27 Mar 2023

Number of handouts
Handouts include
1. Slides
2. Module outline
Presented by:
3. Case Law pack
Tsireledzo Mulaudzi
4. Tutorials
MTP(SA)

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Lecture Outcomes
By the end of this lecture, you should be able to:

1. Specific inclusions Identify and explain which amounts should specifically be included in
in gross income ‘gross income’, even though these amounts may be of a capital nature
and support your opinion with the relevant authority

Demonstrate your knowledge through practical examples (theory and

calculation-based scenarios).

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Learning Agenda
 Annuities - Par (a)
 Alimony payments - Par (b)
 Services - Par (c)
 Restraint of trade - Paras (cA) & (cB)
 Services – compensation for termination of employment - Par (d)
 Fund benefits - Paras (e) & (eA)
 Services- Commutation of amounts due - Par (f)
 Lease premiums - Par (g)
 Compensation for imparting knowledge and information - Par (gA)
 Leasehold improvements - Par (h)
 Fringe benefits - Par (i)
 Proceeds from the disposal of certain assets - Par (jA)
 Dividends - Par (k)
 Key-man insurance policy proceeds - Par (m)
 Recoupments and other inclusions - Par (n)

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Resources

SILKE: First Touch to Tax 2023

M.Stiglingh – Chapter 4 (pg. 59 – 76)
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Framework – Normal tax payable (company)

Description Amount
Gross Income (definition in s 1(1)) xxx
Less: Exempt Income (s 10)) (xxx)
Equals: Income (as defined in s 1(1)) xxx
Less: Deductions and capital allowances (various, but excluding s18A) (xxx)
Less: Assessed loss brought forward (s 20 and s 20B) (Tax III) (xxx)
Add: Amounts included in taxable income xxx
Add: Taxable capital gain (s 26A) xxx
Subtotal xxx
Less: s 18A deduction (Donations to PBOs) (Tax III) (xx)
TAXABLE INCOME XXX

28%/27% of taxable income XXX

Less: s 6quat rebate (Tax III) (xxx)
NORMAL TAX PAYABLE XXX

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Framework – Normal tax payable (natural person)

Description Amount
Gross Income (general and specific inclusions in s 1(1), s 7, s 8(4)(a)) xxx
Less: Exempt Income (s 10, s 10 - s10C, s 12T exemptions) (xxx)
Equals: Income (as defined in s1(1)) xxx
Less: Deductions and capital allowances (ss 11 -19, ss 21-24P, excl. s 11F & s 18A) (xxx)
Less: Assessed loss brought forward (s 20 - s 20B) (Tax III) (xxx)
Add: Amounts included in taxable income (e.g. s 8(1)(a)) xxx
Add: Taxable capital gain (s 26A) xxx
Less: Deductions in terms of s 11F (Tax III) (xxx)
Subtotal xxx
Less: s 18A deduction (Donations to PBOs) (Tax III) (xxx)
TAXABLE INCOME XXX

Normal tax per progressive tax table (based on taxable income) XXX
Less: s 6 Rebates (primary, secondary, tertiary) and s 6quat rebate (Tax III) (XXX)
Add: Additional tax in terms of s 12T(7)(a) xxx
Add: Normal tax payable on the taxable income of lump sums (Tax III) xxx
Less: S 6A and s 6B tax credits (Tax III) (xx)
NORMAL TAX PAYABLE XXX

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Introduction
 ‘Gross income’ is defined in s 1(1) of the
Income Tax Act.

 After the general gross income definition,

paragraphs (a) to (n) follows. These paragraphs
include specific amounts in gross income, even
though these amounts may be capital in nature.
 Specific provisions override general
provisions - specific provisions

 A list of specific inclusions in gross income is

set out on the following slide:

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SPECIFIC INCLUSIONS IN GROSS INCOME SECTION 1(1): GROSS INCOME

1 Annuities Par (a)

2 Alimony payments Par (b)

3 Services Par (c)

4 Restraint of trade Paras (cA) & (cB)

5 Services – compensation for termination of employment Par (d)

Specific
6 Fund benefits Paras (e) & (eA)

7 Services- Commutation of amounts due Par (f)

Inclusions
8 Lease premiums Par (g)

9 Compensation for imparting knowledge and information Par (gA)

10 Leasehold improvements Par (h)

11 Fringe benefits Par (i)

12 Proceeds from the disposal of certain assets Par (jA)

13 Dividends Par (k)

14 Key-man insurance policy proceeds Par (m)

15 Recoupments and other inclusions Par (n)

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Annuities – Par (a)

Description Detail
Par (a) Par (a) includes in gross income any an annuity, living annuity and annuity amount per s10A(1)
(purchased annuity)

Definitions Annuity Not defined in s 1(1) of the Income Tax Act.

The 4 main characteristics of an annuity (Hogan case):

 It is an annual payment
 It is a repetitive payment
 It is chargeable against some person;
 A capital amount (debt) settled in installments, is NOT an annuity.

Living Defined in s(1)(1) of Income Tax Act.

annuity Annuities earned by a member of any retirement fund on or after the retirement date
of the member.

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Annuities – Par (a)

Description Detail

Definitions Annuity Defined in s 10A(1) of the Income Tax Act.

amount
Annuity amounts (purchased annuities) are purchased from insurers (insurance
companies) for cash consideration.

Total annuity amount earned included in gross income and the capital part is
exempt from tax in terms of s 10A(2) – module 5.

Par (a) Par (a) excludes any insurance policy payouts received (directly or indirectly) by an employee
specifically or director in respect of employer-owned insurance policies(par (d)(ii); Par (a) specifically
excludes excludes par (d)(ii).

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Annuities: Par (a) – Example & Solution

Annuities?
A Mr. Sebastien Kidd died on 1 May 2014. Mr. Kidd’s previous employer now X
pays his pension to Mr. Kidd’s widow, Carrie. The employer can terminate Pension – terminable
these payments whenever the employer want. (employer not obliged to
pay pension)
B Mr. Sebastien Kidd died on 1 May 2014. Mr. Kidd’s previous employer a
contractually bound themselves to pay the pension for life to Mr. Kidd’s widow, Pension – not terminable
Carrie. (employer obliged to pay pension)

C Mr. Holmes makes payments towards Watson’s studies. The payments are X
voluntary and occur on a regularly basis.
Voluntary payments toward studies

D Mr. Holmes makes payments towards Watson’s studies on a monthly basis,

based on a contractual obligation. When Mr Home’s contractually agreed to
a
pay for Watson’s studies, Watson was undecided on whether he was going to
Contractual payment toward studies
pursue a career in finance, the medical field or engineering.

Watson at the time was also unsure of the institution that he would study at.
The contractual obligation is binding until Watson has completed his studies.

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Annuities: Par (a) – Example & Solution

Annuities?
E Mr. Rich purchased a boat from Mr. Smith for R5 million
X
payable over a 5-year period at a rate of R1 million per year. Instalment on sale of capital asset

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Alimony or maintenance
payments - Par (b)

Description Detail
Par (b) Par (b) includes in gross income any amount payable to the taxpayer:
 by his/her spouse or former spouse that constitute alimony, allowance
or maintenance payments in terms of any judicial order, written
agreement of separation or order of divorce.
 in terms of a maintenance order for the maintenance of a child per the
Maintenance Act.

Tax Paying No deduction -

consequences spouse
Receiving Gross income - Par (b) inclusion in gross R20 000
spouse income (R20 000)
Exempt income - S 10(1)(u) exemption**
Income - as defined

**Refer to Module 5 - Exempt income

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Services – Par (c)

Description Detail
Par (c) Par (c) includes in gross income any amounts earned by a taxpayer that relates to:
 services rendered or to be rendered
 employment
 holding of an office**
** Refers to e.g. directors of a company
Par (c) Voluntary awards received for services rendered (or employment) are specifically included in par (c)
specifically
includes The anti-avoidance provision (proviso (ii) par (c)) stipulates that an amount received by a person in
respect of services rendered by another person is included in the gross income of the person who
renders the service.
Par (c) Fringe benefits (par (i)) are excluded from the scope of par (c). Par (c) does not apply if the
specifically provisions of par (i) applies (proviso (i) par (c)).
excludes
S 8(1) allowances are specifically excluded from par (c). S 8(1) allowances (e.g., travel allowances
given to employees) need to be included in taxable income (NOT gross income). Refer to normal
tax payable framework.

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Services – Par (c)

Description Detail
NB! 3 important principles to consider in respect to par (c):

 There needs to be a causal relationship between the amount received and the services rendered (or
employment):
 There needs to be a link between the amount received and the services that the person rendered;
that is, the payment needs to be a reward for services rendered. From: Notes on South African Income Tax
2023: P Haupt – pg. 61 & 62
 A causal relationship does not ONLY exists in an employer-employee relationship.
 Stevens case (refer to Special inclusion case law pack)
 The term ‘in respect of’ suggests a causal relationship between the receipt and the taxpayers
service or employment.
 The ex gratia (voluntary) payment made by the company to the taxpayer was directly linked to
the taxpayer’s services and employment. As there was a causal relationship between the
taxpayer’s employment and the receipt, such receipt fell within par (c).

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Services – Par (c)

Description Detail
 Specific provisions override general provisions - specific provisions (such as par (c)) overrides
general provisions (such as the general gross income definition).

Note: Para (c ) (vii)-only applies for YOA commencing on or after 1 March 2022-Thus N/A for 2022 YOA.

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Services rendered: Par (c) – Example

 Joy is a sole proprietor who programmes and repairs computers for a living.
 Joy is a resident for tax purposes.

Required:
Advise Joy if the following amounts should be included in her gross income for the 2023 year of
assessment. Give a brief reason for your answer.

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Services rendered: Par (c) – Solution

Description Reason Amount
A Joy received an amount of Taxed on the earlier of receipt or accrual. Therefore, she would -
R7 000 on 3 March 2022 have been taxed in the 2022 year of assessment as the service
for a repair job that she was performed on 15 February 2022.
performed on No par (c) inclusion in gross income for the 2023 year of
15 February 2022. assessment.

B Joy went to New Zealand to Received for services rendered and resident taxed on world-wide R6 000
visit her brother during the receipts and accruals. Therefore, the amount of R6 000 will be
month of August 2022. included in Joy’s gross income for the 2023 year of assessment in
While she was there, she terms of par (c) of the gross income definition.
fixed a few computers and
earned the equivalent of R8
000.
C Marnie sold her personal Par (c) does not apply, as the amount received was not for -
computer to a friend for services rendered. The personal computer sold is of a capital in
R1 500 on 1 October nature and therefore the proceeds will not be included in gross
2023. income.

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Services rendered: Par (c) – Solution

For whom Tax consequences Calculation
D On 6 November 2022 Joy made a Causal link between service rendered and the R3 000
deal with a client that she would donation. Therefore, the amount of R3 000 will be
write some programme codes for included in Marnie’s gross income for the 2023 year
the client’s computer. In payment, of assessment in terms of par (c) of the gross
the client agreed to donate a income definition.
computer to the value of R2 000
and a printer to the value of R1 000
to Joy.

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Restraint of trade payments: Par (cA) & par (cB)

Description Detail

Par (cA) & Restraint of trade payments are capital in nature. Certain restraint of trade payments are, however,
Par(cB) specially included in gross income in terms of par (cA) or par (cB).
From: Notes on South African Income Tax 2023 – P Haupt – page 63

Definition of Restraint of trade payments are compensation for the restriction or loss of a person’s right to freely
restraint of trade. Thus, a payment NOT to render services.
trade From: Notes on South African Income Tax 2023 – P Haupt – page 63
payments
Par (cA) & Any restraint of trade payments received by (or accrued to) the following persons are specifically included
Par(cB) in gross income:
 is or was a ‘labour broker’ without a certificate of exemption (par (cA) or
 is or was a ‘personal service provider’ (par (cA); or
 is or was a ‘personal service company’ or ‘personal service trust (par c(A));
 a natural person in respect of present, past or future employment or holding of an office is specially
included in gross income in terms of par(cB).

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Restraint of trade payments: Par (cA) & par (cB)

Description Detail
NB! If a natural person receives a restraint of trade payment that does NOT relate to employment, the
restraint of trade payment will NOT be included in gross income as it is of a capital nature.

Tax consequences Recipient of restraint of The receipt is taxed immediately and in full in the hands of the recipient.
trade payment
Payer of the restraint of The payer of the restraint of trade will be allowed to claim a deduction
trade under s 11(cA) provided the recipient is taxed under par (cA).

The deduction in the hands of the payer must be spread over a certain period
in accordance with section 11(cA).

Section 11 (cA) deduction will be coved in module 8.

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Restraint of trade payments:

Par (cB) - Example

 Mr. Small was retrenched by his employer on 12 September 2022.

 Mr. Small had befriended many of the customers who had been serviced
by his former employer. As a result, if he became employed by a
competing employer, he would be able to poach many of his former
employer’s customers.

 Mr. Small’s former employer therefore paid him R500 000 on 30

September 2022 for him not to work for a competitor within the region for a
period of four years.

Required:

To determine whether any amount will be included in Mr. Small’s gross income
for the 2023 year of assessment.

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Restraint of trade payments: Par (cB) Solution

Description Reason Amount included
in gross income

Mr. Small received R500 000 for The R500 000 was received as consideration for a R500 000
him not to work for a competitor restraint of trade imposed on Mr Big (a natural
within the area for a period of 4 person). The receipt was directly linked to Mr Small’s (Included in full in
years past employment and therefore was received by Mr the 2023 year of
(Restraint of trade payment) Small in respect of past employment. Included per par assessment)
(cB) of the gross income definition

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Restraint of trade payments: Par (cB) - Example

 On 06 January 2022 Miss Curls purchased a hair salon business, called ‘Frotec International’ from Mr. James.

 Mr. James carried on his business as a sole proprietor.

 In order to avoid an erosion of Frotec International’s client base, Miss Curls included a restraint of trade clause
in the purchase agreement.

 On 15 February 2022, Miss Curls paid Mr. James an amount of R550 000, for him not to open nor work in a
hair salon business within a 10 km radius of Frotec International for the next 2 years.

Required:

To determine whether any amount will be included in Mr. James's gross income for the 2023 year of assessment.

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Restraint of trade payments: Par (cB) - Solution

Description Reason Amount included in
gross income

R550 000 received not to open nor The restraint of trade payment received by Mr. R-
work in a hair salon business within James does not relate to past, present or
a 10km radius of Frotec future employment (or the holding of office)
International for the next 2 years – and is therefore not included in his gross
(Restraint of trade payment) income in terms of par (cB) of the gross income
definition.

As the amount is of a capital nature, it will also

not be included in his gross income in terms of
the general gross income definition.

NB!
Always consider specific inclusions first (such as par (cB)), thereafter consider the general gross income definition.

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Services - compensation for termination of employment -

Par (d)
Description Detail
Par (d) Paragraph (d) includes in gross income:
 any amounts received (or accrued) due to the termination or variation of any office or employment
(including death) (par d(i)); or
 any insurance policy payouts received (directly or indirectly) in respect of employer-owned
insurance policies (par (d)(ii)); or
 the value of any insurance policy (excluding a risk policy) ceded to an employee or director by
employer (par d(iii))

Par (d) amounts earned

by employee (director)

Amounts received due Insurance policy payouts

The value of any insurance
to the termination or variation of received (directly or indirectly)
policy (excl. a risk policy)
employment (incurred by in respect of
employer) ceded to an employee by
employer-owned insurance
employer (par d(iii))
(par d(i)) policies (par (d)(ii))

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Services - compensation for termination of employment -Par

(d)
Description Detail

NB! Par (d)(i)

The meaning of the terms:
 ‘termination’ – loss of employment or holding of an office
 ‘variation’ – amendment of employment conditions e.g. leave policy changes

Par (d)(ii)
Employer-owned insurance policies – employer is the holder of the policy
These amounts are specifically excluded from par (a).

Par (d) specially includes any voluntary amounts received that fall within the scope of par (d). Such amounts do
not need to be paid in terms of a contract.

Examples Par (d)(i):

 Employee retires and employer pays employee an amount for loyal services over the years. From: A Student’s Approach to
Income Tax /Natural person 2020:K Coetzee page 76
 An amount (which constitutes the unexpired portion of employee’s contact) was received by an employee from
his employer for breach of his employment contract (e.g., due to early termination of contract).
 An amount received by a director for surrendering his/her right to a permanent directorship.

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Services - compensation for termination of

employment - Par (d)
Description Detail
Examples  Any compensation paid by an employer in respect of the death of an employee. The death of the
employee must arise out of and in the course of the employee’s employment.

Par (d)(ii)
 Payouts (directly or indirectly) from life insurance policies where the employer is the holder of the
insurance policy (employer-owned insurance policy)).

Par (d) is subject  Lump sums from retirement funds are excluded from par (d)(i) and (d)(ii). It is dealt with in par (e) of
to the gross income definition - (proviso (aa))
3 provisos
 2 deeming provisions:
 Par (d)(i) includes death. Amounts that become payable in consequence of or following the death of
any employee’s (or director) is deemed to be an amount which accrued to the employee or director
immediately before his or her death - (proviso (bb)).
 Insurance policy payouts (ss (d)(ii) and (d)(iii)) received or accrued to a dependant or nominee of
the employee or director, is deemed to be received by or accrued to the employee or director –
(proviso (cc))

From: Notes on South African Income Tax 2023: P Haupt – page 64 & Silke: First Touch to Tax 2023: M Stinglingh – page 68

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Services - compensation for termination of employment: Par (d) -

Example
John (33 years old and unmarried) is a RSA resident. John designs websites and is in the full-time employment of Webdezine CC, an RSA close
corporation. Webdezine often sends him to provide training to its clients in the United States of America (USA). John’s receipts and accruals
during the 2023 year of assessment were as follows:

Description Notes Amount

Salary Note 1 R192 000
Lump sum from employer Note 2 R32 000
Leave conditions amended Note 3 R4 000

Note 1
John’s salary was divided between the periods that he worked in the RSA and the USA (he was, however, at all times an RSA resident):
South Africa R128 000 (8 months)
USA R 64 000 (4 months)
Total R192 000

Note 2
In recognition of all his years of faithful service Webdezine voluntarily paid an amount equal to two months’ salary to John on 28 February 2023.

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Services - compensation for termination of employment:

Par (d) - Example
Note 3
Due to the recession Webdezine amended the leave conditions of all its employees. From 1 June 2022 John is no longer
entitled to paid study leave. To compensate him for this, Webdezine paid a once-off amount of R4 000 to John on 1 June
2022.

Required:
To calculate, with brief reasons or reference to legislation, John’s gross income for the 2023 year of assessment.

Example adapted from Silke: First Touch to Tax 2023 – M Stiglingh page 74 – 75

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Services - compensation for termination of employment:

Par (d) - Solution
Description Notes Amount
Gross income
Salary Par (c) of the gross income definition (services rendered) R192 000
OR
services rendered - specific inclusion
Lump sum Par (c) of the gross income definition (services rendered) OR R32 000
services rendered - specific inclusion

Not par (d) as employment conditions were not amended nor was the
employment terminated.
Leave conditions Par (d) of the gross income definition (lump sum from employer) OR R4 000
Par (f) of the gross income definition (amount received in commutation
of paid study leave that was due to taxpayer in terms of employment
contract) OR
Lump sum from employer - specific inclusion
Total R228 000

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Fund benefits: Par (e) & Par (eA)

Description Detail
Par (e) Par (e) includes in gross income lump sums received from retirement funds (pension funds, provident
funds, retirement annuity funds etc).
From: Notes on South African Income Tax 2023 – P Haupt – page 65

Par (e) includes in gross income both a ‘retirement fund lump sum benefit’ and ‘retirement fund lump
sum withdrawal benefit’.

The taxable portion of the lump sum benefit is included in gross income and NOT the gross lump sum
benefit received. For Tax II purposes, the taxable portion will be provided.

Par (e) excludes Par (e) excludes amounts included in terms of par (eA).

Example Andile elects to retire from a pension fund on 28 February 2023. A lump sum benefit of R600 000 accrues
to him on this date. The taxable portion of the lump sum benefit amounts to R581 400.

Required:
What amount, if any, should be included in Andile’s gross income for the 2023 year of assessment?
Taxable portion – R581 400

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Fund benefits: Par (e) & Par (eA)

Description Detail
Par (eA) Par (eA) applies to a member of a state pension fund that for example:
 transfers amounts to a provident fund; or
 withdraws (resigns) from the state pension fund or utilised the benefits to
redeem a debt:

The 2/3 rule applies – i.e.

 2/3 of their benefits transferred from their state pension fund (public sector pension fund) to a
public or private sector provident fund will be included in gross income par (eA).

 2/3 of their benefits withdrawn from the state pension fund (public sector pension fund) or utilised to
redeem a debt included will be included gross income par (eA).

This inclusion is also applicable in the case of a conversion from a public sector pension fund to a
provident fund as well as in terms of divorce proceedings where any part of a member’s benefits
should be paid to his/her former spouse.

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Services - commutation of amounts due – Par (f)

Description Detail
Par (f) Par (f) includes in gross income any amounts received or accrued in commutation of (in substitution
of), amounts due under a contract of employment or services.

Commutation When a person substitutes his/her right to a specific benefit, for a right to obtain another benefit.
definition
From: Silke: First Touch to Tax 2023 – M Stinglingh – page 70

NB! In view of the wide scope of par (d), there is little need for par (f) which was enacted many years prior
to the enactment of par (d).

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Lease premiums - Par (g)

Description Detail
Par (g) Par (g) includes in gross income any amount received (or accrued) from another person as a (lease)
premium or like consideration for the use (or the right of use) of land or buildings; plant or
machinery; motion picture films, television films, videotape or disc (or connected sound recordings or
advertising matter); patent or design or trademark, copyright etc.

Definition of lease The term lease premium is not defined in section 1(1) of the Income Tax Act, case law is therefore
premiums referred to for guidance.
In terms of case law CIR v Butcher Bros. (Pty) Ltd), lease premiums are amounts paid by:
 the lessee to the lessor,
 whether in cash or otherwise,
 for the use (or right of use) of certain assets (e.g., land, buildings etc.)
 Use – an ‘upfront payment’ for use of assets
 Right of use – an ‘upfront payment’ for a right to enter into an agreement to lease the assets
 distinct from and in addition to OR instead of rent (that is, a payment over
and above the monthly rentals)

Generally, a lease premium is received as a cash lump sum at the commencement of lease and not
refundable.

All of the above from: Notes on South African Income Tax 2023 – P Haupt – page 66 - 68

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Lease premiums: Par (g)

Description Detail
NB! Not lease premiums:
 a rental deposit – to cover damages
 upfront rental receipt (bullet rental) – nature remains rent e.g. rental received in advance

Tax consequences Lessor The entire amount of the premium is included in gross income in the year in which it is
received by or accrues to the lessor (par (g)).

Lessee Section 11(f) deduction may be claimed. The deduction is spread over the probable
duration of use or occupation but limited to 25 years. Covered in module 9 - Capital
Allowances and Recoupments

Lessee sublets Par (g) may also apply if a lease premium is paid by a sub-lessee to a sub-lessor (the principal
property lessee). From: SARS Interpretation note 109 issue 7 Feb 2019 page 6

Lessee cedes or If the right to lease the land is ceded or disposed of by a lessee to a third person for a fixed amount, it
disposes of the will not be a lease premium; that is, merely consideration (purchase price) paid by the new lessee
right to lease the to the former lessee.
land

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Lease premiums: Par (g)

Example
Adam Jay agrees to lease land to Evan Ross for an upfront lump-sum payment of R100 000. In
terms of the lease agreement, the monthly rental amounts to R25 000 and is payable on the first day
of each respective month.

Required: Does the R100 000 constitute a lease premium?

Example adapted from Silke: First Touch to Tax 2023 – M Stiglingh page 71

Solution:

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Lease premiums: Par (g)

Example
Adam Jay agrees to lease land to Evan Ross for an upfront lump-sum payment of R100 000. In
terms of the lease agreement, the monthly rental amounts to R25 000 and is payable on the first day
of each respective month.

Required: Does the R100 000 constitute a lease premium?

Example adapted from Silke: First Touch to Tax 2023 – M Stiglingh page 71

Solution: The term lease premium is not defined in section 1(1) of the Income Tax Act, case law is therefore referred
to for guidance.

In terms of case law (CIR v Butcher Bros. (Pty) Ltd), lease premiums are amounts paid by:
▪ lessees to lessors,
▪ whether in cash or otherwise,
▪ for the use (or right of use) of certain assets
▪ distinct from and in addition to OR instead of rent

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Lease premiums: Par (g)

• The R100 000 is a cash amount paid by Evan Ross (the lessee) to Adam Jay (the lessor).

• The amount was paid upfront by the lessee to obtain a right to enter into an agreement to lease the land. The R100 000 payment made by the
lessee was therefore to obtain the right of use of the land.

• The R100 000 lump sum payment is separate from and over and above the monthly rental payments of R25 000. Accordingly, the R100 000 is
distinct from and in addition to the monthly rental payments of R25 000.
• The R100 000, therefore, constitutes a lease premium.

Example adapted from Silke: First Touch to Tax 2023 – M Stiglingh page 71

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Compensation for imparting knowledge and

information - Par (gA)
Description Detail
Par (gA) Par (gA) includes in gross income any amount received or accrued for:
 imparting STIC knowledge or information or
 providing assistance with the application or utilisation of STIC knowledge or information

The above refers to ‘know-how’ payments.

STIC - Scientific, Technical, Industrial or Commercial

NB! ‘Imparting’ suggests that the person providing the information needs to render a service to the person
obtaining the information.

From: Notes on South African Income Tax 2023: P Haupt – page 68

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Leasehold improvements - Par (h)

Description Detail
Par (h) The lessor (owner) must include the value of the improvements effected on his land or to his buildings by
the lessee in gross income (par (h)).

Definition of a Leasehold improvement - when a lessee make an improvement to property leased from the lessor.
leasehold
From: Notes on South African Income Tax 2023 – P Haupt – page 69
improvement
NB! The inclusion only applies if the lessor has a right to have the improvements effected to his property. Thus, an
agreement obliging the lessee needs to exist.

Amount and accrual Refer to table on the next slide

date of the
leasehold
Improvement
Tax consequences Lessor Leasehold improvement will be in gross income in terms of par (h) and taxed in full.
May receive relief in terms of s 11(h) – (covered later in module 9)
Lessee Entitled to allowance – s 11(g). Deductible over the lease term from completion of
improvements but limited to 25 years.
Covered in module 9 - Capital Allowances and Recoupments.

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Leasehold improvements - Par (h)

Summary: Leasehold improvement - amount and accrual
Leasehold improvement Amount to be Date of accrual
included in gross income
Amount stipulated in the lease Amount stipulated in agreement (even if the lessee When parties sign agreement
agreement spent more) UNLESS refer to note 1 below

Amount not stipulated in the lease Fair and reasonable value of the improvement Date of completion of the
agreement improvements

Note 1
If the leasehold agreement must meet certain specifications with a certain stated minimum value, then the fair and
reasonable value of the improvement will be used and not merely the minimum stated amount.

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Leasehold improvements: Par (h) - Example

John (33 years old and unmarried) is a RSA resident. Below is an extract from John’s receipts and accruals for the 2023 year
of assessment:

Description Notes Amount

Rent received Note 1 R91 300
Leasehold improvements Note 1 ?
Lease premium received Note 1 ?

Note 1
John owns a house in Stellenbosch, which he let to the Khumalo couple for the whole year. The lease contract was concluded
on 1 August 2021 and specified the following:

 The Khumalo’s must pay a monthly rent of R8 300 from 1 August 2021. The Khumalo’s only paid the February 2023 rental
on 15 March 2023. The Khumalo’s rented the house from 1 August 2021 until 31 July 2023.

 The Khumalo’s are obligated to effect improvements to the house to the value of R40 000. Due to cash flow problems, the
Khumalo’s only completed the improvements during April 2022 at an amount of R35 000.

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Leasehold improvements: Par (h) - Example

 The lease term expired on 31 July 2022. However, the Khumalo’s had a preference right to lease the house again and
paid a once-off amount of R6 000 as a lease premium (the right to occupy the house) on 1 August 2022. The monthly
rent remained unchanged at R8 300.

Required:
To calculate, with brief reasons or reference to legislation, John’s gross income for the 2023 year of assessment. If an item is
not included in gross income, provide a short reason by identifying the element that is not met.

Example adapted from Silke: First Touch to Tax 2023 – M Stiglingh page 74 – 75

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Leasehold improvements: Par (h) - Solution

Description Notes Amount
Gross income
Rental S1(1): general gross income definition R99 600
February 2023 rental has already accrued
Taxed on earlier of receipt or accrual

R8 300 x 12 = R99 600

Lease hold Par (h) of the gross income definition - leasehold improvement must be included in R0
improvements gross income of lessor on the date of accrual

Date of accrual - in the year contract was concluded (2022 year of assessment) as
the amount is specified in the contract.

The amount is specified in the contract and John (lessor) was taxed on R40 000
(irrespective of amount incurred by lessee) in 2022
Lease premium Par (g) of the gross income definition (lease premium) OR R6 000
Lease premium – specific inclusion
Total R105 600

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Fringe benefits - Par (i)

Description Detail
Par (i) Fringe benefits are included in gross income in terms of par (i) of the gross income definition.

Definition Fringe benefits are non-cash benefits obtained by the employee from the employer.

e.g., school fees paid by employer in respect of employee’s children.

Notes on South African Income Tax 2023 – P Haupt – page 71

NB!  An employer-employee relationship is required.

 Paragraph (i) overrides paragraph (c). A benefit or an advantage to which par (i) applies can therefore not
be taken into account for par (c) ((provio (i) to par (c))

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Proceeds from disposal of certain assets - Par (jA)

Description Detail
Par (jA) The proceeds from the disposal of a (capital) asset will be included in gross income,
 if the capital asset sold was manufactured, produced, constructed or assembled by the taxpayer;
AND
 is similar to the trading stock manufactured, produced, constructed or assembled by the taxpayer
for purposes of resale.

Example E.g., a manufacturer of motor vehicles takes a vehicle from its trading stock (a revenue asset) to use as a staff
vehicle/demonstration vehicle (a capital asset). When this vehicle is sold in a later year, the proceeds will be
included in gross income in terms of par (jA).

From: Notes on South African Income Tax 2023 – P Haupt – page 72

Manufacture vs Par (jA) applies to any asset that was manufacture, produced, constructed or assembled by the taxpayer.
purchased It does NOT apply to any asset that was purchased by the taxpayer and later sold.
3From: Notes on South African Income Tax 2020 – P Haupt – page 72

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Proceeds from disposal of certain assets: Par (jA) - Example

A manufacturer of motor vehicles, A Ltd, uses one vehicle manufactured by it in its business operation as a
demonstration model. It also gave the right of use of another similar vehicle manufactured by it to an employee as a
fringe benefit (in the 2012 year of assessment).

A Ltd disposed of both vehicles during the 2023 year of assessment for an amount of R280 000 per vehicle.

Required:

To calculate A Ltd.'s gross income for the 2023 year of assessment.

Example adapted from Silke: First Touch to Tax 2023 – M Stiglingh page 73

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Proceeds from disposal of certain assets:

Par (jA) - Solution
Description Notes Amount
Gross income
Sale of vehicles The full proceeds from the disposals (R280 000 per vehicle) are included in gross R560 000
income in the 2023 year of assessment in terms of par (jA) of the gross income
definition.

 A Ltd is a car manufacturer.

 The vehicles (capital assets) that were sold were manufactured by A Ltd; AND
 are similar to trading stock manufactured by A Ltd for resale.

R280 000 x 2 = R560 000

Total R560 000

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Dividends - Par (k)

Description Detail
Par (k) Par (k) includes in gross income South African dividends (local) and foreign dividends.

Gross dividend The gross dividend is included in gross income. If a dividend is received after dividend withholding tax of
vs. 20% was withheld it needs to be grossed up:
net dividend
Gross dividend = net dividend / 80%

Exemption of Certain dividends may be exempt:

dividends  South African (local) - s 10(1)(k)(i) – (covered in Module 5 - Exempt Income)
 Foreign dividends - s 10B (Tax III)

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Dividends: Par (k) - Example

John (33 years old and unmarried) is a RSA resident. Gross dividends of R49 000 accrued to John during the 2023 year of
assessment:

Description Notes Amount

Dividends accrued Note 1 R49 000

Note 1
The following gross dividends accrued to John as a result of his shareholding in both RSA and Australian companies.
 From South Africa: R32 000
 From Australia: R17 000
 Total: R49 000

Required:
To calculate, with brief reasons or reference to legislation, John’s gross income for the 2023 year of assessment. If an item is
not included in gross income, provide a short reason by identifying the element that is not met.

Example adapted from Silke: First Touch to Tax 2023 – M Stiglingh page 74 – 75

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Dividends: Par (k) - Solution

Description Notes Amount
Gross income
Dividend income Par (k) of the gross income definition (local dividends and foreign dividends) OR R49 000
local dividends and foreign dividends - specific inclusion

R32 000 + R17 000 = R49 000

Total R49 000

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Key-man insurance policies proceeds - Par (m)

Description Detail
Par (m) Employers take out insurance policies to hedge themselves against loss of profits due to the death,
disablement or illness of an employee or director. Proceeds from such insurance policies (e.g. key man
policies) paid out to the employer is included in gross income in terms of par (m).

From: Notes on South African Income Tax 2020 – P Haupt – page 73

Par (m)  The employer needs to be the policy holder; and

requirements  The insurance policy needs to relate to death, disablement or illness of an employee or director (or
former employee or director).

NB!  Par (m) deals with insurance policy payouts received by an employer in respect of employer-owned
insurance policy.
 Par (d)(ii) deals with insurance policy payouts received (directly or indirectly) by an employee in respect of
employer-owned insurance policy.

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Key-man insurance policies proceeds:

Par (m) - Example
An annual premium of R20 000 is paid by an employer for life insurance cover on the life of Mr. Blue (a director). The employer
is the policy holder and beneficiary of this policy. A R1 000 000 was received by the employer on the death of Mr. Blue during the
2023 year of assessment .

Required:

Will any amount be included in the gross income of the employer for the 2023 year of assessment?

Solution:

The proceeds of R1 000 000 received by the employer in respect of a key-man insurance policy (employer is the policy holder
and the policy relates to the death of an employee or director) will be included in the gross income of the employer in terms of
par (m) for the 2023 year of assessment.

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Recoupments and other inclusions - Par (n)

Description Detail
Par (n) All amounts that are specifically included in a taxpayer’s income through other provisions of the Act are
included in gross income in terms of par (n).

Example S 8(4) – Recoupment

Covered in module 9 - Capital Allowances and Recoupments

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Exam technique – Specific inclusions

Description Notes Amount
Gross income
Dividend income Par (k) of the gross income definition (local dividends and foreign dividends) R49 000

OR

Specific inclusion - local dividends and foreign dividends

Total R49 000

NB!

NO marks will be awarded for merely stating that an amount is a specific inclusion.

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References for these slides

 Notes on South African Income Tax 2023 - Phillip Haupt

 SARS Interpretation Note 110 (7 February 2019)

 SAICA Student Handbook 2022/2023

 SILKE: First Touch to Tax 2022/2023 - M Stiglingh et al

 Taxation of individuals simplified: 2020 - KL de Hart et al

 A Student’s Approach to Income Tax /Natural person 2020 - K Coetzee et al

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MB [2]2

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Slide 60

MB [2]2 Use this for end of lecture series

Michael Buchling; 21 Aug 2020