Module Guide - Taxation 2A

TAXATION 2A
Module Guide
Copyright © 2021
MANCOSA
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machines, without the written permission of the publisher. Please report all errors and omissions to the following email
address: [email protected]
This Module Guide,
Taxation 2A (NQF level 6)
will be used across the following programmes:
 Bachelor of Commerce in Financial Management

 Bachelor of Commerce in Accounting
TAXATION 2A
Preface.................................................................................................................................................................... 3
Unit 1: Introduction to South African taxation system.............................................................................................. 9
Unit 2: Gross income............................................................................................................................................. 32
Unit 3: Income exempt from tax ............................................................................................................................ 44
Unit 4: General Deduction Formula....................................................................................................................... 54
Unit 5: Fringe Benefits........................................................................................................................................... 71
Unit 6: Retirement Benefits ................................................................................................................................. 103
Unit 7: Capital Gains Tax .................................................................................................................................... 120
Unit 8: Income and expenses of individuals ........................................................................................................ 138
Answers to Revision Questions .......................................................................................................................... 151
References.......................................................................................................................................................... 155
Bibliography ........................................................................................................................................................ 156
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List of Contents
List of Tables
Table 1.1: Steps to calculate taxable income couple married in community of property................................... 16
Table 1.2: Interest Exemptions ......................................................................................................................... 17
Table 1.3: 2019 tax year (1 March 2018 – 28 February 2019).......................................................................... 20
Table 1.4: Tax Rebates .................................................................................................................................... 21
Table 1.5: Medical tax credit rates .................................................................................................................... 23
Table 5.1: Value of taxable benefit for assets that the employee has the right of use ...................................... 79
Table 5.2: Rate per kilometer (1 March 2018 - 28 February 2019) ................................................................... 97
Table 6.1: Steps to calculate tax on a withdrawal benefit ............................................................................... 109
Table 6.2: 2019 retirement fund lump sum withdrawal tax table ..................................................................... 110
Table 6.3: Steps to calculate tax on a retirement benefit ................................................................................ 115
Table 6.4: 2019 Retirement & death benefits or severance benefits tax table ................................................ 116
Table 7.1: Steps to calculate taxable capital gains or capital loss .................................................................. 123
List of Figures and Illustrations
Figure 1.1: Overview of taxation framework (Source: Coetzee, De Hart, Koekemoer,

Oosthuizen and Stedal 2018: 1) .................................................................................................... 12
Figure 1.2: Steps to calculate taxable income .................................................................................................. 14
Figure 1.3: Framework for calculation of final normal tax liability (source: Coetzee et al. 2018: 11)................ 19
Figure 2.1: Calculation of taxable income diagram ........................................................................................... 34
Figure 2.2: Steps to determine whether a person is a resident of the Republic or not...................................... 36
Figure 3.1: Taxable income framework............................................................................................................. 46
Figure 4.1: General deduction formula in taxable income framework ............................................................... 56
Figure 4.2: General deduction formula ............................................................................................................. 57
Figure 5.1: Framework for the calculation of taxable income (Coetzee et al. 2018: 185) ................................. 73
Figure 5.2: Summary of calculation of taxable benefit (Source: Coetzee et al. (2018: 201)) ............................ 87
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Figure 5.3: Travel allowance taxable ................................................................................................................ 96
Figure 6.1: Study Unit 6 summary .................................................................................................................. 118
Figure 7.1: Paragraph 27 of the Eight Schedule – summary (Coetzee et al. 2018: 487) ................................ 133
Figure 8.1: Framework to calculate taxable income........................................................................................ 140
Figure 8.2: Determine whether the loss from the operating of a trade is limited when
calculating the taxable income ...................................................................................................... 149
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Preface
A. Welcome
Dear Student
It is a great pleasure to welcome you to Taxation 2A (TAX2A6). To make sure that you share our passion about
this area of study, we encourage you to read this overview thoroughly. Refer to it as often as you need to, since it
will certainly make studying this module a lot easier. The intention of this module is to develop both your confidence
and proficiency in this module.
The field of Taxation is extremely dynamic and challenging. The learning content, activities and self- study
questions contained in this guide will therefore provide you with opportunities to explore the latest developments
in this field and help you to discover the field of Taxation as it is practiced today.
This is a distance-learning module. Since you do not have a tutor standing next to you while you study, you need
to apply self-discipline. You will have the opportunity to collaborate with each other via social media tools. Your
study skills will include self-direction and responsibility. However, you will gain a lot from the experience! These
study skills will contribute to your life skills, which will help you to succeed in all areas of life.
We hope you enjoy the module.
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rights in or to multimedia used or provided in this module guide. Such multimedia is copyrighted by the
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must obtain permission from the copyright owner.
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B. Module Overview
The study of taxation forms an integral part of your accounting or business degree as taxation affects many aspects
of daily commercial activities. The purpose of this module is to provide you with a basic knowledge of the relevant
sections of the Income Tax Acts, so that you can determine the income tax liability or refund of natural persons.
This module is a 15-credit module pitched at NQF level 6.
Work through the modules in your textbook that form the prescribed reading for this study session, together with
the notes that follow in this study guide. The notes in this study guide will take you step by step through the
prescribed reading. Sometimes these notes will help you to understand a key concept, or introduce content that is
not included in the textbook. Keep the learning outcomes above in mind as you read.
Read the various boxes in your textbook as you come to them. Study the content of the boxes titled 'definition' and
'e.g.' Read the 'pause for thought', 'did you know', 'activity' and 'case study' boxes for background information. You
might also like to follow the links given in the 'e-link' boxes.
C. Learning Outcomes and Associated Assessment Criteria of the Module
Learning Outcomes of the Module Associated Assessment Criteria of the Module
 Explain the operation and scope of the  South African Tax system is explored to gain an informed
South African tax system understanding of its implications on taxable income and normal
tax liability of individuals
 Provisions of Section 10 of the Income Tax Act are applied to
 Demonstrate through application the
gain an understand of income exempt from tax
effect of exempt income and tax
allowable deductions  Income and expenses of individuals are scrutinised to
determine deductions that are allowable for income tax
purposes
 Expenditure incurred by a taxpayer is examined using general
 Display knowledge and application of
deduction formula to determine if it is an allowable deduction
the general deduction formula
or not
 Components of the general deduction formula are applied in
practical tax cases to determine prohibited deductions
 General rules are applied to determine the deductibility of

expenditure that would otherwise be not allowed in terms of
the general deduction formula
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 Provisions of the Seventh Schedule are identified and applied

 Demonstrate an understanding of and
to gain an informed understanding of the fringe benefits and its
compute fringe benefits of an
tax implications on taxable income
individual
 Provision of Section 10 of the Income Tax Act are explored to
gain an understanding of exemptions arising from an
employer/employee relationship
 Demonstrate an understanding of and  Relevant provisions of the Income Tax Act are applied to gain
compute the retirement benefits of an an understanding of their impact on the retirement benefits
individual available to salaried persons
 Compute capital gains taxes of an  Rules set out in the Eighth Schedule of the Income Tax Act
individual Understand and use are analysed to understand capital gains tax
applicable tax tables to compute the
 Tax implications of capital gains and losses are assessed to
tax liability of an individual
understand their impact on normal tax liability of natural persons
D. Learning Outcomes of the Units

You will find the Unit Learning Outcomes on the introductory pages of each Unit in the Module Guide. The Unit
Learning Outcomes lists is an overview of the areas you must demonstrate knowledge in and the practical skills
you must be able to achieve at the end of each Unit lesson in the Module Guide.
E. Acronyms
SARS South African Revenue Service
CGT Capital Gains Tax
VAT Value Added Tax
PAYE Pay As You Earn
PFMA Public Finance Management Act
MTC Medical Tax Credit
AMTC Additional Medical Tax Credit
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F. How to Use this Module

This Module Guide was compiled to help you work through your units and textbook for this module, by breaking
your studies into manageable parts. The Module Guide gives you extra theory and explanations where necessary,
and so enables you to get the most from your module.
The purpose of the Module Guide is to allow you the opportunity to integrate the theoretical concepts from the
prescribed textbook and recommended readings. We suggest that you briefly skim read through the entire guide
to get an overview of its contents. At the beginning of each Unit, you will find a list of Learning Outcomes and
Associated Assessment Criteria. This outlines the main points that you should understand when you have
completed the Unit/s. Do not attempt to read and study everything at once. Each study session should be 90
minutes without a break
This module should be studied using the prescribed and recommended textbooks/readings and the relevant
sections of this Module Guide. You must read about the topic that you intend to study in the appropriate section
before you start reading the textbook in detail. Ensure that you make your own notes as you work through both the
textbook and this module. In the event that you do not have the prescribed and recommended textbooks/readings,
you must make use of any other source that deals with the sections in this module. If you want to do further reading,
and want to obtain publications that were used as source documents when we wrote this guide, you should look
at the reference list and the bibliography at the end of the Module Guide. In addition, at the end of each Unit there
may be link to the PowerPoint presentation and other useful reading.
G. Study Material
The study material for this module includes tutorial letters, programme handbook, this Module Guide, a list of
prescribed and recommended textbooks/readings which may be supplemented by additional readings.
H. Prescribed and Recommended Textbook/Readings

The prescribed and recommended readings/textbooks presents a tremendous amount of material in a simple,
easy-to-learn format. You should read ahead during your course. Make a point of it to re-read the learning content
in your module textbook. This will increase your retention of important concepts and skills. You may wish to read
more widely than just the Module Guide and the prescribed and recommended textbooks/readings, the
Bibliography and Reference list provides you with additional reading.
The prescribed and recommended textbooks/readings for this module is:

 Coetzee, K., De Hart, K. L., Koekemoer, A. D. Oosthuizen, A. and Stedal, C. 2018. A Student's Approach
to Income Tax: Natural Persons 2019. Cape Town: LexisNexis (Pty) Ltd.
In addition to the prescribed textbook, the following should be considered for recommended books/readings:
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 Stiglingh, M., Van Heerden, L., Koekemoer, A., Wilcocks, J.S. and Van Der Zwan, P. 2019. SILKE: South
African Income Tax. Cape Town: LexisNexis (Pty) Ltd.
I. Special Features
In the Module Guide, you will find the following icons together with a description. These are designed to help you
study. It is imperative that you work through them as they also provide guidelines for examination purposes.
Special Feature Icon Explanation
The Learning Outcomes indicate aspects of the particular Unit you have
LEARNING to master.
OUTCOMES
The Associated Assessment Criteria is the evaluation of the students’

ASSOCIATED
understanding which are aligned to the outcomes. The Associated
ASSESSMENT
Assessment Criteria sets the standard for the successful demonstration
CRITERIA
of the understanding of a concept or skill.
A Think Point asks you to stop and think about an issue. Sometimes you
THINK POINT are asked to apply a concept to your own experience or to think of an
example.
You may come across Activities that ask you to carry out specific tasks.
In most cases, there are no right or wrong answers to these activities.
ACTIVITY
The purpose of the activities is to give you an opportunity to apply what
you have learned.
At this point, you should read the references supplied. If you are unable
READINGS to acquire the suggested readings, then you are welcome to consult any
current source that deals with the subject.
PRACTICAL Practical Application or Examples will be discussed to enhance
APPLICATION understanding of this module.
OR EXAMPLES
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KNOWLEDGE You may come across Knowledge Check Questions at the end of each
CHECK Unit in the form of Knowledge Check Questions (KCQ’s) that will test
QUESTIONS your knowledge. You should refer to the Module Guide or your
textbook(s) for the answers.
You may come across Revision Questions that test your understanding
REVISION
of what you have learned so far. These may be attempted with the aid
QUESTIONS
of your textbooks, journal articles and Module Guide.
Case Studies are included in different sections in this Module Guide.
CASE STUDY This activity provides students with the opportunity to apply theory to
practice.
You may come across links to Videos Activities as well as instructions
VIDEO ACTIVITY on activities to attend to after watching the video.
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Unit
1: Introduction to
South African Taxation System
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Unit Learning Outcomes
CONTENT LIST LEARNING OUTCOMES OF THIS UNIT:
1.1 Introduction  Discuss the system of taxation in South Africa
1.2 Taxation in perspective
1.3 The budget process  Discuss the tax system of South Africa in relation to the budget
process
1.4 Calculation of taxable income  Calculate taxable income of individuals

(section 5)
1.5. Calculation of net normal tax  Calculate net normal tax liability of individuals
liability
1.6 Summary  Summarise topic areas covered in unit
Prescribed and Recommended Textbooks/Readings

Prescribed Textbook
 Coetzee, K., De Hart, K. L., Koekemoer, A. D. Oosthuizen, A. and Stedal, C.

2018. Introduction. In: Coetzee, K., De Hart, K. L., Koekemoer, A. D. Oosthuizen,
A. and Stedal, C. 2018. A Student's Approach to Income Tax: Natural Persons
2019. Cape Town: LexisNexis (Pty) Ltd, 1 – 28.
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1.1 Introduction
First and foremost, this study unit provides a brief overview of the income tax system in South Africa. A discussion
of the framework that is used to calculate income tax of an individual follows the overview. The diagram provided
below (figure 1.1) is an overview of taxation framework that this module will be exploring in more detail in
subsequent study units. Each component of this framework will constitute a study unit on its own. Illustrative
examples of this framework will also be provided in this study unit. Once you are able to answer the questions
listed in think points below, then your understanding of this study unit will be complete.
Think Point
How are the tax rates determined?
Which types of taxes are levied in the Republic?
What does the government do with the tax levied?
How is a person’s taxable income for the year calculated?
How does a person know how much tax they should pay?
How does the government collect the tax that is due?
The following figure provides an overview of taxation framework. The components of this framework are discussed
further in subsequent study units of this module.
Gross income XXXXXX
Less: Exempt income (sections 10, 10A and 12T) (XXXXX)
Equals: Income (as defined in section 1) XXXXXX
Less Allowable deductions (section 11 read in conjunction with section 23(m) and
(XXXXX)
assessed losses (section 20))
Add: Taxable portion of allowances (section 8 – such as travel and subsistence

XXXXXX
allowances)
Add: Taxable capital gains (section 26 A) XXXXXX
Equals Taxable income before retirement fund deduction XXXXXX
Less: Retirement fund deduction (section 11F) (XXXXX)
Equals Taxable income before donation deduction XXXXX
Less: Donations deduction (section 18A) (XXXXX)
Equals: Taxable income (as defined in section 1) XXXXX
Multiply by Tax rate (as per tax table)
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Equals Tax liability XXXXX
Less: Rebates (XXXXX)
Equals: Net normal tax payable XXXXX
Less: Prepaid taxes (XXXXX)
Equals Net tax due/(refundable) XXXXX
Figure 1.1: Overview of taxation framework

(Source: Coetzee, De Hart, Koekemoer, Oosthuizen and Stedal 2018: 1)
You will also need to answer the following questions in order to understand the South African taxation system.
What is tax? Who is the taxpayer? Who is the tax receiver? What is the purpose of charging tax? These are all the
questions that this study unit intends to answer.
1.2 Taxation in perspective

Tax is a levy (capital gains tax (CGT), Value Added Tax (VAT), Pay As You Earn (PAYE), and so on) that is
charged by the Government on taxpayers (citizens and corporate entities) to finance the government's expenditure
(Coetzee et al. 2018). According to Coetzee et al. (2018: 2), there is a variety of taxes in South Africa of which the
main types are value added tax, capital gains tax, income tax, excise and customs duties, transfer duty, local
authority taxes, donations tax, estate duty, marketable securities tax on shares and local property rates.
For tax to be imposed, a tax base has to be established. Legislative provisions provide guidance as to what should
be included or excluded in the tax base. In South Africa, taxes are levied based on income, wealth and consumption
(Stiglingh, Koekemoer, Van Heerden, Wilcocks and Van Der Zwan 2018: 2). For the purposes of income tax,
income consist of income earned and profit realized by the taxpayer during a year of assessment. Wealth is based
on assets and property of the taxpayer. Consumption is based on the amount spent by the taxpayer on goods and
services.
The following are three structures for which tax is imposed:

 Progressive – the effective tax rate increases as the taxable amount increases
 Proportional – the same effective tax rate is charged to all taxpayers (flat rate)
 Regressive – this structure of taxation is the opposite of progressive structure. As taxable amount
decreases, the effective tax rate increases
Recommended Readings
Visit the website below to get more insight and depth regarding South African taxation systems.
This will in turn help you to answer the above questions as well:
https://en.wikipedia.org/wiki/Taxation_in_South_Africa
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1.3 The budget process

The South African Parliament and Provincial Legislatures are required to allocate money (budget) for each financial
year on an annual basis, before such funds can be utilised (Chapter 4, Section 26 of the PFMA, Act 1 of 1999, as
amended by Act 29 of 1999). This Act is dealt with in conjunction with The Income Tax Act 58 of 1962. All sectors
of the economy are taken into account when preparing a budget. The type of government expenditure budgeted for
in 2019 fiscal year include:
 Basic education;
 Economic affairs and agriculture;
 Defence, public order and safety;
 Human settlements and municipal infrastructure;
 Health;
 Social protection;
 Post school education and training; and
 General public services.
Attempt revision question 1.1 and activity 1.1 below to test your understanding of the government’s sources of
income and its budgeting process.
REVISION QUESTION 1.1

Identify three major sources of government income and state how much each source
generated in the 2018/2019 fiscal year
Activity 1.1
How does the medium-term expenditure framework assist in preparation of the national
budget?
If you have read the introduction to taxation, and the budget process above, you are ready to attempt calculations
of taxable income.
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1.4 Calculation of taxable income (section 5)

Provisions provided in section 5 of The Income Tax Act 58 of 1962 govern all calculations pertaining to taxable
income. Taxable income has to be determined in order to establish how much tax a taxpayer has to pay. Before
you calculate taxable income, it is crucial that you understand the definition of taxable income as provided for in
the Act. The Act defines taxable income as follows:
Definition
“'taxable income' means the 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” (South Africa 1962: 35).
Figure 1 below provides a demonstration of the steps to follow when calculating taxable income.
Step 3: Identify amounts that

Step1: Identify the amounts
Step 2: Identify exempts can be deducted for tax
that comply with the “gross
amounts purposes using gross
income”
deduction formula
Step 6: Calculate total taxable Step 5: Calculate taxable Step 4: Calculate taxable
income capital gain income
Figure 1.2: Steps to calculate taxable income
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Apply these steps in example 1.1 below and do not look at the solution before you attempt the example on your
own.
Example 1.1
Londiwe is a 41-year old resident of South Africa. The following receipts and
contributions occurred during the current year of assessment:
Income and gains:

She also received a salary of R320 000 and a dividend (exempt income) of R5000 from
the Investec Ltd for shares she holds at this company. In addition, she realised a capital
gain of R1 500.
Contributions:
She made a contribution of R6 300 (allowable deduction) to his employer’s pension fund
(the total amount is deductible for income tax purposes).
Required:
Calculate Londiwe’s taxable income for the current year of assessment.
Example 1.1: Solution

R
Gross income
Salary received 320 000
Dividends received 5 000
325 000
Less: Exempt income
Dividends received (5 000 )
Income 320 000
Less: Deductions
Pension fund contributions (6 300)
Taxable income (from revenue activities) 313 700
Add: Taxable capital gain 1 500
Taxable income (total) 315 200
The above example is merely an illustration of how the steps in the figure 1.1 are applied to calculate taxable
income. An in depth discussion of exempt income and deductions will be covered in subsequent study units.
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THINK POINT
Why dividends received added in the calculation of gross income because they are exempt
income?
Does it matter if taxable capital gain is included in the gross income calculation another than
including it in taxable income after taking all deductions and exemptions into account?
The questions asked above will be answered when discussing gross income in the following study unit. For the
purpose of this study unit, just ensure that you learn the framework for calculation of taxable income thoroughly.
As you move on to other study units, you will note that calculation of taxable income framework expands, but the
principle behind calculation of taxable income remains the same.
It is worth noticing that the calculation of taxable income for couple married in community of property is different
from that of couple married out of community of property. For a couple married in community of property, passive
income (any income other than trade income) is deemed to have accrued equally to both partners. Examples of
passive income includes dividends received and interest income. Although income from letting a property is from
trade however, it is also treated as passive income for tax purposes of couples married in community of property.
The following steps are followed when calculating taxable income of couple married in community of property:
1Table 1.1: Steps to calculate taxable income couple 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.
(Source: Coetzee et al. 2018: 5)
Take note of the following definition and interest exemptions table below and then attempt example 1.2:
Definition
The definition of a South African source varies according to the type of income or
expenditure being assessed. For the purposes of interest income, Section 9 of Income Tax
Act states that an interest (as defined in section 24J of the Act) shall be deemed to have
been received or accrued from a source within the Republic, where such interest was
derived from the utilization or application in the Republic by any person of any funds or credit
obtained in terms of any form of interest-bearing arrangement.
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2Table 1.2: Interest Exemptions
Year of assessment 2020 2019 2018 2017 2016 2015
Person younger than 65 R23 800 R23 800 R23 800 R23 800 R23 800 R23 800
Person 65 and older R34 500 R34 500 R34 500 R34 500 R34 500 R34 500
(Source: The South African Revenue Service 2019)
Table 1.2 above provides a list of interest exemptions available to natural persons as per the Income Tax Act.
These exemptions imply that if a natural person who is younger than 65 receives interest from a South African
source, the interest that is not taxable (exempt from tax) is limited to R23 800. Any amount of interest received
above R23 800 is taxable. For a natural person who is 65 or older, the exemption is limited to R34 500.
Example 1.2
Zefana (64 years old) and Doreen (67) are married in community of property. The
following were received by Zefana during the year of assessment:
 A salary of R160 000
 Interest of R70 000 from his saving accounts
Doreen did not receive any income during the current year of assessment.
Required:
Calculate Zefana and Doreen’ taxable income for year current year of assessment.

R
Zefana
Gross income
Salary 160 000
Interest received (70 000/2)* 35 000
195 000
Less: Interest exemption – limited to R23 800 (23 800)
Taxable income 171 200
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Doreen
Gross income
Interest received (70 000/2)* 35 000
Less: Interest exemption – limited to R34 500 (34 500)
Taxable income 500
*As Zefana and Doreen are married in community of property, it is deemed that the interest was received by
both spouse. Therefore, the each include R70 000/2 in their gross income.
In the solution to example 1.2, you will notice that the interest exemption for Zefana is lower than that of Doreen
however, their share of interest income equal. The reason for this is that interest income from a South African
source earned by a natural person is exempt, per annum, up to an amount as indicated in the table 1.2 above.
Take note of the following important regarding natural persons.
IMPORTANT STATEMENT
Although the Income Tax Act doesn't specify the requirements for a person to be regarded
as a natural person, the individual human being as opposed to a fictitious or legal person is
to be regarded as a natural person. Examples of legal or fictitious persons may include
private business entities, private non-governmental or governmental organisations.
It is also worth noting that although Zefana received R35 000 interest income, the portion that will be taxable from
his interest is only R11 200 (R35 000 – R23 800). Whereas, for Doreen, only R500 (35 000 – 34 500) will be taxed.
Once taxable income of individuals is calculated, the next step is to calculate the net normal tax liability.
1.5 Calculation of net normal tax liability

The calculation of net normal tax liability involves identifying the relevant year of assessment. The year of
assessment enables you to select the applicable tax rates from the tax tables. You will then be able to calculate
normal tax using applicable tax rates and taxable income. Thereafter, you will need to deduct all applicable tax
credits and prepaid taxes from the normal tax to arrive at the net normal tax liability. The tax credits include normal
tax rebates, medical scheme fees, and addition medical expenses. See the framework for calculation of final
normal tax liability in figure 1.3 below. The calculation of net normal tax liability is discussed further in the following
sections.
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Normal tax calculated based on the tax tables xxx
Less: Annual rebates (as per table 1.6 below) (xxx)
Less: Medical tax credits (as per table 1.7 below) (xxx)
Equals: Net normal tax liability for the year xxx
Less: PAYE and provisional tax (prepaid taxes) (xxx)
Equals: Normal tax due by or to the taxpayer xxx
Add: withholding tax on dividends xxx
Final tax liability of natural person xxx
Figure 1.3: Framework for calculation of final normal tax liability

(source: Coetzee et al. 2018: 11)
1.5.1 Assessment year or period (section 1)

The current year of assessment for natural persons refers to the period starting from 1 March 2018 and ending on
28 February 2019 (2019 year of assessment). If you are given a transaction that occurred on 30 April in the current
year of assessment, it means that the transaction took place on 30 April 2018. If amounts are carried to the
following year of assessment, it means that they are carried to the 2020 year of assessment (which starts on 1
March 2019 and ends on 29 February 2020. A year of assessment for a company is the financial year of that
company ending during the calendar year in question.
1.5.2 Normal tax (section 5)

Section 5(2) of the Income Tax Act provides that the Parliament must determine tax rates annually to be used to
calculate normal tax liability. The calculation of normal tax liability is based on taxable income. The difference
between taxable income and normal tax liability is that taxable income has to be calculated first before normal tax
can be calculated. Tax tables provide applicable tax rates that are used to calculate normal tax liability. Tax rates
vary according to the amount of taxable income. The higher the taxable income a person earns, the higher the tax
rate. To calculate normal tax liability you will have to multiply taxable income by the applicable tax rate. Table 1.3
below provides taxable income and corresponding tax rates to be used when calculating normal tax liability for
natural persons. The tax rates provided in table 1.3 are only applicable for the year of assessment starting from 1
March 2018 and ending on 28 February 2019. This period is referred to as current year of assessment. Refer to
the tax rates in table 1.3 below and attempt example 1.3.
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3Table 1.3: 2019 tax year (1 March 2018 – 28 February 2019)
Taxable income (R) Rates of tax (R)
0 – 195 850 18% of taxable income
195 851 – 305 850 35 253 + 26% of taxable income above 195 850
708 311 – 1 500 000 207 448 + 41% of taxable income above 708 310
1 500 001 and above 532 041 + 45% of taxable income above 1 500 000
Example 1.3
In the current year of assessment, Sipho Khumalo and Nosipho Dladla have a taxable
income of R560 000 and R320 000, respectively.
Required:
Calculate Sipho and Nosipho’s normal tax for the current year of assessment.

R
Sipho (taxable income R560 000)
On R555600 (per tax tables) 147 891
Add: 39% of R4 400 (the amount in excess of R555 600 thus R560 000 – R555 600) 1 716
Normal tax 149 607
Nosipho (taxable income R320 000)

On R305 850 (per tax tables) 63 853
Add: 31% of R14149 (the amount in excess of R308 850 thus R320 000 – R305 850) 4 386.19
Normal tax 68 239.19
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You will notice that taxable income is already given in example 1.3. However, you may be required to calculate
both the normal tax and taxable income. This should not be a problem for you since you already know how to
calculate taxable income.
IMPORTANT STATEMENT
The following concepts are essential when dealing with normal tax calculations:
 Marginal rate of tax – This is a rate of that applies to an additional R1 of taxable income
earned. Referring to the example 1.3 above, the marginal rate of tax is 31% because if
Nosipho earned R1 more of taxable income, she would have to pay 31% tax on this R1.
 Average rate of tax – This is the rate of tax applying to the total taxable income. In
68 239.19
example 1.3 above, Nosipho’s average rate of tax is: x 100 = 21,32%
320 000
Attempt the following activity to enhance your understanding of normal tax calculation. Thereafter proceed to the
following section to study the implications of tax rebates on net normal tax.
Activity 1.2
Using the same information from Example 1.2 above, calculate how much Sipho’s normal
tax would be if his taxable income is R720 000 per annum.
1.5.3 Normal tax rebates for natural persons (section 6)

In terms of section 6 of the Income Tax Act, there are certain tax credits applicable to individuals of a particular
age. These tax credits are referred to as normal tax rebates and are deducted from the normal tax liability in order
to arrive at the net normal tax. The following table provides types of normal tax rebates applicable to certain
individuals for the 2019 year of assessment.
4Table 1.4: Tax Rebates
Tax Rebate
Primary R14 067
Secondary (65 and older, but under 75) R7 713
Tertiary (75 and older) R2 574
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It should be noted that a person who is 65 years or older but under 75 years of age qualifies for the secondary and
primary rebates, that is to say the total rebates is R21 780 (R14 067 + R7 713). For a person who is 75 years or
older, the total rebate is R24 354 (R14 067 + R7 713 + R2 574).
Attempt the following example to understand the application of rebate.
Example 1.4
In the current year of assessment, Sisipho Khuzwayo who is 76 years old received a salary
of R560 000.
Required:
Calculate Sisipho’s net normal tax for the current year of assessment.

R
Gross income
Salary 560 000
Normal tax on R560 000

On R555600 (per tax tables) 147 891
Add: 39% of R4 400 (the amount in excess of R555 600 thus R560 000 – R555 600) 1 716
Normal tax 149 607
Less: Normal tax rebates: 76 years of age
Primary rebate R14 067
Secondary rebate R7 713
Tertiary rebate R2 574
(24 354)*
Net normal tax payable 125 253
*Normal tax rebates are proportioned on pro rata basis if tax period is less than 12 months. To be accurate when
proportionating the normal tax rebate, a number of days are used instead of number of months.
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IMPORTANT STATEMENT
Normal tax rebates are deducted from normal tax and not from taxable income.
Now that you have learnt how to account for normal tax rebates, proceed to medical scheme fees tax credit in the
following section.
1.5.4 Medical scheme fees tax credit (section 6A)

Medical scheme fees tax credits are deductions allowed in terms of section 6A of the Income Tax Act. In order to
qualify for this allowance, the taxpayer must make medical contributions to a registered medical aid scheme.
According to Coetzee et al. (2018: 17), “as from 1 March 2018, where more than one person pays fees to a medical
scheme, the medical tax credits listed in table 1.5 below must be apportioned between the people paying in the
same proportion as their payment is to the total payment”. Table 1.5 below provides the medical scheme fees tax
credits applicable in the 2019 year of assessment.
5Table 1.5: Medical tax credit rates
Medical tax credit rate per month
For the taxpayer who paid the medical scheme contributions R310
For the first dependant R310
For each additional dependant(s) R209
To understand how medical aid tax credits are applied in calculation of net normal tax liability, attempt example
1.5 below. Thereafter, attempt activity 1.3 below to test your understanding of medical aid scheme tax credits.
Example 1.5
Kim (28 years old) is married Victor (35 years old) and they have one child (Victoria) who
is 5 years old. None of them has any disabilities. Kim belongs to medical fund and her
taxable income for the current year of assessment is R320 000.
Required:
1. Calculate Kim’s net normal tax for the current year of assessment assuming that Kim
makes the full medical aid payment.
2. Calculate the amount that Victor can claim as a medical tax credit if the full medical
aid payment is R4 000 per month and he pays R1 500 of the payment.
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Taxation 2A

R
1. Kim’s net normal tax
Medical scheme fees tax credits:
(620 (Kim + Victor) + 209 (Victoria)) x 12 months = R9 948

Normal tax (63 853 + 31% x 14 150 (320 000 – 305 850) 68 239.50
Less: Primary rebate (14 067)
Less: Medical scheme fees tax credits (9 948)_
Net normal tax 44224.5
2. Victor’s medical tax credit

Medical scheme fees tax credits calculated as above – R9 948
Apportioned for Victor’s payment – R9 948 x (R18 000*/R48 000**) R3 730.50
*R1 500 x 12 = R18 000

**R4 000 x 12 = R48 000
IMPORTANT STATEMENT
Medical scheme fees tax credit is deducted from normal tax and not from taxable income.
You should also note that medical scheme fees tax credit should not exceed normal tax.
Activity 1.3
Siyanda is 39 years old. He makes a monthly contribution of R5 000 to his medical aid, in
respect of himself and his three dependents. None of them has any disability. Siyanda's taxable
income for the current year of assessment, prior to the medical expense deduction is R550
000.
You are required to calculate Siyanda's net normal tax for the current year of assessment.
1.5.5 Additional medical expenses tax credit (section 6B)

According to SARS (2019), “an Additional Medical Expenses Tax Credit (also known as an "AMTC") is a rebate
which reduces the normal tax a person pays. This rebate is non-refundable and any portion that is not allowed in
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Taxation 2A
the current year can’t be carried over to the next year of assessment. It applies for years of assessment starting
on or after 1 March 2014 (from the 2015 year of assessment) and is mostly calculated against qualifying "out of
pocket" medical expenses paid for you and any dependant. It is a rebate given in addition to the medical scheme
fees tax credit (MTC).”
SARS (2019) explains the conditions for medical expenses to qualify as out-of-pocket medical expenses as
follows:
“These are amounts paid and not recovered during the year of assessment in respect of you or any dependant,
and include:
 Services rendered and medicines supplied by any duly registered medical practitioner, dentist,
optometrist, homeopath, naturopath, osteopath, herbalist, physiotherapist, chiropractor or orthopaedist;
 Hospitalisation in a registered hospital or nursing home;
 Home nursing by a registered nurse, midwife or nursing assistant, including services supplied by any
nursing agency;
 Medicines prescribed by any duly registered physician (as listed above) and acquired from
any duly registered pharmacist;
 Expenditure incurred and paid outside South Africa in respect of services rendered or medicines supplied
which are substantially similar to the services and medicines listed above;
 Any qualifying expenses prescribed by the Commissioner as a result of any physical impairment or
disability.”
According to SARS (2019), “a dependant is:
 A spouse
 A child and the child of a spouse (e.g. son, daughter, step son, step daughter, legally adopted child)
o Who was alive during any portion of the year of assessment, and who on the last day of the year
of assessment:
 Was unmarried and was not or would not, had he or she lived, have been:
 Older than 18 years
 Older than 21 years and was entirely or partly dependent for maintenance on
the person and has not become liable to pay normal tax for the year
 Older than 26 years and was entirely or partly dependent for maintenance on
the person and has not become liable to pay normal tax for the year and was
a full-time student at an educational institution of a public character; or
 In the case of any other child, was incapacitated by a disability from maintaining himself
or herself and was entirely or partly dependent for maintenance on the person and
hasn’t become liable to pay normal tax for that year
 Any other member of a person’s family for whom he or she is liable for family care and support (e.g.
mother, father, mother-in-law, father-in-law, brother, sister, grandparents, grandchildren.)
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 Any other person who is recognised as a dependant of that person in terms of the rules of a registered
medical scheme or fund.”
“The AMTC will depend on a person’s age and whether the person, his or her spouse or any of their dependant(s)
has a disability as defined.
a) A person who is 65 years of age or older may claim the following AMTC:
Qualifying medical expenditure paid during the year of assessment, amounting to –
 33,3% of the fees paid to a medical scheme or qualifying foreign fund as exceeds three times the amount
of the MTC to which that person is entitled; plus
 33,3% of the qualifying medical expenses paid (out-of-pocket expenses).
b) A person who is, or whose spouse or child is a person with a disability, may claim the following AMTC:
Qualifying medical expenditure paid during the year of assessment, amounting to –
 33,3% of the fees paid to a registered medical scheme (or similar qualifying foreign fund) as exceeds
three times the amount of the MTC to which that person is entitled; plus
 33,3% of the qualifying medical expenses paid (out-of-pocket expenses).
Note that this concession is only available where the person, his or her spouse or child is a person with
a disability. It is not available in respect of any other dependant with a disability (for example, the person’s
mother).
c) All other persons not mentioned in the two categories above, may claim the following AMTC:
25% of the amount by which the sum of the amounts listed below exceeds 7,5% of the taxable income
(excluding retirement fund lump sum benefits, retirement fund lump sum withdrawal benefits, and severance
benefits) before taking into account this AMTC:
i) All contributions paid by the person to a registered medical scheme (or similar qualifying foreign fund) in
respect of the person and any of his or her dependants as exceeds four times the amount of the MTC to
which that person is entitled; and
ii) Actual qualifying medical expenses (including physical impairment expenses) paid by the person and not
recoverable from the medical scheme in respect of the person and any of his or her dependants” (SARS
2019).
For additional reading on additional medical tax credits, refer to the following SARS
website:
https://www.sars.gov.za/TaxTypes/PIT/Pages/Additional-Medical-Expenses-Tax-
Credit.aspx
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Attempt the following activity to assess your understanding of additional medical tax credits.
Activity 1.4
Pinky King is 67 years old. She made a monthly medical aid contribution of R3 500 on
behalf of himself and her husband. She paid R24 000 qualifying medical expenses for the
year. Pinky’s annual salary is R350 000.
Required:
Calculate Pinky’s medical aid tax credits for the 2019 year of assessment, assuming the
above transactions occurred during the year of assessment commencing 1 March 2018.
1.5.6 Prepaid taxes

Prepaid taxes also form part of the amounts that reduce the normal tax liability. These taxes normally consist of
Pay As You Earn (PAYE) and provisional tax. Both PAYE and provisional tax are beyond the scope of this module.
However, you may need to know how these taxes are treated when calculating net normal tax. Attempt the following
example to understand the treatment of prepaid taxes when accounting for net normal tax.
Example 1.6
Muzi’s normal tax payable for current year of assessment is R44 223. Muzi is 28 years
old. An amount of R35 400 was deducted by his employer from his monthly salary for
employee’s tax. Muzi is a registered provisional taxpayer and he paid provisional tax of
R14 500 during the current year of assessment.
Required:
Calculate Muzi’s net normal tax due to him or to SARS for the current year of assessment.

R
Net normal tax payable 44 223
Less: Prepaid taxes
Employees tax (35 400)
Provisional tax (14 500)
Net credit (amount due to Muzi) ( 5 677 )
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Taxation 2A
In the above example, you will notice that employee tax (PAYE) and provisional tax are deducted from the normal
tax liability. It is not always the case for actual tax liability to be equivalent to the tax provisionally paid. Therefore,
there should be a refund to the taxpayer if the PAYE or provisional tax payment made is higher than the actual
normal tax. If the PAYE or provisional tax paid is lower than the actual normal tax liability therefore, the taxpayer
should pay the shortfall to SARS.
1.6 Summary
This study unit provided a brief overview of the South African perspective of income tax system. This perspective
was then explored in relation to calculation of taxable income and normal tax liability. The components of taxable
income discussed included an overview of gross income, exempt amounts, tax rebates, prepaid taxes and medical
aid expenses. Lastly, basic calculations of net normal tax were performed to illustrate how normal tax for individuals
is determined in South Africa. Normal tax calculations will be explored further in subsequent study units as this
study unit was just introducing you to the framework and steps to calculate tax due to or from SARS. The next
study unit discusses gross income.
You should now revisit the examples and activities you have attempted in this study unit then attempt Knowledge
Check Questions below. Do not look at the solutions before you try answering the questions on your own.
KNOWLEDGE CHECK QUESTIONS

Linda and Anny are married in community of property. Linda and Anny are 66 years and 60
years old, respectively. Anny received a salary of R230 000 and interest of R180 000 during
the year of assessment. Linda received a salary of R450 000 and an interest of R20 000,
respectively. Linda contributed R65 000 to his retirement annuity fund during the current year
of assessment. He also paid municipal levy of R90 000 for his private house.
Both Linda’s and Anny’s interest were received from an investment account with a South
African bank. The investment is not tax free. The contributions paid by Linda to retirement
annuity fund are all tax deductible.
Required:
Calculate Linda’s and Anny’s taxable income for the current year of assessment.
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Taxation 2A
1.7 Answers to activities

Activity 1.1: Answer
The preparation of the medium-term expenditure framework document is the first step towards the government’s
budgeting process. The medium-term expenditure framework document outlines the expected revenue for the next
three years as well as the expected expenditure for each government’s department. In addition, the medium-term
expenditure framework document also assist in addressing government’s main objectives as outlined in the
National Development Plan.
((R720 000 – R708 311) x 41%) + R207 448) = R212 240.49

Refer to paragraph 1.5 for a further explanation of this calculation.
Calculate the medical scheme fees tax credit:

(R620 (R310 for Siyanda + R310 for one dependant) + R209 x 2 (for the remaining 2 dependants)) x 12 months
= R12456
Calculation of net normal tax:

Taxable income R550 000
Normal tax (R100 263 + (36% x (R550 000 - R423 300))) R145 875
Less primary rebate (R14 220)
Less: Medical scheme fees tax credit (R12 456)
Net normal tax R119 199
Please refer to Table 1.5 above for tax brackets. Taxable income of R550 000 falls within the following tax bracket:
Taxable Income Tax Rate
NB: Since Siyanda is under 65 years old, therefore he only qualifies for a primary rebate. Refer to Table 1.2 above
for the normal tax rebates.
29 MANCOSA
Taxation 2A

R
Medical scheme fees tax credit (R620 x 12 Months) 7 440
Excess medical scheme fees credit
((R3 500 x 12) – (3 x R7 440)) x 33,3% 6 553,44
Additional medical expenses tax credit (R24 000 x 33,3%) 7 992
Total medical tax credits that will reduce Pinky’s normal tax 21 985,44
Knowledge Check Questions: Answers

R
Linda’s Taxable income
Salary 450 000
Interest received (Note 1) 100 000
550 000
Less: exempt income

Interest received (Note 1) (R100 000 but limited to R23 800) (34 500)
Income 515 500
Less: Deductions
Retirement fund contribution (65 000)
Private house cost (Note 3) nil
Anny taxable income

Salary 230 000
Interest received (Note 1) 100 000
330 000
Less: Exempt income

Interest received (Note 2) (23 800)
Income 306 200
Less: Deductions nil
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Notes
1. Since Linda and Anny are married in community of property, the interest income has to be split between
equally between them. Therefore, interest income that will be included in their gross income is calculated
follows:
R20 000 + R180 000 = R200 000 total interest
Therefore, Linda interest is R200 000 ÷ 2 = R100 000 and Anny’s is R200 000 ÷ 2 = R100 000
2. Linda qualifies for interest exemption of R34 500 because he is 66 years old (over 65 years old) whereas
Anny qualifies for interest exemption of R23 800 because she is 60 years (under 65 years old).
3. Private costs are not allowed for income tax purposes.
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Unit
2: Gross income
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2.1 Introduction  Define of gross income
2.2 Resident of the Republic  Analyse and apply the definition of gross income in practical
2.3 Total amount in cash or otherwise tax cases
2.4 Received by or accrued to or in favour

of
2.5 Year or period of assessment
2.6 Special inclusions  Identify the types of income that qualify for special inclusions
in the gross income
2.7 Receipts or accruals of a capital  Identify and discuss the criteria for classifying amount as
nature deemed to be of a capital nature

Prescribed Textbook

2018. Gross income. In: Coetzee, K., De Hart, K. L., Koekemoer, A. D. Oosthuizen,
A. and Stedal, C. A Student's Approach to Income Tax: Natural Persons 2019.
Cape Town: LexisNexis (Pty) Ltd, 29 – 82.
33 MANCOSA
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2.1 Introduction
This study unit is centered on a discussion of gross income. According to section 1 of the Income Tax Act (South
Africa 1962: 21), there are five components of the definition of gross income, this study unit discusses these
components in each section comprehensively. It further discusses the types of amounts that are specifically
included in gross income. Last but not least, this study unit discusses amounts that are deemed to be capital in
nature, and therefore, do not form part of gross income.
You learnt the basis for the calculation of taxable income as well as normal tax in study unit 1. However, the starting
point, (i.e. gross income) for the calculation of taxpayer’s tax was not covered. Refer to the following diagram
(figure 2.1) and see where gross income fits in the calculation of taxable income.
Gross Income General deductions

Less Specific deductions
Exempt Income Capital allowances
INCOME DEDUCTIONS TAXABLE INCOME
4Figure 2.1: Calculation of taxable income diagram
Section 1 of the Income Tax Act defines gross income as follows (South Africa 1962: 21-22):
Definition
' "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 otherwise, received
by or accrued to or in favour of such person from a source within or deemed to be within the
Republic, during such year or period of assessment, excluding receipts or accruals of a capital
nature.'
Gross income is certainly the most important definition in the Income Tax Act and also one of the most
comprehensive ones. Therefore, you should study it in detail, together with the cases provided to support the
application of its components in practical cases. Below is a list of five components extracted from the above
definition. Each component will be discussed further in the sections that follow.
 Resident;
 The total amount;
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Taxation 2A
 In cash or otherwise;
 Received by or accrued to or in favour of;
 During the year of assessment; and
 Excluding amounts of a capital nature.
The gross income definition is applied differently between a resident of the Republic and a non-resident. Therefore,
it is important that you understand the distinction between a resident of the Republic and a non-resident.
2.2 Resident of the Republic

Residents of the republic are taxed on receipts and accruals from anywhere in the world. However, non-residents
are only taxed on accruals and receipts from the Republic. Hence, for the purposes of calculating gross income, it
is important to distinguish whether the person is resident of the Republic or non-resident.
Section 1 of the Income Tax Act defines a resident as “any natural person or person (other than a natural person)
which is incorporated, established or formed in the Republic or which has its place of effective management in the
Republic; but does not include any person who is deemed to be exclusively a resident of another country for
purposes of the application of any agreement entered into” (South Africa 1962).
For the purposes of this module, the focus is on the definition of a resident pertaining to a natural person. In terms
of the Act, there are two categories that are used to determine whether a natural person is a resident of the Republic
or not. These are:
 ordinarily resident; and
 the 'physical presence' test.
The following diagram demonstrates the steps to follow when determining whether a person is a resident of the
Republic or not.
35 MANCOSA
Taxation 2A
Step 1:
Is the person an exclusive resident of another Yes
country due to double-tax agreement?
No The person is not a resident in the

Republic
Step 2: Yes
Is the person an ordinarily resident in the Republic?
The person is a resident in

No
the Republic
Step 3:
Does the person comply with requirement of a Yes
physical presence test?
No
5Figure 2.2: Steps to determine whether a person is a resident of the Republic or not
IMPORTANT STATEMENT
To determine 'ordinarily resident' status, there are two important tax cases that you should
take note of. These are:
 Cohen v Commissioner for Inland Revenue 13 SATC 362; and
 Commissioner for Inland Revenue v Kuttel 54 SATC 298.
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The principle established in the case of “Cohen v Commissioner for Inland Revenue 13 SATC 362’ was that
ordinarily resident refers to the place where a person will return to after his wanderings. In the case of
‘Commissioner for Inland Revenue v Kuttel 54 SATC 298’ a person’s residence is where he had his usual or
principal residence that which may be described as his real home. It was further established that a person may
have a second home, for exam in South Africa, however, the South African home must be seen as his home to
which the person will return to after his wanderings.
A person may not meet the requirements of being ordinarily resident, but if such person is physically present in the
Republic for certain periods, they may be considered a resident. To determine whether a person is a resident
based on the number of periods such person was physical present in the Republic, a physical presence is applied.
According to Coetzee et al. (2018: 35) a person is a resident will be classified as a resident if they were physically
present in the Republic for a period or periods exceeding:
 91 days in aggregate during the relevant year of assessment;
 91 day 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
 915 days in aggregate during such five preceding years of assessment preceding the current year of
assessment.
The burden of proof above lies with the taxpayer.

Attempt activity 2.1 below to assess your understanding of a resident of the Republic.
Activity 2.1
Galo Smith is a resident of and lives in South Africa. He went on a holiday in Rome for the
last 93 days of the year of assessment.
Required:
Determine whether Galo is a resident of the Republic.
Once it has been confirmed if a natural person is a resident or non-resident of the Republic, the next step is to
determine the total amount accrued or received.
2.3 Total amount in cash or otherwise

For gross income to be determined, there must be an actual amount received or accrued to the taxpayer. The term
‘amount’ does not only include money but also the value of any other property the taxpayer earned. The value to
be included in the gross income, if the amount is a form other than money, is the market value of the property
received by the taxpayer at the time the property was received. The most important case that is used as basis for
determination of the amount other than cash accrued to the taxpayer was between Commissioner for Inland
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Revenue v Butcher Bros (Pty) Ltd 13 SATC 21. In this case it was established that it is the Commissioner who has
to prove that amount has actually accrued to the taxpayer. It is also the Commissioner's responsibility to ascertain
the money value of the amount accrued to the taxpayer.
2.4 Received by or accrued to or in favour of

On the day an amount accrues to the taxpayer, but before being received, that is the day it will be included in the
gross income. However, when the accrued amount is actually received, it won't be included again in the gross
income. Otherwise there will be double taxation. One of the important factor to consider in this component of gross
income is to determine when the deemed to have been received or accrued to the taxpayer. In the case of
Geldenhuys v Commissioner for Inland Revenue 1947 14 SATC 419 (A), it was established that, for an amount to
be included to the gross income of taxpayer, it should be received by the taxpayer or on his behalf for his own
benefit. The mere receipt of the amount does not result in inclusion in gross income.
The term ‘in favour of’ means that if, for example, the an agent collect the rental fees from tenants on behalf of the
landlord, the rental fees collected will not be taxed at the hands of agent but will be taxed at the hands of the
landlord. The rental fees are collected in favour of the landlord.
Attempt activity 2.2 below to test your understanding of amount received by or accrued to.
Activity 2.2
Jack Mabaso received R4 000 for booking fees on behalf of his client Seaside Hotel. Seaside
Hotel runs accommodation business in Durban. Jack receives booking fees from Seaside
Hotel clients and pays it over to Seaside Hotel.
Required:
Determine in whose hands the R4 000 will be taxable.
IMPORTANT STATEMENT
Take note of the following:
 Deposits received for work still to be performed are included in gross income,
although payment only accrues to the taxpayer after the services are performed.
 The term ‘received’ means that the taxpayer has received the amount in their favour
or for their benefits and for themselves.
 The amount to be included in taxpayer’s gross income is amount received by or
accrued to the taxpayer, whichever comes first.
 The term ‘accrued’ means that the taxpayer has become unconditionally entitled to
the amount.
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Once this the component ‘received by or accrued to or in favour of’ has been ascertained, the next step is determine
whether it is in the current year of assessment.
2.5 Year or period of assessment

A year of assessment for tax purposes for a natural person always ends on 28 or 29 February. For any company
or any other type of business, a financial year can start at any time, but it has to end on the last day after twelve
months of the commencement of the financial year. For example, if the financial year for a company starts on 1
August, then every other year from the date of commencement will end on 31 July. Detailed discussion on the
period of assessment for companies or close corporations is covered in Taxation 2B.
2.6 Receipts or accruals of a capital nature

Capital amounts do not form part gross income. However, it should be noted that amounts that are capital in nature
will be taxable somewhere else other than from the gross income. Tax dealing with items that are capital nature
will be covered in study unit 7 (capital gains tax). The case: CIR v Visser 8 SATC 271 provides the basis on which
the distinction between capital or revenue receipts can be drawn. In this case, a fruit and a tree analogy is applied,
where a fruit is linked to a revenue receipt and tree to a capital receipt. Over the years, the courts developed tests
to determine the difference between capital and revenue receipts. These tests are:
 subjective tests; or
 objective factors.
2.6.1 Subjective tests

To determine whether an amount is of a capital or a revenue nature, the application of a subjective test will look at
the following:
 the intention of the taxpayer;
 change of intention;
 mixed intentions; and
 establishing a taxpayer's true intention.
2.6.2 Objective factors

Objective tests consider the following as indications:
 the manner of acquisition;
 the manner of 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;
39 MANCOSA
Taxation 2A
 reason for the receipt;

 legal nature of the transaction; and
 an operation of a business carrying out a scheme for profit-making.
2.7 Special inclusions

Certain types of income may not be included in the gross income when applying the general principle of gross
income. This is due to the nature of such income. Therefore, the Act, paragraph (a) to (n), provides for certain
types of income to be specially included in gross income. Such items include:
 annuity;
 alimony, allowance or maintenance;
 amounts received in respect of services rendered, employment or holding an office;
 retirement fund lump sum benefits or retirement fund lump sum withdrawal benefits;
 'know-how' payments;
 dividends; and
 other amounts included in gross income.
You may now revise all sections covered in this study unit and attempt the following revision question to assess
your overall understanding of gross income.
Revision question 2.1

Karin Marais is a 36-year old resident of South Africa. She inherited a house situated in
Kempton Park from her grandfather. As she works in Harrismith she decided to sell the house
for R850 000. On this sale, she made a gain of R150 000 as the value of the value of the
house was estimated at R700 000 by the property valuator. The house was sold on 30 June
2018. Immediately after she received the money from the sale of the house, she invested it
with Standard Bank. By 31 March 2019, her investment account already accumulated
interest of R43 875.
You are required to discuss whether or not the amounts received by Karin Marais will form
part of her gross income for the year ended 28 February 2019.
2.8 Summary
In this study unit, you learnt that gross income is the first main building block of taxation. You also learnt that for
an amount to be included in gross income, it should either comply with the definition of gross income or fall within
the scope of special inclusions. You were also made aware that all amounts meeting the definition of gross income
or falling within the scope of special inclusion must be included in gross income before they are subject to tax.
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The following study unit explores the types of income that has been included in gross income but due to its nature
are exempt from tax. Attempt the following Knowledge Check Questions before you proceed to the following
section.
Knowledge Check Questions 2.1

You are required to discuss whether or not the amounts received by following individuals will
form part of their gross income for the year ended 28 February 2013.
2.1 Denny Kay is a 46-year old resident of South Africa. He inherited a house situated in
Benoni from his grandmother. As he works in Durban he decided to sell the house for
R750 000. On this sale, he made a gain of R50 000 as the value of the value of the
house was estimated at R700 000 by the property valuator. The house was sold on 31
July 2018. Immediately after he received the money from the sale of the house, he
invested it with MTN Zakhele Shares. By 31 March 2019, he earned a dividend of R12
875 from MTN Zakhele Shares.
2.2 Miss Angie Baker is a landlord who owns several properties in Durban. One of the
requirements of her lease agreement is that each tenant who want to occupy the
premises must make a deposit before occupying her premises. She keeps these
deposits in a trust bank account that she set up only for this purpose. Upon termination
of the lease agreement, a tenant will be refunded his/her deposit. However, the refund
will only be made if the tenant has given a one month's notice for the termination, and
the premises are left in the same condition as there were when they took occupation.
In the event that one that these conditions are not met upon termination, the deposit will
be not be refunded to the tenant. The deposit will then be withdrawn from the trust
account and deposited to Miss Angie's Account. Miss Angie received R15 000 in
deposits in the current year of assessment.
2.3 Jessica owns a jewellery shop in Johannesburg. On 1 February 2019 as she was turning
59 years old, she decided to retire and sell her business for R500 000. She couldn't find
a buyer who could pay R500 000 upfront. One of the potential buyers negotiated to pay
R300 000 upfront and R5 000 would be paid on monthly basis for the rest of the
Jessica's life to cover the remaining balance. Jessica agreed to the offer.
2.4 Siyanda, a sole trader, owns an accounting firm in Durban. On 1 February 2019 he
decided to sell his business to Sinenhlanhla Mchunu, his friend from college. The price
he was looking for was R700 000. Sinhlanhla couldn't afford R700 000 at once, but
offered to pay R500 000 upfront and R5 000 would be paid on monthly basis for the
next seven years for the remaining balance. Siyanda agreed to Sinenhlanhla's offer.
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The monthly instalments of R5000 will comprise both interest and capital portion of the
remaining balance.

1st step – Determine whether the person is exclusively a resident of another county as a result of a double-tax
agreement: In this case, no.
2nd step – Determine whether the person is ordinarily resident in the Republic: In this case, yes Galo is resident
of the Republic. He was on holiday and his intention was to return to the Republic.
Therefore, he is a resident of the Republic and ordinarily resident.

Since Jack Mabaso did not receive the booking fees on his own behalf and for his own benefits, the R4000 will
form part of Seaside Hotel’s gross income.
Self-test question 2.1: Answer

2.1 Although Denny Kay made a profit on the sale of her house, she did not sell it with an intention to make a
profit. The reason why she sold the house was due to her personal circumstances. Therefore,e the
inheritance as well as sale of the house constitute a receipt of income, which is capital in nature, therefore
not included in Denny's gross income.
The dividend income from MTN Zakhele Shares will constitute a receipt of a revenue nature, because
investing capital is considered a profit-making intention. Therefore, interest will be included in Denny's gross
income.
2.2 The deposits have not been received by Angie (as they are retained in the trust account) nor unconditionally
accrued to her. Therefore, these deposits would not be included in Angie's gross income as there is no
receipt or accrual. However, if the tenant does not meet the condition as provided in Angie's lease agreement
upon termination, it is then when the deposits are considered as accrued to Angie. And if Angie physically
received such deposit, it will be included in her gross income.
It should also be noted that had Angie not opened a trust account for the purposes of retaining these
deposits, and had such deposits been deposited into her business account or personal account, the deposits
would be considered as received by Angie and therefore included in her gross income. Even if these deposits
were not used for any purposes other refund purposes, it would still be included her gross income, if these
deposits were received and retained in her account.
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2.3 The receipt of R300 000 from the sale of business is of a capital nature. The sale of the business which is
not Jessica's ordinary business is a capital asset. The monthly payment of R5 000 meets the requirements
for annuity and therefore will be included in Jessica's gross income.
2.4 Only the interest portion of the monthly instalments will be included in Siyanda's gross income. The portion
of R5 000 that represents a capital repayment will not be included in Jessica's gross income as it is capital
nature. The receipt of R500 000 from the sale of business is of capital nature.
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Unit
3: Income Exempt From Tax
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3.1 Introduction  Identify and discuss the types of income that are exempt from tax
3.2 Exemptions available to non- due to the status of the tax payer
residents (section 10)
3.3 Exemption based on the nature  Identify exemptions that are available to non-residents
of the income (section 10)  Identify and discuss exemptions based on the nature of the income

Prescribed Textbook
2018. Income exempt from tax. In: Coetzee, K., De Hart, K. L., Koekemoer, A. D.
Oosthuizen, A. and Stedal, C. A Student's Approach to Income Tax: Natural
Persons 2019. Cape Town: LexisNexis (Pty) Ltd, 83 – 107.
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3.1 Introduction
The previous study unit discussed the requirements that must be met in order for any type of income to be included
in gross income. In this study, the discussed is centered on the types of income that qualify to be included in gross
income but exempt from tax. In other words, the income that is free from tax. The main focus of this study unit is
on provisions section 10 of the income tax act. Section 10 is going to be explored in respect of exemptions resulting
from the status of the taxpayer, exemptions available to non-residents and exemptions based on the nature of
income.
Before you proceed to the following section, it is important to know where the exempt income fits in the calculation
of taxable income. This is shown in following diagram.
R Relevant sections of the Income Tax Act
Gross income xxxx Section 1 (definition of gross income)
Less: Exempt income (xxx) Sections 10, 10A and 12T
= Income xxxx Section 1 (definition of income)
Less: Deductions (xxx) Section 11 (studied together with section

23(m) and 20)
Add: Taxable portion of allowances xxxx Section 8
= Taxable income before taxable capital gain xxxx
Add: Taxable capital gain xxxx Section 26A
= Taxable income before retirement fund

deduction
xxxx
Less: Retirement fund deduction (xxx) Section 11F
= Taxable income before donations xxxx

deduction
Less: Donations deduction (xxx) Section 18A
= Taxable income xxxx Section 1 (definition of taxable income)
6Figure 3.1: Taxable income framework
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3.2 Exemptions available to non-residents (section 10)

The payments, in the form of dividends, interest and royalties, made to non-residents investors or sportspersons
by South African persons are subject to withholding tax. Non-residents are not subject to normal tax if the amounts
they received have been subjected to withholding tax. The exemptions available to non-residents are discussed
below.
3.2.1 South African dividends

Dividends paid to non-residents are subject to dividends tax as per the provisions of section 64D. Section 10(1)(k)
provides that dividends of this nature are not subject to normal tax. However, if these dividend are paid or declared
by a headquarter company, they are not exempt from tax.
3.2.2 South African interest

Interest paid to non-residents is exempt from tax. However, if the interest is paid in the form of annuity, the
exemption does not apply. The exemption is also not applicable if:
 the person receiving or the interest accrues to has been staying in the Republic for more than 183 days during
the last 12 months prior to the receipt or accrual of interest; or
 the debt for which the interest arises is connected to an establishment that is permanent in the Republic.
3.2.3 Royalties
Coetzee et al. (2018: 88) define royalty as the amount received or accrued in respect of:
“the use or right of use of or permission to use intellectual property; or
the imparting of or the undertaking to impart scientific, technical, industrial or commercial knowledge or information,
or the rendering of assistance in this regard.
Royalties are subject to withholding tax and hence they are not subject to normal tax. However, the exemption
does not apply if:
 the person receiving or the royalty accrues to has been staying in the Republic for more than 183 days during
the last 12 months prior to the receipt or accrual of royalty; or
 the intellectual property or knowledge or the information for which the royalty is paid is connected to a
permanent establishment of that person in the Republic.
3.2.4 Foreign entertainers and sportspersons

Non-residents who are entertainers and sportspersons are exempt from normal tax if the amounts they receive or
accrue to them is subject to tax on foreign entertainers and sportspersons as per sections 47A to 47K.
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3.2.5 Employment of non-residents outside of the Republic by the Government

According to section 10(1)(p), a non-resident who receives or an amount is accrued to for rendering a service or
work or labour done by them outside the Republic for or on behalf of an employer in the national or provincial
sphere of government or municipality in Republic, or national or provincial public entity, is exempt from tax.
However, this exemption applies if not less than 80% of the expenditure of the entity is defrayed directly or indirectly
from the funds voted by Parliament. In addition, the amount has to be subjected to tax in the country of the non-
resident for this exemption to apply. If the income tax is paid the government on behalf of the non-resident,
therefore the exemption does not apply.
Attempt activity 3.1 below to assess your understanding of provisions of the Income Tax Act in relation to
exemptions available to non-residents.
Activity 3.1
In terms of Section 10(1)(h) of the Income Tax Act, interest received by or accrued to a non-
resident is exempt from tax. However, there are certain instances where this exemption of
interest to non-residents does not apply.
You are required to state the instances where provision of Section 10(1)(h) do not apply in
respect of interest received by or accrued to non-resident.
3.3 Exemption based on the nature of the income (section 10)

Section 10 also provides for exemptions of income or portions of income based on the nature of the income. In this
case, the nature of income, not the status of the taxpayer, determines whether the income is exempt from tax or
not. These exemptions are discussed in the following sections.
3.3.1 Pensions
Pensions that are exempt from tax include the following:
 Pensions payable to the State President, Vice State President or their widow or widower (section
10(1)(c)(ii))
 War pensions and awards for diseases (section 10(1)(g))
 Disability pensions and compensation (section 10(1)(gA) and section 10(1)(gB)
o The exemption with respect to compensation paid by the employer for the death of an employee
is limited to R300 000.
 Foreign pensions, lump sums and annuities (section 10(1)(gC))
o This exemption only applies if the amount is received from a foreign retirement fund.
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3.3.2 Benefits
Exempt benefits include the following:
 Funeral benefits (section 10(1)(gD))
 Beneficiary fund awards (section 10(1)(gE))
 Unemployment insurance benefit funds (section 10(1)(mB))
 Insurance policies in respect of the following covers (section 10(1)(gI)):
o Death
o Disability
o Illness
o Unemployment
3.3.3 Amounts in relation to employment

 Exemption applicable to amounts relating to employment include the following:
 Employer owned insurance policies in respect of amounts paid to employee
o This exemption only applies if the contributions paid by the employer were considered fringe
benefit to the employee.
 Pure risk policies

o The amount received in respect of risk policies are exempt from tax if the benefits in respect of
contributions to these policies were included in taxable income of the employee as a fringe
benefit.
 Other polices – in relation to:

o Death
o Disability
o Illness
These policies are also exempt from tax if the contributions by the employer in respect of these
policies were included in employee’s taxable income.
 Compensation plan
 Uniform and uniform allowances
o This exemption only applies if, as the condition of employment, the employee is required to wear
a special uniform, while on duty, which is clearly distinguishable from ordinary clothing.
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 Relocation benefits
o These include:
 Transportation cost from the old residence to the new residence
 Cost of the selling previous residence and settling in costs
 Hiring residential accommodation for the employee or members of the employee
household for a period ending 183 day from the date the employee took up the
appointment
 Fringe benefits
o Refer to study unit 5 for the types of fringe benefits that qualify for exemption under the provisions
of section 10(1)(nC), section 10(1)(nD) and section 10(1)(nE)
 Employment outside the Republic

o Remuneration derived from employment by the following:
 Officer or crew of a ship
 Officer or crew of a South African ship
o Foreign services
 Exemption includes amount paid in respect of remuneration, allowances, fringe benefits
and amounts received from broad-based employee share plans and vesting equity
instruments.
 Scholarships and bursaries

o Includes:
 Scholarship or bursaries paid to non-employees
 Employers to employees
 Employers to relatives of employees
 Persons without disabilities
o The exemption is limited to R20 000 for a bursary granted for studies
from grade R to grade 12 or NQF level 1 – 4 qualification.
o For bursaries granted to study from NQF level 5 to level 10
qualification, the exemption is limited to R60 000
 Persons with disabilities
o The exemption is limited to R30 000 for a bursary granted for studies
from grade R to grade 12 or NQF level 1 – 4 qualification.
o For bursaries granted to study from NQF level 5 to level 10
qualification, the exemption is limited to R90 000
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3.3.4 Investment income

The exemption pertaining to investment income includes:
 South African interest
o The exemption applies as follows:
 For persons under 65, the exemption is limited to R23 800
 For persons 65 and older, the exemption is limited to R34 500
 Interest and dividends from tax free investment
o These are fully exempt from income tax
o The investment contribution is, however, limited to R33 000 per annum and R500 000 in total.
 If a person exceed these limits, a penalty of 40% of the excess amount is payable to
SARS as deemed normal tax.
 Distribution from a portfolio of collective investment schemes
 Dividends (other foreign dividends or headquarter company dividends)
 Foreign dividends and headquarter company dividends
3.3.5 Other exemptions

Other exemptions include:
 Capital element of purchased annuity
 Gratuity received from public funds
 Alimony received
 Government grants
Now that you are familiar with types of exemptions available to individuals do the following example and then
attempt activity 3.2 and 3.3.
Example 3.1
Terry Blanch is an employee at Siyazama Traders. Terry is required to wear black and
white clothes at her work, hence her employer gives her a uniform allowance of R500 per
month. During the current year of assessment spent R4 450 on black and white clothes.
She kept all her receipts for purchases of these clothes.
Required:
What are the tax implications of the uniform allowance that Terry received?
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The total uniform allowance that Terry received from her employer during the year of assessment is R6 000
(R500 x 12). This is amount will be included in her gross income and it will be exempt.
The reason for this is that, the uniform cannot be clearly distinguished from the ordinary clothing. Hence, the
exemption of uniform allowance in Terry’s case does not apply. Uniforms and uniform allowances are discussed
further in study unit 6 (Fringe benefit).
Activity 3.2
You are required to make a summary of all types of pension income or portions of pension
income that are exempt from tax due to the nature of the income
Activity 3.3
Rose Roberts is a 48-year-old resident of South Africa. During the year of assessment she
received R100 000 interest from an investment in the Republic. This is not a tax-free
investment.
With the aid of provision of section 10 of the Income Tax Act, you are required to discuss the
tax implications of interest received by Rose.
3.4 Summary
This study unit examined the income that has been included in gross income by applying the definition of gross
income, but due to the nature of such income, section 10 provides that that income must be exempt from tax. It
was also discussed how exempt income fits into the calculation of taxable income.
The next study unit discusses the application of the general deduction formula in terms of Sections 11(a) and 23.
You will learn about the sequence of deducting specific deductions and exempt income from gross income.
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The instances where exemption of interest received by or accrued to non-residents does not apply includes:
 The payment of interest to non-resident in a form of an annuity.
 The interest is received from a debt in a permanent establishment of the Republic connected to that
person receiving it.
 The non-resident was physically present in the Republic for at least 183 within 12 months prior
receiving the interest.

Pensions that are exempt from tax include the following:
 Pensions payable to the State President, Vice State President or their widow or widower (section
10(1)(c)(ii))
 War pensions and awards for diseases (section 10(1)(g))
 Disability pensions and compensation (section 10(1)(gA) and section 10(1)(gB)
 Foreign pensions, lump sums and annuities (section 10(1)(gC))
 Non-deductible element of compulsory annuities (section 10C)

Since this interest received is from investment that is not tax-free, it is taxable. However, Rose qualifies for an
interest exemption of R23 800, hence the amount that is going to be taxed is R76 200 (R100 000 – R23 800).
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Unit
4: General Deduction Formula
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4.1 Introduction  Define general deduction formula
4.2 Carrying on a trade (section 1)  Analyse and apply the definition of general deduction formula
4.3 The general deduction formula in practical tax cases
(sections 11(a) and 23)  Demonstrate an informed understanding of the prohibited

deductions
4.4 Expenditure and losses
 Identify and analyse types of expenditure that are assessed
4.5 Actually incurred according to the general rules
4.6 Year of assessment
4.7 In the production of income
4.8 Not of a capital nature
4.9 Prohibited deductions (section 23)

Prescribed Textbook
2018. General deduction formula. In: Coetzee, K., De Hart, K. L., Koekemoer, A.
D. Oosthuizen, A. and Stedal, C. A Student's Approach to Income Tax: Natural
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4.1 Introduction
In previous study units, you were introduced to the framework that is used to calculate taxable income together
with net normal tax. Thereafter you continued to explore what gross income consists of. You went on to examine
the type of income that should be exempt from tax. In order to complete the equation of normal tax calculation
(refer to Figure 4.1), this study unit introduces you to the deductions. Determining whether the expenditure or loss
incurred by the taxpayer should be deducted from taxable income would not be possible without the use of section
11(a) of the Income Tax Act. The framework for determining if the expenditure is deductible or not is called the
general deduction formula. You should study the general deduction formula in conjunction with the provisions
contained in section 11(a) and sections 11(c) to (x) of the Income Tax Act. The following diagram (Figure 4.1)
shows you how the general deduction formula fits with the taxable income framework.
Gross Exempt Taxable

Deductions
Income Income Income
Tax
Payable
General
Deduction
Formula
7Figure 4.1: General deduction formula in taxable income framework
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The elements of a general deduction formula that provides guidance as whether the expenditure or loss should or
should not be allowed for deduction from the taxable income are listed in Figure 4.2 below.
Carrying on a trade
GENERAL DEDUCTION FORMULA
Expenditure or loss
Actually incurred
Year of assessment
In the production of income
Not of capital nature
8Figure 4.2: General deduction formula
The general deduction formula needs to be tested to determine whether that specific expense is deductible or not.
As you gain more practice, there'll be certain expenses that you know are deductible, and so you won't need to
apply the requirements of the general deduction formula every time you wish to deduct an amount. On the other
hand, where you are confronted with an expense that you are not sure about, you'll need to run through the
requirements of the general deduction formula to ascertain whether it meets all the requirements and is
consequently deductible or not. The provisions of section 11 can only apply if a taxpayer is carrying on a trade.
The following section discusses the requirement for carrying on a trade.
4.2 Carrying on a trade (section 1)

The general aspects of carrying on a trade, pre-trade expenses and expenses incurred after trading has stopped
are discussed below. These aspects are crucial when assessing whether a taxpayer is carrying on a trade or not.
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4.2.1 General
The definition of ‘carrying on a trade’ is very broad. In terms of section 1 of the Income Tax Act trade is defined as
follows:
“'trade' includes 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 as defined in the Patents Act, 1978 (Act
57 of 1978), or any design as defined in the Designs Act, 1993 (Act 195 of 1993), or any trade mark as defined in
the Trade Marks Act, 1993 (Act 194 of 1993), or any copyright as defined in the Copyright Act, 1978 (Act 98 of
1978), or any other property which is of a similar nature” (South Africa 1962). This definition does not include
passive investment activities. Passive investment activities include activities that generate interest, dividends,
pensions and annuities. Passive investment activities are not considered carrying on a trade. However, the extent
of the certain passive activity, such as speculating on shares or securities, might constitute a trade. In addition, it
is not necessarily a requirement that a profit motive has to prevail for a trade to be considered to be carrying on.
This is evident in a tax case between Burgess v Commissioner for Inland Revenue.
4.2.2 Pre-trade expenses

In some cases, expenses will qualify for deduction although carrying on a trade has not started. The following
requirements have to be met before allowing such deductions:
 The person must have actually incurred the loss or expenditure in relation to preparing for the trade
 The expenditure or loss is assessed whether it would have been deducted in terms of the following sections
had it been incurred after the trade has begun:
o Section 11 – assess whether the expenditure or loss meets the provisions of this section to be deductible
o Section 11D – assess whether the expenditure or loss was incurred in respect of scientific or technological
research and development
o Section 24J – assess if the expenditure is incurred or accrued in respect of interest
 The person must have not claimed a deduction for this expenditure or loss during the year or in the previous
year assessment.
If the above requirements are met, therefore the taxpayer claim the expenses in the year the trading commences.
However, these expenses are limited to the income from the trade. If pre-trade expenses exceed the income, they
are then carried forward to the following year of assessment.
4.2.3 Expenses after trading has stopped

Where trade has stopped because the business is being liquidated, such expenses will not be allowable for
deduction. This is due to the fact that liquidation process is not considered as carrying on a trade.
Now that the aspects of carrying on a trade has been discussed, you can proceed to the following section where
the deductions arising from carrying on a trade are discussed using the general deduction formula.
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4.3 The general deduction formula (sections 11(a) and 23)

As explained in the introduction above, the general deduction formula should be studied in conjunction with the
provisions of section 11(a). There are also provisions of section 23 that list certain expenditure or losses that do
not qualify for deduction from taxable income. Section 11(a) provides that, for an expenditure and/or losses to be
deductible, they have to be actually incurred during the year of assessment, in the production of income that is not
of a capital nature. The general deduction formula was derived from this provision. Each component of the general
deduction formula is discussed, briefly, in the following sections.
4.4 Expenditure and losses

Although the Act does not provide a definition for the word ‘loss’ but in Joffe & Co (Pty) Ltd v CIR 13 SATC 354, it
was held that a loss mean nothing different from the expenditure.
Deductible expenditure is not limited to monetary expenditure but may be in any other form. However, the
expenditure or loss has to be actually incurred in order to be deductible for income tax purposes. The cost to be
allowed as a deduction for the asset exchanged, other than cash, is normally the fair value at the time of acquisition
of that asset. If the asset was constructed by the taxpayer, the labour costs incurred to construct the asset are
excluded from the value to be deducted. Attempt example 4.1 to understand the treatment of expenditure incurred
in a form other than cash.
Example 4.1
Marvin Zuma carries on business that does sofa repairs. Due to cash shortage, he was
unable to pay the money he owes the supplier for the sofa covers that he bought on
consignment basis. The money that he owed the supplier was R4 500. He decided to pay
the supplier with a laptop that had a market value of R5 000.
Required:
Discuss the deductibility of the amounts.
Marvin would be able to deduct the market value of the laptop (R5 000) in respect of the purchase of the sofa
covers. As long as the expenditure incurred has a determinable value, it may be deductible even if it is any form
other than cash.
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4.5 Actually incurred

This component of the general deduction formula includes both amounts paid and amounts that a taxpayer is liable
to pay (Caltex Oil (SA) Limited v Secretary for Inland Revenue (1974)). In other words, the term actually incurred
does not necessarily mean that expenditure is due and payable. The taxpayer may incur a liability that is payable,
for example, in the following year of assessment. This liability would still be deductible. The court judgement to the
following tax cases are necessary when determining whether the amount is actually incurred or not:
 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.
The principles drawn from these cases are as follows:

 An expenditure is deemed incurred if all conditions that pre-existed are met. In other words, at the time the
expenditure is recognised as incurred, it should be condition free. It does not matter whether the conditions
of the expenditure are resolute (not effective until conditions have been met) or suspensive (effective
immediately but suspended until conditions have been met). So long as the liability or expense is classified
as contingent, it won’t be tax deductible.
 Regardless of the time the legal dispute is launched, it is only taken as effective on the final court's decision.
The expenditure that a taxpayer is unable to quantify in the current year of assessment but can only estimate the
amount, and only able to quantify it in subsequent year of assessment, it will be deductible in the year in which it
is quantified.
4.6 Year of assessment

For financial reporting purposes in financial accounting, the matching principle is applied when preparing financial
statements. The matching principle means that expenditure may be carried forward to a subsequent year or back
to an earlier year. However, for income tax purposes, the expenditure is only deductible in year in which it is
incurred. If the taxpayer did not deduct expenditure in the year in which it is incurred, the expenditure cannot be
deducted in future years. However, section 23H of the Act provides an exception to this rule. Section 23H provides
that:
 “(1) Where any person has during any year of assessment actually incurred any expenditure (other than
expenditure incurred in respect of the acquisition of any trading stock)-
o which is allowable as a deduction in terms of the provisions of section 11 (a), (c) or (d) or section 28
(2) (a) and (c); and
o in respect of-
 goods or services, all of which will not be supplied or rendered to such person, during such year
of assessment; or
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 any other benefit, the period to which the expenditure relates extends beyond such year of
assessment, the amount of the expenditure which shall be allowable as a deduction in terms of
such section in the said year and any subsequent year of assessment, shall be limited to, in the
case of expenditure incurred in respect of-
 goods to be supplied, so much of the expenditure as relates to the goods actually
supplied to such person in such year of assessment; or
 services to be rendered, an amount which bears to the total amount of such expenditure
the same ratio as the number of months in such year during which such services are
rendered bears to the total number of months during which such services will be
rendered; or
 any other benefit to which such expenditure relates, an amount which bears to the total
amount of such expenditure the same ratio as the number of months in such year during
which such person will enjoy such benefit bears to the total number of months during
which such person will enjoy such benefit or where the period of such benefit is not
determinable, such period over which the benefit is likely to be enjoyed:
Provided that the provisions of this section shall not apply –
o 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 such person will have the full enjoyment of such benefit in
respect of which the expenditure was incurred within such period; or
o where the aggregate of all amounts of expenditure incurred by such person,
which would otherwise be limited by this section, does not exceed R50 000; or
o to any expenditure to which the provisions of section 24I, 24J, 24K or 24L
apply; or
o to any expenditure actually paid in respect of any unconditional liability to pay
an amount imposed by legislation.
 (2) If the Commissioner is in any case satisfied that the apportionment of the expenditure in accordance
with subsection (1) does not reasonably represent a fair apportionment of such expenditure in respect of
the goods, services or benefits to which it relates, he may direct that such apportionment be made in such
other manner as to him appears fair and reasonable.
 (3) Notwithstanding the provisions of subsections (1) and (2), where it is during any year of assessment
shown by any person that-
o (a) the goods or services in respect of which the expenditure is incurred will never be received by or
be rendered to such person; or
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o (b) such person will never enjoy such other benefit in respect of which any expenditure is incurred,
such expenditure shall be allowed in such year, to the extent that such expenditure has been actually
paid by such person.
 (4) The exercise by the Commissioner of his discretion contemplated in subsection (2) shall be subject to
objection and appeal” (South Africa 1962).
Even if the expenditure or loss is actually incurred during the year of assessment, but if it is not incurred in the
production of income, then it will not be deductible. The following section discusses the component ‘in the
production of income’.
4.7 In the production of income

In study unit 2, where gross income was discussed, you learnt that income is arrived at by deduction exempt
income from gross income. You further learnt that capital amounts are excluded from the gross income. Therefore,
the expenditure incurred in the production of capital and exempt income is tax deductible. There are a number of
scenarios where it is not clear whether the expenditure is incurred in the production of income or not. However,
court judgements have been used to develop principles that can be used to decide whether the expenditure was
incurred in the production of income or not. Read through the following case to familiarise yourself with the principle
developed from this case to determine whether the expenditure was incurred in the production of income or not:
CASE:
Port Elizabeth Electric Tramway Company Ltd V Commissioner for Inland
Revenue 8 SATC 13 (CPD) – 1935
Facts:
“The taxpayer company carried on business as a tramway transporter. A driver of one of its tram-cars lost control
while descending a steep gradient. He died some time later as a result of the injuries sustained in the accident.
A claim was made in terms of the Workmen’s Compensation Act, on the taxpayer for damages. The Cape
Provincial Division of the Supreme Court compelled the taxpayer to pay an amount as compensation to the
driver’s widow. In addition, the taxpayer also incurred legal costs in resisting the claim. The taxpayer claimed
these two amounts as a deduction but these claims were disallowed by the Commissioner” (Coetzee, et al.
2018: 121).
Issue:
Are both claims (compensation and legal costs) deductible in terms of section 11(a) of the Income Tax Act as
being expenditure incurred “in the production of income”?
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Judgement:
“That section 11(a) permits the deduction of all expenses attached to the performance of a business operation
bona fide performed to earn income, whether such expenses are necessary for its performance or attached to
it by chance, provided they are so closely connected with it that they may be regarded as part of the cost of
performing it. That as the employment of drivers was necessary for the carrying on the business of the company
and the employment of drivers carried with it, as a necessary consequence, a potential liability to pay
compensation if such drivers were injured in the course of their employment. The payment made by the
company by way of compensation was to be regarded as part of the cost of the company’s operations to earn
income and so deductible in terms of section 11(2)(a) of the Income Tax Act, 1925 (equivalent to the now section
11(a)). That the legal costs incurred in resisting the claim for compensation had not been expended in an
operation entered into to earn income and were not allowable as a deduction” (Coetzee, et al. 2018: 121).
The support for the definition of this component of the general deduction formula is largely dependent on court
cases. Although the facts of such cases are important however, for the purposes of this module, the focus is on
the principles developed from such cases to decide whether the expenditure or loss is incurred in the production
of income or not. In Joffe & Co (Pty) Ltd v Commissioner for Inland Revenue 13 SATC 354, it was established that
compensations paid in connection with negligent action that is not naturally accompanying or associated with
trading operations is disallowed as a deduction.
The principle developed from the judgement in a case of Sub-Nigel Ltd v Commissioner for Inland Revenue 15
SATC 381 was that, it is not necessary that the expenditure must have produced income in the same year of
assessment it is incurred for it to be deductible.
In a of Commissioner for Inland Revenue v Nemojim (Pty) Ltd, it was established if an expenditure is incurred for
trading and non-trading purposes, only the portion that relates to trading purposes is deductible. The provisions of
section 23(g), where the apportionment of expenditure that relates to private-purposes and trading purposes is
dealt with, also support this.
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IMPORTANT STATEMENT
Other important aspects to note when assessing where expenditure is incurred in the
production of income or not are as follows:
 Section 23(o) disallows the deduction of expenditure incurred in respect of fines and
bribes.
 Expenditure or losses incurred in connection with theft are regarded as attached to the
business operations by chance. However, such expenditure or losses are only
deductible if they are closely connected with the business operation, in such a way that
they may be regarded as cost of performing that business operation.
 Although fees paid to accountants, tax consultants and bookkeepers may be regarded
as not in the production of income but Practice Note No. 37 provides for the deduction
of such fees.
Do the following activities to assess your understanding of court rulings on certain cases in relation to expenditure
incurred in the production of income.
Activity 4.1
Mbali Dumakude runs catering business from home. During the current year of assessment,
she incurred total cost of R120 000 in respect of groceries. She established that 10% of
grocery purchases was for her personal use and the rest was used in her catering business.
She paid a total of R10 000 to her friends for helping in preparation of the food for her catering
business.
Required:
Discuss the deductibility of the amounts mentioned above for the current year of assessment.
Activity 4.2
Rajesh Maharaj operates a spaza shop that operates on cash basis. During the current year
of assessment, he discovered that cashier stole R2 100 from the cash register. Rajesh was
also robbed at gunpoint of his takings of the day in his spaza shop. The loss, as a result of
the robbery, amounted to R1 500.
Required:
Discuss the deductibility of the amounts mentioned above for the current year of assessment.
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The last component of the general deduction formula is expenditure or losses that are not allowed in terms of
section 11(a) because of their capital nature. This component is discussed in the following section.
4.8 Not of a capital nature

The definition of what constitute an expenditure of non-capital nature is not provided in the Income Tax Act. Hence,
it is not always easy to tell if an expenditure is capital in nature or not. As a result, the courts have established
several tests that are used to determine whether the expenditure is capital in nature or not.
One of the important cases that is used as basis for determining whether the expenditure is of a capital or revenue
nature is as follows:
New State Areas Ltd v Commissioner for Inland Revenue 14 SATC 155
Facts:
“The taxpayer company carried on the business of gold mining. The company was required by law to install a
system of water-borne sewerage and to link it up with the local authority’s system. The system installed
consisted of sewers and connections on the company’s property and sewers on land outside the company’s
property linking up the system with the local authority’s main system. The system was installed at the cost of
the local authority but the cost was recovered by way of charges payable by the company over 60 months for
the cost of the system on its own property (which would become its own property) and over 180 months for the
cost of the system which was not located on its own property (to remain the property of the local authority).
When claimed as a deduction, the Commissioner disallowed all the monthly amounts payable to the local
authority as being expenditure of a capital nature” (Coetzee et al. 2018: 130).
Judgement:
The payments made in respect of the internal sewers were clearly of a capital nature, being the payment of
instalments towards the acquisition of an asset which remained the property of the company, the payments
made in respect of the external connections, which did not produce any permanent asset for the company,
constituted in effect a charge for the use of the local authority’s system, which did not lose its nature of a
recurrent business charge by reason of the fact that it had been commuted into a fixed payment to be paid off
by a series of instalments over a period of years (Coetzee et al. 2018: 130).
The principle applied in the above case is that expenditure is to be regarded as part of the cost of performing the
income-earning operations or as part of the cost of establishing or improving or adding to the income-earning
structure, the “operations v structure” test. The other tests used for assistance in deciding the matter were the
“fixed v floating capital” test. Similar to the “operations v structure” test, this test is also used to establish whether
there was any enduring benefit or permanent asset created by the expenditure and even the recurrence test, which
is not of much use.
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In the judgement of the above case, it was also pointed out that the purpose (intention) of the taxpayer in incurring
the expenditure is an important factor in determining the true nature of the expenditure.
Below is summary of a few tests that are of assistance when determining the capital or revenue nature of an
expenditure:
 The true nature of the transaction
This test looks at the purpose for which expenditure was incurred. If the expenditure was incurred for the
purposes of acquiring capital asset, therefore it will be classified as capital expenditure, even if the repayments
are recurring on annual basis.
 Closeness of the connection to the income-earning operation

This test was established to assess the connection between the expenditure and the income-earning
operation. This test was amplified in CIR v George Forest Timber CO Ltd 1 SATC 20, where 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” (Coetzee et al. 2018: 132).
 Fixed or floating capital

This was developed to establish whether the expenditure relate to fixed or floating capital. The distinction
between expenditure incurred in respect of floating and fixed capital was referred to in the New State Areas
case as follows:
“when 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 manufacturer article) and this is done for the purpose of making a profit,
then the capital so employed is floating capital. The expenditure of capital nature, the deduction which is
prohibited……, is expenditure of a fixed capital nature, not expenditure of 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” (Coetzee et al. 2018: 133).
You will come across other tests, such ‘once and for all’ expenditure; nature of business carried on; halfway house
between capital and income; etc., as you proceed further to other levels of taxation field. However, for purposes of
this module, focus on the tests discussed above.
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It is worth noting that, not only capital expenditure is prohibited, but there also are other types of expenditure are
not deductible. The prohibited deductions are discussed in the following section.
4.9 Prohibited deductions (section 23)

Section 23 of the Income Tax Act (South Africa 1962) prohibits the following items from being deductible despite
the fact that might be eligible for deductibility in terms of section 11(a):
(a) costs incurred by the taxpayer in relation to maintaining themselves, their family as well as their
establishment;
(b) costs incurred by the taxpayer for domestic or private purposes, and such costs do not relate to any part that
is used for trade purposes provided that:
 such part shall not be deemed to have been occupied for the purposes of trade, unless such part is
specifically equipped for purposes of the taxpayer's trade and regularly and exclusively used for such
purposes; and
 no deduction shall in any event be granted where the taxpayer's trade constitutes any employment or
office unless:
o his income from such employment or office is derived mainly from commission or other variable
payments which are based on the taxpayer's work performance and his duties are mainly
performed otherwise than in an office which is provided to him by his employer; or
o his duties are mainly performed in such part;
(c) any loss or expense, the deduction of which would otherwise be allowable, to the extent to which it is
recoverable under any contract of insurance, guarantee, security or indemnity;
(d) any tax, duty, levy, interest or penalty imposed under this Act, any additional tax imposed under section 60
of the Value-Added Tax Act, 1991 (Act 89 of 1991), and any interest or penalty payable in consequence of
the late payment of any tax, duty, levy or contribution payable under any Act administered by the
Commissioner;
(e) income carried to any reserve fund or capitalized in any way;
(f) any expenses incurred in respect of any amounts received or accrued which do not constitute income as
defined in section one;
(g) 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;
(h) interest which might have been made on any capital employed in trade;
(i) an expenditure, loss or allowance, to the extent of which it is claimed as a deduction from a retirement fund
lump sum benefit or retirement fund lump sum withdrawal benefit;
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(j) where the taxpayer is an employer or associated institution (as respectively defined in paragraph 1 of the
Seventh Schedule), the cost to the taxpayer of any scholarship or bursary granted to any employee (as so
defined) of the taxpayer or of any employer in relation to whom the taxpayer is an associated institution, or to
any relative of any such employee, if in consequence of the grant of such scholarship or bursary any
remuneration to which the employee was entitled or might in the future have become entitled was in any
manner reduced or forfeited;
(k) any expense incurred by:
o a labour broker as defined in the Fourth Schedule, other than a labour broker in respect of which a
certificate of exemption has been issued in terms of paragraph 2 (5) of the said Schedule;
o a personal service company as defined in the said Schedule; or
o a personal service trust as defined in the said Schedule, other than any expense which constitutes an
amount paid or payable to any employee of such labour broker, company or trust for services rendered
by such employee, which is or will be taken into account in the determination of the taxable income of
such employee;
(l) any expense incurred in respect of the payment of any restraint of trade, except as provided for in section 11
(cA);
(m) subject to paragraph (k), any expenditure, loss or allowance, contemplated in section 11, which relates to
any employment of, or office held by, any person (other than an agent or representative whose remuneration
is normally derived mainly in the form of commissions based on his or her sales or the turnover attributable
to him or her) in respect of which he or she derives any remuneration, as defined in paragraph 1 of the
Fourth Schedule, other than:
 any contributions to a pension or retirement annuity fund as may be deducted from the income of that
person in terms of sections 11 (k) or (n);
 any allowance or expense which may be deducted from the income of that person in terms of section 11
(c), (e), (i) or (j); and
 any deduction which is allowable under section 11 (a) in respect of any premium paid by that person in
terms of an insurance policy:
o to the extent that it covers that person against the loss of income as a result of illness, injury,
disability or unemployment; and
o in respect of which all amounts payable in terms of that policy constitutes or will constitute income
as defined;
(n) any deduction or allowance in respect of any asset to the extent that an amount is granted to the taxpayer
by the Government, which is exempt from tax and is granted for purposes of the acquisition of that asset;
(o) no deduction of fines, bribes, unlawful kickbacks or penalties due to unlawful activates
(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
(q) no deduction for expenditure incurred in the production of income in the form of foreign dividends; and
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(r) no deduction for any premium paid by a person in term of an insurance policy if that policy covers that person
against illness, injury, disability, unemployment or death of that person (the so-called income protection
policies)
4.10 Summary
This study unit was focused on tax payers are carrying on a trade. It examined the deductibility of expenditure or
losses using the general deduction formula. The components of the general deduction discussed were: expenditure
and losses; actually incurred; year of assessment; in the production of income; and not of a capital nature. The
discussion was guided by the provisions of section 11(a) read together with section 23 (prohibited deductions).
Lastly, it was also discussed how allowable deductions fit within the framework of taxable income calculation. The
following study unit discusses types of fringe benefits and their tax implication
Before you proceed to the following study unit, attempt Knowledge Check Questions to assess your understanding
of the general deduction formula.
Knowledge Check Questions 4.1

Rose Roberts is a carpenter. During the year of assessment she took out a loan of R100 000
from Standard Bank. She used R70 000 to purchase wood and R30 000 to purchase shares
in a South African operating company. During the year of assessment she earned dividends
of R4 200. She did not sell any of the furniture that she had made from the purchased wood.
She had to pay R9 000 interest on the loan during the current year of assessment.
You are required to discuss the deductibility of the interest paid on the loan for the current
year of assessment.
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Only R108 000 (90%) of her grocery purchases and R10 000 paid to her friends are deductible as per the provisions
of section 11(a) since it relates to expenditure incurred in the production of income.

One cannot conclude that the R2 100 and R1 500 losses were incurred in the production of income. However,
since getting robbed or theft of cash from a cash-basis business are risks associated with carrying on a cash-basis
business, it is therefore considered as part of costs related to production of income.
Self-test question 4.1: Answer

The loan was used for two different purposes and therefore the deductibility of the interest will depend on whether
or not the expense was incurred in the production of income. Dividends received are exempt from tax, and
therefore, the portion of the loan used to purchase shares would normally not be in the production of income.
However, section 23O states that interest paid on debt to acquire an equity share in an operating company is
incurred in the production of income. Therefore, the interest paid is deductible: R30 000 / R100 000 × R9 000 =
R2 700.
The purchase of wood in order to make furniture is in the production of income, even if the income has not yet
been received. Therefore, the interest relating to this portion of the loan will be deductible in the current year of
assessment: R70 000 / R100 000 × R9 000 = R6 300, if it is assumed that Rose is already carrying on a trade.
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Unit
5: Fringe Benefits
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5.1 Introduction  Apply the provisions of the Seventh Schedule to identify and
5.2 Fringe benefits in terms of the calculate fringe benefits and tax implications thereof
Seventh Schedule
5.3 Allowances and advances  Identify and discuss exemptions arising from an employer/employee
5.4 Exemptions from tax in an relationship
employer/employee
relationship (section 10)

Prescribed Textbook
2018. Fringe benefits. In: Coetzee, K., De Hart, K. L., Koekemoer, A. D.
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5.1 Introduction
There are cases where an employee is entitled to use company’s assets for their own benefits and, in addition,
receives some amounts or allowances over and above their salaries. These amounts or allowances and use of
company’s assets are referred to as fringe benefits. The Seventh Schedule of the Income Tax Act lists benefits
that are classified as fringe benefits and should be included in taxable income. This study unit discusses types of
fringe benefits that are specifically listed in the Seventh Schedule and the rules applicable for calculating the value
of the fringe benefit to be included in the income of the taxpayer. The special inclusion rules that were discussed
in study unit 2 (Gross Income) in relation to fringe benefits are also examined further in this study unit.
Refer the framework used to calculate taxable income (figure 5.1 below), fringe benefits are included in gross
income calculation.
R
Gross income
 As per definition of gross income XXXXXX

 Special inclusion – paragraph (i) fringe benefits
(Seventh Schedule)
Less: Exempt income (sections 10, 10A and 12T) (XXXXX)
Equals: Income (as defined in section 1) XXXXXX
Less Allowable deductions (section 11 read in conjunction with section 23(m) and assessed
(XXXXX)
losses (section 20))
Add: Taxable portion of allowances (section 8 – such as travel and subsistence allowances) XXXXXX
Add: Taxable capital gains (section 26 A) XXXXXX
Equals Taxable income before retirement fund deduction XXXXXX
Less: Retirement fund deduction (section 11F) (XXXXX)
Equals Taxable income before donation deduction XXXXX
Less: Donations deduction (section 18A) (XXXXX)
Equals: Taxable income (as defined in section 1) XXXXX
9Figure 5.1: Framework for the calculation of taxable income (Coetzee et al. 2018: 185)
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The following are questions that you must have answers to when you have studied all sections in this study unit.
Think Point
In terms of the Seventh Schedule of the Income Tax Act:
 What types of benefit are taxable?
 How is a cash equivalent of fringe benefit determined?
 What are tax implications of fringe benefits?
5.2 Fringe benefits in terms of the Seventh Schedule

5.2.1 General
This section deals with quantification of benefits granted to an employee in any form other than cash. These
benefits form part of the remuneration paid by the employer to his or her employees. The remuneration is included
in calculation of taxable income. This means that these benefits are also taxable since they form part of the
remuneration. However, there are certain provisions that provides for tax implications of these benefits. Therefore,
it is the responsibility of the employer to determine the cash equivalent of these benefits. The South African
Receiver of Revenue (SARS) will then assess if the cash equivalent is calculated correctly. If it is incorrectly
calculated, SARS will re-determine the cash equivalent of the taxable benefits.
For the purposes of determining befits arising from employer-employee relationship, it is essential to know what
comprises an employer and an employee. Below are the definitions of these two terms:
An employer:
Definition
An employer is defined as a person who pays an amount in a form of remuneration to an
employee for services rendered to or on behalf of the employer. This definition includes close
corporation, company and the government.
An employee:
Definition
An employee is a person who receives remuneration or whom remuneration accrues to in
return for the services rendered to or on behalf of the employer. This definition includes
directors of a company, personal service providers and labour brokers. Shareholders of
company are excluded from this definition.
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According to the Seventh Schedule of the Income Tax Act, the following are taxable benefits:
 Acquisition of an asset at less than the actual value (paragraph 5)
 Right of use of an asset (paragraph 6)
 The right of use of a motor vehicle (paragraph 7)
 Meals, refreshments and meal and refreshment vouchers (paragraph 8)
 Accommodation (paragraph 9)
 Free or cheap services (paragraph 10)
 Benefits in respect of interest on debt (paragraph 11)
 Subsidies in respect of loans
 Medical fund contributions paid on behalf of an employee (paragraph 12A)
 Costs incurred for medical services (paragraph 12B)
 Benefit in respect of employer owned insurance policies (paragraph 12C)
 Payment of contribution on behalf of employee to a pension, provident or retirement annuity fund
(paragraph 12D)
 Payment of employee's debt or the release of the employee from the obligation to pay a debt (paragraph
13)
Each of the above benefits are discussed in the following sections. The discussion for each benefit includes
explaining the meaning of the benefit and the calculation of the cash equivalent of the benefit.
IMPORTANT STATEMENT
The cash equivalent of the benefit to be included in gross income is equal to the total cash
equivalent of the benefit (determined according to general rules of the Seventh Schedule) less
any amount paid or consideration given up by the employee in exchange for such benefit.
5.2.2 Acquisition of an asset at less than the actual value (paragraph 5)

According to the Seventh Schedule, this benefit comprises any asset (other than money), i.e. goods, commodities,
financial instruments or property sold or disposed of by an employer to the employee for no consideration or a
consideration that is less than the market value of that asset. The cash equivalent of this benefit is equal to the
difference between the market value of asset at the time the employee acquired the asset and the consideration
given by the employee. The calculated cash equivalent of the benefit will be then be included in the taxable income
of the employee. Attempt the following example to understand the calculation of this benefit.
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Example 5.1
Mpilo is an employee of Zakum (Pty) Ltd. He acquired a laptop from Zakum (Pty) Ltd for R2
500. The market value of the laptop at the time Mpilo acquired it from the company was R4
500.
Required:
Determine the cash equivalent of the benefit, if any, that should be included in Mpilo’s taxable
income.

R
Laptop market value at the time of sale 4 500
Less: Consideration received from Mpilo 2 500
Cash equivalent of the benefit 2 000
For the purposes of this type of benefit, the definition of an asset exclude any meals, refreshment, voucher, board,
fuel, power or water; any marketable securities; and any qualifying shares in terms of section 8B or 8C.
The following are two exceptions to the general valuation rule of this benefit:
 If the asset in question is an immovable property (other marketable securities or any other type of asset that
the employer had use of prior to the transfer of ownership to the employer) which was acquired by the employer
for the purposes of disposing it to the employees, the cash equivalent of the benefit to the employee is the
cost to the employer; and
 If the asset acquired by the employee is trading stock, the cash equivalent is lesser of the cost of trading stock
or its market value
The following are two exclusions from this type of benefit:

 If the asset is awarded to an employee in respect of bravery award or long service award, the cash equivalent
is reduced by the lesser of cost of that asset to the employer or R5 000.
 “In respect of properties bought on or after 1 March 2014, no value shall be placed on immovable property
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 connected person in relation to the
employer“(Coetzee et al. 2018: 190).
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IMPORTANT STATEMENT
The following points are essential when dealing with fringe benefits arising from acquisition of
an asset at less than its actual value:
 “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 reduction 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 in the previous year of assessment”
Coetzee et al. 2018: 190).
Attempt the following examples to assess your understanding of benefits arising from acquisition of an asset at
less than its actual value. Thereafter attempt activity 5.1 and then proceed to the following section.
Example 5.2
Zack is an employee of Great Deals (Pty) Ltd (clothing factory). During the current year of
assessment, he acquired winter clothes from Great Deals (Pty) Ltd for R2 500. The market
value and the cost of these clothes was R3 500 and R3 000, respectively.
Required:
Determine the cash equivalent of the benefit, if any, that should be included in Zack’s taxable
income.

R
Value of the benefit – cost price of the asset 3 000
Less: Consideration paid by Zack (2 500)
Cash equivalent of the benefit 500
Since the Zack work for clothing factory, the clothes that he bought constitute trading stock off the employer, the
cash equivalent is the lesser of market value and cost price of the clothes.
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Example 5.3
Sipho received an asset with a market value of R7 500 from his employer as an award for a
20-year unbroken service he rendered to his employer. This asset was not initially bought with
an intention to be disposed of to the employees. The cost price of this asset was R6 500.
Required:
Determine the cash equivalent of the benefit, if any, that should be included in Sipho’s taxable
income.

R
Value of the benefit – market price of the asset 7 500
Less: exemption in terms of long service award (5 000)
Less: Consideration paid by Sipho (Nil)
The exemption of up to R5 000 in respect of long-service award is available for 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.
Activity 5.1
Cyprian received an asset with a market value of R5 500 from his employer as an award for
a 15-year unbroken service he rendered to his employer. This asset was not initially bought
with an intention to be disposed of to the employees. The cost price of this asset was R4
500.
Required:
Determine the cash equivalent of the benefit, if any, that should be included in Cyprian
taxable income.
5.2.3 Right of use of an asset (excluding a motor vehicle and accommodation) (paragraph 6)
This benefit arises when an employee is granted the use of entity’s asset for private or domestic use at no
consideration or a consideration that is less the market value of such use. The value of the taxable cash equivalent
of the benefit varies according to the occupation of the asset, i.e. leased, owned or right of use of the asset is
transferred to the employee. Refer to the following table to for a summary of how the value of taxable benefit of
the asset is determined:
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6Table 5.1: Value of taxable benefit for assets that the employee has the right of use
Type of occupation Value of taxable benefit
Asset that is leased by the employer Rental amount the employer has to pay for the period
the asset is used by the employee
Asset that is owned by the employer 15% per annum of the lesser of:
 Market value of the asset on the date the

rights of use were conferred on the employee;
and
 The cost of the asset
The sole right of use of the asset is given to the Cost of the asset on the date the rights were conferred
employee on the employee.
Take note of the following exclusions in respect of taxable benefits arising from the right of use of assets discussed
in this section.
According to Coetzee et al. (2018: 193), 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 facilities (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 (MSOfiice, operating systems,
development and management tolls ) and telephone line rentals and subscriptions for internet access; or
 The asset is a book, literature, recording or a work of art.”
Attempt the following examples and then proceed to the following section.
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Example 5.3
Sipho has had the use of his employer’s cell phone from the beginning of the current year of
assessment on a condition that he must be constantly available for business purposes. The
private use of this cell phone is incidental. The market value of cell phone at the time Sipho
acquired the right of use was R5 000. His employer bought the cell phone for R8 500.
Required:
Calculate the cash equivalent of the benefit that must be included in Sipho’s taxable income,
if any, for the current year of assessment.
No value is place on this benefit, as the cell phone is used mainly for the employer’s business.
Example 5.4
Sophia was granted the use of a laptop by his employer for a period 6 months from 1 August
in the current year of assessment. Sophia used the laptop for private purposes. The market
value of laptop was on 1 August 2018 was R8 000. Sophia’s employer bought the laptop for
R10 500.
Required:
Calculate the cash equivalent of the benefit, if any, for the current year of assessment.

R
Value of the benefit – 15% x R8 000 (market value is lower cost (R10 500) of the laptop) x 5/12 500
Less: Consideration paid by Sophia (Nil)
Cash equivalent of the benefit 500
Notes:
 The exemption does not apply because the laptop was used for private purposes.
 The value of the benefit is deemed to have accrued on monthly basis and therefore must be apportioned
according number of months or weeks.
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Example 5.5
Cynthia Carte was granted the use of a laptop by her employer for a period 6 months from 1
August in the current year of assessment. Cynthia uses the laptop for private purposes. The
market value of laptop was on 1 August 2018 was R8 000. Cynthia’s employer leased the laptop
from Automobiles (Pty) Ltd at monthly rental fee of R500.
Required:
Calculate the cash equivalent of the benefit that must be included in Cynthia’s taxable income,
if any, for the current year of assessment.

R
Rental payable by the employer (R500 x 6) 3 000
Less: Consideration paid by Cynthia (Nil)
5.2.4 The right of use of a motor vehicle (paragraph 7)

This benefit occurs when an employee is granted the use of company motor vehicle for private or domestic
purposes. It should be noted that even if the employee is travelling between the employer’s premises and the
employee’s place of residence, it is considered a benefit.
The cash equivalent in the right of use of a motor vehicle is determined as value of private use less any amount
(excluding fuel costs, insurance, cost of licences or maintenance) paid by an employee.
The value of private use is calculated as follows:

 3,5% of the determined value for each month the employee is entitled to use the motor vehicle for private
purposes
 3.25% of the determined value for each month if the vehicle (at acquisition by the employer) is a subject of a
maintenance plan.
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IMPORTANT STATEMENT
If the employee uses the motor vehicle for a period shorter than a month, the value of the
benefit is calculated using the ratio of days. The number of days used in the calculation of the
ratio must be accurate. For example, if the employee was granted the rights of use of motor
vehicle from the 11th of June, therefore the ratio of number of days the vehicle is used to the
total number of in June is 19/30. Hence value of private use will be calculated as follows:
Determined value x 3,5% x 19/30
The determined value of a motor vehicle in terms of Regulation R362 is the retail market value (excluding finance
charges and interest payable). The rules to determine the retail market value vary according to the type of
employer. For the purposes of this module, retail market value of the vehicle will be provided in the tests and
exams.
IMPORTANT STATEMENT
The determined value is reduced by a depreciation allowance if the rights to use the motor
vehicle were conferred to the employee 12 or more months from the date of purchase of the
motor vehicle. The depreciation allowance is calculated at 15% using a reducing balance
method for each completed 12 month period. Attempt the following example to understand
how is applied in practice.
Example 5.6
Rajesh has been granted the rights of use of a motor vehicle by his employer during the
current year of assessment. The motor vehicle was purchased by the Rajesh’s employer 14
months ago and its market value on the date of purchase was R114 000 (VAT inclusive @
14%). The retail market value of this care cost less VAT.
Required:
Assuming all kilometres travelled by Rajesh were for private purposes, calculate the taxable
benefit arising from the right of use of motor vehicle for the current year of assessment.
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R
Determined value 114 000
Less: VAT (R114 000 x 14/114) (refer to notes below) (14 000)
100 000
Taxable benefit – R100 000 x 3,5% x 12 42 000
Notes
VAT rate changed from 1 March 2018 from 14% to 15%. Therefore, the VAT included in the purchase price of a
motor vehicle bought 14 months ago is at 14%.
IMPORTANT STATEMENT
The value of the monthly benefit is reduced if the employee pays for the use of the motor
vehicle to the employer. However, the reduction of the monthly benefit excludes costs related
to fuel, insurance, licence or maintenance of the vehicle.
The taxable benefit is also reduced if:
 the employee is able provide an accurate record of kilometres travel for business
purposes;
 the benefit is reduced by pro rata with the ratio of kilometres travelled for business
purposes to the total number of kilometres travelled; or
 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).
Attempt the following example to understand the provisions mentioned above.
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Example 5.7
Prakash is has the right of use of a motor vehicle from his employer and he does not receive a
travel allowance. He is responsible for bearing the maintenance costs (R35 000) of the motor
vehicle. The company is responsible for the fuel costs. Prakash kept an accurate record of
kilometres travelled for private purposes. He travelled 30 000 kilometres for private purposes
of his total 50 000 kilometres travelled.
The motor vehicle Prakash has the right of use was purchased by his employer for R300 000
(retail market value).
Required:
Calculate the cash equivalent of the benefit for the current year of assessment.

R
The private portion of the total kilometers is taxed
The fringe benefit is calculated as follows:
R300 000 x 3,5% x (30 000 km/50 000 km) x 12 75 600
Less: cost paid for private use (R35 000 x (30 000 km /50 000 km)) (21 000)
Taxable benefit 54 600
Example 5.8
Elisha Smit has the right of use of a company car from her employer from the beginning of the
current year of assessment. The car was purchased by her employer for R350 000 (VAT
included) on 1 March 2018. The retail market value of this car is R350 000. Elisha pays R300
per month for the use of the vehicle.
Required:
Calculate the cash equivalent of the benefit that must be included in Elisha’s taxable income
for the current year of assessment if:
1. Elisha did not keep the records kilometres travelled and did not pay any costs of the
vehicle himself.
2. Elisha kept records of kilometres travelled for business purposes. The record shows 10
000 business kilometres out 40 000 total kilometres travelled.
3. Elisha kept the records of business kilometres as per above and the she paid the following
costs herself:
R
Licence of the vehicle 300
Insurance 13 000
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Maintenance 30 000
Fuel 26 000
4. The vehicle was purchased with a three-year/60 000 kilometre maintenance plan; it cost
R399 000 (VAT included) and he did not keep any records or pay any expenses of the
vehicle.

R
The private portion of the total kilometers is taxed
1.
Rental payable by the employer (R350 000 x 3,5% x 12) 147 000
Less: Consideration paid by Elisha (R300 x 12) (3 600)
2.
Taxable amount
Annual amount (3,5% x R350 000 x 12) 147 000
Less: portion travelled for business purposes (R147 000 x 10 000 km/ 40 000km) (36 750)
Annual amount 110 250
Less: consideration paid by Elisha (R300 x 12) 3 600
3.
Annual amount (3,5% x R350 000 x 12) 147 000
Less: portion travelled for business purposes (R147 000 x 10 000 km/ 40 000km) (36 750)
Less: Privat e costs R
Licence 300
Insurance 13 000
Maintenance 30 000
43 300
Therefore, R43 300 x 30 000km/ 40 000km (32 475)
Fuel cost – as per table (30 000km x 133.5 cents) (refer to table 5.2) (40 050)
Less: consideration paid by Elisha (3 600)
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4.
3.25% x R399 000 x 12 months = R155 610 less consideration paid R3 600 152 010
For additional reading on the right of use of a motor vehicle, visit the following website:
https://www.sars.gov.za/AllDocs/OpsDocs/Guides/PAYE-GEN-01-G02%20-
%20Guide%20for%20Employers%20in%20respect%20of%20Fringe%20Benefits%20-
%20External%20Guide.pdf
The following diagram summarises the calculation of taxable benefit arising from the right of use of a motor vehicle.
Study this diagram and then proceed to the following section.
MANCOSA 86
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Determined value
(Retail market value = cost including
VAT but excluding finance charges
Value of private
3,5% or 3,25% per month of the

determined value
On assessment:
Deduction for business use if a record
of kilometers travelled for private and
business use is kept
Bears all the fuel cost pro rata Bears all the fuel cost pro rata
deduction for business use deduction for business use
Receives a travel allowance for same vehicle?
Yes No
Deduct consideration paid by employee
Taxable benefit
10Figure 5.2: Summary of calculation of taxable benefit (Source: Coetzee et al. (2018: 201))
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5.2.5 Meals, refreshments and meal and refreshment vouchers (paragraph 8)

These are types of benefits that result from meals, refreshments and meal and refreshment vouchers provided by
the employer to the employees at no consideration or at a value less than the cost of these benefits. The cash
equivalent for these benefits is determined by deducting the consideration paid by the employee from the cost of
meals, refreshments and meal and refreshment vouchers provided by the employer.
Take note of the following exclusions to these type of benefits:

No value is placed on:
 “a meal or refreshment supplies 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 employer’s business premises;
 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)” (Coetzee et al. 2018: 205 – 206).
Example 5.9
The lecturers and administrators at Academy College of Training seat together at lunch time
in a staff cafeteria located inside the college premises and eat their lunch every day. The staff
eat free of charge and the cost per employee amounts to R40 per day for the employer.
Required:
No value is placed on the benefit as a meals or refreshments supplied by an employer to their employees in a
cafeteria operated by or on behalf of the employer and used mainly or wholly by their employees.
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5.2.6 Accommodation (paragraph 9)

A fringe benefit arising from the accommodation offered by an employer to an employee can either be residential
or holiday accommodation. These two types are discussed below.
5.2.6.1 Residential accommodation

The meaning for the benefit of this nature is derived through accommodation offered to an employee at either low
or no rental. The following formula is used to calculate the cash equivalent of the taxable benefit derived from a
residential accommodation if the employer owns the accommodation or does not own the accommodation but it
vests in the employer or associated institution.
(A – B) × C /100 × D / 12
This formula is explained below:

A= Remuneration proxy
Remuneration proxy is a remuneration derived by the employee in the previous year of assessment. If the
employee did not work for a full year in the previous year of assessment, if the remuneration is
proportionated according to the number of days the employee worked. If the employee did not work at all
in the previous year of assessment, the remuneration proxy is calculated using the first month’s
remuneration of the current year of assessment. The first month’s remuneration is also proportionated
according to the number of days the employees worked. The remuneration proxy excludes fringe benefit
arising from accommodation.
B= R78 150. This is the amount that reduces the remuneration proxy provided the employee or the employee’s
spouse has no direct or indirect controlling interest in the employer (a private company) or the employee or
their spouse or minor child may not become the owner of the property. If there is a controlling interest or
the employee or their spouse or minor child may become the owner of the property therefore, B in the
formula becomes nil.
C= This represents a quantity of 17; or
18 where the accommodation provided to the employee is a flat, apartment or a house that has at least four
rooms and where the employer provides either the furniture nor water or electricity in that accommodation;
or
19 if the accommodation, consists of a house, flat or apartment that has at least four furnished rooms and
where the employer supplies power or fuel.
D= this represents the number of months the employee was entitled to the accommodation during the current
year of assessment.
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This formula is also used where the employee has the interest in the accommodation. Where the employer does
not own the accommodation and the rent is paid in an arm length transaction to a person (offering the
accommodation) who is not a connected person, the taxable benefit is determined as follows:
 the lower of the amount calculated using the formula above; and
 the rental amount paid by and any expenditure incurred by the employer in respect of the accommodation
Take note of the following exclusions to the residential accommodation benefits:
IMPORTANT STATEMENT
No value is placed on accommodation benefits:
 “Where usual place of residence is in South Africa:
- Any accommodation, inside or outside South Africa supplied by the employer while
the employee is away from his usual place of residence for work purposes.
 Where usual place of residence is outside South Africa:
- Any accommodation inside South Africa provided for a period not exceeding 2 years
from the date of arrival of the employee in SA to perform his work duties (this provision
does not apply if the employee was physically present in SA for more than 90 days in
the year preceding the date of arrival in SA or to the extent that the cash equivalent
exceeds R25 000 per month); or
- If the employee is physically present in SA for a period of less than 90 days during
the year in which the accommodation is provided (so even beyond 2 years)” (SAIPA
2019).
5.2.6.2 Holiday accommodation

This type of benefit arises when the employer provides an employee with free or low rental holiday accommodation.
The cash equivalent of holiday accommodation benefit depends on the occupation of the accommodation. The
occupation of the holiday accommodation can either be owned or hired by the employer or associated institution.
For accommodation owned by the employer, the cash equivalent of the benefit to be included in the employee’s
taxable income is the prevailing daily market value that could be charged to let the accommodation to any person
other than the employee less the consideration given by the employee (if any).
For accommodation hired by the employer, the taxable cash equivalent of the benefit is the amount payable or
charged to the employer by the lessor in respect of rental fees, meals and refreshment costs less the consideration
given by the employee (if any).
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Attempt the following example assess your understanding of this accommodation benefit and then proceed to the
section that follows.
Example 5.8
Adam Sandler has been granted the use of a 5-room unfurnished apartment by his employer to use
as from 1 March in the current year of assessment. The company owns the apartment and bears all
the costs of electricity, water, sewerage and municipal rates. Adam Sandler earned remuneration of
R300 000 (excluding accommodation benefit) during the previous year of assessment. The company
also granted Adam Sandler the use of a holiday flat for free for 18 days to use on his vacation with his
family during the current year of assessment. Adam’s employer also owns the holiday flat. Adam and
his wife together with their 2 children made use of the holiday flat. The company normally rents out
the holiday flat at R300 a day per person to independent third parties.
Required:
Apartment
𝐶 𝐷 18 12
(A – B) x x = (R300 000 – R78 150) x x = R39 933
100 12 100 12
Holiday flat
R300 x 4 people x 18 days = R21 600
Total benefit: R39 933 + R21 600 = R61 533
5.2.7 Medical fund contributions paid on behalf of an employee (paragraph 12A)

This type of benefit arises when the employer contributes directly or indirectly to the medical scheme on behalf of
the employee. The cash equivalent of this benefit is the amount contributed by the employer on behalf of the
employee and employee’s dependents.
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The following exceptions apply in respect of benefits arising from medical fund contributions:
 If the contributions made by the employer is in such a way that an appropriate portion cannot be attributable
to the advantage of the employee or the employee’s dependants for whose benefit it is made, the benefit will
be calculated as follows:
o the total contributions made the employer is divided by the number of employees who are benefiting
from the contributions and allocate the amount per employee to the relevant employee.
 if the employee feels that the above apportionment is not fair, he may apply to the commissioner the for the
review of the apportionment and commissioner will decide whether the apportionment is fair or not.
The benefits arising from medical fund contributions is regarded as not taxable if:
 it is made on behalf of a pensioner, provided the pensioner retired from service due to old age, poor health or
other disability;
 it made on behalf of the dependents of a person who died while in employ of such employer; or
 the contributions are made on behalf of the dependants of a pensioner, after such person’s death, provided
that such person retired from service due to old age, poor health or other disability.
Example 5.10
ABC Ltd made the following contribution to medical aid fund (recognised in terms of Medical
Aid Scheme Act) on behalf of its employees for the current year of assessment:
R
Anny Hornby 30 000
Rowena Bhana 38 000
Other employees and their dependants 4 500 000
Anny Hornby does not have any dependants and contributions were only made for his benefit.
Rowen Bhana is a pensioner who retired 2 years ago from ABC Ltd due to old age. The
contribution of R4 500 000 made by ABC Ltd was in respect of 300 employees (including their
dependants). Suzan Mbila is one of these other employees and has 2 dependants.
Required:
Calculate the cash equivalent of the taxable benefit arising from the contributions to medical
aid fund by ABC Ltd in respect of all taxpayers mentioned above for the current year of
assessment.
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R
Anny Hornby
All contributions made by the company on behalf of Anny are taxable 30 000
Rowen Bhana
No taxable benefit (since she has retired and receives pension) nil
Suzan Mbila (and her 2 dependants)

Taxable benefit (R4 500 000/300) 15 000
5.2.8 Costs incurred for medical services (paragraph 12B)

In terms of paragraph 12B of the 7th Schedule of the Income Tax Act, a taxable benefit arises where the employer,
directly or indirectly, incurred any amount (other than a medical scheme contribution paid to a registered medical
scheme) in respect of medical, dental and similar services, hospital services, nursing services or medicines
provided to the employee, his / her spouse, child, relative or other dependant (South Africa 1962).
The cash equivalent of this benefit is the amount incurred by the employer (directly or indirectly) in respect of any
medical, dental and similar services, hospital services, nursing services or medicines in respect of that employee,
his / her spouse, child or other relative or dependants.
Appropriate portion cannot be attributed to the relevant employee:

“Where the payment is made in such a manner that an appropriate portion thereof cannot be attributed to the
relevant employee and his / her spouse, children, relatives and dependants, the amount of that payment in relation
to that employee and his / her spouse, children, relatives and dependants is deemed to be an amount equal to the
total amount incurred by the employer during the relevant period in respect of all medical, dental and similar
services, hospital services, nursing services or medicines for the benefit of all employees and their spouses,
children, relatives and dependants divided by the number of employees who are entitled to make use of those
services” (South African Tax Guide 2019).
No value must be placed on any benefit:

 “resulting from the provision of medical treatment listed in any category of prescribed minimum benefits
determined by the Minister of Health in terms of Section 67(1)(g) of the Medical Schemes Act No. 131 of 1998,
which is provided to the employee or his / her spouse or children in terms of a scheme or programme of that
employer:
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o which constitutes the carrying on of the business of medical schemes if that scheme or programme is
approved by the Registrar of Medical Schemes as being exempt from complying with the requirements of
medical schemes; or
o which does not constitute the carrying on of the business of medical schemes, if that employee and his /
her spouse and children:
– are not beneficiaries of a medical scheme registered under the Medical Schemes Act no. 131 of
1998; or
– are beneficiaries of such medical scheme and the total cost of that treatment is recovered from that
medical scheme;
 derived from an employer by:
o a person who by reason of superannuation, ill-health or other infirmity retired from the employ of that
employer;
o 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;
o 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 an employee who is 65 years or
older; or
 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” (South African Tax Guide 2019).
5.2.9 Payment of contribution on behalf of employee to a pension, provident or retirement annuity fund
(paragraph 12D)
Contributions to retirement fund benefits by the employer on behalf of the employee is considered a taxable benefit
on the hands of employee. The cash equivalent of this benefit depends on whether the contributions are made to
defined befit fund or defined contribution fund. If contributions are made to a defined contribution fund, the
contributions allocated to the employee are included as a fringe benefit for that employee as the cash value of the
contribution.
IMPORTANT STATEMENT
No value is placed on fringe benefits in relation to retirement fund payment:
 where the payment made by the employer is in respect of the employee who has retired
from service; or
 where the payment made by the employer is in respect of dependants of a decease
member of the fund.
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IMPORTANT STATEMENT
“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 formula is required to determine the
employer’s specific contribution to one person’s retirement benefits” (Coetzee et al. 2018: 205
– 206).
Other taxable benefits include the following, however for the purposes of this module focus on the benefits
discussed above:
 Free or cheap services (paragraph 10)
 Benefits in respect of interest on debt (paragraph 11)
 Subsidies in respect of loans (paragraph 12)
 Benefit in respect of employer owned insurance policies (paragraph 12C)
 Payment of contribution on behalf of employee to a pension, provident or retirement annuity fund (paragraph
12D)
 Payment of employee's debt or the release of the employee from the obligation to pay a debt (paragraph 13)
5.3 Allowances and advances

Certain expenses may be incurred by an employee in order to do his or her job. The employer will then provide an
allowance to the employee to cover such expenses. Certain forms of allowance may not be included in the
employee's taxable income. These types of allowances are called reimbursive allowance. A reimbursive allowance
takes the form of reimbursing the employee for expenses actually incurred for furtherance of the business on behalf
of the employer. The employee has to provide proof for such expenses and the employer will reimburse the
employee. In this case, there will be no tax benefit to the employee. Therefore, nothing will be included in the
employee's taxable income. Another form of allowance is when the employer provides an allowance to an
employee to spend however the employee wishes. In this case the entire allowance will give rise to taxable benefit
of the employee.
Taxable allowances could include a travel allowance, subsistence allowance, public officer allowance, and any
other allowance. However, some exceptions to travel allowances and subsistence allowances may apply. These
types of allowances are discussed below.
5.3.1 Travel allowance (section 8(1)(b))

As long as the employee used the allowance to pay for business related travel expenses, there will be no taxable
benefit.
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11Figure 5.3: Travel allowance taxable
Figure 5.3 above shows that if the employee received travel allowance that is higher than the portion expended for
business purposes, the difference will be included in the taxable income of the employee.
To determine the cost of business travel, you will need business kilometres travelled and cost per kilometre.
Therefore, the cost of business travel will be calculated as follows:
Cost of business travel = business kilometres x cost per kilometre
Cost per kilometre is calculated by using actual expenses incurred or deemed cost as per the table 5.3 below.
Actual expenses include the following costs:
 For a vehicle that is owned by the employee, the cost of wear and tear. The cost of the vehicle that is
used to calculate the wear and tear is limited to R595 000 and the wear and tear calculated over a period
of seven years.
 For leased vehicles, the total lease payments. However, this cost is limited to the fixed cost as per table
5.3 below.
 Finance cost in respect of leased vehicles. However, it is limited to the amount that would have had the
original cost been R595 000.
 All other costs, including insurance, tyres, licences, etc. that are necessary in running and maintaining
the vehicle.
Deemed cost per kilometre

The deemed cost per kilometre is determined as per table 5.3 below. This cost is used when the employee did not
keep an accurate record of expenses actually incurred. To use table 5.3 below, the value of a vehicle has to be
determined. The determined value of the vehicle for which the travel allowance is granted varies according the
type the vehicle was acquired. These acquisition types are discussed below:
 If a vehicle was acquired under bona fide agreement, the determined value will be the original cost price (VAT
inclusive), excluding finance charges and interest payable.
 For vehicles acquired under lease, the determined value is the cash value of the vehicle (including VAT).
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 For any other type of acquisition, the determined value is market value at the time the employee obtained the
vehicle right of use.
IMPORTANT STATEMENT
Remember,
 if the employee did not keep accurate record for kilometres travelled for business
purposes, the entire travel allowance will be taxable.
 travel between place of resident of the employee and place of employment is
considered private travel.
 the higher of the actual cost per kilometre and the deemed cost is used to the determine
the taxable travel allowance. This means that if the employee has the record of actual
costs incurred in respect of use of the vehicle, these costs will have to be compared
with deemed costs (calculated using values from the table 5.2) to determine the cost
per kilometre to be used to calculate the taxable allowance.
7Table 5.2: Rate per kilometer (1 March 2018 - 28 February 2019)

Value of the vehicle (R) Fixed cost per annum (R) Fuel cost (cent/km) Maintenance cost
(cent/km)
0 - 85 000 28 352 95.7 34.4
85 001 - 170 000 50 631 106.8 43.1
170 001 - 255 000 72 983 116.0 47.5
255 001 - 340 000 92 683 124.8 51.9
340 001 - 425 000 112 443 133.5 60.9
425 001 - 510 000 133 147 153.2 71.6
510 001 - 595 000 153 850 158.4 88.9
more than 595 000 153 850 158.4 88.9
(Source: SARS 2019)
The fixed costs in the table are per annum and in Rands while the fuel and maintenance costs are in cents and
per kilometre. This means that the fixed costs will have to be converted into cents and proportionated on pro rata
basis, if the right of use of a vehicle was not for a full year.
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IMPORTANT STATEMENT
If the employer pays a travel allowance to an employee based on actual number of kilometres
expended for business purposes, the allowance is not taxable up to 361 cents per kilometre.
This means that any cost above 361 cents per kilometre will be taxable, although the kilometres
would have been expended for business purposes. This is applicable where the employee does
not receive a fixed monthly travel allowance.
Example 5.10
Gabe Stone received a travel allowance from his employer amounting to R130 000 for the
current year of assessment. He uses his car for business and private travels. He bought this
car a year ago for R460 000 (including a VAT of R60 000). Gabe travelled a total of 29 000
kilometres during the current year of assessment, of which 19 000 were for private purposes.
He also kept an accurate record of expenses incurred in respect of the car for the current year
of assessment. The costs are as follows:
R
Finance charges 79 110
Maintenance cost 11 000
Fuel cost 23 000
Insurance premiums and licences fees 8 500
Required:
Calculate the taxable portion of the travel allowance received by Gabe for the current year of
assessment.

Compare the deemed and actual cost to select the higher of the two:
Actual cost per kilometre:
Wear and tear (R460 000/7) R65 714
Finance cost R79 110
Maintenance cost R11 000
Fuel cost R23 000
Insurance premiums and licences fees R8 500_
Total vehicle expense for the year R187 324
Cost per kilometre (R187 324/29 000 x 100) 645,9 cents
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Deemed cost per kilometre: Cents

Fixed cost per kilometre (133 147/29 000 x 100) 459,1
Fuel cost 153,2
Maintenance cost 71,6
Total cost per kilometre 683,9
Therefore, the deemed cost is selected since it the highest cost per km.
Calculation of business kilometres travelled:

Total kilometres travelled 29 000
Private kilometres travelled (19 000)
Business kilometres travelled 10 000_
Calculation of taxable allowance: R

Travel allowance received 130 000
Business travels (10 000 km x 683,9 cents/100) (68 390)
Taxable portion of the allowance 61 610_
IMPORTANT STATEMENT
“Eight 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” (Coetzee et al. 2018: 236).
5.3.2 Subsistence allowance (section 8(1)(c))

Subsistence allowance is provided to employees when they are away from their place of residence for at least one
night. It is provided to cover costs incurred by the employee in respect of accommodation, meals and other incidental
costs. The portion of the allowance expended for business purposes is not taxable and it is calculated based on:
 actual figures (if the employee has proof of expenditure incurred); or
 deemed figures (if employee does not have proof of expenditure incurred).
These figures are explained below:

 Actual figures
This is the amount that has been actually incurred by the employee in respect of accommodation, meals and
incidental costs. The employee must be able to prove to the Commissioner that these costs were actually
incurred.
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 Deemed figures
These figures are used to calculate the exclusion from the taxable allowance provided to employees. Deemed
figured are applied where the employee does have proof of actual expenditure incurred in respect of meals
and incidental costs. Deemed costs in respects of accommodation in the Republic are determined as follows:
 If the advance or allowance is in respect incidental costs incurred, the exclusion amount per day is R128;
or
 If the advance or allowance is in respect of meals and incidental cost, the exclusion amount per day is
R416.
You may visit the following website for deemed costs in respect of accommodation outside the Republic:
https://www.sars.gov.za/AllDocs/Documents/PAYE%20tables/2019%20tables/PAYE-GEN-
01-G03-A02%20-%20Subsistence%20Allowance%20Foreign%20Travel%20-
%20External%20Annexure.pdf
IMPORTANT STATEMENT
If the deemed figure is higher than the actual expenditure, it will be used instead of actual
expenditure so that the employee will not suffer too much tax on the allowance.
Other allowances and advances include Public officer allowance (section 8(1)(d)) and employees' tax implications
regarding the receipt of allowances. However, for the purposes of this module, focus on the allowances discussed
above.
For additional reading on allowances and advanced, you may visit the following website:
http://www.sars.gov.za/AllDocs/OpsDocs/Guides/PAYE-GEN-01-G03%20-
%20Guide%20for%20Employers%20in%20respect%20of%20Allowances%20-
%20External%20Guide.pdf
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5.4 Exemptions from tax in an employer/employee relationship (section 10)

The following allowances are exempt from tax as per the provision of section 10 of the Act:
 special uniforms
o this is exempt only if the following requirements are met:
 the employee is required to wear the uniform while on duty; and
 the uniform must be clearly distinguishable from ordinary clothing (such as uniform for security guards,
police officer, nurses, etc.)
 transfer costs; and
o These include:
 Transportation cost from the old residence to the new residence
 Cost of the selling previous residence and settling in costs
 Hiring residential accommodation for the employee or members of the employee household for a
period ending 183 day from the date the employee took up the appointment
 scholarships and bursaries ( refer to section 3.4.3 - Amounts in relation to employment (in study unit 3))
 qualifying equity shares in terms of a broad-based employee share plan.
 Equity instruments in terms section 8C
 Equity instruments in terms section 8C – ‘stop loss’ provision
IMPORTANT STATEMENT
When accounting for fringe benefits:
 Take note of the rules applicable in calculation of cash equivalent.
 Add taxable fringe benefit to the taxable income before deductions.
 An employer/employee relationship should exist before a fringe benefit can arise.
5.5 Summary
In this study unit, types of fringe benefits were identified and discussed as per the provisions of the Seventh
Schedule and other relevant sections of the Income Tax Act. The discussion focused on the meaning of each type
of benefits and the calculation of taxable cash equivalent of such benefits. The tax implications of the different
types of benefits arising from an employer/employee relationship were also explored in this study unit. Lastly,
allowances and advances to employees as well as exemptions from tax in an employer/employee relationship
were also examined.
The following study unit examines types of retirement benefits and tax implications thereof.
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Activity 5.1: Solution
R
Value of the benefit – market price of the asset 5 500
Less: exemption in terms of long service award (4 500)
Less: Consideration paid by Cyprian (Nil)
The exemption of up to R5 000 in respect of long-service award is available for 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.
However, this exemption could never exceed the cost to the employer, hence, in this case it is limited to R4 500
(cost to the employer).
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Unit
6: Retirement Benefits
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6.1 Introduction  Identify relevant tax principles applicable to retirement
6.2 Types of retirement benefits benefits
6.3 Periodic payments  Calculate periodic payments of the retirement benefits
6.4 Lump sum benefits received  Determine the tax implications of lump sum benefits
received

Prescribed Textbook
2018. Retirement benefits. In: Coetzee, K., De Hart, K. L., Koekemoer, A. D.
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6.1 Introduction
This study unit discusses how taxpayers, during their years of employment, make provisions for their retirement.
The discussion will mainly focus on salaried employees who use portions of their salaries or income to contribute
to a retirement fund. The types of retirement funds that a salaried employee can choose from can be either a
pension or provident fund. Another option that a taxpayer may choose to contribute for their retirement fund
includes contributing to a retirement annuity fund. These types of retirement funds will also be discussed in this
chapter. The discussion goes further and looks at the options available for retirement benefits to be paid out to a
taxpayer. Payment options include paying out the retirement benefits on a monthly annuity, or lump sum basis, or
combination of a monthly annuity and a lump sum basis. These options will depend on the type of retirement fund
the taxpayer belongs to. Taxation of retirement funds will also be discussed in this chapter. Lastly but not least, we
will look at circumstances that trigger the payment of retirement funds. These circumstances include: death,
retirement, retrenchment and withdrawal.
6.2 Types of retirement benefits

The retirement benefits are divided into two main categories, i.e. periodic payments and lump sums. Periodic
payments comprise a series of payments from the retirement fund whereas lump sums are once off payments.
The sources of periodic payments normally consist of pension fund received from retirement fund, annuities paid
by an employer and annuities paid by insurance companies. The sources of lump sums payment can be pension
funds, pension preservation funds, retirement annuity funds, provident funds, provident preservation funds, and
employers. The types of retirement funds are each discussed further in the following sections.
6.3 Periodic payments

On retirement, an employee will have his or her retirement benefit paid on a monthly, quarterly or annual basis.
Since an employee will no longer be working, the retirement fund replaces his or her salary. As the salary is
included to the taxpayer gross income, the same applies to retirement fund. A member of a person fund or/and a
retirement annuity fund can only take a lump sum of up one-third of the total of value of their benefit. However, it
the remaining two-thirds does not exceed R165 000, a member of the pension fund can take full amount of their
retirement benefit as a lump sum. The remaining two-thirds of the retirement benefit is used to by a monthly
pension. The monthly pension fund are referred to as periodic payment. A member of a provident fund can take
the full amount of the retirement benefit as a lump sum, irrespective of the total value of the benefit.
Activity 6.1
The value of the retirement benefit that Sam Smith was R3 000 000 at his retirement. Sam
was a member of a provident fund.
Required
Determine the maximum lump sum that Sam can take.
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6.3.1 Pensions
Retirement fund benefits vary according to an employee's choice. Below are types of retirement fund benefits an
employee can choose to be paid:
 a pension;
 a provident fund; and
 a retirement annuity.
The above retirement benefits are included in gross income. However, section 10(1)(gC) exempt these benefits
from tax, if paid or accrued to any resident:
 under the social security system of another country; and
 as a result of employment outside the outside the Republic.
A pension derived from a South African source by a non-resident of South Africa is subject to tax. There are some
instances where the pension paid to a non-resident of South Africa may relate to a period when the non-resident
was employed in South Africa and the other period employed outside South Africa. In this case, it may be necessary
to apportion the payment of pension according to the period of employment.
Activity 6.2
Elvis Scott, a non-resident, retired on 31 January 2018. He earns a pension of R4 500 per
month that started from 1 February 2018. He was employed by a South African employer for
30 years and during this time was also employed from time to time outside the Republic for a
period of 13 years.
Required:
Calculate the taxable portion of the pension fund for the current year of assessment.
6.3.2 Annuities and living annuities (paragraph (a) of the definition of 'gross income')
An annuity is characterised by having the following features:
 There must be a fixed amount, which is payable in instalments;
 The payment of which must be repetitive in nature; and
 There must be an obligation to pay such amounts
Types of annuities include monthly pension, annuity received from an employer, non-capital portion of purchased
annuity and living annuities. The sources of annuities include the following:
 Retirement annuity, pension and provident funds;
 Employers;
 Insurance policies;
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 Trusts
 The purchaser of business (where the cost price is paid in a form of annuity)
In terms of paragraph (a) of the gross income, annuities are taxable in full.
6.3.3 Purchased annuities (section 10A)

A taxpayer may choose to invest his or her retirement fund lump sum with an insurance company in exchange for
an annuity. This is referred to as a purchased annuity. The total amount invested is not taxable, because it
represents the capital portion of the lump sum and the capital portion is capital in nature. The exempt portion is
calculated suing 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 receipts during the current year of assessment.
The sum of all the expected returns (B in in the above formula) is calculated using the life expectancy and present
value table provided in the Government Notice R1942 dated 23 September 1977. You may visit the following
website for life expectancy and present value table. However, for the purpose of this module relevant life
expectancy and present value figures will be provided when necessary.
https://www.sars.gov.za/AllDocs/LegalDoclib/Notes/LAPD-IntR-IN-2012-58%20-
%20Brummeria%20Case%20Right%20Use%20Loan%20Capital%20Interest%20Free.p
df
Attempt the following example to understand how the above formula is applied.
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Example 6.1
When Samson Grey turned 60 years old on 28 February 2018, he purchased annuity for R400
000. The annuity pays R3 500 per month for the rest Samson’s life. Samson’s life expectancy
was 14,61 (at the time the contract was concluded) according to the life expectancy and
present value table.
Required:
Calculate the taxable amount of the annuity received by Samson for the current year of
assessment.
Expected return from the purchased annuity:

R3 500 x 12 x 14,61 = R613 620
A = R400 000
B = R613 620
C = R42 000 (R3 500 x 12)
R400 000
Y= x R42 000
R613 620
Y = R27 378,51
Therefore, the taxable portion is:

= R42 000 – R27 378,51
= R14 621,49
You should note from this example that:

 the formula is used to calculate the tax-free portion of the lump sum; and
 the gross income only includes taxable portion of the lump sum.
6.4 Lump sum benefits received

A lump sum can be received either from an employer or from a retirement fund to which the employee belongs.
Lump sums are paid out on termination of service to an employer by the employee. A termination of service by an
employee may be through resignation, death, withdrawal from the fund or retrenchment. Taxation of lump sum
benefits paid to non-resident is different from that paid to a resident of the Republic. The portion of the lump sum
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paid to a non-resident is taxable in South Africa to the extent of the number of years a non-resident worked in
South Africa. The formula to calculate the portion of the lump sum taxable in South Africa is as follows:
No of years worked in South Africa

Amount taxed in South Africa = Lump received X
Total period worked
6.4.1 Retirement fund lump sum withdrawal benefits (paragraphs 2(1)(b) and 6)
If an employee received a retirement fund lump sum due to withdrawal from employment before retirement age,
the retirement fund will be kept and taxed separately according to the working of the Second Schedule. You should
also note that this type of retirement fund lump benefit is taxed differently from the retirement fund benefit received
as a result of retirement, retrenchment or death.
Some of the reasons why a retirement fund could be taken before time could be the result of a divorce order, an
employee might be withdrawing from a fund that is dissolving, or transferring from one fund to another fund.
Some deductions are allowed on where the taxpayer retirement fund is a result of divorce or transfer out from a
fund. For the deductions to be allowed in respect of retirement fund transfer, an approved fund that is receiving the
fund in terms of Income Tax Act should be ascertained.
Take note of the following steps are followed to calculate tax on the retirement fund lump sum withdrawal benefit
from 1 March 2011.
8Table 6.1: Steps to calculate tax on a withdrawal benefit

Step 1 Calculate the current withdrawal benefit by deducting allowable deduction from the total current
benefit received
Step 2 Add together taxable any of following amounts received but before current benefit (calculated in step
1):
 withdrawal benefit received on or after 1 March 2009;
 retirement fund lump sum benefit received on or after 1 October 2007; and
 severance benefits received on or after 1 March 2011
Step 3 Add together the amounts derived in step 1 and step 2 then use the retirement fund lump sum
withdrawal tax table to calculate tax on total benefits
Step 4 Calculate tax on the benefits calculated in step 2 above using the retirement fund lump sum
withdrawal tax table
Step 5 Tax amount calculated in step 3 – Tax amount calculated in step 4 = Tax on current lump sum
withdrawal benefit
(Source: Coetzee et al. 2018: 344 – 345)
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Take note of the following tax table to calculate tax on retirement fund lump sum withdrawal benefit for the current
year of assessment.
9Table 6.2: 2019 retirement fund lump sum withdrawal tax table
Taxable income from lump sum benefits (R) Rate of tax
0 – 25 000 0%
25 001 - 660 000 18% of taxable income above R25 000
660 001 - 990 000 114 300 + 27% of taxable income above R660 000
990 001 and above R203 400 + 36% of taxable income above R990 000
(Source: SARS (2019))
Attempt the following example to test your understanding of this section.
Example 6.2
Cherise Joshua is resident of the Republic and she is 40 years old. She resigned from her
employment on 30 August 2018. She received a lump sum from her pension fund of R90 000.
She used R30 000 of this lump to pay off her car and transferred the remaining balance into a
pension preservation fund. In the past, Cherise’s pension fund contribution of R7 000 had not
been deducted for tax purposes. Her taxable income for the current year of assessment before
the lump sum benefit amounted to R145 000.
Required:
a) Assuming Cherise had resigned from her previous employment in the year 1999, and
received a lump sum withdrawal benefit from her previous pension fund, calculate the tax
payable on her current lump sum. The taxable amount of her previous lump sum amount
to R R19 000.
b) Calculate the tax payable by Cherise 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
R19 000.
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a)
R
Retirement fund lump sum withdrawal benefit 90 000
Less: Allowable deductions
Contributions not deducted in the past (7 000)
Amount transferred to pension preservation fund (R90 000 – R30 000) (60 000)
Taxable portion of the lump sum from pension fund 23 000
Tax payable on lump sum as per retirement fund withdrawal benefit table (R23 000 x 0%) nil
b)
Since the lump sum from Cherise’ previous fund was received after 1 March 2009, it will be
included when calculating tax on her current lump sum benefit.
Tax payable on lump sum as per retirement fund withdrawal benefit table
Taxable income from current benefit 23 000

Taxable income from previous benefit 19 000
42 000
Tax per table (R42 000 – R25 000) x 18% 3 060
Less: Tax per table on previous lump sums (R19 000) ( nil )
Tax payable on current lump sum 3 060
6.4.2 Retirement benefits: Lump sums received from an employer (paragraphs (d) and (f))
Paragraphs (d) and (f) of the definition of gross income provide that an amount received by a person from an
employer arising from an employer/employee relationship is taxable. The lump sum paid by an employer to an
employee is therefore included, in full, in the gross income unless it is a severance benefit.
Severance benefits are paid by an employer to employee on termination of employment of an employee.
Severance benefits are paid in respect of accumulated leave and the term an employee served with the employer.
It is taxed the same way as taxing a retirement fund lump sum benefit. However, the following conditions have to
be satisfied first before the tax table that is applicable to retirement fund lump sum benefits is applied:
 the person receiving the severance package should be at least 55 years of age;
 such relinquishment, termination, loss, repudiation, cancellation or variation is due to the person becoming
permanently incapable of holding the person's office or employment due to sickness, accident, injury or
incapacity through infirmity of mind or body; or
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 such termination or loss is due to:

o the person's employer having ceased to carry on or intending to cease carrying on the trade in respect
of which the person was employed or appointed, or
o the person having become redundant in consequence of a general reduction in personnel or a reduction
in personnel of a particular class by the person's employer, unless where the person's employer is a
company, the person at any time held more than five per cent of the issued share capital or members'
interest in the company.
The normal tax table will be applied to the severance benefit if none of the above conditions apply to the employee
who receives a severance benefit. Now do the following activity.
Activity 6.3
You required to:
List the requirements for a severance benefit to be taxed according to the retirement fund
tax table.
6.4.3 Retirement benefits: Retirement fund lump sum benefits (paragraphs 2(1)(a) and 5)
It is very important to identify whether the person receiving the retirement fund lump sum benefit is receiving it as
a result of withdrawal from the fund or as a result of retirement since the tax will be treated separately for each
case. The tax payable from a lump sum received as a result of withdrawal from the fund is substantially different
from that which is received as a result of retirement. Some unfortunate events such as death will trigger the
payment of retirement fund even if the employee has not yet reached the retirement stage.
When calculating tax on the portion of a lump sum received from the following items, it is important to first determine
if the allowable deductions exist:
 pension;
 pension preservation;
 provident;
 provident preservation; and
 retirement annuity fund on retirement.
Allowable deductions as per the provisions of the Second Schedule consist of the following:
 Contributions disallowed
 Deductions in respect of divorce orders
 Amount of the pension fund benefit transferred to an approved fund
 Unclaimed benefits
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The above deduction:

 are allowed as long as they have not been previously allowed; and
 are limited to the amount of the lump sum befit that was received
IMPORTANT STATEMENT
You should note that all past contributions not allowed as a deduction should be taken into
account. Should there be any contributions disallowed in the current year, they must also be taken
into account as a deduction.
Now do the following activity.
Activity 6.4
You required to:
List the allowable deductions from the lump sum in terms of the Second Schedule.
Lump sums received from public sector pension funds (paragraph 2A)
The formula used to calculate the lump sum benefit received from Government pension is given below. Study this
formula and attempt the example that follows to see how this formula is applied.
The amount deemed received is determined through the application of the following formula:
A = B/C × D
Read the following explanation of the components of the above formula:
A = The taxable portion of the lump sum to be determined, subject to further deductions in terms of the Income
Tax Act.
B = The completed years of employment after 1 March 1998 or completed years of employment approved after
1 March 1998 during which the individual had been a member of the Fund, including previous or other
periods of service approved as pensionable service in terms of the rules of the Fund after 1 March 1998.
C = Total number of years taken into account for determining the benefits payable to the individual (pensionable
service years), or the number of completed years during which the individual had been a member of the
Fund.
D = The lump sum (gratuity) benefit payable to the individual.
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Attempt the following example to assess your understanding of this lump sum received from government.
Example 6.3
Joseph White is 65 years old. On his retirement from a government department, he
received a lump sum benefit of R2 000 000 from the government pension fund. Joseph
had worked for 40 years for this department. He retired on 31 December 2018.
You are required to calculate how much of Joseph’s lump sum will be included in his
gross income.

The amount deemed received is calculated as follows:
A = B/C × D
= 14/40 × R2 000 000
= R700 000
Note that 14 from the above calculation is the number of completed years of service from 1 March 1998 to 31
December 2012.
The deductions from the lump sum received is R1 300 000 (R2 000 000 – R700 000).
Remember: B (from the above formula) is the completed number of years after 1 March 1998
IMPORTANT STATEMENT
While working through the example you should note the following:
 Formula C is used to calculate the amount of the deduction from the lump sum
actually received.
 Only completed years of service are used.
 The tax-free nature of public sector pre-1 March 1998 membership is still applicable
to people who transferred their public sector benefits to another fund.
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Tax on retirement fund lump sum benefits

When calculating tax on retirement fund lump sum benefits, the following should be noted:
 Retirement fund lump sum benefits are taxed separately from other income.
 Separate tax table (table 6.4) applicable for the year of assessment in which the retirement fund lump sum
benefit is received and the deduction of the allowable deductions from the lump sum benefits.
 Any assessed losses or annual rebates do not affect the retirement fund's lump sum benefits. Therefore, these
funds are taxed at their own rates.
 Lump sums that are received from retirement funds are taxed on an accumulated basis. Therefore,
subsequent lump sum benefits will be added and taxed at a higher marginal rate.
Take note of the following steps to follow when calculating tax on retirement, death or severance benefits.
10Table 6.3: Steps to calculate tax on a retirement benefit
Step 1 Calculate the current retirement fund lump sum benefit by deducting allowable deduction from the
total current benefit received. As of 1 March 2011, this could also be a severance benefit received
from an employer.
Step 2 Add together taxable any of following amounts received but before current lump sum benefit
(calculated in step 1):
 withdrawal benefit received on or after 1 March 2009;

 retirement fund lump sum benefit received on or after 1 October 2007; and
 severance benefits received on or after 1 March 2011
Step 3 Add together the amounts derived in step 1 and step 2 then use the retirement fund lump sum tax
table (table 6.4 below) to calculate tax on total benefits
Step 4 Calculate tax on the benefits calculated in step 2 above using the retirement fund lump sum tax table
Step 5 Tax amount calculated in step 3 minus Tax amount calculated in step 4 = Tax on current lump sum
benefit
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Take note of the following tax table to calculate tax on retirement, death or severance lump sum benefits for the
current year of assessment.
11Table 6.4: 2019 Retirement & death benefits or severance benefits tax table
Taxable income (R) Rate of tax
0 – 500 000 0% of taxable income
500 001 - 700 000 18% of taxable income above R500 000
700 001 – 1 050 000 R36 000 + 27% of taxable income above R700 000
1 050 001 and above R130 500 + 36% of taxable income above R1 050 000
(Source: SARS (2019))
Attempt the following example to understand how the information in the above tables (table 6.3 and 6.4) is applied
in practice.
Example 6.4
Peter Andre is resident of the Republic and he is 69 years old. He retired from his
employment on 31 September 2018. The taxable amount of the retirement lump sum
benefit he received from pension fund on his retirement amounted to R1 090 000. His
taxable income for the current year of assessment before the lump sum benefit
amounted to R345 000.
Required:
a) Calculate the tax payable by Peter assuming he has never received any lump sums
in the past.
b) Calculate the tax payable by Peter he received a retirement annuity lump sum
payment of R600 000 on 31 July 2011.
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a) R
Taxable portion of lump sum from pension fund 1 090 000
Tax payable on taxable portion of lump sum (R130 500 + (36%x(R1 090 000 - R1 050 000))) 144 900 *
b)
Taxable portion of all lump sums received (R1 090 000 + R600 000) 1 690 000
Tax payable on all lump sums received (R130 500 + (36%x(R1 690 000 - R1 050 000))) 360 900
Less: notional tax payable on previous lump sum (R600 000 – R500 000) x 18%) (18 000)
Tax on current retirement fund lump sum benefit 342 900
* Lump sums from retirement funds are taxed separately, therefore other income (R345 000) is not taken into
account.
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6.5 Summary
Refer to the following diagram and proceed to the next study unit where capital gains tax is explored.
LUMP SUM RECEIVED
EMPLOYER RETIREMENT FUND
RETIREMENT,
WITHDRAWAL RETRENCHMENT
OR DEATH
DEDUCTIONS DEDUCTIONS DEDUCTIONS
Contributions Contributions
disallowed disallowed
Not Applicable Amount transferred
Amount tranferred
Amount less A in
Formula C
TAXATION TAXATION TAXATION
Taxed according
Taxed according to to retirement lump Taxed according to
retirement lump sum withdrawal retirement lump
sum benefit tax benefit tax table sum withdrawal
table or according benefit tax table
to normal tax table
12Figure 6.1: Study Unit 6 summary
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The full amount (R3 000 000) can be taken as Sam was a member of a provident fund.

R
Total pension received for the current of assessment (R4 500 x 12) 54 000
Portion deemed to be from a South African source (R54 000 x 17/30) 30 600
Therefore, the R30 600 is included in Elvis’ taxable income derived from South Africa for the current year of
assessment.

The following conditions have to be satisfied first before the tax table that is applicable to retirement fund lump sum
benefits is applied:
 the person receiving the severance package should be at least 55 years of age;
 such relinquishment, termination, loss, repudiation, cancellation or variation is due to the person becoming
permanently incapable of holding the person's office or employment due to sickness, accident, injury or
incapacity through infirmity of mind or body; or
 such termination or loss is due to:
o the person's employer having ceased to carry on or intending to cease carrying on the trade in respect of
which the person was employed or appointed; or
o the person having become redundant in consequence of a general reduction in personnel or a reduction
in personnel of a particular class by the person's employer, unless where the person's employer is a
company, the person at any time held more than five per cent of the issued share capital or members'
interest in the company.

Allowable deductions as per the provisions of the Second Schedule consist of the following:
 Contributions disallowed
 Deductions in respect of divorce orders
 Amount of the pension fund benefit transferred to an approved fund
 Unclaimed benefits
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Unit
7: Capital Gains Tax
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7.1 Introduction  Apply base cost of an asset, market value of assets

7.2 Application of capital gains tax (paragraphs 2 to and special provisions to calculate capital gains
10)
7.3 Identify whether capital gains tax is applicable
(Step 1)(paragraph 1 and section 1)
7.4 Capital gain or loss on the disposal of an asset
(Step 2) (paragraphs 3 and 4)
7.5 Proceeds from the disposal of an asset (Step
2.1)
7.6 Base cost of an asset (Step 2.2) (paragraph 20)
7.7 Market value of assets (paragraphs 29 and 31)
7.8 Time-apportionment base cost (TAB)  Apply the 20% rule and time-apportionment base to
(paragraph 30) calculate capital gains or losses
7.9 The 20% rule
7.10 Selecting the valuation date value (paragraphs

26 and 27)
7.11 Exclusions (Step 2.4)  Select and apply exclusions, inclusion rate and
7.12 Roll-overs limitation of losses when accounting for capital

gains or losses
7.13 Inclusion rate (paragraphs 9 and 10)
7.14Assessed capital loss carried forward  Select and apply appropriate procedures to account
(paragraphs 6 and 7) for proceeds from and capital gain or loss on the
disposal of asset

Prescribed Textbook
2018. Capital gains tax for individuals. In: Coetzee, K., De Hart, K. L., Koekemoer,
A. D. Oosthuizen, A. and Stedal, C. A Student's Approach to Income Tax: Natural
121 MANCOSA
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7.1 Introduction
This study unit explores tax implications of gains or losses arising from disposal of assets by natural persons. For
the purposes of accounting for capital gain tax, this study unit is going to explain what constitute an asset.
Accounting for capital gains or losses when calculating taxable income and normal tax of individuals is also
discussed in this study unit. Other aspects of capital gains tax, other than impact on capital gains on individuals,
are covered in Taxation 2B.
This type of tax was introduced in South Africa on the 1st of October 2001. The following section discusses how
capital gains tax is applied in South Africa.
7.2 Application of capital gains tax (paragraphs 2 to 10)

Capital gains tax is paid by a taxpayer who disposes off an asset that is subject to capital gains tax regulations.
Capital gains tax is levied on the disposal of:
• asset of a resident; or
• the following assets of a non-resident:
− immovable property situated in the Republic or any interest or right of immovable property situated
in the
Republic,
− 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 company; and
• a vested interest in any assets of a trust;
Take note of the following steps to follow when calculating taxable capital gain for the year of assessment or
assessed capital loss to be carried forward to the following year of assessment.
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12Table 7.1: Steps to calculate taxable capital gains or capital loss
Step 1 Determine whether the transaction is subject to capital gains tax
Step 2 Calculate the capital gain or loss on the disposal of each asset
Step 3 Add all the capital gains and capital losses for the year to determine the aggregate capital
gain or loss for the year.
Step 4 Reduce the gain or loss for the year with annual exclusion of R40 000 in case of natural
persons. This exclusion increases to R300 000 if a person dies during the year of
assessment.
Step 5 Determine whether an assessed capital loss is brought forward from the previous year of
assessment.
Step 6 Calculate the net capital gain or loss for the year by reducing the aggregate capital gain
(Step 4) by the assessed capital loss (Step 5), or by 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 for the year of
assessment. If there is gain, then proceed to Step 8. If there is assessed capital loss, this
should be carried forward to the following year of assessment.
Step 8 Determine the inclusion rate applicable to the taxpayer (40% for natural persons)
Step 9 Calculate the taxable capital gain by multiplying the net capital gain (Step 6) by the
inclusion rate (Step 8).
Step 10 Add the taxable capital gain (Step 9) to other taxable income of the taxpayer for the
current year of assessment in order to calculate total taxable income for the year.
It is worth noting that assessed capital losses are not offset against taxable income. Instead, they are carried to
the following year assessment to be aggregated with capital gains or losses of that year of assessment.
Do the following example to assess your understanding of treatment of the capital gains and losses when
calculating taxable income.
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Example 7.1
Samuel Jackson earned a salary of R250 000 during the current year of assessment.
During the year, Samuel sold his boat and motor vehicle. He realised capital gain of:
 R50 000 on sale of motor vehicle; and

 R13 000 on the sale of boat
Required:
Calculate Samuel’s taxable income for the current year of assessment.

R
Gross income 250 000
Salary 250 000
Taxable capital gain 23 000
Capital gain on motor vehicle 50 000
Capital loss on the sale of boat 13 000
Total capital gain (50 000 + 13 000) 63 000
Less: Annual exclusion (natural person) (40 000)
Net capital gain 23 000
Example 7.2
Mike Black earned a salary of R300 000 during the current year of assessment. During
the year, Mike sold his boat and motor vehicle. He realised capital gain of R56 500 on sale
of motor vehicle and a capital loss of R13 000 on the sale of boat. Mike has an assessed
capital loss of R12 000 in the previous year.
Required:
Calculate Mike’s taxable income for the current year of assessment.
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Taxable capital gain R

Capital gain on motor vehicle 56 500
Capital loss on the sale of boat (13 000)
Total capital gain (56 500 – 13 000) 43 500
Less: Annual exclusion (natural person) (40 000)
Aggregate capital gain 3 500
Less assessed capital loss – previous year (12 000)
Net capital loss (8 500)
This means that a capital loss of R8 500 will be carried forward to the following year of assessment. This loss
is not included in Mike’s taxable income, it will be aggregated with capital gains or losses in the following year
of assessment. Therefore Mike’s taxable income for the current year of assessment is only R300 000 (his
salary).
The steps listed above are each explained further in the following sections.
7.3 Identify whether capital gains tax is applicable (Step 1)(paragraph 1 and section 1)
This section is step 1 of the steps to calculate taxable capital gain or assessed capital loss. There are a number of
requirements to be met in order to impose capital gains tax on transactions involving assets. However, in this
module, it is assumed that all assets disposed of are of capital nature and that events qualify as disposals as
defined in the Act. For further reading on this step, you may refer to chapter 6: section 6.3 in the prescribed textbook
of Taxation 2B module. The book is titled: A Student’s approach to Income Tax: Business Activities (2019).
To determine whether a transaction attract capital gains tax, the following has to be ascertained:
 Determine whether the asset is involve in transaction; and
 Determine whether the transaction is a disposal or deemed disposal.
Once a transaction has been ascertained that it does attract capital gains tax, the next step is to calculate the
capital gain or loss.
7.4 Capital gain or loss on the disposal of an asset (Step 2) (paragraphs 3 and 4)
If an asset that is subject to capital gains tax is disposed of, the capital gain or loss on that asset needs to be
calculated. To calculate capital gain or loss, proceeds from the sale and base cost of the asset sold have to be
determined. Capital gain or loss is the difference between proceeds from the sale and base cost of the asset sold.
Once a capital gain or loss has been calculated, the next step will be to identify the portion of the capital gain or
loss that must be excluded from capital gains tax. Thereafter, limitations on the capital loss or roll-over relief for
the capital gain has to be applied. The following section discuss, in depth, proceeds from disposal of an asset.
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7.5 Proceeds from the disposal of an asset (Step 2.1)

Proceeds refer to the amount received or accrued to another person as a result of a disposal of an asset. In other
words, proceed is the selling price of an asset. This amount must be reduced by the following:
 Any amount already or to be included in the gross income or calculation of taxable income before taking into
account the capital gain.
 Any amount (in connection with the disposal of asset) payable to whom the asset is disposed
 Any reduction resulting from:
o The cancelation, or an agreement; or
o The prescription or waiver of claim or release from an obligation; or
o any event in connection with the proceeds of the disposal
It is important to note that the capital gain realised can only be recognised in the year in which it accrues to the
person disposing the asset. This also applies where the disposal resulted in a capital loss.
IMPORTANT STATEMENT
The disposal of an asset by way of donation to a connected person for a consideration
(other than money) that is higher or lower than the market value of the disposed asset,
it is deemed the asset is disposed of at its market value.
7.6 Base cost of an asset (Step 2.2) (paragraph 20)

The base cost of an asset is the cost (expenditure) incurred by the taxpayer to acquire and retain the asset. Base
cost calculation depends on whether the asset was acquired before 1 October 2001 or after 1 October 2001. This
date is referred to as valuation date for capital gain purposes. Assets acquired before 1 October 2001 are called
pre-valuation date assets whereas those were acquired on or after 1 October 2001 are referred to as post valuation
assets. The following expenditure may form part of the base cost:
 expenditure incurred to acquire or create the asset;
 valuation costs incurred for the purposes of determining the capital gain or loss of an asset;
 expenditure actually incurred and directly related to the acquisition or disposal of an asset, i.e.:
o remuneration of a surveyor, valuer, auctioneer, accountant, broker, agent, consultant or legal advisor, for
the services rendered;
o transfer costs;
o stamp duty, transfer duty, security transfer tax, or similar duty;
o advertising costs in relation to the sale of the asset;
o installation costs of the asset; and
o donations tax paid in relation the asset
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 any expenditure actually incurred for the purposes of establishing, maintaining or defending a legal title to or
right in that asset; and
 expenditure actually incurred for the purposes of improving or enhancing the value of an asset (Coetzee et al.
2018: 475).
Do example 7.2 and activity 7.2 below to test your knowledge of the sections you have covered thus far in this
study unit. You may then proceed to the following section, where an in depth discussion of the market value of
asset is covered.
Example 7.3
An asset with a base cost of R75 000 was disposed of for R100 000
Required:
Calculate capital gain or loss for the current year of assessment.
Proceeds 100 000
Less: Base cost (75 000)
Capital gain 25 000
Activity 7.1
An asset with a base cost of R95 000 was disposed of for R80 000.
Required:
Calculate capital gain or loss for the current year of assessment.
It is important to note that the base cost of asset acquired before the valuation date (1 October 2001) has two cost
components. The first component being the costs incurred before the valuation date and, the second component
being the costs incurred on or after the valuation date. Since capital gains tax was introduced in South Africa on 1
October 2001 therefore, this requires the value of an asset acquired before 1 October 2001 to be determined on 1
October 2001 for capital gains purposes. The value so determined on 1 October 2001 is referred to as valuation
date value. Therefore, the base cost of an asset acquired before the valuation date is calculated adding together
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the valuation date value and costs incurred on that asset after the valuation date. The base cost of an asset
acquired on or after the valuation date, is simply all the costs incurred to acquire or improve the value of that asset.
There are three methods to determine the valuation date value of an asset that was acquired before the valuation
date, i.e.:
 the market value;
 the time-apportionment base cost; and
 the 20% rule.
Normally, the highest of value of the above methods is used as valuation date value. These methods are discussed
in the following sections.
7.7 Market value of assets (paragraphs 29 and 31)

Where a person wants to use the market value on the valuation, the asset must have been valued within three
years after the valuation date (from 1 October 2001 to 30 September 2004).
When a person ceases to be exempt after the valuation date, the valuation will be the date when they cease to be
exempt. A person is not required to submit the valuation with tax returns, but it must be retained for SARS audit
purposes.
7.8 Time-apportionment base cost (TAB) (paragraph 30)

The valuation date value can be calculated using the proceeds formula and/or time apportionment formula. The
time apportionment formula is applied when all the expenditure on the asset was incurred before 1 October 2001.
When expenditure on the asset was incurred before and on or after 1 October 2001, both the time-apportionment
formula and proceeds formula are applied to determine the valuation date value. The following sections discuss
further the application of these formulae.
7.8.1 TAB: Cost only incurred before the valuation date

This method spreads the growth over the period they owned the asset. The TAB cost is the sum of expenditure
incurred to acquire the asset plus growth of the asset before valuation date. To calculate the time-apportionment
base cost if all expenditure was incurred before 1 October 2001, the following formula is applied:
Y = B + {(P – B) × (N/(T + N))}
Where:
Y– time-apportionment base cost
B– expenditure before 1 October 2001;
P– proceeds on sale of asset less selling costs;
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N– number of years since acquisition until valuation date, must not exceed 20 years
T– number of years from valuation date until its disposal
IMPORTANT STATEMENT
For the purposes of this module, focus on TAB: Cost incurred before and after the
valuation date. This method is covered in the following section.
Attempt the following example to understand how the valuation date is calculated using the above formula.
Example 7.3
Benzi Mabuza bought a house on 1 October 1984 at a cost of R500 000. In 1995 certain
improvements were made to the building at a total cost of R400 000. The building was
sold on 30 December 2018 for R3 500 000.
Required:
Calculate the valuation date value of the building using TAB.
Y = B + {(P – B) × (N/(T + N))}

Y = R900 000 + {(R3 500 000 – R900 000) × (17/(18 + 17))}
= R900 000 + R1 262 857
= R2 162 857 the valuation date value
7.8.2 TAB: Cost incurred before and after the valuation date
If expenditure was incurred before and on or after the valuation date, the time apportionment formula and proceeds
formula will have to be used to determine the valuation value. The first formula that needs to be applied is proceeds
formula which determines the proceeds relating to the pre-valuation date costs. Thereafter, the TAB will be applied.
The proceeds formula is follows:
P = R × B/(A + B)
Where:
P– proceeds that related to the cost incurred before 1 October 2001
R– total proceeds on sale less selling costs
A– total costs incurred on or after the valuation date
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B– costs incurred before the valuation date
The next step will then be to use the TAB cost formula:
Y = B + {(P – B) × (N/(T + N))}
Where:
Y– TAB base cost
B– expenditure before 1 October 2001;
P– the answer of the proceeds formula;
N– number of years since acquisition until valuation date, must not exceed 20 years;
T– number of years from valuation date until the asset was disposed of.
Attempt the following example to understand how the valuation date is calculated using the above formulae.
Example 7.4
Zakes Sithole bought a house on 1 October 1972 at a cost of R500 000. In 2005 certain
improvements were made to the building at a total cost of R300 000. The building was
sold on 30 November 2018 for R3 500 000.
Required:
Calculate the valuation date value of the building using TAB cost method. You are also
required to calculate the base cost the building.
The proceeds formula must be used first to calculate the TAB cost
Proceeds formula:
P = R × B/(A + B)
R = R3 500 000
A = R300 000
B = R500 000
P = R x B/(A + B)
= R3 500 000 x R500 000 / (R300 000 + R500 000)
= R2 187 500
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The proceeds to be used in TAB formula is therefore R2 187 500.
TAB cost formula:

Y = B + {(P – B) × (N/(T + N))}
B = R500 000
P = R2 187 500
N = 20 years (limited to 20 years)
T = 18 years
Y = B + {(P – B) × (N/(T + N))}

Y = R500 000 + {( R2 187 500 – R500 000) × (20/(18 + 20))}
= R500 000 + R888 158
= R1 388 158
The valuation date value of the house is therefore R1 388 158.
The total cost of the house is therefore R1 388 158 + R300 000 = R1 688 158.
You may then proceed to third method of calculating the valuation date value (the 20% rule) which is discussed in
the following section.
7.9 The 20% rule

This is another method that may be used to determine the valuation date value. The formula applied in this method
is as follows:
20% x (P – A)
Where:
A – Proceeds from sale less costs incurred on or after 1 October 2001; and
P – Costs incurred on or after 1 October 2001.
7.10 Selecting the valuation date value (paragraphs 26 and 27)

The taxpayer normally select the highest value determined from the three methods discussed above. However,
the Income Tax Act has some reservations in terms of selecting the valuation date value. These are discussed in
paragraphs 26 and 27 of the Eighth Schedule. These paragraphs are summarized in the following diagrams:
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Valuation date value where proceeds exceed expenditure or where expenditure in respect of an asset cannot be
determined:
Proceeds of disposal exceeds expenditure

incurred before, on or after valuation date
Does the market value on valuation date

exceed the proceeds on disposal?
Yes No
Can the expenditure incurred Proceeds less the allowable

before valuation date in respect of expenditure in terms of
a pre-valuation date asset be paragraph 20 incurred on or after
determined? the valuation date
Yes No
Valuation date value is the higher of:

 Market value on 1 October 2001;
 Market value on 1 October 2001; or
or
 (Proceeds – after 1 October 2001 costs) x
 (Proceeds – after 1 October 2001
20%; or
costs) x 20%
 TAB amount.
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Figure 7.1: Paragraph 26 of the Eight Schedule – summary (Coetzee et al. 2018: 476)
Valuation date value where proceeds does not exceed expenditure:
Proceeds of disposal does NOT exceeds

expenditure incurred before, on or after
valuation date
Has the market value of the asset been

determined?
Yes No
Is the cost incurred before the

valuation date: Valuation date value is the TAB
 equal to or more than the
proceeds; and amount.
 more than the market value?
Yes No

Valuation date value is the higher of:  Market value; or
 Market value on 1 October 2001; or  TAB amount.
 Proceeds less the expenditure
allowable in terms of paragraph 20
incurred on or after the valuation date
13Figure 7.1: Paragraph 27 of the Eight Schedule – summary (Coetzee et al. 2018: 487)
7.11 Exclusions (Step 2.4)

Certain capital gains and losses are not taken into consideration in determining the capital gains tax. These
exclusions are discussed in the following sections.
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7.11.1 Exclusion: Primary residence (paragraphs 44 to 51)

Certain capital gains and losses must be disregarded by natural persons and special trusts as a result of disposal
of a primary residence. The gross exclusion amount is R2 million. In addition, any capital gain realized from the
disposal of a primary residence must be disregarded if proceeds from such disposal do not exceeding R2 million.
7.11.2 Exclusion: Personal use assets (paragraph 53)

A personal use asset is an asset used other than for carrying on a trade. If such an asset is disposed of, the
resulting capital gain or loss is ignored for the purposes of capital gains tax.
Personal use assets exclude:

 coins made mainly from gold or platinum;
 immovable property;
 aircraft with an empty mass of 450 kilograms;
 boats 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 entitled 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.
7.11.3 Exclusion: Disposal of small business assets (paragraph 57)

If a person disposes of a small business, the capital gains, to the maximum of R1 800 000 are disregarded in
calculating the aggregate capital gain or loss.
This exclusion is granted to a natural person:

 who is the owner or partner in a small business;
 who hold interest in each active business assets of a small business, owned by a partnership, to the extent of
their interest in that partnership; or
 who hold at least 10% of equity directly in a company.
A business qualifies as a small business only if the market value of all its assets at the date of disposal does not
exceed R10 million. The assets must be active business assets.
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Active business assets relate to:

 immovable assets used for business purposes; and
 other assets used or held wholly and exclusively for business purposes, but excludes:
− a financial instrument (shares); and
− assets held mainly to derive income, annuity, rental income, foreign exchange, royalty or similar
income.
The exclusion will only apply where the person:

 held the asset for at least five years before disposal;
 was substantially involved in the operation of the business during the five years;
 has reached the age of 55 years; or
 has disposed the interest as a result of ill-health, other infirmity, superannuation or death.
7.12 Roll-overs
The Act provides that capital gains tax can be rolled over to a future date if the asset is disposed of involuntarily or
when it is being replaced. A roll-over occurs when a capital gain arising on the disposal of an asset other than a
financial instrument by operation of law (for example, expropriation), theft or destruction is held over until the
disposal of its replacement asset. Therefore, when the asset is finally disposed of, capital gains will be paid on the
difference between the proceeds and the original base cost. In this section, you need to know the conditions that
must be met for capital gains tax to be disregarded when determining a taxpayer's aggregate capital gain or loss
for the year of assessment in which the asset is disposed of. These conditions are discussed below:
 involuntary disposal of assets (paragraph 65);
where the taxpayer has involuntary disposed of an asset as a result of, for example, expropriation, the loss
or destruction thereof, and the proceeds are used to acquire a replacement asset, the taxpayer has the
option to roll the gain over.
 reinvestment in replacement assets (paragraph 66);
the taxpayer may choose to ignore a capital gain or loss realised from disposal of a depreciable asset which
in turn is replaced with a similar asset.
 transfer of assets between spouses (section 9HB);
the person transferring the asset to their spouse is deemed to have disposed of the asset at its base cost.
This result in no tax being charged at the hands of the transferor. However is only applicable if the transferee
is a residence of the Republic or the asset being transferred is subject to capital gains tax in South Africa.
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7.13 Inclusion rate (paragraphs 9 and 10)

You will notice that not the entire amount of the capital gain is taxable. The taxable capital gains of individuals and
special trusts is 40% of the total capital gain whereas for companies, close corporations and trusts is 80% of the
total capital gain.
7.14 Assessed capital loss carried forward (paragraphs 6 and 7)

The most important point to note in this section is that an assessed capital loss is NOT offset against taxable
income, but rather carried forward to the following year of assessment. The calculation of assessed loss that can
be carried forward to the following year of assessment is calculated as follows:
 If the taxpayer has an aggregate capital gain for the current year, the amount of the assessed capital loss to
be carried forward to the following year of assessment is the amount by which the assessed capital loss
brought forward from the previous year exceeds the aggregate capital gain for the current.
 If the taxpayer has an aggregate capital loss for the current year, the amount of the assessed loss to be carried
forward to the following year of assessment is the total of assessed capital loss for the current year and
assessed capital loss brought forward from the previous year.
 If the taxpayer has neither capital loss nor capital gain, the assess capital loss to be carried forward to the
following year of assessment is the assessed capital loss brought forward from the previous year.
7.15 Summary
In this study unit, you learnt that there are four fundamental capital gains tax components to be determined, i.e.
proceeds on disposal, the base cost of an asset, the amounts excluded and any rules limiting losses on disposal
of the asset. You also learnt how to calculate capital gain or loss on each asset, base cost of an asset and taxable
capital gain for the year. The assets or gains that are not subject to capital gains tax as well as assets that are
classified as personal-use assets were also discussed in this study unit.
Attempt the following revision question to assess your understanding of this study unit and proceed to the following
study unit where tax implications of income and expenses are assessed.
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Revision question 7.1

Suanne Dix married to Ronnie Dix in 1995. They are married out of community of property.
Suanne owns an apartment which she purchased for R200 000 on 1 October 1969. She
relocated to another and used the apartment as rental accommodation for students. On 1
April 2018, she transferred the ownership of the apartment to Ronnie Dix. The market value
of the apartment on 1 April 2018 and 1 October 2001 was R700 000 and R540 000,
respectively. On 28 February 1985, a shower was installed in the apartment at a cost of R15
000. The apartment’s kitchen was extended at a cost of R80 000.
Ronnie sold the apartment on 1 September 2018 for R800 000.
Required:
Calculate the net capital gain or assessed capital loss as a result of the transfer and disposal
of the apartment.

Proceeds 80 000
Less: Base cost (95 000)

Capital loss
(15 000)
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Unit
8: Income and expenses
of individuals
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8.1 Introduction  Identify and discuss the types of income that are included in the
taxable income by way of specific inclusion
8.2 Specific income  Calculate taxable income applying the order of deductions
8.3 Specific deductions
8.4 Income of minors (section 7(3))
8.5 Limiting losses when calculating  Apply the provisions of section 20A when determining the
taxable income (section 20A) limitations of losses

Prescribed Textbook
2018. Capital gains tax for individuals. In: Coetzee, K., De Hart, K. L., Koekemoer,
A. D. Oosthuizen, A. and Stedal, C. A Student's Approach to Income Tax: Natural
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8.1 Introduction
This study unit is based on investment income earned by a salaried person from local and offshore investments. It
further discusses the types of expenses that a salaried person can claim for income tax purposes. However, the
general deduction formula provides that private or domestic expenses are not deductible, this study unit discusses
the provisions of the Income Tax Act where certain private or domestic expenditure are allowed to be deducted for
income tax purposes.
Refresh your memory on the following framework that is used to calculate taxable income. This framework is more
relevant in this study unit as most of the study units covered in this module are integrated in this study unit.
R
Gross income (Section 1 – definition of gross income) xxxx
Less: Exempt income (Sections 10, 10A and 12T) (xxx)
= Income (Section 1 – definition of income) xxxx
Less: Deductions (Section 11 studied together with section 23(m) and 20) (xxx)
Add: Taxable portion of allowances (Section 8) xxxx
= Taxable income before taxable capital gain xxxx
Add: Taxable capital gain (Section 26A) xxxx
= Taxable income before retirement fund deduction xxxx
Less: Retirement fund deduction (Section 11F) (xxx)
= Taxable income before donations deduction xxxx
Less: Donations deduction (Section 18A) (xxx)
= Taxable income (Section 1 – definition of taxable income)) xxxx
14Figure 8.1: Framework to calculate taxable income
Keep the following questions in mind as you work through with this study unit. Test your knowledge of this study
unit by attempting to answer these after you have studied all sections discussed in this study unit.
MANCOSA 140
Taxation 2A
Think Points
 What portion of the investment income must be included in 'gross income'?
 What is the difference between the taxation of South African investment income and
foreign investment?
 How much of the retirement fund contributions can be claimed for tax purposes.
 Are donations claimable for tax purposes?
 Is the order of deducting expenses important when calculating taxable income?
 What types of private or domestic expenses are claimable for tax?
 What rebates are available against any foreign tax paid?
8.2 Specific income

Specific income is a type of income that is included in gross income by applying the special inclusion provisions.
This type of income would not be included in gross income had the general definition of gross income applied. A
brief overview of this specific income is covered in study unit 2. In this study, you will learn how specific income
are treated when calculating taxable income and tax liability of the taxpayer. The types of specific income that are
discussed in this study unit include South African and foreign income. aaaaaaaaaaaaaaa
A resident of the Republic is taxed on all income earned in South Africa. However, each type of income earned is
assessed for tax implications in terms of the definition of gross income. South African income include the following:
 South African dividends;
All dividends received from South African companies are exempt from normal tax. However, these types are
subject to dividends tax.
 South African interest exemption;
The interest exemption for a natural person who is younger than 65 is limited to R23 800, and for a natural
person who is 65 or older, the exemption is limited to R34 500. Refer to study unit 1 for a detailed discussion
on interest exemption.
 Interest and dividends from tax free investments;
These types of income are fully exempt from tax.
Residents of the Republic are also taxed on foreign income. The type of foreign income that this study unit focuses
on is foreign dividends and headquarter company dividends. Foreign dividends are included in the gross income
before accounting for dividends withholding tax. These types of dividends are not subject to dividends tax except
if they are paid by dual-listed companies.
141 MANCOSA
Taxation 2A
The exemptions that are applicable on foreign dividends are as follows:

 Full exemptions:
 Participation exemption – where the person receiving the dividend holds at least 10% of equity shares
from the company that is declaring dividends.
 Previously taxed exemption – where the dividend is paid from a profit that is has been previously taxed
 JSE listed shares – where the company paying dividends is listed in the JSE.
 Partial exemption
If any of the above exemption on foreign dividend does not apply, the exempt amount on a foreign dividend is
calculated as follows:
 Foreign dividend received multiply by 25/45
Do the following example to understand further the tax implications of specific income.
Example 8.1
Wiseman Ndlovu (57 years old), a resident of the Republic, holds 8% of the total equity
shares and voting rights in a NAS Inc. (a foreign company). On acquiring these shares,
he incurred an expenditure of R3 000 in a form a loan. He received a dividend of R60 000
from NAS Inc. The dividend received from NAS Inc. is subject to withholding tax of 10%.
He also earned the following amounts:
 An interest of R1 200 from a foreign investment.
 An interest of R37 000 from a local investment (not tax free investment)
Required:
Calculate Wiseman’s taxable income for the current year of assessment.
MANCOSA 142
Taxation 2A
R R
Foreign dividends (gross income special inclusion) (refer to notes below) 60 000
Expenditure in respect of production of income – prohibited in terms of section 23(q) nil
Less exempt (section 10B(3)) (R60 000 x 25/45) (33 333) 26 667
Interest from foreign investment (fully taxable) 1 200
Interest from local investment 37 000
Less: interest exemption (23 800) 13 200
Notes:
Since foreign dividends are subject to dividends withholding tax, the South African tax payable on these dividends
will be calculated as follows (Assuming Wiseman pays income tax at the marginal rate of 39%):
Dividend included in taxable income 26 667
Additional tax at 39% (26 667 x 39%) 10 400
Less: foreign tax rebate (Lesser of (R60 000 x 10%) or (R26 667 x 39%)) (6 000)
South African tax payable on foreign dividends 4 400
8.3 Specific deductions

The general deduction formula provides that, for an expenditure to be deductible for income tax purposes, it should
incurred in the production of income. Expenditure or losses incurred by taxpayers for maintaining themselves and
their families cannot be claimed for tax purposes because they are not incurred in the production of income. These
expenditures are prohibited in terms of Section 11(a), Section 23(a) and Section 23(b). Furthermore, Section 23(m)
prohibits expenditure deductions by a persons who derives remuneration. However, the following employment
related expenditures are deductible for tax purposes in terms Section 23(m):
 legal expenses (section 11(c));
 contributions to pension funds, provident funds or retirement annuity funds (section 11F)
 depreciation allowances (wear-and-tear) (section 11(e));
 bad debts allowance (section 11(i));
 provision for doubtful debts (section 11(j));
143 MANCOSA
Taxation 2A
 refund of an amount for services rendered or a refund in respect of a restraint of trade, where either amounts
had been included in gross income (section 11(11nA) and nB)); and
 home-study expenses (section 11(j) to the extent that they are not private or domestic expenses.
For the purposes of this study unit, a ‘remuneration' is defined as: “any amount of income which is paid or is
payable to any person by way of any salary, leave pay, wage, overtime pay, bonus, gratuity, commission, fee,
emolument, pension, superannuation allowance, retiring allowance or stipend, whether in cash or otherwise and
whether or not in respect of services rendered” (South Africa 1962), including:
 “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” (Coetzee et al. 2018: 157).
8.3.1 Contributions to retirement funds (section 11F)

Pension and provident funds
Pension and provident fund contributions are type of forced savings that are employed persons are required to
make. In most cases an employer also makes contributions to pension or provident fund on behalf of employees.
Contributions made to pension or provident funds are allowed as a deduction for tax purposes.
IMPORTANT STATEMENT
A pension fund deduction from taxable income can never exceed the actual contribution to
pension fund.
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Taxation 2A
Retirement annuity fund contributions

Retirement annuity fund contributions are type of voluntary savings that employees make if they do not contribute
to pension or provident fund. However, if they do contribute to provident or pension fund, they may also contribute
to the retirement annuity fund in order to supplement their retirement earnings. Retirement annuity funds are
entered into between the employee and the desired fund. Unlike provident and pension fund, retirement annuity
funds are not linked to employment.
IMPORTANT STATEMENT
Retirement annuity fund is a sub-component of the retirement fund. Retirement funds includes:
 Pension funds;
 Provident fund; and
 Retirement annuity fund
Deduction of the contributions to retirement funds

As from 1 March 2016, contributions made in respect of retirement funds are deductible under section 11F. The
deduction is calculated as follows:
Add all contributions made in respect of provident, pension and retirement fund and the total is limited the lesser
of:
 R350 000; or
 27,5% of the higher of:
o Remuneration; or
o Taxable income (excluding lump sums and severance benefits) before this deduction and deduction in
respect of donations as per section 18A (donations to public benefit organisations); or
 Taxable income before this deduction and before the inclusion of any taxable capital gain
IMPORTANT STATEMENT
If the actual contribution exceeds the limit, the difference between the allowable deduction and
actual contribution is carried forward to the following year of assessment.
8.3.2 Donations to public benefit organisations (section 18A and the Ninth Schedule)
Donations are deducted after all other deductions have been deducted when calculating taxable income. In terms
of section 18A, only donations to public benefit organisations (PBO) are deductible for income tax purposes.
Donations that are deductible from taxable income are only be limited to 10% of the taxable income after all
deductions have been taken into account (excluding any retirement fund lump sum benefit, retirement fund lump
sum withdrawal benefits and severance benefits). Any donations made to a non-registered public benefit
organisation will not qualify for a deduction in taxable income.
145 MANCOSA
Taxation 2A
8.3.3 Calculation of taxable income

The order of deductions is very important when calculating taxable income. Take note of the order of the following
items to be included last when calculating taxable income:
 Assessed loss brought forward from the previous years of assessment;
 Taxable capital gain (after taking into account the annual exclusion and inclusion);
 Deductions in relation to contributions made to retirement funds; and
 Donations to public benefit organisations
The following example integrates most study units covered so far and you should expect questions similar to this
example in the exam.
Example 8.1
During the current year of assessment Jack Jackson, aged 30 and a resident, received
the following:
 Salary of R300 000
 Bonus (non-pensionable) of R25 000
 Rental income of R264 300 from a source within South Africa
 South African interest of R30 000 (not tax free investments)
In addition to the above amounts, Jack realised a capital gain of 195 000 and capital loss
of R10 000 during the current year of assessment.
His monthly contributions for the current year of assessment were as follows:
 Pension fund – R4 500
 Retirement annuity fund – R10 000
 Medical aid – R24 000
He was employed for the full year of assessment. His employer made no contributions to
any fund. The balance of unclaimed contributions to all her retirement funds on 28
February 2018 amounted to R8 000.
Jack also made donation to:

 public benefit organisation of R1 000
 non-public benefit organisation of R500
Required:
Calculate Jack’s taxable income for the current year of assessment.
MANCOSA 146
Taxation 2A
Calculations Remuneration Taxable

income
R R R
Salary 300 000 300 000
Bonus 25 000 25 000
Rental income 264 300
Interest income 30 000
Less exemption (23 800) 6 200
Subtotal 325 000 595 500
Taxable capital gain:

Capital gain 195 000
Capital loss (10 000)
Annual exclusion (40 000)
145 000
Inclusion rate (R145 000 x 40%) 58 000

Subtotal 653 500
Less: Contribution to retirement (Section 11F)

Actual contributions:
Pension fund contributions (R4 500 x 12) 54 000
Retirement annuity fund contribution (R10 000 x 12) 120 000
174 000
Unclaimed contributions rolled forward from 2018 8 000
Total (actual) contribution for current year 182 000
Limited to the lesser of:

 R350 000; or
 27,5% x the higher of:
o Remuneration (R325 000); or
o Taxable income (R653 500) (refer to note 1 below)
147 MANCOSA
Taxation 2A
Thus (the higher of is) 27,5% x R653 500 = R179 713; or

 R595 500 (Taxable income before taxable capital gain) (refer to note 2 below)
Thus, (the lesser of is) R179 713 (refer to note 3 below) (179 713)
Taxable income before donations deduction R 473 787

Less: Donations to PBO 1 000
Donations to non-PBO nil
1 000
Limited to 10% x R473 787 = R47 379 ( 1 000 )
Taxable income for the current year of assessment 472 787
Notes:
1. The ‘taxable income’ is based on the taxable income after the inclusion of the taxable capital gain.
2. The taxable income for the third limitation is calculated before:
• the taxable capital gain;
• the s 11F deduction, and
• the s 18A deduction.
3. The excess of R2 288 (R182 000 – R179 713) is carried forward to the following year of assessment.
8.4 Income of minors (section 7(3))

A minor is defined as any person who is under 18 years of age. Therefore, income received by a minor will be
included in the minor's parent or guardian's gross income. Section 7(3) deems income that accrues or received by
a minor as result of donations, settlement, or any kind of disposition, by a parent to a minor, as income received
by a parent. This means that income received by a minor child by way of donation from their parent is taxable in
hands of the parent.
8.5 Limiting losses when calculating taxable income (section 20A)

This is applicate to natural persons who suffer a loss from their trading operations. Section 20A provides that a
loss from a trade cannot be claimed (set off) against income from another trade under certain circumstances. The
following steps (as outline d in figure 8.1 below) demonstrates how limiting a loss from operating a trade is
determined when calculating the taxable income for the year of assessment.
MANCOSA 148
Taxation 2A
15Figure 8.2: Determine whether the loss from the operating of a trade is limited when calculating the
taxable income
149 MANCOSA
Taxation 2A
Revision Question 8.1

Donald Ximba is a 38-year-old South African resident. He earns a salary of R126 000 per
annum and non-pensionable yearly bonus of R4 000. He contributes R8 500 per annum in
respect of current contributions of pension fund and R1 200 per month in respect of medical
scheme.
Donald’s employer made the following contributions on behalf of Donald:
 Medical fund – R600 per month
 Pension fund – R800 per month
He received the following amounts during the current year of assessment:
 Interest of R18 000 from a source within South Africa (not tax free investment)
 Interest of R10 000 from a foreign source.
During the current year of assessment, Donald made the following donations:
R
 Donation to Cancer crisis centre (public benefit organisation) 600
 Donation to Gauteng University 1 200
 Donation to Helping Hand Records (not a public benefit organisation) 800
Required:
Calculate Donald’s taxable income for the current year of assessment.
8.6 Summary
This study unit discussed specific income that is included in gross income by applying the special inclusion rules
rather than the general definition of gross income. It further examined the specific employment related deductions
of salaried employees that are allowed in terms of section 23(m). Other types and aspects of income and expenses
of individuals, such as income of minors and limiting losses, were also discussed in this study unit.
Now that you have completed this study unit and rest of other study units in this module, you are ready to proceed
to Taxation 2B module, where tax implications of business activities are explored.
MANCOSA 150
Taxation 2A
Answers to Revision Questions
Revision question 1.1: Answer

Government sources of income include personal income tax, Value Added Tax, Corporate income tax, Fuel levies
and customs and excise duties
The three major sources were as follows:
 Personal income tax which generated 505,8 billion in 2018/2019 fiscal year
 VAT which generated 348,1 billion in 2018/2019 fiscal year
 Corporate income tax which generated 231,1 billion in 2018/2019 fiscal year
Although Karin made a profit on the sale of her house, she did not sell it with an intention to make a profit. The reason
why she sold the house was due to her personal circumstances. Therefore, the inheritance as well as sale of the house
constitute a receipt of income, which is capital in nature, therefore not included in Karin's gross income.
The interest received from her investment will constitute a receipt of a revenue nature, because investing capital is
considered a profit making intention. Therefore, interest will be included in Karin's gross income.

As the apartment is transferred from Suanne to Ronnie, paragraph 67 applies. Suanne will disregard the capital gain
or loss resulting from the transfer. Now Ronnie has disposed of the apartment, he will account for the capital gain
or loss the same way as Suanne would have accounted for it.
Ronnie: R
Proceeds 800 000
Less: Base cost (refer to notes 1 to 3 below) (620 000)
Capital gain 180 000
Less: (40 000)
151 MANCOSA
Taxation 2A
Notes:
1. Time-apportionment base cost:
Before 1 October 2001 After 1 October 2001 Total
Expenditure R R R
Original cost 200 000 nil 200 000
Shower 15 000 nil 15 000
Extended kitchen nil 80 000 80 000
215 000 80 000 295 000
Expenditure incurred before and after 1 October 2001

B
P=Rx
(A + B
R = R800 000
B = R215 000
A = R80 000
215 000
P = R800 000 x
(80 000 + 215 000
P = R583 051
N
Y = B + {(P − B) x ( )}
T+N
P = R583 051
B = R215 000
N = 32 years limited to 20 years since expenses were incurred in more than one year of assessment before the
valuation date
T = 17 years
32
Y = 215 000 + {(R583 051 − R215 000) x ( )}
17+32
Y = R240 360
2. Valuation date value

The valuation date value is:
 Market value = R540 000
 20% rule = 20% x (R800 000 – R80 000) = R144 000
 Time-apportionment base cost (Note 1) = R240 360
Proceeds is higher the expenditure
Therefore: Highest is market value = R540 000
MANCOSA 152
Taxation 2A
Proceeds is higher than market value

Therefore: valuation date value = R540 000
3. Base cost
Base cost = valuation date value (Note 2) + expenditure after 1 October 2001
= R540 000 + R80 000
= R620 000
Revision Question 8.1: Answer

Calculations Remuneration Taxable
income
R R R
Salary 126 000 126 000
Bonus 4 000 4 000
Fringe benefit: 16 800 16 800
Medical fund (R800 x 12) 9 600

Pension fund (R600 x 12) 7 200
Interest income from local source 18 000
Less exemption (23 800) nil
Interest income from foreign source (fully taxable) 10 000

Subtotal 146 800 156 800
Less: Contribution to retirement (Section 11F)

Deduction limited to the lesser of:
 R350 000 or
 27,5% of the higher of:
o Remuneration (R146 800) or Taxable income (R156 800)
Therefore 27,5% x R156 800 = R43 120; or
 R156 800
R43 120 is less than R350 000 and R156 800 therefore the limit is R43 120.
Thus, (the full amount is deductible) (8 500)
Taxable income before donations deduction 148 300
153 MANCOSA
Taxation 2A
Less: Donations
Donation to Cancer crisis centre – allowable 600
Donation to Gauteng University – allowable 1 200
Donation to Helping Hand Records – not allowable nil
1 800
Limited to 10% x R148 300 = R14 830 therefore can deduct the full amount (1 800)_
MANCOSA 154
Taxation 2A
References
Caltex Oil (SA) Limited v Secretary for Inland Revenue. 1974. (37), SATC 1. (Supreme Court of Appeal).
Coetzee, K., De Hart, K. L., Koekemoer, A. D. Oosthuizen, A. and Stedal, C. 2018. A Student's Approach to
Income Tax: Natural Persons 2019. Cape Town: LexisNexis (Pty) Ltd.
South Africa. 1962. Income Tax Act 58 of 1962 (online). Available: http://www.into-
sa.com/uploads/download/file/12/Income_Tax_Act__1962_.pdf (Accessed 09 April 2019).
South Africa. 2017. Public Finance Management Act No. 1 of 1999 (online). Available:
http://www.treasury.gov.za/legislation/pfma/PFMA%201999%20as%20amended%20March%202017.pdf
(Accessed 05 April 2019).
South Africa. 2017. Public Finance Management Amendment Act No. 29 of 1999 (online). Available:
http://www.energy.gov.za/files/policies/act_publicfinancemanagement_29of1999.pdf
South African Tax Guide. 2019. Fringe benefits – Medical Costs incurred by an Employer (online). Available:
http://www.sataxguide.co.za/fringe-benefits-medical-costs-incurred-by-an-employer/ (Accessed 31 May
2019).
Stiglingh, M., Koekemoer, A.D., Van Heerden, L., Wilcocks, J.S. and Van Der Zwan, P. 2018. SILKE: South
African Income Tax 2019. Durban: Lexus Nexus (Pty) Ltd.
The South African Revenue Service. 2019. Interest and dividends (online). Available:
http://www.sars.gov.za/Tax-Rates/Income-Tax/Pages/Interest-and-Dividends.aspx (Accessed 04 March
2019).
The South African Revenue Service. 2019. Medical tax credit rates (online). Available:
http://www.sars.gov.za/Tax-Rates/Pages/Medical-Tax-Credit-Rates.aspx (Accessed 05 April 2019).
The South African Revenue Service. 2019. Rates of tax for individuals (online). Available:
http://www.sars.gov.za/Tax-Rates/Income-Tax/Pages/Rates%20of%20Tax%20for%20Individuals.aspx
(Accessed 04 April 2019).
The South African Revenue Service. 2019. Rates per kilometre (online). Available:
https://www.sars.gov.za/Tax-Rates/Employers/Pages/Rates-per-kilometer.aspx (Accessed 02 June 2019).
The South African Revenue Service. 2019. Retirement lump sum benefits (online). Available:
https://www.sars.gov.za/Tax-Rates/Income-Tax/Pages/Retirement-Lump-Sum-Benefits.aspx (Accessed 31
May 2019).
155 MANCOSA
Taxation 2A
Bibliography
Bruwer, L., Cass, C., Cucciolilllo, D., Koekemoer, A. D., Oosthuizen, A. and Stedall, C. 2018. A student's
approach to income tax: Business Activities 2019. LexisNexis (Pty) Ltd: Cape Town.
Stiglingh, M., Van Heerden, L., Koekemoer, A., Wilcocks, J.S. and Van Der Zwan, P. 2019. SILKE: South
African Income Tax. Cape Town: LexisNexis (Pty) Ltd.
MANCOSA 156
Taxation 2A
157 MANCOSA

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TAXATION 2A

 Bachelor of Commerce in Financial Management

Unit 1: Introduction to South African taxation system.............................................................................................. 9

Unit 2: Gross income............................................................................................................................................. 32

Unit 3: Income exempt from tax ............................................................................................................................ 44

Unit 4: General Deduction Formula....................................................................................................................... 54

Unit 5: Fringe Benefits........................................................................................................................................... 71

Unit 6: Retirement Benefits ................................................................................................................................. 103

Unit 7: Capital Gains Tax .................................................................................................................................... 120

Unit 8: Income and expenses of individuals ........................................................................................................ 138

Answers to Revision Questions .......................................................................................................................... 151

Bibliography ........................................................................................................................................................ 156

Table 1.2: Interest Exemptions ......................................................................................................................... 17

Table 1.3: 2019 tax year (1 March 2018 – 28 February 2019).......................................................................... 20

Table 1.4: Tax Rebates .................................................................................................................................... 21

Table 1.5: Medical tax credit rates .................................................................................................................... 23

Table 6.1: Steps to calculate tax on a withdrawal benefit ............................................................................... 109

Table 6.3: Steps to calculate tax on a retirement benefit ................................................................................ 115

List of Figures and Illustrations

Figure 1.1: Overview of taxation framework (Source: Coetzee, De Hart, Koekemoer,

Figure 1.2: Steps to calculate taxable income .................................................................................................. 14

Figure 2.1: Calculation of taxable income diagram ........................................................................................... 34

Figure 3.1: Taxable income framework............................................................................................................. 46

Figure 4.1: General deduction formula in taxable income framework ............................................................... 56

Figure 4.2: General deduction formula ............................................................................................................. 57

Figure 5.3: Travel allowance taxable ................................................................................................................ 96

Figure 6.1: Study Unit 6 summary .................................................................................................................. 118

Figure 8.1: Framework to calculate taxable income........................................................................................ 140

We hope you enjoy the module.

C. Learning Outcomes and Associated Assessment Criteria of the Module

Learning Outcomes of the Module Associated Assessment Criteria of the Module

 General rules are applied to determine the deductibility of

 Provisions of the Seventh Schedule are identified and applied

D. Learning Outcomes of the Units

SARS South African Revenue Service

CGT Capital Gains Tax

VAT Value Added Tax

PAYE Pay As You Earn

PFMA Public Finance Management Act

MTC Medical Tax Credit

AMTC Additional Medical Tax Credit

F. How to Use this Module

H. Prescribed and Recommended Textbook/Readings

The prescribed and recommended textbooks/readings for this module is:

Special Feature Icon Explanation

The Associated Assessment Criteria is the evaluation of the students’

PRACTICAL Practical Application or Examples will be discussed to enhance

APPLICATION understanding of this module.

Case Studies are included in different sections in this Module Guide.

You may come across links to Videos Activities as well as instructions

VIDEO ACTIVITY on activities to attend to after watching the video.

Unit Learning Outcomes

CONTENT LIST LEARNING OUTCOMES OF THIS UNIT:

1.1 Introduction  Discuss the system of taxation in South Africa

1.2 Taxation in perspective

1.4 Calculation of taxable income  Calculate taxable income of individuals

1.6 Summary  Summarise topic areas covered in unit

Prescribed and Recommended Textbooks/Readings

 Coetzee, K., De Hart, K. L., Koekemoer, A. D. Oosthuizen, A. and Stedal, C.

Gross income XXXXXX