or representatives who derive their income
mainly by means of commission based on turnover. Agents or representatives might
still qualify for deductions in respect of all other expenses incurred in the production
of the commission income in terms of section 11(a) (refer to chapter 6).

REMEMBER

• All the above discussions on allowances (in 14.4) refer to the calculation of the annual
taxable income and not to the monthly employees’ tax implications.

14.4.4 Employees’ tax implications regarding the receipt of

allowances
• Travel allowance
Eighty per cent (80%) of a travel allowance paid by an employer is included in
remuneration for employees’ tax purposes. Employees’ tax is not deducted from a
reimbursive travel allowance. If it can be proved that most of the travelling is done
for business purposes, only 20% of the allowance could be included for employees’
tax purposes.
• Subsistence allowance
SARS does not require the deduction of employees’ tax from a subsistence allow-
ance. The full allowance must, however, be reflected on the employees’ tax certifi-
cate, even if it does not exceed the stipulated amount of deemed expenditure on
subsistence.
• Allowance to a holder of a public office
Fifty per cent (50%) of the total allowance to a holder of a public office is included
in remuneration and is subject to employees’ tax.
• Other allowances
For all other allowances the gross amounts are included in remuneration and are
subject to employees’ tax without taking any allowable deductions into account.

652
14.5 Chapter 14: Fringe benefits

14.5 Exemptions from tax in an employer/employee

relationship (section 10)
In terms of section 10 of the Act, there are a number of exemptions from tax in an
employer/employee relationship namely:
• special uniforms (refer to 14.5.1);
• transfer costs (refer to 14.5.2); and
• scholarships and bursaries (refer 14.5.3).

14.5.1 Special uniforms (section 10(1)(nA))

Section 10(1)(nA) determines that the value of a uniform or an allowance in respect of
a uniform given to an employee by an employer is exempt from tax. Refer to chapter
3.4.3.

14.5.2 Transfer costs (section 10(1)(nB))

Section 10(1)(nB) determines that the benefit an employee receives, where their
employer paid the cost to relocate an employee from one place to another on the
appointment or termination of the employee’s employment, may be exempt from
tax. Refer to 3.4.3.

Example 14.30
XYZ Ltd transferred Anike Moody from Durban to Pretoria. Her basic salary is R8 700 per
month. XYZ Ltd paid for the transfer of her personal goods and made arrangements
for Anike and her family to stay in a hotel on their account for two months during which
Anike had to wait for the previous owners to move out of the house that she bought.
Anike puts in a claim for the following expenses to XYZ Ltd:
Amount
Description R
1 New school uniforms purchased for her two children 2 180
2 Curtains made for her new house 12 800
3 Motor vehicle registration fees 480
4 Telephone, water and electricity connections 1 500
5 Loss on sale of previous residence 20 000
6 Agent’s fee on sale of previous residence 28 895
7 Transfer duty on new residence 30 000
95 855
You are required to indicate which portion of Anike’s claim will be exempt from tax.

653
A Student’s Approach to Taxation in South Africa 14.5

Solution 14.30
The benefit Anike receives due to the fact that her employer paid for the transfer of her
personal goods as well as the hotel accommodation (in respect of herself and her family)
for two months qualifies for the exemption in terms of section 10(1)(nB).
Items 1 to 4 are considered to be settling-in costs and can be paid back to Anike tax free.
Item 5 is a taxable benefit and if XYZ Ltd pays this amount to Anike, it is taxable in full.
Items 6 and 7 qualify again for the exempt relocation allowance.

REMEMBER

• XYZ Ltd could have paid Anike R8 700 (one month’s basic salary) without withholding
employees’ tax (also not taxable on assessment) in respect of settling-in expenses as per
SARS’s practice. If they chose this option, they could not refund her for items 1 to 4 and
6 and 7 again (as this must be covered from her additional one month’s basic salary).

14.5.3 Scholarships and bursaries (section 10(1)(q) and (qA))

Section 10(1)(q) and (qA) exempt bona fide scholarships or bursaries granted to en-
able or assist a person to study at a recognised educational or research institution
(refer to 3.4.3).

Example 14.31
JD Motors Ltd granted a bursary of R18 000 to each of the two high-school children of
Marinella Davids. Marinella earns a salary of R54 000 per annum. JD Motors Ltd does not
operate a bursary scheme open to the general public.
You are required to calculate the effect of the bursaries on Marinella’s taxable income.

Solution 14.31
Marinella received the bursaries in consequence of services rendered by her, and the bursa-
ries are less than the exemption of R20 000 per relative. The bursaries are therefore not
taxable in Marinella’s hands.
Note
If one of Marinella’s children were a person with a disability (as defined in section 6B(1))
then her employer could have given her a bursary of up to R30 000 for this child and it
would have been exempt from tax.
If the child with a disability were at university Marinella could receive a bursary of up to
R90 000 for the child’s studies at university and it would have been exempt from taxation.

REMEMBER

• If Marinella’s remuneration exceeded R600 000 per annum, the bursaries (R18 000 × 2 =
R36 000) are taxable in full (even if the children were persons with disabilities).

654
14.6–14.7 Chapter 14: Fringe benefits

14.6 Summary
When calculating the taxable income of an employee, certain benefits received in any
form other than a cash payment should be valued in terms of the Seventh Schedule
and included in the employee’s taxable income.
In terms of section 8 of the Act, there must be included in the taxable income of a
person any amount which has been paid or granted during that year by their princi-
pal (an employer, authority, company or body in relation to which any office is held
and an associated institution in relation to that employer) as an allowance or advance.
These allowances are reduced with the portion used for business purposes.
The next section contains a question that can be completed to evaluate your
knowledge on fringe benefits.

14.7 Examination preparation

Question 14.1
Jan and Martha Williams are married in community of property and are both 45 years old.
They do not have any children and were both employed for the full year of assessment.
Monthly amounts are applicable for a 12-month period unless stated otherwise.
Information relating to Martha
The following amounts accrued to her during the current year of assessment:
Salary R250 000
Rental R12 000
Interest R40 000
She contributed 5% of her salary to a provident fund and R5 000 to a retirement annuity
fund during the current year of assessment.
Information relating to Jan
Income accrued during the current year of assessment R
Monthly basic salary 28 000
Annual bonus 25 200
Entertainment allowance (Note 1) 6 850
Monthly travel allowance until 30 April of the current year of
assessment (Note 2) 13 000
Use of company vehicles (from 1 May of the current year of
assessment) (Note 2) ?
Briefcase (acquired by the employer with the purpose of giving it to
Jan) received in recognition of 22 years of service – cost to employer
(Note 3) 6 875
South African dividends received 4 000
Income for the year of assessment from trade activities (Note 4) 34 500

continued

655
A Student’s Approach to Taxation in South Africa 14.7

Expenses incurred during the current year of assessment

Monthly pension fund contributions (based on basic salary) (Note 5) 2 240
Total retirement annuity fund contributions 24 000
Tax-deductible expenses relating to trade activities (Note 4) 30 900
Monthly medical fund contributions paid by Jan (Jan and Martha are
members of the fund) 5 000
Medical expenses not refunded by the medical fund 18 500
Donation to a PBO (an approved Public Benefit Organisation –
section 18A receipt was obtained) 7 500

Notes
1. Jan is required to entertain clients regularly and incurred entertainment costs of
R3 120 during the year of assessment.
2. Jan used his own vehicle while he received the travel allowance. His car had a cash
cost of R220 000 (excluding VAT at 14%). He kept a logbook and travelled 6 000 km in
total during March and April of the current year of assessment, of which 2 333 km
were for business purposes. He bore the cost of fuel and maintenance for the vehicle
but did not keep record of his expenses.
As from 1 May of the current year of assessment, Jan enjoyed the use of two company
cars:
• Martha used the one vehicle with a determined value of R160 000.
• Jan used the other vehicle. The company purchased this vehicle for R108 300
(including VAT at 14%) on 1 March three years ago. His employer pays all
maintenance and fuel for his private and business travel. He kept a detailed log-
book from 1 May of the current year of assessment, which revealed that his pri-
vate use of this company car until the end of the year of assessment amounted to
5 333 km, and his business use amounted to 6 km. The total distance travelled for
the period was 12 110 km.
3. This is the first time Jan has received any recognition for long service.
4. Jan repairs electronic equipment after hours.
5. On 30 November of the current year of assessment, Jan bought back years of pen-
sionable service for R3 000.

656
14.7 Chapter 14: Fringe benefits

You are required to:

Calculate the normal tax liability of Jan and Martha Williams for the current year of
assessment.

Answer 6.1
Normal tax liability of Martha Williams R
Salary 250 000
Rental R12 000 × 50% 6 000
Interest R40 000 × 50% 20 000
Dividends R4 000 × 50% (exempt) Nil
Less: Interest exemption (limited to R23 800 – therefore full amount is
exempt) (20 000)
256 000
Retirement fund contributions R
Provident fund R250 000 × 0,05 12 500
Retirement annuity fund contributions actual 5 000
17 500
Limited to lesser of
R350 000 or
27,5% of higher of
R250 000 or
R256 000
Thus 27,5% of R256 000 = R70 400;
Or R256 000
the limit is R70 400, therefore allow contributions in full (17 500)
Taxable income 238 500

Tax payable (R40 680 + ((R238 500 – R226 000) × 26%)) 43 930
Less: Primary rebate (16 425)
Normal tax liability 27 505

Normal tax liability of Jan Williams

Salary (R28 000 × 12 months) 336 000
Bonus 25 200
Entertainment allowance 6 850

Use of company vehicle R108 300 × 85% × 85% × 85% = R66 510
(Jan) (3,5% × R66 510) × 10 months ×
(5 333 km / 12 110 km) R10 251
(Martha) (3,5% × R160 000 × 10 months) R56 000 66 251
Briefcase R6 875 – R5 000 1 875

continued

657
A Student’s Approach to Taxation in South Africa 14.7

R
Rental (wife) 50% × R12 000 6 000
Interest (wife) 50% × R40 000 20 000
Dividends 50% × R4 000 (exempt) Nil
Less: Interest exemption (20 000)
Net profit from trade (R34 500 – R30 900) 3 600

Taxable portion of travel allowance

Allowance received (R13 000 × 2) R26 000
Less: Business costs (2 333 km × 4.2778) (R9 980) 16 020
Value of vehicle:
R220 000 + 14% = R250 800
Fixed cost:
R76 033 / 6 000 km × 61 / 365× 100 211.78 cents
Fuel cost 159.7 cents
Maintenance 56.3 cents
427.78 cents

Taxable income before retirement fund contribution 461 796

Retirement fund
contribution Actual contributions:
(a) Pension R
- current: (R2 240 × 12) = 26 880
- arrear 3 000
29 880
(b) Retirement annuity fund 24 000
Total contributions 53 880
Limited to the lesser of:
- R350 000; or
- 27,5% of the higher of
•Taxable income (R461 796 ) or
•Remuneration (Note) (R454 148)
(Thus R126 718 (27,5% × R461 796 );
or
R461 796
Limit is therefore R126 718
Therefore, allow contributions in full (53 880)
407 916
Entertainment No deduction is allowed as Jan is not an agent or repre-
cost sentative who normally derives his income mainly in the
form of commissions based on sales or turnover. nil
407 916

continued

658
14.7 Chapter 14: Fringe benefits

R
Donations Actual = R7 500
Limited to 10% × R407 916 thus allow in full (7 500)
Taxable income 400 416
Normal tax (R73 726 + ((R400 416 – R353 100) × 31%)) 88 394
Less: Primary rebate (16 425)
Medical scheme fees tax credit
(section 6A credit) (R347 × 2 × 12) (8 328)
Medical cost tax credit (section 6B credit)
Medical scheme fees actually paid (R5 000 × 12 months) 60 000
Less: Medical scheme fees tax credit (R8 328 × 4) (33 312)
Surplus contributions 26 688
Medical cost not refunded 18 500
45 188
Less: 7,5% × R400 416 (29 956)
Total 15 232
@ 25% (3 808)
Normal tax liability 59 833

Note
Remuneration for retirement contribution:
R336 000 (salary) + R25 200 (bonus) + R6 850 (entertainment allowance + [(R26 000 × 80%)
(travel allowance) + (80% × (3,5% × R66 510) × 10 months) + (80% × (3,5% × R160 000 × 10)
(use of company vehicle)] + R1 875 (briefcase) = R454 148.
It is uncertain from legislation whether the company vehicle should be adjusted for private
travel. In this calculation it was assumed not.

Additional questions for this chapter are available electronically at

www.myacademic.co.za/books

659
 15 Retirement benefits

Gross Exempt Taxable Tax

– – Deductions =
income income income payable

Farming Lump sum Non- Adjustments for

income benefits residents tax avoidance

Page
15.1 Introduction............................................................................................................ 662
15.2 Lump sums ............................................................................................................. 663
15.3 Lump sums from employers (paragraphs (d) and (f) definition of
‘gross income’) ....................................................................................................... 664
15.4 Lump sum benefits from retirement funds (paragraph (e) definition
of ‘gross income’) ................................................................................................... 666
15.4.1 Retirement fund lump sum benefits
(paragraphs 2(1)(a) and 5) ....................................................................... 669
15.4.1.1 Deductions (paragraph 5) ....................................................... 670
15.4.1.2 Lump sums received from public sector pension funds
(paragraph 2A) ......................................................................... 671
15.4.1.3 Tax on retirement fund lump sum benefits .......................... 672
15.4.2 Retirement fund lump sum withdrawal benefits
(paragraphs 2(1)(b) and 6) ....................................................................... 674
15.4.2.1 Deductions ................................................................................ 675
15.4.2.2 Tax on retirement fund lump sum withdrawal benefits..... 676
15.5 Exemption of qualifying annuities (sections 10C and 11F and
paragraph 5(1)(a) or 6(1)(b)(i)) ............................................................................. 678
15.6 Other provisions .................................................................................................... 679
15.7 Summary of lump sums ....................................................................................... 679
15.8 Examination preparation ...................................................................................... 680

661
A Student’s Approach to Taxation in South Africa 15.1

15.1 Introduction
When people become too old to work, they still need money to live on. With this in
mind, they normally contributes to a retirement fund during their working years so
that when they retire they will still receive some form of income.
Most salary packages make provision for employees to contribute to a retirement
fund. There are three basic types of retirement funds in South Africa: Pension funds,
provident funds and retirement annuity funds. For individuals who change employ-
ers before they retire, there are preservation funds that hold retirement savings until
the person retires. Pension funds and provident funds are linked to a specific
employer, and retirement annuity funds are linked to life insurance companies. The
monthly contributions that an employee makes to one of these retirement funds are
generally allowed as a deduction (subject to limitations – refer to chapter 12) for
income tax purposes. This deduction results in the contributions that are deductible
not being subject to income tax.
When persons change employment, lose their jobs (are retrenched) or retire (early or
normal retirement), the pension or provident fund to which a person belonged will
pay a lump sum to the person withdrawing or retiring from the fund. As retirement
annuity funds are not linked to employment, persons will only receive a lump sum
from a retirement annuity fund if they withdraw from the fund or when they reach
retirement age. Retirement funds will also pay out when persons die before they
retire.
A question often asked is ‘Why are senior citizens not exempt from income tax?’ It
must be kept in mind that such a measure would place an extra burden on other
people, especially young people who must finance housing and the education of their
young children. Committees that have specifically examined the taxation systems of
other countries, have determined that the best alternative is to spread the tax burden
as far as possible among all classes of taxpayers and all types of income, rather than
to levy tax at a very high rate on only a few taxpayers.
Bear in mind that interest income earned on investments remains taxable, even after
retirement. This income can be viewed in the same light as pensions. Money is saved,
invested and earns a return. Certain exemptions (such as the interest exemption) and
deductions (such as contributions to pension funds) serve to lighten the tax burden;
however, the proceeds are still subject to tax. When a person receives an amount on
retirement, resignation or withdrawal from a fund or employment, or when a person
dies and these funds pay out a lump sum, the lump sum received will be reduced by
certain allowable deductions and the taxable lump sum will be taxed in accordance
with tax tables specifically designed for lump sum benefits.
In this chapter, the taxation of the benefits received from a pension, pension preserva-
tion, provident, provident preservation, or retirement annuity fund when the person
retires or withdraws from a fund, are discussed, as well as the benefits that are
deemed to accrue to persons immediately before their deaths.

662
15.1–15.2 Chapter 15: Retirement benefits

Tax statistics

According to the latest tax statistics available (Tax Statistics 2021) contributions to retire-
ment funds were the largest deduction at R181.3 billion. Pension, provident and retirement
annuity paid on behalf of employees was the largest fringe benefit at R204.1 billion.

15.2 Lump sums

In order to apply the correct taxation principles, it is necessary to briefly differentiate
between the various benefits that are applicable with respect to retirement. Each of
the principles is discussed in more detail later in the chapter. On retirement date (the
date the taxpayer elects to retire) a member has the option to commute a part of their
retirement interest to a single payment or lump sum (of up to one third of the retire-
ment interest) and the balance will be paid as annuities (monthly or annually, often
referred to as pension), therefore, retirement benefits can be divided into two main
categories, namely:
• annuities (for example monthly pension payments); and
• lump sums (a once off payment from the fund or employer).
In this chapter we will examine the taxation of the amount that a taxpayer commutes
to a single payment known as the lump sum benefit.
Lump sums can be received from employers who are not funds or from retirement
funds to which the taxpayer belongs.
Where the lump sum is paid by the employer (that is not a fund) they are included in
gross income in terms of paragraphs (d) and (f). These lump sums might qualify as
severance benefits if specific requirements are met (refer to 15.3).
If the lump sum is from a retirement fund, the provisions of the Second Schedule
apply. Lump sums are defined in the Act in section 1 as well as in the Second Sched-
ule. The definition differentiates between a retirement fund lump sum benefit and a
retirement fund lump sum withdrawal benefit. This results in the lump sum being
defined in terms of the event which led to its receipt. Paragraph (e) of the definition of
gross income includes the net amount of both types of lump sums in gross income.
The net amount included in gross income is the lump sum received less the allowable
deductions calculated in terms of paragraphs 5, 6 and 6A of the Second Schedule. The
functioning of the provisions of section 5 results in the lump sum benefit being taxed
according to a table that differs from the taxable income table.
It is therefore suggested that if lump sums are included in the tax calculation that the
framework is expanded to include a further two columns as shown below to keep the
amounts separate from the other amounts in the taxable income calculation.

663
A Student’s Approach to Taxation in South Africa 15.2–15.3

Taxable income framework (including lump sums)

1 = Retirement and severance lump sum
2 = Withdrawal lump sum benefit
3 = Other

1 2 3

R R R
Gross income xxx
• as defined in section 1
• specific inclusions (voluntary awards, net amount of xxx xxx
retirement fund lump sum benefit or retirement fund
withdrawal benefit) (paragraphs (d), (e), (eA) and (f))
Less: Exempt income (section 10C) (xxx)
Income (as defined in section 1) xxx
Less: Deductions section 11 – but see below; subject to
section 23(m) and assessed loss (xxx)
(sections 20 and 20A)
Add: Taxable portion of allowances (such as travel xxx
and subsistence allowances)
Taxable income before taxable capital gain xxx
Add: Taxable capital gain (section 26A) xxx
Taxable income before retirement fund deduction xxx
Less: Retirement fund contributions (section 11F) (xxx)
Taxable income before deduction of qualifying xxx
donations
Less: Deduction of qualifying donations (section 18A) (xxx)
Taxable income (as defined in section 1) xxx xxx xxx

There are many reasons why a person may receive a lump sum payment, but ulti-
mately lump sum payments fall into one of these three categories:
• lump sums from employers who are not funds;
• lump sums received prior to retirement (withdrawal benefits); and
• lump sums received on retirement (retirement benefits).

15.3 Lump sums from employers (paragraphs (d) and (f)

definition of ‘gross income’)
In terms of paragraphs (d) and (f) of the definition of gross income, an amount
received by a person in connection with their employment (where there is an
employer-employee relationship) is taxable. An amount paid by an employer to an
employee in respect of services rendered (for whatever reason) is therefore taxable.
There are two types of payments by employers which fall into this category.

664
15.3 Chapter 15: Retirement benefits

Compensation for termination of employment or office (paragraph d(i) definition

of ‘gross income’ and definition of severance benefits in section 1(1)).
A lump sum paid by the employer to the employee is included in full in gross income
unless it is a severance benefit.
Commutation of amounts due (paragraph (f) definition of ‘gross income’)
Any amount received or accrued in substitution of amounts due under a contract of
employment or service must be included in gross income. Amounts in terms of this
paragraph could also be severance benefits if the requirements are met.

REMEMBER

• If an associated institution in respect of a person’s employer pays a lump sum to an

employee, it will be treated the same as if the person’s employer had paid the amount.
• The provisions of the Second Schedule only apply to retirement funds and therefore can
never apply to severance benefits.

A severance benefit is defined in the Act as

• a lump sum payment (other than originating from an insurance policy);
• received from the person’s employer; and
• as a result of termination of employment,
where
• the person is 55 years or older; or
• the termination of employment was because the employee became incapable of
doing their work because of sickness, an accident, injury or incapacity through
infirmity of mind or body; or
• the employee was retrenched or became redundant (refer to ‘Remember’ below).
Where a severance benefit is received, it is taxed according to the same tables as a
retirement fund lump sum benefit (refer to 15.4.1.3).

REMEMBER
• If an associated institution in respect of a person’s employer pays a lump sum to an
employee, it will be treated the same as if the person’s employer had paid the amount.
• Accumulated leave pay is a payment in respect of services rendered and does not form
part of a severance benefit.
• Termination of employment includes relinquishment, loss, repudiation, cancellation or
variation of office or employment or of appointment.
• Retrenchment is where the employer has stopped carrying on the trade for which the
person was employed or they intend stopping.
• Redundancy is where the person is no longer needed because of a general reduction in
employees or the reduction of employees of a particular type.
• Where a severance benefit is paid to an employee of a company and that person at any
time held more than 5% of the issued share capital or member’s interest in the com-
pany, the lump sum will not be treated as a severance benefit.
• The provisions of the Second Schedule apply to retirement funds only and therefore can
never apply to severance benefits.
• Amounts paid in terms of paragraphs (d) and (f) are remuneration as defined.
• Section 6(2) rebates are set off against normal tax payable and NOT against the normal
tax on severance benefits and/or lump sums.

665
A Student’s Approach to Taxation in South Africa 15.4

15.4 Lump sum benefits from retirement funds (paragraph (e)

definition of ‘gross income’)
Pension, pension preservation, provident, provident preservation and retirement
annuity funds are defined in the Act and must be approved by the Commissioner.
Pension and provident funds are linked to employment. Preservation funds are set
up to cater for the situation where an employee resigns from employment before
retirement age but would like to preserve their contributions to the pension/ provi-
dent fund. The respective pension or provident fund to which the employee belonged
will then transfer the funds to the preservation fund. In this way, employees do not
diminish their savings towards their retirement and do not attract any tax on the
amount at the time of transfer. Retirement annuity funds are normally funded by
independent individuals and any person can be a member of these funds. A member
of a retirement annuity fund is not entitled to any benefit before reaching normal
retirement age.
Members of pension, provident and retirement annuity funds make contributions to
these funds. As pension and provident funds are linked to employment, the employ-
er normally deducts these contributions from the taxpayer’s salary and pays them
over to the fund. Members of retirement annuity funds normally pay contributions
directly to the fund. Taxpayers can claim a section 11F deduction on these contribu-
tions (refer to chapter 5). With the limitation of this deduction an unclaimed balance
of contributions can arise.
Membership of a pension and provident preservation fund is limited to former mem-
bers of pension, provident and other pension and provident preservation funds. No
contributions can be made to a preservation fund; only transfers (as discussed above).
A member of a preservation fund becomes entitled to their benefit only on their
retirement date.
By law, a member of a pension fund and/or a retirement annuity fund can only take
up to one-third of their interest/benefits in the form of a lump sum (except where the
total retirement interest in the fund does not exceed R247 500, in which case the full
benefit can be taken in the form of a lump sum). However, a member of a provident
fund could take their full benefit in the form of a lump sum (irrespective of the value
of the full benefit) up to 1 March 2021. From 1 March 2021 new members of provident
funds will be allowed to receive only one-third of their interest/benefit as a lump
sum and the remaining two-thirds will be annuitised. Historic rights from a provi-
dent fund are protected as follows:
• balances in a provident fund on 1 March 2021 (and subsequent growth) can still be
taken in full as a lump sum at retirement; and
• if a provident fund member is 55 years or older on 1 March 2021, he or she will be
allowed to take the full benefit as a lump sum on retirement.

666
15.4 Chapter 15: Retirement benefits

When a person elects to retire, as they can elect to take up to one-third of their pen-
sion and/or retirement annuity fund as a lump sum, the balance will be used to
purchase an annuity (with the current fund or with another insurance company). This
monthly amount is referred to as a qualifying annuity. A qualifying annuity is a
periodic payment and is often referred to as a pension. The person can choose to
receive an annuity from the retirement fund or can use their accumulated funds to
purchase an annuity from an insurer. When purchasing an annuity from an insurer,
one can choose between two types of annuities: a guaranteed annuity or a living
annuity (refer to chapter 2 for tax implications of annuities).

REMEMBER

• You must be told how much the lump sum portion of your retirement benefit is, as one
can elect to take a lump sum up to one-third of their retirement interest/benefit.

Example 15.1
Lydia Dlamini was a member of a pension fund and on her retirement the value of her
investment amounted to R1 500 000. Lydia took the maximum lump sum and the balance
was used to purchase a compulsory monthly pension with Aftreewoema Insurance Com-
pany. She will receive R5 000 a month from the fund.
You are required to determine the maximum lump sum that Lydia may take and to indi-
cate whether the R5 000 is taxable or not.

Solution 15.1
As the fund is a pension fund, Lydia may take R500 000 (R1 500 000 / 3) in the form of a
lump sum and the balance (R1 000 000) has to be used to purchase a compulsory monthly
pension. Lydia will be taxed on the R5 000 per month as it will be included in her gross
income, along with any other income that she might receive.

Example 15.2
Pieter Swanepoel was a member of a provident fund and on his retirement the value of
his investment amounted to R2 750 000.
You are required to determine the maximum lump sum that Pieter may take.

Solution 15.2
As the fund is a provident fund, Pieter may take the full R2 750 000 as a lump sum.

Where a person belongs to a retirement fund and elects to commute part of their
retirement interest/benefit to a single payment on retirement date, a lump-sum
payment arises. Retirement funds will pay lump sums when one of the following
events happens:

667
A Student’s Approach to Taxation in South Africa 15.4

• retirement – this means that in terms of the rules of the fund, the person is entitled
to a lump sum because they have reached the normal retirement age and have
elected to retire (paragraph 2(1)(a)(i));
• death (paragraph 2(1)(a)(i)); or
• termination or loss of employment due to:
– the employer having stopped carrying on the trade in respect of which the
person was employed or appointed (or intending to cease trade); or
– the person becoming redundant because the employer made a general reduc-
tion in personnel or a reduction in personnel of a particular class (para-
graph 2(1)(a)(ii)); or
• commutation of an annuity for a lump sum benefit (paragraph 2(1)(a)(iii)); or
• transfer on or after normal retirement age but before retirement date (para-
graph 2(1)(c)); or
• divorce order (paragraph 2(1)(b)(iA)); or
• direct transfer between funds of the same member (paragraph 2(1)(b)(iB)); or
• certain other events (paragraph 2(1)(b)(ii)).
The provisions of paragraph 2(1) determine how the net amounts due to the different
events are calculated. These provisions are subject to the source rule in section 9(2)(i)
as well as the special formula applicable to Public Sector Pension Funds (para-
graph 2A; refer to 15.4.1.2).

Date of accrual of benefit

A lump sum accrues on the earliest of the following dates:
• date on which an election is made to retire;
• date on which any amount is deducted from the fund for the benefit of a mem-
ber’s spouse in terms of a divorce order;
• date on which the benefit is transferred to another retirement fund; or
• date of death of the member.
Where a person dies while they are a member of a pension, provident or retirement
annuity fund and a lump sum is paid to the persons’ estates as a result of their death,
the lump sum is deemed to have accrued to the person immediately preceding their
death and are treated as retirement fund lump sum benefits.

REMEMBER

• Involuntary (forced) retrenchment is treated as retirement from a retirement fund for

taxation purposes.
• Involuntary retrenchment is where employment is terminated because the employer
ceases or intends to cease carrying on a trade, or where a person has become redundant
because the employer has effected a general reduction in personnel or a reduction in
personnel of a particular class, but only if the person was never a director of the com-
pany or if they had never held more than 5% of the issued capital of the company.

668
15.4 Chapter 15: Retirement benefits

15.4.1 Retirement fund lump sum benefits (paragraphs 2(1)(a) and 5)

There are four events that qualify as retirement fund lump sum benefits.

Retirement or death (paragraphs 2(1)(a)(i))

To understand when a person retires, three definitions need to be understood.
Retire Means that the person become entitled to the annuity or lump sum benefits
contemplated in the definition of ‘retirement date’.

Retirement Is the date on which a member elects to retire and becomes entitled to an
Date annuity or a lump sum benefit or on or after attaining the normal retirement
age in terms of the rules of the fund

Normal Is the date on which a member of a pension or provident fund are entitled to
retirement retire.
age A member of a retirement annuity fund, pension preservation fund or prov-
ident preservation fund is 55 years (para (b) of the definition of ‘normal
retirement age’.
Normal retirement age is also reached where a person becomes permanently
incapable of carrying on their occupation due to sickness, accident, injury or
incapacity through infirmity of mind or body.

This means that any person receiving a retirement benefit on electing to retire on or
after normal retirement age, then the lump sum benefit will be taxed as a retirement
lump sum benefit.

Loss of office or employment (paragraphs 2(1)(a)(ii))

Where members receive their benefit from a retirement fund due to retrenchment, the
lump sum is taxed as a retirement fund lump sum benefit. The deductions provided
in para 6 are allowed to reduce the benefit received.

Commutation of annuity (paragraphs 2(1)(a)(iii))

The one-third limitation on lump sum benefits from pension funds, pension preserva-
tion funds and retirement annuity funds is subject to the de minimis rule. This rule
means that where the remaining two-thirds does not exceed R165 000 (or in other
words, the full benefit does not exceed R247 500), the two-thirds can be commuted for
a lump sum benefit. Where this rule applies, the lump sum will be a retirement fund
lump sum benefit. From 1 March 2021, this rule also applies to new members of
provident funds.

Transfer on or after normal retirement age but before retirement date

(paragraph 2(1)(c))
This provision allows for a transfer of the retirement interest on or after the attain-
ment of normal retirement age but before the taxpayer elects to retire. A taxpayer is
not forced to retire on reaching normal retirement age. Individuals are entitled to
elect their retirement date. Individuals who do not elect to retire at normal retirement
age, keep their benefits within such a fund and may continue to contribute to the
fund until they elect to retire. Paragraph 2(1)(c) allows such members to transfer any
amount after normal retirement age but before election to retire and paragraph 6A
allows these transfers as deductions.

669
A Student’s Approach to Taxation in South Africa 15.4

REMEMBER

• There are differences in the tax implications when retiring from a fund or withdrawing
from a fund.
• Annuities are specifically included in gross income (refer to chapter 3).

15.4.1.1 Deductions (paragraph 5)

Where a lump sum is received by a person due to retirement, death or termination,
certain deductions are allowed against the lump sum received and the balance of the
lump sum will be subject to tax in accordance with the tax table for retirement fund
lump sum benefits.
In terms of the Second Schedule, a person may deduct the following from the lump
sum before it is subject to taxation:
• Contributions disallowed The person’s own contributions to a pension fund,
pension preservation fund, provident fund, provident preservation fund or retire-
ment annuity fund that have not been deducted from the person’s income in terms
of section 11F. The contributions disallowed can relate to funds where the person is
or was a member.
• Divorce orders An amount transferred for the benefit of the person to another
fund because of an election made by the non-member spouse in terms of a divorce
order.
• Amounts transferred to an approved fund An amount transferred for the benefit
of a person to a pension fund, pension preservation fund, provident fund, provi-
dent preservation fund or retirement annuity fund, from a fund of which the per-
son is or was a member and the amount was deemed to have accrued to the person
on the date of the transfer.
• Unclaimed benefits An amount paid or transferred to a pension preservation fund
or a provident preservation fund as an unclaimed benefit and that was subject to
tax prior to that transfer or payment.
• Lump sums from government funds Any other amounts that have been paid into
a pension fund, pension preservation fund, provident fund, provident preserva-
tion fund or retirement annuity fund for the person’s benefit by a government pen-
sion fund, less the amount represented by symbol A in the formula (government
funds are discussed later).
• Transfers on or after normal retirement age but before retirement date An
amount transferred for the benefit of a person from a pension fund into a pension
preservation fund or a retirement annuity fund, or from a provident fund into a
pension preservation fund, a provident preservation fund or a retirement annuity
fund. From 1 March 2022, transfers from a pension preservation fund or a provi-
dent preservation fund to a pension preservation fund, or a provident preservation
fund or a retirement annuity fund is also allowed as a deduction.

670
15.4 Chapter 15: Retirement benefits

The above deductions

• are allowed as long as they have not previously been allowed as a deduction in
terms of the Second Schedule or as an exemption in terms of section 10C in deter-
mining the amount of the lump sum that will be subject to taxation; and
• are limited to the amount of the lump sum benefit that was received (they cannot
create a loss situation in respect of a lump sum received).

Example 15.3
Joseph Black is 65 years old. On his retirement, he received a lump sum benefit of R935 000
from the pension fund of which he had been a member for 28½ years. Joseph elected to
retire on 30 November of the current year of assessment. At the end of the previous year of
assessment, he had an unclaimed balance of contributions of R10 000.
You are required to calculate the taxable amount of the retirement fund lump sum benefit.

Solution 15.3
R
Retirement fund lump sum benefit 935 000
Less: Allowable deductions: Contributions disallowed in the past (10 000)
Taxable income from retirement fund lump sum benefit 925 000

15.4.1.2 Lump sums received from public sector pension funds

(paragraph 2A)
In the past, lump sums from certain public funds were completely tax free. These
were mainly from the previous government’s pension fund. The effect of this was
that when people retired from the civil service, the lump sums received from the
public sector pension fund were tax free. With effect from 1 March 1998, the Act was
amended and currently the portion of a lump sum paid by the public sector fund that
has accumulated since 1 March 1998 is taxable.
Where a lump sum is paid from a public sector pension fund (the government fund),
the amount that is included in gross income is calculated using the following formula:
B
A = ×D
C
where
A = the amount to be calculated;
The calculation of B and C depend on the rules of the fund:
• Where the rules of the fund take into account the number of completed years of
employment for the purpose of determining the amount of a benefit payable:
B = the total completed years of employment after 1 March 1998 (excluding cer-
tain amounts);
C = the total completed years of employment taken into account in determining
the benefit.

671
A Student’s Approach to Taxation in South Africa 15.4

• Where the rules of the fund do not take completed years of employment into
account when determining the amount of the benefit payable:
B = the completed number of years after 1 March 1998 during which the mem-
ber had been a member of the funds;
C = the number of completed years (up to date of accrual) during which the
member had continuously been a member of a public sector fund;
D = the lump sum benefit that is payable.

Application of public sector pension fund rules

Example 15.4
Charles Ngomani is 65 years old. On his retirement from a government department, he
received a lump sum benefit of R1 232 000 (based on his years of employment) from the
government pension fund of which he had been a member for 28½ years, which was
equivalent to his years of employment. Charles elected to retire on 30 June of the current
year of assessment. He has not previously received a lump sum benefit from a fund.
You are required to calculate how much of Charles’ lump sum will be included in his gross
income.

Solution 15.4
Use the formula (A = B / C × D):
B = 24 (completed years of service after 1 March 1998)
C = 28 (completed years of membership of the fund)
D = R1 232 000
A = 24 / 28 × R1 232 000 = R1 056 000
R1 056 000 will be included in Charles’ gross income.

REMEMBER

• The tax-free nature of public sector pre-1 March 1998 membership is preserved for
people who transferred their public sector benefits to another fund. From 1 March 2018
the tax-free nature of pre-1 March 1998 membership will be preserved for one addi-
tional transfer to another fund.

15.4.1.3 Tax on retirement fund lump sum benefits

Retirement fund lump sum benefits received are taxed separately to other income.
Lump sums received from retirement funds are taxed on an accumulated basis (that
is to say subsequent lump sum benefits are added and taxed at a higher marginal
rate).

672
15.4 Chapter 15: Retirement benefits

Cumulative basis of taxation

Severance benefits, retirement fund lump sum benefits and retirement fund lump
sum withdrawal benefits are taxed on a cumulative basis. This means that previous
lump sums received will influence the tax rate and non-taxable portion of the current
lump sum.
Severance benefits and retirement fund lump sum benefits are taxed according to the
same table. In terms of this table the first R500 000 is taxed at 0%. In order to ensure
that a taxpayer only receives a maximum of R500 000 in respect of all severance
benefits, retirement fund lump sum benefits and retirement fund lump sum with-
drawal benefits over their life time, a cumulative taxation principle is applied. The
same principle is applied to retirement fund lump sum withdrawal benefits to ensure
that the R25 000 at 0% tax is also not exceeded.
The cumulative principle therefore takes into account all previous severance benefits
and lump sum benefits from:
• retirement fund lump sum benefits received or accrued on or after 1 October 2007
• retirement fund lump sum withdrawal benefits received or accrued on or after 1
March 2009, and
• severance benefits received or accrued on or after 1 March 2011.
These previous lump sums (as listed above) are added to the current severance bene-
fit or lump sum benefit.

Calculating tax on a retirement benefit

Step 1: Calculate the current retirement fund lump sum benefit (or severance
benefit) = amount received less any allowable deductions.

Step 2: Add together the taxable amounts of

• any previous withdrawal benefits received on or after 1 March 2009
but before the current lump sum benefit; and
• any retirement fund lump sum benefits received on or after 1 Octo-
ber 2007 but before the current lump sum benefit; and
• any severance benefits received on or after 1 March 2011 but before
the current lump sum benefit.

Step 3: Calculate the tax on all retirement fund lump sum benefits (Step 1 +
Step 2) per table below.

Step 4: Calculate the notional tax on the previous retirement fund lump sum
benefit (Step 2) per table below.

Step 5: Tax per Step 3 – tax per Step 4 = Tax on current retirement fund lump
sum benefit.

673
A Student’s Approach to Taxation in South Africa 15.4

Taxable amount Rate of tax

R0–R500 000 0% of the taxable amount
R500 001–R700 000 18% of the taxable amount exceeding R500 000
R700 001–R1 050 000 R36 000 plus 27% of the taxable amount exceeding R700 000
R1 050 001 and above R130 500 plus 36% of the taxable amount exceeding R1 050 000

Example 15.5
Nelia Simons is 68 years old and elected to retire on 31 October of the current year of
assessment. The taxable portion of the lump sum that she received from the pension fund
on retirement amounted to R975 000. Nelia’s taxable income before considering the lump
sum amounted to R225 500.
You are required to calculate the tax payable by Nelia if
(a) she has never received any lump sums in the past;
(b) she received a retirement annuity fund lump sum payment of R550 000 on
1 November 2013.

Solution 15.5
R
(a) Lump sums from retirement funds are taxed separately, therefore we do
not take Nelia’s other income into account.
Taxable portion of lump sum from pension fund 975 000
Tax payable on taxable portion of lump sum
(R36 000 + (27% × (R975 000 – R700 000)) 110 250
(b) Taxable portion of all lump sums received (R975 000 + R550 000) 1 525 000
Tax payable on all lump sums received
(R130 500 + (36% × (R1 525 000 – R1 050 000))) 301 500
Less: Notional tax payable on previous lump sum
(18% × (R550 000 – R500 000)) (9 000)
Tax on current retirement fund lump sum benefit 292 500

15.4.2 Retirement fund lump sum withdrawal benefits

(paragraphs 2(1)(b) and 6)
Lump sums received by taxpayers from a retirement fund prior to the member attain-
ing normal retirement age because of:
• a divorce order;
• a transfer from a fund elected by the taxpayer;
• withdrawal from a fund;
• termination of employment; or
• the dissolution of a fund;
are withdrawal benefits.

674
15.4 Chapter 15: Retirement benefits

The receipt of a lump sum from a fund before retirement is taxable and the amount is
included in the taxpayer’s gross income. When ascertaining the amount of the with-
drawal benefit to be included in gross income, certain deductions are allowed to
reduce the withdrawal benefit before the ‘taxable amount’ is subject to tax.

15.4.2.1 Deductions
Divorce orders and transfers between funds
Where the lump sum received is the result of a divorce order or transfer out of the
fund, the deduction allowed against the lump sum is that portion of the lump sum
that is transferred to another fund.
Amounts transferred from pension funds, pension preservation funds, provident
funds or provident preservation funds can be paid into a pension fund, pension
preservation fund, provident funds, provident preservation or retirement annuity
fund in order to get a deduction. Retirement annuity funds can only be transferred to
other retirement annuity funds to qualify for a deduction.
Other circumstances
Where the withdrawal benefit is due to another circumstance, a person is allowed to
deduct the following from the lump sum:
• Previously disallowed contributions The person’s own contributions to a pension
fund, pension preservation fund, provident fund, provident preservation fund or
retirement annuity fund that were not previously deducted in terms of section 11F.
The disallowed contributions must relate to funds where the person is or was a
member.
• Previously taxed divorce award transfers to approved funds An amount trans-
ferred for the benefit of the person to a pension fund, pension preservation fund,
provident fund, provident preservation fund or retirement annuity fund as elected
by the person.
• Previously taxed transfers between funds An amount deemed to have accrued to
the person that was previously transferred to a fund.
• Previously taxed unclaimed benefits transferred to preservation funds An
amount that was paid or transferred to a pension preservation fund or a provident
preservation fund as an unclaimed benefit and which had been subject to tax prior
to that transfer or payment.
• Exempt portion of public sector funds (service years before 1 March 1998) The
exempt amount of a public sector fund lumpsum which relates to service years be-
fore 1 March 1998 that has been paid into a retirement fund for the person’s benefit
(public sector funds are discussed later) or transferred to another fund for the per-
son’s benefit.
The above deductions
• are allowed so long as they have not previously been allowed as a deduction in
determining the amount of the lump sum that will be subject to taxation or al-
lowed as an exemption in terms of section 10C; and
• are limited to the amount of the lump sum benefit that was received (they cannot
create a loss situation in respect of a lump sum received).

675
A Student’s Approach to Taxation in South Africa 15.4

Example 15.6
Ansie Troulus married Mr Koos Trousku on 9 September of the current year of assess-
ment. She resigned from her employment on 31 August and received a lump sum from
the pension fund. She received all her contributions of R12 000 and interest amounting to
R3 500. On 28 February of the previous year of assessment, contributions up to R10 000
had been allowed as deductions. Ansie used all the money as a deposit on a new house.
You are required to calculate the taxable portion of the lump sum.

Solution 15.6
R
Lump sum received from pension fund (R12 000 + R3 500) 15 500
Less: Contributions not previously allowed (R12 000 – R10 000) (2 000)
Taxable portion 13 500

15.4.2.2 Tax on retirement fund lump sum withdrawal benefits

Retirement fund lump sum withdrawal benefits received are taxed separately to
other income. Lump sums received from retirement funds are taxed on an accumu-
lated basis (that is to say subsequent lump sum benefits will be added and taxed at a
higher marginal rate). Tax is also calculated on the cumulative basis as discussed
previously in retirement fund lump sum benefits.

Calculating tax on a withdrawal benefit

Where the retirement fund lump sum withdrawal benefit accrues to a person from
1 March 2011, the tax on the amount is calculated as follows:

Step 1: Calculate the current taxable withdrawal benefit = Current benefit

received less any allowable deductions.

Step 2: Add together the taxable amounts of

• any previous withdrawal benefits received on or after 1 March 2009
but before the current withdrawal benefit; and
• any retirement fund lump sum benefits received on or after 1 Octo-
ber 2007 but before the current withdrawal benefit; and
• any severance benefits received on or after 1 March 2011 but before
the current withdrawal benefit

Step 3: Calculate tax per retirement fund lump sum withdrawal table on the
total benefits (Step 1 + Step 2) per the table below.

continued

676
15.4 Chapter 15: Retirement benefits

Step 4: Calculate tax per retirement fund lump sum withdrawal table on the
previous benefits (Step 2) per the table below .

Step 5: Tax per Step 3 – tax per Step 4 = Tax on current lump sum withdrawal
benefit.

Retirement fund lump sum withdrawal benefits will only accrue as from
1 March 2009 and will be taxed according to the following table:

Taxable income from

Rate of tax
lump sum benefits
R0–R25 000 0% of the taxable amount
R25 000–R660 000 18% of the taxable amount exceeding R25 000
R660 000–R990 000 R114 300 plus 27% of the taxable amount exceeding R660 000
Exceeding R990 000 R203 400 plus 36% of the taxable amount exceeding R990 000

Example 15.7
Lana Hip is 38 years old and resigned from her employment on 30 June of the current
year of assessment. She received a lump sum from her pension fund of R80 000. She trans-
ferred R50 000 into a pension preservation fund and used the balance to pay off her car.
On 28 February of the previous year of assessment, R6 000 of Lana’s contributions to the
fund had not been deducted for tax purposes. Her taxable income for the current year of
assessment before the current lump sum amounted to R134 000.
You are required to
(a) calculate the tax payable by Lana on the current lump sum that she received if she
received a lump sum withdrawal benefit from her previous pension fund when she
resigned from employment in 2000. The taxable amount of the lump sum amounted
to R15 000;
(b) calculate the tax payable by Lana on the current lump sum that she received if she
received a lump sum withdrawal benefit from her previous pension fund when she
resigned from employment in 2010. The taxable amount of the lump sum amounted
to R15 000.

677
A Student’s Approach to Taxation in South Africa 15.4–15.5

Solution 15.7
(a) R
Retirement fund lump sum withdrawal benefit 80 000
Less: Allowable deductions
Contributions not deducted in the past (6 000)
Amount transferred to pension preservation fund (50 000)
Taxable portion of lump sum from pension fund 24 000
Tax payable on lump sum using the retirement fund withdrawal benefit table
(R24 000 – R25 000) × 18% nil

(b) R
As the previous lump sum withdrawal benefit was received after 1 March 2009,
we will need to include the amount when calculating tax on the current lump
sum benefit.
Tax payable on lump sum using the retirement fund withdrawal benefit table:
Taxable income from current benefit 24 000
Taxable income from previous benefit 15 000
39 000
Tax per table (R39 000 – R25 000) × 18% 2 520
Less: Tax per table on previous lump sums (R15 000) (nil)
Tax payable on current lump sum 2 520

1. In (a) above why is Lana’s other income ignored when the tax is calcu-
lated?
2. In (a) above why is the R15 000 previous lump sum ignored in the
calculation?
3. In (b) above why was there no tax on the previous lump sum?

15.5 Exemption of qualifying annuities

(sections 10C and 11F and paragraph 5(1)(a) or 6(1)(b)(i))
Section 5.3.3 included a discussion on the unclaimed balance of contributions. These
are contributions to pension funds, provident funds, retirement annuity funds that
have not been deducted in terms of section 11F up to the end of the previous year of
assessment. These unclaimed contributions can be used as an exemption against
qualifying annuities.
When a person retires, they can only receive up to a one-third portion of their fund as a
lump sum. The remaining two-thirds are commuted to qualifying annuities. Section
10C provides an exemption equal to the person’s own contributions to any pension,
provident and retirement annuity fund that have not been deducted in terms of sec-
tion 11F or not alllowed as a deduction in terms of paragraph 5 or 6 of the Second
Schedule.

678
15.5–15.7 Chapter 15: Retirement benefits

When calculating taxable income in the year that a person receives a lump sum, any
unclaimed balance of contributions to retirement funds should first be used to reduce
the lump sum received. If the unclaimed contributions exceed the lump sum, the
balance can be used to exempt any qualifying annuities received during the year of
assessment. Should the unclaimed contributions exceed the compulsory annuities
received, any balance of unclaimed contributions can be added to the current
contributions to retirement funds and be deducted in terms of section 11F (subject to
the limitation) (refer to 12.3.3).
The section 10C exemption is limited to the total amount of qualifying annuities
received in a specific year of assessment.

15.6 Other provisions

• Paragraph 4(2) of the Second Schedule provides for the situation where an assur-
ance policy is ceded or transferred in another manner by a person when withdraw-
ing or resigning from a fund, or during the liquidation of a fund.
• A lump sum that accrues in terms of such a policy or the selling-off of such a policy
is deemed to be a lump sum benefit to the person on the date of accrual and this
amount is taxable in terms of the Second Schedule. Where the person pays a pre-
mium after the cession or transfer of the policy, an amount can be deducted from
the lump sum. The amount deducted from the lump sum bears the same propor-
tion to the lump sum as that which the premium paid bears to the total premiums
that were paid to the policy. Paragraph 4(2)bis further stipulates that where a poli-
cy is ceded or transferred, the member of the fund is deemed to have received a
lump sum benefit on that date, equivalent to the value of the policy.
• Where members of a provident fund retire before they are 55 years old due to reasons
other than ill health, the lump sum they received from the fund is taxed in terms of
paragraph 4(3) as if the lump sum was a benefit that accrued to them due to resigna-
tion or withdrawal from the fund, unless the Commissioner declares otherwise.
• If a spouse receives an amount from a fund because of a divorce settlement, the
amount is deemed to have accrued to the member of the fund on the date that the
member became entitled to the amount.

15.7 Summary of lump sums

Received
Employer Retirement fund
from

Reason Any Severance Pre-retirement Retirement Public sector

lump award or death or fund
sum • > 55 years termination
• Ill health
• General
retrench-
ment
continued

679
A Student’s Approach to Taxation in South Africa 15.7–15.8

Received
Employer Retirement fund
from

Gross
Amount received or accrued
income
Deductions None • Contribu- • Contribu- • Contribu-
tions dis- tions dis- tions dis-
allowed allowed allowed
• Amount • Amount • Amount
transferred transferred transferred
to preserv- to preserv- • Amount A in
ation fund ation fund formula
Tax Tax Retirement Retirement Retirement Retirement
tables fund lump fund lump fund lump fund lump
with sum benefit sum with- sum benefit sum benefit
other table drawal benefit table table
taxable table
income

A number of questions follow where you can test your knowledge on retirement benefits.

15.8 Examination preparation

Question 15.1
Dieter Wrogemann (54 years old) resigned from his employment during the current year
of assessment and immediately commenced with new employment.
Employer 1 R
Salary 400 000
Pension fund contributions 40 000
Lump sum from pension fund on resignation (Note) 1 950 000
Employer 2
Salary 750 000
Provident fund contributions 75 000
Interest received from a South African bank 9 000
Retirement annuity fund contributions 20 000

Note
Lump sum from pension fund
Dieter had never received a withdrawal benefit before. Contributions not deducted on
28 February 2022 amounted to R30 000. He decided to utilise his lump sum in the
following ways:
Transferred into a retirement annuity fund – R300 000
Transferred into his new provident fund – R1 200 000
Deposit on a new car – R100 000
Fixed deposit with bank – R150 000

You are required to:

Calculate the total income tax payable by Dieter for the current year of assessment.

680
15.8 Chapter 15: Retirement benefits

Answer 15.1
Calculation of tax payable by Dieter:
R R
Lumpsum Other
Salary (R400 000 + R750 000) 1 150 000
Lump sum from pension fund 1 950 000
Less: Deductions
Transfer to retirement annuity fund (300 000)
Transfer to provident fund (1 200 000)
Deposit on new car – not allowed nil
Fixed deposit with bank – not allowed nil
Contributions not deducted before (refer to the note) (30 000)
420 000
Interest received (R9 000 up to R23 800 is exempt) nil
1 150 000
Less: Retirement fund contributions:
R40 000 + R20 000 + R75 000 135 000
Limited to lesser of
1. R350 000 or
2. 27,5% × the higher of
Remuneration R1 150 000; or
Taxable income R1 150 000
= 27,5% × R1 150 000 = R316 250; or
3. Taxable income – R1 150 000
Therefore, limit is R316 250, allow contributions in full (135 000)
Taxable income 1 015 000
Add: Taxable income from lump sum 420 000
Total taxable income 1 435 000
Tax on taxable income ((R1 015 000 – R817 600) × 41% + R239 452) 320 386
Less: Primary rebate (16 425)
Normal tax 303 961
Tax on pension fund withdrawal benefit
Tax on R420 000
(R420 000 – R25 000) × 18% 71 100
Net normal tax payable 375 061
Note
Where the taxpayer receives a lump sum during the year, the unclaimed amount of deduc-
tions is first set off against the lump sum benefit. If there is any excess, it is used to exempt
any compulsory annuities in terms of section 10C. If there is still an excess amount, that
excess is deemed to have been contributed in the current year of assessment and deducted
in terms of section 11F (refer to chapter 12 for the discussion on the order of deductions).

Additional questions for this chapter are available electronically

www.myacademic.co.za/books

681
 16 Taxation of trusts

Exempt = Taxable
Gross income – – Deductions Tax payable
income income

Adjustments
Partnerships Companies Trusts for tax
avoidance

Page
16.1 Introduction ......................................................................................................... 684
16.2 The nature of a trust ............................................................................................ 685
16.3 Rate at which a trust is taxed ............................................................................. 686
16.4 Person liable for tax on income of a trust......................................................... 687
16.4.1 Section 25B .............................................................................................. 687
16.4.2 Section 7 .................................................................................................. 688
16.4.3 Meaning of ‘donation, settlement or other disposition’ ................... 689
16.4.4 ‘By reason of’ or ‘in consequence of’ ................................................... 690
16.5 Vested rights to income (sections 7(1) and 25B(1)) ......................................... 691
16.6 Transactions between spouses (section 7(2) to 7(2C)) .................................... 692
16.6.1 Spouses married in or out of community of
property (section 7(2)) ........................................................................... 692
16.6.2 Spouses married in community of property (section 7(2A)) ........... 693
16.6.3 Exclusions (section 7(2C)) ..................................................................... 693
16.7 Transactions between parents and children (section 7(3)) ............................ 695
16.8 Donations linked to a condition (section 7(5))................................................. 697
16.9 Donations between a resident and non-resident (section 7(8)) ..................... 699
16.10 Loans between trusts and connected persons (section 7C) ........................... 701

683
A Student’s Approach to Taxation in South Africa 16.1

Page
16.11 Miscellaneous provisions ................................................................................... 710
16.11.1 General remarks about section 7 ....................................................... 710
16.11.2 Limitation of amount deemed to be income .................................... 711
16.11.3 Calculation of interest amount (section 7D) .................................... 713
16.12 The nature of income from a trust .................................................................... 713
16.13 Losses in a trust (section 25B(3) to 25B(6)) ....................................................... 714
16.14 Summary of income tax consequences of trusts ............................................. 717
16.15 Capital gains tax implications of trusts ............................................................ 731
16.15.1 General .................................................................................................. 731
16.15.2 The attribution rules............................................................................ 731
16.15.2.1 Specific rules for ‘donation, settlement or other
disposition’ (paragraphs 68 to 72) .................................. 731
16.15.2.2 General rules (paragraph 80) .......................................... 732
16.16 Summary .............................................................................................................. 734
16.17 Examination preparation ................................................................................... 734

16.1 Introduction
Pierre le Paulle (a French author) made the following comment:
Trusts have now pervaded all fields of social institutions in common law countries.
They are like those extraordinary drugs curing at the same time toothache, sprained
ankles and baldness, sold by peddlers on the Paris boulevards; they solve equally well
family troubles, business difficulties, religious and charitable problems. What amazes
the sceptical civilian is that they really solve them.
Trusts can have several uses especially in the milieu of estate planning. Where
simplicity, flexibility and retention of control are of paramount importance, there is
simply no form of entity that can measure up to the trust. A person may, for instance,
transfer ownership of an asset to a discretionary trust where the trustees can manage
that asset for the benefit of the beneficiaries of that trust while the asset is also
protected against creditor claims that may in future be instituted against that person
or beneficiaries. In a business context, trusts are often used by employer companies in
employee share incentive schemes where the trust functions as a vehicle allowing
employees to share in the profits of the company through the ownership of shares.
Although there are numerous credible motivations for the use of trusts, the use of
discretionary trusts for South African income tax and estate duty savings has become
under intense scrutiny in recent years, which resulted in the introduction of certain
anti-avoidance provisions, such as section 7C (refer to 16.10) to discourage these
practices. In this chapter, we give attention to the taxation of trusts in terms of the
Income Tax Act 58 of 1962 (the Act). The general rules of taxation discussed earlier
also apply to trusts. In this chapter, however, attention is given to the provisions of
the Act that apply to trusts in particular.

684
16.2 Chapter 16: Taxation of trusts

16.2 The nature of a trust

The basic principle of a trust is that someone (the trustee) controls and administers
property, not for himself, but on behalf of and for the benefit of other persons.

Legislation:
A ‘trust’ is defined in section 1 of the Act as:

any trust fund consisting of cash or other assets which are administered and
controlled by a person acting in a fiduciary capacity, where such person is appointed
under a deed of trust or by agreement or under the will of a deceased person.

There are always at least three parties to a trust, namely the founder, the trustee
and the beneficiary. The founder establishes the trust and hands over any property
(that may also include money) to the trustee. The trustee receives the property and
is obliged to administer these trust assets to the benefit of the beneficiary. The bene-
ficiary is the person for whose benefit the trust assets are administered and applied.
Such a person has a vested or contingent interest in all or a portion of the receipts,
accruals or assets of the trust (refer to the definition of ‘beneficiary’ in section 1).
A trust may be established in one of two ways: testamentary or inter vivos.
Testamentary trust (trust mortis causa): With such a trust, the testator bequeaths
cash or other assets in his or her will to a trust, where a trustee or trustees will
administer the assets for the benefit of the testator’s beneficiaries. Such a trust comes
into existence on the death of the testator. This is particularly popular when the
beneficiaries are minor children. The parent who dies leaves assets to a trust, and a
trustee is appointed to apply and administer these assets on behalf of and for the
benefit of the children. When the children reach a certain age, the trust may be
dissolved and the remaining trust assets may be distributed to the children, or the
trust may continue to exist indefinitely, depending on the testator’s stipulations in the
will.
Inter vivos trust: An ‘inter vivos trust’ is a trust that is established while the founder
is still alive. The assets may be donated or sold to the trust and do not necessarily just
have to be donated or sold by the founder. For example, a father (founder and donor)
may establish a trust for the benefit of his children and donate R100 to the trust. The
children’s grandfather may then donate or sell further assets to the trust. The assets
vest in the trustee, who must administer the trust in accordance with the stipulations
of the trust deed. Inter vivos trusts are particularly popular in estate planning and are
used to peg the value of assets in the estate.

Example 16.1
Jan Jorris owns a block of flats with a current market value of R1,5 million. Jan Jorris’ life
expectancy is another 20 years and it is expected that the value of the block of flats could
increase to R10 million in that period. Jan is considering selling the block of flats to a trust
at the current market value. The sale will be financed by Jan by means of an interest-free
loan to the trust.
You are required to explain to Jan what the effect of the sale will be on his estate.

685
A Student’s Approach to Taxation in South Africa 16.2–16.3

Solution 16.1
Before the sale, Jan’s estate consisted of a block of flats with a market value of R1,5 million.
This block of flats is sold to the trust at market value and, after the sales transaction, it will
no longer form part of Jan’s estate. However, Jan is financing the transaction and therefore
the trust still owes him the amount of the outstanding loan account. The loan amounting to
R1,5 million is interest-free. The loan is not paid back and if Jan dies in 20 years’ time, there
will still be an asset of R1,5 million (the loan) in his estate. The block of flats is now the asset
of the trust and the increase in market value from R1,5 million to R10 million takes place in
the trust. If Jan had not sold the block of flats to the trust, his estate would have consisted of
the block of flats with a market value of R10 million.
Note
While Jan is still alive, the provisions of section 7 must be applied to the income produced
by reason or in consequence of the block of flats donated to the trust (refer to 16.4.2).
Consideration must also be given to the provisions of section 7C that deal with loans
between trusts and connected persons (refer to 16.10).

Further to the above two types of trusts, trusts can be classified as either discretionary
trusts or bewind (vested) trusts. With a discretionary trust, no beneficiary has a
vested (unconditional) right to the income or capital of the trust and the trustees have
full discretion with regard to how much is distributed to which beneficiary. With a
bewind trust, the beneficiaries have vested (unconditional) rights to the capital and
income of the trust. In practice, a trust is not necessarily solely one of the above and
could also be a combination of these, with some beneficiaries having vested rights
(refer to 16.5) and other beneficiaries having discretionary rights.

16.3 Rate at which a trust is taxed

For tax purposes, a trust is deemed to be a person. The definition of a ‘person’ in
section 1 of the Act expressly includes a trust. Trusts (excluding special trusts) are
subject to normal tax at a flat rate of 45%.

Example 16.2
ABC Trust, a testamentary trust, has a taxable income of R100 000 for the current year of
assessment ending 28 February. Included in the R100 000 is taxable interest income of
R15 000. No beneficiary has a vested right to the income. ABC Trust is not a special trust.
You are required to calculate the normal tax payable by ABC Trust for the current year of
assessment.

Solution 16.2
R100 000 × 45% = R45 000. The normal tax payable by ABC Trust is R45 000 for the
current year of assessment. The basic interest exemption in terms of section 10(1)(i) is not
available to a trust as it is not a natural person.

686
16.3–16.4 Chapter 16: Taxation of trusts

REMEMBER

• A trust is a person, but not a natural person, therefore a trust is not entitled to the
primary, secondary or tertiary rebates for natural persons.
• A trust is not entitled to the local interest exemption under section 10(1)(i).
• A company’s year of assessment ends at its financial year-end but a trust’s year of
assessment always ends on the last day of February.
• Although we calculate the normal tax liability of the trust, the trustee of the trust is its
representative taxpayer who is, among other things, responsible for paying the tax over to
SARS on behalf of the trust. However, the income tax returns are still submitted, and
SARS’ income tax assessments are issued, in the trust’s name.
• A personal service provider, as defined in the Fourth Schedule to the Act, also includes
certain defined trusts which are also taxed at the flat rate of 45% (refer to chapter 11 for
further information regarding personal service providers).

16.4 Person liable for tax on income of a trust

When income is received by or accrues to a trust, the income could be retained in the
trust or it could be distributed to a beneficiary. Usually, the income is taxable in the
hands of the person where it finally ends up, but there are specific sections in the Act
stipulating that this income is, under certain circumstances, deemed to be taxable in
another person’s hands.
The income of the trust may be taxed in the hands of one of the following persons:
• the ‘person’ responsible for the donation, settlement or other disposition to the
trust (hereafter referred to as the ‘donor’) that generated the income;
• a beneficiary of the trust; or
• the trust. A trust is usually taxed on the income retained in the trust, unless sec-
tion 25B or 7 modifies this rule by deeming the income of the trust to be taxable in
someone else’s hands. It is therefore important to understand the provisions
contained in sections 25B and 7 of the Act.

16.4.1 Section 25B

Section 25B is the specific section in the Act that regulates the tax consequences of the
income earned by trusts. This section provides as follows:
Section 25B(1): This section is subject to the provisions of section 7 (refer to 16.4.2). If
the provisions of section 7 do not apply, this section determines that the income that is
received by or accrues to a trust will be deemed to accrue to a beneficiary of that trust if
the beneficiary has a vested right to this income. If there is no beneficiary with a vested
right to the income, the income will be taxable in the hands of the trust. The conse-
quence of this is that a trust can only be taxed on the retained income in the trust to
which no beneficiary has a vested right.
This section does not apply to amounts of a capital nature that is not included in gross
income. Further excluded from the ambit of this section is any lump-sum benefit that
becomes recoverable from certain funds (such as a pension, pension preservation,
provident, provident preservation or retirement annuity fund) or a long-term insurer as

687
A Student’s Approach to Taxation in South Africa 16.4

defined in section 29A(1) in consequence of membership or past membership of such a

fund, which is deemed to accrue to the trust under paragraph 3B of the Second Sched-
ule immediately before termination of that trust.
Section 25B(2): This section only clarifies what is also included in the meaning of
‘vested right’ as referred to above. It stipulates that if the trustees have a discretion as
to whether income should be distributed to a beneficiary, any income distributed in
consequence of the exercise by the trustee(s) of a discretion will constitute income to
which a beneficiary has a vested right.
Section 25B(2A): This section provides that the distributed capitalised income of a
non-resident trust could, in certain instances, be taxable in the hands of a resident
beneficiary acquiring a vested right to such capital income.
Section 25B(3) to (7): These subsections determine in whose hands the expenditure
of a trust is deductible and limits the deductibility of expenditure in the hands of a
beneficiary (refer to 16.13 for a detailed discussion on these subsections).
Section 25B is subject to the provisions of section 7. Therefore, the provisions of sec-
tion 7 must first be applied and if this section does not apply, the provisions of sec-
tion 25B are followed.

16.4.2 Section 7
Many ways exist for taxpayers to legally spread their income in order to reduce their
normal tax liability. Section 7 deals with these tax avoidance arrangements. Example
16.3 illustrates one of the schemes targeted by section 7 whereby an individual
attempts to reduce his normal tax payable by shifting taxable income to his minor
children.

Example 16.3
Example of a scheme to reduce tax payable
Mr Coleman, aged 50, has two sons who are both unmarried and under the age of 18
years at the end of the current year of assessment. Mr Coleman earned taxable income of
R650 000 for the current year, while his sons did not earn any taxable income for the
current year.
Mr Coleman will pay normal tax before rebates of R174 088 (((R650 000 – R641 400) ×
39%) + R170 734). This is an effective rate of tax of 26,78%.
If Mr Coleman shifts R400 000 of his taxable income to his sons so that they each receive
R200 000, what will the result on the fiscus be?
Mr Coleman
Mr Coleman will be taxed on R250 000 (R650 000 – R400 000).
This will amount to normal tax before rebates for Mr Coleman of
(((R250 000 – R226 000) × 26%) + R40 680) = R46 920.
Each son
Each son will be taxed on R200 000.
Normal tax before rebates for each son: R200 000 × 18% = R36 000

continued

688
16.4 Chapter 16: Taxation of trusts

This amounts to an effective rate of tax of 18,30% ((R46 920 + R36 000 + R36 000) /
R650 000) as opposed to the 26,78% that Mr Coleman would have had to pay if he were
taxed on the full amount.
Further to this, Mr Coleman and each son would receive a primary rebate of R16 425, so
the end result would be that the fiscus would receive R69 645 ((R46 920 – R16 425) +
(R36 000 – R16 425) + (R36 000 – R16 425)) instead of R157 663 (R174 088 – R16 425) if this
arrangement was permitted.

Section 7, and specifically subsections (1) to (8), is geared towards counteracting

possible tax avoidance schemes where a taxpayer disposes of his or her income or
property in such a manner that he or she might still have all or some of the benefits
thereof without incurring a normal tax liability on the income. These anti-avoidance
provisions do not merely apply to transactions involving trusts but to all targeted
transactions where income is received by or accrues to a person ‘by reason of’ or ‘in
consequence of’ a ‘donation, settlement or other disposition’.
Reference is often made in the subsections to the concept ‘income’ and this concept
might be understood as ‘gross income minus exempt income’. However, in CIR v
Simpson 16 SATC 268, Chief Justice Watermeyer determined that it refers to the profit
or gain for the purposes of section 7(2) to (7). If a person therefore donates an amount
to another person, he or she will, in terms of this interpretation, be taxed on the full
profit or gain.
To know exactly in whose hands the income of a trust is taxable, a thorough knowledge
of section 7(1) to (8) is vital. In order to understand the provisions of section 7 the
following concepts must first be discussed:
• ‘donation, settlement or other disposition’; and
• ‘by reason of’ or ‘in consequence of’.

16.4.3 Meaning of ‘donation, settlement or other disposition’

Section 7(2) to (8) refers to a donation, settlement or other disposition. This expression
excludes the disposition of property at a fair consideration, as in the case of a trade or
business transaction, but includes a disposition made wholly gratuitously or for no
consideration, or where an appreciable element of generosity is present (Ovenstone v SIR
42 SATC 55).
It therefore includes a direct donation as well as the sale of an asset to a person (such
as a trust) for consideration that is less than the market value of the asset at the date
of sale (section 7(9)).
An interest-free loan contains an appreciable element of generosity and therefore the
interest portion is seen as a gratuitous disposition. It therefore activates the
provisions of section 7 to the extent that a market-related interest is not being levied.
In addition, an interest-free or low-interest loan could also lead to the provisions of
section 7C (refer to 16.10) being applied.
When a transaction is deemed to be partially for value and partially a donation,
settlement or other disposition, there has to be a suitable apportionment of the
income. The taxpayer must prove that the apportionment made was fair.

689
A Student’s Approach to Taxation in South Africa 16.4

16.4.4 ‘By reason of’ or ‘in consequence of’

Section 7(2) to (8) refers to income received ‘by reason of’ or ‘in consequence of’ a
donation, settlement or other disposition. The expression ‘by reason of’ was inter-
preted to mean that there must be a causal link between the donation and the income
that is received. Further, the actual origin of the income received must be determined,
based on all the facts of the matter (CIR v Widan 19 SATC 341).
In CIR v Widan it was determined that ‘income earned on income’ was the result of
the original donation. Chief Justice Centlivres came to the following conclusion:
There must be some causal relation between the donation and the income in question.
Difficult cases may conceivably arise. Where, for instance, a father donates a sum of
money to a minor child and the child buys a business to which he contributes his skill
and labour and from which he earns an income, that income may be regarded as being
attributable to two causes, viz. the donation and the skill and labour of the child. In
such a case it may be impossible to say which part of his income was the result of the
donation and which part the result of his skill and labour and it may be that the
Commissioner would not be able to apply [the equivalent of section 7(3)].
When the income is a direct result of the original donation, the provisions of section 7
should be applicable. When the income is earned as a result of the application of the
knowledge and skills of the child, for example, it may be argued that it does not have
a direct relation to the original donation.

Example 16.4
John Dann donates R100 000 to his 17-year-old, unmarried son, Jusha. Jusha had recently
completed a course in share transactions and began to speculate with the R100 000 on the
stock exchange. For the current year of assessment he realised profits of R80 000 on the
stock exchange.
You are required to indicate in whose hands the R80 000 will be taxable.

Solution 16.4
The R80 000 is the direct result of the application of Jusha’s knowledge and skills and
therefore not necessarily earned ‘by reason of’ or ‘in consequence of’ the donation (refer
to the Widan case). Therefore, the R80 000 should be taxable in Jusha’s hands and section
7(3) should not be applicable to attribute the income to John.

Example 16.5
John Dann donates R100 000 to his only daughter, Chané, who is 16 years old and
unmarried. Chané invests the full R100 000 in the bank and, for the previous year of
assessment, earned interest amounting to R10 000 on it. She capitalised the interest and
for the current year of assessment, earned interest of R11 000. R10 000 thereof relates to
the original donation and R1 000 relates to the capitalised interest of the previous year.
You are required to determine in whose hands the interest amounting to R11 000, with
regard to the current year of assessment, will be taxable.

690
16.4–16.5 Chapter 16: Taxation of trusts

Solution 16.5
In terms of section 7(3), the R10 000 (R11 000 – R1 000) is definitely taxable in the hands of
John Dann. There may be arguments regarding the taxability of the R1 000 in John’s
hands. However, there is clearly a causal link between the original investment and the R1
000 interest earned, and the fact that it is ‘income upon income’ that was earned does not
necessarily mean that it was not earned ‘by reason of’ the original donation. The minor
child did not really apply any knowledge or skill to earn the income and it still relates
directly to the original donation. The R1 000 interest should therefore, in terms of section
7(3), also be taxable in the hands of John Dann.

16.5 Vested rights to income (sections 7(1) and 25B(1))

In terms of sections 25B(1) and 7(1) (but subject to section 7(2) to (8) discussed below)
a person is taxable on income if he or she has a vested right to the income, irrespect-
ive of whether the income was paid to that person or not. The normal rules with
regard to accrual are still applicable. A beneficiary is therefore taxed on all amounts
that accrued to him or her by means of vesting, irrespective of whether such amounts
have been paid out to him or her. The trust deed determines whether a beneficiary
has a vested right to the capital and/or income of the trust. The following may
indicate vested rights:
• income due and payable to a beneficiary;
• income credited to an account in favour of the beneficiary;
• income capitalised in the name of the beneficiary; or
• income that has been dealt with in favour of a beneficiary.
It is sometimes difficult to determine whether a person has a vested right to income
or not. When a beneficiary is entitled to income but the payment thereof is deferred to
the occurrence of a contingent event in the future, it is important to determine what is
going to happen to the income if the event does not take place, or if the person should
die before the event takes place. This is typically applicable where the income is
retained until the attaining by a beneficiary of a certain age.
If the income would accrue to the estate of the person at his or her death, the person
has a vested right to such income, regardless of the fact that the event has not yet
occurred (for example the attaining of a specific age). If not, that person cannot have a
vested right to the income before the event (attaining the specific age) has taken place
(CIR v Polonsky 12 SATC 11).
If the event is conditional, the person may only become entitled to the income if the
condition has been fulfilled. An example of this is when a parent promises to pay a
child a certain amount of money when he or she successfully completes a degree.
Vesting of the amount of money would only take place when that child has success-
fully completed his or her degree.
The above examples must be distinguished from the case where a person receives a
certain amount by way of bequest, but the testator stipulates that the amount will be
held and administered in a trust for that person. It was the intention of the testator
from the beginning that the person would be entitled to the full amount, but

691
A Student’s Approach to Taxation in South Africa 16.5–16.6

sometimes it is held in trust to ensure that the person does not deal thriftlessly with
the money and, as such, waste it. This is sometimes the case when a parent dies and
his or her child has never had any experience in managing finances. The legacy is
then bequeathed to the trust, for the benefit of his or her child. In this manner, a
competent person is appointed to administer the assets so that the child will have
sufficient funds available up to the date of his or her death or until the child reaches a
specific age. It is sometimes also necessary to do something similar to protect funds
against future creditor claims. In these cases the beneficiary is taxed on the full
income as it accrued for his or her benefit.

16.6 Transactions between spouses (section 7(2) to 7(2C))

Section 7(2), (2A), (2B) and (2C) amends the general rule that a taxpayer is taxed on
income that is received by or accrues to him or her. In certain cases, it is deemed that
the income (or a portion of the income) of one spouse accrues to the other spouse.
A spouse is defined in section 1 of the Act and not only includes marriages or cus-
tomary unions recognised by South African laws, but also includes unions recognised
as marriages in accordance with the tenets of any religion and same-sex or
heterosexual unions that are intended to be permanent.

16.6.1 Spouses married in or out of community of property

(section 7(2))
In the following cases, it is deemed that the income that is received by or accrues to
the one spouse (the recipient spouse) accrues to the other spouse (the donor spouse):
• income derived by the recipient spouse in consequence of a donation, settlement or
other disposition made by the donor spouse, if the sole (100%) or main (>50%)
purpose of such a donation was the reduction, postponement or avoidance of any
tax liability of the donor spouse;
• income derived by the recipient spouse in consequence of a transaction, operation
or scheme entered into or carried out by the donor spouse, if the sole or main
purpose of such a transaction was the reduction, postponement or avoidance of any
tax liability of the donor spouse; or
• income received by or accrued to the recipient spouse from any trade carried on by
the recipient spouse in partnership or in association with the donor spouse or from
any partnership of which the donor spouse is a member or any private company of
which the donor spouse was the sole, main or a principal shareholder, if such
income is out of proportion;
• for example, if a recipient spouse receives remuneration for services rendered to a
company of which his or her spouse is the sole shareholder and such remuneration is
out of proportion to the value of the services rendered, the portion of the income that is
excessive would be attributed to the donor spouse in terms of section 7(2).

692
16.6 Chapter 16: Taxation of trusts

16.6.2 Spouses married in community of property (section 7(2A))

Section 7(2A) regulates the accrual of income for persons married in community of
property as follows:
• Income derived from a trade that is carried on by only one of the spouses, is
deemed to have accrued to that spouse alone.
• Income derived from a trade that is carried on jointly by both spouses is deemed to
accrue to both spouses in the proportion that they would be reasonably entitled to
if the apportionment of profits is not as per agreement or, if there is no such
agreement, and the profits are not apportioned in a fair proportion.
• Income derived from the letting of fixed property is deemed to accrue to both
spouses in equal shares if such income falls within the joint estate.
• Non-trade income, for example interest and dividends, is deemed to accrue to both
spouses in equal shares if such income falls within the joint estate.

16.6.3 Exclusions (section 7(2C))

In terms of section 7(2C), income only accrues to one spouse and is not deemed to be
the income of the other spouse irrespective of whether they are married in or out of
community of property:
• benefits paid or payable to a spouse as a member or past member of a pension
fund, pension preservation fund, provident fund, provident preservation fund,
retirement annuity fund, benefit fund or any other similar fund;
• annuities paid or payable to a spouse from a purchased annuity; and
• income derived by a spouse from granting the right of use of a patent, design,
trademark, copyright or other property or right if that spouse is the registered
holder of that patent, design or trademark or the author of the work on which that
copyright has been conferred (or the owner of that copyright) or the holder of that
property or right.
In the following scenarios, the income of one spouse is also not deemed to accrue to
the other spouse:
• trade income derived by a spouse from carrying on his or her own trade;
• remuneration earned by a spouse as an employee of an unrelated person;
• income from property or assets that does not fall within the joint estate of spouses
that accrues to a spouse married in community of property; and
• income obtained by a spouse from donations, transactions, operations or schemes
negotiated between spouses before 20 March 1991.

693
A Student’s Approach to Taxation in South Africa 16.6

REMEMBER

• When one spouse receives an amount, and it is deemed taxable in the hands of the other
spouse, the other spouse is entitled to the proportional share of the permissible deduc-
tions or allowances against such income in terms of section 7(2B).
• It is important to note that the provisions of section 7(2) for a donation, settlement or
other disposition between spouses only apply in circumstances where the sole or main
purpose was the reduction, postponement or avoidance of any tax liability for the
donor spouse.

Example 16.6
Harry Baloy is married out of community of property to Sue Baloy. Sue earns no income
and Harry wants to benefit from the lower normal tax rate that she would pay. On
1 March, Harry donates a block of flats to Sue. During the current year of assessment, Sue
received rental income of R100 000 and she incurred deductible expenses of R20 000.
You are required to explain the income tax consequences with regard to the current year
of assessment.

Solution 16.6
Sue Baloy received the R100 000, but in terms of section 7(2)(a), the amount will be
deemed to accrue to her husband, Harry. The amount is the direct result of a donation
that Sue received from Harry and Harry made the donation with the sole or main
purpose of reducing his normal tax liability.
Harry must therefore include the amount of R100 000 in his taxable income, but in terms
of section 7(2B), he is also entitled to deduct the R20 000 expenses against this. Harry’s
taxable income for the current year will therefore increase by the amount of R80 000
(R100 000 – R20 000).

What will the income tax consequences be if Harry and Sue Baloy
were married in community of property?

694
16.6–16.7 Chapter 16: Taxation of trusts

Section 7(2) may sometimes also apply if the donation, settlement or other disposition
was made to a trust or if a trust was also a party to the transaction, operation or scheme
that the donor carried out with the sole or main purpose of reducing, postponing or
avoiding any tax.

Example 16.7
Harry Baloy is married out of community of property to Sue Baloy. Sue does not earn
any income and Harry wants to benefit from the lower normal tax rate that she can pay.
On 1 March, Harry donates a block of flats to the Baloy Trust. Sue is the only beneficiary
of the trust and she has a vested right to the income of the trust. During the current year
of assessment, the Baloy Trust received rental income of R100 000 and incurred
deductible expenses of R20 000.
You are required to explain the tax consequences of the above income and expenses with
regard to the current year of assessment.

Solution 16.7
The Baloy Trust received the R100 000, but in terms of section 7(1), Sue has a vested right
to it. In terms of section 7(2)(a), the amount will be deemed to accrue to her husband,
Harry. The amount is the direct result of a donation that the Baloy Trust received from
Harry and Harry made the donation with the sole or main purpose of reducing his
normal tax.
Harry must therefore include in his taxable income the amount of R100 000, but in terms
of section 7(2B), he is also entitled to deduct the R20 000 expenses against this. Harry’s
taxable income for the current year will therefore increase by the amount of R80 000
(R100 000 – R20 000).

REMEMBER

• The income tax consequences would have been similar if Harry and Sue Baloy had been
married in community of property. Although section 7(2A)(b) deems income derived
from the letting of fixed property to accrue to both spouses in equal shares, the pro-
visions of section 7(2)(a) will be triggered as Harry made a donation with the sole or
main purpose of reducing his normal tax liability. Consequently, a total amount of
R80 000 (R100 000 income – R20 000 expenditure) will be included in Harry’s taxable
income. The latter represents half of the rental income that accrued to him in terms of
section 7(2A)(b) as well as his wife’s share of the rental income that is deemed to accrue
to him in terms of section 7(2)(a).

16.7 Transactions between parents and children (section 7(3))

In terms of section 7(3), any income received by or accrued to or in favour of a minor
child or stepchild (‘child’) by reason of a donation, settlement or other disposition
made by the parent of that child, is deemed to be the income of that parent. This also

695
A Student’s Approach to Taxation in South Africa 16.7

applies to any income from such donation, settlement or disposition spent on the
maintenance, education or benefit of a minor child or income that has accumulated
for the benefit of that child.
For example, if a father donates an amount of money to his minor child and invests it
in a savings account at a bank, the interest that is earned on the investment is taxed in
the hands of the father, even if he uses the interest for the maintenance of the child.
A parent who conducts a business may pay a wage or salary to his or her minor child.
The wage or salary that is received by or accrues to the child would not be attributed
to the father under section 7(3) provided that it is a bona fide payment for the services
rendered by the child to the business and the payment is not excessive. The payment
is permitted as a deduction for business purposes by the father and the child is liable
in his or her own right for the normal tax on such income. Here, there is no issue of a
donation, settlement or other disposition.
Section 68 of the Act stipulates that each parent must include in his or her income tax
return any income received by or accrued to or in favour of his or her minor children,
whether directly or indirectly from that parent or from his or her spouse, together
with any details that the Commissioner may require. Section 68 also applies to any
income which, in terms of section 7(3), is deemed to be the income of the parent.
Please note that a minor child is a child under the age of 18 who has never been
married. A divorced person or a widow/widower under the age of 18 does not
regain the status of a minor. A ‘child’ is defined in section 1 of the Act and includes
an adopted child and a stepchild. SARS accepts that an illegitimate child also falls
within the definition of ‘child’. A stepchild is specifically included in the definition of
a ‘child’ for the purposes of section 7(3).
It is not necessary for the donation to be made directly to the child. Section 7(3) also
applies when the donation is made to a trust and the minor child is a beneficiary of
the trust.

Example 16.8
Harry Baloy wants to benefit from the lower normal tax rate that his unmarried daughter,
Jenny, 16 years old, may pay. On 1 March, Harry donated a block of flats to the Baloy
Trust. Jenny is the only beneficiary of the trust and she has a vested right to the income of
the trust. During the current year of assessment, the Baloy Trust received net rental
income of R100 000.
You are required to explain the income tax consequences pertaining to the net rental
income with regard to the current year of assessment.

Solution 16.8
The Baloy Trust received the R100 000, but in terms of section 7(1), Jenny has a vested
right to it. In terms of section 7(3), the amount will be deemed to accrue to her father,
Harry. The amount is the direct result of a donation that the Baloy Trust received from
Harry. Harry must therefore add the amount of R100 000 to his taxable income.

696
16.7–16.8 Chapter 16: Taxation of trusts

REMEMBER
• Section 7(3) applies to the specific parent who made the donation to the minor child and
not to his or her spouse. If the parent who made the donation dies, the income is not
taxed in the other parent’s hands but will be taxed in the hands of the child.
• Since this subsection only refers to a child of the donor, it does not affect a donation
made by a grandparent to his or her grandchild. Grandparents are therefore able to
donate assets to their minor grandchildren without them being taxed in terms of
section 7(3) on the income derived from the assets. A minor child is subject to normal tax
on the amount that is received or accrues from a trust as a result of a donation made by a
grandparent.
• Unlike section 7(2) that deals with transactions between spouses, none of the other
provisions in section 7 (including section 7(3)) requires that the sole or main purpose of
the transaction must be to reduce, postpone or avoid any tax liability for the donor.

16.8 Donations linked to a condition (section 7(5))

Section 7(5) deals with donations subject to a stipulation or condition to the effect that
the income will not vest in the beneficiary until the happening of a certain event. If
Mr A donates an investment to his son, but stipulates that he may only obtain the
benefit of the money when he marries, Mr A is taxed on the income of the investment
in terms of section 7(5) until his son marries or until Mr A dies, whichever happens
first.
This section refers to a fixed or contingent future event. A provision in the trust deed
could stipulate, for example, that the income will only be paid out to the beneficiaries
when they have reached a certain age, after a specific number of years, when they get
married, when they achieve a certain qualification such as a university degree, or that
it will be withheld until a beneficiary living overseas returns to South Africa. The
income that the beneficiary would have received if it wasn’t for the condition will
thus be deemed to be the income of the person making the donation, settlement or
other disposition until the happening of the event.
When the trust is a discretionary trust and the trustees have discretionary powers to
decide over the distribution of income, the events are deemed to take place on the
date that the trustees make their decision to distribute the income. The income does
not have to be distributed physically; it is sufficient if the amount vested in the
beneficiary by virtue of a trustees’ resolution. When the trustees decide not to
distribute a portion or all of the income of the trust, the provisions of section 7(5)
apply to all the undistributed income of the trust. When the income has been
distributed (vested in a beneficiary), section 7(5) can no longer be applied, and the
income could be taxable in the hands of the beneficiary (sections 25B(1) and 7(1)),
except when the other provisions of section 7, for example section 7(3), apply.
Note that a person may impose the stipulation or condition, but that the income
derived from the donation that is not distributed or vested due to the stipulation or
condition, is taxed in the hands of the donor (and not in the hands of the person who
imposed the stipulation or condition). In this manner, the trust could have been
founded by a parent for the benefit of his or her children, with a stipulation in the trust

697
A Student’s Approach to Taxation in South Africa 16.8

deed that the income may only be distributed to the children after the occurrence of a
certain event. If a grandparent makes a donation to the trust that is subject to the same
stipulations as imposed by the parent, the donation falls within the ambit of sec-
tion 7(5). The grandparent is then taxed on the undistributed income derived from the
donation. This undistributed income would have accrued to the beneficiaries if it had
not been for the condition in the trust deed.

Example 16.9
A grandfather donates property to a trust with his two minor unmarried grandchildren as
beneficiaries. He stipulates that each year each of them will receive a quarter of the net
rental income from the property and that each year a further quarter of the net rental
income will be accumulated for each child in the trust until the younger of the two children
turns 30 years old. If a child dies before this date, the other child will get the benefit of the
accumulated income, but only when he or she turns 30 years old. The net rental income
from the property in the current year of assessment is R200 000.
You are required to discuss the income tax consequences of the above.

Solution 16.9
Taxable in the hands of each grandchild (R200 000 × ¼) R50 000
Taxable in the hands of the grandfather in terms of section 7(5)
R100 000
(R200 000 net rental income – R100 000 vested in his two grandchildren))
The grandfather (donor) made a donation via a trust to his grandchildren (the bene-
ficiaries) subject to the stipulation that a portion of the income must be withheld from the
beneficiaries until the occurrence of a fixed event. The income that would have accrued to
the beneficiaries by reason of the donation to the trust, had it not been for the condition, is
therefore taxed in the hands of the grandfather (being the donor) until the youngest child
turns 30 or until the grandfather dies, whichever occurs first. The income tax
consequences of the donation for the trust after the occurrence of the event depend on the
other stipulations of the trust deed. The trust deed can stipulate, for example, that the
property and accrued rental income must be transferred to the children after the
occurrence of the stipulated event.

REMEMBER

• It has been found that, in application, section 7(1) holds more weight than (dominates)
section 7(5) – refer to ITC 1328 43 SATC 56. Thus, if the beneficiary has a vested right to
the income retained in the trust, the stipulations of section 7(5) cannot be applicable. In
the above example, there was no vested right, since the income would not accrue to the
estate of the particular child upon his or her death and therefore section 7(1) cannot
apply.

continued

698
16.8–16.9 Chapter 16: Taxation of trusts

• The person making the donation, settlement or other disposition must still be alive for
income to be attributable to that person through the application of section 7(5) (or any
of the other section 7 provisions for that matter). However, if the person who imposed
the condition has died, section 7(5) will continue to apply with regard to any living
donors, who will be taxed proportionally to the extent that such income can be attri-
buted to the donations made by them. Remember, section 7(5) does not attribute the
income to the person who imposed the condition, but to the donor.
• Section 7(5) applies up to and including the date that the condition or stipulation is
fulfilled or the date of death of the donor, whichever occurs first.
• In the case of a discretionary trust, the exercising of the trustees’ discretion is the event
as intended in section 7(5).

16.9 Donations between a resident and non-resident

(section 7(8))
Section 7(8) applies where, by reason of or in consequence of a donation, settlement
or other disposition made by a resident, an amount is received by or accrues to a
non-resident. A resident in South Africa is taxed on his or her worldwide income
whereas a non-resident is merely taxed on his or her South African-sourced income.
Section 7(8) is only applicable where the amount that is received by or accrues to the
non-resident would have constituted income had that person been a resident. The
resident donor must then include the amount that was received by or accrued to the
non-resident in his or her income.
In determining the amount that would have constituted ‘income’ of the non-resident
had that person been a resident, the foreign dividend exemption under sec-
tion 10B(2)(a) of the Act must be disregarded. Section 10B(2)(a) contains the so-called
‘participation exemption’ that, subject to certain exceptions, fully exempts foreign
dividends in the hands of a person that holds at least 10% of the equity shares and
voting rights in the company declaring the foreign dividend (refer to chapter 11).
Thus, if a donation, settlement or other disposition made by a resident results in the
receipt or accrual of a foreign dividend to a non-resident that holds 10% or more of
the equity shares in the company declaring the dividend, the provisions of sec-
tion 7(8) could still apply to attribute such a foreign dividend to the resident donor.
Although the foreign dividend would have been fully exempt in the hands of the
non-resident if that person had been a resident, and would therefore not have
constituted ‘income’ in that person’s hands, the participation exemption under
section 10B(2)(a) must be disregarded in determining the hypothetical ‘income’ of the
non-resident. Consequently, the foreign dividend would still be taxed in the hands of
the resident donor.
However, the participation exemption under section 10B(2)(a) is only disregarded in
determining whether the foreign dividend is attributable to the resident donor where
both the following conditions are met:
• The non-resident must (whether alone or together with a connected person in
relation to such a non-resident) hold more than 50% of the participation or voting
rights in the company that declared the foreign dividend, and

699
A Student’s Approach to Taxation in South Africa 16.9

• The non-resident must be a connected person in relation to the resident donor (or
any connected person in relation to such a donor).
Further, to prevent the imposition of double taxation in the hands of the resident
donor, the participation exemption under section 10B(2)(a) must only be disregarded
to the extent that the foreign dividend is not derived from an amount that must be
included as ‘income’ or attributed as a capital gain to the resident donor or any other
resident who is a connected person to the donor.

Example 16.10
Tom Palesky is a resident of the Republic and the father of Sharon Palesky, a major non-
resident who is the sole beneficiary of the Palesky Trust, a non-resident discretionary
trust. On 1 March 2019, Tom donated his entire interest of 60% of the equity shares in
Palesky Fashions Plc, a non-resident company, to the Palesky Trust. During the current
year of assessment, Palesky Fashions Plc declared a dividend of R100 000 to the Palesky
Trust. The dividend declared to the Palesky Trust was not funded by an amount that
constitutes income or a capital gain in the hands of Tom. Tom did not hold any voting
rights in Palesky Fashions Plc during the current year of assessment.
You are required to explain the tax consequences of the above with regard to the current
year of assessment.

Solution 16.10
In terms of section 7(8), the foreign dividend of R100 000 will be deemed to accrue to Tom
as it resulted directly from a donation made by Tom, being a resident donor, to the
Palesky Trust, which is a non-resident.
Section 7(8) provides that the amount attributable to the resident donor must have
constituted ‘income’ in the hands of the non-resident had that person been a resident.
However, in determining such hypothetical income of the non-resident, the foreign
dividend exemption under section 10B(2)(a) of the Act must be disregarded in specific
circumstances.
In the present scenario, the foreign dividend of R100 000 would have been fully exempt
under section 10B(2)(a) in the hands of the Palesky Trust had that trust been a resident as
the trust holds at least 10% of the equity shares in Palesky Fashions Plc. However, for
purposes of section 7(8), this exemption must be disregarded, particularly since the
Palesky Trust holds more than 50% of the participation rights in Palesky Fashions Plc and
the Palesky Trust is a connected person in relation to the resident donor (being Tom)
since he is a relative of a beneficiary of the Palesky Trust.
Tom must therefore include the foreign dividend of R100 000 that accrued to the Palesky
Trust in his gross income for the current year. In terms of section 10B(3), a part of this
dividend (25 / 45) would be exempt from normal tax, provided that the foreign dividend
was not funded by or paid in the form of an annuity (refer to chapter 11). Note that Tom
would not be entitled to a full exemption under section 10B(2) for this foreign dividend.
In particular, the participation exemption under section 10B(2)(a), which requires a
minimum holding of 10% of the equity shares and voting rights in the foreign company
declaring the dividend, would not apply as Tom holds no equity shares or voting rights
in Palesky Fashions Plc.

continued

700
16.9–16.10 Chapter 16: Taxation of trusts

Will the answer above differ if the Palesky Trust only held 40% of the
total participation rights in Palesky Fashions Plc?

The provisions of section 7(8) do not apply to:

• a donation, settlement or other disposition to a foreign entity that is similar to a
public benefit organisation as contemplated in section 30; and
• an amount received by or accrued to a controlled foreign company in relation to
the resident as contemplated in section 9D.
It is not necessary that the donation, settlement or other disposition be made directly
to a non-resident. The provisions of section 7(8) also apply if the donation was made
to a trust and a non-resident is a beneficiary of the trust. Any expenditure, allowance
or loss incurred by the non-resident that would have been deductible from the
relevant income had the non-resident been a South African resident, is deductible
from the income attributable to the resident donor under section 7(8). A loss may not
be created with this deduction (section 7(8)(b)).
For purposes of section 7(8), the reference to ‘income’ is regarded to mean income as
defined (gross income minus exempt income).

Example 16.11
Harry Baloy is a resident of the Republic. On 1 March 2019, Harry donated a block of flats
to the Baloy Trust, a discretionary trust that is tax resident in South Africa. Strauli, a
major non-resident, is the only beneficiary of the trust. During the current year of assess-
ment, the Baloy Trust received rental income amounting to R100 000 that was paid over
to Strauli. The rental income was received from a source outside the Republic.
You are required to explain the tax consequences of the above with regard to the current
year of assessment.

Solution 16.11
The Baloy Trust received R100 000. However, the full amount was paid to Strauli. In
terms of section 7(8), the amount will be deemed to accrue to Harry. The amount is the
direct result of a donation that the Baloy Trust received from Harry and had Strauli been
a South African resident, the R100 000 would have constituted income as defined in his
hands.
Harry must therefore include the amount of R100 000 net rental in his taxable income.

16.10 Loans between trusts and connected persons (section 7C)

Section 7C has been introduced into the Act to address the scenario where a natural
person disposes of an asset to a trust at market value, but then leaves the amount
owing by the trust outstanding on a loan account. National Treasury has quite a few

701
A Student’s Approach to Taxation in South Africa 16.10

issues with this type of scenario. Firstly, by disposing of an asset at market value,
donations tax is not triggered as the requirement for a gratuitous disposal is not met.
Secondly, by transferring an asset out of his or her estate, a natural person is able to
peg (freeze) the value of his or her estate for estate duty purposes.
Thirdly, if interest on the outstanding loan is either not charged at all or at a very low
interest rate, this constitutes, according to National Treasury, further tax avoidance
by the natural person. This is because such schemes are lawfully structured with the
sole or main purpose to derive a tax benefit through a reduction of the interest
receipts or accruals that would have otherwise been included in the natural person’s
gross income.
Section 7C applies where:
• a natural person provides a loan (or an advance or credit) to a trust;
• a company provides a loan to a trust at the instance of a natural person who is a
connected person to that company; or
• a natural person or a company, at the instance of a natural person who is a
connected person to that company, provides a loan to a company in which a trust
(either alone or together with a beneficiary of that trust, a spouse of such a
beneficiary or a person related to such a beneficiary or spouse within the second
degree of blood relation) directly or indirectly holds at least 20% of the equity
shares or voting rights,
provided that the trust is a connected person in relation to the natural person or the
company providing the loan or any of their connected persons. The natural person or
company does not have to provide the loan directly to the trust as section 7C also
applies in respect of indirect loans.

REMEMBER

• A natural person or a company is a connected person to a trust if such a natural person

or company is either a beneficiary of that trust or a connected person of a beneficiary of
that trust (paragraph (b) of the definition of ‘connected person’ in section 1 of the Act).
• A natural person or a trust is a connected person to a company if such a natural person
or trust (either alone or together with a connected person) directly or indirectly holds at
least 20% of the equity shares or the voting rights in the company (paragraph (d)(iv) of
the definition of ‘connected’ person in section 1 of the Act).
• In the case of a loan to a company, the expression ‘together with’ implies that the
provisions of section 7C will not apply if the trust holds no equity shares or voting
rights in such a company regardless of whether a beneficiary of that trust (or a spouse
of such a beneficiary or a person related within the second degree of blood relation)
holds at least 20% of the equity shares or voting rights in that company.

The effect of section 7C is two-fold. Firstly, if the person that advanced the loan either
cancels or writes off the outstanding loan amount owing by the trust or company,
that person cannot claim a deduction, loss or allowance in respect of that waiver (for
example in terms of either section 11(i) (bad debts) or (j) (provision for bad debts)).
The person can also not claim a capital loss in respect of the cancellation or write-off
of the outstanding debt (for example in terms of paragraph 56 of the Eighth Schedule)
(section 7C(2)).

702
16.10 Chapter 16: Taxation of trusts

Secondly, if the loan is either a low-interest or an interest-free loan, the natural person
who advanced the loan or at whose instance a company advanced the loan, is
deemed to have made a donation to the trust that is subject to donations tax. The
amount of the deemed donation is calculated as the difference between the interest
calculated at the official rate and the interest that the trust or company actually paid
(if any) (section 7C(3)). The daily simple interest method must be used in determining
the interest that would have been charged had the loan been subject to interest at the
official rate of interest (section 7D(b)).

REMEMBER

• The definition of the ‘official rate of interest’ for purposes of this calculation can be
found in section 1 of the Act. In the case of a loan denominated in South African rand,
the official rate of interest represents the sum of the South African repurchase rate
(more commonly known as the repo rate of the South African Reserve Bank) plus 1%.
For loans denominated in foreign currency, the official rate of interest represents the
equivalent of the South African repurchase rate applicable to such currency plus 1%.
• At the time of publication of this book, the official rate of interest in South Africa was
7,25% (November 2022).

The deemed donation in terms of section 7C(3) is deemed to have been made by the
person on the last day of the year of assessment of the trust and is subject to donations
tax. If the donation has been made to a company, the donation is deemed to have been
made by the person on the last day of the year of assessment of the company. The rate
at which donations tax is levied depends on the aggregate value of property donated
by the natural person on or after 1 March 2018 that was subject to donations tax,
including the amount of the deemed donation made under section 7C(3). The first R30
million of the value of property donated on or after 1 March 2018 is subject to donations
tax at 20%, whereas the excess (above R30 million) is subject to donations tax at 25%
(refer to chapter 17 for detail regarding donations tax).

Example 16.12
Jan Jorris sold a block of flats at its market value of R15 million to a trust on 1 March 2022.
The sale was financed by Jan by means of an interest-free loan to the trust. Jan and the
trust are connected persons. Jan did not make any donations during the 2023 year of
assessment and the aggregate value of all donations made by Jan from 1 March 2018
(including any donation resulting from the current transaction) does not exceed
R30 million.
You are required to explain to Jan what the effect of section 7C on the above information
will be, if any. You can assume that the official rate of interest is 7,25% and that the trust
made no capital repayments on the loan.

703
A Student’s Approach to Taxation in South Africa 16.10

Solution 16.12
R
Jan provided a loan to the trust and he is a connected person to the trust.
The provisions of section 7C must be considered.
The loan is interest free and Jan will be deemed to have made a donation to
the trust on 28 February 2023. The amount of the deemed donation is
calculated as follows:
Interest calculated at the official rate of interest (R15 million × 7,25%) 1 087 500
Less: Interest incurred by the trust (nil)
Deemed donation 1 087 500
Jan is a natural person and is entitled to a R100 000 general donations tax exemption
during a year of assessment (refer to chapter 17 for detail regarding donations tax). Jan
will thus be liable for donations tax on R987 500 (R1 087 500 – R100 000) in respect of this
deemed donation.
Jan must pay the donations tax of R197 500 (R987 500 × 20%) to SARS by 31 March 2023.

In the case where a company provides a loan to a trust or to another company at the
instance of more than one natural person who is a connected person to that company,
the deemed donation for purposes of section 7C(3) is regarded as having been made
by each of those natural persons in accordance with their respective interests in the
equity shares or voting rights of that company relative to the aggregate interests held
by such persons in that company (section 7C(4)).

Example 16.13
Thami Sebeela owns 60% of the equity shares in AA (Pty) Ltd while Mogale Lethiba owns
the remaining 40% of the equity shares. Thami and Mogale are also beneficiaries of the
BB Trust. At the instance of Thami and Mogale, AA (Pty) Ltd loans an amount, interest free,
to the BB Trust.
Does section 7C apply to the loan between AA (Pty) Ltd and the BB Trust and if yes, what
are the effects for Thami and Mogale?

Solution 16.13
Thami and Mogale are both connected persons in relation to the BB Trust (they are
beneficiaries of the trust) and AA (Pty) Ltd (they are natural persons who each hold at
least 20% of the equity shares in the company). The loan to a trust does not need to be
directly provided by the natural person. If the loan is provided to the trust by a company
(in this case AA (Pty) Ltd) at the instance of one or more natural persons who are
connected persons in relation to that company, section 7C applies.
Because the loan is provided to the trust by the company at the instance of Thami and
Mogale, they are regarded as having donated the difference between the interest
calculated at the official rate of interest and the interest incurred by the trust, in their
respective shareholding ratios.

continued

704
16.10 Chapter 16: Taxation of trusts

Thami is regarded as having made a deemed donation of 60% of the difference

between the interest calculated on the loan at the official rate of interest and the
interest incurred by the trust. In turn, Mogale is regarded as having made a
deemed donation of 40% of that difference.

Section 7C contains various anti-avoidance provisions, which aim to combat schemes

whereby taxpayers attempt to circumvent the application of section 7C. A natural
person or company may, for example, transfer a claim to a loan owing by a trust (or
company) to another person. In this regard, section 7C(1A) provides that a person
acquiring a claim to such a loan will be treated as having provided a loan equal to the
amount of the claim so acquired to the relevant trust (or company). The person
acquiring the claim will be deemed as having provided the loan to that trust (or
company) on the date of acquiring the claim if that person is a connected person in
relation to the trust or the person who initially provided the loan to the relevant trust
(or company). In the absence of such a connected-person relationship, the person
acquiring the claim will only be regarded as having provided the loan to the trust or
company on the date of becoming a connected person in relation to that trust or the
person from whom the claim was acquired.

Example 16.14
Assume the same information as in Example 16.12, except that Jan transferred his claim to
the loan owing by the trust to a beneficiary of that trust, Ben Mtsweni, on
15 November 2022. Assume that no repayments had been made on the loan during the
2023 year of assessment and that the outstanding balance of the loan remained fixed at
R15 million. You can further assume that neither Jan nor Ben made any donations during
the 2023 year of assessment and that the aggregate value of all donations made by each of
them from 1 March 2018 (including any donation resulting from the current transaction)
does not exceed R30 million.
You are required to explain what the effect of section 7C on the above information will
be, if any. You can assume that the official rate of interest is 7,25%.

Solution 16.14
R
Jan is a connected person to the trust and provided an interest-free loan to that
trust during the year of assessment. Consequently, Jan will be deemed in terms
of section 7C to have made a donation to that trust on the last day of the year
of assessment (28 February 2023). The amount of the donation is calculated as
follows:
Interest calculated at the official rate of interest until the date of transferring 771 678
his claim to a loan owing by the trust (R15 million × 7,25% × 259 / 365)
Less: Interest incurred by the trust (nil)
Deemed donation 771 678

continued

705
A Student’s Approach to Taxation in South Africa 16.10

Jan is a natural person and is entitled to a R100 000 general donations tax
exemption during a year of assessment. He is therefore liable for donations
tax on R671 678 (R771 678 – R100 000) in respect of this deemed donation. Jan
must pay the donations tax of R134 336 (R671 678 × 20%) to SARS by
31 March 2023.
Further to the above, Ben will be treated under section 7C(1A) as having
provided a loan to the trust in the amount of the claim acquired to an amount
owing by that trust (that is to say R15 million). As a beneficiary, Ben is a
connected person to the trust and he is therefore deemed to have provided
the loan to the trust on the date of acquiring the claim to that loan, namely on
15 November 2022. Consequently, Ben is deemed under section 7C(1A) to
have made a donation to the trust on the last day of the year of assessment of
the trust (28 February 2023) of an amount calculated as follows:
Interest calculated at the official rate of interest from the date of acquiring the
claim to a loan owing by the trust (R15 million × 7,25% × 106 / 365) 315 822
Less: Interest incurred by the trust (nil)
Deemed donation 315 822

As a natural person, Ben is entitled to a R100 000 general donations tax exemption during
a year of assessment. He is therefore liable for donations tax on R215 822 (R315 822 – R100
000) in respect of this deemed donation. Ben must pay the donations tax of
R43 164 (R215 822 × 20%) to SARS by 31 March 2023.

To address schemes whereby a natural person tries to circumvent the provisions of

section 7C by providing an interest-free or low-interest loan to a company instead of
a trust, section 7C may also apply. In this regard, a deemed donation is triggered
under section 7C if a natural person or a company (at the instance of a natural person
who is a connected person to that company) provides an interest-free or low-interest
loan to a company in which a trust (either alone or together with a beneficiary of that
trust, a spouse of such a beneficiary or a person related to such a beneficiary or
spouse within the second degree of blood relation) directly or indirectly holds at least
20% of the equity shares or voting rights. Such a deemed donation will only arise if
the relevant trust is a connected person to the natural person or the company
providing the loan, or any of their connected persons.

Example 16.15
Patrick O’Malley, a beneficiary of the ABC Trust, sold a luxury motor vehicle with a market
value of R4 million to ABC (Pty) Ltd on 1 March 2022. The sale was financed by Patrick by
means of an interest-free loan to the company. Patrick holds 15% of the equity shares in
ABC (Pty) Ltd, while the ABC Trust holds the remaining 85% equity shares.

continued

706
16.10 Chapter 16: Taxation of trusts

You are required to explain to Patrick what the effect of section 7C on the above situation
will be, if any. You can assume that the official rate of interest is 7,25% and that neither
Patrick nor the ABC Trust made any donations during the 2023 year of assessment. You
can further assume that the aggregate value of all donations made by Patrick from 1
March 2018 (including any donation resulting from the current transaction) does not
exceed R30 million. ABC (Pty) Ltd made no capital repayments on the loan. ABC (Pty)
Ltd has a 30 June year-end.

Solution 16.15
The interest-free loan that Patrick provided to ABC (Pty) Ltd triggers a
deemed donation under section 7C since Patrick is a connected person in
relation to the ABC Trust (as a beneficiary of the trust) and the trust holds
at least 20% of the equity shares in that company. Consequently, the
provisions of section 7C apply and Patrick is deemed to have made a
donation to the ABC Trust on 30 June 2023. The amount of the deemed
donation is calculated as follows:
R
Interest calculated at the official rate of interest (R4 million × 7,25%) 290 000
Less: Interest incurred by the company (nil)
Deemed donation 290 000
As a natural person, Patrick is entitled to a R100 000 general donations tax exemption
during a year of assessment (refer to chapter 17 for detail regarding donations tax). He
is therefore liable for donations tax on R190 000 (R290 000 – R100 000) in respect of this
deemed donation. Patrick must pay the donations tax of R38 000 (R190 000 × 20%) to
SARS by 31 July 2023.

Will the answer above differ if the ABC Trust held only 10% of the equity
shares in ABC (Pty) Ltd?

Instead of providing a loan, advance or credit to a targeted company, which is one of

the requirements for section 7C to apply, some individuals transfer wealth to these
companies by subscribing for preference shares with a low or no rate of return. To
counteract these schemes, section 7C(1B) was introduced that applies to local and
foreign dividends that accrue on such preference shares during years of assessment
commencing on or after 1 January 2021.
If a natural person or a company (at the instance of a natural person who is a
connected person to that company) subscribes for a preference share in a company,
the consideration that is received by or accrues to that company for issuing that share
is deemed to be a loan provided to that company for purposes of section 7C. Any
local or foreign dividend that accrues in respect of that preference share is also
deemed to be interest that accrued on the loan.

707
A Student’s Approach to Taxation in South Africa 16.10

Section 7C(1B) only applies if a trust (being a connected person to the natural person
or company that subscribed for the preference share) holds, whether alone or
together with any beneficiary of that trust, at least 20% of the equity shares or voting
rights in the company that issued the preference share. The natural person or
company that subscribed for the preference share is deemed to have made a donation
to this trust on the last day of the year of assessment of the company. The deemed
donation is calculated as the difference between the interest at the official rate of
interest on the deemed loan to the company and the interest incurred by the company
on that loan (being the dividends that accrued in respect of the preference shares).

Example 16.16
On 1 March 2022, Cecil Meyer who is a beneficiary of the ABC Trust, subscribes for
preference shares in ABC (Pty) Ltd at a total subscription price of R3 million. The ABC
Trust holds 20% of the equity shares in ABC (Pty) Ltd. On 31 January 2023, dividends of
R20 000 accrued to Cecil in respect of the preference shares held in ABC (Pty) Ltd.
You are required to explain to Cecil what the effect of section 7C on the above situation
will be, if any. You can assume that the official rate of interest is 7,25% and that Cecil did
not make any donations during the 2023 year of assessment. You can further assume that
the aggregate value of all donations made by Cecil from 1 March 2018 (including any
donation resulting from the current transaction) does not exceed R30 million. ABC (Pty)
Ltd has a 31 January year-end.

Solution 16.16
R
Cecil is a connected person to the ABC Trust (as a beneficiary of the trust)
and subscribed for preference shares in ABC (Pty) Ltd, a company in
which the ABC Trust holds at least 20% of the equity shares. Conse-
quently, Cecil is deemed to have made a loan equal to the subscription
price of the shares (R3 million) to ABC (Pty) Ltd on 1 March 2022 for
purposes of section 7C. The dividends of R20 000 that accrued in respect
of the preference shares are deemed to be interest incurred by ABC (Pty)
Ltd in respect of this deemed loan. Consequently, Cecil is deemed to have
made a donation to the ABC Trust on 31 January2023. The amount of the
deemed donation is calculated as follows:
Interest calculated at the official rate of interest
(R3 million × 7,25% × 337 / 365) 200 815
Less: Interest incurred by the company (20 000)
Deemed donation 180 815
As a natural person, Cecil is entitled to a R100 000 general donations tax exemption
during a year of assessment (refer to chapter 17 for detail regarding donations tax). He
is therefore liable for donations tax on R80 815 (R180 815 – R100 000) in respect of this
deemed donation. Cecil must pay the donations tax of 16 163 (R80 815 × 20%) to SARS
by 28 February 2023.

708
16.10 Chapter 16: Taxation of trusts

It is evident that the primary target of section 7C is high net worth individuals.
Where an interest-free loan is granted by a natural person to a trust or a company,
which attracts a deemed donation at the maximum rate of 7,25% on the capital
amount, this provision will only result in a donations tax liability if the loan provided
to the trust exceeds R1 379 310. This will be the effect if the taxpayer made no other
donations during the year of assessment, since the entire annual donations tax
exemption of R100 000 can be used to diminish the deemed donation of R100 000
(R1 379 310 × 7,25%) resulting from the interest-free loan.
Section 7C does not apply to all instances where loans were provided by connected
persons to trusts or to companies that are at least 20% owned by such trusts. If a loan
is provided to such a trust or company in the following circumstances, the provisions
of section 7C are not applicable (section 7C(5)):
• the loan is advanced to a trust or company that is an approved public benefit
organisation (PBO) or an approved small business funding entity;
• the loan is advanced to a trust to obtain a vested interest in the income and assets
of the trust and there are no discretionary powers in the trust (so-called ‘bewind’ or
business trusts);
• the loan is advanced to a special trust as defined;
• the loan is advanced to a trust or company that used the loan to fund the
acquisition of a residence that is used either by the natural person or his or her
spouse as a primary residence;
• the loan is subject to the transfer pricing provisions in section 31 that apply to
transactions between residents and non-residents;
• the loan is advanced in terms of ‘sharia compliant financing arrangement’
(financing that complies with Islamic principles);
• the loan is subject to the dividends tax provisions in terms of section 64E(4) (refer
to chapter 11); or
• the loan is advanced to an employee share incentive trust, provided that certain
requirements are met. Firstly, the trust must have been created solely for purposes
of the incentive scheme. The loan must further be provided by the scheme com-
pany or, if it is provided by another person, it must be in support of the trust ac-
quiring shares in the scheme company. Moreover, the trust may only offer equity
instruments (as contemplated in section 8C) relating to or deriving value from
shares in the scheme company to a full-time employee or a director of that com-
pany. Finally, a person who holds (either alone or together with connected per-
sons) at least 20% of the equity shares or voting rights in the scheme company may
not participate in that employment incentive scheme.
The introduction of section 7C into the Act is an indication that the revenue author-
ities are focusing their attention on the use of trusts for tax planning opportunities.
This was confirmed in the Second and Final Report on Estate Duty of the Davis Tax
Committee.

709
A Student’s Approach to Taxation in South Africa 16.10–16.11

REMEMBER

A low-interest or an interest-free loan that is provided by a connected person to a trust or a

company that is 20% owned by the trust can have the following consequences:
• In the case of a loan to a trust, the fact that it is either a low-interest or an interest-free
loan triggers the possible application of section 7 due to the fact that the interest-saving
by the trust is regarded as a ‘donation, settlement or other disposition’ for purposes of
section 7 (refer to 16.4.3).
• It could also trigger the application of section 7C and a deemed donation in the hands
of the natural person if the loan is provided to a trust by a connected person or to a
company in which that trust holds at least 20% of the equity shares or voting rights.
• Where a company provides a low-interest or interest-free loan to a trust or company
that triggers the application of section 7C, the deemed donation would arise in the
hands of the natural person at whose instance the company made the loan.

16.11 Miscellaneous provisions

16.11.1 General remarks about section 7

• The requirement that the donation should have been made with the sole or main
purpose of reducing, postponing or avoiding a tax liability pertains only to the
application of section 7(2)(a). Section 7(3) to (8) do not contain such requirements
and the sections still apply even if the donor can prove that he or she had no
intention of reducing, postponing or avoiding a liability for tax.
• Section 7(2), (3) and (5) to (8) only applies if the donor is alive (even if he or she
was only alive for a portion of the year). In the case of an interest-free or low inter-
est loan, an allocation would need to be made to determine the interest that ac-
crued up to the date of the donor’s death, which may be attributed to the donor in
terms of section 7. If the donor is deceased, the income is taxable in the hands of
the beneficiary receiving it. Section 7(4) still applies if the donor is deceased as the
income is taxable either in the hands of the donor (that is to say parent A) who
made a cross donation to the child of parent B, the surviving spouse of parent A
(who is the donor if parent A is deceased) or in equal shares in the hands of parent
A and his or her spouse (if the donated amount forms part of the communal estate
where they are married in community of property).
• Section 7(9) stipulates that when an asset is disposed of at a consideration that is
less than the market value of the asset, the amount by which the market value
exceeds the consideration is deemed to be a donation for purposes of section 7.
• Section 7(10) stipulates that where a resident at any time makes a ‘donation, settle-
ment or other disposition’, he or she must disclose such fact in writing to the
Commissioner when submitting his or her income tax return for the said year and
at the same time supply the information that is required by the Commissioner.
• Section 7(1) dominates section 7(5). In turn, section 7(2) to 7(4) and 7(6) to 7(7)
dominate section 7(1). Thus, even though a child has a vested right to income
under section 7(1), the parent is taxed on such income in terms of section 7(3).

710
16.11 Chapter 16: Taxation of trusts

• If none of the provisions in section 7 apply, the income of a trust is taxed either in
the hands of the beneficiary (where that beneficiary has a vested right) or in the
hands of the trust (section 25B read with section 7).

Example 16.17
Shazia Tayob donates a fixed deposit of R100 000 to her minor child. During the current
year of assessment, the fixed deposit earns interest amounting to R12 000.
You are required to explain the income tax consequences of the above.

Solution 16.17
Although the interest income of R12 000 accrues to Shazia’s minor child, the full amount
is included in Shazia Tayob’s income. The interest income of R12 000 will retain its nature
in Shazia’s hands and will qualify for the basic interest exemption to which Shazia is
entitled as a natural person.

16.11.2 Limitation of amount deemed to be income

In C:SARS v Woulidge 63 SATC 483, the court had to consider the taxation implica-
tions of an interest-free loan.

CASE:
Commissioner for South African Revenue Services
v Woulidge 63 SATC 483
Facts: Judgment:
The taxpayer set up two similar trusts for For section 7(3) to apply it requires a dis-
his minor children who were both in- position made wholly or to an appreciable
come and capital beneficiaries under the extent gratuitously and out of liberality
terms of the trusts. The taxpayer sold the or generosity. The court ruled that there
shares which he held in four companies was indeed an appreciable degree of
to the trusts. gratuitousness as far as the forbearance of
interest was concerned, but the market-
The purchase price was left on loan related purchase price, the terms of the
account and although the agreement of deed of sale and the subsequent payment
sale entitled the taxpayer to charge of that purchase price constituted due
interest on the loan account, he did not consideration in respect of the sale itself.
do so. Half the shares were sold and Accordingly, only the forbearance of
from the proceeds, income was gen- interest was gratuitous and not the sale
erated. SARS contended that the original itself. It was clear that the in duplum-rule
sale of the shares to the trusts was a could only be applied in the real world of
simulation or, at the very least, contained commerce and economic activity where it
a considerable element of gratuitousness served considerations of public policy in
and consequently all the income received the protection of borrowers against ex-
or accrued by virtue of that sale should ploitation by lenders. The result is a gra-
have been taxed in the taxpayer’s hands. tuitous disposition and that very element

continued

711
A Student’s Approach to Taxation in South Africa 16.11

of gratuitousness cannot be said to trigger ‘continuing donation’ for the purposes of

the working of the in duplum rule. section 7. The principle decided in this case
was that the in duplum rule (limitation of
Principle: interest up to the capital sum lent) does not
An apportionment needs to be made apply in tax cases. But a limitation must be
between the gratuitous disposition ele- placed on the amount that is deemed to be
ment and the non-gratuitous disposition income in the hands of the donor. The
element in order to determine the income limitation in this case represented the
to be attributable to the donor for the market-related interest on the loan. The
purposes of section 7. Only the interest- limitation was also applied cumulatively.
free portion of the transaction will be
deemed to represent a donation, settlement Remember an interest-free loan is not
or other disposition for the purposes of regarded as a donation for the purposes
section 7. It was confirmed that an of section 54 and thus is not subject to
interest-free loan was regarded as a donations tax.

REMEMBER
• The interest-free portion of the transaction does in fact activate the application of
section 7, but no donations tax is payable.
• Although the Woulidge case establishes an important principle, it was specifically
applicable to the facts of that case. It was not necessary for the court to decide whether the
transaction was a sham or not, but it remains a risk in any such transaction and the
application of section 80A must also always be examined.

Example 16.18
The assets of the XYZ Trust consist of investments amounting to R1 million. The
investments were funded by means of an interest-free loan that Asmali Kader made to the
trust on 1 March 2019. A market-related interest rate on a similar loan is 10%. The trust
received no income before the current year of assessment. The trust’s investment income
for the current year of assessment amounts to R450 000 and the full amount was paid out
to Asmali’s minor child, Kaja.
You are required to explain the income tax consequences of the above for the current year
of assessment.

Solution 16.18
The interest-free loan is deemed to be a ‘donation, settlement or other disposition’ and
it activates the application of section 7. Section 7(3) stipulates that the income
distributed to Kaja is deemed to be taxable in the hands of the parent. The R450 00 0
may therefore be deemed to be taxable in the hands of Asmali, but the amount is
limited to R400 000 (R1 million at 10% interest per year for four years (2020, 2021, 2022
and 2023)). The R400 000 represents the interest saving to the trust over the four years.
The excess of R50 000 (R450 000 – R400 000) reverts to Kaja (the minor) and is taxable in
his hands.

712
16.11–16.12 Chapter 16: Taxation of trusts

16.11.3 Calculation of interest amount (section 7D)

In line with the principle laid down in Woulidge, section 7D stipulates that in deter-
mining the amount of interest that would have been incurred or accrued if a loan had
carried interest at a specific rate, one must disregard a common-law or statutory
provision that limits the aggregate interest fee and similar finance charges in respect
of that debt to the outstanding capital. In addition, a common-law or statutory provi-
sion that prohibits the debt from carrying interest once the aggregate interest equals
the outstanding capital, must be disregarded. The latter confirms that the in duplum
rule will not apply, for instance, to limit the interest that would be regarded as a
donation for purposes of section 7C when a connected person provides an interest-
free- or low-interest loan to a trust (or a company).

16.12 The nature of income from a trust

The application of the conduit pipe principle was established in the case of Armstrong
v CIR 10 SATC 1.

CASE:
Armstrong v Commissioner for Inland Revenue
10 SATC 1
Facts: £2,469 returned by the taxpayer, disre-
Under the will of her husband, the tax- garding the allocation made to dividends
payer was entitled to receive during her which were exempt from normal income
lifetime the whole of the net income of tax.
the residue of his estate. Shortly after his
Judgment:
death, a family arrangement was entered
into, under which the taxpayer’s interest The intervention of a representative tax-
was vested in a trust. The trustees were payer (trust) to receive the dividend from
obliged to pay to the taxpayer a fixed the company for the benefit of the ulti-
amount each year. The balance of the mate beneficiary did not deprive the latter
income, after providing for expenses, was of the exemption, since the dividend did
divided between the taxpayer’s daughters. not lose its character as a dividend when
For the year of assessment, the taxpayer the trustees paid it over to the taxpayer.
returned an income of £2,469 and her
return indicated that of this sum £1,495 Principle:
was derived from dividends and £974 The ‘conduit pipe’-principle is described,
from rents and interest. The Commissioner namely that income derived by a trust
for Inland Revenue levied normal does not lose its identity when it is
income tax upon the whole amount of received by the beneficiary.

The Armstrong case established the important principle that a trust is a conduit. The
conduit principle, however, is also contained in the wording of section 25B(1) of the
Act.
The income received by the trust retains its identity until distributed to beneficiaries.
For example, if the trust receives local dividends, the dividends retain their nature in
the hands of a beneficiary with a vested right and the applicable exemption for local
dividends (section 10(1)(k)) are available to that beneficiary. Other examples include

713
A Student’s Approach to Taxation in South Africa 16.12–16.13

that income of a capital nature remains capital; income from a foreign source remains
subject to the rules of determining the source of income for non-residents; foreign
dividend income is eligible for the foreign dividend exemptions in terms of section 10B;
and interest income for the exemptions referred to in section 10(1)(h) and (i).

REMEMBER

• In the Rosen case the court found that the income had to be distributed in the year in
which it was earned to retain its identity. If income is therefore distributed out of
retained income, the income will lose its identity and will be treated as capital in nature.

However, when dividend income is paid out in the form of an annuity, it retains its
nature as a dividend, but it loses the general dividend exemption in terms of sec-
tion 10(1)(k) due to the provisions of section 10(2)(b). Similarly, where foreign divi-
dend income is paid in the form of an annuity, it loses the complete foreign dividend
exemptions contained in section 10B(2) and the partial foreign dividend exemption
contained in section 10B(3) due to the provisions of section 10B(5). Section 10B(5)
further provides that any payments out of a foreign dividend do also not qualify for
the foreign dividend exemptions under section 10B(2) and 10B(3). Local interest
income paid out by way of an annuity still retains the basic interest exemption in
terms of section 10(1)(i)). However, local interest received by non-residents in the
form of an annuity loses the exemption in terms of section 10(1)(h).

REMEMBER
• The effect of both sections 10(2)(b) and 10B(5) is similar in that all exemptions in respect
of local and foreign dividends are lost if dividends are paid out in the form of an annui-
ty. Furthermore, if a payment is made out of a foreign dividend, such an amount does
not qualify for the foreign dividend exemptions under section 10B(2) and (3).

16.13 Losses in a trust (section 25B(3) to 25B(6))

Section 25B(3) stipulates that when a beneficiary has a vested right to an amount in
the trust, that beneficiary is also entitled to claim a deduction or allowance against
such an amount in respect of the deductions or allowances that the trust was entitled
to deduct for income tax purposes. If no beneficiary has a vested right to the amount
and the amount is also not deemed to accrue to the donor in terms of section 7, the
amount would be taxable in the trust. In terms of section 25B(3), the trust would then
be entitled to claim the deductions or allowances permitted against such an amount.

Example 16.19
Magdalena Kwaso is the only beneficiary of the Madala Trust and has a vested right to all
the income of the testamentary trust. During the current year of assessment, the trust
received rental income amounting to R100 000. Deductible expenses in the trust
amounted to R20 000 for the year. No amount was distributed to Magdalena.
You are required to explain the income tax consequences for the current year of assessment.

714
16.13 Chapter 16: Taxation of trusts

Solution 16.19
This is a testamentary trust and therefore there can be no income tax consequences for the
donor. The beneficiary is therefore taxed on all income to which she has a vested right.
Magdalena has a vested right to the full R100 000 income and she is entitled to claim the
R20 000 expenses as a deduction. Her taxable income is therefore R80 000 (R100 000 –
R20 000).

A beneficiary is not entitled to set off the expenditure or losses of a trust against his or
her other taxable income. Therefore, any deductions or allowances attributed to the
beneficiary under section 25B(3) are limited to the amounts of income of the trust to
which the beneficiary has a vested right, and which are included in the income of the
beneficiary (section 25B(4)).
The remaining deductions and allowances exceeding the income vested in the
beneficiary are firstly applied against the taxable income of the trust, if that trust is
subject to normal tax in South Africa. The deduction may not create or increase an
assessed loss in the hands of the trust (section 25B(5)(a)). Any surplus deductions and
allowances that exceeds the taxable income of the trust is again deemed to be an
amount that is deductible by the beneficiary in the following year of assessment. If
the trust is not subject to normal tax in South Africa, the expenses that are not
deductible in the hands of the beneficiary are merely carried forward, without being
utilised by the trust, and are deemed to be an amount that is deductible by the
beneficiary in the following year (section 25B(5)(b)). The excess expenditure or losses
that are deemed to be amounts deductible by the beneficiary in the following year is
once again limited to amounts that accrue to the beneficiary from that trust (sec-
tion 25B(6).

Example 16.20
Magdalena Kwaso is the only beneficiary of the Madala Trust, a South African tax
resident trust, and has a vested right only to the gross rental income of the testamentary
trust. During the first year, the trust received rental income amounting to R100 000 and
interest income amounting to R12 000. Deductible rental expenses for the year amounted
to R120 000. No amount was paid out to Magdalena during the first year.
During the second year, the trust received rental income amounting to R80 000 and
interest income amounting to R10 000. Deductible rental expenses for the year amounted
to R75 000. An amount of R10 000 of the rental income was distributed to Magdalena
during the second year.
You are required to calculate the tax consequences of the above for the applicable years of
assessment.

715
A Student’s Approach to Taxation in South Africa 16.13

Solution 16.20
R R
First year: Magdalena Kwaso
Rental income 100 000
Less: Rental expenditure (limited to the rental income) (100 000)
Taxable income – Magdalena nil
Deductible expenditure still available
Total expenditure 120 000
Less: Deducted by Magdalena (100 000)
Expenditure still available 20 000
First year: Madala Trust
Interest income 12 000
Less: Rental expenditure brought forward from Magdalena
(no deduction – not incurred in the production of
interest income) (nil)
Taxable income – Madala Trust 12 000
Deductible expenditure still available
Brought forward from Magdalena 20 000
Applied in the trust (nil)
Expenditure still available – carried forward to second year 20 000

Second year: Magdalena Kwaso

Rental income 80 000
Less: Deductible rental expenditure (75 000)
Less: Residue brought forward from the first year (20 000)
Limited to the rental income (95 000) (80 000)
Taxable income – Magdalena nil
Deductible expenditure still available R
Total 95 000
Less: Deducted by Magdalena (80 000)
Expenditure still available 15 000
The actual amount distributed to her is irrelevant, because she is taxed on the full amount
to which she is entitled, irrespective of whether she receives it or not since she has a
vested right to the rental income.
Second year: Madala Trust R
Interest income 10 000
Less: Rental expenditure brought forward from Magdalena
(no deduction – not incurred in the production of interest
income) (nil)
Taxable income – Madala Trust 10 000
Available expenditure to carry forward to the third year (R15 000 – R0) = R15 000

716
16.13–16.14 Chapter 16: Taxation of trusts

REMEMBER

• A beneficiary who obtains a vested right to the income of a trust, may only claim
permissible deductions and allowances to the extent that such amounts form part of his
or her ‘income’ for the year of assessment. For example, if a non-resident beneficiary
obtains a vested right to the income of a trust that has been derived from a source
outside South Africa, no deductions or allowances would be claimable by the
beneficiary against such an amount.
• A trustee remuneration paid to the beneficiary (who may also be a trustee) as well as
interest due to the beneficiary may be claimed as deductions in the trust. Such income
must be disregarded when determining the maximum amount deductible for the
beneficiary in respect of vested income from the trust.
• Only tax-deductible expenses in the trust may be claimed as a deduction by the beneficiary.

16.14 Summary of income tax consequences of trusts

The rules pertaining to the taxation of trusts are quite complex and it is therefore
important to have a framework within which one can test for the application of all the
specific sections. The following framework is suggested:

Step 1: Compile a table

1.1 Compile a table that summarises the trust’s income (in separate
columns) for the current year of assessment.
1.2 Allocate all distributions and vested rights proportionately to
each type of income. The amounts to which beneficiaries have
vested rights should, at the same time, be allocated as distri-
butions next to their names.
Step 1: 1.3 Next to the name of each beneficiary, write his or her status as
resident and indicate whether he or she is a minor.
1.4 Where an amount is received by reason of an annuity, write the
amount in italics so that you can remember that the annuity no
longer qualifies for the following: the general dividend exemption
under section 10(1)(k), the interest exemption under sec-
tion 10(1)(h), the total foreign dividend exemptions under sec
tion 10B(2) and the partial foreign dividend exemption under
section 10B(3). An amount that is paid out of a foreign dividend
does not qualify for the foreign dividend exemptions under
section 10B(2) and (3).
1.5 In the heading of each income column, write the name of the
person responsible for the income as a consequence of a donation,
settlement or other disposition.
1.6 Round off amounts to the nearest rand.
1.7 You should then refer to the table when calculating the income in
a person’s normal tax calculation, and then cross out the relevant
amount in that table, so that in the end you can see if you have
dealt with all the relevant amounts.

continued

717
A Student’s Approach to Taxation in South Africa 16.14

Step 2: Calculate the taxable income of the donors

2.1 Account for all amounts to which the donors have a vested right,
for example if a donor is also a beneficiary of the trust.
2.2 Examine amounts that are actually received by or accrued to the
donors. Establish whether or not they are entitled to trustee
remuneration and interest on a loan.
2.3 Test for the application of section 7(2) to (8) one by one to determine
if any amounts are attributable to a donor. Do not skip one.
2.4 Compare the amount included in terms of section 7(2) to (8) with
the amount of the benefit derived from the donation and limit
the income deemed to accrue to the donor accordingly.
2.5 Ensure that expenditure that had to be allocated to the donor has
in fact been allocated and that any losses are correctly dealt with.
Losses in a trust are ‘ring-fenced’ in the trust and carried forward
to the next year of assessment. Losses cannot be distributed to
the beneficiaries of a trust.
2.6 If income vests in a beneficiary from a trust’s capital derived in a
previous year of assessment (retained or accumulated income), it
is not taxable in the hands of a donor, but test for the possible
application of section 25B(2A) in the hands of a resident
beneficiary if vested from a non-resident trust.
2.7 When spouses are married in community of property, divide the
applicable passive income equally between the spouses.
2.8 Give the donor the applicable interest and dividend exemptions.
2.9 Consider if any capital gain that vested in a beneficiary is
attributable to the donor in terms of paragraphs 68 to 72 of the
Eighth Schedule (refer to 16.15.2.1).
2.10 Although not relevant for purposes of determining taxable
income, establish whether a natural person or a company, at the
instance of a natural person, provided a low-interest or interest-
free loan to a trust (which is a connected person in relation to
that natural person, company or any of their connected persons)
or a company in which that trust (either alone or together with a
beneficiary of that trust, a spouse of such a beneficiary or a
person related to such a beneficiary or spouse within the second
degree of blood relation) holds at least 20% of the equity shares
or voting rights. If so, test whether the provisions of section 7C
must be applied and determine whether there is a deemed
donation in the hands of the natural person.

718
16.14 Chapter 16: Taxation of trusts

REMEMBER

• If the donor dies during the year of assessment, section 7 applies only to the period the
donor was alive. After that person’s death there is no donor that can be taxed, therefore
only the beneficiary (if the beneficiary has a vested right) or the trust can be taxed.

Step 3: Calculate the taxable income of the beneficiaries

3.1 The beneficiaries are only taxable on amounts (on the table next to
their names) that have not already been crossed out (and therefore
included in the taxable income of others).
3.2 Check whether there are any amounts to which they have a
vested right and which have not already been distributed.
3.3 Ensure there is no residue of an amount limited by Step 2.4 that
must still be included in the taxable income of the beneficiaries.
3.4 Ensure that expenditure that should have been allocated to the
relevant income stream that vested in the beneficiary has been
allocated and that any losses have been correctly dealt with.
3.5 If income vests in a resident beneficiary from a trust’s capital
(retained or accumulated income) derived in a previous year of
assessment, it may be taxable in terms of section 25B(2A) in the
hands of the beneficiary if the capital vests from a non-resident trust.
3.6 Give the beneficiary the applicable interest and dividend exemp-
tions.
3.7 When spouses are married in community of property, distribute
the passive income equally between the spouses.
3.8 Consider if any capital asset or a capital gain has vested in the
beneficiary which should be taken into account by the beneficiary
for capital gains tax purposes in terms of paragraph 80 of the
Eighth Schedule (refer to 16.15.2.2).
Step 4: Calculate the taxable income of the trust
4.1 The trust will now be taxable on everything that has not already
been crossed out. You can check yourself on this (refer to 4.2
below).
4.2 The trust may be done first or last, because with the assistance of
the rules below, it is easier to identify the amount on which the
trust is liable to pay normal tax.
The maximum that a trust may be taxed on is:
• the undistributed (retained) income;
– if the donor is dead; or
– the income that was not derived as a consequence of a
donation, settlement or other disposition; and
continued

719
A Student’s Approach to Taxation in South Africa 16.14

• the retained income, where no one has a vested right to the

income (therefore, discretionary income).
4.3 Consider whether any capital asset or a capital gain that vested in
a beneficiary is exempt from normal tax or whether there are any
capital gains retained in the trust which should be taken into ac-
count by the trust for capital gains tax purposes in terms of para-
graph 80 of the Eighth Schedule (refer to 16.15.2.2).

REMEMBER

• When the taxable income of a trust, donor or beneficiary is calculated, it is important to

first determine whether the person is a resident of the Republic or not. Non-residents
are only taxed on income from a source within the Republic, while residents are taxed
on their worldwide income.
• After the taxable income has been calculated, the normal tax is calculated based on the
rate applicable to the taxpayer.
• When a trustee may exercise his or her discretion regarding the distribution of income
to a beneficiary, he or she must do it on or before the last day of the year of assessment,
otherwise the income is deemed to accrue to the trust and any later distribution will be
dealt with as income distributed from the capitalised (retained) income of the trust. This
is a practical problem that has to be borne in mind, since most financial statements are
only finalised after year end.

The above steps may now be applied to the following examples.

Example 16.21
According to the last testament of the late Duncan McLoid, a testamentary trust was
established and on the date of his death, all his assets were transferred to this trust.
His will stipulates that the income derived from the assets should be divided as follows:
• 40% of the gross rentals to my only daughter, Mary;
• the remainder of gross rentals to my only son, James;
• notwithstanding the above, the trustee shall in each year apply 331/3% of the gross interest on
investment towards the maintenance, education and welfare of my son and daughter in such
proportions as he in his sole discretion shall think fit.
Subject to the above, all other income shall be set aside and accumulated for the future benefit of
any children of my son, James.

continued

720
16.14 Chapter 16: Taxation of trusts

The trustee provided the following account:

Income statement
R R
Bequests of rent Income
Mary 244 000 Rent 610 000
James 366 000 Interest on investment 450 000
Trustee remuneration
On rent 30 000
On interest 22 500
Discretionary payments
Mary (only interest) 60 000
James (only interest) 90 000
Net surplus 247 500
1 060 000 1 060 000
Neither Mary nor James received any other income and they are both under the age of 65
at the end of the current year of assessment. All persons are South African residents, as
defined. All marriages, where applicable, are outside of community of property.
You are required to calculate the taxable income of all the relevant parties for the current
year of assessment.

Solution 16.21
STEP 1: Compile a table that allocates the different incomes and distributions
Rent Interest Total
R R R
Income of trust (Note 5) 610 000 450 000 1 060 000
Less: Distributions and vested rights
Mary (resident) (244 000) (60 000) (304 000)
James (resident) (366 000) (90 000) (456 000)
Undistributed income nil 300 000 300 000
STEP 2: Calculate the taxable income of the donor (not applicable as he is deceased)
STEP 3: Calculate the taxable income of the beneficiaries
(Remember to cross each amount off in the table as you include it in the taxable income of
the beneficiary.)
Mary R
Rent from the trust (vested payment) 244 000
Interest from the trust (discretionary payment) (Note 2) 60 000
Total 304 000
Less: Basic interest exemption (23 800)
Income 280 200
Less: Trustee remuneration (Note 1)
(R30 000 × R244 000 / R610 000) + (R22 500 × R60 000 / R450 000) (15 000)
Taxable income 265 200

continued

721
A Student’s Approach to Taxation in South Africa 16.14

James
Rent from the trust (vested payment) 366 000
Interest from the trust (discretionary payment) (Note 2) 90 000
Total 456 000
Less: Basic interest exemption (23 800)
Income 432 200
Less: Trustee remuneration (Note 1)
(R30 000 × R366 000 / R610 000) + (R22 500 × R90 000 / R450 000) (22 500)
Taxable income 409 700
STEP 4: Calculate the taxable income of the trust
Trust
Interest on investment (Note 3) 300 000
Less: Trustee remuneration (Note 1) (R22 500 × R300 000 / R450 000) (15 000)
Taxable income (Note 4) 285 000

Notes
1. Beneficiaries are liable for tax on any part of the income of a trust to which they are
entitled (section 25B(1)). Each is entitled to the basic interest exemption as provided
for in section 10(1)(i). The portion of trustee remuneration that is attributable to the
income distributed to the beneficiary is deductible in terms of section 25B(3) in the
hands of the beneficiary.
2. In terms of the will, the trustee is obliged to pay 33 1/3% of the interest on the invest-
ment for the maintenance of the two children in such proportions as he thinks fit.
These discretionary payments are taxed in the hands of the beneficiaries (section 25B(2))
after deducting the trustee’s remuneration (section 25B(3)).
3. The right to the remainder of the income vests in undetermined heirs, that is to say
James’ future children. As no beneficiary is entitled to this income yet, it is taxable in
the hands of the trust (section 25B(1)).
4. The taxable income of a trust is determined in the ordinary way. The expenditure
incurred in the production of income is allowed. Therefore, the remaining trustee’s
remuneration is deductible from the interest on the investment. The trust is not
entitled to the section 10(1)(i) basic interest exemption, which is available only to a
natural person. It is also not entitled to the primary, secondary or tertiary rebates for
the same reason.
5. The beneficiaries are entitled to the gross amounts of interest and rentals, therefore,
the trustees’ remuneration is excluded from the table compiled in Step 1.

722
16.14 Chapter 16: Taxation of trusts

Example 16.22
Below is the income statement of an inter vivos trust created by Zelda Smith who donated
all the assets to the trust. In terms of the trust deed, Xavier Smith is entitled to an annuity
of R240 000 and Yolandi Smith is entitled to 50% of the net income remaining after
payment of the annuity. The balance of the receipts and accruals shall be paid out to
Xavier upon Yolandi’s death. Should Xavier die before Yolandi, the balance of the receipts
and accruals of the trust will be paid to Yolandi. Xavier and Yolandi are both majors and
residents of South Africa. All taxpayers are younger than 65 years of age.
Income statement of trust
R R
Trustee’s remuneration 48 000 Rent 480 000
Property expenses Interest
(allowable) 164 000 Dividends from South 320 000
Property expenses African companies which qualify
(disallowed alterations) 108 000 for the section 10(1)(k) exemption 160 000
Annuity to Xavier 240 000
Share of net income Yolandi
(50% of R400 000) 200 000
Surplus accumulated 200 000
960 000 960 000
You are required to calculate the taxable income of all the relevant parties for the current
year of assessment.

Solution 16.22
STEP 1: Compile a table that allocates the different incomes and distributions
Divi-
Total Rent Interest dends
R R R R
Amount 960 000 480 000 320 000 160 000
Less: Trustee remuneration (48 000) (24 000) (16 000) (8 000)
(Note 1) (Note 2) (Note 2) (Note 3) (Note 4)
912 000 456 000 304 000 152 000
Less: Property expenses
(allowable) (164 000) (164 000) nil nil
748 000 292 000 304 000 152 000
Less: Property expenses
(disallowable) (Note 5) (108 000) (108 000) nil nil
640 000 184 000 304 000 152 000
Less: Annuity Xavier (240 000) (69 000) (114 000) (57 000)
(Note 8) (Note 9) (Note 10)
400 000 115 000 190 000 95 000
Less: Award Yolandi (200 000) (57 500) (95 000) (47 500)
(Note 11) (Note 12) (Note 13)
Accumulated in trust 200 000 57 500 95 000 47 500

continued

723
A Student’s Approach to Taxation in South Africa 16.14

STEP 2: Calculate the donor’s taxable income

Zelda R
Balance of the trust income attributable to donor (Note 6) 200 000
(The R200 000 consists of R57 500 rent, R95 000 interest and R47 500
dividends.)
Less: Dividends (exempt) (47 500)
Basic interest exemption (23 800)
Taxable income 128 700
STEP 3: Calculate the taxable income of the beneficiaries
Xavier
Annuity (Note 7) 240 000
Less: Basic interest exemption (23 800)
Taxable income 216 200
Yolandi
R200 000 award made up of: Rent 57 500
Interest 95 000
Dividends 47 500
Less: Dividends (exempt in terms of section 10(1)(k)) (47 500)
Basic interest exemption (23 800)
Taxable income 128 700
STEP 4: Calculate the taxable income of the trust
Trust
Disallowed property expenses (Note 5) 108 000
Disallowed trustee remuneration (Note 5) 8 000
Taxable income 116 000

Notes
1. The beneficiaries are entitled to the net amounts of rent, interest and dividends and
therefore the trustees’ remuneration is included in the table compiled in Step 1 (this
is in contrast to the scenario in Example 16.21).
2. (R480 000 / R960 000) × R48 000
3. (R320 000 / R960 000) × R48 000
4. (R160 000 / R960 000) × R48 000
5. When, in terms of the trust deed, the beneficiaries are entitled to the net income only,
it is submitted that the trust is liable for tax on inadmissible expenditure. Therefore,
the trust will be liable for tax on the inadmissible property expenses of R108 000 and
on the portion of trustee remuneration that is attributable to local dividends since
section 23(f) prohibits a deduction for expenditure incurred in the production of
exempt income. SARS follows this procedure in practice.
6. Because the donation made by Zelda is subject to a stipulation or condition that
neither party will receive the income retained by the trust until the death of the other
party, section 7(5) deems the income retained in the trust to be Zelda’s income.

continued

724
16.14 Chapter 16: Taxation of trusts

7. The annuity of R240 000 falls into gross income (section 1) and consists of R69 000
rent, R114 000 interest and R57 000 dividends. The income retains its nature through
the trust. It should be noted that the provisions of section 10(2)(b) will be applicable
resulting in Xavier not being entitled to the section 10(1)(k) exemption since he
receives the dividend income by way of an annuity. However, he will still qualify for
the interest exemption in terms of section 10(1)(i).
8. (R184 000 / R640 000) × R240 000
9. (R304 000 / R640 000) × R240 000
10. (R152 000 / R640 000) × R240 000
11. (R115 000 / R400 000) × R200 000
12. (R190 000 / R400 000) × R200 000
13. (R95 000 / R400 000) × R200 000
With regards to the calculation at Note 11 note of the following:
If the calculation was done as (R184 000 / R640 000 × R200 000), the answer would also
have been R57 500. However, the calculation is done as (R115 000 / R400 000 × R200 000)
because sometimes there are distributions in a table that are not proportional and that
will not always give the same answer. The principle is the same for the calculations at
Note 12 and Note 13.

Example 16.23
During his lifetime, James Joyce created a trust for the benefit of the following beneficiaries:
• his son, Marcus Joyce, who is 32 years old, resides permanently in Australia and
operates his business there;
• his son, Karl Joyce, who is 25 years old and lives in the Republic;
• his unmarried daughter, Gillian Joyce, who is 15 years old and lives in the Republic; and
• his mother, Mrs Caroline Joyce (60 years old), who is a widow and lives in the Republic.
James Joyce also lives in South Africa and donated the following assets to the trust:
• shares in South African companies; and
• the use of a large office building in Johannesburg for a period of ten years. At the end
of the ten-year period, Mr Joyce will regain the full right of ownership of the property.
The office building was erected before 2007.
Mrs Caroline Joyce, 60 years old and grandmother of the children, also donated certain
assets to the trust:
• a block of flats in Pretoria that she inherited from her deceased husband; and
• a patent that her deceased husband developed that is used by a manufacturing com-
pany in the Republic.
The following clauses, among others, appear in the trust deed:
(i) An annuity of R1 000 per month is payable to Mrs Caroline Joyce for the rest of her
life.
(ii) After deduction of the trustee remuneration and the annuity to Mrs Caroline Joyce,
one-third of the net income of the trust is payable to Marcus and one-third to Karl.

continued

725
A Student’s Approach to Taxation in South Africa 16.14

(iii) The trustee may distribute as much of the remaining third to Gillian for her
education as is necessary according to his discretion. The rest of the income must
be left in the trust until Gillian turns 25, when the balance must be paid out to her
and she must share in the income with her brothers on an equal basis. If Gillian
should die before the age of 25, the unpaid balance will be distributed to her
brothers.
(iv) Mr Joyce reserved the right to transfer Gillian’s right to her share of the trust
income in equal parts to her brothers if she were to marry before the age of
25 years.
(v) The trustees’ remuneration amounts to 5% of the net income of the trust, before the
deduction of any distributions to the beneficiaries. The trustees are all independent
third parties.
(vi) All distributions of income are paid proportionately from all sources of income.
(vii) All income received by the trust was received from a source within the Republic.
The trustee compiled the following income and expenditure account for the current year
ending on 28 February:
R R
Local dividends received 18 600
Net rental on office building in Johannesburg 186 900
Royalties 33 000
Local interest (there is no causal link with any donation,
settlement or other disposition) 4 500
Net rental on block of flats in Pretoria 360 000
603 000
Less: Trustees’ remuneration (30 150)
572 850
Less: Annuity paid to Mrs Joyce
(R1 000 × 12 months) (12 000)
560 850
Less: Distribution to Marcus (R560 850 × 1 / 3) 186 950
Distribution to Karl (R560 850 × 1 / 3) 186 950
Distribution to Gillian 60 000 (433 900)
126 950
You are required to calculate the taxable income of all the relevant parties with regard to
the current year of assessment.

726
16.14 Chapter 16: Taxation of trusts

Solution 16.23
STEP 1: Compile a table that allocates the different incomes and distributions.
Letting Letting
Dividends Royalties Interest Total
of office of flats
Non-
Donor James James Caroline Caroline
donation
R R R R R R
Net income 18 600 186 900 33 000 4 500 360 000 603 000
Less: Expenses
Trustee
remuneration (930) (9 345) (1 650) (225) (18 000) (30 150)
Net income after trustee
remuneration 17 670 177 555 31 350 4 275 342 000 572 850
Less: Distributions and
vested rights (13 755) (138 206) (24 402) (3 328) (266 209) (445 900)
Caroline (annuity
– resident) (Note 1) 370 3 719 657 90 7 164 12 000
Distributions: Marcus
(non-resident) 5 767 57 945 10 231 1 395 111 612 186 950
Karl (resident) 5 767 57 945 10 231 1 395 111 612 186 950
Gillian (minor/
resident) 1 851 18 597 3 283 448 35 821 60 000
Undistributed
income 3 915 39 349 6 948 947 75 791 126 950

STEP 2: Calculate donor’s taxable income

R
Taxable in the hands of James Joyce
James Joyce himself received nothing (nothing accrued to him either), and he
is also not a trustee. nil
Section 7(2) – not applicable nil
Section 7(3) nil
Distribution to Gillian
Dividends (Note 2) 1 851
Dividends exemption (1 851)
Rental income (Note 3 – part of section 7(7)) nil
Section 7(4) – not applicable nil
Section 7(5) nil
Dividends (retained) 3 915
Dividends exemption (3 915)
Rental income (Note 3 – part of section 7(7)) nil
Section 7(6) (Note 4) nil
Section 7(7)
Rental income (Note 3) (R186 900 – R9 345) 177 555
Section 7(8)
Distribution to Marcus (Note 5)
Rental income (Note 3) nil
Taxable income of James Joyce 177 555
(Remember each time to cross out amounts used in the above table, before moving to
the following taxpayer.)

continued

727
A Student’s Approach to Taxation in South Africa 16.14

Taxable in the hands of Caroline Joyce

(Caroline is a donor and a beneficiary.)
Amounts with a vested right and actually received
Annuity (Note 6) (R12 000 – R3 719) 8 281
Less: Interest exemption (section 10(1)(i)) (Note 6) (90)
Section 7(2) – not applicable: Husband deceased nil
Section 7(3) – not applicable: Grandmother and not parent nil
Section 7(4) – not applicable nil
Section 7(5) nil
Undistributed trust income
Royalties (Note 7) 6 948
Letting of flats (Note 7) 75 791
Section 7(6) – not applicable (Note 8) nil
Section 7(7) – not applicable nil
Section 7(8) – (Note 9)
Royalties 10 231
Letting of flats 111 612
Taxable income of Caroline Joyce 212 773

STEP 3: Calculate the taxable income of the beneficiaries R

Taxable in Gillian’s hands
Dividends – taxed with James (section 7(3)) nil
Office rent – taxed with James (section 7(3) or 7(7)) nil
Next to Gillian’s name is still the following:
Royalties 3 283
Interest 448
Letting of flats 35 821
39 552
Less: Interest exemption (section 10(1)(i)), limited to (448)
Taxable income of Gillian 39 104
Taxable in Marcus’ hands (non-resident)
Dividends – taxed with James (section 7(8)) nil
Office rent – taxed with James (section 7(7), 7(8)) nil
Royalties – taxed with Caroline (section 7(8)) nil
Letting of flats – taxed with Caroline (section 7(8)) nil
What remains next to his name:
Dividends – section 7(8) (Note 5) 5 767
Dividend exemption – section 10(1)(k) (5 767)
Interest 1 395
Interest exemption – section 10(1)(h) (1 395)
Taxable income of Marcus nil

continued

728
16.14 Chapter 16: Taxation of trusts

Taxable in Karl’s hands

Dividends 5 767
Less: Exempt (section 10(1)(k)(i)) (5 767)
Rental income – taxed with James (section 7(7)) nil
Royalties 10 231
Interest 1 395
Less: Interest exemption (section 10(1)(i)) – limited to (1 395)
Letting of flats 111 612
Taxable income of Karl 121 843
Step 4: Taxable income of the trust
Interest income (Note 10) 947
Notes
1. The table is compiled so that the different sources of income are indicated above. The
expenditures and distributions are then allocated in proportion to the different incomes
(unless financed from a specific income). The annuity, for example, was allocated as
follows: R17 670 (net dividends) / R572 850 (total net income) × R12 000 (total annuity)
= R370. The R370 is then allocated under the dividend column as the portion of the
annuity that is financed from dividends. To find the portion that relates to the letting of
the office block, the net dividend is replaced with the net amount of rental. For the other
distributions, the same approach is followed, except that the annuity is replaced with
the new amount of the other distribution.
2. Since Gillian is a minor, the dividend income that is actually distributed to her is taxed
in her father’s hands in terms of section 7(3), because he donated the shares to the
trust. Although James Joyce also donated the rental income of the office building, the
full amount is taxed in his hands in terms of section 7(7) and it cannot be taxed twice.
Section 7(7) does not take preference over section 7(3), and if the R18 597 had now
been taxed in terms of section 7(3), we would just exclude it later when section 7(7)
was calculated.
3. The net rental income of the property that James Joyce donated is taxed in his hands
in terms of section 7(7), since he retains an interest in the property and because he
regains the full right of ownership after ten years. The trustees’ remuneration may be
deducted in terms of section 11(a), and it is only the net rental income after the
trustees’ remuneration that is included with James Joyce, that is to say R177 555
(R186 900 – R9 345). The amounts could also have been included otherwise: R18 597
in terms of section 7(3), R39 349 in terms of section 7(5) and R57 945 in terms of sec-
tion 7(8), and then the difference of R61 664 (R177 555 – R18 597 – R39 349 – R57 945)
or R61 664 (R3 719 + R57 945) in terms of section 7(7).
4. The provisions of section 7(6) are also applicable here. The trust deed stipulates that
Mr Joyce reserves the right to transfer Gillian’s share in the trust income to her
brothers. As long as her father retains this right (that is to say until she is 25 years old
or marries), the income accrued to her as a result of the donation will be deemed to be
the income of her father. Since section 7(3) applies to the dividend income and section
7(7) to the rental income, it is not necessary to apply section 7(6). After Gillian
becomes an adult, section 7(6) will be applied to the dividend income and it would be
included in her father’s tax calculation.

continued

729
A Student’s Approach to Taxation in South Africa 16.14

5. Section 7(8) provides that if a donation, settlement or other disposition is made in

terms of which income accrues to a non-resident, the income is deemed to be taxed in
the hands of the donor. Marcus, a non-resident, earned the dividends and the rental
income from the office as a result of the donation that James made to the trust.
However, the dividend would not have constituted income as defined had Marcus
been a resident (the total dividend would have been exempt in terms of section
10(1)(k)) and is thus not subject to the provisions of section 7(8). It will not be
included in James’ taxable income calculation.
6. The annuity (except the portion that was paid out of rental income – refer to Note 3)
that was paid to Caroline is fully taxable in terms of paragraph (a) of the definition of
gross income. The income retains its nature, but the dividend portion loses the general
exemption available to dividends in terms of section 10(1)(k) because of the
provisions of section 10(2)(b). Interest is subject to the R23 800 exemption (for persons
65 and older, R34 500) for local interest received, that may be claimed in terms of
section 10(1)(i). The full amount less the portion included with James Joyce, is
included with Caroline (R12 000 – R3 719 = R8 281). The annuity amount is made up as
follows: R370 (dividends), R657 (royalties), R90 (interest) and R7 164 (letting of flats).
(Annuities must always be in italics or in colour in the table so that one may be
reminded that the general dividend exemption is lost.)
7. The undistributed income of the trust that may be attributed to the royalties and
letting of the flats, is taxable in terms of section 7(5) in Caroline Joyce’s hands. Her
donation is subject to a condition (imposed by James Joyce) in terms of which income
must be withheld from Gillian until an ‘event’ takes place, that is to say her 25th
birthday. Furthermore, it is a discretionary trust and the exercising of the trustees’
discretion is an event or condition as intended in section 7(5).
8. The question is now whether section 7(6) may be applied, with the result that the
royalties and rental income of the flats are deemed to be income from the grand-
mother. Gillian’s grandmother did not impose the condition and although sec-
tion 7(5) stipulates that the condition or stipulation may be made or be imposed by
the donor or another person, section 7(6) stipulates that it only applies to the donor
that can exercise the control. Section 7(6), therefore, does not apply to the donation
that was made by Mrs Caroline Joyce.
9. Section 7(8) stipulates that if a donation, settlement or other disposition is made in
terms of which income accrues to a non-resident, the income is deemed to be taxable
in the hands of the donor. Marcus earned the royalties and the rent of the flats as a
consequence of the donation that Caroline made to the trust. Marcus is a non-resident
and the amounts would have constituted income as defined had he been a resident.
10. The only retained income of the trust that has not been taxed anywhere else, is the
retained interest. It was put clearly in the question that it was not earned directly by
reason of or in consequence of a donation. Since the trust is not a natural person, the
basic interest exemption in terms of section 10(1)(i) does not apply to the trust.

730
16.15 Chapter 16: Taxation of trusts

16.15 Capital gains tax implications of trusts

16.15.1 General
The general provisions with regard to capital gains tax are discussed in chapter 10.
Capital gains tax is contained in the Eighth Schedule to the Act and only the specific
aspects that relate to trusts are discussed here.
A ‘trust’ is deemed to be a person other than a natural person and when the total
capital gain or loss is calculated, trusts (other than paragraph (a) special trusts) are not
entitled to the annual exclusion of R40 000. The inclusion rate for a taxable capital gain for
trusts (other than special trusts) is 80% of the net capital gain for that year of assess-
ment. A trust therefore pays capital gains tax at an effective rate of 36% (80% × 45%).
The disposal of an asset by a trust, for example by vesting it in a beneficiary, is subject
to the general principles applicable to disposals, base cost and proceeds, as well as the
general anti-avoidance stipulations and the loss limitation rules. For example, the
disposal of an asset to a beneficiary for consideration which is not at arm’s-length is
subject to the same rules applicable to connected persons in paragraph 38 of the
Eighth Schedule, while the disposal of an asset by a trust could also trigger the loss
limitation rules under paragraph 39 of the Eighth Schedule.
A capital gain resulting from the disposal of an asset by a trust is taxable either in the
hands of the trust, the beneficiary or, where an attribution rule is applicable, the
person who made the donation, settlement or other disposition to the trust.

16.15.2 The attribution rules

16.15.2.1 Specific rules for ‘donation, settlement or other disposition’
(paragraphs 68 to 72)
Just as section 7(2) to (8) is applicable to any income earned as a result of a donation,
settlement or other disposition, paragraphs 68 to 72 of the Eighth Schedule also deem
the capital gain (not loss) to be taxable in the hands of the person who made the
‘donation, settlement or other disposition’ that gave rise to the capital gain (not loss).
No attribution rules are applicable with regard to capital losses. The loss remains
available for calculating the aggregate capital gain/(loss) in the trust.
Paragraph 68 is the equivalent of section 7(2) (refer to 16.6) and is applicable to
transactions between spouses. There is no requirement that a spouse has to be a resident.
Paragraph 69 is the equivalent of section 7(3) (refer to 16.7). Once again, there is no
requirement that a party to the transaction has to be a resident.
Paragraph 70 is the equivalent of section 7(5) (refer to 16.8), but it is a requirement
that the section may only be applied if the person who is responsible for the
‘donation, settlement or other disposition’ has been a resident throughout the year of
assessment in which the capital gain has arisen.
Paragraph 72 is the equivalent of section 7(8) (refer to 16.9). However, it is only
applicable if the person who makes the ‘donation, settlement or other disposition’ is a
resident of the Republic.
Where the Woulidge case basically places a limitation on the ‘income’ that may
be attributed to the donor in terms of section 7(2) to 7(8), this limitation is regulated

731
A Student’s Approach to Taxation in South Africa 16.15

for capital gains tax in terms of the Eighth Schedule to the Act. Paragraph 73
stipulates that the amount of income in terms of section 7 together with the amount of
‘capital gains’ that are attributed to a person in terms of the Eighth Schedule may not
exceed the amount of the benefit. ‘Benefit’ from the ‘donation, settlement or other
disposition’ means the amount that the person to whom the donation, settlement or
other disposition was made, benefited due to the fact that it was made for no or
inadequate consideration, including consideration in the form of interest.

Example 16.24
Abrie Verhoef (a resident of the Republic) sold a block of flats to a trust. The selling price
of R1 000 000 was still outstanding and interest was levied at 5%. A market-related
interest rate is deemed to be 15%. During the current year of assessment, rental income
amounting to R60 000 was earned. One of the flats in the block was sold to a third party
and a capital gain of R89 000 was realised by the trust. The trust is a discretionary trust
and no portion of the income or capital gain was paid out to any beneficiary. Abrie is still
alive.
You are required to calculate the taxable income of all the relevant parties with regard to
the current year of assessment.

Solution 16.24
In terms of section 7(5), the part of the rental income that can be attributed to the dona-
tion, settlement or other disposition (the low-interest loan) is taxable in the hands of
Abrie. R40 000 (((15% – 5%) / 15%) × R60 000) of the total rental income of R60 000 is
therefore taxable in the hands of Abrie.
In terms of paragraph 70, R59 333 (((15% – 5%) / 15%) × R89 000) of the total capital gain
of R89 000 will be attributed to Abrie. However, the amount to be attributed to Abrie in
total in terms of both section 7(5) and paragraph 70 must be limited to R100 000. The
benefit that Abrie gives to the trust is the forfeited interest of 10% (15% – 5%), which
amounts to R100 000 (R1 000 000 × 10%) for the year.
R40 000 has already been taxed in Abrie’s hands in terms of section 7(5) and therefore the
entire R59 333 of the capital gain can also be attributed to Abrie in terms of paragraph 70.
The Act does not prescribe a specific order for the application and limitation of the
different sections. The limitation might thus apply proportionally as well. The trust will
be taxed on the R20 000 rental income (R60 000 – R40 000 (taxed in the hands of the
donor)) to which the provisions of section 7(5) do not apply as well as the R29 667 capital
gain (R89 000 – R59 333 (taxed in the hands of the donor)) to which the provisions of
paragraph 70 do not apply.
In circumstances where a natural person provides a loan to a trust and the parties are
connected persons, regard must also be given to the provisions of section 7C (refer to
16.10).

16.15.2.2 General rules (paragraph 80)

Just as section 25B is subject to the provisions of section 7, the general rules in para-
graph 80 regarding capital gains are also subject to the specific attribution rules as
contained in paragraphs 68 to 71 and paragraph 64E (excluding paragraph 70).

732
16.15 Chapter 16: Taxation of trusts

Although paragraph 70 (equivalent to section 7(5)) is excluded, the effect is not differ-
ent. The wording in the Eighth Schedule is only clearer and, where it had to be
determined by case law that section 7(1) was stronger than section 7(5), it is clear in
the Eighth Schedule that paragraph 70 (equivalent to section 7(5)) is not applicable
when vesting occurs in a South African resident (equivalent to section 7(1)).
The general rule is that the capital gain is brought into account for the purposes of
determining the total capital gain or total capital loss of the trust and not necessarily
the person in whose hands the profit finally ends up.
Exceptions to the rule are the attribution rules in paragraphs 68 to 71 (excluding
paragraph 70) as well as the following provisions:
• the capital gain determined with the vesting of an asset in a resident beneficiary is
brought into account in the hands of such beneficiary, unless the beneficiary is an
approved public benefit organisation, a tax-exempt entity as contemplated in
paragraph 62(a) to (e) or an employee in which a section 8C equity instrument is
vested (refer to chapter 14 for further details regarding section 8C). This is the case
when the trust realised a capital gain (or would have realised a capital gain had
that trust been a resident), because a trust asset was transferred to a beneficiary
who is a resident (paragraph 80(1));
• when an asset is not transferred to a resident beneficiary, but the trust realises a
capital gain, for example by disposing of an asset to an independent third party,
such a capital gain, or an amount derived from that capital gain, is disregarded by
the trust and included in the hands of a resident beneficiary of that trust who has a
vested right to that amount or acquires a vested right to such an amount
(paragraph 80(2)). However, if the beneficiary is an approved public benefit
organisation or a tax-exempt entity contemplated in paragraph 62(a) to (e), the
capital gain is taxed in the hands of the trust.
• in some instances, an amount that that is derived by a resident beneficiary, other
than an approved public benefit organisation or a tax-exempt person contemplated
in paragraph 62(a) to (e), through vesting from a non-resident trust must be taken
into account by that beneficiary as a capital gain in determining the aggregate
capital gain or loss for the year of assessment. This is the case if that amount was
derived directly or indirectly from that non-resident trust or another non-resident
trust in respect of the disposal of an asset during the same year of assessment,
provided that the amount would have constituted a capital gain had the trust that
disposed of the asset been a resident (paragraph 80(2A)).
When the trust realises a capital gain and does not distribute it, and no beneficiary
who is a South African resident has a vested right thereto, it is taxable either in the
hands of the donor in terms of paragraph 70 or in the hands of the trust.
There are no attribution rules with regard to capital losses in a trust and only the trust
can bring such losses into account.

733
A Student’s Approach to Taxation in South Africa 16.15–16.17

REMEMBER

• When a testamentary trust distributes income to a beneficiary, the income is taxable in

the hands of the beneficiary. When a testamentary trust distributes a capital gain to a
beneficiary, the beneficiary must be a resident; otherwise the capital gain forms part of
the trust’s tax calculation.
• A primary residence held in a trust, excluding a special trust, does not qualify for the
primary residence exclusion, irrespective of whether the profit is taxable in the hands of
the trust or a beneficiary who is a natural person.

16.16 Summary
In this chapter, a detailed explanation is given of the tax principles of trusts. The
income from a trust is usually taxed in the hands of the person receiving the income,
unless sections 25B and 7 deem it to be taxable in the hands of another person.
The general rule is that the capital gain is brought into account for the purposes of
determining the total capital gain or total capital loss of the trust. Exceptions to the
rule are the attribution rules in paragraphs 68 to 72 as well as when an asset or capital
gain vests in or is distributed to a beneficiary who is a resident.
It is clear that the taxation of trusts is complicated and a taxpayer’s tax risk is very
high if trusts are used without tax experts being consulted.
The next section contains a number of practical questions that the student may use to
test his or knowledge of the taxation of trusts.

16.17 Examination preparation

Question 16.1
The Nightingale Trust is a non-resident discretionary trust with a February year end. The
trust was established in die United States in 2014 by way of a donation of $100 by a non-
resident who has since passed away. The trust has two beneficiaries, namely Mr X (a South
African resident) and Mr Y (a non-resident). Neither of the beneficiaries have a vested
right to any of the income or capital of the foreign trust.
On 1 March 2022, Mr X granted an interest-free loan (denominated in US dollar) to the
foreign trust. The trust used the entire loan to finance the purchase of a block of flats situated
in the United States.
During the 2023 year of assessment, the trust received rental income from the letting of this
block of flats (assume such rental income is from a source outside the Republic). The trust
had no other receipts or accruals for 2023. The trust distributed 50% of the rental income
earned during 2023 to Mr Y, while retaining the other 50% of the rental income in the
foreign trust.

734
16.17 Chapter 16: Taxation of trusts

You are required to:

Explain the South African tax consequences of the above for the 2023 year of
assessment for the Nightingale Trust, Mr X and Mr Y. Ignore transfer pricing as well as
the provisions of any double taxation agreement (DTA) for purposes of this question.

Answer 16.1
Mr X
• Section 7(8) of the Act applies to attribute the rental income received by or accrued to
the Nightingale Trust from the letting of the block of flats to Mr X to the extent that such
income is attributable to a donation, settlement or other disposition (such as the
interest-free loan) provided by Mr X to the trust.
• The rental income attributable to Mr X in terms of section 7(8) is limited to the amount
of gratuitousness (refer to the Woulidge case). In the case of an interest-free loan, the
amount of gratuitousness would be the shortfall in the market-related interest not
charged on the loan.
• If the rental income earned by the Nightingale Trust during the year exceeds the
maximum amount attributable to Mr X, it must be considered whether such an excess is
taxable in the hands of a beneficiary who obtained a vested right to such income
(through a distribution made by the trustees) or in the trust itself (where the rental
income is retained in the trust).
• Section 7C applies further to trigger a deemed donation in the hands of Mr X since he is
a natural person who provided an interest-free loan to a trust in relation to which he is a
connected person (being a beneficiary of that trust). Provided that none of the
exclusions listed in section 7C(5) applies, the shortfall in interest between the ‘official
rate of interest’ and the interest actually charged (being nil) would be deemed to be a
donation made by Mr X to the trust. Since the loan to the trust is denominated in US
dollar, the official rate of interest is the US equivalent of the South African repurchase
rate plus 1%.
• The donation is deemed to take place on 28 February 2023 (being the last day of the year
of assessment of the trust). As a natural person, Mr X is eligible for an annual donations
tax exemption of R100 000, which can be utilised against this donation. The excess is
subject to donations tax, which is levied at a rate of 20% on the first R30 million of the
value of the deemed donation, whereas the value above R30 million is subject to
donations tax at 25%. Mr X must settle the donations tax by 31 March 2023.
Mr Y
• Mr Y is not subject to South African income tax on rental income that accrued to him
through the distribution made by the Nightingale Trust. As a non-resident, Mr Y is only
subject to South African income tax in respect of receipts and accruals from a South
African source and the rental income is not from a South African source. Consequently,
any portion of the rental income that is not attributable to Mr X under section 7 (in
consequence of exceeding the amount of gratuitousness) is not subject to tax in the
hands of Mr Y.
The Nightingale Trust
As a non-resident, the trust is only subject to South African income tax on receipts and
accruals from a South African source. The rental income retained in the trust is therefore not
subject to South African income tax in the hands of the trust as it is not from a South African
source. In a similar vein, any portion of the rental income that is not attributable to Mr X
under section 7 is not taxed in the hands of the foreign trust.

Additional questions for this chapter are available electronically

www.myacademic.co.za/books

735
 11
17 Donations tax

Income Donations Estate Value- Turnover

tax tax duty added tax tax

Page
17.1 Introduction ....................................................................................................... 738
17.2 Levying of donations tax (sections 54 and 58) .............................................. 739
17.3 Rate at which tax is levied (section 64)........................................................... 740
17.4 Persons liable for payment (sections 55 and 59) ........................................... 740
17.4.1 Property deemed to be donated by another person ..................... 740
17.4.1.1 Spouses married in community of property
(section 57A) ................................................................... 740
17.4.1.2 Donation by companies or other entities on the
instruction of another (section 57) ............................... 740
17.4.2 Recoupment of donations tax paid (section 59) ............................ 741
17.5 Period in which payment must occur (section 60) ....................................... 741
17.6 Calculation of donations tax ............................................................................ 741
17.7 Specific exemptions (section 56)...................................................................... 743
17.8 General exemptions (section 56(2))................................................................. 746
17.9 Value: Property other than limited interests (section 62) ............................ 748
17.10 Value: Limited interests (section 62) .............................................................. 749
17.10.1 Fiduciary right and usufruct ......................................................... 749
17.10.2 Annuities .......................................................................................... 751
17.10.3 Bare dominium .................................................................................. 752
17.11 Summary ............................................................................................................ 754
17.12 Examination preparation ................................................................................. 755

737
A Student’s Approach to Taxation in South Africa 17.1

17.1 Introduction
When a donation is made, the amount donated may in certain circumstance be de-
ducted when calculating taxable income. This deduction is regulated by section 18A
of the Income Tax Act 58 of 1962 (the Act) (refer to chapter 5), which provides for the
deduction of donations to certain public benefit organisations. This deduction must
not in any manner be confused with the concept of ‘donations tax’.
Donations tax is a separate tax and bears no relation to the normal tax calculation or
the deduction of certain donations to benefit organisations. Donations tax is also
regulated by the Act and is contained in Part V of the Act from sections 54 to 64. It is,
therefore, important that the transactions that are subject to donations tax be identi-
fied, and that a separate calculation be performed for them. Donations tax is only
applicable to residents of the Republic.
Donations tax is a form of capital transfer tax. It is not a tax that is levied on income,
but on the transfer of capital (assets/property). In South Africa, we have two forms of
capital transfer tax, namely donations tax and estate duty. When a person dies, estate
duty is payable on the net value of the property in that person’s estate. Persons
would therefore be able to prevent an estate duty liability accruing if they donated all
their property to someone else before the date of their death. The purpose of dona-
tions tax is to prevent this avoidance practice. For example, should an individual
know that they are to die the following day and they donate some of their assets
before their death, donations tax would be payable on it. Both donations tax and
estate duty are levied at the same rate.

Tax statistics
During the 2021 fiscal year R602 million was collected as donations tax.

Critical questions

When a person deals with donations tax, the person is usually confronted with the follow-
ing questions:
• Which transactions attract donations tax?
• At which rate is donations tax calculated?
• Are there certain transactions that are deemed to be donations?
• Which specific donations are exempt from donations tax?
• Is there a general exemption applicable to all persons?
• Who is responsible for the payment of donations tax?
• When is the donations tax payable?

738
17.2–17.3 Chapter 17: Donations tax

17.2 Levying of donations tax (sections 54 and 58)

Donations tax is payable on:
• the value of property disposed of (refer to 17.9 and 17.10)
• in terms of a donation
• by a resident (refer to chapter 3).
It is payable irrespective of whether the disposal occurs directly, indirectly or in
terms of a trust.
For these purposes, a ‘donation’ is described as a gratuitous disposal of property, and
also a gratuitous waiver or renunciation of a right. ‘Property’ includes any right to
property, whether movable or immovable, corporeal or incorporeal, wherever it may
be located. The following are examples of property that could activate the provisions
of donations tax if donated to someone else:
• motor vehicle;
• holiday home in Namibia;
• furniture and household effects;
• cash investment; and
• shares in listed and unlisted companies.
Although the definition refers specifically to gratuitous disposal, section 58(1) stip-
ulates that if property is disposed of at a consideration that in the opinion of the
Commissioner is inadequate, it may also be deemed that the property was donated.
Note that if a property is disposed of at less than fair market value, it does not neces-
sarily represent inadequate consideration, as implied in section 58(1). When a transac-
tion between unrelated persons takes place, the price between an informed buyer and
informed seller should be a fair consideration, even though it is lower than the cur-
rent market value. The application of section 58(1) must usually be examined when
transactions take place between connected persons.

REMEMBER

• Residents include both companies and natural persons.

• Non-residents do not pay donations tax, irrespective of the location of the assets that
they are donating.
• No donation has occurred if services are rendered to someone free of charge, because
no transfer of property takes place.
• For donations tax purposes, the granting of an interest-free loan can be deemed to be a
donation and activate the provisions of section 7 (refer to A Student’s Approach to Income
Tax/Business Activities chapter 11).

17.3 Rate at which tax is levied (section 64)

Donations tax is levied on the value of a donation at a rate of 20% for donations up to
R30 million and 25% of the value of property donated for more than that (refer to 17.9
and 17.10). Note that donations are now accumulated from 1 March 2018 to be able to
determine when the taxpayer reaches a donated amount of R30 million.

739
A Student’s Approach to Taxation in South Africa 17.4

17.4 Persons liable for payment (sections 55 and 59)

Section 55 defines the ‘beneficiary’ in terms of a donation (therefore, the person
receiving the donation) as the donee. Where property is disposed of in terms of a
donation to a trustee for their administration on behalf of a beneficiary, the trustee is
the donee of the donation.
The resident making the donation, directly or indirectly, is called the donor.
The donor is liable for the payment of the donations tax. If the donor omits to pay this
tax within the prescribed period, the donor and the donee are jointly and severally
liable for the donations tax.
The Commissioner may assess the donor, the donee or both for the donations tax
payable, or for any difference between the amount payable and the amount that was
actually paid. Payment by any one of the parties must discharge the joint obligation.

17.4.1 Property deemed to be donated by another person

17.4.1.1 Spouses married in community of property (section 57A)
If a spouse, married in community of property, disposes of property in terms of a
donation, and:
• the property forms part of the joint estate of the spouses, it is deemed that the
donation was made in equal share by each of the spouses;
• the property does not form part of the joint estate, it is deemed that the donation
was made by the spouse who made the donation.

Legislation:
Section 1: Interpretation
‘spouse’, in relation to any person, means a person who is the partner of such person—
(a) in a marriage or customary union recognised in terms of the laws of the Republic;
(b) in a union recognised as a marriage in accordance with the tenets of any religion; or
(c) in a same-sex or heterosexual union which the Commissioner is satisfied is intended
to be permanent,
and ‘married’, ‘husband’ or ‘wife’ shall be construed accordingly: Provided that a mar-
riage or union contemplated in paragraph (b) or (c) shall, in the absence of proof to the
contrary, be deemed to be a marriage or union without community of property;

17.4.1.2 Donation by companies or other entities on the instruction of

another (section 57)
If someone instructs a company to donate property, it is deemed that the person who
gives the instruction has donated the property. Thus the donor is the person who
instructs that the donation be made, even if they themselves do not actually make the
donation.

740
17.4–17.6 Chapter 17: Donations tax

REMEMBER

• The person who gives the instruction to donate must be a resident although the entity
does not have to be a resident. Donations tax is only levied on South African residents.

17.4.2 Recoupment of donations tax paid (section 59)

A donee who is a trustee may, irrespective of other stipulations in the trust deed
concerned, recoup any donations tax paid or payable by them from the assets of the
trust in their capacity as trustees.

17.5 Period in which payment must occur (section 60)

Donations tax is paid to the Commissioner at the end of the month following the
month in which the donation occurred (or a longer period that the Commissioner may
permit).
A donation is deemed to have been made on the date upon which all the legal
requirements for a valid donation have been met. A verbal donation comes into effect
on the date of delivery of the property and a written donation on the date of the
contract.
The payment must be accompanied by a return in the form prescribed by the Com-
missioner.

REMEMBER

• Donations tax is payable per donation. It is not calculated for a year of assessment or tax
period.

17.6 Calculation of donations tax

The calculation of donations tax

Step 1: Determine whether the disposal was made by a resident.

Yes: Go to Step 2.
No: No donations tax.

Step 2: Determine whether the disposal taking place represents a donation

(refer to 17.2). Do this by ascertaining whether it was a gratuitous dis-
posal, or if not gratuitous, whether the disposal may possibly have
taken place at less than fair market value. If there was a donation or
deemed donation, go to Step 3.

continued

741
A Student’s Approach to Taxation in South Africa 17.6

Step 3: Determine whether the donation is specifically exempt (refer to 17.7).

Yes: Identify the specific exemption.
No: Go to Step 4.

Step 4: Determine the value of the donation (refer to 17.9 and 17.10). Reduce
the value with any consideration paid.

Step 5: Reduce the value by the balance of the general exemption applicable to
the person (refer to 17.8).

Step 6: Adjust the balance of the general exemption still available for the year
of assessment. The answer may not be negative and is limited to nil. If
the beginning of a new year of assessment commences, the full general
exemption applies again.

Step 7: Multiply the answer in Step 5 by the donations tax rate (20%/25%).

Example 17.1
Silo Zilkaatz is a resident of the Republic and owns all the shares in ABC (Pty) Ltd. The
issued share capital of ABC (Pty) Ltd consists of ten shares of R1 each. ABC (Pty) Ltd
owns a fixed property with a market value of R1 000 000 as well as a positive bank bal-
ance of R10. The market value of the company is R1 000 010. It was decided that the com-
pany would issue an additional ten ordinary shares of R1 each to Silo’s son, Tobia. Tobia
received the shares and paid R10 for them. No other disposals, either by Silo or ABC (Pty)
Ltd, were made during that year of assessment.
You are required to discuss and calculate the donations tax effects of the above transac-
tions.

Solution 17.1
Although the disposal was made by ABC (Pty) Ltd, it is deemed as having been made by
Silo Zilkaats. Silo is the sole shareholder and therefore controls the company. Any deci-
sion of the company is actually made by Silo, and the disposition was made on Silo’s
instruction. Silo is therefore the donor and he is a resident of the Republic.
A disposal of property has definitely taken place, but whether it is a donation still has
to be determined. The nominal value of the shares issued to Tobia is R10 and he paid
R10. It was thus not a gratuitous disposition. Silo and Tobia are connected persons and the
application of section 58(1) must be examined.
R
The market value of the company before the disposal 1 000 010
The cash paid for the additional shares 10
The total market value of the company 1 000 020

continued

742
17.6–17.7 Chapter 17: Donations tax

R
Tobia received 50% of the shares (R1 000 020 × 50%)
(20 shares in total, of which he received ten) 500 010
Thus, there was a donation because less was paid than what is considered
as adequate consideration.
No specific exemption is available.
The value of the donation is the value of the disposal less the consideration paid
(R500 010 – R10) = R500 000
The full general exemption is still available (refer to 17.8). Therefore, R500 000 – R100 000 =
R400 000. (As section 57 is applicable – property is deemed to be donated by Silo and
therefore he is liable for donations tax, the R100 000 exemption for natural persons
applies.)
Hereafter, Rnil available for the rest of the year of assessment.
Donations tax payable of R80 000 (R400 000 × 20%).

In this example, how can there be a donation if he paid for the shares?

17.7 Specific exemptions (section 56)

Certain donations made by a resident are specifically exempt from the payment of
donations tax, including:
• Donations to or for the benefit of the donor’s spouse in terms of:
– a duly registered antenuptial or postnuptial contract (section 56(1)(a)); or
– a notary contract negotiated in terms of the Matrimonial Property Act 88 of 1984.
The words ‘for the benefit of’ have the effect that this exemption should also apply
if the donation is made to a trust where the spouse is the only beneficiary or the
beneficiary with a vested right to the donation.
• Donations to or for the benefit of the donor’s spouse who is not separated from
them in terms of a judicial order or notary deed of separation (section 56(1)(b)).
The exemption should also apply to a donation to a trust, where the spouse is the
only beneficiary or has a vested right to the donation.
• A donation in contemplation of death (donatio mortis causa) (section 56(1)(c)).

Example 17.2
Suppose Margaret Mtombe must undergo a life-threatening operation. She promises her
eldest daughter that she may have her wedding ring should she die during this operation.
If Margaret survives the operation, she will retain her wedding ring and no donations tax
is payable. The donation is a donatio mortis causa and therefore exempt. If Margaret should
die during the operation, there is still no donations tax payable, but the wedding ring will
then form part of the property that is included for estate duty purposes (refer to 12.4.3).

743
A Student’s Approach to Taxation in South Africa 17.7

• Donations from which the donee receives no benefit before the death of the donor
(section 56(1)(d)).
This donation does not occur specifically with death in mind, but takes place if
Margaret Mtombe should tell her daughter that she could have her wedding ring
the day she died – whenever that may be.

REMEMBER

• A donation to a trust where the beneficiaries only benefit from the donation upon the death
of the donor, does not qualify for this exemption.

• A donation that is cancelled within six months of the date upon which it took effect
(section 56(1)(e)).
• Any donation made by or to a traditional council, community or a tribe referred to
in section (10)(1)(t)(vii) (section 56(1)(f)).
• Donations that consist of a right to property located outside the Republic, if the
donor obtained the property:
– before the donor became a resident of the Republic for the first time; or
– by bequest/inheritance from someone who was not ordinarily resident in the
Republic at the date of their death; or
– by a donation from a person (excluding a company) who was not ordinarily
resident in the Republic on the date of the donation; or
– from funds obtained from the sale of the property in the three points referred to
above, or if the donor sold such property and replaced it with other properties
(that were also located outside the Republic and were financed from the pro-
ceeds on the sale of the foreign property) (section 56(1)(g)).
• Donations made by or to a person referred to in the following sections (exempt
organisations) (section 56(1)(h)):
– section 10(1)(a): any sphere of the Government;
– section 10(1)(cA): institutions, boards or bodies conducting scientific, technical or
industrial research, or providing necessary or useful services to
the State or general public, or promoting commerce, industry
or agriculture;
– section 10(1)(cE): a political party;
– section 10(1)(cN): public benefit organisations approved by the Commissioner in
terms of section 30(3);
– section 10(1)(cO): recreational clubs approved by the Commissioner in terms of
section 30A;
– section 10(1)(cQ): small business funding entity;
– section 10(1)(d): funds, including pension funds, provident funds, retirement
annuity funds and benefit funds; or
– section 10(1)(e): share block companies or body corporates.

744
17.7 Chapter 17: Donations tax

• Voluntary awards:
– which must be included in the gross income of the recipient or donee in terms
of one of the following paragraphs of the definition of gross income in section 1:
* paragraph (c): certain amounts derived for services rendered;
* paragraph (d): certain amounts derived on, among others, the termination of
services; or
* paragraph (i): taxable fringe benefits.
– the gain in respect of which must be included in the income of the donee in
terms of:
* section 8A: gains made by directors of companies or employees in respect of
rights to acquire marketable securities;
* section 8B: taxation of amounts derived from broad-based employee share
plans; or
* section 8C: taxation of directors and employees on the vesting of equity
instruments (section 56(1)(k)).
– from 1 March 2022 any work done and paid for by a capital asset given to
someone appointed by the employee doing the work, will be subject to dona-
tions tax.
• Donations made in terms of and in pursuance of a trust. These are donations made
by the trust to a beneficiary and not donations made to the trust. Donations to a
trust still remain subject to donations tax (section 56(1)(l)).
• Donations that consist of a right (excluding a fiduciary right, usufruct or similar
right) to the use or occupation of property used for farming purposes without consid-
eration or for inadequate consideration should the donee be a child of the donor
(section 56(1)(m)).
• Donations by a company recognised as a public company in terms of section 38
(section 56(1)(n)).
• Donations, should the property consist of the full ownership in immovable goods, if:
– that immovable property was obtained by a donee that was entitled to a grant
or service in terms of the Land Reform Programme; and
– the Minister of Land Affairs (or a person designated by them) approved the
specific project in terms of which the immovable property was obtained, in
terms of the terms and conditions prescribed by that Minister, in consultation
with the Commissioner;
– or the immovable property was acquired by a person in terms of land reform
initiatives of the National Development Plan (section 56(1)(o)).
• A donation by a company to another company (that is to say a resident), if both
companies are members of the same group of companies (section 56(1)(r)).
• So much of a bona fide contribution that the donor contributes to the maintenance
of someone as the Commissioner considers reasonable (section 56(2)(c)). (This
donor does not only have to be a natural person.)

745
A Student’s Approach to Taxation in South Africa 17.7–17.8

REMEMBER

• It is important that these exemptions are not confused with the qualifying donations in
section 18A. These exemptions are the donations on which no donations tax is payable,
while the section 18A type of donations determine which are deductible for income tax
purposes.
Although some donations that are deductible in terms of section 18A are also exempt
from donations tax, all donations that are exempt from payment of donations tax are
not necessarily deductible for income tax purposes.

17.8 General exemptions (section 56(2))

Section 56(2) provides further that certain amounts be exempt from payment of dona-
tions tax. These amounts are as follows:
• Natural persons: The sum of the value of all property donated by a natural per-
son, provided that the donation does not exceed R100 000 in a year of assessment
(this amount is not decreased or increased pro rata).
This exemption applies to all donations made by the natural person, irrespective of
the extent thereof. Should the natural person therefore donate R70 000, the full
R70 000 will be exempt if the R100 000 exemption had not been used in the year of
assessment.
The R100 000 exemption applies to each spouse and therefore a couple married in
community of property may donate R200 000, exempt from donations tax, from the
joint estate (section 56(2)(b)).
• Persons other than natural persons: The sum of the value of incidental donations
that a donor (excluding a natural person) makes that does not exceed R10 000 dur-
ing a year of assessment. If the year of assessment is longer or shorter than
12 months, the amount of R10 000 is increased or decreased pro rata.
The first R10 000 of incidental donations is exempt. Should a large donation of,
say, R60 000 be made, it might not be considered an incidental donation and the
R10 000 exemption might not apply.
Persons other than natural persons include companies, close corporations and trusts
(section 56(2)(a)).
The above exemptions are usually applied to the donations in the sequence in which
the donations take place. If a donor has made more than one donation on the same date,
it is deemed for the purposes of donations tax that the donations were made:
• in the sequence that the donor prefers; or
• in the sequence that the Commissioner determines should the donor fail to make a
choice within 14 days after they have been informed by the Commissioner to do so.

746
17.8 Chapter 17: Donations tax

Example 17.3
Margaret Madela made the following donations during the current year of assessment:
3 March – R23 000 to her brother
15 July – R75 000 to her granddaughter on her 21st birthday
5 January – R8 000 to her brother
31 January – R5 000 to her 19-year-old son to assist him with his study fees
You are required to calculate the donations tax liability of Margaret Madela for each of
the above donations.

Solution 17.3
3 March
The donation is for R23 000. No specific exemption is applicable. Margaret is a natural per-
son and may therefore apply the R100 000 annual general exemption to this donation. This
R23 000 donation is therefore exempt and the balance of the annual general exemption that
can still be used in the future is R77 000 (R100 000 – R23 000).
15 July
The donation is for R75 000. No specific exemption is available. The full R75 000 is exempt
because the balance of the annual general exemption can be used. The remaining balance
of the annual general exemption after this donation is R2 000 (R77 000 – R75 000).
5 January
The donation is for R8 000. No specific exemption is available. R2 000 is exempt because
the balance of the annual general exemption can be used. The remaining balance of the
donation attracts donations tax of R1 200 (20% × (R8 000 – R2 000)).
31 January
The donation is R5 000. This is for the bona fide maintenance of her son and therefore qual-
ifies for a specific exemption and the full amount is exempt from donations tax.

Why did they not deduct the R100 000 general deductions from the
donation in January – the 1st of January is a new year?

REMEMBER

• Donations tax is calculated per donation and paid over to SARS. There is no annual
calculation for the year of assessment.
• The general exemption however is linked to a year of assessment. If the full exemption
is not used in the year of assessment, it falls away and no portion thereof can be carried
forward to the following year.

747
A Student’s Approach to Taxation in South Africa 17.9

17.9 Value: Property other than limited interests (section 62)

The value of property for the purposes of donations tax is the fair market value of the
property at the date upon which the donation takes effect.
Should the value of the property decrease due to conditions that, in the opinion of the
Commissioner, were laid down by or on instruction of the donor, the value of the
property is determined as if the conditions were not laid down.
Should the Commissioner be of the opinion that the amount indicated in a return as
the fair market value is less than the fair market value of the property, they may
determine the fair market value. When determining the fair market value of the
property, the Commissioner must take the following factors into consideration:
• the municipal or divisional council valuation of such property;
• a sworn valuation of the property supplied by or on behalf of the donor or donee;
and
• a valuation made by a competent and independent person appointed by the
Commissioner.
The fair market value of immovable property on which a bona fide farming operation
is being conducted in the Republic is determined by reducing the market value (that
is to say the price that could be obtained on the sale of the property between a willing
buyer and seller, dealing at arm’s length in an open market) by 30%.
This reduced market value may also be used in the calculation of the value of shares
in a company that owns immovable property on which a bona fide farming operation
is conducted in the Republic. It only applies if the shares are not listed on a stock
exchange.

REMEMBER

• When an amount represents a donation because, according to the opinion of the Commis-
sioner, it was not disposed of at a fair market value, the value of the donation must be
reduced by the amount of the consideration paid.

Section 58(2) provides for a possible deemed donation where section 8C (taxation of
directors and employees on vesting of equity instruments) is applicable. The main
purpose of section 8C is to defer the taxation of restricted equity instruments until a
later date so that the full level of gain on the instrument is properly taxed at ordinary
rates. Hence, taxpayers in these circumstances have a strong incentive to artificially
trigger ordinary rates of tax at an early date before the appreciation of the equity
instrument is fully realised. One potential way of avoiding section 8C is to sell re-
stricted equity instruments at an early date either in a non-arm’s length transaction or
to connected persons (section 8C(5)). Section 58(2) counteracts these avoidance schemes
by deeming the restricted instrument to be donated at the time that it is deemed to
vest for purposes of section 8C. The value for donations tax is the fair market value of
that instrument at that time, reduced with an amount of consideration in respect of
that transaction.

748
17.10 Chapter 17: Donations tax

17.10 Value: Limited interests (section 62)

17.10.1 Fiduciary right and usufruct

Fiduciary right
This legal institution refers to the state of affairs where goods may first be transferred
to one person, the fiduciarius, subject to a condition of transferring it at a specified
later point in time or at the fulfilling of a specific condition to another, the fideicommis-
sarius. Although this legal institution may take place between the living, it occurs
particularly in wills. The idea is that property is left sequentially to a series of inheritors.
The testator stipulates in their will, for example, that they bequeath their farm,
Randjiesfontein, to their son, José, subject to the condition that, after their death, the
farm must go to José’s son Mario, which means that:
• Mario has no rights to the property while his father, José, is still alive;
• José has the full usufruct of the property, but may not sell it; and
• should Mario die before his father the full ownership belongs to José.
The process may go even further and the testator may stipulate that at Mario’s death,
the farm must go to Mario’s eldest son. Mario’s son is the second fideicommissarius
and he may then claim the full ownership. As regards immovable goods, the legal
institution is limited to two sets of fideicommissarii.

Usufruct
A usufruct is created when a beneficiary becomes the rightful owner of the benefits
of the fruit, income or usufruct of a concern, but acquires no claim to the right of
ownership as such. For example, Abel bequeaths his farm to his son, Benso, subject to
a usufruct in favour of Abel’s wife, Violet. At Abel’s death, the farm is transferred to
Benso and the title deed states that Violet has a usufruct on the farm. Violet is known
as the usufructuary and Benso the bare dominium holder.
A usufruct is attached to the person of the usufructuary and cannot be transferred to
someone else. The usufructuary may transfer their right to enjoyment of the matter to
someone else, but that does not mean that this person becomes the new usufructuary.
At the death of the usufructuary, the usufruct automatically expires. Therefore,
should Violet have a usufruct on a farm, and she gives Xander the enjoyment thereof,
Xander cannot obtain any further benefits after Violet’s death, since Violet’s right
expires on the date of her death.
At the expiry of the usufruct, the owner’s bare dominium grows to full ownership and
they become the owner of the concern, free of the usufruct by someone else.
At the death of the owner of the bare dominium, the matter is disposed of in the estate
of the owner of the bare dominium and it does not automatically fall to the usufructu-
ary. (It therefore differs from the fiduciary right in this respect.)

749
A Student’s Approach to Taxation in South Africa 17.10

Calculating the value of a fiduciary right or usufruct

Step 1: Calculate the fair market value of the property subject to the limited
interest.

Step 2: Calculate the annual value of the right by multiplying the fair market
value by 12%.

Step 3: Determine the life expectancy of the donor (the life expectancy is
obtained from the life expectancy Table A (refer to Appendix C).
The next birthday and gender of the donor are used to read the life
expectancy from the table.

Step 4: Determine the life expectancy of the donee (usufructuary/fiduciarius)

or if the right is held for a shorter period, such shorter period.

Step 5: Determine the shortest period of the answers in Step 3 or Step 4.

Obtain the applicable discount rate for this period per Table A or if the
shortest period is a fixed period, use Table B (refer to Appendix D).

Step 6: Multiply the answer in Step 2 by the answer in Step 5 to obtain the
value for donations tax purposes.

REMEMBER

• Should the property consist of books, paintings, statues and other objects of art, the
annual value (amount in Step 2) is the average net receipts during the three preceding
years of assessment of the person who was entitled to the right of enjoyment thereof
(before the donation became effective).

Example 17.4
On 30 June of the current year of assessment, Mr Johan Olufsen donated the usufruct of a
block of flats that he owned to his father, Kristen Olufsen. The fair market value of the
block of flats on this date was R1 000 000. Mr Kristen Olufsen is currently 60 years old
and Mr Johan Olufsen 34 years old.
You are required to calculate the value of the usufruct for donations tax purposes.

750
17.10 Chapter 17: Donations tax

Solution 17.4
R
Value of the full ownership of the property 1 000 000
Annual value (R1 000 000 × 12%) 120 000
Johan’s (donor) life expectancy is 33,94 years. This is based on his age on his
next birthday (35) and obtained from Table A in Appendix C. The expectancy
in the male column is used.
Kristen’s (donee) life expectancy is 14,01 years. On his next birthday he will
be 61 years old, obtained from the male column.
The shorter period of donor’s life expectancy and donee’s life expectancy is
obviously 14,01 years. The applicable discounting factor per Table A is 6,63010.
Value for donations tax purposes (R120 000 × 6,63010) 795 612

1. Must the value of the property always be multiplied by 12%?

2. Can’t I just use the donor’s life expectancy? Isn’t that always the
shortest?

17.10.2 Annuities
There is no definition for an annuity, but in ITC 761 10 SATC 103 it was determined
that the following elements need to be present before there can be an annuity:
• it must be an annual payment;
• the payment must be repetitive in nature; and
• someone must have the obligation of making the payment.

Calculating the value of an annuity

Step 1: Calculate the annual value of the annuity. (Amounts that are payable
monthly must be multiplied by 12 and amounts that are payable six-
monthly (bi-annually) must be multiplied by two to obtain the annual
value. An amount that is payable annually is not adjusted and is used
just like that as the annual value.)

Step 2: Determine the life expectancy of the donor (the life expectancy is
obtained from the life expectancy table (Table A) (refer to Appendix
C). The next birthday and gender of the donor are used to read from
the table.

Step 3: Determine the life expectancy of the donee or if the annuity is obtained
for a fixed shorter period, such shorter period.

continued

751
A Student’s Approach to Taxation in South Africa 17.10

Step 4: Determine the shortest period of the answers in Step 2 or Step 3.

Obtain the applicable discounting rate for this period per Table A or if
the shortest period is a fixed period, use Table B.

Step 5: Multiply the answer of Step 1 by the answer of Step 4 to calculate the
value for donations tax purposes.

Example 17.5
On 1 May of the current year of assessment, Mr James Barker donated a life annuity of
R10 000 (per annum) to Craig Barker, a cousin of James Barker. James Barker is 39 years
old and Craig Barker is 21 years old.
You are required to calculate the value of the usufruct for donations tax purposes.

Solution 17.5
Annuity per annum R10 000
Life expectancy of James Barker (donor); next birthday 40 29,54 years
Life expectancy of Craig Barker (donee); next birthday 22 45,65 years
The shortest period is 29,54 years and the applicable discounting rate
is 8,04030.
Value of annuity for donations tax purposes (R10 000 × 8,04030) R80 403

17.10.3 Bare dominium

The person who owns property that is subject to the usufruct by a third person is the
holder of the bare dominium. This is a basic right of ownership without any other
rights. The owner of the bare dominium may, however, deal with it as they choose:
they may sell it, donate it or bequeath it to whomever they choose in their estate.

Calculating the value of a bare dominium

Step 1: Calculate the fair market value of the property that is subject to the
limited interest.

Step 2: Calculate the annual value of the right by multiplying the fair market
value by 12%.

continued

752
17.10 Chapter 17: Donations tax

Step 3: Determine the life expectancy of the usufructuary or if the right is held
for a shorter period, such period. Select the shortest period. (The life
expectancy of the donor is thus irrelevant for the purpose of this calcu-
lation.)

Step 4: Obtain the applicable discounting rate for the period in Step 3 per
Table A or if it is a fixed period, use Table B.

Step 5: Multiply the answer of Step 2 by the answer in Step 4.

Step 6: Reduce the fair market value (Step 1) by the answer as per Step 5 to
calculate the value of the bare dominium for donations tax purposes
(Step 1 minus Step 5).

Example 17.6
On 1 June of the current year of assessment, Mr Zückerman donated the usufruct of an
office building to his son, Abraham. On the same date, he donated the bare dominium to
his brother, Solomon. The fair market value of the property on that date amounted to
R3 000 000. The ages of these persons on the date of the donation are as follows:
Mr Zückerman: 49
Abraham: 18
Solomon: 57
You are required to calculate the value of both the usufruct and the bare dominium for
donations tax purposes.

Solution 17.6
Usufruct R
Fair market value 3 000 000
Annual value (R3 000 000 × 12%) 360 000
Life expectancy of Mr Zückerman (donor) is 21,47; next birthday 50
Life expectancy of Abraham (usufructuary) is 48.31; next birthday 19
21,47 is the shorter period. Applicable discounting rate is 7,60201
Value of usufruct for donations tax purposes (R360 000 × 7,60201) 2 736 724
Bare dominium
Fair market value 3 000 000
Annual value (R3 000 000 × 12%) 360 000
Life expectancy of Abraham (usufructuary) is 48,31; next birthday 19
Discounting rate is 8,29841
Therefore, R360 000 × 8,29841 2 987 428
Value of the bare dominium for donations tax purposes
(R3 000 000 – R2 987 428) 12 572

continued

753
A Student’s Approach to Taxation in South Africa 17.10–17.11

Note
The total value of the donation of the usufruct and bare dominium on the property
amounts to R2 736 724 + R12 572 = R2 749 296. Donations tax may therefore be reduced if
the property is divided into a usufruct and bare dominium. However, there is a saving
only if the person who was given the usufruct is younger than the donor.

1. In the answer above there seems to be a calculation error as the two

amounts do not add up to the value of the property.
2. Why must I do two life expectancy calculations in this example?

REMEMBER

• Should the Commissioner be of the opinion that any of the properties in the calculation
of the limited interests cannot reasonably expect to produce an annual yield of 12%, the
annual yield is an amount determined by the Commissioner.
• Any discretionary decision of the Commissioner in terms of the sections that apply to
donations tax is subject to objection and appeal.
• Should the determination of the life expectancy of a person (excluding a natural person)
be made, it is taken over a period of 50 years (for example in the case of a trust or a
company).
• In the case of a natural person, the life expectancy is based on their age on their next
birthday (after the date on which the donation became effective).
• When the donee has paid any consideration for the obtaining of the limited right, this
consideration is deducted to determine the value on which the donations tax is payable.

17.11 Summary
In this chapter, a short summary of the principles of donations tax are given. A tax-
payer may donate property in an attempt to decrease their normal tax burden or to
reduce their estate that will eventually be subject to estate duty. Donations tax there-
fore limits the benefits that a taxpayer may obtain from these tax evasion practices.
Although the donations tax calculation is done separately, a donation may have
donations tax effects as well as other tax effects:
• Donations of property could result in capital gains tax. When an asset is donated, it
is deemed that the person disposed of the asset at market value for capital gains
tax purposes.
• Income resulting from amounts donated could activate the provisions of section 7
of the Act and the income may then be taxed in the donor’s hands, although they
did not receive the income themselves (sections 7(1) to 7(10)).
• Donations of assets on which wear and tear have been claimed may result in a
recoupment of the wear-and-tear allowances.
The next section contains a question that can be completed to evaluate your
knowledge on donations tax.

754
17.12 Chapter 17: Donations tax

17.12 Examination preparation

Question 17.1
Gere Richard was born in England and is currently 50 years of age. He has been a resident
in the Republic for the past 11 years.
Gere Richard made the following donations during the current year of assessment (ending
28 February 2023):
1. On 1 April he donated his house with 15 bedrooms, situated in England, to Peter
Prince, who was 40 years old. Gere Richard purchased this house 16 years ago at a cost
of R500 000. The market value at the date of the donation amounted to R900 000.
2. On 30 June, he sold his total rights in a recording of ‘Women are Pretty’ to a local
record company, in which he also has an interest, for R3 500 000. The accountant
estimated the market value of these rights on the transaction date at R5 000 000. SARS
accepted the accountant’s valuation as reasonable.
3. On 1 August, he gave Roberts Julia his three Picasso paintings. The market value
amounted to R1 880 000. The paintings were valued at R700 000 ten years ago.
4. Three years ago he inherited his mother’s piano in terms of her will. His mother had
been a resident of England. On 1 September, when he donated the piano to Wonder
Stevie for his 45th birthday, the market value amounted to R390 000. The piano was
never brought to the Republic.
5. On 27 November, he donated R1 000 000 to the Government for purposes of the National
Development Programme (NDP).
6. On 30 January, he donated the usufruct of his Gauteng home to his friend, Fraizer
Brandon, who turned 39 on this date. The bare dominium was donated on the same date
to Nelson Leslie, currently 36 years old. The fair market value of the house amounted
to R4 800 000 on 30 January.
Gere Richard makes the following donation during the following year of assessment (end-
ing 28 February 20234:
7. On 7 March he donates the usufruct of his holiday home in Durban to Slater Christian
for a ten-year period. On 7 March the fair market value of the house amounted to
R1 250 000. Slater Christian is currently 33 years old. Gere Richard will turn 51 on
10 March.

755
A Student’s Approach to Taxation in South Africa 17.12

You are required to:

Calculate the donations tax payable by Gere Richard on each of the above donations.

Answer 17.1
Donations tax payable on each of the donations
Exempt Taxed Donations
Date Donee Amount
portion portion tax at 20%
R R R R
01/04 Peter Prince
(Note 1) 900 000 900 000 nil Nil
30/06 Record company
(Note 2) 1 500 000 100 000 1 400 000 280 000
01/08 Roberts Julia 1 880 000 nil 1 880 000 376 000
01/09 Wonder Stevie
(Note 3) 390 000 390 000 nil Nil
27/11 NDP
(Note 4) 1 000 000 1 000 000 nil Nil
30/01 Fraizer Brandon 4 341 387 nil 4 341 387 868 277
Nelson Leslie
(Note 5) 168 787 nil 168 787 33 757
07/03 Slater Christian
(Note 6) 847 530 100 000 747 530 149 506

Notes
1. Exempt in terms of section 56(1)(g)(i) – immovable property situated outside the
Republic, purchased before the donor became a resident of the Republic.
2. Market value less proceeds = R5 000 000 – R3 500 000 = R1 500 000.
Deemed donation in terms of section 58(1) – inadequate consideration received.
R100 000 is exempt in terms of section 56(2)(b).
3. Exempt in terms of section 56(1)(g)(ii) – donor acquired property by inheritance from a
non-resident at the date of the non-resident’s death. Property situated outside the
Republic.
4. Exempt in terms of section 56(1)(h) – donation to local government.

continued

756
17.12 Chapter 17: Donations tax

5. Usufruct
Annual value R4 800 000 × 12% = R576 000.
Gere Richard’s life expectancy (based on age of 51 on next birthday) is another
20,72 years.
Fraizer Brandon’s life expectancy (based on age of 40 on next birthday) is another
29,54 years.
Use the shorter life expectancy of 20,72, which has a present value factor of 7,53713.
Thus: R576 000 × 7,53713 = R4 341 387.
Bare dominium
Annual value R4 800 000 × 12% = R576 000
Life expectancy of usufructuary (Fraizer Brandon) is another 29,54 years, which has a
present value factor of 8,04030.
Thus: R576 000 × 8,04030 = R4 631 213.
R R
Bare dominium 168 787
Market value of house 4 800 000
Less: Usufruct value (4 631 213)
6. Usufruct holiday home
Annual value R1 250 000 × 12% = 150 000
Gere Richard’s life expectancy is another 20,72 years.
Slater Christian’s life expectancy (based on age of 34 on
next birthday) is another 34,84 years.
Since the period of ten years is shorter than Gere Rich-
ard’s and Slater Christian’s life expectancies, we use
ten years which has a present value factor of 5,6502
(refer to Appendix D).
Thus: R150 000 × 5,6502 = 847 530
The full R100 000 annual exemption is again available as this donation was made in the
next year of assessment.

Additional questions for this chapter are available electronically at

www.myacademic.co.za/books

757
 18 Estate duty

Income Donations Estate Value-

tax tax duty added tax

Page
18.1 Introduction ....................................................................................................... 761
18.2 Calculation of estate duty ................................................................................ 761
18.2.1 Ordinary residents ............................................................................ 761
18.2.2 Non-residents .................................................................................... 762
18.2.3 Systematic calculation of estate duty .............................................. 762
18.3 Property (Step 1) (section 3)............................................................................. 764
18.3.1 General definition of property (section 3(2)) ................................. 764
18.3.1.1 Valuation of property as per general definition
(section 5(1)) ..................................................................... 765
18.3.2 Limited interests and annuities included as property
(section 3(2)) ....................................................................................... 766
18.3.2.1 Valuation of limited interests (section 5(1)(b)) ............ 767
18.3.2.2 Valuation of annuities (section 5(1)(c) and (d)) ........... 771
18.4 Deemed property (Step 2) (section 3(3)) ........................................................ 774
18.4.1 Domestic insurance policies on the life of the deceased
(section 3(3)(a))................................................................................... 774
18.4.2 Any property donated under a donatio mortis causa or in
terms whereby the donee receives no benefit until the death
of the donor (section 3(3)(b)) ............................................................ 777
18.4.3 Claim against the spouse under section 3 of the Matrimonial
Property Act 88 of 1984 (section 3(3)(cA)) ...................................... 777
18.4.4 Property that the deceased was, immediately prior to
their death, competent to dispose of for their own benefit
or for the benefit of their estate (section 3(3)(d)) ........................... 779
18.4.5 Contributions to retirement funds (section 3(3)(e) ........................ 780
18.4.6 General ................................................................................................ 780

759
A Student’s Approach to Taxation in South Africa

Page
18.5 Deductions (Step 3) (section 4) ........................................................................ 780
18.5.1 Funeral and death-bed expenses (section 4(a)) ............................. 780
18.5.2 Debts due to persons ordinarily resident within the Republic
(section 4(b)) ....................................................................................... 781
18.5.3 All allowable costs in the administration and liquidation
of the estate (section 4(c)) ................................................................. 781
18.5.4 Sundry expenditure incurred in meeting the requirements
of the Master or the Commissioner of SARS (section 4(d)) .......... 781
18.5.5 Certain foreign assets and rights thereto (section 4(e)) ................ 781
18.5.6 Any debt due by the deceased to persons ordinarily resident
outside the Republic (section 4(f)) ................................................... 782
18.5.7 Deductions of certain limited interests (section 4(g)) ................... 782
18.5.8 Bequests to public benefit organisations (section 4(h)) ................ 783
18.5.9 Improvements made by the beneficiary (section 4(i)) .................. 783
18.5.10 Improvements made to property by a holder of a limited
interest (section 4(j)) .......................................................................... 784
18.5.11 Claim against the spouse under section 3 of the Matrimonial
Property Act 88 of 1984 (section 4(lA)) ........................................... 785
18.5.12 Limited interest and annuity charged against property
created by a predeceased spouse (section 4(m)) ............................ 785
18.5.13 Books, pictures, statuary and other objects of art
(section 4(o)) ....................................................................................... 786
18.5.14 Deemed property taken into account in valuing unlisted
shares (section 4(p)) ........................................................................... 786
18.5.15 Property accruing to the surviving spouse (section 4(q)) ............ 787
18.6 Section 4A abatement (Step 4) ......................................................................... 787
18.7 Successive death rebate (Step 7) ...................................................................... 788
18.8 Deduction of foreign death duty (Step 7) (section 16) ................................. 791
18.9 Deduction of transfer duty (Step 7) (section 16) ........................................... 791
18.10 Persons liable for payment of estate duty (Step 8) (section 13) .................. 791
18.11 Assessment......................................................................................................... 793
18.12 Marriage in community of property .............................................................. 794
18.13 Summary ............................................................................................................ 795
18.14 Examination preparation ................................................................................. 796

760
18.1–18.2 Chapter 18: Estate duty

18.1 Introduction
John’s father died last year. He bequeathed all his assets to John’s mother. Unfortu-
nately, there were also a lot of liabilities (debts, like clothing accounts, cell phone
accounts etc.) still to be paid on date of death. All the available cash was used to settle
these liabilities.
After the executor prepared the accounts for the Master, the estate duty liability was
calculated to be R130 000. As the cash was depleted, some of the assets in the estate
needed to be sold in order to raise cash for the estate duty liability.
Estate duty is one of the most significant taxes on wealth currently charged in South
Africa. The purpose of estate duty is to tax the transfer of wealth from one person to
another in the event of death. The Estate Duty Act 45 of 1955 came into operation on
1 April 1955 and replaced the Death Duties Act 29 of 1922. The Estate Duty Act is
administered by the Commissioner of the South African Revenue Service (SARS)
whose office is responsible for the collection of estate duty. The Estate Duty Act is the
statute that creates the obligation to pay estate duty and deals with the adminis-
tration of the collection process.
Every executor or administrator of a deceased estate is compelled to compute the
estate duty liability in the estate they are administering. It is also the responsibility of
this executor or administrator to pay this duty to the Commissioner.
The estate duty addendum is a subsection of the liquidation and distribution account
for a deceased estate in terms of the Administration of Estates Act 66 of 1965.

Tax statistics

The estate duty collected during the 2020/2021 year of assessment amounted to
R2 316 million according to Tax Statistics 2021. It was only 0.0018532% of the total tax rev-
enue collected.

18.2 Calculation of estate duty

Persons ordinarily resident in the Republic as well as non-residents might be liable
for estate duty at date of death.

18.2.1 Ordinary residents

Estate duty is levied on the dutiable amount of the estate of a person who is ordinari-
ly resident in the Republic at the date of his death. The physical location of the
person’s assets is irrelevant. It is important to note that the Estate Duty Act only
refers to ordinarily resident in the Republic and not to a South African resident as
per the Income Tax Act 58 of 1962 (the Act). One has to refer to case law in order to
determine the meaning of ordinarily resident.

761
A Student’s Approach to Taxation in South Africa 18.2

According to the court case Cohen v CIR 1946 AD 174, 13 SATC 362, a person is ordi-
narily resident in the country to which they would naturally and as a matter of course
return to from their wanderings. In Kuttel v CIR 54 SATC 298, 1992 (3) SA 242 (A), the
courts stated that a person is ordinarily resident in a country if the person has their
real or ordinary home in that country (refer to 2.3).
Certain foreign property does not attract estate duty if it qualifies for a deduction
(refer to 18.5.5).

18.2.2 Non-residents
Estate duty is also payable on assets physically located in the Republic irrespective
of where the owner was residing at the date of their death. Double-tax agreements
are entered into with certain other countries to prevent the same property being
dutiable twice. The agreement with the country where the non-resident lives must be
consulted in order to determine if estate duty can be levied in South Africa.

18.2.3 Systematic calculation of estate duty

Just as the calculation of income tax requires a step-by-step approach, estate duty
must be calculated systematically as follows:

Calculation of the amount of estate duty that the estate is liable for

Step 1: R
Determine the value of property (section 3(2))
(refer to 18.3). xxxx

Step 2: Determine the value of deemed property

(section 3(3) to (5)) (refer to 18.4). xxxx
GROSS VALUE OF ESTATE (Step 1 plus Step 2) xxxx

Step 3: Reduce the gross value of the estate by the allowable

deductions (section 4) (refer to 18.5). (xxxx)
NET VALUE OF ESTATE xxxx

Step 4: Reduce the net value of the estate by the section 4A

abatement that is available for all estates (refer to 18.6). (xxxx)

Step 5: DUTIABLE AMOUNT OF THE ESTATE xxxx

continued

762
18.2 Chapter 18: Estate duty

R
Step 6: Calculate the estate duty by multiplying the dutiable
amount (Step 5) by 20% on the first R30 000 000 and by
25% on amounts over that. xxxx

Step 7: Reduce the amount by the successive death rebate, for-

eign death duty rebate or a rebate in respect of transfer
duty paid (if applicable) (refer to 18.7, 18.8 and 18.9). (xxxx)

Step 8: Determine whether any persons are liable for the estate
duty and recover the duty from them (refer to 18.10). (xxxx)
Amount of estate duty due by the estate xxxx

Example 18.1
Ernst Dlamini, ordinarily resident in the Republic, died on 25 March. Information relating
to his estate is as follows:
R
Property in the Republic 2 400 000
Property in the United Kingdom 1 400 000
Deemed property in the Republic 200 000
Allowable deductions 150 000
Section 4A abatement 3 500 000
You are required to calculate the estate duty on the dutiable amount of Ernst’s estate.

Solution 18.1
R
Property in the Republic 2 400 000
Property in the United Kingdom 1 400 000
Value of property 3 800 000
Deemed property in the Republic 200 000
Gross value of estate (R3 800 000 + R200 000) 4 000 000
Allowable deductions (150 000)
Net value of estate (R4 000 000 – R150 000) 3 850 000
Section 4A abatement (3 500 000)
Dutiable amount of the estate (R3 850 000 – R3 500 000) 350 000
Estate duty payable (R350 000 × 20%) 70 000

1. Do you continue to pay income tax once you die?

2. If my estate has to pay income tax after I die, won’t I pay income tax
and estate duty on the same amount?

763
A Student’s Approach to Taxation in South Africa 18.2–18.3

REMEMBER

• When ordinarily resident in the Republic, estate duty is levied on all the person’s assets
at date of death. Where the assets of such a person are located is irrelevant. Both the
assets located in the Republic and United Kingdom could attract estate duty in South
Africa.

18.3 Property (Step 1) (section 3)

Section 3(1) of the Estate Duty Act determines that the estate of a person must consist
of all property of that person as at the date of their death.

18.3.1 General definition of property (section 3(2))

‘Property’ is very widely defined in section 3(2) of the Estate Duty Act and means:
Any right in or to property, movable or immovable, corporeal or incorporeal.
This definition effectively includes every item of goods the deceased possessed, or in
which they had an interest.
For example, the following items are included in property:
• cash investments;
• shares in listed and unlisted companies;
• fixed property;
• motor vehicles; and
• furniture and household effects.
This definition refers to all assets of a person but excludes the following for persons
not ordinarily resident in the Republic at date of death:
• a right in immovable property situated outside the Republic;
• a right in movable property physically situated outside the Republic;
• a debt which is only recoverable or enforceable outside the Republic;
• goodwill, licence, patent, design, trademark, copyright or similar right registered or
enforceable only outside the Republic, or only attaching to a business outside the
Republic;
• stocks and shares held in a body corporate which is not a company;
• stocks or shares held in a company where change of ownership is not required to
be registered in the Republic; and
• rights to income produced by or proceeds derived from the assets as discussed in
the previous four bullets: and
for persons ordinarily resident in the Republic at date of death, the following is
excluded from property:
• a benefit (that is a lumpsum) that is due and payable by or in consequence of
membership or past membership of a pension, pension preservation fund, provi-
dent, provident preservation fund or retirement annuity fund as defined, on or as a
result of the death of the deceased.

764
18.3 Chapter 18: Estate duty

The result of the above-mentioned exclusions is that a person not ordinarily resident
in the Republic must only include movable and immovable fixed property located in
the Republic in their estate at the date of their death.
For example, if a person who ordinarily resides in Spain owns property in both Spain
and in the Republic at the date of their death, only the fixed property in the Republic
attracts estate duty in the Republic.
Once it has been established that an item must be included in property, the value of
these items needs to be calculated. Section 5 of the Estate Duty Act sets out these
valuation rules.

18.3.1.1 Valuation of property as per general definition (section 5(1))

Assets sold
• Special rules pertain to the property if it is sold by way of a bona fide sale in the
course of liquidating the estate. In terms of section 5(1)(a), the price realised by the
sale is the value of the property at date of death. This is applicable to all assets sold
in the course of liquidating the estate including property on which bona fide farm-
ing operations were conducted. For example, farming property sold for R800 000 in
the course of liquidating the estate is included in the estate at R800 000 and not at
the fair market value reduced by 30%.
Assets not sold
• The value of a property for estate duty purposes is the fair market value of the
property at date of death in terms of section 5(1)(g). ‘Fair market value’ means the
price that could be obtained upon a sale of the property between a willing buyer
and a willing seller dealing at arm’s length in an open market.
• In respect of land owned on which bona fide farming operations were conducted,
the property may be valued at the market value (normally taken at Landbank val-
ue according to the Act ) reduced by 30% (section 1).
Special rules whether sold or unsold
• Shares in unlisted (private) companies, members’ interests in close corporations
and debentures held in private companies must be valued at fair market value irre-
spective of the amount realised when these shares or interests are sold (sec-
tion 5(1)(f)bis). The valuer must ignore a restriction contained in the memorandum
and articles of the company, or founding statement and association agreement of a
close corporation, which may reduce the value of the share or interest. A special
right conferred on the deceased by virtue of their shareholding must be taken into
account. If an unlisted company owns bona fide farming property, the underlying
property may be valued at its fair market value reduced by 30% when the shares
are valued (section 5(1A)).
• If a condition has been imposed on the property, which reduces the value of the
property at or after the moment of death (for example, a usufruct granted over the
property according to the deceased’s will), the property is valued as though the
condition has not been imposed (section 5(4)).
Where the Commissioner is not satisfied with the fair market value of a property
reflected in the estate duty return, they might adjust the fair market value for the
purpose of calculating estate duty.

765
A Student’s Approach to Taxation in South Africa 18.3

18.3.2 Limited interests and annuities included as property

(section 3(2))
Section 3(2) also includes certain amounts as property.

Legislation:
Section 3(2)
(a) any fiduciary, usufructuary or other like interest in property (including a right to an
annuity charged upon any property) held by the deceased immediately prior to his
death;
(b) any right to an annuity (other than a right to an annuity charged upon any property)
enjoyed by the deceased immediately prior to his death which accrued to some other
person on the death of the deceased.

A fiduciary, usufructuary or other like interest in property refers to a limited interest

in property and means something less than full ownership. (Refer to 11.10 on dona-
tions tax for an explanation of these terms.)
Full ownership has two components, namely a usufruct and a bare dominium. For
example, a property generating rental income: the right to receive the rental income
belongs to the owner of the usufruct, while the person in who’s name the property is
registered is the bare dominium holder (he is not entitled to any rent received while
the usufruct holder is still alive). Although the limited interest (for example usufruc-
tuary) terminates upon death, the benefit then accrues to someone else. The value
that needs to be included in the deceased’s estate is therefore the value of the benefit
that will now be enjoyed by the new person entitled to the right.
To establish a value of a fiduciary, usufructuary or other like interest in property, a
valuation method is applied in terms of section 5(1)(b) of the Estate Duty Act that
expresses the value of the interest as a lump sum.
Included in property, in terms of section 3(2)(a) and (b), is:
• limited interests, for example fiduciary, usufructuary or other like interest in prop-
erty (refer to explanations in 11.10 and for valuation refer to 18.3.2.1);
• right to an annuity charged against property (refer to 18.3.2.2); and
• right to an annuity not charged against property (refer to 18.3.2.2).

766
18.3 Chapter 18: Estate duty

18.3.2.1 Valuation of limited interests (section 5(1)(b))

Calculation of the value of a limited interest for estate duty purposes

Step 1: Calculate the fair market value of the property to which the limited
interest is attached.

Step 2: Establish the annual value of the right by multiplying the fair market
value of the property by 12% (the Commissioner may allow a lower
percentage to arrive at the annual value if the annual yield of the asset
is less than 12%).

Step 3: Calculate the life expectancy of the person to whom the benefit is
being transferred. The age at their next birthday is used. (This infor-
mation is taken from the life expectancy table (Table A) issued in
terms of the Estate Duty Act – refer to Appendix C for a copy of such
table. If the person to whom the benefit is being transferred is not a
natural person, a life expectancy of 50 years should be used.)

Step 4: Determine the period for which the beneficiary is entitled to hold the
limited right.

Step 5: Calculate the present value of the annual value over the shorter
period of your answer in Step 3 or Step 4, using a discount rate of 18%
per annum. (The rate to be used is also provided in the life expectancy
table (Table A) issued in terms of the Estate Duty Act, that provides
the present value of R1 per annum capitalised at 18% over the expec-
tation of a person’s life (or Table B issued in terms of the Estate Duty
Act, that provides the present value of R1 per annum capitalised at
12% over fixed periods). Refer to Appendix D for a copy of such
table.)

By following the above steps, the value of a usufruct in a fixed property could be
calculated. To be able to calculate the bare dominium in terms of section 5(1)(f), the
value of the usufruct must be subtracted from the market value of the asset at the
date of death of the deceased.

Example 18.2
Simon Mamabolo, ordinarily resident in the Republic, died on 2 September during the
current year of assessment. Simon held a fiduciary right over property immediately prior
to his death. This fiduciary right must be transferred to his sister, Elsie, aged 47 at date of
Simon’s death. The property was worth R1 000 000 at the time of Simon’s death.
You are required to calculate the value of the fiduciary right to be included in Simon’s
estate.

767
A Student’s Approach to Taxation in South Africa 18.3

Solution 18.2
The fair market value of the property: R1 000 000.
The annual value of the right: R1 000 000 × 12% = R180 000.
The life expectancy of the fideicommissary (Elsie) according to Table A (Elsie will be
48 years old when she celebrates her next birthday, resulting in a life expectancy of
28,41 years).
Compare the answer in life expectancy of beneficiary with the period that the beneficiary
is entitled to hold the limited right: Elsie is entitled to the benefit for the rest of her life:
28,41 years.
The present value of the limited interest to be included in Simon’s estate:
R180 000 × 8,000 26 (Table A) = R960 031.

Example 18.3
Johannes van Zyl, ordinarily resident in the Republic, died on 25 May. Johannes held a
usufructuary right over property immediately prior to his death. The usufruct passes to
his brother, Gert, aged 34 at the date of Johannes’ death, for a period of 20 years where-
after it will go to Johannes’ sister. The property is worth R1 000 000 at the time of Johan-
nes’ death.
You are required to calculate the estate duty on the dutiable amount of Johannes’ estate.

Solution 18.3
The fair market value of the property: R1 000 000.
The annual value of the right: R1 000 000 × 12% = R180 000.
The life expectancy of the person to whom the benefit is being transferred according to
Table A is 33,94 years (Gert will be 35 years old when he celebrates his next birthday).
Compare the answer in life expectancy of beneficiary with the period that the beneficiary
is entitled to hold the limited right: Gert will be entitled to the benefit for the next
20 years. Shorter period of the two: 20 years.
The present value of the limited interest to be included in Johannes’ estate: R180 000 ×
7,469 4 (Table B) = R896 328.

If Gert had been entitled to the benefit for the rest of his life and not a fixed
period of 20 years, how much would have been included in Johannes’
estate?

In addition to the above, there are two provisos that apply in valuing a usufruct,
namely:
First proviso
If the bare dominium holder paid a consideration for the bare dominium from the
creator of the usufruct (the original owner) and the full right to enjoyment then

768
18.3 Chapter 18: Estate duty

accrues to this bare dominium holder, the value to be included in the estate of the
usufructuary must be reduced, for example where a man (original owner) bequests a
farm to his son (who pays a bequest price) subject to his wife having the right of use
of the farm, that is to say the usufruct.
The value of the reduction is the cost of the bare dominium, when it was originally
acquired, plus interest at 6% per annum from date of acquisition to date of death of the
usufructuary. The Estate Duty Act is not clear on whether this interest should be
calculated as being compound or simple interest. It would be more beneficial for the
deceased to use compound interest, as this will provide a bigger deduction.
Two steps are, therefore, added to the above steps to calculate the value of a limited
interest for estate duty purposes if the bare dominium holder paid for the bare
dominium.

Step 6: Determine the cost of the bare dominium when it was originally
acquired plus interest at 6% per annum from date of acquisition to
date of death of the usufructuary.

Step 7: Reduce the value calculated in Step 5 by your answer in Step 6.

Example 18.4
Phineas Kumalo sold the bare dominium of his farm, Devon, to David Kruger (aged 20 on
date of transaction) for an amount of R500 000 on 26 February 20 years ago, but reserves
the usufruct over the farm for himself. Phineas died on 26 February of the current year at
the age of 69. The fair market value of Devon on 26 February of the current year is
R850 000.
You are required to determine the value of the usufruct to be included in Phineas’ estate.

Solution 18.4
The fair market value of the property: R850 000.
The annual value of the right: R850 000 × 12% = R102 000.
The life expectancy of the person to whom the benefit is being transferred according to
Table A is 28,69 years (David will be 41 years old when he celebrates his next birthday).
Compare the answer in life expectancy of the beneficiary with the period that the benefi-
ciary is entitled to hold the limited right: David will be entitled to the benefit for the rest
of his life (28,69 years).
The present value of the annual value to be included in Phineas’ estate:
R102 000 × 8,010 67 = R817 088.

continued

769
A Student’s Approach to Taxation in South Africa 18.3

As the bare dominium holder paid for the bare dominium the following applies:
Determine the cost of the bare dominium when it was originally acquired plus interest at
6% per annum from date of acquisition to date of death of the usufructuary:
R500 000 × 1,0620 = R1 603 568.
The present value of the limited interest to be included in Phineas’ estate:
R817 088 – R1 603 568 = Rnil. The value cannot be negative, therefore, it is limited to Rnil.

Second proviso
On the death of the usufructuary, the value placed on the usufruct passing to the bare
dominium holder, which now gives them full ownership, cannot be more than the
market value of property at date of death less the value of the bare dominium when it
was first created.
This is only applicable when the usufruct and the bare dominium were created in the
same disposition.
Therefore, another four steps are added to the above steps to calculate the value of a
limited interest for estate duty purposes, if the usufruct passes to the bare dominium
holder.

Step 8: Determine the market value of the property at date of death.

Step 9: Calculate the value of the bare dominium when it was first created
(market value on the date it was first created less the answer of Steps 1
to 5), with the exception that the age of the usufructuary on the date
these limited interests were first created should now be used in calcu-
lating Step 3.

Step 10: Reduce the value calculated in Step 8 with the value calculated in
Step 9.

Step 11: The value to be included as property must be the lowest value of the
answers found in Steps 5, 7 or 10.

Example 18.5
On 3 January (ten years ago), the grandfather of Saartjie and Danie van der Walt
bequeathed his farm to his two grandchildren. Saartjie was 19 years old and Danie 16 on
the date of their grandfather’s death. Saartjie received the usufructuary interest and Danie
the bare dominium. The value of the property was R250 000 on date of acquisition of these
limited rights. Saartjie’s usufruct ceases on 3 January of the current year due to her sud-
den death in a motor vehicle accident. Danie acquires full ownership on this date. The fair
market value of the property on the day of Saartjie’s death is R380 000.
You are required to determine the value of the usufruct to be included in Saartjie’s estate.

770
18.3 Chapter 18: Estate duty

Solution 18.5
The fair market value of the property: R380 000.
The annual value of the right: R380 000 × 12% = R45 600.
The life expectancy of the person to whom the benefit is being transferred according to
Table A is 41,20 years (Danie will be 27 years old when he celebrates his next birthday).
Compare the answer in life expectancy of beneficiary with the period that the beneficiary
is entitled to hold the limited right: Danie will be entitled to the benefit for the rest of his
life (41,20 years).
The present value of the annual value to be included in Saartjie’s estate: R45 600 × 8,25516
= R376 435.
As the value of the usufruct passes to the bare dominium holder and the usufruct, and the
bare dominium was created at the same time, apply the following:
The market value of the property at date of death: R380 000.
The value of the bare dominium when it was first created: market value at date when the
bare dominium was acquired less the value of the usufruct therein = R250 000 – (R250 000
× 12% × 8,31584 (Saartjie’s life expectancy was 54,41 years as her next birthday would
have been her 20th)) = R525.
Reduce market value of the property at date of death with value of the bare dominium
when it was first created: R380 000 – R525 = R379 475.
The present value of the limited interest to be included in Saartjie’s estate must be the
lowest value of the present value of the annual value = R376 435, or amount calculated
above = R379 475. An amount of R376 435 should therefore be included.

18.3.2.2 Valuation of annuities (section 5(1)(c) and (d ))

Two types of annuities are included in property, namely a right to an annuity
charged on property held by the deceased immediately prior to their death, and a
right to an annuity (not charged against property) enjoyed by the deceased immedi-
ately prior to their death and which accrued to some other person on the date of
death of the deceased.
An ‘annuity’ is not defined but refers to a fixed recurring annual payment.
It is important to note that annuities originating on date of death and paid by a pen-
sion fund or a retirement annuity fund, as defined in section 1 of the Act, do not form
part of a deceased’s estate. This annuity is specifically excluded in terms of section 3
(refer to 18.4.2).

Annuities charged upon property

An example of an annuity charged on property is when a father bequeaths an office
block to his son on condition that the son pays the mother a monthly annuity of
R10 000 from the rentals received as long as she lives. When the mother dies, she
must include in her estate the value of the annuity charged against the property. The
annuity will either cease or will be paid to someone else. If the annuity ceases, the
person who has to pay the annuity will benefit as their obligation of payment ends.
The value of an annuity charged against property is determined in terms of sec-
tion 5(1)(c).

771
A Student’s Approach to Taxation in South Africa 18.3

Calculation of the value of an annuity charged against property for estate

duty purposes

Step 1: Calculate the annual amount of the annuity.

Step 2: Calculate the life expectancy of the person to whom the benefit is
being transferred – if the annuity ceases, the owner of the property;
otherwise the person to whom it is transferred (this information is
taken from the life expectancy table (Table A) issued in terms of the
Estate Duty Act). If the person to whom the benefit is being trans-
ferred is not a natural person, a life expectancy of 50 years should be
used.

Step 3: Determine the period that the beneficiary is entitled to hold the lim-
ited right for. (If the annuity ceases, this step will not be applicable.)

Step 4: Calculate the present value of the annual amount over the shorter
period of your answer in Step 2 or Step 3 using a discount rate of 18%
per annum (the rate to be used is also provided in the life expectancy
table (Table A) issued in terms of the Estate Duty Act that provides
the present value of R1 per annum capitalised at 18% over the expect-
ation of a person’s life, or Table B issued in terms of the Estate Duty
Act that provides the present value of R1 per annum capitalised at
18% over fixed periods).

Example 18.6
Christine Rappard was entitled to an annuity of R5 000 per month from the income of
property held in a trust. On her death her daughter, Elsa, aged 31, is entitled to receive
the annuity.
You are required to determine the value of the annuity to be included in Christine’s
estate.

Solution 18.6
The annual amount of the annuity: R5 000 × 12 months = R60 000.
The life expectancy of the person to whom the benefit is being transferred (Elsa) accord-
ing to Table A is 42,96 years (Elsa will be 32 years old on her next birthday).
Compare the life expectancy of Elsa with the period that the beneficiary is entitled to hold
the limited right: Elsa will be entitled to the benefit for the rest of her life (42,96 years).
The present value of the annuity charged against property to be included in Christine’s
estate: R60 000 × 8,269 30 (Table A) = R496 158.

continued

772
18.3 Chapter 18: Estate duty

If the annuity Christine received from the income of property held in the
trust ceased on the date of her death, how much would have been included
in her estate?

Annuities not charged against property

Annuities not charged against property consist mostly of purchased annuities. These
are contracts sold by life assurance companies in terms of which regular payments
are made over a specified period or for the life of the annuitant, in return for the
payment of a lump sum by the purchaser. The death of the annuitant will either
result in the annuity ceasing (as would be the case with a life annuity) or the payment
of the annuity to another person (as would be the case in a fixed-term annuity).
If the annuity of the deceased passes on to another person on the date of death, there
will be an inclusion in property. This is only the case if the annuity is not charged
against property.
If the annuity ceases, there is no value being passed to another person, hence there is
no inclusion as property in the deceased’s estate. This is only the case if the annuity is
not charged against property.
The value of an annuity not charged against property passing to another beneficiary
is determined in terms of section 5(1)(d).

Calculation of the value of an annuity not charged against property for

estate duty purposes

Step 1: Calculate the annual amount of the annuity.

Step 2: Calculate the life expectancy of the person to whom the benefit is
being transferred (this information is taken from the life expectancy
table (Table A) issued in terms of the Estate Duty Act). If the person to
whom the benefit is being transferred is not a natural person, a life
expectancy of 50 years should be used.

Step 3: Compare the answer in Step 2 with the period the beneficiary is
entitled to hold the limited right.

Step 4: Calculate the present value of the annual value over the shorter period
of your answer in Step 2 or Step 3 using a discount rate of 12% per
annum (the rate to be used is also provided in the life expectancy table
(Table A) issued in terms of the Estate Duty Act that provides the pre-
sent value of R1 per annum capitalised at 12% over the expectation of
a person’s life; or Table B, issued in terms of the Estate Duty Act, that
provides the present value of R1 per annum capitalised at 12% over
fixed periods).

773
A Student’s Approach to Taxation in South Africa 18.3–18.4

Example 18.7
Ernst Grobbelaar died on 1 November of the current year of assessment. In terms of an
annuity contract he is entitled to an annuity of R6 000 per annum for a period of 60 years.
Ernst only received the annuity for five years before his death. In terms of Ernst’s will,
this annuity must accrue for the remaining period (55 years) to his son Ivan (16 years).
You are required to determine the value of the annuity to be included in Ernst’s estate.

Solution 18.7
The annual amount of the annuity is R6 000 (already an annual value).
The life expectancy of the person to whom the benefit is being transferred (Ivan) accord-
ing to Table A is 50,12 years (Ivan will be 17 years old on his next birthday).
Compare life expectancy of Ivan with the period that the beneficiary is entitled to hold the
limited right: Ivan will be entitled to the benefit for a period of 55 years.
Use the shorter of the two periods above: Therefore, 50,12 years.
The present value of the annuity not charged against property to be included in Ernst’s
estate: R6 000 × 8,304 89 (Table A) = R49 829.

18.4 Deemed property (Step 2) (section 3(3))

In terms of the Estate Duty Act, certain deemed properties need to be taken into
account in the estate of the deceased in order to determine the gross estate.
Property which is deemed to be property of the deceased, includes:
• domestic insurance policies on the life of the deceased (section 3(3)(a));
• a property donated by the deceased in terms of a donation which was exempt from
donations tax under section 56(1)(c) or (d) of the Income Tax Act, that is to say
property donated by the deceased under a donatio mortis causa or in terms of a do-
nation whereby the donee receives no benefit until the death of the donor (section
3(3)(b));
• a claim against the spouse under section 3 of the Matrimonial Property Act 88 of
1984 (section 3(3)(cA));
• property of which the deceased was, immediately prior to their death, competent
to dispose of for their own benefit or for the benefit of their estate (section 3(3)(d));
and
• contributions to retirement funds allowed as a deduction when determining the
retirement lump sum benefit (section 3(3)(e)).

18.4.1 Domestic insurance policies on the life of the deceased

(section 3(3)(a))
Under domestic insurance policies, the general rule is that the proceeds of these
policies must be included as deemed property of the deceased, irrespective of whether
the proceeds are paid to a beneficiary named in the contract or whether the deceased

774
18.4 Chapter 18: Estate duty

himself was the beneficiary and the proceeds paid out to the executor. The require-
ment for inclusion in the estate of the deceased (as deemed property for estate duty
purposes) is not whether the deceased was the owner of the policy or not, but whether
it was their life which was assured.
There are three situations where the amount is not included as deemed property in
the deceased’s estate:
• If the amount of the policy is payable to the surviving spouse or child of the
deceased under a duly registered ante-nuptial or postnuptial contract. A ‘child’ is
defined in the Act to include an adopted person.
• If the policy was taken out or acquired (for example by way of session) by a part-
ner or a person who holds shares or a like interest in a company of which the
deceased also held shares or a like interest on the day of death of the deceased, to
enable that person to acquire the whole or part of the interest or shares of the
deceased. In addition, for this policy to be excluded from deemed property, the
person whose life was insured must not have been responsible for payment of
premiums. These policies are commonly referred to as ‘buy-and-sell’ policies. It is
possible that the proceeds of the policy may exceed the amount required to buy the
interest of the deceased. If the difference in the proceeds of the policy and the val-
uation of the partnership or company as at date of death is substantial, the Com-
missioner may exercise their discretion and not allow the exclusion. The ground
for the disallowance in such a case is the ‘intention of the parties’. However, if the
difference can be verified, for instance by a general drop in that specific type of
business which occurred shortly before the death of the partner or co-shareholder,
the intention of the parties is beyond doubt.
• If the policy was taken out by a third party (not effected by or at the instance of the
deceased), the proceeds are then payable to such person. This policy must also
meet the following requirements:
– the Commissioner must be satisfied that no premium was paid by the deceased;
– no amount that is recoverable will be paid into the estate of the deceased;
– no amount may be used for the benefit of a relative of the deceased or a person
wholly or partly dependent on the deceased for their maintenance. Relative in
relation to a person means the spouse of such person or anybody related to them
or their spouse within the third degree of consanguinity, or a spouse of anybody
so related. An adopted child is deemed to be related to their adoptive parent
within the first degree of consanguinity; and
– no amount should also be payable to a family company of the deceased in terms
of this policy. The Estate Duty Act (section 1) defines a family company in rela-
tion to a deceased person:
Any company (other than a company whose shares are quoted on a recognised
stock exchange) which at any relevant time was controlled or capable of being
controlled directly or indirectly, whether through a majority of the shares thereof
or any other interest therein or in any other manner whatsoever, by the deceased
or by the deceased and one or more of his relatives.
The value of a domestic insurance policy that needs to be included is the proceeds
(full amount due and recoverable) of the policy.

775
A Student’s Approach to Taxation in South Africa 18.4

If the beneficiary of the policy (other than the deceased) paid the premiums, the pro-
ceeds can be reduced by the amount of premiums plus interest at 6% per annum.
If spouses are married in community of property and premiums were borne by the
joint estate with the surviving spouse being the beneficiary under the policy, 50% of
the premiums plus interest at 6% thereon is allowed as a deduction.
The definition of ‘spouse’ refers to a person in relation to the deceased at the time of
death where that person was their partner:
• in a marriage or customary union recognised in terms of the laws of the Republic;
• in a union recognised as a marriage in accordance with the tenets of any religion;
or
• in a same-sex or heterosexual union, which the Commissioner is satisfied is
intended to be permanent.
The amount to be included cannot be reduced if the deceased paid the premiums
himself.

Example 18.8
Jan Matla had a policy taken out by his wife, Linda (to whom he was married out of
community of property), on his life. Their ante-nuptial contract did not mention anything
regarding this policy. Linda was the sole beneficiary under the policy and had paid all the
premiums. Jan Matla died and the policy paid out an amount of R1 million. The pre-
miums (including interest at 6%) paid by Linda amounted to R380 000.
You are required to determine the value of the insurance policy to be included in Jan’s
estate.

Solution 18.8
R
Proceeds of the policy (Note) 1 000 000
Less: Premiums plus interest (paid by Linda) (380 000)
Value of insurance policy 620 000

Note
The policy is not excluded, as it was not in terms of an ante-nuptial or postnuptial con-
tract.

776
18.4 Chapter 18: Estate duty

REMEMBER

• This amount is an allowable deduction under section 4(q) as property accruing to the
surviving spouse (refer to 18.5.15).
• Section 5(1)(d)bis determines that if the annuity received from the domestic insurance
policy on the life of the deceased ceases to be payable within five years after the death
of the deceased because:
– of the death of the annuitant within that period; or
– where the annuitant is the widow of the deceased, because of the remarriage within
that period,
the value of the annuity in the re-assessed estate of the predeceased shall be deemed to
be an amount equal to the lesser of:
– the aggregate of the amounts that accrued to the annuitant in respect of the annuity
and any amounts that accrued to the person or the person’s estate upon or as a result
of the termination of the annuity; or
– the capitalised value of the annuity.

18.4.2 Any property donated under a donatio mortis causa

or in terms whereby the donee receives no benefit
until the death of the donor (section 3(3)(b))
Property donated under a donatio mortis causa (a donation in contemplation of death)
or in terms whereby the donee receives no benefit until the death of the donor, is
deemed to be property of the deceased if that property is not otherwise included in
the property of the estate. A donatio mortis causa is a donation where the donor
donates the property with death in mind. The property will only be transferred to the
donee if the donor dies. No donations tax is payable on this transaction as the donee
does not receive any benefit until the death of the donor. The property remains that
of the donor (the deceased) immediately prior to death and needs to be included in
the deceased’s estate as deemed property, if that property is not otherwise included
in the property of the estate.

18.4.3 Claim against the spouse under section 3 of the Matrimonial

Property Act 88 of 1984 (section 3(3)(cA))
If the deceased was married under the accrual system, the executor needs to perform
a calculation to determine the claim regarding accrual.
Spouses married out of community of property under the accrual system will each
retain their own estate. However, on date of death, the accrual in the estate of each
spouse is calculated and the spouse whose estate shows the smallest accrual has a
claim against the other’s estate for half of the difference between the accrual in the
respective estates.
The calculation of the accrual excludes, however, the following assets:
• inheritances, legacies and donations received;
• damages received in respect of non-financial losses;
• donations between spouses; and
• assets excluded in terms of the ante-nuptial contract.

777
A Student’s Approach to Taxation in South Africa 18.4

A provision for indexing is made and the inflation rate reflected in the consumer
price index is used in practice for this calculation.
If an amount is due to the deceased under this system, it is included as part of
deemed property in the estate.

Example 18.9
On 10 March five years ago, Simon and Martha Mhlari were married out of community of
property under the accrual system. Simon died on 18 May during the current year. The
following information relates to their estates:
1. The values of the estates as stipulated in their ante-nuptial contract were converted to
rand using the inflation rate reflected in the consumer price index:
(a) Simon R250 000 (rand value in the current year)
(b) Martha R550 000 (rand value in the current year)
2. The values of their estates on the day of Simon’s death:
(a) Simon R550 000
(b) Martha R1 750 000
3. A bequest of R250 000 to Martha on 28 March in the current year from the estate of her
late father is included in the value of her estate on the day of Simon’s death (18 May)
but her father’s will stipulated that it is free of the communal estate.
You are required to calculate the amount to be included in Simon’s estate in respect of the
Matrimonial Property Act.

Solution 18.9
Simon Martha
R R
End value of the estate 550 000 1 750 000
Less: Amounts excluded (250 000)
550 000 1 500 000
Less: Commencement value (250 000) (550 000)
Accrual 300 000 950 000
Difference in accrual (R950 000 – R300 000) 650 000
Accrual to be included in Simon’s estate (R650 000 / 2) 325 000

What would have happened if Martha had died instead of Simon?

778
18.4 Chapter 18: Estate duty

18.4.4 Property that the deceased was, immediately prior

to their death, competent to dispose of for their own benefit
or for the benefit of their estate (section 3(3)(d ))
Any property that the deceased was competent to dispose of for their own benefit or
for the benefit of their estate immediately prior to their death, needs to be included as
deemed property. This might include property of a trust if the deceased had the
power to dispose of the property for their own benefit, being the sole trustee and
beneficiary of the trust.

Example 18.10
Johannes Labuschagne died on 30 September of the current year and was the only trustee
and beneficiary of the JL Trust. There was only one asset in the JL Trust, namely a farm
(on which bona fide farming was being carried on) with an open-market value of
R920 000 on the date of Johannes’ death.
You are required to determine the value of the property that has to be included in Johan-
nes’ estate (if any).

Solution 18.10
As Johannes was the only trustee and beneficiary of the JL Trust, he was competent to
dispose of the farm for his own benefit immediately prior to his death. The farm in the
trust, therefore, has to be included in Johannes’ estate in terms of section 3(3)(d) at
R644 000 (being the fair market value, that is to say the market value (R920 000) reduced
by 30%).

REMEMBER

• If the deceased was a sole trustee but not a beneficiary (they also had no rights to
change the beneficiary) of a trust, the property will not form part of their estate as they
could not dispose of it for their own benefit. The deceased could thus exercise control
over property without attracting this provision.

In the situation where a deceased was entitled to receive the profits from a trust in
terms of section 3(3)(d), the inclusion is the annual value of such profits capitalised at
12% over the life expectancy (from Table A) of the deceased immediately prior to the
date of their death (section 5(1)(f)ter).

Example 18.11
Petro van Jaarsveld died on 30 November of the current year of assessment at the age of
47 and was the only trustee and beneficiary of the PVJ Trust. The PVJ Trust was a busi-
ness trust from which Petro received profits amounting to R20 000 per year.
You are required to determine the value of the asset (if any) that has to be included in
Petro’s estate.

779
A Student’s Approach to Taxation in South Africa 18.4–18.5

Solution 18.11
As Petro was the only trustee and beneficiary of the PVJ Trust, she was competent to dis-
pose of the business for her own benefit immediately prior to her death. The profits that
are distributed to Petro each year have to be included in her estate as deemed property in
terms of section 3(3)(d). The profits will be capitalised at a rate of 12% per year over
Petro’s life expectancy immediately prior to the date of her death. Her life expectancy on
the day immediately prior to her death in terms of the life expectancy table (Table A) was
28,41 years (as she would have been 48 years old on her next birthday).
The current value of the annual value that has to be included in Petro’s estate:
R20 000 × 8,00026 = R160 005,20.

18.4.5 Contributions to retirement funds (section 3(3)(e))

Lump sum benefits received from retirement funds upon death are not considered
property in the estate. However, the contributions made to these retirement funds
(that were allowed as a deduction in terms of paragraph 5 of the Second Schedule to
the Income Tax Act to determine the taxable portion of the lumpsum benefit that is
deemed to have accrued to the deceased immediately prior to their death) will be
deemed property for the estate.
Note: Section 3(3)(e) is applicable from 30 October 2019 and affects persons who die
on or after this date and to contributions made after 1 March 2016.

18.4.6 General
The annual value of the right of enjoyment of property, which is subject to a fiduci-
ary, usufructuary or other interest consisting of books, pictures, statuary or objects of
art, shall be deemed to be the average net receipts (if any) derived by the person
entitled to such right of enjoyment of such property during the three years immedi-
ately preceding the date of death of the deceased.

18.5 Deductions (Step 3) (section 4)

Section 4 of the Estate Duty Act lists the deductions which may be made from the
gross estate to establish the value of the net estate. These deductions must relate to
costs or liabilities that were settled out of property that was included in the estate or
to certain assets that have been included in the estate. The qualifying deductions are:

18.5.1 Funeral and death-bed expenses (section 4(a))

Included in this allowable deduction are all expenses that relate to the funeral, tomb-
stone and death-bed (last illness). This deduction is limited to an amount the Com-
missioner considers to be fair and reasonable.

780
18.5 Chapter 18: Estate duty

18.5.2 Debts due to persons ordinarily resident within the

Republic (section 4(b))
All amounts due by the deceased to persons ordinarily resident within the Republic
(other than a debt that constitutes a claim by a person to property donated by the
deceased under a donatio mortis causa or in terms of a donation whereby the donee
receives no benefit until the death of the donor) are allowed as a deduction. These
amounts must be settled out of property that is to say included in the estate (for
example a bank account of the deceased).

18.5.3 All allowable costs in the administration and liquidation

of the estate (section 4(c))
All costs relating to the administration and liquidation of the estate are allowed as a
deduction. Examples of such expenditure are executor’s fees, Master’s fees, adver-
tisements (notices) placed in newspapers, costs of realising assets and expenditure
incurred in collection of debts. Note that the executor’s fees are limited to 3.5% of the
gross value of the estate assets and the Master’s fees are between R600 and R7 000
also depending on the gross value of the estate assets. An estate of R250 000 or less
will not be charged any Master’s fees. See the table in Appendix I.
Costs incurred in connection with management of income accruing to the estate after
the date of death are not allowed as a deduction in terms of this section.

18.5.4 Sundry expenditure incurred in meeting the requirements

of the Master or the Commissioner of the SARS
(section 4(d))
All sundry expenses incurred in meeting the requirements of the Master or Commis-
sioner of SARS in pursuance of the Estate Duty Act are allowed as a deduction.
Examples of such expenditure are costs of furnishing satisfactory security for the
winding up of the estate, that is to say fees paid to professional persons such as
valuers, accountants and attorneys.

18.5.5 Certain foreign assets and rights thereto (section 4(e))

A person ordinarily resident in the Republic must include all assets (whether located
in the Republic or outside) in their estate. Some property might however be
deducted, namely the total value of a right in or to property situated outside the
Republic and acquired by the deceased
• before they became ordinarily resident in the Republic for the first time;
• after they became ordinarily resident for the first time by way of donation or
inheritance if at the date of the donation the donor was a person (other than a
company) not ordinarily resident in the Republic; or
• out of profits or proceeds of any of the above-mentioned property.
This does not only apply to immovable property but also to movable property.

781
A Student’s Approach to Taxation in South Africa 18.5

18.5.6 Any debt due by the deceased to persons ordinarily

resident outside the Republic (section 4(f ))
Any debt due by the deceased to persons ordinarily resident outside the Republic
(other than a debt that constitutes a claim by a person to property donated by the
deceased under a donatio mortis causa or in terms of a donation whereby the donee
receives no benefit until the death of the donor) is allowed as a deduction only to the
extent that the amount exceeds the value of property not included in the dutiable
estate (property allowed as a deduction – refer to 18.5.5). These debts must be settled
out of property that is included in the estate.

Example 18.12
Gert Geringer (the deceased) was ordinarily resident in the Republic all his life. Gert owes
persons not ordinarily resident in the Republic debts amounting to R1 500 000.
At date of death, Gert owned property in the United Kingdom of R1 150 000, inherited
from his uncle who is not ordinarily resident in the Republic.
You are required to determine the net value of the above two items in Gert’s estate.

Solution 18.12
R
United Kingdom property 1 150 000
Less: Property inherited from a person not ordinarily
resident in the Republic (1 150 000)
Less: Foreign debt (R1 500 000 – R1 150 000) (350 000)
(350 000)

REMEMBER

• The only portion of the R1 500 000 expenditure that will be allowed as a deduction is
the portion of R350 000 (the amount by which the foreign debt exceeds the foreign
property not included in the estate: R1 500 000 – R1 150 000) if this debt is settled from
other property in the estate.

18.5.7 Deductions of certain limited interests (section 4(g))

If a limited interest held by the deceased was received by virtue of a donation to them
from the person to whom the right of enjoyment accrued on the date of death, the
value of the limited interest is allowed as a deduction.
For example: If the deceased received a usufruct under a donation from someone to
whom the usufruct will revert on the date of death, the value of the usufruct (capital-
ised over the life expectancy of the donor) is included in the property of the deceased.
This exact value will, however, qualify for a deduction under this section.

782
18.5 Chapter 18: Estate duty

Another example is if the deceased was entitled to an annuity they received by way
of a donation and, on their death, the annuity reverts to the donor. This annuity
qualifies for a deduction in terms of this section.
If in the case of an annuity charged on property, the right accrues to the person who
is the owner of the property, the value of the annuity is allowed as a deduction if the
owner was the donor.
This deduction is therefore available if the annuity reverts to the donor who is
the current owner of the property. It is important to remember the deduction is
applicable only if the deceased obtained their right to the annuity or limited interest
by way of a donation.

18.5.8 Bequests to public benefit organisations (section 4(h))

The value of a property included in the estate, which accrues to the following
institutions, is allowed as a deduction:
• a public benefit organisation that is exempt from tax in terms of section 10(1)(cN) of
the Act;
• an institution, board or body that is exempt from tax in terms of section 10(1)(cA)(i)
of the Act and that has as its sole or principal object the carrying on of a public
benefit activity contemplated in section 30 of the Act; or
• the state or a ‘municipality’ within the Republic as defined in section 1 of the
Income Tax Act.

18.5.9 Improvements made by the beneficiary (section 4(i))

An amount by which the value of any property has been enhanced by any improve-
ments made to the property concerned, is allowed as a deduction. This, however, is
not valid for a limited interest that ceased upon the death of the deceased.
The expense must meet two requirements, namely:
• it must have been incurred by the person to whom the property accrues upon the
death of the deceased; and
• the expenditure must have been incurred during the lifetime of the deceased and
with their consent.
Remember that it is not the actual amount of the expenditure incurred that qualifies
for the deduction, but the value by which the property has increased due to these
improvements. The actual deduction can therefore be lower or higher than the
amount expended.

Example 18.13
Madie du Toit effected improvements amounting to R20 000 to property owned by her
father, Nico. These improvements were done during Nico’s lifetime and with his consent.
The market value of this property (a house) is R1 150 000 at the date of Nico’s death. The
improvements made by Madie increased the value of the house by R12 000.
Nico’s will stipulates that the property will be transferred to Madie.
You are required to determine the net value to be included in Nico’s estate.

783
A Student’s Approach to Taxation in South Africa 18.5

Solution 18.13
R
Market value of property on date of death 1 150 000
Less: The value by which the property has been enhanced due to the
improvements made by the beneficiary (12 000)
Net value to be included in Nico’s estate 1 138 000

REMEMBER

• The expenditure must have been incurred during the lifetime of the deceased and with
their consent before a deduction can be claimed.

18.5.10 Improvements made to property by a holder of a limited

interest (section 4(j ))
A deduction will be allowed from the deceased’s estate if the value of a fiduciary,
usufructuary or other like interest has been enhanced by the value of improvements
made by the person who will receive the benefit of the interest at date of death.
The improvements need to be made during the lifetime of the deceased and with
their consent.
The amount of the deduction is the amount by which the value of the interest has
been enhanced.

Example 18.14
Carl Lubbe donated a bare dominium over property to Julia Mhlangu (39 years old at next
birthday) who effected improvements at a cost of R50 000. He kept the usufruct for him-
self. Upon Carl’s death, the market value of the property is R250 000 without taking the
improvements into account. If the improvements made by Julia are taken into account,
the market value of the property is R400 000. The usufruct goes to the holder of the bare
dominium.
You are required to determine the net value of the limited interest to be included in
Carl’s estate.

784
18.5 Chapter 18: Estate duty

Solution 18.14
R
Calculate the value of the limited interest to be included in the estate using
the market value on date of death: the value of the limited interest based on
the market value of R400 000 (R400 000 × 12% × 8,19866 (Julia’s factor)). 393 536
Recalculate the value of the limited interest using the market value of the
property ignoring the improvements effected: the value of the limited interest
based on the market value of R250 000 (R250 000 × 1% × 8, 19866) 245 960
The deduction allowed against the value of the limited interest (147 576)
The net value of the limited interest in Carl’s estate. 245 950

18.5.11 Claim against the spouse under section 3 of the

Matrimonial Property Act 88 of 1984 (section 4(lA))
If the deceased was married under the accrual system, the executor needs to perform
a calculation to determine the claim regarding accrual.
If an amount is due by the deceased to their spouse under this system, it is allowed as
a deduction in the estate (refer to 18.4.4 for details on such calculation).

18.5.12 Limited interest and annuity charged against property

created by a predeceased spouse (section 4(m))
A deduction of the amount of any limited interest or an annuity charged against
property created by a predeceased spouse is allowed if:
• the property over which the deceased enjoyed such interest or right formed part of
the estate of such predeceased spouse; and
• no deduction in respect of the value of such interest or right was allowed in the
determination of the net value of the estate of the predeceased spouse (refer to
18.5.15).
Section 4(m) is thus applicable to assets that formed part of the predeceased estate
before section 4(q) came into effect in 1985.
One cannot argue that a deduction is allowed under section 4(m) because no deduc-
tion was claimed under section 4(q) as the net value was less than the R3 500 000
abatement. The amount should not have qualified at all for a section 4(q) deduction in
order to qualify for a section 4(m) deduction.

REMEMBER

• If the spouses were married in community of property, only 50% of the value of the
limited interest is deductible as only half of the interest formed part of the estate of the
predeceased spouse.

785
A Student’s Approach to Taxation in South Africa 18.5

18.5.13 Books, pictures, statuary and other objects of art

(section 4(o))
• The value of books, pictures, statuary and other objects of art; or
• so much of the value of any shares in a body corporate as is attributable to such
body’s ownership of books, pictures, statuary or other objects of art
is allowed as a deduction if they have been lent under a notarial deed to the national,
provincial or local government within the Republic for a period of not less than 30
years and the deceased died during such period.

REMEMBER

• The lending period should have started before date of death of the deceased for this
deduction to take effect.

18.5.14 Deemed property taken into account in valuing unlisted

shares (section 4(p))
If any deemed property is included in the estate that has been taken into account in
the determination of the value of any unlisted shares or a member’s interest in a close
corporation included in the property of the estate, the value of the deemed property is
allowed as a deduction to the extent that it has not been allowed under any of the other
before-mentioned deductions. The purpose of this deduction is to avoid what will
effectively be a double inclusion in the estate, as the value is included in the value of
the unlisted shares and the inclusion of deemed property. The following deemed
property qualify for the deduction:
• domestic insurance policies;
• benefit payments from funds;
• property donated under a donatio mortis causa or in terms of a donation whereby
the donee receives no benefit until the death of the donor;
• claim against the spouse under the Matrimonial Property Act;
• property of which the deceased was, immediately prior to their death, competent
to dispose of for their own benefit or for the benefit of their estate.

Example 18.15
Marie Botha owned 100% of the shares of Stay Trim (Pty) Ltd. The company took out a
life insurance policy on her life that will pay out an amount of R300 000 on Marie’s death.
The policy does not qualify for an exemption in terms of section 3(3)(a). Upon Marie’s
death, the value of her shares in the company will be enhanced with the value of the life
insurance policy by R210 000 (the value of the policy less income tax thereon). The value
placed on her shares in Stay Trim (Pty) Ltd (by an independent assessor) is R985 000.
You are required to determine the net value to be included in Marie’s estate in respect of
the above-mentioned transaction.

786
18.5–18.6 Chapter 18: Estate duty

Solution 18.15
R
Value of unlisted shares 985 000
Value of deemed property – life insurance policy 300 000
Less: Value of deemed property taken into account in valuing the
unlisted share (210 000)
Net property to be included in Marie’s estate 1 075 000

18.5.15 Property accruing to the surviving spouse (section 4(q))

So much of the value of any property included in the estate (which has not been
allowed as a deduction under the foregoing provisions) as accrued to the surviving
spouse of the deceased, is allowed as a deduction.
This deduction will refer to all items bequeathed by the deceased to the surviving
spouse as well as all other benefits accruing to the surviving spouse due to the death
of the deceased. An example of the latter is a life insurance policy taken out by the
deceased on their life with the spouse as beneficiary.
The deduction is not allowed if the spouse has to dispose of the property to another
person or trust in terms of the provisions of the will of the deceased.
No deduction is allowed in respect of any property accruing to a trust established in
the will of the deceased for the benefit of the surviving spouse, if the trust is a discre-
tionary trust and the trustee can distribute income to a person other than the surviv-
ing spouse.

18.6 Section 4A abatement (Step 4)

The net value of the estate must be reduced by the section 4A abatement. Currently
the abatement is R3 500 000. If the deceased was the spouse of a person who died
before him/her, the abatement must be calculated as follows:
The value of the section 4A abatement (currently R3 500 000) plus [value of the sec-
tion 4A abatement (currently R3 500 000) less the amount used to reduce the net value
of the predeceased person’s estate].

REMEMBER

• The abatement can never be more than the net value of the estate.
• If both spouses die simultaneously, for example in a car accident, the person whose
estate has the lowest net value is deemed to have passed away first.
• If the predeceased person (first dying) had more than one spouse and they inherited,
the abatement used to reduce the net value of the estate must be shared pro rata.
• If the deceased had more than one predeceased spouses, the reduction is limited to the
current value of the abatement (which is R3 500 000).

787
A Student’s Approach to Taxation in South Africa 18.6–18.7

Example 18.16
Magie passed away two years after her husband, Petrus Baloy. Petrus left R600 000 cash
to his only son. Magie was the only heir to the rest of Petrus’ estate. The net value of
Petrus’ estate (before Magie’s inheritance) was R4 500 000. Magie’s assets on date of her
death was R6 500 000.
You are required to determine the estate duty payable by Petrus’ and Magie’s estates.

Solution 18.16
R
Petrus
Value of the estate (given) 4 500 000
Less: Section 4(q) deduction (surviving spouse) (3 900 000)
NET VALUE OF THE ESTATE 600 000
Less: Section 4A abatement (Note) (600 000)
TAXABLE VALUE OF THE ESTATE nil
Magie
NET VALUE OF ESTATE (GIVEN) 6 500 000
Less: Section 4A abatement (Note) (6 400 000)
TAXABLE VALUE OF THE ESTATE 100 000

Note
Each estate qualifies for a R3 500 000 section 4A abatement. The value of the abatement is,
however, limited to the net value of the estate, therefore the value of the abatement in Petrus’
estate is R600 000. As Magie was Petrus’ spouse, her estate qualifies for twice the value of the
abatement less the amount used by Petrus. Her estate qualifies for a total abatement of
(R3 500 000 plus [R3 500 000 minus R600 000]) = R6 400 000.

18.7 Successive death rebate (Step 7)

If a person bequeaths property to another who subsequently dies within ten years
thereafter, the estate duty of the second-dying person is reduced by a percentage
established in terms of a table provided in the First Schedule of the Estate Duty Act.
It is a requirement that the second-dying person had to pay the estate duty on the
property into the first-dying person’s estate.

REMEMBER

• If the second-dying person was a residuary heir in the estate of the first-dying, they are
regarded as having borne the estate duty attributable to the property they inherited.
Estate duty that is not apportioned to a person is payable out of the residue of the estate
and the residuary heirs are therefore regarded as bearing the estate duty on their por-
tions of the residue.

788
18.7 Chapter 18: Estate duty

This reduction is allowed provided that the property was included in the estate of
both the first-dying and second-dying persons.
The deduction allowed is as follows:
Deduction allowed on successive deaths Deduction
If the deceased dies within two years of the death of the first-dying person 100%
If the deceased dies more than two years, but not more than four years
after the death of the first-dying person 80%
If the deceased dies more than four years, but not more than six years after
the death of the first-dying person 60%
If the deceased dies more than six years, but not more than eight years
after the death of the first-dying person 40%
If the deceased dies more than eight years, but not more than ten years
after the death of the first-dying person 20%
If the deceased dies more than ten years after the death of the first-dying
person nil%

The deduction cannot exceed the estate duty attributable to the property in the estate
of the first-dying person.

Calculation of the successive death rebate

Step 1: Calculate the normal estate duty liability in the second-dying person’s
estate.

Step 2: Determine the net value of property in the first-dying person’s estate.
Net value = value of property (included in both the first-dying and
second-dying persons’ estates) less any relating expenses.

Step 3: Determine the net value of property in the second-dying person’s

estate. Net value = value of property (included in both the first-dying
and second-dying persons’ estates) less any relating expenses.

Step 4: Determine the lesser of Step 2 or Step 3.

Step 5: Calculate the proportion of the estate duty in the second-dying per-
son’s estate attributable to the answer in Step 4.

Step 6: Multiply your answer in Step 5 with the percentage prescribed in the
Schedule to the Estate Duty Act, determined according to the length
of time between the two deaths.

continued

789
A Student’s Approach to Taxation in South Africa 18.7

Step 7: Compare your answer in Step 6 with the estate duty paid by the first-
dying person on the applicable assets without the reduction of any
percentages. The lesser of the two amounts qualifies as the successive
death rebate.

Step 8: Deduct this rebate from the total estate duty liability as calculated.

Example 18.17
Tom Maloy died five years after his father, Joseph Maloy. Tom was the only legatee as he
was the only child. The net value of Joseph’s estate was R1 750 000. The estate duty paid
by Tom in respect of his father’s estate amounted to R187 500.
The property he inherited from his father declined in value and, on the date of Tom’s
death, it was worth R910 000. Tom also owned other property and deemed property
amounting to R3 340 000. Liabilities and expenditure in Tom’s estate were R220 000,
which relates 45% to the assets inherited from his father and 55% to his own assets.
You are required to determine the estate duty payable by Tom’s estate.

Solution 18.17
R
The normal estate duty liability in Tom’s estate:
Property inherited from his father 910 000
Other property 3 340 000
GROSS VALUE OF ESTATE 4 250 000
Less: Liabilities (220 000)
NET VALUE OF ESTATE 4 030 000
Less: Abatement (3 500 000)
DUTIABLE AMOUNT OF ESTATE 530 000
Estate duty at 20% 106 000
The net value of property in Joseph’s estate: R1 750 000.
The net value of property in Tom’s estate: R910 000 less expenditure relating to the prop-
erty (45% × R220 000) = R811 000.
Determine the lesser: R811 000.
The proportion of the estate duty in Tom’s estate attributable to inheritance: R811 000 /
R4 030 000 (net estate) = 20,12%.
20,12% × R106 000 (estate duty) = R21 332
Tom died five years after Joseph and a 60% deduction is applicable: R21 332 × 60% =
R12 799.
The estate duty payable by Joseph was R187 500. R12 799 qualifies as the successive death
rebate as this is the lesser of rebate and estate duty paid by Joseph.
Deduct this rebate from the total estate duty calculated: R106 000 – R12 799 = R93 201 to
derive at the final estate duty liability.

790
18.8–18.10 Chapter 18: Estate duty

18.8 Deduction of foreign death duty (Step 7) (section 16)

A deduction of foreign death duty paid to another state in respect of property situ-
ated outside the Republic qualifies as a deduction against the estate duty payable.
This deduction is allowed regarding property included in the estate of persons ordi-
narily resident in the Republic in terms of section 16 of the Estate Duty Act.
The rebate is limited to the amount of South African estate duty in respect of such
property.

18.9 Deduction of transfer duty (Step 7) (section 16)

An amount in respect of transfer duty paid shall be deducted from any estate duty
payable in terms of section 16 of the Estate Duty Act. This deduction is allowed if the
person who is responsible for payment of the transfer duty on property received from
the deceased during their lifetime, is also liable for any estate duty attributable to that
property in circumstances where the property is included in the estate. The rebate is
equal to the transfer duty paid at the time of transfer. This rebate will not be claimed
very often.

18.10 Persons liable for payment of estate duty (Step 8)

(section 13)
It does not automatically mean that the estate duty has to be paid by the deceased’s
estate (thus the executor). The ultimate responsibility for the payment of estate duty
lies with the executor. They have, however, the right to recover the duty from the
beneficiaries/legatees in the case of certain situations if the beneficiary does not pay
the estate duty on the relevant assets from the start.
The estate duty, in respect of the following assets, can be recovered as follows:
• a fiduciary, usufructuary or like interest (including an annuity charged upon
property) – recovered from the beneficiary;
• a right to an annuity not charged upon property – recovered from the beneficiary;
• the proceeds of a domestic insurance policy – recovered from the person to whom
the amount is payable; and
• a donation under a donatio mortis causa or in terms of a donation whereby the
donee receives no benefit until the death of the donor – recovered from the donee.

791
A Student’s Approach to Taxation in South Africa 18.10

REMEMBER

• The property received by the legatee should be identical to the property that formed
part of the dutiable amount in the deceased’s estate before the legatee becomes liable
for a portion of the estate duty. This means that if the market value of a farm is included
in the estate of the deceased, and the deceased’s will determines that the usufruct and
bare dominium of the farm are bequeathed to two different legatees, the legatees cannot
be held responsible for the estate duty in terms of section 13. The reason is that the usu-
fruct and bare dominium did not form two separate assets in the deceased’s estate.

The portion of the estate duty recoverable from the beneficiary is the value of the
benefit in proportion to the net value of the estate multiplied by the estate duty pay-
able.
In all other scenarios, the executor is responsible for the payment of estate duty and
the duty cannot be recovered from the beneficiary.

Example 18.18
The value of Altie Pieters’ estate on date of death:
R
Fixed property 4 325 000
Value of insurance policy payable to Gert 80 000
GROSS VALUE OF ESTATE 4 405 000
Less: Liabilities not relating to the insurance policy (220 000)
NET VALUE OF ESTATE 4 185 000
Less: Abatement (3 500 000)
DUTIABLE AMOUNT OF ESTATE 685 000
Estate duty at 20% 137 000
You are required to determine the apportionment of the estate duty to the various benefi-
ciaries in Altie’s estate.

Solution 18.18
The liability of R137 000 can be apportioned as follows:
Gert is liable for estate duty amounting to:
The value of the benefit in proportion to the net value of the estate multiplied by the
estate duty
= R80 000/R4 185 000 × R137 000 = R2 619
The estate is liable for estate duty on the fixed property net of deductions:
(R4 325 000 – R220 000)/R4 185 000 × R137 000 = R134 381
The portion attributable to Gert plus the estate’s portion equals the total estate duty calcu-
lated: R2 619 + 134 381 = R137 000.

792
18.11 Chapter 18: Estate duty

18.11 Assessment
The executor has to submit a return on the prescribed form with the taxable amount
to the Master of the High Court.
The Commissioner shall assess the estate duty payable and issue a notice of assess-
ment to the executor of the estate. If a notice of assessment had not been issued in
time, it is deemed that the notice was issued on the date the estate became distribut-
able or in cases where the value of the estate is less than the prescribed amount in
section 18(3) of the Administration of Estates Act, the date the death notice is given to
the Master.
The Commissioner may declare a person to be the agent of another person. The agent
may be required to make a payment of the estate duty or interest in respect of the
other person. The Commissioner must have the same remedies against all property of
any kind vested in or under the control or management of an agent or trustee as the
Commissioner would have against the property of a person liable to pay a duty or
interest and in such a full and ample manner.
The duty payable must be paid on such date and at such place as the Commissioner
prescribes in the notice of assessment.
SARS has issued a quick guide on estate duty and the following principles are guide-
lines from this guide. Estate duty is due within one year of the date of death or
30 days from the date of assessment, if an assessment is issued within one year of
date of death. After this date interest is charged on the outstanding amount (Tax
Administration Act: section 187).
If the executor does not pay the tax within the set time, a senior officer of SARS may
rule that the interest is not payable if the late payment is due to:
• natural or human-made disasters;
• a civil disturbance or disruption in services; or
• serious illness or accident.
Payment of estate duty may be tendered to any branch office to SARS without formal
documentation (such as an assessment). It is, however, necessary to reflect the Mas-
ter’s number, date of death and identity number of the deceased.
The Commissioner has the power to raise an additional assessment if they are satis-
fied that any amounts have not been assessed that should have been.
If additional assets are found within five years of completion of the estate and a
supplementary liquidation and distribution account is prepared, the notice of assess-
ment is deemed to have been issued on the date the supplementary liquidation and
distribution account became distributable.
If additional assets are found after five years of completion of the estate and a sup-
plementary liquidation and distribution account is prepared, it is deemed that these
assets are the only asset of the estate and that the death of the deceased occurred on
the date on which the additional property is shown in the supplementary liquidation
and distribution account.
If the executor or another person is not satisfied with the assessment raised by the
Commissioner, they may object and appeal against that assessment under the same
provisions as determined in the Act.

793
A Student’s Approach to Taxation in South Africa 18.12

18.12 Marriage in community of property

When a couple is married in community of property, the assets and liabilities of both
spouses form part of the spouses’ joint estate. Certain assets could, however, be
specifically excluded from the joint estate. When the marriage ends due to the death
of one of the spouses, the surviving spouse and the estate of the deceased spouse are
each entitled to a half share of the joint estate.
In calculating the estate duty liability in the estate of the deceased spouse, the fol-
lowing points are included in their estate duty calculation:
• their half share of the net joint estate (assets less liabilities); and
• any property owned by them, which was excluded from the joint estate.
A fiduciary or usufructuary interest held by the deceased does not form part of the
joint estate as it is purely a personal right. It will only be added to the estate of the
deceased after the half of the joint estate has been calculated. A right to an annuity
held by the deceased, however, falls into the joint estate, unless it was expressly
excluded from the joint estate by the creator of the right.
Liabilities that arise only after the death of the deceased spouse, for example funeral
expenses, do not form part of the spouses’ joint estate and are therefore deductible in
full in the estate duty calculation of the deceased spouse.
The estate duty arising on the estate of the deceased spouse is also not a liability of
the joint estate and is therefore payable in full by the estate of the deceased spouse.

Example 18.19
Rajan was married in community of property to Tasnim. At the date of Rajan’s death, the
executor in the couple’s joint estate found the following:
R
Residence 4 850 000
Furniture and household effects 1 650 000
Fixed deposit 400 000
Liabilities (including funeral costs of R10 000) 100 000
Rajan was also the holder of a usufruct over a farm. The usufruct was valued at R150 000.
The usufruct now accrued to Tasnim.
You are required to determine the estate duty payable into Rajan’s estate.

794
18.12–18.13 Chapter 18: Estate duty

Solution 18.19
R
Residence 4 850 000
Furniture and household effects 1 650 000
Fixed deposit 400 000
6 900 000
Less: Liabilities (excluding funeral costs of R10 000) (90 000)
6 810 000
Less: One half (due to marriage in community of property) (3 405 000)
Value of Rajan’s half of the joint estate 3 405 000
Add: Value of the usufruct 150 000
GROSS VALUE OF ESTATE 3 555 000
Less: Funeral costs (10 000)
NET VALUE OF ESTATE 3 545 000
Less: Abatement (3 500 000)
DUTIABLE AMOUNT OF ESTATE 45 000
Estate duty at 20% 9 000

18.13 Summary
When calculating the estate duty on death, one first needs to ascertain whether the
deceased was a person ordinarily resident in the Republic or not. The property and
deemed property of the deceased must be valued and added together to determine
the gross estate. The allowable deductions will reduce the gross estate to the net
estate. Every individual in the Republic is entitled to a R3 500 000 abatement. Estate
duty is then levied at 20% on the dutiable amount of the deceased’s estate on the first
R30 000 000 and by 25% on amounts over that.
The next section contains a question that can be completed to evaluate your
knowledge on estate duty.

795
A Student’s Approach to Taxation in South Africa 18.14

18.14 Examination preparation

Question 18.1
Sean Ferreira, ordinarily resident in the Republic, dies on 25 May of the current year of
assessment. His wife died two years before, leaving him with their two sons, Neil and Lee.
No estate duty was payable on her estate as her net value of the estate was R500 000.
Information relating to Sean’s estate is as follows:
R
1. Residence in Mooikloof – valuation 6 000 000
The residence is bequeathed to Neil Ferreira, Sean’s son. Two years
before his father’s death, with his father’s written approval, Neil
effected improvements to the residence at a cost of R20 000. These
improvements increased the value of the residence by R50 000 at the
date of death of the deceased.
2. At the date of his death, Sean owned a squash court complex in
respect of which he had donated the usufruct to his sons, Neil (50%)
and Lee (50%), on 1 January of the previous year, at which date the
complex was worth R200 000. At the date of Sean’s death, the market
value was R250 000. This is the only donation Sean made during his
life.
3. Furniture and private property – valuation 950 000
4. The farm (Bona-fide farming activities) ‘Dumela’ in the Brits district
• Market value 500 000
5. On Sean’s death, his business partner, Steve, was paid out R800 000
on a life policy taken out on Sean’s life by Steve. Steve had taken out
the policy to enable him, in the event of Sean’s death, to purchase
Sean’s shares in a private company they jointly owned. This had
been agreed upon between Sean and Steve and the company was re-
sponsible for the payment of the premiums.
6. Auditor’s valuation of Sean’s interest in above-mentioned company 600 000
The interest was sold for R500 000 to Steve in terms of an agreement
between the deceased and Steve.
7. Proceeds from selling of fixed property in Sydney (Australia) 1 505 000
Sean obtained this property as a donation from his aunt 30 years ago.
She is an Australian resident.
8. Water and electricity due to the City Council of Sydney on the prop-
erty in Sydney (refer to Note 7 above) 40 000
9. At the date of his death, Sean controlled the profits of a trust. He had
the right to decide what should happen to the profits and was also
entitled to dispose of them. This right is deemed to be property in
terms of section 3(3)(d) of the Estate Duty Act. The Commissioner
has determined the annual value of such profits at R1 000.

continued

796
18.14 Chapter 18: Estate duty

R
10. 15 years prior to his death, Sean received a Lamborghini as a donation
from his uncle. At that date, the car was worth R110 000. His uncle
died a week after his generous gesture and Sean paid the donations
tax of R20 000 in respect of the donation. At the date of Sean’s death,
the car was worth R70 000.
11. Bank overdraft – bank in South Africa 129 733
12. Outstanding income tax due by Sean as calculated by the executor 7 225
13. Executor’s remuneration and masters fees 287 700

You are required to:

Calculate the total estate duty payable in respect of Sean’s estate.

Age next birthday Sean Neil Lee

1 January – previous year 67 27 28
25 May – current year 68 28 29

Answer 18.1
R R
Residence – Mooikloof 5 950 000
Market value 6 000 000
Less: Value of improvements by beneficiary (50 000)
Bare dominium – squash court complex
Fair market value 250 000
Less: ½ usufruct over Neil’s life (age next birthday = 28) that
is to say ½ × 12% of R250 000 × 8,246 77 and (123 702)
Less: ½ usufruct over Lee’s life (age next birthday = 29) that
is to say ½ × 12% of R250 000 × 8,237 37 (123 561) 2 737
Furniture and private property 950 000
Dumela market value reduced by 30% 350 000
Proceeds of life policy (exempt in terms of section 3(3)(a)) nil
Shares in private company
Valued by an independent valuer 600 000
Property in Sydney 1 505 000 1 505 000
Water and electricity – not deductible as the applicable
property is exempt nil

continued

797
A Student’s Approach to Taxation in South Africa 18.14

R R
Profits of a trust of which the deceased was, immediately prior
to his death, competent to dispose of
Valued over life expectancy of Sean at date of death (age next
birthday = 68) R1 000 × 5,734 03 5 734
Lamborghini (Note) 70 000
Gross value of estate 9 433 471
Bank overdraft (129 733)
South African Revenue Services (SARS) (7 225)
Executors remuneration and Master’s fees (287 700)
Less: Value of the Sydney property as was received by
means of a donation from a non-South African
resident (section 4(e)) (1 505 000)
Net value of estate 7 503 813
Less: Abatement (6 500 000)
Dutiable estate (Note) 1 003 813
Estate duty payable at 20% 200 763
Note
• As Sean’s wife died two years before, Sean qualifies for an additional section 4A rebate.
The rebate in his estate will be (R3 500 000 plus (R3 500 000 minus R500 000)) = R6 500 000.
• Although Sean paid the donations tax on the Lamborghini, there is no section in the
Estate Duty Act that allows for it as a deduction in the estate.

798
 Administrative
19 procedures

Exempt Taxable
Gross income – – Deductions = Tax payable
income income

Adjustments
Partnerships Companies Trusts for tax
avoidance

Page
19.1 Introduction ......................................................................................................... 800
19.2 Powers and duties of the Commissioner for the South African
Revenue Services (sections 2 to 12) and the role of the
Tax Ombud (sections 14 to 21) .......................................................................... 803
19.3 Step by step approach ......................................................................................... 804
19.3.1 Registration .......................................................................................... 805
19.3.2 Returns .................................................................................................. 805
19.3.2.1 Prescribed form and place (section 25) ............................ 805
19.3.2.2 Notice by the Commissioner and the manner of
furnishing returns ............................................................... 806
19.3.2.3 Books, accounts and records ............................................. 808
19.4 Advance tax rulings (sections 75 to 90) ............................................................ 809
19.5 Reportable arrangements (sections 34 to 39) ................................................... 811
19.5.1 Definitions ............................................................................................ 811
19.5.2 Disclosure ............................................................................................. 813
19.5.3 Consequences ....................................................................................... 813
19.6 Assessments ......................................................................................................... 814
19.6.1 Original assessments (section 91) ...................................................... 814

799
A Student’s Approach to Taxation in South Africa 19.1

Page
19.6.2 Additional and reduced assessments (sections 92 and 93) .......... 814
19.6.3 Jeopardy assessments (section 94) .................................................. 814
19.6.4 Estimation of assessments (section 95) ........................................... 815
19.6.5 Finality of assessments (sections 99 and 100) ................................ 815
19.6.6 Withdrawal of assessments (section 98) ......................................... 817
19.6.7 Record of assessments (section 97) ................................................. 817
19.7 Penalties and additional tax ............................................................................ 818
19.7.1 Fixed-amount penalties (section 211) ............................................. 818
19.7.2 Percentage-based penalties (section 213) ....................................... 819
19.7.3 Understatement penalty (section 222) ............................................ 820
19.7.4 Criminal offences (sections 234 to 238)........................................... 821
19.8 Dispute resolution (sections 101 to 150) ......................................................... 823
19.8.1 Objection (section 104) ...................................................................... 824
19.8.2 Settlement of disputes (sections 142 to 150)................................... 825
19.8.3 Appeal (sections 107 to 141) ............................................................. 828
19.9 Burden of proof (section 102) .......................................................................... 832
19.10 Payment, recovery and refund of tax ............................................................. 832
19.10.1 Date for payment of tax and interest on overdue payments
(sections 162 and 187 to 189) ............................................................ 832
19.10.2 Payment and recovery: Third parties (sections 179 to 184) ......... 833
19.10.3 Suspension of payment of tax in dispute (section 164) ................ 834
19.10.4 Waiver, write-off or compromise of amounts payable
(sections 195 to 199)........................................................................... 834
19.11 Refunds (sections 190 and 191) ....................................................................... 835
19.12 Registration of tax practitioners (section 240) ............................................... 835
19.13 Reporting of unprofessional conduct (sections 239 to 243) ......................... 836
19.14 Summary ............................................................................................................ 837
19.15 Examination preparation ................................................................................. 838

19.1 Introduction
The previous chapters have focused on the calculation of taxable income and tax
payable. The Tax Administration Act (the TAA), which was promulgated on 4 July
2012, contains the general provisions relating to the returns and assessments, objec-
tion and appeal rules, the payment and recovery of tax, representative taxpayers and
various miscellaneous matters. This chapter focuses on some of the general principles
contained in the TAA and the administrative matters still listed in the Income Tax
Act.

800
19.1 Chapter 19: Administrative procedures

Critical questions

When a taxpayer deals with administrative procedures, the following questions arise:
• In what form and place must returns be submitted?
• Who is liable to render an income tax return?
• For which period must a return be rendered?
• Who is liable to register as a taxpayer?
• Who is liable to register as a tax practitioner?
• Under what circumstances are penalties and additional tax imposed by the Commis-
sioner?
• What are the requirements that must be met before an arrangement must be reported to
the Commissioner?
• What types of advance tax rulings can be issued by the Commissioner?
• Under what circumstances is an assessment issued by the Commissioner?
• How are objection and appeal rules applied?
• Who carries the burden of proof in terms of section 102?
• When must tax be paid and how is interest charged on outstanding amounts of tax?
• What are the tax consequences of being a representative taxpayer?

The TAA contains several of the administrative provisions that SARS must apply
when conducting administrative procedures for any of the acts under its jurisdiction.
The TAA consists of 20 chapters with several provisions and parts under each chap-
ter. The outline provided below aims to give some guidance of where to find relevant
sections. Note that only sections that apply to the majority of taxpayers are discussed
in this chapter.

Legislation:
Tax Administration Act

Chapter 1 – Definitions (section 1)

Chapter 2 – General administration provisions
Part A In general (sections 2 to 5)
Part B Powers and duties of SARS and SARS officials (sections 6 to 9)
Part C Delegations (section 10)
Part D Authority to act in legal proceedings (sections 11 to 12)
Part E Powers and duties of Minister (sections 13 to 14)
Part F Powers and duties of Tax Ombud (sections 15 to 21)
Chapter 3 – Registration (sections 22 to 24)
Chapter 4 – Returns and records
Part A General (sections 25 to 33)
Part B Reportable arrangements (sections 34 to 39)

continued

801
A Student’s Approach to Taxation in South Africa 19.1

Chapter 5 – Information gathering

Part A General rules for inspection, verification, audit and criminal
investigation (sections 40 to 44)
Part B Inspection, request for relevant material, audit and criminal investigation (sections 45
to 49)
Part C Inquiries (sections 50 to 58)
Part D Search and seizure (sections 59 to 66)
Chapter 6 – Confidentiality of information (sections 67 to 74)
Chapter 7 – Advance rulings (sections 75 to 90)
Chapter 8 – Assessments (sections 91 to 100)
Chapter 9 – Dispute resolution
Part A General (sections 101 to 103)
Part B Objection and Appeal (sections 104 to 107)
Part C Tax board (sections 108 to 115)
Part D Tax court (sections 116 to 132)
Part E Appeal against tax court decision (sections 133 to 141)
Part F Settlement of dispute (sections 142 to 150)
Chapter 10 – Tax liability and payment
Part A Taxpayers (sections 151 to 161)
Part B Payment of tax (sections 162 to 164)
Part C Taxpayer account and allocation of payments (sections 165 to 166)
Part D Deferral of payment (sections 167 to 168)
Chapter 15 – Administrative non-complince penalties
Part A General (sections 208 to 209)
Part B Fixed amount penalties (sections 210 to 212)
Part C Percentage based penalty (section 213)
Part D Procedure (sections 214 to 215)
Part E Remedies (sections 216 to 220)
Chapter 16 – Understatement penalty
Part A Imposotion of understatement penalty (sections 221 to 224)
Part B Voluntary disclosure programme (sections 225 to 233)
Chapter 17 – Criminal offences (sections 234 – 238)
Chapter 18 – Registration of tax practitioners and reporting of unprofessional conduct
(sections 239 to 243)

It is important to firstly list some of the definitions applicable to the TAA that are
covered in this chapter.

802
19.1–19.2 Chapter 19: Administrative procedures

Legislation:
Section 1: Definitions
‘Assessment’ means the determination of the amount of tax liability or refund, by way of
self-assessment by the taxpayer or assessment by SARS.
‘Business day’ means a day which is not a Saturday, Sunday or public holiday, and for
purposes of determining the days or a period allowed for complying with the provisions of
Chapter 9 (dispute resolutions, objection and appeals) excludes the days between
16 December of each year and 15 January of the following year, both days inclusive.
‘Date of assessment’ means –
(a) in the case of an assessment by SARS, the date of the issue of the notice; or
(b) in the case of self-assessment by the taxpayer –
(i) if a return is required, the date that the return is submitted; or
(ii) if no return is required, the date of the last payment of the tax for the tax period
or, if no payment was made in respect of the tax period, the effective date.
‘International tax agreement’ means –
(a) an agreement entered into with the government of another country in accordance
with a tax Act; or
(b) any other agreement entered into between the competent authority of the Republic
and the competent authority of another country relating to the automatic exchange of
information under an agreement referred to in paragraph (a).
‘Return’ means a form, declaration, document or other manner of submitting information
to SARS that incorporates a self-assessment, is a basis on which an assessment is to be
made by SARS or incorporates relevant material required under section 25, 26 or 27 or a
provision under a tax Act requiring the submission of a return.
‘SARS official’ means –
(a) the Commissioner;
(b) an employee of SARS; or
(c) a person contracted or engaged by SARS, other than an external legal representative,
for purposes of the administration of a tax Act and who carries out the provisions of a
tax Act under the control, direction or supervision of the Commissioner.
‘Self-assessment’ means an amount of tax payable under a tax Act, which has been deter-
mined by a taxpayer and submitting a return which incorporates the determination of the
tax or if no return is required, making a payment of the tax.
‘Tax Act’ means this Act or an Act, or portion of an Act, referred to in section 4 of the SARS
Act, excluding the Customs and Excise Act, the Customs Control Act, 2014 and the Cus-
toms Duty Act, 2014.

Secondly, before starting with the administration process, it is important to understand

the powers and duties of the Commissioner of SARS and the role of the Tax Ombud.

19.2 Powers and duties of the Commissioner for the South

African Revenue Services (sections 2 to 12) and the role of
the Tax Ombud (sections 14 to 21)
The various acts administered by SARS provide the Commissioner with certain
discretionary powers. In terms of section 6, the Commissioner must carry out these

803
A Student’s Approach to Taxation in South Africa 19.2–19.3

duties personally or by a person delegated by the Commissioner (section 10). One of

these powers is the power to give notice that income tax returns must be submitted.
As some of the decisions made by the Commissioner or SARS are based on an inter-
pretation of facts, section 3(4) of the Income Tax Act sets out a list of the discretionary
decisions subject to objection and appeal in accordance with Chapter 9 of the TAA.
Should a specific section not be mentioned in the list, the taxpayer still has the right to
objection and appeal based on the wording of the specific section.
Chapter 6 states that anyone working for the Commissioner must preserve and aid in
preserving secrecy regarding any information obtained in the performance of their
duties. The Commissioner may, however, use the information obtained to combat tax
evasion under any law administered by him. The Commissioner can disclose certain
information to other government institutions or employers.
Parts E and F of Chapter 2 refer to the appointment of a Tax Ombud in South Africa.
They are appointed for a term of five years, which term may be renewed. The man-
date of the Tax Ombud is to review and address any complaint by a taxpayer regard-
ing a service matter or a procedural or administrative matter arising from the
application of the provisions of a tax Act by SARS. In addition to this the review, at
the request of the Minister or at the initiative of the Tax Ombud (with the approval of
the Minister), any systemic and emerging issue related to a service matter or the
application of the provisions of this Act or procedural or administrative provisions of
a tax Act. The procedure on how to lodge a complaint and the documentation that
must be provided are included in Part F.

19.3 Step by step approach

After the year of assessment has ended, there are certain steps and procedures that
both the taxpayer and SARS must follow. Many of these steps are legislated in the
TAA and the Income Tax Act. This chapter examines some of the key aspects that
take place during each step in relation to taxpayers.

Administrative steps and other provisions

Step 1: A person may voluntarily apply for registration or in some instances

he is obliged to apply for registration under a tax Act (refer to 19.3.1).

Step 2: The taxpayer is responsible for furnishing returns in the prescribed

form and manner (refer to 19.3.2).

Step 3: Where a taxpayer is uncertain about how SARS will interpret or apply
certain sections, the taxpayer can request an advance tax ruling (refer
to 19.4).

continued

804
19.3 Chapter 19: Administrative procedures

Step 4: If a taxpayer is involved in a reportable arrangement, it is his respon-

sibility to disclose this to SARS (refer to 19.5).

Step 5: SARS uses the information provided on the tax return to issue an
assessment indicating how much tax the taxpayer still owes or will
receive back (refer to 19.6).

Step 6: Where the taxpayer has not adhered to the prescribed form or dates,
penalties and additional tax are levied by SARS when assessing the
return (refer to 19.7).

Step 7: Where the taxpayer is not satisfied with the assessment, they may
object or appeal against the assessment (refer to 19.8 and 19.9).

Step 8: Once the dispute has been settled, SARS refunds any amount due to
the taxpayer or the taxpayer settles any additional amount of tax due
to SARS (refer to 19.10 and 19.11).

19.3.1 Registration
A person is obliged to apply or can voluntarily apply for registration with SARS
under a tax Act. He/she must do so within the applicable period provided for in a tax
Act or within 21 business days of becoming obliged to register where no period is
provided for in the particular tax Act. He/she must apply in the prescribed form and
manner. Failure to do so will be regarded as the person not having applied for regis-
tration.
Once a person has been registered, he/she must notify SARS within 21 business days
of any changes relating to postal, physical and electronic addresses, representative
taxpayer, banking details or other details required by the Commissioner by public
notice.
Once registered, the taxpayer is allocated a reference number that must be included
in all returns or other documents submitted to SARS. Failure to do so may result in
the submitted documents being invalid.

19.3.2 Returns
19.3.2.1 Prescribed form and place (section 25)
A taxpayer is obliged to submit a return for each tax period. All returns must be
submitted in the prescribed form and manner (including electronically) at the place as
prescribed by the Commissioner before the date specified in an Act or announcement
by the Commissioner.

805
A Student’s Approach to Taxation in South Africa 19.3

19.3.2.2 Notice by the Commissioner and the manner of furnishing returns

• Persons liable to render returns (section 66 of the Income Tax Act 58 of 1962)
The Commissioner must give notice annually, calling for the rendering of returns,
which must be rendered within the period prescribed in the notice.
Currently the Commissioner has compelled the following persons to render returns:
• a person other than a company whose gross income for the 12 months ending on
the last day of February consisted of or included ‘remuneration’ (as defined in par-
agraph 1 of the Fourth Schedule for employees’ tax purposes) that exceeds an
amount stated by the Commissioner in the public notice;
• a person other than a company whose gross income for the 12 months ending on
the last day of February consisted of or included:
– interest if the aggregate of the interest exceeded:
* R34 500 in the case of a person who was, or had he lived, would have been at
least 65 years of age on the last day of the year of assessment;
* R23 800 in any other case; or
– amounts other than interest and remuneration as defined in paragraph 1 of the
Fourth Schedule, if his gross income exceeded an amount stated by the Commis-
sioner in his public notice;
• a company;
• a person required by the Commissioner in writing to render a return of income for
the year of assessment under charge;
• a person whose aggregate capital gain or aggregate capital loss for the year of
assessment exceeds an amount to be stated by the Commissioner in his public no-
tice; and
• a resident who owns funds or assets outside South Africa, or funds or assets from
which any income or capital gain would be attributable to the resident during the
relevant year of assessment in terms of section 7 or Part X of the Eighth Schedule.

REMEMBER
An individual who has a total income of less than R500 000 (for the 2021/2022 year of
assessment, same as it was in 2020/2021), does not need to submit a tax return, provided:
• he/she was employed by one employer (remember, if the person had two employers,
he/she needs to submit a return irrespective of the income earned);
• he/she has no car allowance or other income (for example interest or rent);
• he/she is not claiming tax-related deductions (for example medical expenses, retire-
ment, travel);

continued

806
19.3 Chapter 19: Administrative procedures

• he/she received interest from a source in South Africa that did not exceed –
– R23 800 if he is below the age of 65 years; or
– R34 500 if he aged 65 years or older;
• dividends were paid to him/her and he was a non-resident during the year of assess-
ment.
Returns submitted electronically (via the eFiling system) have a later date for submission
than those filed manually (paper-based).

It is the duty of all persons who are required by the TAA to furnish returns to apply
for the prescribed forms.
A person failing to furnish returns will not be relieved from any administrative
penalty simply because he never received a notice calling on him to furnish them or
the prescribed form was never delivered to him.
The Commissioner may also call upon a person to render an interim return prior to
the issue of the annual notice and may make an assessment for that period on the
basis of that return.
A person who is not obliged to render a return may do so voluntarily within three
years after the end of that year for the purpose of having his liability for tax assessed.
The word ‘income’ must be construed as including any aggregate capital gain or
aggregate capital loss.

• Signature of returns (section 25)

A taxpayer’s return must be signed by him or by his duly authorised representative.
A person signing a return is deemed to be cognisant of all statements made in that
return.
A return made or signed by or on behalf of a person is deemed to be duly made and
signed by the person affected, unless he proves that such return was not made or
signed by him or on his behalf.

• Electronic format
The Commissioner may, in the case of a return rendered by a taxpayer or his auth-
orised agent in electronic format, accept electronic or digital signatures as valid sig-
natures.
The Minister may make rules and regulations prescribing the procedures for submit-
ting a return in electronic format and the requirements for electronic or digital sig-
natures.

REMEMBER

• SARS requires certain identification documentation when registering on ‘eFiling’. This

verifies the taxpayer or representative taxpayer and means that all future electronic cor-
respondence with SARS via eFiling will have a recognised electronic signature.

807
A Student’s Approach to Taxation in South Africa 19.3

Period of return (section 66 of the Income Tax Act)

The return of income to be made by a person in respect of a year of assessment must
be a true and full return.

• Person other than a company

For a person other than a company, the return must be for the whole period of
12 months ending on the last day of February. However, in the event of a person’s
death, the return must be made for the period commencing on the first day of that
period and ending on the date of death. Where a person ceases to be a resident, a
return for the period commencing on the first day of that period and ending on the
day before the date that the person ceases to be a resident must be made. When a
person’s estate is sequestrated, separate returns must be made for the periods:
• commencing on the first day of the period and ending on the day preceding the
date of sequestration; and
• commencing on the date of sequestration and ending on the last day of that period.
Note that, in terms of section 68 of the Income Tax Act, a taxpayer is expressly
required to include in his return income derived by his spouse or minor children that
is deemed to accrue to him under section 7(2), (3) or (4) or any capital gain deemed to
be that parent’s capital gain in terms of paragraphs 68 and 69 of the Eighth Schedule.

• Company
In the case of a company, the return must be for the whole period of the relevant
financial year of that company comprising the year of assessment.

• Periods other than the year of assessment

In certain circumstances, the whole or some portion of a person’s income cannot
conveniently be returned for the year of assessment. The Commissioner may then
accept accounts for the whole or a portion of the taxpayer’s income drawn to some
other date. These accounts may be drawn for a longer or shorter period than the year
of assessment under charge. The income disclosed in the accounts, whether for 12
months or any other period, is deemed to be that person’s income for the period or
year of assessment under charge.

19.3.2.3 Books, accounts and records

Returns and accounts for other persons (sections 28 and 29)
A person must keep the records, books of account or documents that enable him to
observe the requirements of a tax Act or are specifically required by a tax Act. These
records must satisfy SARS that the person has met the requirements.
Section 28 imposes the duty on persons submitting accounts in support of returns or
preparing accounts for other persons, to submit a certificate or statement recording
the extent of examination of books and supporting documents and, as far as may be
ascertained by such examination, whether they disclose the true nature of a transac-
tion, receipt, accrual, payment or debit.

808
19.3–19.4 Chapter 19: Administrative procedures

Persons who render returns (sections 29 and 30)

Section 29 imposes the duty on a person who is required to render a return or who
has rendered a return, to retain all records (including electronic representations of
information in any form) relevant to that return for a period of five years from the
date of submitting a return or end of the tax period. The records must be retained in
such form (including any electronic form) as may be prescribed by the Commissioner.

Retention period in case of audit, objection or appeal (section 32)

Section 32 imposes the duty on a person who lodges an objection or appeal against an
assessment, if records, books of account or documents are relevant to an audit or
investigation, to retain all relevant records until that audit, investigation or assess-
ment becomes final.

REMEMBER

• Every person (including companies) liable for tax must submit a return of their income.
• Every return must be signed by the taxpayer himself or his duly authorised agent.
• Electronic signatures are accepted as valid signatures.
• All returns must be submitted to the Commissioner within the prescribed period.

19.4 Advance tax rulings (sections 75 to 90)

Sections 75 to 90 contains an advance tax ruling (ATR) system within SARS. An ATR
system is intended to promote clarity, consistency, and certainty in respect of the
interpretation and application of the TAA to an applicant. The ATR process is quite
rigid and formal. It is not designed to provide answers to all queries of the applicant
in connection with tax affairs. The ATR process can be relatively lengthy and expen-
sive, therefore it is important to consider whether it is necessary or cost-effective to
obtain an ATR, given the applicant’s set of circumstances.
Sections 75 to 90 establish the framework for the system, setting out basic provisions
regarding:
• the application process;
• fees;
• exclusions and refusals;
• effect of rulings;
• impact of subsequent law changes;
• retrospectivity; and
• publication of rulings.
Section 78 gives the Commissioner the power to issue the following types of rulings:
• binding private rulings; and
• binding class rulings.

809
A Student’s Approach to Taxation in South Africa 19.4

In certain circumstances the Commissioner may reject an application for an ATR, for
example where the ATR concerns:
• an opinion on the market value of an asset;
• the interpretation of the laws of a foreign country;
• the pricing of goods or services supplied by or rendered to a connected person in
relation to the ‘applicant’ or a ‘class member’;
• transactions that are hypothetical or not seriously considered;
• a matter which can be resolved by SARS issuing a directive under the Fourth
Schedule to the Income Tax Act;
• whether a person is a labour broker, independent contractor or personal service
provider;
• frivolous or vexatious issues;
• an opinion on alternative courses of action;
• the application is submitted for academic purposes;
• an issue that is currently being disputed with SARS, or is the subject of draft legis-
lation, or is pending before the courts; or
• a matter that would be unduly time-consuming or resource-intensive (section 80).
In addition to the above, the Commissioner may publish lists of issues in respect of
which applications for rulings will be rejected. Before giving a ruling, the Commis-
sioner may request additional information and, if this is not given, the application
may be rejected without a refund of the fee.

Binding effect of advance rulings (sections 82 to 85)

An advance ruling only applies to a person if:
• the provision of the Act can be subjected to an advance ruling;
• the taxpayer’s set of facts or ‘transaction’ is the same as the details specified in the
ruling;
• the transaction falls in the effective period of the ruling;
• assumptions made or conditions imposed by SARS to validate the ruling have
been satisfied or carried out; and
• in the case of a ‘binding private ruling’, the person is an ‘applicant’ identified in the
ruling; or in the case of a ‘binding class ruling’, the person is a ‘class member’ iden-
tified in the ruling.
Section 84 describes situations where a ruling is void, for example if the proposed
transaction differs materially from the ruling or an assumption made or condition
imposed by SARS is not satisfied or carried out. Section 85 clearly states an advance
ruling will no longer apply if there are changes in legislation or if it is withdrawn
subsequent to an ATR.

Non-binding private opinions (section 88)

The Commissioner may issue a non-binding private opinion, that is to say a written
statement issued by the Commissioner but it has no binding effect on him.

810
19.4–19.5 Chapter 19: Administrative procedures

REMEMBER

• Binding private rulings are binding upon the Commissioner only with respect to the
applicant and the proposed transaction.
• Binding class rulings are only binding upon the Commissioner with respect to a specific
class of persons in respect of a proposed transaction or ruling.
• Non-binding private opinions do not have any binding effect on the Commissioner.
• Binding private rulings, binding class rulings and binding general rulings must be
published by the Commissioner, unless a similar ruling has already been published
(section 87).

19.5 Reportable arrangements (sections 34 to 39)

Special reporting rules for transactions that contain indicators of potential tax avoid-
ance were introduced into the TAA to uncover ‘innovative’ corporate tax products
that effectively cost the tax system hundreds of millions of rands annually. Most of
these innovative products stem from the banks and other sophisticated financial in-
stitutions. These reporting rules are set out below.

19.5.1 Definitions
Arrangement
An ‘arrangement’ means a transaction, operation, scheme, agreement or understand-
ing (whether enforceable or not).

Financial benefit
A reduction in the cost of finance, including interest, finance charges, costs, fees, and
discounts in the redemption amount.

Participant
In relation to a reportable arrangement means:
• a promoter;
• a person who directly or indirectly derives or is deemed to derive a tax or financial
benefit by virtue of an arrangement; or
• any other person who is party to an arrangement listed in a public notice.

Pre-tax profit
In relation to a reportable arrangement means the profit of a participant resulting
from that arrangement before deducting normal tax. The profit must be determined in
accordance with International Financial Reporting Standards after taking into account
all costs and expenditure incurred by that participant in connection with the arrange-
ment and after deducting foreign taxes paid or payable by that participant.

811
A Student’s Approach to Taxation in South Africa 19.5

Promoter
In relation to an arrangement, means a person who is principally responsible for
organising, designing, selling, financing or managing the arrangement.

Tax benefit
Tax benefit includes avoidance, postponement, reduction or evasion of liability for
tax.
Subject to the exclusion below, section 35 (‘reportable arrangements legislation’) is
generally triggered where an arrangement:
• provides for interest, finance costs, fees or other charges that are partially or wholly
dependent on the assumptions relating to the tax treatment of that arrangement
(other than by reason of a change in any law administered by the Commissioner);
• has any of the characteristics of, or characteristics which are substantially similar
to, the indicators of a lack of commercial substance in terms of the impermissible
tax avoidance arrangements;
• is or will be disclosed by a participant as a financial liability for purposes of Inter-
national Financial Reporting Standards but not for income tax purposes;
• does not result in a reasonable expectation of a pre-tax profit for a participant; or
• results in a reasonable expectation of a pre-tax profit for a participant that is less than
the value of those tax benefits to that participant on a present value basis.
Section 36 provides that the following arrangements are not reportable arrangements:
• a debt in terms of which:
– the borrower receives an amount of cash and agrees to repay at least the same
amount of cash to the lender at a determinable future date; or
– the borrower receives a fungible asset and agrees to return an asset of the same
kind and of the same or equivalent quantity and quality to the lender at a deter-
minable future date;
• a lease;
• a transaction undertaken through an exchange regulated in terms of the Financial
Markets Act 19 of 2012; or
• a transaction in participatory interests in a scheme regulated in terms of the Collec-
tive Investment Schemes Control Act 45 of 2002.
Provided that:
• the arrangement:
– is undertaken on a stand-alone basis and is not directly or indirectly connected
to, or directly or indirectly dependent upon, any other arrangement (whether
entered into between the same or different parties); or
– would have qualified as having been undertaken on a stand-alone basis as
required above, were it not for a connected arrangement that is entered into for
the sole purpose of providing security and no tax benefit is obtained or en-
hanced by entering into such security arrangement;

812
19.5 Chapter 19: Administrative procedures

• that arrangement is not entered into:

– with the main purpose of obtaining or enhancing a tax benefit; or
– in a specific manner or form with the main purposes of obtaining or enhancing a
tax benefit; and
• the Commissioner has not specifically excluded the arrangement in the Gazette due
to the fact that the arrangement would not likely lead to an undue tax benefit.

19.5.2 Disclosure
Section 37(1) provides that the participant in a reportable arrangement must disclose
the required information regarding the arrangement, to the Commissioner at the
place as the Commissioner may determine within 45 days after the date:
• the arrangement becomes a reportable arrangement; or
• he becoming a participant of a reportable arrangement.
SARS may extend the period of 45 days by no more than 45 days when he is satisfied
that reasonable ground exists for the delay in reporting the arrangement.
The participant need not disclose the required information if he is in possession of a
written statement from either the promoter or another participant that they have
disclosed the required information.
In terms of section 38 the following information must be provided to the Commis-
sioner in relation to the reportable arrangement:
• a detailed description of all its steps and key features;
• a detailed description of the assumed tax benefits for all participants, including,
but not limited to, tax deductions and deferred income;
• the names, registration numbers and registered addresses of all participants;
• a list of all its agreements; and
• any financial model that embodies its projected tax treatment.
The Commissioner must issue a reportable arrangement reference number to each
participant. This is, however, only for administrative purposes.

19.5.3 Consequences
Section 212 provides that:
– a participant (as defined in section 34) who fails to disclose the required infor-
mation in respect of a reportable arrangement; or
– an intermediary (as defined in the regulations issued where an “international tax
standard” is defined) who fails to disclose the information required under the regu-
lations;
is liable to a penalty of R50 000 for each month that the failure continues (up to 12
months), in the case of a participant or intermediary (other than the promotor) who
was party to an arrangement, or R100 000 per month in the case of the promoter.
The amount of the ‘penalty’ is doubled if the amount of the anticipated ‘tax benefit’
(as defined in section 34) for the ‘participant’ by reason of the arrangement exceeds
R5 000 000, and is tripled if the benefit exceeds R10 000 000.

813
A Student’s Approach to Taxation in South Africa 19.6

19.6 Assessments
Once a taxpayer has submitted the relevant tax forms, SARS assesses the taxpayer
and issues an assessment (for example an ITA34 letter) which reflects a tax liability or
a refund amount. However, before this step, SARS may decide to investigate the
taxpayer and perform an audit by requesting information from the taxpayer. This is
dealt with in Chapters 5 and 6 of the TAA. These chapters are not covered here.
An assessment must be issued by SARS before it can enforce the collection of an
outstanding tax liability. The following types of assessments exist:
• original assessments (including self-assessments);
• additional or reduced assessments; or
• jeopardy assessments.

19.6.1 Original assessments (section 91)

Section 91 provides that if a taxpayer is required to submit a return that includes an
original self-assessment of the tax liability, this is to be the original assessment or else
SARS must make an original assessment based on the return submitted.

19.6.2 Additional and reduced assessments (sections 92 and 93)

SARS must make an additional assessment if it is at any time satisfied that an assess-
ment does not reflect the correct application of a tax Act resulting in the prejudice of
SARS or the fiscus.
In terms of section 93, SARS may make a reduced assessment if:
• the taxpayer successfully disputed the assessment;
• it is necessary to give effect to a settlement;
• it is required as result of a judgment;
• SARS is satisfied that there is an error in the assessment as a result of an undisput-
ed error by SARS, or by the taxpayer in a return; or
• a senior SARS official is satisfied that an assessment was based on
– the failure to submit a return or the submission of an incorrect return by a third
party or by an employer; or
– a processing error by SARS; or
– a return fraudulently submitted by a person not authorised by the taxpayer.
SARS may reduce an assessment despite the fact that no objection has been lodged or
no appeal has been noted.

19.6.3 Jeopardy assessments (section 94)

SARS may make a jeopardy assessment before the normal due date of a return, if the
Commissioner is satisfied that it is required to secure the collection of tax that would
otherwise be in jeopardy.
The taxpayers can request the High Court to review the jeopardy assessment, and
SARS bears the burden of proving that the making of the jeopardy assessment is
reasonable under the circumstances.

814
19.6 Chapter 19: Administrative procedures

19.6.4 Estimation of assessments (section 95)

SARS may make an original, additional, reduced or jeopardy assessment based in
whole or in part on an estimate if the taxpayer:
• does not submit a return;
• submits a return or relevant material that is incorrect or inadequate; or
• does not submit a response to a request for relevant material under section 46, in
relation to the taxpayer, after delivery of more than one request for such material.
The estimate must be made on information readily available. The taxpayer and a
senior SARS official may sometimes agree in writing on the amount of tax chargeable
and an assessment is issued accordingly. This assessment is only subject to objection
and appeal if SARS decides not to make a reduced or additional assessment after the
taxpayer submits the return or relevant material.
The taxpayer may within 40 business days from the date of the estimated assessment,
request SARS to make a reduced or additional assessment by submitting a true and
full return or the relevant material (section 95(6).
If reasonable grounds for an extension are submitted by a taxpayer, a senior SARS
official may extend the 40 day period within which the return or relevant material
must be submitted, as long as it doesn’t exceed the period set out in section 99(1) or
40 business days, whichever is the longest.
If SARS decides not a make a reduced or additional assessment, the date of the as-
sessment is regarded as the date of the notice of the decision.

19.6.5 Finality of assessments (sections 99 and 100)

Section 99 of the TAA contains the provisions within which period an assessment
must be issued. Simultaneously section 100 contains the provisions when the assess-
ment will become final.

Legislation:
Section 99: Period of limitations for issuance of
assessments
(1) SARS may not make an assessment in terms of this Chapter—
(a) three years after the date of assessment of an original assessment by SARS;
(b) in the case of self-assessment for which a return is required, five years after the date
of assessment of an original assessment—
(i) by way of self-assessment by the taxpayer; or
(ii) if no return is received, by SARS;
(c) in the case of a self-assessment for which no return is required, after the expiration of
five years from the—
(i) date of the last payment of the tax for the tax period; or
(ii) effective date, if no payment was made in respect of the tax for the tax period;

continued

815
A Student’s Approach to Taxation in South Africa 19.6

(d) in the case of—

(i) an additional assessment if the—
(aa) amount which should have been assessed to tax under the preceding
assessment was, in accordance with the practice generally prevailing at
the date of assessment, not assessed to tax; or
(bb) full amount of tax which should have been assessed under the preceding
assessment was, in accordance with the practice, not assessed;
(ii) a reduced assessment, if the preceding assessment was made in accordance
with the practice generally prevailing at the date of that assessment;
(iii) a tax for which no return is required, if the payment was made in accordance
with the practice generally prevailing at the date of that payment; or
(e) in respect of a dispute that has been resolved under Chapter 9.
(2) Subsection (1) does not apply to the extent that—
(a) in the case of assessment by SARS, the fact that the full amount of tax chargeable was
not assessed, was due to—
(i) fraud;
(ii) misrepresentation; or
(iii) non-disclosure of material facts;
(b) in the case of self-assessment, the fact that the full amount of tax chargeable was not
assessed, was due to—
(i) fraud;
(ii) intentional or negligent misrepresentation;
(iii) intentional or negligent non-disclosure of material facts; or
(iv) the failure to submit a return or, if no return is required, the failure to make the
required payment of tax;
(c) SARS and the taxpayer so agree prior to the expiry of the limitations period; or
(d) it is necessary to give effect to—
(i) the resolution of a dispute under Chapter 9; or
(ii) section deleted
(iii) an assessment referred to in section 93(1)(d) if SARS becomes aware of the error
referred to in that subsection before expiry of the period for the assessment un-
der subsection (1); or
(iv) a reduced or additional assessment under section 95(6).
(e) SARS receives a request for a reduced assessment under section 93(1)(e) or
(3) the Commissioner may extend a period under subsection (1), before the expiry thereof,
by an appropriate period in the following circumstances:
(a) if a taxpayer fails to provide relevant material to SARS within a reasonable period;
(b) the time taken to resolve an information entitlement dispute, including all legal
proceedings; or
(4) the Commissioner may extend a period under subsection (1), before the expiry thereof
where an audit or investigation under Chapter 5 relates to—
(i) the application of the doctrine of substance over form;
(ii) the application of PART IIA of Chapter III of the Income Tax Act, section 73 of the
Value-added Tax Act or any other general anti-avoidance provision under a tax
Act;
(iii) the taxation of hybrid entities or hybrid instruments; or
(iv) section 31 of the Income Tax Act.

816
19.6 Chapter 19: Administrative procedures

An assessment or a decision is final if:

• no objection has been made, or an objection has been withdrawn;
• after the decision of an objection, no notice of appeal has been filed or a notice has
been filed and is withdrawn;
• the dispute has been settled under settlement of dispute rules;
• an appeal has been determined by the tax board and there is no referral to the tax
court;
• an appeal has been determined by the tax court and there is no right of further
appeal; or
• an appeal has been determined by a higher court and there is no right of further
appeal.

19.6.6 Withdrawal of assessments (section 98)

The Commissioner may, notwithstanding the fact that no objection has been lodged
or appeal has been noted, withdraw an assessment which was issued:
• to the incorrect taxpayer;
• in respect of the incorrect tax period; or
• as a result of an incorrect payment allocation.
An assessment so withdrawn is for all purposes of the TAA deemed not to have been
issued. Where an assessment is withdrawn, SARS may issue an additional or reduced
assessment if satisfied that it is required for the relevant tax period. If the additional
assessment is an agreed assessment between SARS and the taxpayer, it is not subject
to objection or appeal.

19.6.7 Record of assessments (section 97)

The record of assessments shall not be open to public inspection, but every taxpayer
shall be entitled to copies certified by or on behalf of the Commissioner of such rec-
ords that relate to him. SARS may destroy assessments (including the return or rec-
ords on which it was based, whether electronic or otherwise) after a period of seven
years from the date of assessment or a further period that may be required by the
Auditor General, as a result of the application of section 99(2)(c) (refer to 19.6.5) or for
the purposes of a verification, audit or investigation under Chapter 5 (Information
gathering) or Chapter 9 (Dispute resolution).

REMEMBER

• The tax that is payable by a taxpayer is conveyed to him by means of an assessment.

• The Commissioner may issue different types of assessments:
– original assessments;
– additional assessments; and
– jeopardy assessments.

817
A Student’s Approach to Taxation in South Africa 19.7

19.7 Penalties and additional tax

The penalty system can be illustrated as follows:

Penalties across all taxes

Administrative
Understatement Criminal
non-compliance
penalties offences
penalties

Specific tax type

Fixed-amount Percentage-based General
offences listed in
penalties penalties offences
Tax Acts

Reportable
arrangement
&
Mandatory
disclosure
penalty

The TAA prescribes two types of penalties, namely administrative non-compliance

penalties (sections 208 to 220) and understatement penalties (sections 221 to 224). The
TAA also lists certain actions as criminal offences (sections 234 to 238).
Administrative non-compliance penalties can be divided into fixed-amount penalties
and percentage-based penalties.

19.7.1 Fixed-amount penalties (section 211)

The fixed-amount penalties are imposed for a range of non-compliances, including
failure to register as a taxpayer, failure to inform SARS of a change of address and
other personal particulars, and failure to submit tax returns and other documents to
SARS.

818
19.7 Chapter 19: Administrative procedures

The penalty system provides for recurring monthly penalties for each month that an
income tax return remains outstanding. For the first time, the penalty amounts are
determined according to the taxpayer’s taxable income:
Assessed loss or taxable income for preceding year Penalty
R
Assessed loss 250
R0–R250 000 250
R250 001–R500 000 500
R500 001–R1000 000 1 000
R1 000 001–R5 000 000 2 000
R5 000 001–R10 000 000 4 000
R10 000 001–R50 000 000 8 000
Above R50 000 000 16 000

Taxpayers with multiple outstanding income tax returns will receive a penalty
assessment notice in writing or electronically (for registered eFilers) of the imposition
of a penalty regarding each outstanding return.
Should they fail to submit these outstanding returns within 30 days, a second penalty
– increasing by the same amount – will be imposed. The new regulations allow for
penalties to be imposed each month or part thereof for up to 35 months.
Where a taxpayer fails to pay penalties by the due date, the penalty will be collected
without further notice. As part of the collection process SARS will approach employ-
ers, or other parties in control of their funds, to act as agents. Such employers or third
parties will be required to debit the outstanding amount from the defaulting taxpay-
er’s salary or other funds and pay it over to SARS. Failure by an agent to pay the
amount to SARS constitutes a criminal offence.
Taxpayers penalised under the regulations may apply for relief from the penalties by
completing a Remission Request form if there were reasonable or exceptional circum-
stances responsible for their non-compliance.
Note that there is also a reportable arrangement and mandatory disclosure penalty
under section 212 where a participant (as defined in section 37) fails to disclose in-
formation in respect of a reportable arrangement as required by section 37 (refer to
19.5.3).

19.7.2 Percentage-based penalties (section 213)

If SARS is satisfied that an amount of tax was not paid as required, SARS must also
impose a ‘penalty’ equal to the percentage of the amount of unpaid tax as prescribed
in the tax Act. If the amount of the tax changes, the penalty must be recalculated.

819
A Student’s Approach to Taxation in South Africa 19.7

Some examples include:

Income tax When a SA resident buys immovable property from a non-

(section 35A) resident seller and does not withhold and pay the fixed per-
centage to SARS, a penalty of 10% is imposed.
Turnover tax A penalty of 20% will be imposed where a micro business's
(ITA 6th Schedule estimate of taxable turnover used for interim payments is
paragraph 11(6)) less than 80% of the actual taxable turnover.
Provisional tax A 10% penalty is imposed on the late or non-payment of
(ITA Fourth Schedule) provisional tax (paragraph 27).
A 20% penalty is imposed if the taxpayer understates a pro-
visional tax estimate by a particular percentage of the taxable
income (paragraph 20).

19.7.3 Understatement penalty (section 222)

If a taxpayer understates his tax liability, the following penalty must be levied, unless
the understatement is the result of a bona fide error.

Steps to calculate the understatement penalty

Step 1: Determine the penalty percentage to be applied (refer below).

Step 2: Calculate the shortfall: The correct amount of tax due for the period and
the amount declared or reported by the taxpayer. (If the taxpayer fails
to submit a return the amount declared or reported is considered as
nil).

Step 3: Multiply the percentage (Step 1) with the shortfall (Step 2).

The TAA also states that the understatement penalty must be reduced in certain
situations.

Legislation:
Section 223(3): Remittance of understatement penalty
(3) SARS must remit a penalty imposed for a ‘substantial understatement’ if SARS is satis-
fied that the taxpayer—
(a) made full disclosure to SARS of the arrangement, as defined in section 34, that gave
rise to the prejudice to SARS or the fiscus by no later than the date that the relevant re-
turn was due; and

continued

820
19.7 Chapter 19: Administrative procedures

(b) was in possession of an opinion by an independent registered tax practitioner, that—

(i) was issued by no later than the date that the relevant return was due;
(ii) was based upon full disclosure of the specific facts and circumstances of the
arrangement and, in the case of any opinion regarding the applicability of the
substance over form doctrine or the anti-avoidance provisions of the Act, this
requirement cannot be met unless the taxpayer is able to demonstrate that all of
the steps in or parts of the arrangement were fully disclosed to the tax practi-
tioner, whether or not the taxpayer was a direct party to the steps or parts in
question; and
(iii) confirmed that the taxpayer’s position is more likely than not to be upheld if the
matter proceeds to court.

As with the percentage-based administrative non-compliance penalties, the penalty

comprises a percentage of the shortfall. Unlike the non-compliance penalties, how-
ever, this percentage varies depending on the behaviour displayed by the taxpayer. It
may be as high as 200% where the taxpayer repeatedly and intentionally evaded tax
or it may be zero % in certain cases where the taxpayer alerts SARS to the shortfall
prior to an audit.
The following guidelines must be used to determine which percentage to apply:

Voluntary Voluntary
If disclosure disclosure
Standard obstructive, after before
Behaviour
case or if it is a notification notification
‘repeat case’ of audit or of audit or
investigation investigation
Substantial understatement 10% 20% 5% 0%
Reasonable care not taken 25% 50% 15% 0%
in completing return
No reasonable grounds for 50% 75% 25% 0%
‘tax position’ taken
Impermissible avoidance 75% 100% 35% 0%
arrangement
Gross negligence 100% 195% 50% 5%
Intentional tax evasion 150% 200% 75% 10%

19.7.4 Criminal offences (sections 234 to 238)

The TAA identifies four types of actions that can lead to criminal offences:
• offences relating to non-compliance with tax Acts;
• offences relating to evasion of tax;
• offences relating to secrecy provisions; and
• offences relating to filing a return without authority.

821
A Student’s Approach to Taxation in South Africa 19.7

A person who wilfully or negligently takes or fails to take certain actions is guilty of
an offence and, upon conviction, is liable for a fine or for imprisonment for a period
not exceeding two years. The following actions constitute offences:

Legislation:
Section 234: Criminal offences relating to
non-compliance with tax acts

Any person who wilfully—

(a) submits a false certificate or statement under Chapter 4;
(b) issues an erroneous, incomplete or false document required to be issued under a tax
Act to SARS or another person;
(c) fails to—
(i) reply to or answer truly and fully any questions put to the person by a SARS
official, as and when required in terms of this Act; or
(ii) take an oath or make a solemn declaration as and when required in terms of this
Act;
(d) obstructs or hinders a SARS official in the discharge of the official’s duties;
(e) refuses to give assistance required;
(f) holds himself or herself out as a SARS official engaged in carrying out the provisions
of this Act; or
(g) dissipates that person’s assets or assists another person to dissipate that other per-
son’s assets in order to impede the collection of any taxes, penalties or interest,
(2) Any person who wilfully or negligently fails to—
(a) register or notify SARS of a change in registered particulars as Required;
(b) appoint a representative taxpayer or notify SARS of the appointment or change of a
representative taxpayer as required under section 153 or 249;
(c) register as a tax practitioner as required under section 240;
(d) submit a return or document to SARS or issue a document to a person as required
under a tax Act;
(e) retain records as required under a tax Act;
(f) furnish, produce or make available any information, document or thing, excluding
information requested under section 46(8), as and when required under this Act;
(g) attend and give evidence, as and when required under this Act;
(h) comply with a directive or instruction issued by SARS to the person under a tax Act;
(i) disclose to SARS any material facts which should have been disclosed under a tax Act
or to notify SARS of anything which the person is required to so notify SARS of under
a tax Act;
(j) comply with the provisions of sections 179 to 182, if that person was given notice by
SARS to transfer the assets or pay the amounts to SARS as referred to in those sec-
tions or
(k) in the event where that person becomes liable to make a payment for withholding
any tax, deduct or withhold or pay to SARS the amount of tax, as and when required
under a tax Act.

822
19.8 Chapter 19: Administrative procedures

19.8 Dispute resolution (sections 101 to 150)

Some of the sections provide for the Commissioner to exercise his discretion in a
particular matter, and most of these sections also make the exercise of the Commis-
sioner’s discretion subject to objection and appeal. The exercise of the Commission-
er’s discretion could result in the issuance of an assessment or of a notice (which by
definition is included in the concept of assessment).
Sections 101 to 150 contain provisions of how to resolve differences between the
taxpayer and SARS. To resolve issues, different steps must be taken.

Steps taken where a taxpayer resolves disputes

Step 1: Request reasons:

• Prior to lodging an objection, the taxpayer may write to the Com-
missioner within 30 business days after the date of the assessment
and request written reasons for the assessment.
• The Commissioner has 45 business days after receiving the request
for reasons to provide the reasons (or where the reasons have
already been provided, SARS must notify the taxpayer of this with-
in 30 business days of receiving the request).

Step 2: Objection (refer to 19.8.1)

For objections relating to: Company Income Tax, Personal Income
Tax, PAYE or VAT:
• A form prescribed by SARS the Notice of Objection (NOO) via
eFiling
Can only be submitted via eFiling or submitted at a SARS branch,
For objections relating to other taxes:
• A manual process is followed, using a manual Notice of Objection
form, the ADR1
Can be submitted via post, at the SARS branch or email.
The objection must be lodged within 30 business days of the date of
assessment (or 30 days after the date SARS provided reasons, if the
taxpayer first requested reasons for the assessment)
• The prescribed form must specify in detail the grounds of objec-
tion.

continued

823
A Student’s Approach to Taxation in South Africa 19.8

Step 3: SARS must notify the taxpayer if an objection has been allowed, disal-
lowed or partly allowed (section 106):
• The taxpayer must be informed of the decision by SARS.
• The reasons for the decision and the procedure on how to lodge an
appeal must be supplied.
• If applicable, a new assessment must be issued.

Step 4: Follow settlement of disputes procedures, if selected (refer to 19.8.2).

Step 5: Appeal against disallowance of an assessment (refer to 19.8.2):

• Notice must be delivered to SARS within 30 business days of the
date of receiving the notice of SARS’ decision in respect of the objec-
tion.
• This must be done on a form prescribed by SARS (Notice of Ap-
peal (NOA) or ADR 2 depending on the type of tax).
• Indicate which of the grounds specified in the objection are being
appealed.
• Channel tax dispute with SARS through one of the following:
– alternative dispute resolution process;
– the Tax Board, where tax dispute is less than R500 000; or
– the Tax Court, where tax dispute is in excess of R500 000.

19.8.1 Objection (section 104)

A taxpayer may object against
• an assessment where the taxpayer is aggrieved by the assessment;
• a decision by SARS to not extend the period for objection or appeal where the
taxpayer requested such extension;
• a decision that may be objected to or appealed against under a tax Act;
• a decision to not authorise a refund;
• a decision to not remit an administrative non-compliance penalty; and
• a decision to not remit an understatement penalty.
Section 104 provides the rules for lodging objections against assessments. The im-
portant points to be noted are that the objection must be made within 30 business
days after the date of the assessment (as prescribed in the TAA Rules).
The period prescribed in the rules may be extended by the Commissioner when he is
satisfied that reasonable grounds exist for the delay in lodging the objection. The
period for objection may not be so extended:
• for a period exceeding 30 business days, unless exceptional circumstances exist
that gave rise to the delay in lodging the objection;
• when more than three years have lapsed from the date of the assessment; or

824
19.8 Chapter 19: Administrative procedures

• when the grounds for the objection are based wholly or mainly on a change in
practice generally prevailing that applied on the date of the assessment.
The Commissioner must, upon receipt of the notice of objection made on a form NOO
or ADR1, either reduce or alter the assessment or disallow the objection. He must
send the taxpayer notice of the alteration, reduction or disallowance and record any
alteration or reduction made in the assessment.
When no objections are made to an assessment or where objections have been al-
lowed or withdrawn, the assessment or reduced or altered assessment is, subject to
the right of appeal, final and conclusive.

19.8.2 Settlement of disputes (sections 142 to 150)

Sections 142 to 150 contain the general provisions pertaining to the settlement of
disputes.

Definitions (section 142)

Dispute
A ‘dispute’ is a disagreement on the interpretation of:
• the relevant facts involved;
• the law applicable to it;
• of both the facts and the law; or
• which arises pursuant of the issue of an assessment or the making of a decision.

Settle
To ‘settle’ means to resolve a dispute by compromising any disputed liability, other
than by way of either the Commissioner or the person concerned accepting the other
party’s interpretation:
• of the facts;
• the law applicable to those facts; or
• of both the facts and the law.

Purpose (section 143)

Section 143 provides that the basic principle in law is that it is the duty of the Com-
missioner to assess and collect taxes, duties, levies, charges and other amounts ac-
cording to the laws enacted by Parliament and not to forgo any of these taxes, duties,
levies, charges and other amounts properly chargeable and payable.
Circumstances may, however, require that the strictness and rigidity of this basic
principle be tempered when it would be to the best advantage of the State.
The purpose of this part is to prescribe the circumstances:
• when it would be inappropriate; and
• when it would be appropriate,
that the basic rule be tempered and for a decision to be made to settle a dispute.

825
A Student’s Approach to Taxation in South Africa 19.8

Inappropriate circumstances (section 145)

It would be inappropriate, and not to the best advantage of the State, to settle a dis-
pute, when, in the opinion of the Commissioner:
• the actions of the taxpayer constitute intentional tax evasion or fraud;
• the settlement would be contrary to the law or a clearly established practice of the
Commissioner on the matter, and no exceptional circumstances exist to justify a
departure from the law or practice;
• judicial clarification of the issue is in the interest of the public and the dispute is
appropriate for this purpose;
• pursuit of the matter through the courts will significantly promote compliance of
the tax laws and the dispute is suitable for this purpose; and
• non-compliance with the provisions of an Act administered by the Commissioner
by the taxpayer and the Commissioner is of the opinion that this non-compliance is
of a serious nature.

Appropriate circumstances (section 146)

When it will be to the best advantage of the State, the Commissioner may settle a
dispute, in whole or in part, on a basis that is fair and equitable to both the person
concerned and himself, having regard to, among other things:
• whether the settlement would be in the interest of good management of the tax
system, overall fairness and the best use of his resources;
• the cost of litigation in comparison to the possible benefits with reference to:
– the prospects of success in a court;
• whether there are any:
– complex factual or quantum issues in contention; or
– evidentiary difficulties;
that are sufficient to make the dispute problematic in outcome or unsuitable for
resolution through the ADR procedures or the courts;
• a situation when a participant, or a group of participants, in a tax avoidance ar-
rangement has accepted his (the Commissioner’s) position in the dispute, in which
instance the settlement may be negotiated in an appropriate manner required to
unwind existing structures and arrangements; or
• whether the settlement of the dispute will promote compliance of the tax laws by
the person concerned, or a group of taxpayers, or a section of the public, in a cost-
effective way.

Procedure for settlement (section 147)

The person concerned should at all times disclose all relevant facts in discussions
during the process of settling a dispute. A settlement will be conditional upon full
disclosure of material facts known to the person concerned at the time of settlement.
All disputes settled in whole or in part must be evidenced by a written agreement
between the parties in the format as may be prescribed by the Commissioner, includ-
ing details on:
• how each particular issue was settled;

826
19.8 Chapter 19: Administrative procedures

• relevant undertakings by the parties;

• treatment of that issue in future years;
• withdrawal of objections and appeals; and
• arrangements for payment.
The written agreement will represent the final agreed position between the parties
and will be a full and final settlement of all, or the specified, aspects of the dispute in
question between the parties.
When the dispute is not ultimately settled, the Commissioner must explain the fur-
ther rights of objection and appeal to the person concerned. The Commissioner and
his delegated official must adhere to the secrecy provisions with regard to the infor-
mation relating to the person concerned. They may not disclose the terms of an
agreement to third parties unless authorised by law or by the person concerned.
The Commissioner must adhere to the terms of the agreement, unless it emerges that:
• material facts were not disclosed to him; or
• there was fraud or misrepresentation of the facts.
The Commissioner has the right to recover any outstanding amounts involved in the
settlement in full when the person concerned fails to adhere to any agreed payment
arrangement.

Register of settlements and reporting (section 149)

The Commissioner must maintain a register of all disputes settled in the circumstances
contained in these provisions and must fully document the process in terms of which
each dispute was settled. This document must be signed on behalf of the Commis-
sioner and the person concerned.
The Commissioner must, on an annual basis, provide the Auditor-General and the
Minister of Finance with a summary of all disputes that were settled. This summary
must:
• be in a format that, subject to the secrecy provisions, does not disclose the identity
of the person concerned. It must be submitted at such time as may be agreed be-
tween the Commissioner and the Auditor-General or Minister of Finance, as ap-
propriate; and
• contain details of the number of disputes settled, or partially settled, the amount of
revenue foregone and the estimated amount of savings in litigation costs. These
must be reflected for main classes of taxpayers or sections of the public.

Alteration of assessment on settlement (section 150)

When a dispute between the Commissioner and the person aggrieved by an assess-
ment has been settled in terms of this part, the Commissioner may, notwithstanding
anything to the contrary contained in this Act, alter the assessment for purposes of
giving effect to the settlement. This altered assessment is not subject to objection and
appeal.

827
A Student’s Approach to Taxation in South Africa 19.8

19.8.3 Appeal (sections 107 to 141)

In terms of section 103 the Minster may from time to time publish ‘rules’ to be fol-
lowed in the appeal procedures. At time of publication the rules provided in this
section were applicable. Note that amounts and allowable time periods may change
by means of a notice in the Government Gazette.
The appeal process can be illustrated as follows:

APPEAL

ADR PROCESS OR
LITIGATION

TAX BOARD TAX COURT

HIGH COURT
OR
SUPREME COURT OF
APPEAL

A taxpayer who wishes to appeal against the results of an objection must submit a
Notice of Appeal (NOA) within 30 days after delivery of the notice of disallowance of
the objection (or an extended period if reasonable grounds or exceptional circum-
stances exist). The NOA must indicate the grounds of the appeal. It may indicate
whether or not the taxpayer wishes to make use of the ADR procedures.

Alternative dispute resolution (ADR)

When a taxpayer makes a notice of appeal against his/her assessment, he/she can
inform SARS that he/she wishes to make use of the ADR process. SARS will then
inform the taxpayer within 30 business days of the notice of appeal whether the
matter is suit-able for ADR. The ADR procedure places emphasis on resolving dis-
putes outside the court. This process is less formal and less expensive than the court
processes and will save time as well as money.

828
19.8 Chapter 19: Administrative procedures

SARS will appoint a facilitator who is a trained and experienced SARS officer. The
facilitator is bound by a code of conduct and must seek a fair, equitable and legal
resolution of the matter. The process is also governed by a set of terms and conditions
to which the taxpayer agrees.
SARS will determine the ADR process and the facilitator will arrange an ADR meet-
ing and notify all parties. The meeting is conducted in an informal manner and dur-
ing the meeting both parties will state their case and provide evidence. During the
process, the facilitator will endeavour to resolve the dispute between the parties.
The taxpayer can represent himself or if the facilitator agrees to it, in exceptional
circumstances, the taxpayer can be represented by a representative of his choice.
Where the dispute is resolved between SARS and the taxpayer, it must be recorded
and signed and, where necessary, SARS will issue a revised assessment to give effect
to the agreement reached.
If the dispute is not resolved, the taxpayer may continue on appeal to the Tax Board
or the Tax Court.
If the amount in dispute is less than R500 000, the parties can agree within 30 days of
the notice of appeal that the Tax Board can hear the case. If the case cannot be heard
by the Tax Board, it must be referred to a Tax Court. The parties must meet within 45
days after the issue of the notice of appeal or failed ADR. During this meeting the
parties may agree to a limitation of the issues in dispute. Minutes of this limitation of
issue meeting must be prepared within 20 days.
Within 10 days after the completion of the minutes of the limitation of issue meeting,
SARS must issue a statement of the grounds of assessment. Hereafter, the taxpayer
has 10 days to issue a statement of the grounds of appeal. Sixty days after the discov-
ery process is complete, a pre-trial meeting must be held. During the meeting the
parties must attempt to reach a settlement. If no settlement can be reached, the
minutes of the meeting must be prepared within ten days of the meeting. The case
can then be placed before the Tax Court. The documents placed before the court must
include the minutes of the pre-trial meeting.

Appeal to the Tax Board (section 113)

Should the Commissioner disallow the objection in part or as a whole, section 106
provides a right of appeal against this decision, in the first instance, to the Tax Board
constituted in terms of section 110. The board consists of the chairperson who must
be an advocate or attorney. If the chairperson, after considering any representations
by a senior SARS official or the taxpayer, considers it necessary, an accountant and a
representative of the commercial community can form part of the Tax Board.
Within the prescribed period, the clerk of the Board must, in the rules, furnish the
members of the Board and the appellant with a written notice of the time and place of
the hearing of the appeal and a dossier containing copies of:
• the assessment against which the appeal has been lodged;
• the notice of objection and appeal;
• the relevant return of income; and
• any correspondence between the Commissioner and the appellant and any other
documents that are, in the Commissioner’s opinion, relevant to the appeal.

829
A Student’s Approach to Taxation in South Africa 19.8

In terms of section 109, where:

• the amount of tax in dispute does not exceed the amount the Minister of Finance
may fix by notice in the Gazette or, having regard to any assessed loss which may
be carried forward, will probably not exceed this amount (the Minister fixed this
amount at R500 000 with effect from 1 December 2007);
• the Commissioner and appellant agree to it; or
• no objection to the jurisdiction of the Tax Board to hear the appeal is made at or
before the commencement of the hearing of the appeal,
an appeal must be heard by the Tax Board established for hearing such appeals.
The Board consists of a qualified advocate or attorney who acts as its chairman. He
may be joined by a representative of the commercial community (as set out in sec-
tion 120).
The Commissioner and the Chairman of the Board are empowered to divert an ap-
peal destined for the Board to the Tax Court if either of them is of the opinion that the
appeal should rather be heard by the Tax Court. The Commissioner must form his
opinion at any time prior to the hearing of the appeal, while the Chairman may form
his at any time prior to or even during the hearing of the appeal.
A written statement of the decision must be published within 60 business days after
completion of the hearing. If the taxpayer or SARS are dissatisfied with the Board’s
decision, he/she may appeal to the Tax Court. The taxpayer must make the request
within 30 business days after the date of the notice of the Board’s decision.
An appeal heard by the Board that has been referred to the Tax Court in either of
these ways must be heard afresh by that court.
Appeal to the Tax Court (section 116 - 132)
A person entitled to make an objection may appeal to the Tax Court against the
Commissioner’s disallowance of an objection if he is dissatisfied with the Commis-
sioner’s decision (section 115).
The notice of appeal must be delivered to the Commissioner within 30 business days
after the date of the Commissioner’s notice informing him of his decision to alter the
assessment or disallow the objection, but this period may be extended by the Com-
missioner when he is satisfied that reasonable grounds exist for the delay in noting
the appeal. The Commissioner’s decision is subject to objection and appeal.
A notice of appeal will be of no force or effect unless it is delivered at the Commis-
sioner’s office within the prescribed period or within any extended period allowed by
the Commissioner.
The Tax Court consists of a judge or acting judge from the High Court, a selected
accountant and a representative from the commercial community (section 118).
If at any stage during the hearing of the appeal, or after the hearing but before judg-
ment has been handed down:
• one of the judges dies, retires or becomes otherwise incapable of acting in that capac-
ity, the hearing of an appeal shall be heard de novo, unless the court consists of three
judges, as contemplated in section 123, and the remaining judges constitute the
majority of the judges before whom the hearing was commenced, in which event the
hearing must proceed before the remaining judges and members; or

830
19.8 Chapter 19: Administrative procedures

• one of the members dies, retires or becomes otherwise incapable of acting in that
capacity, the hearing of an appeal must proceed before the President and remain-
ing members.
The judgment of the remaining judges and members will be the judgment of the
court.
The Commissioner or a person authorised by him may appear in support of the
assessment on the hearing of an appeal, and the taxpayer may appear in person or be
represented by his council, attorney or agent.
The Tax Court may act in one of the following ways:
• order the assessment under appeal to be amended, reduced or confirmed or refer
the assessment back to the Commissioner for further investigation and assessment
or make an appropriate order in a procedural matter. Any such assessment is sub-
ject to objection and appeal (section 129);
• reduce, confirm or increase the amount of an additional tax imposed when the
appeal is against the amount of an additional tax imposed by the Commissioner
(section 129);
• confirm or amend another decision of the Commissioner that is subject to appeal;
or (section 129);
• hear an interlocutory application (an application within the matter being heard)
and decide on procedural matters as provided for in the rules of the Tax Court
(section 117).
Judgments or decisions of the court must be published for general information, in a
form that does not reveal the identity of the appellant.
A decision of the Tax Court is final, subject to the right of both the taxpayer and the
Commissioner to appeal to the High Court.

Appeal to the High Court (section 133)

Section 133 provides for an appeal against a decision of the Tax Court by either the
taxpayer or the Commissioner. This appeal is made to the provincial division of the
High Court having jurisdiction in that area or, with the leave of the President of the
Tax Court, directly to the Supreme Court of Appeal.
An appeal against a decision of the Tax Court may be made both on questions of fact
and law, and the notice of the intention to appeal must be lodged within 30 business
days after the notice issued by the Registrar notifying of the decision of the Tax
Court, or within whatever further period the President may on good cause shown
allow.
A party who fails to lodge a notice of intention to appeal within the time allowed is
deemed to have abandoned his right of appeal, except that he still retains the right to
cross-appeal if the other party notes an appeal.

Payment of tax pending an appeal (section 164)

Section 164 states that, unless the Commissioner directs otherwise, the obligation to
pay tax due under the TAA will not be suspended during the objection and appeal
process. To enable the Commissioner to give a directive to suspend the obligation, he
may request any appropriate information. If the obligation to pay is suspended, the

831
A Student’s Approach to Taxation in South Africa 19.8–19.10

suspension may be revoked at any time if the prescribed provisions of the TAA are
complied with. If an objection is successful, the payment made by the taxpayer is
refunded. The section further obliges SARS to pay interest on that amount (refer to
11.10.3 for further information regarding section 164).

REMEMBER

• A taxpayer must carry out certain steps to lodge an objection and appeal.
• An objection must be lodged within 30 business days after the date of assessment or
after reasons for the assessment have been obtained.
• An appeal can be lodged to the Tax Board, Tax Court or High Court.

19.9 Burden of proof (section 102)

A taxpayer bears the burden of proving:
• that an amount, transaction, event or item is exempt or otherwise not taxable;
• that an amount or item is deductible or may be set off;
• the rate of tax applicable to a transaction, event, item or class of taxpayer;
• that an amount qualifies as a reduction of tax payable;
• that a valuation is correct; or
• whether a ‘decision’ that is subject to objection and appeal under a tax Act, is
incorrect.
The burden of proving whether an estimated assessment is reasonable or the facts on
which SARS based the imposition of an understatement penalty, is upon SARS.

19.10 Payment, recovery and refund of tax

The term ‘tax’ is defined in section 1 as a levy or tax leviable under the TAA. It there-
fore includes normal tax, capital gains tax, secondary tax on companies and dona-
tions tax, as well as the additional (penalty) tax payable in terms of section 76.

19.10.1 Date for payment of tax and interest on overdue payments

and refunds payable by SARS (sections 162 and 187 to 189)
Payment
Any tax chargeable must be paid on such day and at such place is notified by the
Commissioner or specified by the TAA. The Commissioner notifies the period for
payment of normal tax in the notice of assessment. For this purpose, the notice of
assessment specifies two dates, one representing the date for payment (the ‘due date’)
and the other representing the last day by which the tax must be paid if the payment
of interest is to be avoided.
When the specified date for payment or the last day by which payment is to be made
falls on a Saturday, Sunday or public holiday, payment must be made not later than
the last business day prior to the Saturday, Sunday or public holiday.

832
19.10 Chapter 19: Administrative procedures

The Commissioner may prescribe the time by which payment made on a business
day must be received by the Commissioner and payment received after that time is
deemed to have been made on the first business day following that day.
Section 167 provides for payment of outstanding tax by means of an instalment
payment agreement. If amounts are outstanding SARS can appoint a third party to
collect the outstanding tax debt on its behalf (section 179 to 184).

Interest on arrears (sections 187 & 188)

If a taxpayer fails to pay his tax in full within the period for payment notified by the
Commissioner in the notice of assessment or prescribed by the TAA, he must pay
interest at the prescribed rate on the outstanding balance of the tax. The outstanding
balance is that balance of the tax in respect of each completed month, reckoned from
the due date for payment, during which a portion of the tax has remained unpaid.
This interest is payable, unless the Commissioner, having regard to the circumstanc-
es, grants an extension of the period for payment and directs otherwise. Interest
payable on outstanding amounts is calculated on a daily compounded method.

Prescribed rate of interest (section 189)

The rate at which interest is payable under section 187 is the prescribed rate.
The ‘prescribed rate’ is defined in section 1 in relation to any interest payable in terms
of the TAA as meaning the rate fixed by the Minister of Finance from time to time by
notice in the Gazette in terms of section 80(1)(b) of the Public Finance Management 1
of 1999).
Provided that where the Minister fixes a new rate in terms of that Act, that new rate
applies for purposes of this Act from the first day of the second month following the
date on which that new rate came into operation . In the case of interest payable with
respect to refunds on assessment of provisional tax and employees’ tax for purposes
of final assessment of income tax, the rate payable by SARS is four percentage points
below the prescribed rate.

19.10.2 Payment and recovery: Third parties (sections 179 to 184)

In terms of section 179 a senior SARS official may authorise the issue of a notice to a
person who holds any money (including pension, salary, wage or other remunera-
tion) of a taxpayer, to pay the money to SARS in satisfaction of the taxpayer’s tax
debt. The person required to pay the money to SARS must preserve the money held
or owed for up to 72 hours and then pay the full amount of the money over to SARS
unless:
• SARS withdraws or amends the notice as is appropriate under the circumstances;
or
• SARS is informed by the person who received such notice, that the taxpayer re-
quests SARS to amend the notice to allow the payment of the basic living expense
of the taxpayer and his or her dependents.
A person is personally liable for the tax debt of the taxpayer if the person’s negligence
or fraud resulted in the failure to pay the tax and that person controls or is regularly
involved in the management of the overall financial affairs of a taxpayer; and SARS is

833
A Student’s Approach to Taxation in South Africa 19.10

satisfied that the person is or was negligent or acted fraudulently. The TAA also
contains rules to ensure payment of outstanding tax in cases where companies are
wound up or assets transferred to connected persons.
If a person knowingly assists in dissipating a taxpayer’s assets in order to obstruct the
collection of tax, the person is jointly and severally liable with the taxpayer for the tax
to the extent that the person’s assistance reduces the assets available to pay the tax-
payer’s tax debt.

19.10.3 Suspension of payment of tax in dispute (section 164)

A senior SARS official may suspend payment of the disputed tax considering relevant
factors, including:
• whether the recovery of the disputed tax will be in jeopardy or there will be a risk
of dissipation of assets;
• the compliance history of the taxpayer with SARS;
• whether fraud is prima facie involved in the original dispute;
• whether payment will result in irreparable hardship to the taxpayer; or
• whether the taxpayer has tendered adequate security for the payment of the dis-
puted tax.

19.10.4 Waiver, write-off or compromise of amounts payable

(sections 195 to 199)
A senior SARS official may decide to temporarily ‘write off’ an amount of tax if
collecting the tax is uneconomical at that time. The decision by the SARS official to
temporarily write off an amount of tax does not absolve the ‘debtor’ from the liability
for that tax debt (section 195).
In terms of section 197 a senior SARS official may authorise the permanent write off
of an amount of tax debt to the extent that the tax is irrecoverable at law or if the debt
is part of a compromise.
A senior SARS official may authorise the compromise of a portion of a tax debt if it
complies with the requirements set and if:
• the purpose of the ‘compromise’ is to secure the highest net return from the recov-
ery of the tax debt; and
• the compromise is consistent with considerations of good management of the tax
system and administrative efficiency.

REMEMBER

• The date of payment of the tax is noted on the assessment.

• Interest is levied on outstanding tax at a prescribed rate of interest.
• Penalties (first) and then interest will be redeemed when any outstanding amount of tax
is paid.
• If taxes are due to another government with which the South African government has a
double-tax agreement, the Commissioner may, subject to certain provisions, request
payment of the amount due. The amount can then be collected as if it were a South
African tax liability.

834
19.11–19.12 Chapter 19: Administrative procedures

19.11 Refunds (sections 190 and 191)

A person is entitled to a refund (including interest) of:
• an amount refundable under a tax Act and if so reflected in an assessment; or
• the amount erroneously paid in respect of an assessment in excess of the amount
payable in terms of the assessment.
SARS only needs to make a refund after verification, inspection, audit or criminal
investigation of the refund has been finalised. A refund must however be made
before finalisation if the taxpayer provides security in a form acceptable to a senior
SARS official.
A person is entitled to a refund properly refundable and payable under a tax Act by
SARS and there is no limitation period in which to claim for such payment. A limita-
tion period does, however, exist if a refund of an amount erroneously paid in respect
of an assessment in excess of the amount payable in terms of the assessment is not
claimed within three years from the date of payment, or five years, in the case of self-
assessment, from the date of payment. Also erroneous payments claimed by taxpay-
ers within the three or five limitation period mentioned, but which have not been
paid by SARS within these periods are refunds. Refunds not claimed within the
prescribed period are regarded as a payment in favour of the National Revenue Fund
(thus a donation to the State).
If a taxpayer has an outstanding tax debt, an amount refundable must first be used as
payment of the amount outstanding. If the amount is less than R100, the amount
must be carried forward in the taxpayer’s account.

REMEMBER

• The Commissioner is entitled to first set off any refundable amount of tax against any
outstanding amount of tax debt before making a refund to the taxpayer.

19.12 Registration of tax practitioners (section 240)

Every natural person who:
• provides advice to another person on the application of any Act administered by
the Commissioner; or
• completes, or assists in completing, a return by another person,
must register with a recognised controlling body and with the Commissioner as a tax
practitioner in the prescribed form and manner within 21 days after the date on
which that person for the first time so provides advice or completes or assists in
completing the return. This registration must be done on the form prescribed by the
Commissioner within 30 days after the date that the person gave advice for the first
time or provided assistance in the completion of a return.

835
A Student’s Approach to Taxation in South Africa 19.12–19.13

The provisions of section 240 do not apply to a person who:

• provides advice or completes or assists in completing a return for no consideration
to him or his employer or employer’s connected person including a connected per-
son in relation to the person providing the advice or assisting in the completion of
a return;
• provides advice in anticipation of any litigation to which the Commissioner is a
party, or in the course of this litigation;
• provides advice as an incidental or subordinate part of providing goods or other
services to another person;
• provides advice or completes or assists in completing a return to or for his full-time
employer or his employer’s connected person; or
• provides advice or completes or assists in completing a document solely under the
supervision of a registered tax practitioner who has assigned or approved the as-
signment of those functions to another person. The tax practitioner will then be
accountable for the actions of that person for the purposes of a complaint to a rec-
ognised controlling body.
A person may not register as a tax practitioner if:
• a controlling body removed him from a related profession for serious misconduct
during the preceding five years,
• if he was convicted of theft, fraud, forgery or uttering a forged document, perjury
or an offence under the Prevention and Combating of Corrupt Activities Act 12 of
2004 during the preceding five years or an offence involving dishonesty, resulting
in a sentence of imprisonment exceeding two years without the option of a fine,
• if he was convicted of a serious tax offence during the preceding five year, or
• if during the preceding 12 months has for an aggregate period of at least six
months not been tax compliant (for example, has outstanding tax debt or an out-
standing tax return) and has failed to demonstrate that they are compliant for that
period or remedy such non- compliance within the period specified in a notice by
SARS.

19.13 Reporting of unprofessional conduct

(sections 239 to 243)
Section 105A makes it possible for the Commissioner to lodge a complaint with the
controlling body of a professional person regarding unprofessional conduct which in
the opinion of the Commissioner:
• was intended to enable or assist a taxpayer in the avoidance or undue postpone-
ment of the performance of a duty or obligation in terms of the TAA; or
• by reason of negligence on the part of such person resulted in the avoidance or
undue postponement of the performance of any such duty or obligation; or
• constitutes a contravention of a rule or code of conduct laid down by the control-
ling body, which may result in disciplinary action being taken against such person
by the body.

836
19.13–19.14 Chapter 19: Administrative procedures

For the purposes of this section ‘controlling body’ means:

a body established, whether voluntarily or under a law, with power to take discipli-
nary action against a person who, in carrying on a profession, contravenes the appli-
cable rules or code of conduct for the profession.
Before lodging a complaint or disclosing information, the Commissioner must notify,
in writing, the taxpayer concerned and the person against whom the complaint is to
be made of his intended action, setting forth particulars of the said information.
The taxpayer or the said person can, within 30 business days after the date of the
written notification, object against the complaint, in writing, to the Commissioner.
If no objection has been lodged after 30 business days, or if an objection has been
lodged and the Commissioner is not satisfied that the objection should be sustained,
he can lodge the complaint.
The controlling body must then consider the complaint and deal with it as it deems
fit, provided that a hearing of the matter must not be public and may only be attend-
ed by persons whose attendance, in the controlling body’s opinion, is necessary for
the proper consideration of the complaint.
The controlling body and its members must at all times preserve and aid in pre-
serving secrecy in regard to any information in respect of the affairs of the taxpayer
conveyed to them by the Commissioner or which has otherwise come to their atten-
tion while investigating the complaint. Such information may not be disclosed to any
person other than the taxpayer and the person against whom the complaint is lodged,
unless the disclosure is ordered by a competent court of law.

REMEMBER

• Where a professional person assists a taxpayer in the avoidance of tax, the Commis-
sioner is entitled to report it to the controlling body concerned.

19.14 Summary
Every taxpayer must submit a return of income earned during a tax year. He is then
assessed on this income by the Commissioner who determines the amount of tax
payable by the taxpayer for such tax year. If the taxpayer is not satisfied with the tax
assessed, he can then lodge an objection against such assessment and if his objection
is sustained, appeal to either the Tax Board or Tax Court. If the taxpayer agrees with
the assessment or is successful with his objection and appeal, he must pay the tax
when it becomes due or is payable, or interest will be charged on the outstanding
amount of tax. If a taxpayer does not submit a return, he is guilty of an offence and
liable to a fine or imprisonment if convicted. He may also suffer additional tax in
certain circumstances.
The next section contains practical questions where your knowledge on administra-
tive procedures is tested.

837
A Student’s Approach to Taxation in South Africa 19.15

19.15 Examination preparation

Question 19.1
You are a chartered accountant and a member of the Independent Regulatory Board for Au-
ditors. Lina Mbokasi has been a client of yours for a number of years. You have completed
her provisional and final tax returns for the past three years as a result of a verbal request
made by her.
During March another client requested you to prepare IT3(b) forms, ‘Return of Income
from Investments, Property, Rights and Royalties’, on its behalf. While completing this
request, you established that this client paid rentals of R78 000 to Lina Mbokasi during the
previous year of assessment for a property belonging to Lina Mbokasi.
You immediately contact Lina and ask her about this property and the resulting income
and why she has not informed you about it. She replies by saying that she inherited this
property five years ago and, as she understood, inheritances are to be tax-free and she
failed to see the necessity to provide you with this information.
After informing her of the correct tax position in relation to the income earned form this
inherited property, she wants to know what the Commissioner is likely to do about it
should he come to find out about it.

You are required to:

Inform Lina Mbokasi of the consequences of the omission and the actions the Com-
missioner can take in this instance.

Answer 19.1
The Commissioner could do the following about this matter:
• The Commissioner will issue an additional assessment in respect of the amount that
was omitted.
• The Commissioner may call for a certificate from me detailing the extent of work I have
done on your returns.
• You have been guilty of omitting an amount that ought to have been included. The fact
that I completed the return on your behalf does not relieve you from this offence. You
will be liable for an understatement penalty based on the value of the understatement.
• In addition to the additional tax for which you are liable, as detailed above, you will
also be liable for a penalty of a fine or imprisonment for a period not exceeding 24
months.
• You are also guilty of evading taxation and will therefore be subject to a fine or impris-
onment for a period not exceeding five years.
• If the Commissioner is of the opinion that I assisted you in avoiding the payment of
tax, he would be entitled to lodge a complaint with my controlling body (the Inde-
pendent Regulatory Board for Auditors). It, in turn, is entitled to deal with the matter in
a manner as it sees fit. It is probable that disciplinary action would be taken against me by
the Independent Regulatory Board for Auditors.

Additional questions for this chapter are available electronically at

www.myacademic.co.za/books

838
 Appendices

APPENDIX A
2023 tax rates
(i) Persons (other than companies and trusts)
Taxable income Rates of tax
Not exceeding R226 00 ................................................. 18 per cent of taxable income
Exceeding R226 00 but not exceeding R353 100 R40 680 plus 26 per cent of the amount by which
taxable income exceeds R226 000
Exceeding R353 100 but not exceeding R488 700 .... R73 726 plus 31 per cent of the amount by which
taxable income exceeds R353 100
Exceeding R488 700 but not exceeding R641 400 ... R115 762 plus 36 per cent of the amount by
which taxable income exceeds R488 700
Exceeding R641 400 but not exceeding R817 600 ... R170 734 plus 39 per cent of the amount by which
taxable income exceeds R641 400
Exceeds R817 600 but not exceeding R1 731 600 .... R239 452 plus 41 per cent of the amount by which
taxable income exceeds R817 600
Exceeds R1731 600 .......................................................... R614 192 plus 45 per cent of the amount by which
taxable income exceeds R1 731 600

(ii) Trusts (other than special trusts)

Tax is levied at a flat rate of 45%.

(iii) Small business corporations

Year of assessment ending on or after 1 April 2022 and 31 March 2022.
Taxable income Rate of tax
Not exceeding R91 250 .................................................... 0% of taxable income
Exceeding R91 250but not exceeding R365 000 ........... 7% of the amount by which the taxable income
exceeds R91 250 .
Exceeding R365 000 but not exceeding R550 000 ........ R19 163+ 21% of the amount by which the taxable
income exceeds R365 000.

continued

839
A Student’s Approach to Taxation in South Africa

Taxable income Rate of tax

Exceeding R550 000 .......................................................... R58 013 + 28% of the amount by which the taxable
income exceeds R550 000.
If the year of assessment ends on or after 3 March R58 013 + 27% of amount by which taxable income
2023 exceeds R550 000
That is: if both dates are relevant then the rate is
the lowest of the 28%, 27% or the rate applicable to
a company in a special economic zone (but not
really relevant for individuals

(iv) Turnover tax

Year of assessment ending on or after 1 March 2022 .
Taxable turnover Rate of tax
R0 – R335 000..................................................................... 0% of taxable turnover
R335 000 – R500 000 ......................................................... 1% of the amount by which the taxable turnover
exceeds R335 000
R500 000 – R750 000 ......................................................... R1 650 + 2% of the amount by which the taxable
turnover exceeds R500 000
R750 000 and above .......................................................... R6 650 + 3% of the amount by which the taxable
turnover exceeds R750 000

(v) Tax on retirement lump sum benefits (or on death)

Taxable income from benefit Rate of Tax
R0–R500 000 .................................................................... 0% of taxable income
Exceeding R500 000 but not exceeding R700 000 ...... 18% of taxable income exceeding R500 000
Exceeding R700 000 but not exceeding R1 050 000 ... R36 000 plus 27% of taxable income exceeding
R700 000
Exceeding R1 050 000..................................................... R130 500 plus 36% of taxable income exceeding
R1 050 000

(vi) Tax on retirement lump sum withdrawal benefits (pre-retirement)

Taxable income from benefit Rate of Tax
R0–R25 000 ...................................................................... 0% of the taxable income
Exceeding R25 000 but not exceeding R660 000 ........ 18% of taxable income exceeding R25 000
Exceeding R660 000 but not exceeding R990 000 ...... R114 300 plus 27% of taxable income exceeding
R660 000
Exceeding R990 000 ........................................................ R203 400 plus 36% of taxable income exceeding
R990 000

840
 Appendices

APPENDIX B
Life expectancy and present value tables (Table A)
Present value of R1
Age Expectation of life Age
per annum for life
Male Female Male Female
0 64,74 72,36 8,327 91 8,331 05 0
1 65,37 72,74 8,328 28 8,331 14 1
2 64,50 71,87 8,327 76 8,330 91 2
3 63,57 70,93 8,327 14 8,330 64 3
4 62,63 69,97 8,326 44 8,330 33 4
5 61,69 69,02 8,325 67 8,329 99 5
6 60,74 68,06 8,324 80 8,329 61 6
7 59,78 67,09 8,323 81 8,329 18 7
8 58,81 66,11 8,322 71 8,328 69 8
9 57,83 65,14 8,321 46 8,328 15 9
10 56,85 64,15 8,320 07 8,327 53 10
11 55,86 63,16 8,318 49 8,326 84 11
12 54,87 62,18 8,316 73 8,326 08 12
13 53,90 61,19 8,314 80 8,325 22 13
14 52,93 60,21 8,312 65 8,324 27 14
15 51,98 59,23 8,310 29 8,323 20 15
16 51,04 58,26 8,307 70 8,322 03 16
17 50,12 57,29 8,304 89 8,320 71 17
18 49,21 56,33 8,301 80 8,319 26 18
19 48,31 55,37 8,298 41 8,317 64 19
20 47,42 54,41 8,294 71 8,315 84 20
21 46,53 53,45 8,290 61 8,313 83 21
22 45,65 52,50 8,286 13 8,311 61 22
23 44,77 51,54 8,281 17 8,309 12 23
24 43,88 50,58 8,275 64 8,306 33 24
25 43,00 49,63 8,269 59 8,303 26 25
26 42,10 48,67 8,262 74 8,299 81 26
27 41,20 47,71 8,255 16 8,295 95 27
28 40,30 46,76 8,246 77 8,291 71 28
29 39,39 45,81 8,237 37 8,286 97 29
30 38,48 44,86 8,226 94 8,281 70 30
31 37,57 43,91 8,215 38 8,275 83 31
32 36,66 42,96 8,202 57 8,269 30 32
33 35,75 42,02 8,188 36 8,262 10 33
34 34,84 41,07 8,172 62 8,254 00 34
35 33,94 40,13 8,155 36 8,245 09 35
36 33,05 39,19 8,136 47 8,235 17 36
37 32,16 38,26 8,115 58 8,224 26 37

continued

841
A Student’s Approach to Taxation in South Africa

Present value of R1
Age Expectation of life Age
per annum for life
Male Female Male Female
38 31,28 37,32 8,092 74 8,211 99 38
39 30,41 36,40 8,067 81 8,198 66 39
40 29,54 35,48 8,040 30 8,183 86 40
41 28,69 34,57 8,010 67 8,167 62 41
42 27,85 33,67 7,978 44 8,149 83 42
43 27,02 32,77 7,943 44 8,130 12 43
44 26,20 31,89 7,905 47 8,108 81 44
45 25,38 31,01 7,863 80 8,085 27 45
46 24,58 30,14 7,819 24 8,059 56 46
47 23,79 29,27 7,771 09 8,031 19 47
48 23,00 28,41 7,718 43 8,000 26 48
49 22,23 27,55 7,662 36 7,966 17 49
50 21,47 26,71 7,602 01 7,929 50 50
51 20,72 25,88 7,537 13 7,889 67 51
52 19,98 25,06 7,467 48 7,846 46 52
53 19,26 24,25 7,393 87 7,799 65 53
54 18,56 23,44 7,316 31 7,748 34 54
55 17,86 22,65 7,232 34 7,693 55 55
56 17,18 21,86 7,144 14 7,633 63 56
57 16,52 21,08 7,051 78 7,568 96 57
58 15,86 20,31 6,952 25 7,499 27 58
59 15,23 19,54 6,850 04 7,423 21 59
60 14,61 18,78 6,742 06 7,341 35 60
61 14,01 18,04 6,630 10 7,254 57 61
62 13,42 17,30 6,512 32 7,160 20 62
63 12,86 16,58 6,393 01 7,060 46 63
64 12,31 15,88 6,268 22 6,955 37 64
65 11,77 15,18 6,137 89 6,841 61 65
66 11,26 14,51 6,007 26 6,723 93 66
67 10,76 13,85 5,871 65 6,598 93 67
68 10,28 13,20 5,734 03 6,466 35 68
69 9,81 12,57 5,591 82 6,328 18 69
70 9,37 11,96 5,451 65 6,184 66 70
71 8,94 11,37 5,307 75 6,036 07 71
72 8,54 10,80 5,167 44 5,882 78 72
73 8,15 10,24 5,024 37 5,722 22 73

continued

842
 Appendices

Present value of R1
Age Expectation of life Age
per annum for life
Male Female Male Female
74 7,77 9,70 4,878 76 5,557 43 74
75 7,41 9,18 4,734 90 5,388 93 75
76 7,07 8,68 4,593 54 5,217 27 76
77 6,73 8,21 4,446 63 5,046 79 77
78 6,41 7,75 4,303 09 4,870 92 78
79 6,10 7,31 4,158 98 4,693 89 79
80 5,82 6,89 4,024 40 4,516 47 80
81 5,55 6,50 3,890 51 4,343 99 81
82 5,31 6,13 3,768 02 4,173 15 82
83 5,09 5,78 3,652 76 4,004 82 83
84 4,89 5,45 3,545 46 3,839 88 84
85 4,72 5,14 3,452 32 3,679 21 85
86 4,57 4,85 3,368 64 3,523 71 86
87 4,45 4,58 3,300 66 3,374 26 87
88 4,36 4,33 3,249 07 3,231 75 88
89 4,32 4,11 3,225 97 3,102 96 89
90 4,30 3,92 3,214 38 2,989 12 90

The above tables have been extracted from Government Notice R1942 dated
23 September 1977.

843
A Student’s Approach to Taxation in South Africa

APPENDIX C
Annuity table (Table B)
Present value of R1 per annum capitalised at 12% over fixed periods
Year Amount Year Amount Year Amount Year Amount Year Amount
1 0,892 9 21 7,562 0 41 8,253 4 61 8,325 0 81 8,332 5
2 1,690 0 22 7,644 6 42 8,261 9 62 8,325 9 82 8,332 6
3 2,401 8 23 7,718 4 43 8,260 8 63 8,326 7 83 8,332 6
4 3,037 4 24 7,784 3 44 8,276 4 64 8,327 4 84 8,332 7
5 3,604 8 25 7,843 1 45 8,282 5 65 8,328 1 85 8,332 8
6 4,111 4 26 7,895 7 46 8,288 0 66 8,328 6 86 8,332 8
7 4,563 8 27 7,942 6 47 8,292 8 67 8,329 1 87 8,332 9
8 4,967 6 28 7,984 4 48 8,297 2 68 8,239 6 88 8,333 0
9 5,328 2 29 8,021 8 49 8,301 0 69 8,330 0 89 8,333 0
10 5,650 2 30 8,055 2 50 8,304 5 70 8,330 3 90 8,333 0
11 5,937 7 31 8,085 0 51 8,307 6 71 8,330 7 91 8,333 1
12 6,194 4 32 8,111 6 52 8,310 4 72 8,331 0 92 8,333 1
13 6,423 6 33 8,135 4 53 8,312 8 73 8,331 2 93 8,333 1
14 6,628 2 34 8,156 6 54 8,315 0 74 8,331 4 94 8,333 1
15 6,810 9 35 8,175 5 55 8,317 0 75 8,331 6 95 8,333 2
16 6,974 0 36 8,192 4 56 8,318 7 76 8,331 8 96 8,333 2
17 7,119 6 37 8,207 5 57 8,320 3 77 8,332 0 97 8,333 2
18 7,249 7 38 8,221 0 58 8,321 7 78 8,332 1 98 8,333 2
19 7,365 8 39 8,233 0 59 8,322 9 79 8,332 3 99 8,333 2
20 7,469 4 40 8,243 8 60 8,324 0 80 8,332 4 100 8,333 2

844
 Appendices

APPENDIX D
Write-off periods based on Interpretation Note No. 47
Period of write-off
Item
(Number of years)
Adding machines 6
Air conditioners
Window type 6
Mobile 5
Room unit 10
Air conditioning assets (excluding pipes, ducting and vents):
Air handling units 20
Cooling towers 15
Condensing sets 15
Chillers:
Absorption type 25
Centrifugal 20
Aircraft: Light passenger/commercial/helicopters 4
Arc welding equipment 6
Artefacts 25
Balers 6
Battery chargers 5
Bicycles 4
Boilers 4
Bulldozers 3
Bumping flaking 4
Carports 5
Cash registers 5
Cell phone antennae 6
Cell phone masts 10
Cellular telephones 2
Cheque writing machines 6
Cinema equipment 5
Cold drink dispensers 6
Communication systems 5
Compressors 4
Computers
Mainframe 5
Personal 3
Computers software (main frames)
Purchased 3
Self developed 1
Computers software (personal computers) 2
Concrete mixers (portable) 4
Concrete transit mixers 3
Containers (large metal type used for transport freight) 10
Crop sprayers 6
Curtains 5
Debarking equipment 4
Delivery vehicles 4
Demountable partitions 6
Dental and doctors’ equipment 5
Dictaphones 3
Drilling equipment (water) 5
Drills 6
continued

845
A Student’s Approach to Taxation in South Africa

Period of write-off
Item
(Number of years)
Electric saws 6
Electrostatic copiers 6
Engraving equipment 5
Escalators 20
Excavators 4
Fax machines 3
Fertiliser spreaders 6
Firearms 6
Fire extinguishers (loose units) 5
Fire detection systems 3
Fishing vessels 12
Fitted carpets 6
Food bins 4
Food-conveying systems 4
Fork-lift trucks 4
Front-end loaders 4
Furniture and fittings 6
Gantry cranes 6
Garden irrigation equipment (movable) 5
Gas cutting equipment 6
Gas heaters and cookers 6
Gearboxes 4
Gear shapers 6
Generators (portable) 5
Generators (standby) 15
Graders 4
Grinding machines 6
Guillotines 6
Gymnasium equipment
Cardiovascular equipment 2
Health testing equipment 5
Weights and strength equipment 4
Spinning equipment 1
Other 10
Hairdressers’ equipment 5
Harvesters 6
Heat dryers 6
Heating equipment 6
Hot water systems 5
Incubators 6
Ironing and pressing equipment 6
Kitchen equipment 6
Knitting machines 6
Laboratory research equipment 5
Lathes 6
Laundromat equipment 5
Law reports: Sets (legal practitioners) 5
Lift installations (goods/passengers) 12
Medical theatre equipment 6
Milling machines 6
Mobile caravans 5
Mobile cranes 4
Mobile refrigeration units 4
continued

846
 Appendices

Period of write-off
Item
(Number of years)
Motors 4
Motorcycles 4
Motorised chain saws 4
Motorised concrete mixers 3
Motor mowers 5
Musical instruments 5
Navigation systems 10
Neon signs and advertising boards 10
Office equipment – electronic 3
Office equipment – mechanical 5
Oxygen concentrators 3
Ovens and heating devices 6
Ovens for heating food 6
Packaging and related equipment 4
Paintings (valuable) 25
Pallets 4
Passenger cars 5
Patterns, tooling and dies 3
Pellet mills 4
Perforating equipment 6
Photocopying equipment 5
Photographic equipment 6
Planers 6
Pleasure craft etc. 12
Ploughs 6
Portable safes 25
Power tools (hand-operated) 5
Power supply 5
Public address systems 5
Pumps 4
Race horses 4
Radar systems 5
Radio communication equipment 5
Refrigerated milk tankers 4
Refrigeration equipment 6
Refrigerators 6
Runway lights 5
Sanders 6
Scales 5
Security systems (removable) 5
Seed separators 6
Sewing machines 6
Shakers 4
Shop fittings 6
Solar energy units 5
Special patterns and tooling 2
Spin dryers 6
Spot welding equipment 6
Staff training equipment 5
Surge bins 4
Surveyors
Instruments 10
Field equipment 5
continued

847
A Student’s Approach to Taxation in South Africa

Period of write-off
Item
(Number of years)
Tape-recorders 5
Telephone equipment 5
Television and advertising films 4
Television sets, video machines and decoders 6
Textbooks 3
Tractors 4
Trailers 5
Traxcavators 4
Trolleys 3
Trucks (heavy duty) 3
Trucks (other) 4
Truck mounted cranes 4
Typewriters 6
Vending machines (including video game machines) 6
Video cassettes 2
Warehouse racking 10
Washing-machines 5
Water distillation and purification plant 12
Water tankers 4
Water tanks 6
Weighbridges (movable parts) 10
Wire line rods 1
Workshop equipment 5
X-ray equipment 5

848
 Appendices

APPENDIX E
Table of interest rates contained in the Income Tax Act, 1962
Fringe benefit low interest loans – paragraph (a) of the definition of ‘official rate of in-
terest’ in paragraph 1 of the Seventh Schedule to the Act
Date from Date to Rate
1.08.2020 30.11.2021 4.50%
1.12.2021 31.01.2022 4.75%
1.02.2022 31.03.2022 5.00%
1.04.2022 31.05.2022 5.25%
1.06.2022 31.07.2022 5.75%
1.08.2022 30.09.2022 6.50%
1.10.2022 30.11.2022 7.25%
1.12.2022 Until change in the repo rate 8.00%

Interest payable by taxpayers on an amount of tax which is not paid on the date pre-
scribed for payment – paragraph (b) of the definition of ‘prescribed rate’ in section 1 of the
Act
Date from Date to Rate
01.11.2020 28.02.2022 7.00%
01.03.2022 30.04.2022 7.25%
01.05.2022 30.06.2022 7.50%
01.07.2022 31.08.2022 7.75%
01.09.2022 31,10.2022 8.25%
01.11.2022 31.12.2022 9.00%
01.01.2023 Until change in PFMA* rate 9.75%
* Public Finance Management Act 1 of 1999

Interest payable to taxpayers on credit amounts under section 89quat(4) of the Act –
paragraph (a) of the definition of ‘prescribed rate’
Date from Date to Rate
01.11.2020 28.02.2022 3.00%
01.03.2022 30.04.2022 3.25%
01.05.2022 30.06.2022 3.50%
01.07.2022 31.08.2022 3.75%
01.09.2022 31.10.2022 4.25%
01.11.2022 31.12.2022 5.00%
01.01.2023 Until change in PFMA* rate 5.75%
* Public Finance Management Act 1 of 1999

849
A Student’s Approach to Taxation in South Africa

APPENDIX F
Employee-owned vehicles (section 8(1))

Scale of values

Value of the vehicle (including VAT) Fixed cost Fuel cost Maintenance
cost

(R p.a.) (c/km) (c/km)

0–R95 000 29 836 131.7 40.9

Exceeds R95 001 but does not exceed– R190 000 52 88926 147.0 51.1
Exceeds R190 000 but does not exceed R285 000 76 033 159.7 56.3
Exceeds R285 000 but does not exceed R380 000 96 197 171.8 61.5
Exceeds R380 000 but does not exceed R475 000 116 438 183.8 72.3
Exceeds R475 000 but does not exceed R570 000 137 735 210.8 84.9
Exceeds R570 000 but does not exceed R665 000 159 031 218.04 105.5
Exceeds R665 000 159 031 218.04 105.5

Simplified method:
Where the amount of the allowance is based on the actual distance travelled by the
receiver (employee) and no other compensation is received (except for parking and
toll fees), a rate per kilometre of 418 cents can be used at the option of the employee.

Employer-owned vehicles (Paragraph 7(4) of the Seventh Schedule)

Paragraph 7(4): Subject to subparagraph (10), the value to be placed on the private
use of such vehicle shall be determined for each month or part of a month during
which the employee was entitled to use the vehicle for private purposes (including
travelling between the employee‘s place of residence and his or her place of
employment) and the said value shall—
(a) as respects each such month, be an amount equal to 3,5 per cent of the
determined value of such motor vehicle: Provided that where the motor vehicle is
the subject of a maintenance plan at the time the employer acquired the motor
vehicle or the right of use thereof, that amount shall be reduced to an amount
equal to 3,25 per cent of the determined value of the motor vehicle; and
(b) as respects any such part of a month, be an amount which bears to the
appropriate amount determined in accordance with item (a) for a month the same
ratio as the number of days in such part of a month bears to the number of days
in the month in which such part falls.

850
 Appendices

APPENDIX G
Master’s fees applicable to estates from 1 January 2018 (Government Gazette No
41 224)
Total value according to executor’s or curator’s account Master’s Fees
Under R250 000 Nil
Between R250 000 and R399 999 R600
From R400 000 with each increase of a full R100 000 Add R200

To a maximum of R7 000
On an estate of R3 600 000 and more

851
 Index

Para
A
Accrued to ................................................................................................................................................. 3.5
Acquisition or disposal of trading stock ......................................................................................... 8.3.10
Actually incurred .................................................................................................................................. 7.3.2
Additional tax ......................................................................................................................................... 19.7
Administrative penalties....................................................................................................................... 19.7
Advance tax rulings ............................................................................................................................... 19.4
Advertising ............................................................................................................................................... 7.5
Alimony ................................................................................................................................................. 4.2.2
Allowances .............................................................................................................................................. 14.4
Allowance on credit sales .................................................................................................................... 8.5.3
Amounts received in respect of services rendered, employment or holding an office ................. 4.2.3
Annual exclusion for capital gains tax .......................................................................................... 10.11.5
Annuities ................................................................................................................................................ 4.2.1
Former employees ............................................................................................................................. 8.4.2
Appeal ................................................................................................................................................... 19.8.3
Apportionment ...................................................................................................................................... 7.3.6
Assessed capital loss ............................................................................................................................ 10.13
Assessed losses ....................................................................................................................................... 8.11
Assessments ............................................................................................................................................ 19.6
of donations tax ..................................................................................................................................... 17
period of ................................................................................................................................................. 3.6
year of ..................................................................................................................................................... 3.6
Assets ............................................................................................................................................. 9.5, 10.3.1
acquired for less than market value ............................................................................................. 14.3.2
cost .......................................................................................................................................................... 9.5
connected persons ......................................................................................................................... 10.12.6
disposal of....................................................................................................................... 9.11, 10.3.3, 10.5
manufacturing process ........................................................................................................................ 9.8
recoupment on the sale of .............................................................................................................. 9.11.2
replacement assets......................................................................................................................... 10.14.2
right of use ........................................................................................................................................ 14.3.2
used by small business corporation .................................................................................................. 9.7
wasting ................................................................................................................................................... 7.5

853
A Student’s Approach to Taxation in South Africa

Para
Awards
by the CCMA ................................................................................................................................... 12.4.8
by the Labour Court........................................................................................................................ 12.4.8

B
Bad debts ................................................................................................................................................ 8.5.1
Bare dominium valuation .................................................................................................................. 17.10.3
Bargaining council, contribution by employer ............................................................................ 14.3.14
Base cost ................................................................................................................................................... 10.6
Beneficiary fund awards ..................................................................................................................... 6.3.2
Blocked foreign fund ............................................................................................................................... 3.5
Bribes ..................................................................................................................................................... 7.4.13
Burden of proof ...................................................................................................................................... 19.9
Bursaries ............................................................................................................................................... 14.5.3

C
Calculation of taxable income ............................................................................................................... 1.4,
Individual ......................................................................................................................................... 13.3.5
Of a company ...................................................................................................................................... 11.3
Cancellation of contracts ...................................................................................................................... 6.6.4
Capital
allowances ................................................................................................................................................ 9
fixed ..................................................................................................................................................... 7.3.5
floating ................................................................................................................................................ 7.3.5
gain ....................................................................................................................................................... 10.4
loss ........................................................................................................................................................ 10.4
nature, deemed ..................................................................................................................................... 3.7
Capital gains tax .................................................................................................................................... 10.2
20% rule ............................................................................................................................................... 10.9
application ........................................................................................................................................... 10.2
base cost ............................................................................................................................................... 10.6
determination whether transaction subject to ............................................................................ 10.3.3
donations and .................................................................................................................................. 10.5.2
proceeds ............................................................................................................................................... 10.5
time-apportioned base cost............................................................................................................... 10.8
Carrying on a trade .................................................................................................................................. 7.2
Cash or otherwise .................................................................................................................................... 3.4
Ceasing to be tax resident .................................................................................................................. 10.3.3
Close corporation ..................................................................................................................................... 1.3
Closing stock .......................................................................................................................................... 8.3.2
Collective investment schemes, individuals ................................................................................. 5.2.3.1
Commercial building allowance....................................................................................................... 9.10.2
Commissioner, powers of .................................................................................................................... 19.2
Company
definition ............................................................................................................................................... 11.2
classification of.................................................................................................................................... 11.7
collection of tax due ........................................................................................................................... 11.6

854
 Index

Para
Company (continued)
distributions ........................................................................................................................................ 11.8
low-interest and interest-free loans to companies ...................................................................... 17.13
preference shares in .............................................................................................................. 17.13, 16.10
tax rates ................................................................................................................................................ 11.3
taxable income .................................................................................................................................... 11.3
Compensation ........................................................................................................................................ 3.7.3
Compensation for personal injury, exclusion capital gains tax ............................................. 10.11.4.3
Compulsory annuities ........................................................................................................................ 15.3.4
Connected persons ................................................................................................................................... 9.2
Consumable stores ................................................................................................................................ 8.3.7
Contracts, future expenditure on .................................................................................................. 14.3.3.2
Contributions to funds ......................................................................................................................... 8.4.1
Contributed tax capital....................................................................................................................... 11.9.2
Controlled foreign companies ............................................................................................................ 3.6.1
Copyright ............................................................................................................................................. 9.13.1
Cost of an asset ......................................................................................................................................... 9.5
Criminal offences ................................................................................................................................ 19.7.4

D
Damages .................................................................................................................................................... 7.5
Debt
concession or compromise in respect of ................................................................................... 14.4.9.3
doubtful .............................................................................................................................................. 8.5.2
payment of employee’s ................................................................................................................ 14.3.15
waiving ........................................................................................................................................... 10.12.7
Deceased estates, disposals ............................................................................................................ 18.3.1.1
Deductions
double..................................................................................................................................................... 8.7
prohibited .............................................................................................................................................. 7.4
specific ....................................................................................................................................................... 8
Deemed inclusions in income
conditional right to income .............................................................................................................. 16.8
donations between residents and non-residents .......................................................................... 16.9
minor children ........................................................................................................................... 16.7, 16.7
spouses ................................................................................................................................................. 16.6
Definitions
‘asset’ ................................................................................................................................................. 10.3.1
‘company’ ............................................................................................................................................ 11.2
‘contributed tax capital’.................................................................................................................. 11.9.2
‘determined value’ ........................................................................................................................... 6.3.4
‘dividend’.............................................................................................................................. 4.2.13, 11.9.1
‘donation’ for purposes of donations tax’ ..................................................................................... 17.2
‘gross income’ ........................................................................................................................... 3.2, 13.2.2
‘group of companies ......................................................................................................................... 6.6.3
‘official rate of interest’ .................................................................................................................... 6.3.8
‘personal service provider’ ............................................................................................................ 11.4.2

855
A Student’s Approach to Taxation in South Africa

Para
Definitions (continued)
‘property’ for purposes of donations tax ....................................................................................... 17.4
‘small business corporation’ .......................................................................................................... 11.4.1
‘trust’ .................................................................................................................................................... 16.2
Deposits ..................................................................................................................................................... 3.5
Designs .................................................................................................................................................. 9.13.1
Determined value, definition .............................................................................................................. 14.3.4
Disability pensions................................................................................................................................ 6.3.1
Disability compensation ...................................................................................................................... 6.3.1
Discharge or release of obligation .................................................................................................. 14.3.15
Disposal
deemed disposal upon ceasing to be tax resident ...............................................................................
for capital gains tax ......................................................................................................................... 10.3.3
of assets ................................................................................................................................................ 10.5
timing of ............................................................................................................................................ 10.3.4
to a spouse ...................................................................................................................................... 10.14.3
by a trust in terms of share incentive scheme ..................................................................... 17.12.5.13
deceased estates ................................................................................................................................ 17.18
equity shares in foreign company ......................................................................................... 17.12.5.12
Disposal of immovable property by a non-resident person .......................................................... 5.4.3
Dispute resolution.................................................................................................................................. 19.8
Dividends .................................................................................................................................. 4.2.13, 6.3.4
beneficial owner of a ....................................................................................................................... 11.9.8
definition ............................................................................................................................................ 11.9.1
by way of an annuity ........................................................................................................................ 6.3.4
foreign .................................................................................................................................... 6.3.4, 5.2.3.1
from a REIT ........................................................................................................................................ 6.3.4
from collective investment schemes .............................................................................................. 6.3.4
local dividends................................................................................................................................... 6.3.4

Dividend tax ........................................................................................................................................... 11.9

exemption from dividends tax
dividend in cash .......................................................................................................................... 11.9.6
dividend in specie ....................................................................................................................... 11.9.7
levying of dividends tax on
a dividend in cash ....................................................................................................................... 11.9.3
a dividend in specie .................................................................................................................... 11.9.4
dividends from foreign companies .......................................................................................... 11.9.5
payment and recovery of dividends tax....................................................................................... 11.12
refund of dividends tax ................................................................................................................... 11.11
withholding of dividends tax ......................................................................................................... 11.10
Donation ........................................................................................................................................ 8.6.2, 4.11
Between resident and non-resident ................................................................................................ 16.9
by corporate bodies ...................................................................................................................... 17.4.1.2
by spouses married in community of property ...................................................................... 17.4.1.1
deemed ................................................................................................................................................. 17.4
linked to a condition .......................................................................................................................... 16.8
to public benefit organisations ............................................................................................... 17.12.5.10

856
 Index

Para
Donations tax ............................................................................................................................................. 17
calculation of ....................................................................................................................................... 17.6
definition of ‘donation’ for purposes of ........................................................................................... 17.2
definition of ‘property’ for purposes of ........................................................................................... 17.4
general exemption for a donor other than a natural person ....................................................... 17.8
general exemption from, for natural persons ................................................................................ 17.8
levying of ............................................................................................................................................. 17.2
non-residents....................................................................................................................................... 17.7
payment and assessment of ..................................................................................................... 17.4, 17.5
rate of .................................................................................................................................................... 17.3
recoupment of .................................................................................................................................. 17.4.2
specific exemptions from .................................................................................................................. 17.7
Double deductions ................................................................................................................................... 8.7
Doubtful debts ....................................................................................................................................... 8.5.2

E
Employee-related expenses .................................................................................................................... 8.4
Employees’ tax ........................................................................................................................................ 12.2
Administration ................................................................................................................................... 12.5
calculation of ....................................................................................................................................... 12.3
for directors of private companies and close corporations ...................................................... 12.4.5
identifying correct rate to use ....................................................................................................... 12.4.1
Employment
Benefits ................................................................................................................................................. 14.2
of non-residents ................................................................................................................................. 5.3.1
outside the Republic ......................................................................................................................... 6.3.3
Enduring benefit ................................................................................................................................... 7.3.5
Entertainment ........................................................................................................................................... 7.5
Estate duty .................................................................................................................................................. 18
claim in terms of Matrimonial Property Act .............................................................................. 18.4.3
contributions to retirement funds ............................................................................................... 18.4.5
deductions ........................................................................................................................................... 18.5
determination of amount, payable ....................................................................................... 18.2, 18.10
determination of dutiable amount .................................................................................................. 18.2
domestic policies of insurance on the life of the deceased ....................................................... 18.4.1
donatio mortis causa .......................................................................................................................... 18.4.2
liability of foreign death duties and double tax agreements ...................................................... 18.8
marriage in community of property ............................................................................................. 18.12
property ................................................................................................................................ 18.3, 18.3.1.1
deemed to be property .................................................................................................................. 18.4
of which the deceased was competent to dispose for own benefit ..................................... 18.4.4
rapid succession rebate ..................................................................................................................... 18.7
transfer duty ........................................................................................................................................ 18.9
valuation of
bare dominium ......................................................................................................................... 18.3.2.1
limited interests ........................................................................................................................ 18.3.2.1
right to an annuity .................................................................................................................... 18.3.2.2
Ex gratia payments ............................................................................................................................... 7.3.4
Exclusions for capital gains tax .......................................................................................................... 10.11

857
A Student’s Approach to Taxation in South Africa

Para
Exempt
Assets that produce exempt income, exclusion from capital gains tax ............................ 10.11.4.6
bodies and persons .............................................................................................................................. 6.3
persons, exclusion from capital gains tax .............................................................................. 10.11.4.5
dividends ............................................................................................................................................ 6.3.4
fringe benefits .................................................................................................................................... 6.3.2
foreign dividends .............................................................................................................................. 6.3.4
foreign services .................................................................................................................................. 6.3.2
income .................................................................................................................................................... 6.1
interest ................................................................................................................................................. 6.3.4
purchased annuity ............................................................................................................................ 6.3.4
scholarships and bursaries ................................................................................................... 6.3.2,15.5.3
Exercising an option, exclusion of capital gains tax .................................................................... 10.12.4
Expenditure and losses ........................................................................................................................ 7.3.1
Expenses and allowances of salaried taxpayers ................................................................... 13.4.1, 14.4

F
Fines......................................................................................................................................................... 7.4.4
Foreign
dividends ............................................................................................................................................ 6.3.4
dividends expenditure ................................................................................................................... 7.4.15
entertainers and sportspersons ....................................................................................................... 5.4.4
income .................................................................................................................................................... 5.2
pensions .............................................................................................................................................. 6.3.1
services ................................................................................................................................................ 6.3.3
tax rebates .................................................................................................................................... 1.5.6, 5.5
exchange transactions .......................................................................................................................... 8.2
Forfeited deposits .............................................................................................................................. 10.12.3
Free or cheap services......................................................................................................................... 14.3.7
Fringe benefits ................................................................................................................................ 4.2.11,14
From a source in the Republic ............................................................................................................... 5.3
Funeral benefits ..................................................................................................................................... 6.3.2
Funeral expenses ................................................................................................................................. 18.5.1
Future expenditure on contracts ........................................................................................................ 8.6.3

G
Gambling, lottery and prizes .............................................................................................................. 3.7.3
Gambling, games and competitions, exclusion for capital gains tax .................................... 10.11.4.4
General deduction formula ................................................................................................................... 7.3
Gifts and inheritances ............................................................................................................... 3.7.3, 11, 12
Goodwill .......................................................................................................................................... 3.7.3, 7.5
Government grants ............................................................................................................................... 3.4.5
Gross income............................................................................................................................................. 3.2
definition ................................................................................................................................................. 3.2
special inclusions ..................................................................................................................................... 4
Group of companies .............................................................................................................................. 11.2

858
 Index

Para
H
Home office expenses ......................................................................................................................... 13.3.2

I
Illegal receipts ........................................................................................................................................... 3.5
Immovable assets……………………… ............................................................................................... 9.10
Improvements .................................................................................................................................... 9.3, 9.6
In favour of ................................................................................................................................................ 3.5
Inclusion rate for capital gains tax .................................................................................................... 10.15
Income
earning operations ............................................................................................................................... 4.7
foreign ................................................................................................................................................. 5.2.3
gross ....................................................................................................................................................... .3.2
of minors ................................................................................................................................................ 5.4
specific .................................................................................................................................................... 5.2
Income Tax Act ...................................................................................................................................... 1.3.3
Independent contractor ...................................................................................................................... 12.4.3
Industrial policy project allowance .................................................................................................. 4.13.1
Inheritances ......................................................................................................................................... 3.7, 12
Insurance
Cessation ........................................................................................................................................... 7.4.14
policy premiums.............................................................................................................................. 4.2.14
employer owned............................................................................................................................ 14.3.12
premiums .......................................................................................................................................... 7.4.16
Intangible assets ................................................................................................................................ 10.12.2
Intellectual Property ........................................................................................................................... 9.13.2
Intention.................................................................................................................................................. 3.7.1
Interest ............................................................................................................................................................
exemption ................................................................................................................................. 5.3.2, 6.3.4
received, non-residents .................................................................................................................... 5.3.2
paid on debt ..................................................................................................................................... 14.3.8

K
‘Know-how’ payments ......................................................................................................................... 4.2.9
Kruger Rands ......................................................................................................................................... 3.7.3

L
Labour broker ...................................................................................................................................... 12.4.4
Learnership agreements ....................................................................................................................... 8.4.4
Lease premiums .................................................................................................................................. 9.12.2
Leased assets ........................................................................................................................................... 9.12
Leasehold improvements .................................................................................................................. 9.12.3
Legal expenses ....................................................................................................................................... 8.6.1

859
A Student’s Approach to Taxation in South Africa

Para
Limitation
of capital losses ................................................................................................................................. 10.12
of losses ................................................................................................................................................ 13.6
exclusion rule ................................................................................................................................. 5.6.2
Limitation of capital allowances ............................................................................................... 5.15, 10.12
depreciable assets ............................................................................................................................ 5.15.2
lessors ................................................................................................................................................ 5.15.1
Living annuities ................................................................................................................................... 15.3.2
Loans, subsidy ..................................................................................................................................... 14.3.9
Long-term insurance, exclusion of capital gains tax ................................................................ 10.11.4.2
Low-cost housing ................................................................................................................................ 5.12.4
Low interest loans ............................................................................................................................... 14.3.8
Lump sums
received from an employer ............................................................................................................... 15.3
Foreign ................................................................................................................................................ 6.3.2
Public sector funds ....................................................................................................................... 15.4.1.2
received on retirement ......................................................................................................... 4.2.6, 15.4.4
received on withdrawal or resignation ....................................................................................... 15.4.2
taxation of ............................................................................................................................................ 15.4

M
Manufacture, process of ................................................................................................................... 9.4, 9.8
Manufacturing
building allowance .......................................................................................................................... 9.10.1
plant and machinery ......................................................................................................................... 9.7.1
Meals, refreshments and vouchers................................................................................................... 14.3.5
Medical
aid contributions by employers .................................................................................................. 14.3.10
credits .................................................................................................................................................. 7.6.5
expenses tax credit ............................................................................................................................ 1.5.5
lump sum payments. ...................................................................................................................... 4.13.4
scheme fees tax credit ....................................................................................................................... 1.5.4
services ................................................................................................................................................ 14.3.11
Micro businesses ................................................................................................................................. 6.12.4
Motor vehicle, right of use ................................................................................................................. 14.3.4

N
Non-resident companies ....................................................................................................................... 11.5
Non-residents, exemptions ............................................................................................................... 5.3,5.2
Non-resident’s income ............................................................................................................................ 5.3
Non-residents, royalties ....................................................................................................................... 5.3.2
Non-trade expenditure......................................................................................................................... 7.4.7
Notional interest .................................................................................................................................... 7.4.8

860
 Index

Para
Normal tax............................................................................................................................................ 13.5.2
credits .................................................................................................................................... 13.5.4, 13.5.5
rebates ................................................................................................................................... 13.5.3, 13.5.6
Not of a capital nature ................................................................................................................... 3.7, 7.3.5

O
Objection ............................................................................................................................................... 19.8.1
Objective tests ........................................................................................................................................ 3.7.2
Official rate of interest, definition ............................................................................................. 6.3.8, 16.10
Opening stock ........................................................................................................................................ 8.3.3
Options................................................................................................................................................ 10.12.4
Ordinarily resident ........................................................................................................................ 3.3.1, 5.2
Other amounts included in gross income .......................................................................................................4

P
Patents, designs, trademarks and copyright .................................................................................. 9.13.1
Partnerships .............................................................................................................................................. 1.3
PAYE ........................................................................................................................................................ 12.3
Payment, recovery and refund of tax ............................................................................................... 19.10
Penalties .................................................................................................................................................. 7.4.4
Pension fund contributions ................................................................................................. 13.4.2,14.3.13
Pensions ................................................................................................................................................ 15.3.1
Period of assessment ............................................................................................................................... 3.6
Personal injury, compensation for .............................................................................................. 10.11.4.3
Personal service provider ...................................................................................................... 11.4.2, 12.4.2
Personal-use assets exclusion.......................................................................................................... 10.11.2
‘Physical presence’ test ......................................................................................................................... 3.3.2
Premiums
paid ...................................................................................................................................................... 5.3.2
Prepaid expenses ...................................................................................................................................... 8.9
Pre-trade expenses ....................................................................................................................... 4.2.2, 8.10
Primary residence exclusion ........................................................................................................... 10.11.1
Private maintenance expenditure ...................................................................................................... 7.4.1
Private or domestic expenditure ........................................................................................................ 7.4.2
Prizes .......................................................................................................................................................... 3.5
Proceeds ................................................................................................................................................... 10.5
Process of manufacture ........................................................................................................................... 9.4
Production of income ........................................................................................................................... 7.3.4
Prohibited deductions ............................................................................................................................. 7.4
Provident fund contributions.............................................................................................. 13.4.2, 14.3.13
Provisions ............................................................................................................................................... 7.4.5
Provisional tax ........................................................................................................................................ 12.6
companies ................................................................................................................................... 11.6, 12.6
individuals........................................................................................................................................... 12.6
penalties ............................................................................................................................................ 12.6.5

861
A Student’s Approach to Taxation in South Africa

Para
Public benefit organistions, donations to ........................................................................................ 13.4.3
Public benefit organistions, donations to, exclusion from capital gains tax ........................ 10.11.4.7
Public funds, gratuity from ............................................................................................................... 15.4.3
Public officers......................................................................................................................................... 6.4.3
Purchased annuity ................................................................................................................................ 6.3.4
Purchase of stock ................................................................................................................................... 8.3.4

Q
Qualifying annuities .............................................................................................................................. 15.5

R
Rebates .................................................................................................................................................. 13.5.3
foreign tax ......................................................................................................................................... 13.5.6
normal tax ......................................................................................................................................... 13.5.6
Receipts ...................................................................................................................................................... 3.5
of non-residents ............................................................................................................................. 5.1–5.4
or accruals of a capital nature ..................................................................................................... 3.7, 3.9
Recoupment ................................................................................................................. 9.11.2, 9.11.3, 9.11.4
Recoverable expenditure ..................................................................................................................... 7.4.3
Recurrent expenses ............................................................................................................................... 7.3.4
Refreshments ....................................................................................................................................... 14.3.5
Refunds .................................................................................................................................................. 19.11
Registration of taxpayers ................................................................................................................... 19.3.1
Reimbursive allowance ......................................................................................................................... 14.4
Release of obligation ......................................................................................................................... 14.3.15
Relocation benefits .............................................................................................................................. 14.3.2
Remuneration ...................................................................................................................................... 12.3.2
variable.............................................................................................................................................. 12.3.5
Rental paid ........................................................................................................................................... 9.12.1
Repairs ....................................................................................................................................................... 9.3
Reportable arrangements ...................................................................................................................... 19.5
Resident of the Republic ......................................................................................................................... 3.3
Residential buildings .......................................................................................................................... 9.10.3
Restraint of trade payments .................................................................................................... 7.4.11, 8.4.3
Retirement annuity fund contributions............................................................................. 13.4.2, 14.3.13
Retirement benefits, exclusion of capital gains tax .................................................................. 10.11.4.1
Retirement funds, contributions to .................................................................................... 13.4.2, 14.3.13
Returns .................................................................................................................................................. 19.3.2
Right of use
Accommodation .............................................................................................................................. 14.3.6
Asset .................................................................................................................................................. 14.3.3
Motor vehicle ................................................................................................................................... 14.3.4
Ring-fencing of assessed losses............................................................................................................ 13.6
Roll-overs of capital gains or losses .................................................................................................. 10.14
Royalties, non-residents ....................................................................................................................... 5.3.2

862
 Index

Para
S
Salaries and wages ................................................................................................................................... 7.5
Sale of assets ............................................................................................................................................ 10.5
Scholarships ........................................................................................................................................... 6.4.3
Seasonal workers ................................................................................................................................. 12.4.7
Section 6quat rebate.................................................................................................................................. 5.5
Settlement of disputes ........................................................................................................................ 19.8.2
Security expenses ..................................................................................................................................... 7.5
Share dealers (trading stock) ............................................................................................................. 8.3.12
Small business
capital gain exclusion ................................................................................................................... 10.11.3
corporations ................................................................................................................................. 11.4, 9.7
funding entity ..................................................................................................................................... 4.14
Sole trader.................................................................................................................................................. 1.3
Source of income ...................................................................................................................................... 5.2
Social responsibility expenses ............................................................................................................. 7.3.4
Special inclusions ........................................................................................................................................ 4
Specific deductions ............................................................................................................................. 13.3,8
Sterilisation of assets............................................................................................................................. 3.7.3
Subjective tests ....................................................................................................................................... 3.7.1
Subsistence allowance ........................................................................................................................ 14.4.2
Suspect trades ...................................................................................................................................... 13.6.1
Suspension of payment in dispute ................................................................................................. 19.10.3

T
Tax
implications of enterprise type .......................................................................................................... 1.3
ombud .................................................................................................................................................. 19.2
returns ............................................................................................................................................... 19.3.2
Tax practitioners ................................................................................................................................... 19.12
Taxable income
company ....................................................................................................................................... 1.5, 11.3
calculation of ................................................................................................................................ 1.4, 13.2
Taxation of retirement benefits ............................................................................................................ 15.4
Tax-free investment
dividends ....................................................................................................................................... 13.3.1.3
interest ............................................................................................................................................ 13.3.1.3
Theft losses ............................................................................................................................................. 7.3.4
Time-apportionment base cost ............................................................................................................ 10.8
Trade, carrying on a ................................................................................................................................. 7.2
Trademarks .......................................................................................................................................... 14.4.1

863
A Student’s Approach to Taxation in South Africa

Para
Trading stock .................................................................................................................................. 8.3, 8.3.1
acquired for no consideration ......................................................................................................... 8.3.6
consumable stores ............................................................................................................................. 8.3.7
closing stock ....................................................................................................................................... 8.3.2
opening stock ..................................................................................................................................... 8.3.3
purchases ............................................................................................................................................ 8.3.4
Training...................................................................................................................................................... 7.5
Transfer costs ....................................................................................................................................... 14.5.2
Transfer of listed securities to offshore exchange ........................................................................... 6.3.3
Transfer pricing ................................................................................................................................... 11.9.1
Travel allowances................................................................................................................................ 14.4.1
True nature of transaction ................................................................................................................... 4.8.1
Trusts
definition ........................................................................................................................................ 1.3, 16.2
annuities............................................................................................................................................. 16.12
calculation of interest .................................................................................................................... 16.11.3
capital gains tax ................................................................................................................................ 16.15
inter vivos trust .................................................................................................................................... 16.2
limitation of losses............................................................................................................................ 16.13
loans between trusts and connected persons .............................................................................. 16.10
nature of income (conduit) ............................................................................................................. 16.12
person liable for tax ........................................................................................................................... 16.4
right to income .................................................................................................................................... 16.5
tax rates ................................................................................................................................................ 16.3
testamentary trust .............................................................................................................................. 16.2
Types of enterprises ................................................................................................................................. 1.3

U
Unemployment insurance benefit funds .......................................................................................... 6.3.2
Uniform allowance ............................................................................................................................. 14.5.1
Unlawful activities .............................................................................................................................. 7.4.13
Unprofessional conduct ...................................................................................................................... 19.13

V
Vacant property ........................................................................................................................................ 7.5
Valuation
date value .......................................................................................................................................... 10.10
of annuity ........................................................................................................................................ 17.10.2
of bare dominium ................................................................................................................ 17.10.3, 18.3.2
of fiduciary ......................................................................................................................... 17.10.1,18.3.2
of property of limited interest ....................................................................................................... 18.3.2
of property other than limited interests ................................................................................ 17.9, 18.3
of usufructuary .............................................................................................................................. 16.10.1
Valuation date value............................................................................................................................ 10.10

864
 Index

Para
Value-added tax ................................................................................................................................ 2.1, 2.2
accounting basis ................................................................................................................................ 2.3.1
adjusted cost ........................................................................................................................................ 2.26
apportionment .................................................................................................................................... 2.14
calculation of ......................................................................................................................................... 2.3
commercial accommodation ...................................................................................................... 2.11.3.2
connected persons ............................................................................................................... 2.15.2, 2.16.2
documentation ........................................................................................................................... 2.18, 2.19
enterprise ............................................................................................................................................ 2.7.1
electronic services............................................................................................................................... 2.25
exempt supplies ............................................................................................................................... 2.11.4
financial services ............................................................................................................................. 2.11.1
fixed property ..................................................................................................................................... 2.24
second-hand goods ........................................................................................................................ 2.22
fringe benefits .................................................................................................................................. 2.12.4
goods, definition ............................................................................................................................. 2.6.2.1
imports ............................................................................................................................................ 2.8, 2.9
income tax and .................................................................................................................................... 2.36
indemnity payments ....................................................................................................................... 2.12.2
input tax ............................................................................................................................................... 2.17
change-of-use adjustments .................................................................................................. 2.26–2.30
instalment credit agreements ....................................................................................................... 2.23
irrecoverable debt (bad debt) ....................................................................................................... 2.32
prohibited deductions ................................................................................................................... 2.21
second-hand goods ........................................................................................................................ 2.22
leasehold improvements ................................................................................................................... 2.31
non-supply .......................................................................................................................................... 2.13
output tax........................................................................................................................................ 2.4- 2.7
refunds ................................................................................................................................................ 2.3.5
registration ......................................................................................................................... 2.6.3.1, 2.6.3.2
instalment credit agreements ........................................................................................... 2.15.3, 2.23
rental agreements ............................................................................................................... 2.15.3, 2.23
returns, assessments and objections............................................................................................... 2.3.3
rulings .................................................................................................................................................. 2.33
services, definition ......................................................................................................................... 2.6.2.2
supply of goods and services ............................................................................................................. 2.6
to branches .................................................................................................................................... 2.12.3
tax avoidance ...................................................................................................................................... 2.34
tax periods .......................................................................................................................................... 2.3.2
temporarily applied ........................................................................................................................... 2.26
termination of an enterprise (ceasing to be a vendor) .............................................................. 2.12.1
time of supply of goods and ........................................................................................................... 2.15,
value of supply of goods and services ............................................................................................ 2.16
zero-rated supplies............................................................................................................................. 2.10
going concern ................................................................................................................................... 2.10.3
goods ................................................................................................................................................. 2.10.1
services .............................................................................................................................................. 2.10.2
Variable remuneration ....................................................................................................................... 12.3.5
Vouchers ............................................................................................................................................... 14.3.5

865
A Student’s Approach to Taxation in South Africa

Para
W
Wages ......................................................................................................................................................... 7.5
Waiver or cancellation of a debt ..................................................................................................... 10.12.7
War pensions ............................................................................................................................................ 6.2
Wear-and-tear allowances ...................................................................................................................... 9.9
Withholding tax........................................................................................................................................ 5.4
on disposal of immovable property ............................................................................................... 5.4.3
on dividends ....................................................................................................................................... 11.9
on foreign entertainers and sports persons .................................................................................. 5.4.4
on interest ........................................................................................................................................... 5.4.1
on royalties ......................................................................................................................................... 5.4.2
Workmen’s compensation ...................................................................................................................... 6.2

Y
Year of assessment ............................................................................................................... 3.6, 8.3.9, 7.3.3

866