COXTB3-B22.

T22
Taxation 3B

Eduvos (Pty) Ltd (formerly Pearson Institute of Higher Education) is registered with the Department of Higher Education and Training as a private higher education institution under the
Higher Education Act, 101, of 1997. Registration Certificate number: 2001/HE07/008
Objectives:
1. Determine taxable income of sole proprietors
2. Determine taxable income of partners in a
partnership
 Sole Proprietors / Partnerships
1. If a person operates a farming business, a rental of property business, is employed and
operates a consultancy business – all in own name – how many different taxpayers are there?
2. How many different trades are there?
3. Is a partnership a taxpayer?
4. Could either of the above be VAT vendors?
 PER TAXPAYER per year of assessment
s1 of ITS: “taxpayer” means any person chargeable with any tax leviable under this Act
“person” includes (a) insolvent and (b) deceased estate; (c) trust; (d) collective
investment scheme; but does not include a foreign partnership

Gross Income • Section 1

Less Exempt Income • Section 10 + others

Less Allowable • Capital Allowances

Deductions • Section 11(a)

Equals Taxable
Income

Tax per schedule • Year of assessment end February each year

 PARTNERS • Oral or written agreement between 2 or more
HIP persons (not > 20)
See 7 .1 of text book • employs property, money, labour, skills &/or
knowledge
• in a legal understanding
• to joint benefit of all partners
• in a predetermined/agreed ratio

Ordinary or
special type (includes a “silent” or anonymous
partner etc)
 Partners’ Taxable Income (7.3)
1. Taxable business income of partnership;
2. Taxable income of p/ship x profit sharing ratio
3. Add partner’s other (non-partnership taxable income)
from ALL other sources;
4. Take into account personal deductions/allowances
(unless is a company);
5. Calculate the tax
 Partners’ Taxable Income
NB in the calc of p/ship business income:
- exclude interest (each has an exemption)
- exclude donations to PBOs (10% limits)
- capital gains/losses (R40 000 annual exclusions & 40%)
- consider bad debts/debts recovered if arose prior to
p/ship formation OR change in ratios
- salaries to partners = pre-profit sharing
 Partners’ Taxable Income
Partnership DEEMED to be employer and partners an
employee for fringe benefit purposes
also for PAYE and VAT

Contributions to benefit &/or Retirement funds:

- deduct in p/ship; add to partner’s income
 Pre-lecture example: DL – sole proprietor
1. His father gave him R40 000 to assist with his business venture.
Capital receipt. Not gross income. No affect on taxable income. (Father may have to pay donations tax)

2. DL earns an annuity from a trust. During the year of assessment he earned R30 000. The income was made up of
R10 000 in local interest, R15 000 in rentals and R5 000 in dividends.
Annuity is gross income (a). Income from a trust does not change in nature. Therefore DL has gross income
comprising:
- interest R10 000 (of which up to R23 800 is exempt – s10(1)(i) - thus R0 in taxable income;
- rentals of R15 000: no exemption therefore R15 000 on taxable income;
- dividends of R5 000: no exemption because this is in the form of an annuity: taxable income thus R5
000.
 Pre-lecture example: DL – sole proprietor
3. He bought office furniture for R15 000, computer equipment for R20 000 and stationery for R5 000.
The purchase of office furniture and equipment and the computer equipment are purchases of capital assets and
the expenditure incurred is therefore of a capital nature. It is not deductible in determining taxable income.
DL may deduct wear-and-tear under section 11(e). In terms of Interpretation Note 47 and Binding General Ruling
7 furniture is written off over six years, and computer equipment over three years.
Therefore deduction allowed of 15 000/6=R2 500 and 20 000/3=R6 666.67. Assuming the assets were used for
the full 2023 year of assessment.
The R5 000 for stationery is deductible since it is expenditure incurred for the purpose of earning trade income,
not capital in nature. This is trading stock and thus, to the extent still on hand at the end of the year of assessment,
must be added back to income - s22(1).

4. He bought 5 new suits and various other clothing needed for work for R78 000.
This is private and domestic expenditure, not deductible per s23(a) and (b).
 Pre-lecture example: DL – sole proprietor

5. He joined a Business Person’s Club solely for business purposes. The joining fee was R6 000 and the annual
subscription fee is R600.
DL uses the Club solely for business purposes. The R600 he pays as his annual subscription will thus be deductible in terns of
s11(a). The entrance fee of R6 000 is, however, of a capital nature (since it gives rise to an enduring benefit) and is therefore
not deductible.

6. Employed an administrative assistant at R20 000 per month.

The R20 000 per month (R240 000 for the year) deductible under s11(a).
 Pre-lecture example: DL – sole proprietor

7. Registered himself on e-filing for VAT, employees tax and UIF as well as skills development levy.
No costs attached therefore no effect of taxable income but:
Vendor: DL will have to account for value-added tax output tax on the supplies and services he makes and may
deduction input tax on some of the supplies and services made.
Provisional taxpayer: DL will be required to pay a first provisional tax payment not later than 31 August 2022,
and a second provisional tax payment not later than the last day of the 2023 year of assessment. On a voluntary
basis, and to avoid being liable for the payment of interest under section 89quat, he may elect to make a third
provisional tax payment seven months after the 2023 year of assessment has ended (on 30 September 2023).
Levypayer: for the skills development levy DL will be required to pay a ‘payroll’ tax each month. This tax is
regarded as part of the cost of employing his employees and is therefore deductible under s11(a). The position is
the same for his contribution (the employer’s contribution) to the unemployment insurance fund.
 Pre-lecture example: DL – sole proprietor
8. Opened 2 bank accounts: a “business” bank account and a “trust” bank account. The accounts earned interest of R5
000 and R7 000 respectively.
Interest earned: The R5 000 local interest earned from the ‘business’ account must be included in his gross
income. The first R23 800 of it is, however, exempt from normal tax (section 10(1)(i)). The R15 000 local interest
from his ‘trust’ account is not his gross income. It does not accrue to him, and it is not received by him for his own
use or benefit. It accrues to his clients whose funds are being held by him in ‘trust’ for them.

9. Subscribed to De Rebus, a magazine dealing with legal issues, at R300 per annum, and South African Law Reports, a
journal dealing with all recent high Court decisions, for R1 800 per annum.
It is necessary for an attorney to carry on his trade, to subscribe to journals that report on the latest developments
in legal matters. These subscriptions incurred are therefore deductible under s11(a).

10. In December 2022, while on holiday in Zimbabwe, he assisted an erstwhile university friend to defend charges
against her. She was a resident of Zimbabwe. She paid him the equivalent of R3 000 for his help.
Since Douglas Leyland is a resident of the Republic his world-wide receipts and accruals are included in his South
African gross income. He will therefore be required to include in his gross income the equivalent R3 000 that he
earned in Zimbabwe while on holiday there.
 Pre-lecture example: DL – sole proprietor
11. DL plays the Lotto weekly. He spends R7 a week. In February he won R3 300 from the lotto. He estimates that he
has a net gain from playing the lotto of R3 020 (R3 300 – 280) for 2023.
DL is not carrying on the business of a ‘professional’ lotto player (gambler). As a result, the R3 300 cash prize he
won from it is a receipt or accrual of a capital nature and therefore excluded from his gross income. His
expenditure incurred of R280 is not deductible since it did not produce ‘income’ as defined. In any event, he is not
trading in relation to his lotto playing and therefore will not enjoy deductions for his lotto-playing expenses. His
expenditure incurred is both domestic and capital in nature.
Because the National Lottery is a ‘local’ competition his capital gain is also disregarded for capital gains tax
purposes (paragraph 60 of the Eighth Schedule).

12. He charged R400 000 in fees for the 2023 year of assessment. Of this, R300 000 was paid. He wrote off a debt of
R2 000 during the year of assessment. Outstanding at the year-end therefore is R98 000.
The fees charged are gross income, whether actually received or not. The R2 000 written off may be deducted
under s11(i) as a bad debt since it was included in income and is owned by DL.
 Pre-lecture example: DL – sole proprietor
13. He paid PAYE, UIF and SDL based on the Administrative assistant’s salary of R30 000, R4 800 and R2 800 for 2023.

Amounts withheld from the assistant’s salary do not affect DL’s taxable income since he has not actually incurred
the amounts. However, where expenditure is incurred by DL in respect of all these amounts are deductible in
terms of s11(a) Thus:
PAYE – no effect; UIF 1% from each of the employer and employee thus R2 400 is incurred and deductible. SDL
is deductible – no amount withheld from an employee.

14. He also paid R28 000 towards a medical aid fund on her behalf and a further R15 000 towards a provident fund on
her behalf. 50% of each of the contributions were deducted from her remuneration (i.e. the employment contract determines
the contributions at 50% each).
Withheld from employee – no effect. 50% of medical aid – R14 000 – deductible s11(a) and R7 500 for provident
fund deduct under s11(l).

15. VAT has been correctly dealt with.

VAT charged is not gross income because it is not on own behalf – it is collected on behalf of SAR. VAT incurred
is not deductible if it may be claimed as input tax since it is effectively refunded by SARS and therefore is not
actually incurred. To the extent not allowed as input tax, the VAT will form part of the cost and takes on the nature
 Partnership pre-lecture problem
Partnership
KKC (66 years old) and CCP (40 years old) are equal partners, residents of the Calculation:
Republic. 186 400
Trading net income for the year 733 600 -
Net rentals 48 000 -
No adjustment required (9 600)
Capital profit on expropriation of part of its property 9 600
The partnership trades on its own property. It uses one shop and lets a second
shop. In November 2022 the local municipality expropriated a part of the
property comprising an outbuilding on the site. R9 600 was paid as
compensation. A calculation of the pro-rata cost of the expropriated portion of
the property was R5 600. The market value was accepted as the cost.
capital profit is an accounting issue – not applicable to tax. The capital gain/loss needs
to be established.
Proceeds: 9 600
Base Cost: 5 600 Capital Gain R4 000 but to be dealt with individually
 Partnership pre-lecture problem
Partnership
Partners’ salaries: Calculation:
- KKC (264 000) (-)
- CCP (240 000) (-)
No adjustments, but to be included in each partner’s gross income. Effectively
these are a share of profits in a ratio different from the overall agreement

Local interest on capital accounts paid to:

- KKC (37 200)
- CCP (44 400)
(-)
No adjustments. Legitimate expenditure by partnership, but Gross income to
(-)
partners
Insurance premium on the joint lives of the partners (16 800)
16 800
Add back since it seems does not qualify under s11(w) – capital
 Partnership pre-lecture problem Partnership
Calculation:
Donation to a PBO – s18A certificate received) (2 400) 2 400
Add back because of limits in individual’s taxable income calculation
PROFIT FOR THE YEAR 186 400 196 000
Dealt with above as the starting point

98 000
Each partner’s share

CCP also earned interest of R16 000 and a share of profits from another
partnership in which she is a “sleeping” partner, of R120 000.
To be added to CCP’s gross income as below
 Partnership pre-lecture problem

KKC’s taxable income CCP’s taxable income

Share of profit: 98 000 Share of profit 98 000
Add salary 264 000 Plus as “sleeping” partner 120 000
Add interest 37 200 Add salary 240 000
Less exempt (34 500) Add interest 44 400
364 700 Plus 16 000
Less allow donation share R1 200 (1 200) Exempt (23 800)
Taxable income 363 500 Taxable income 494 600
Less donation portion (1 200)
Taxable Service 493 400
 Example 7.1 in text book
Calculate p/ship taxable income (as if it is a tax entity, keeping in mind that the taxable income
is to be shared in terms of the profit sharing ratio: 50/50 in this case
Gross income – no adjustment required therefore R915 000

R15 000 debt recovery: each partner has earned R7 500 but only JOHN actually wrote off an
amount. Therefore for him, R7 500 is a recoupment – work into individual calculation.
For MIKE, R7 500 is a capital receipt with a R0 base cost. Work into individual calculation.

Sundry expenses deductible – claim

(192 450)
 Example 7.1 in text book (contd)
Drawings – no deduction & NOT GI therefore “ignore”

Bad debts – normally allowed s11(i) but R2 000 are debts brought in by John (4 000)
Each will incur R1 000 loss. Only John may deduct his portion since they were in income – do
this in his individual tax computation.
MIKE has capital loss of R1 000 to be deducted from his capital gain above (in his individual
computation.)

Profit on office building – accounting concept. But in this case R100 000 is a capital gain as
well. Take into each individual tax comp a R50 000 gain.

In individual computations: RA fund contributions are in GI and then deductible under s11F
CGT usual calc: gains – losses & annual exclusion and 40%

See solution in book