Silke 2018 S Compressed 1

Silke: South African Income Tax
2018
2018
Professor Madeleine Stiglingh (volume editor)

DCom (UP) CA (SA)
Professor Alta Koekemoer
MCom (Taxation) (UP) CA (SA)
Professor Linda van Heerden
MCom (Taxation) (UP) CA (SA) LLB (Unisa)
Professor Jolani S Wilcocks
Redge de Swardt
MCom (Taxation) (UP) LLB (UP)
Advocate of the High Court
Professor Pieter van der Zwan
Assisted by:
Karen Stark
Wessel Smit
Rudi Oosthuizen
Evádne Bronkhorst
Liza Coetzee
Herman Viviers
Riaan de Lange
Annelize Oosthuizen
Alicia Heyns
Leonard Willemse
Juanita Dos Santos-Venter
Herman van Dyk
Dawid van der Berg
Stevie Coetzee
Andrea Herron
Marese Lombard
Lizelle Bruwer
Mpumi Monageng
Ilinza Penning
Rudie Nel
Piet Nel
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Preface
The objective of the authors and publishers of Silke: SA Income Tax is to provide a book that sim-
plifies the understanding and application of tax legislation in a South African context for both stu-
dents and general practitioners. To ensure that we continue to reach this objective, the authors
undertook a major rewrite of the book and
l simplified the language used
l changed the structure of the book, and
l included new chapters dealing with Transfer Duty and Securities Transfer Tax.
This is the 20th edition of the book. Please take note that, from this 20th edition, Silke: SA Income Tax
will only be available in English.
This edition it is up to date with the amendments that were issued in Bill format or that were promul-
gated during 2017. As far as income tax is concerned, most of the amendments apply to the 2018
year of assessment, that is, years of assessment ending on 28 February 2018 for persons other than
companies, and financial years ending during the period of 12 months ending on 31 March 2018 for
companies. Nevertheless, some amendments may have other effective dates.
In this edition we again attempt to assist the students preparing for the qualifying examination of
chartered accountants. All the discussions in the book that fall outside the 2019 syllabus of the Initial
Test of Competence (ITC) are shaded in the headings of the relevant paragraphs. Students prepar-
ing for the Tax Professional qualification should, however, still include the shaded sections in their
preparation.
This edition is, again, a collaborative effort by several authors and co-workers. The task of producing
a book of this nature so early is made so much more difficult by the fact that the amending legislation
is, regrettably, not only becoming increasingly complex, but is promulgated so late in the year.
We appreciate any suggestions that you may offer for improvement, since we continue to strive
to produce a work that will be useful to general practitioners and students without sacrificing accur-
acy or quality.
Madeleine Stiglingh
Alta Koekemoer
Linda van Heerden
Jolani Wilcocks
Redge de Swardt
Pieter van der Zwan
January 2018
v
Contents
Page
Preface ......................................................................................................................................... v
1 General principles of taxation ............................................................................................ 1
2 Taxation in South Africa ..................................................................................................... 11
3 Gross income ..................................................................................................................... 27
4 Specific inclusions in gross income................................................................................... 55
5 Exempt income .................................................................................................................. 69
6 General deductions............................................................................................................ 113
7 Natural persons .................................................................................................................. 137
8 Employment benefits.......................................................................................................... 175
9 Retirement benefits ............................................................................................................ 217
10 Employees’ tax ................................................................................................................... 243
11 Provisional tax .................................................................................................................... 267
12 Special deductions and assessed losses ......................................................................... 281
13 Capital allowances and recoupments ............................................................................... 323
14 Trading stock ..................................................................................................................... 433
15 Foreign exchange .............................................................................................................. 455
16 Investment and funding instruments.................................................................................. 485
17 Capital gains tax (CGT) ..................................................................................................... 535
18 Partnerships ....................................................................................................................... 641
19 Companies and dividends tax ........................................................................................... 657
20 Companies: Changes in ownership and reorganisations.................................................. 699
21 Cross-border transactions ................................................................................................. 751
22 Farming operations ............................................................................................................ 829
23 Turnover tax system .......................................................................................................... 861
24 Trusts .................................................................................................................................. 869
25 Insolvent and deceased estates ........................................................................................ 893
26 Donations tax ..................................................................................................................... 905
27 Estate duty ......................................................................................................................... 921
28 Transfer duty ...................................................................................................................... 947
29 Securities transfer tax......................................................................................................... 955
30 Customs and excise duty .................................................................................................. 961
31 Value-added tax (VAT) ....................................................................................................... 967
32 Tax avoidance .................................................................................................................... 1049
33 Tax administration .............................................................................................................. 1063
Appendix A: Tax monetary thresholds ......................................................................................... 1119
Appendix B: Rates of tax and other information .......................................................................... 1125
Appendix C: Travel allowance ..................................................................................................... 1129
Appendix D: Expectation of life and present value tables ........................................................... 1131
Appendix E: Write-off periods acceptable to SARS .................................................................... 1135
Appendix F: Subsistence allowance – foreign travel ................................................................... 1137
Table of cases .............................................................................................................................. 1139
Special court cases ...................................................................................................................... 1145
Table of provisions ....................................................................................................................... 1147
Subject index ................................................................................................................................ 1155
vii
1 General principles of taxation
Evádne Bronkhorst and Madeleine Stiglingh
Outcomes of this chapter

After studying this chapter, you should be able to:
l define and understand the concept of taxation
l describe the components of taxation
l evaluate tax policy by applying the principles of a good tax system.
Contents
Page
1.1 Overview .......................................................................................................................... 1
1.2 Tax base .......................................................................................................................... 2
1.3 Tax rate structure ............................................................................................................. 2
1.4 Principles of taxation ........................................................................................................ 5
1.4.1 The Equity Principle......................................................................................... 5
1.4.2 The Certainty Principle .................................................................................... 6
1.4.3 The Convenience Principle ............................................................................. 7
1.4.4 The Economic Efficiency Principle .................................................................. 7
1.4.5 The Administrative Efficiency Principle ........................................................... 8
1.4.6 The Flexibility Principle .................................................................................... 8
1.4.7 The Simplicity Principle ................................................................................... 8
1.5 Conclusion ....................................................................................................................... 10
1.1 Overview
There is a relationship between a government and its citizens that is referred to as the social
compact. In this social compact a citizen has the responsibility to pay taxes, and a government has
the responsibility to deliver certain goods and services in return.
Taxes can be defined as compulsory payments that are imposed on citizens to raise revenue in order
to fund general expenditure, such as education, health and housing, for the benefit of society as a
whole.1
In deciding on an appropriate level of taxation that is imposed on citizens, the government of a
country formulates a tax policy. Policies are those courses of action taken by governments to ensure
that their objectives are achieved.2
In deciding on an appropriate tax policy, governments have to make decisions about the tax base
(see 1.2), the tax rate structure and the incidence of the tax liability (see 1.3). All of the afore-
mentioned must be guided by the general principles of taxation (see 1.4). The following figure
illustrate these components of tax policy.
_________
1 Steyn T, Franzsen R and Stiglingh M ‘Conceptual framework for classifying government imposts relating to the tax burden
of individual taxpayers in South Africa’ International Business & Economics Research Journal (2013) vol 12(2) 242
accessed 2013-11-18 available from http://repository.up.ac.za/bitstream/handle/2263/21199/Steyn_Conceptual(2013).pdf?
sequence=1.
2 Merriam-Webster Policy (2013) accessed 2013-11-18 available from http://www.merriam-webster.com/dictionary/policy.
1
Silke: South African Income Tax 1.1–1.3
× =
Tax base Tax structure Tax incidence
(par. 1.2) (par. 1.3) (par. 1.3)
Definition Rate structure Tax incidence
Tax principles
(par 1.4)
1.2 Tax base

The tax base is the amount on which tax is imposed. This amount is usually determined by legislative
provisions that provide guidance on what is included and excluded from the tax base. The amounts
included in the tax base do not necessarily correlate with our normal understanding of economic
income. For example, when you receive interest income of R30 000, your bank balance and your
economic income increase by R30 000. If tax legislation provides that R20 000 interest income
received per annum is tax free, then only R10 000 (R30 000 – R20 000) of the interest income will be
included in the tax base that is subject to tax. Evidently, economic income will not always be equal to
the amount subjected to tax.
While a specific tax base will be defined within each piece of legislation, a tax base is broadly based
on income, wealth or consumption:
l An income tax base includes income earned or profits generated by taxpayers during a year of
assessment.
l A wealth tax base consists of the value of assets or property of a taxpayer.
l A consumption tax base encompasses the amount spent by taxpayers on goods and services.
After determining the tax base, a percentage or unit is applied to this amount to determine the tax
liability.
1.3 Tax rate structure

The tax rate structure is sometimes expressed as a percentage, for example where tax is imposed at
14% on the value of a transaction. Other times it can be expressed as an amount per unit, for
example where excise taxes are imposed on each packet of cigarettes consumed in a country.
The following terminology is important in understanding the tax rate structure:
l Marginal tax rate: This is the tax rate that will apply if the tax base increases by one rand.
l Statutory tax rate: This is the tax rate that is imposed on the tax base as determined in
accordance with relevant legislation.
l Average tax rate: The average tax rate represents the rate at which tax is paid with reference to
the total tax base of a relevant taxpayer. This is determined by dividing the total tax liability by the
total tax base (i.e. Total tax liability / Total tax base). The total tax base is determined having
regard to relevant legislative provisions.
l Effective tax rate: The effective tax rate can be determined by dividing the tax liability by the total
profit or income. The effective tax rate is often used as a measure to compare the effective tax
liabilities of different taxpayers.
2
1.3 Chapter 1: Introduction and Interpretation
Example 1.1. The average tax rate vs. the effective tax rate
Melody earned interest income of R28 500 and net rental income of R28 500. Suppose the
applicable tax rate is 39%.
Interest income
The average tax rate = Total tax liability / Total tax base
If we assume that R23 800 of the interest income will not be taxable, the tax base will be R4 700
(R28 500 – R23 800).
Melody’s tax liability is R1 833 (R4 700 × 39%).
The average tax rate for Melody’s interest income is 39% (R1 833/R4 700).
The effective tax rate = Total tax liability/Total profit or income
The tax liability will still be R1 833. The total interest income is R28 500. The effective tax rate is
therefore 6,4% (R1 833/R28 500).
Net rental income
The average tax rate = Total tax liability / Total tax base
Assuming the rental income is fully taxable, the total tax base is R28 500.
Melody’s tax liability would then be R11 115 (R28 500 × 39%).
The average tax rate for Melody’s net rental income is 39% (R11 115/R28 500).
The effective tax rate = Total tax liability/Total profit or income
The tax liability will still be R11 115. The total profit equals R28 500. The effective tax rate is
therefore 39% (R11 115/R28 500).
The above can be summarised as follows:
Description Interest income Net rental income
Income before tax R28 500 R28 500
Less: Tax (R1 833) (R11 115)
Income after tax R26 667 R17 385
Average tax rate 39% 39%
Effective tax rate 6,4% 39%
An analysis of the average tax rate (39%) incorrectly creates the impression that the relative after
tax income for both investments should be similar. However, in reality the after tax income of the
interest-bearing investment exceeds the after tax income of the property investment. This conclu-
sion is reflected in the effective tax rate, i.e. the effective tax rate of the interest income (6,4%) is
significantly lower than the effective tax rate of the net rental income (39%).
There are three tax rate structures:

l Progressive: The effective tax rate increases as the tax base increases.
l Proportional: The effective tax rate does not change in line with the tax base (a flat rate tax).
l Regressive: The effective tax rate increases as the tax base decreases.
The type of tax structure elected by policymakers would depend on a number of aspects, one of
which is the policy objectives to be achieved. Governments that aim to achieve wealth redistribution,
usually prefer progressive tax rates.
Example 1.2. Tax rate structure analysis
Miss Clules generated a total profit before tax of R720 730. Her tax practitioner determined that
the amount that should be subjected to tax is R700 730 (i.e. the taxable income).
Assume that the following tax rate table applies:
Taxable amount Rate of tax Tax Bracket
Exceeding R406 400 but not R96 264 plus 36% of the amount by which Tax Bracket 1
exceeding R550 100 taxable amount exceeds R406 400
Exceeding R550 100 but not R147 996 plus 39% of the amount by which Tax Bracket 2
exceeding R701 300 taxable amount exceeds R550 100
Exceeding R701 300 R206 964 plus 41% of the amount by which Tax Bracket 3
taxable amount exceeds R701 300
continued
3
Silke: South African Income Tax 1.3
Using this information, determine the following:

l the tax base
l the tax liability
l the marginal tax rate
l the statutory tax rate
l the average tax rate
l the effective tax rate, and
l if the tax rate structure is progressive, proportional or regressive.
SOLUTION
l The tax base
The tax base is the amount that should be subjected to tax. In this case it is the R700 730
taxable income
l The tax liability
Based on the tax tables provided, Miss Clules will be liable for tax of R206 741,70 [R147 996
+ {39% × (R700 730 – R550 100)}].
l The marginal tax rate
The marginal tax rate of Miss Clules will be 39%. Miss Clules’ taxable income is R700 730.
Currently, her taxable income falls within Tax Bracket 2. If her taxable income increased by
R1 (to R700 731), her taxable income would still fall within Tax Bracket 2 and she would
continue to be taxed at 39%. The tax rate that will be imposed on one additional rand
represents her marginal tax rate.
l The statutory tax rate
The statutory tax rate is the legislated rate. It differs from the marginal tax rate in that it is not
the rate that will be imposed on the next rand, but rather the rate that will be imposed on the
current taxable income. The statutory tax rate applicable to the taxable income of
Miss Clules is 39%, as her current taxable income of R700 730 falls within Tax Bracket 2.
l The average tax rate
The average tax rate can be stated as: Total tax liability / total tax base. In this case the tax
base is represented by the taxable income of R700 730. Therefore the average tax rate is
29,5% (R206 741,70 / R700 730).
l The effective tax rate
The effective tax rate can be stated as: Tax liability / total profit. Miss Clules’ profit before tax
is R720 730. Her tax liability will still be R206 741,70. Therefore the effective tax rate is 28,7%
(R206 741,70 / R720 730).
l The tax rate structure
The tax rate structure applied to Miss Clules’ taxable amount is progressive, because as her
taxable income increases, the effective tax rate also increases.
There is a common misconception that the person liable for tax is the person required to pay the tax.
This is not always the case. Sometimes the person actually paying the tax, does so on behalf of the
person liable to pay the tax. For example, in many countries, employers withhold and pay employ-
ment/payroll taxes to the revenue authorities. It is actually the employee who is liable to pay these
taxes. However, the actual payment is made by the employer on behalf of the employee. In this
example, the tax burden is borne by the employee, even though it is paid by the employer. This is
known as the incidence of taxation, i.e. who bears the true burden of a tax.
In designing tax policy, it is important for policymakers to determine on whom the burden of the tax
will fall. For example, say a specific country wants to focus on the upliftment of lower-income house-
holds by ensuring that these households pay less tax than higher-income households. If the govern-
ment decides to increase fuel levies resulting in increased fuel prices, transporters of fruit and
vegetables may then be compelled to increase their prices in order to cover the higher fuel prices.
This will result in an increase in the prices of fruit and vegetables. This will negatively affect the
consumers, including lower-income households, of the products. Therefore, the increase in the fuel
levy had the unintended consequence of shifting the tax burden to lower-income households.
Another element that policymakers should consider when designing tax policy, is the principles of
taxation.
4
1.4 Principles of taxation

While there is no perfect tax policy, tax policy can be benchmarked against the commonly accepted
principles of a good tax system.
The principles of a good tax system are generally referred to as:
l The Equity Principle: Tax should be imposed according to one’s taxable ability or capacity.
l The Certainty Principle: The timing, amount and manner of tax payments should be certain.
l The Convenience Principle: Taxes should be imposed in a manner or at a time that is convenient
for taxpayers.
l The Economic Efficiency Principle: Tax should be designed in a manner not unduly influencing
economic decision-making.
l The Administrative Efficiency Principle: The tax system should be designed in such a manner as
to not impose an unreasonable administrative burden on the taxpayer and the revenue
authorities.
l The Flexibility Principle3: A good tax system should be designed in such a manner that it can
easily adjust in response to changing economic circumstances.
l The Simplicity Principle4: A tax should be designed in a manner that is easy to understand and
apply.
The priority of application of these principles would depend on the policy objective to be achieved.
For instance, the redistribution of wealth would require a focus on the Equity Principle to ensure that
the tax policy facilitates wealth allocation to lower-income households.
Whatever the order of application, these principles function like a ‘tax ecosystem’. Therefore, there
cannot be an isolated focus on only one principle as this may result in policy failure. For instance,
where a tax deduction is granted to lower-income taxpayers based on the Equity Principle, the
purpose may be defeated if a high administrative burden is imposed on taxpayers desiring to claim
such deduction. Insufficient focus on the Administrative Efficiency Principle has therefore negatively
impacted the ability to apply the Equity Principle.
The following sections will analyse the principles of taxation in more detail.
1.4.1 The Equity Principle

According to the Equity Principle, tax should be imposed according to one’s taxable ability or
capacity. The Equity Principle is based on the concept of fairness. A tax should be fair and should
also be perceived to be fair.5 If a tax is perceived to be unfair, it could negatively impact taxpayers’
willingness to comply.
What is considered to be fair, may be different for each person. Therefore, while the Equity Principle
is an important tax policy principle, its implementation may prove to be challenging. A person’s
economic capacity is at times influenced by personal choices. The decision to smoke, for example,
could result in the payment of more taxes (internationally, cigarettes are generally subjected to taxes
such as value-added tax and excise tax). Should a person be penalised just because such person
exercises his or her free will to satisfy certain desires? How should one then determine what is
regarded as fair and what is not?
Adam Smith6 indicated that equity is underpinned by the ‘ability-to-pay principle’ and the ‘benefit
principle’. In terms of the ability-to-pay principle, the tax liability imposed on a taxpayer should take
into account the economic capacity of the taxpayer. The ‘benefit principle’ indicates that equity is
established where a taxpayer pays tax in proportion to the benefit received from a government (via
tax revenue spending).
_________
3 While the Flexibility Principle and the Simplicity Principle are not part of the principles established by Adam Smith, these
principles are recognised internationally as important modern tax policy design principles.
4 While the Flexibility Principle and the Simplicity Principle are not part of the principles established by Adam Smith, these
principles are recognised internationally as important modern tax policy design principles.
5 Ibid.
6 Ibid.
5
The Equity Principle can further be subdivided into vertical and horizontal equity:7
l Vertical equity is achieved where a taxpayer with a greater economic capacity (or ability to pay)
bears a greater burden of tax than a taxpayer with a lesser ability. For example, where Thabelo
earns taxable income of R500 000 per annum and Dumisane earns R250 000, Thabelo should
pay a greater amount of tax relative to Dumisane in order to establish vertical equity.
l Horizontal equity is achieved where taxpayers with equal economic capacity bear an equal tax
burden. For example, let us assume Thabelo is paid R5 000 in cash for services rendered and
Dumisane receives a laptop with a market value of R5 000 for services rendered. To establish
horizontal equity, both should be subjected to tax on the R5 000 (that is the value of consideration
for services rendered).
Example 1.3. The Equity Principle

Zinkandla Republic has decided that citizens should pay toll fees for the privilege to use certain
public roads. These fees will then be used to maintain the roads. Toll fees will be based on
kilometres travelled between certain points on designated public roads. No special rates are
available to any specific class of road user. Zinkandla Republic has three provinces: Zum-Zum
Province, Beki Province and Dela-Dela Province. Zum-Zum Province is by far the key economic
contributor and its roads carry the most traffic. The wealthier citizens also tend to reside in Zum-
Zum Province.
Would it be equitable if Zinkandla Republic introduces toll fees only in Zum-Zum Province?
SOLUTION
l Vertical equity
Based on the ability-to-pay principle, the proposed system will not achieve vertical equity.
Toll fees will not be based on a road user’s ability to pay/economic capacity but on the kilo-
metres travelled on designated public roads. In other words, a road user that has an annual
economic income of R1 500 000 and that travels 240 kilometres weekly, will pay exactly the
same toll fees as a road user earning R100 000 per annum travelling the same number of
kilometres.
The proposed system is more closely aligned with the benefit principle, because the road
users that receive the greatest benefit pay the most toll fees. For example, if Sandile uses the
relevant road each day, she will pay more toll fees than Khanyi who only uses the road once
a month. Evidently, the benefit principle does not consider a specific road user’s ability to
pay.
l Horizontal equity
Based on the ability-to-pay principle, horizontal equity will not be achieved. Toll fees will not
be levied according to a road user’s ability to pay, but on the number of kilometres travelled
on designated public roads. Taxpayers with the same ability to pay might be required to
travel different distances on designated public roads and would therefore not have to pay
the same amount of toll fees.
Based on the benefit principle, horizontal equity will be achieved as far as Zum-Zum Prov-
ince is concerned. The toll fees liability increases in line with the increase in the benefit from
using the designated public road. Therefore, if two different citizens both use the relevant
road five times a week, they will both be required to pay the same amount of toll fees
because they both receive the same benefit.
However, horizontal equity is not achieved on a national level, because road users in Beki
Province and Dela-Dela Province are able to use public roads free of charge.
1.4.2 The Certainty Principle

According to the Certainty Principle, the timing, amount and manner of tax payments should be
certain. Uncertainty about aspects such as how the revenue authorities will treat a certain
transaction, or how and by when the legislator will introduce new legislation or amend existing
legislation, may have a profound impact on the economy of a country.
Taxpayers cannot act on promises alone, only on what is embodied in law. Therefore, it is imperative
that tax policy be finalised and certain long before its implementation and that it is managed in a
_________
7 Black P, Calitz E and Steenekamp T Public Economics, (5th ed 2011) Oxford: Oxford University Press ch 10.
6
transparent manner to facilitate the creation of certainty. Furthermore, there should also be certainty
about how to apply the relevant legislative principles.
1.4.3 The Convenience Principle

According to the Convenience Principle, taxes should be imposed in a manner or at a time that is
convenient for taxpayers. The Convenience Principle is all about making it easy for taxpayers to
comply with tax legislation and to pay their tax liabilities.8
For example, requiring taxpayers to physically visit the offices of the revenue authorities weekly to
complete their tax returns and to submit all the supporting documentation would contradict the
Convenience Principle. Allowing taxpayers to comply with their tax obligations via the Internet in the
comfort of their own homes would support the Convenience Principle and could possibly increase
taxpayer compliance. Another example of the application of the Convenience Principle is the
inclusion of value-added tax in the retail selling prices of goods and services. Just imagine buying
groceries at a retail store and then having to queue at an in-store revenue authority office to declare
and pay the required taxes!
1.4.4 The Economic Efficiency Principle

According to the Economic Efficiency Principle, a tax is regarded as economically efficient if it does
not unduly influence a person’s economic decision-making.9 Economic efficiency plays an important
role in preserving the tax base. Where a tax is inefficient, taxpayers would be motivated to change
their behaviour in an effort to avoid paying the tax. For example, where interest income is more
heavily taxed than dividend income, some taxpayers might elect to rather invest in dividend-bearing
investments in order to reduce their tax burden. Consequently, there would be a decrease in tax
revenue collected and governments would have to seek alternative avenues to satisfy their revenue
needs.
A tax that is not economically efficient is not always negative from a policy perspective when it
encourages desired behaviour. For example, should taxes levied on alcohol increase, it could
encourage reduced alcohol consumption, and also generate indirect social benefits, such as less
domestic violence and road accidents
Example 1.4. Economic efficiency

The Democratic Republic of Green is proud of the rich biodiversity its country has to offer. It is a
destination of choice for international travellers and therefore environmental conservation is one
of its top priorities. As part of the country’s conservation efforts, the Green Revenue Authority has
introduced a tax on liquids in plastic bottles. Liquids in glass bottles will remain tax free.
Dr Teddi is very upset. She has two small children and never buys cold drinks in glass bottles in
fear of one of them breaking a glass bottle and accidentally cutting themselves on the broken
glass. To avoid paying tax, she no longer buys cold drink in plastic bottles. She now buys cold
drink in glass bottles and pours it into re-usable plastic cups.
Is this tax economically efficient?
SOLUTION
The imposition of a tax on liquids in plastic bottles has caused Dr Teddi to change her behaviour,
i.e. she now buys cold drink in glass bottles where she previously only bought cold drink in
plastic bottles. Therefore, the tax system is not economically efficient because it has caused
behavioural change.
However, in this specific example, the intended policy outcome called for a tax system that is not
economically efficient, as the Democratic Republic of Green wanted to encourage behavioural
change.
It should be noted that even though the intention was to institute behavioural change, in reality
this may not always happen. Some consumers may continue with the undesired behaviour
because of their specific preferences.
_________
8 Smith A The wealth of nations vol 2 (1947) JM Dent & Sons Ltd: London at 307–308.
9 Black P, Calitz E and Steenekamp T Public Economics, (5th ed 2011) Oxford: Oxford University Press ch 11.
7
1.4.5 The Administrative Efficiency Principle

According to the Administrative Efficiency Principle, the tax system should be designed in such a
manner as to not impose an unreasonable administrative burden on the taxpayer and the revenue
authorities. A tax system should therefore cost much less to implement and maintain than the tax
revenue it is able to generate.
Administrative efficiency encompasses the resources required of revenue authorities to give effect to
tax legislation (for example, number of employees, process flow design, etc.) and also the adminis-
trative burden imposed on taxpayers to comply with relevant tax legislation.10
From a revenue authority’s perspective, administrative efficiency relates to the number of internal
controls required to be in place to audit taxpayer’s information, the design of the organisational
structure and the number of personnel required to ensure that the provisions of the different tax Acts
are complied with.
From a taxpayer’s perspective, administrative efficiency can relate to anything from keeping
supporting documents in the prescribed format, the frequency with which tax and other returns have
to be submitted to the revenue authority and the hiring of a tax practitioner to assist with the
completion of tax returns.
1.4.6 The Flexibility Principle

According to the Flexibility Principle, a good tax system should be designed in such a manner that it
can easily adjust in response to changing economic circumstances. The global economy brings with
it rapid changes. A tax system can quickly become out-dated or even obsolete if it does not remain
aligned with the dynamic economic and trade environment. For example, the introduction of
electronic commerce has resulted in an increase in the cross-border sale of goods via the Internet.
This has required governments to give more thought to aspects such as which country has the right
to tax the revenue generated from goods sold over the Internet.
Tax policy is never a closed book. There is always something that can be drafted better, a tax gap
that comes to light, or a need for legislation to support a movement to encourage socially acceptable
behaviour.
1.4.7 The Simplicity Principle

According to the Simplicity Principle, a tax should be designed in a manner that is easy to
understand and apply. Tax legislation and its application should be simple enough so that a relatively
knowledgeable taxpayer would be able to understand and apply it.11
It is therefore important that governments consider the Simplicity Principle in determining how many
taxes should be implemented, what items should be excluded from a specific tax base and how
many supplementary materials should be issued in addition to primary legislation.
Example 1.5. Comprehensive example

Mr Politik has been tasked with designing a tax on food products that have been classified as
unhealthy by the World Health Organization. His research has indicated that unhealthy food
products in Group A are mostly consumed by low-income households, unhealthy food products
in Group B by mid-income households and unhealthy food products in Group C by high-income
households. The intended ‘unhealthy food tax’ has been communicated to the media. However,
because the options had not been analysed yet, the media statement was very brief and did not
include much detail. This caused the media to speculate on the design and impact of the
proposed tax. This caused a lot of unhappiness among South African consumers.
continued
_________
10 Black P, Calitz E and Steenekamp T Public Economics (5th ed 2011) Oxford: Oxford University Press ch 11.
11 BusinessDictionary.com Taxation principles (2013) accessed 2013-11-21 available from http://www.businessdictionary
.com/definition/taxation-principles.html.
8
Mr Politik has drafted the following options and requested that you comment on whether or not
his proposals are in line with the principles of a good tax system:
Option 1
All relevant unhealthy food products will be subjected to a consumption tax of 10% of the sales
price. Consumers will be required to keep records of their consumption and file tax returns
annually that account for their consumption of these food products.
Option 2
All relevant unhealthy food products will be subjected to a consumption tax of 10%. Suppliers will
be required to add the tax to the sales prices of the unhealthy food products and to file a monthly
tax return. The tax return should separately indicate the total tax attributable to the unhealthy
food products in the relevant categories.
Option 3
Unhealthy food products in Group A, Group B and Group C will be subjected to a consumption
tax of 2%, 5% and 12% respectively. Suppliers will be required to add the tax to the sales prices
of the food products and to file a monthly tax return. The tax return should separately indicate the
total tax attributable to the unhealthy food products in the relevant categories.
SOLUTION
Equity
l Options 1 and 2
A consumption tax of 10% on food products in Categories A, B and C represents a
regressive tax rate structure. This is because the tax amount would constitute a greater
portion of a low-income consumer’s total income than of a high-income consumer’s income.
This would be equitable from a horizontal perspective as the tax liability increases in line with
the benefit obtained, i.e. the more food consumed, the greater the tax liability. However, this
tax rate structure does not consider the consumer’s ability to pay. Low-income households
will be expected to pay exactly the same amount of tax as high-income households.
Therefore, the proposed tax rate structures do not achieve vertical equity.
l Option 3
Different rates are imposed on different food product categories based on the income-earning
capacity of the consumers. Therefore, consumers with a greater ability to pay would be
expected to bear a higher tax burden than those having a lesser ability. Because the tax liability
increases as the income earned increases, vertical equity is achieved.
Horizontal equity is achieved within a specific category, i.e. if Thuli purchases an unhealthy
food product included in Category A, for example full-cream milk, and Tlale purchases an
unhealthy food product included in Category A, for example potato chips, both will be
subjected to the same tax rate. However, horizontal equity does not prevail for purchases in
different categories. Suppose Tlale purchases cheddar cheese that is included in Cat-
egory C. The cheddar cheese has the same fat content as the full-cream milk purchased by
Thuli that is included in Category A. Despite the aforementioned, the cheddar cheese is
subjected to a higher tax rate than the full-cream milk even though they both have the same
fat content. Horizontal equity would have been achieved if both the cheddar cheese and the
full-cream milk were subjected to the same tax rate.
It is important to note that the implications of this proposal would depend greatly on the
accuracy of the assumptions on which the categorisation of the food products was based.
The tax rate structure may also become regressive where a low-income taxpayer decides to
purchase food products included in Category C. The general expectation would be that this
would be the exception to the rule, as the research proved that low-income consumers prefer
food products in Category A.
Certainty
The Certainty Principle has not been sufficiently adhered to. The media statements were made
before the policymakers performed an analysis of the impact of the proposed options and
decided on the best option. This has caused speculation among consumers, resulting in
uncertainty.
continued
9
Convenience
Options 2 and 3 will be more convenient than Option 1. The consumers are effectively those who
bear the economic burden of the tax. By including the proposed tax in the retail sales price of the
unhealthy food products, no administrative burden will be imposed on the taxpayers. Under
Option 1, the consumers would be required to account for all purchases of unhealthy food
products to determine the tax payable. Not only would this result in an increase in the number of
taxpayers that Revenue Authorities would have to administer, it would also be inconvenient for
consumers. Arguably, most businesses already have systems in place to track the sales of food
products. Existing systems could be amended to cater for the new tax. Should Option 1 be
implemented, consumers would most likely have to keep record of purchases manually, which
would be onerous and prone to errors.
Economic efficiency
The proposed tax is not economically efficient. Consumers might be motivated to consume food
products that do not fall within Categories A, B and C in an attempt to avoid paying tax. While
inefficient, it could be argued that this inefficiency is positive as it could motivate the consumers
to avoid food products classified as unhealthy. A healthier lifestyle might improve the health of
consumers, thereby indirectly reducing the pressure placed on the public health system.
Option 3 would result in the greatest economic inefficiency between the different categories of
unhealthy food products. The reduction in consumption of unhealthy food products included in
Category C could be relatively more when compared to those included in Categories A and B, as
a result of the higher tax rates. Similarly, the reduction in the consumption of unhealthy food
products included in Category B could be relatively more than those included in Category A, for
the same reason. Therefore, Option 3 would be the most economically inefficient in relation to
those unhealthy food products included in Category C.
Administrative efficiency
The system proposed under Options 2 and 3 appears to be more administratively efficient than
the one proposed under Option 1. It would be reasonable to assume that there are far more con-
sumers than there are suppliers of unhealthy food products. Therefore, the Option 1 system
would take up much more of the Revenue Authority’s capacity as far as the processing and audit
of returns are concerned. Consumers would also most likely not have sophisticated record-keep-
ing systems in place, while most suppliers would probably already have record-keeping systems
in place for accounting purposes. It would therefore also be less burdensome for the taxpayers if
the system under Option 2 or 3 is implemented.
Flexibility
For all of the options, the proposed tax appears to be flexible. Because the tax is expressed as a
percentage of the sales prices of the relevant unhealthy food products, the tax will automatically
increase in line with the sales prices. Therefore, where inflationary pressures result in an increase
in sales prices, the tax will automatically be adjusted in line with inflation.
Simplicity
Generally, the proposed tax could be perceived as being relatively simple. However, if con-
sidered in the context of other taxes already being imposed on certain foods (such as the impo-
sition of value-added tax on certain food products at 0% and on others at 14%), the introduction
of another tax on unhealthy food products introduces complexity. Should Option 3 be imple-
mented, the proposed tax would introduce even more complexity because the different cat-
egories of unhealthy food products will be subjected to differentiated tax rates (i.e. 2%, 5% and
12%).
1.5 Conclusion
Evidently, tax policy design is by no means a simple process as there is no ‘one-size-fits-all’ solution.
While the principles of taxation may provide useful guidance in designing tax policy, in practice their
application is much more challenging. Tax policy cannot be customised in accordance with individ-
uals’ wants and needs. It has to take into account different income groups, international trade
relations, other laws and regulations, the current and anticipated economic environment, and many
other factors.
10
2 Taxation in South Africa
Alta Koekemoer

l explain the legislative process in South Africa
l identify the national taxes levied in South Africa
l describe how the tax Acts are administered
l explain how tax law is interpreted
l illustrate how tax legislation is interpreted by performing a normal tax calculation.
Contents
Page
2.1 Overview ............................................................................................................................. 11
2.2 Background to taxation in South Africa.............................................................................. 12
2.2.1 Brief history of taxation in South Africa ................................................................. 12
2.2.2 The legislative process ......................................................................................... 12
2.2.3 Current tax legislation ........................................................................................... 13
2.2.3.1 Normal Tax 14
2.2.3.2 Withholding Tax (Fourth Schedule, ss 35A, 47A–47K, 49A–49H,
50A–50H and 64D–64N) ....................................................................... 14
2.2.3.3 Turnover Tax (ss 48–48C) ..................................................................... 15
2.2.3.4 Dividends Tax (ss 64D–64N) ................................................................ 15
2.2.3.5 Donations Tax (s 54) ............................................................................. 15
2.2.3.6 Value-Added Tax .................................................................................. 16
2.2.3.7 Transfer Duty.......................................................................................... 16
2.2.3.8 Estate Duty ............................................................................................. 16
2.2.3.9 Securities Transfer Tax .......................................................................... 16
2.2.3.10 Customs and Excise Taxes ................................................................... 16
2.2.3.11 Unemployment Insurance Contributions ............................................... 16
2.2.3.12 Skills Development Levies ..................................................................... 16
2.3 Administration of tax legislation.......................................................................................... 16
2.4 Interpretation of tax law ...................................................................................................... 17
2.4.1 Tax legislation........................................................................................................ 17
2.4.2 Judicial decisions .................................................................................................. 19
2.4.3 Rules of interpretation .......................................................................................... 20
2.5 Illustrating the components of normal tax and the interpretation of tax law in South
Africa .................................................................................................................................. 21
2.5.1 The incidence of normal tax .................................................................................. 21
2.5.2 The rate structure of normal tax ............................................................................ 21
2.5.3 The tax base of normal tax for natural persons and companies .......................... 22
2.6 Comprehensive example ................................................................................................... 24
2.1 Overview
This chapter provides an overview of the national taxes imposed in South Africa. While the focus of
this book is predominantly on the Income Tax Act 58 of 1962, the taxes imposed by the Income Tax
Act 58 of 1962 are, however, not the only taxes levied in South Africa. In South Africa, different types
of taxes are levied based on income, wealth and consumption (see discussion on tax base in chapter
1 (par 1.2)).
The chapter starts with a background to taxation in South Africa in general (see 2.2). In this chapter
we also look at how tax law is administered in South Africa (see 2.3) and how it is interpreted (see 2.4).
Lastly, normal tax will be used as an example to analyse the tax components (set out in chapter 1) and
to illustrate the interpretation of tax law and the calculation of normal tax in South Africa (2.5 and 2.6).
11
2.2 Taxation in South Africa
2.2.1 Brief history of taxation in South Africa

In South Africa, taxation has been around since the 1600s, when transfer duty was imposed on
property transferred by sale and customs taxes imposed on goods imported into the Cape Colony.
Often the taxes were imposed on a colonial level based on the existing colonies of the time, namely
the Cape Colony, the Orange Free State, Natal and the Transvaal. South Africa inherited most of its
earlier tax practices from the Netherlands and Britain. This resulted in a proliferation of requirements.
Subsequently, most of these taxes were nationalised in an attempt to simplify these requirements.1
While income tax was levied since the 1800s, it was only when amendments were made in the early
1900s that income tax was transformed into the format we know today.2 Important contributors to the
transformation of South Africa’s tax system were:3
l The Commission of Enquiry into Fiscal and Monetary Policy in South Africa (‘the Franzsen Com-
mission’) – issued two reports in 1968 and 1970 respectively
l The Commission of Inquiry into the Tax Structure of the Republic of South Africa (‘the Margo
Commission’) – issued one report in 1986, and
l The Commission of Inquiry into Certain Aspects of the Tax Structure of South Africa (‘the Katz
Commission’) – issued nine interim reports during 1994–1999.
Since the review conducted by the Katz Commission, there have been significant changes in the
South African tax system. Consequently, the Davis Tax Committee was established in 2013 to review
whether or not the current tax policy framework facilitates ‘inclusive growth, employment, develop-
ment and fiscal sustainability’. At the date of writing, the Davis Committee was still in the process of
completing its review.4
2.2.2 The legislative process

South Africa’s tax policy has come a long way since the 1600s. The Constitution of South Africa,
1996, ensures that a thorough and transparent process is followed to introduce new legislation or to
amend existing legislation. The legislative process generally commences with the issuing of a Green
Paper. A Green Paper sets out a Government Department’s general view of the matter under
consideration. The public is allowed to comment on the Green Paper. The relevant Government
Department then considers any public comments received and may elect to adjust the Green Paper
for these comments. The adjusted Green Paper is then issued in the form of a White Paper. A White
Paper represents a more refined version of the Green Paper. A White Paper may also be subjected to
further discussions and commentary prior to it being transformed into a draft set of legislation known
as a Draft Money Bill.5
A Draft Money Bill should be prepared and submitted by the National Treasury to the Minister of
Finance. Once Cabinet approval has been obtained, the Draft Money Bill must be reviewed by the
State Law Advisers to ensure that it does not contradict the Constitution and other existing law, and
that there are no technical errors. Upon obtaining the approval of the State Law Advisers, the Draft
Money Bill is then introduced by the Minister of Finance in Parliament to the National Assembly and
the National Council of Provinces.6 The Draft Money Bill is then published in the Government Gazette
for public comment. A consultative process is applied and amendments made where required. Only
after the Draft Money Bill has successfully passed through Parliament will it be submitted for assent
___________
1 De Kock MH Economic History of South Africa Juta & Co. Ltd (1924) at 300.
2 Ibid at 422–425.
3 ‘Polity Fifth interim report of the Commission of Inquiry into Certain Aspects of the Tax Structure of South Africa – basing
the South African income tax system on the source or residence principle – options and recommendations’ (1997)
<http://www.polity. org.za/polity/govdocs/commissions/katz-5.html.> (accessed 2013-06-12).
4 Tax Review Committee The Davis Tax Committee (2013) <http://www.taxcom.org.za/> (accessed 2014-11-15).
5 Parliament of the Republic of South Africa How a law is made (2013) < http://www.parliament.gov.za/live/content.php?
Item_ID=1843> (accessed 2013-11-18).
6 The National Assembly and the National Council of Provinces are collectively referred to as the Houses of Parliament.
12
2.2 Chapter 2: Taxation in South Africa
by the President. Once assented to by the President, the Draft Money Bill becomes an Act of
Parliament and becomes binding on one of the following dates:
l the date the Act is published in the Government Gazette
l the date determined in accordance with the Act, or
l the date as indicated in the Government Gazette.7
The legislative process is depicted in Figure 2.1.
Act of
Parliament
Act of
Parliament
Draft Money Bill

Draft Money Bill
White Paper
White Paper
Green Paper
Green Paper
Figure 2.1: The legislative process in South Africa
2.2.3 Current tax legislation

Table 2.1 provides an overview of the current national taxes levied in South Africa, together with a
categorisation according to the tax base (see 1.2). It also refers you to the specific paragraph in this
chapter where a brief summary is provided as well as the chapter in this book where the particular
tax is dealt with in detail.
Table 2.1: National taxes in South Africa
Tax Base
Legislation Tax Type Tax Base Silke Chapter
Category
Income Tax Act 58 of Normal tax (2.2.3.1) Taxable income Main focus of
1962 the book
Withholding tax Amount paid to non-
Income Chapter 21
(2.2.3.2) resident
Turnover tax (2.2.3.3) Taxable turnover Chapter 23
Dividends tax (2.2.3.4) Amount of dividend paid Chapter 19
Donations tax (2.2.3.5) Value of property
disposed of under a Wealth Chapter 26
donation
Value-Added Tax Act Value-added tax* Taxable supplies of goods
Consumption Chapter 31
89 of 1991 (2.2.3.6) and services
continued
___________
7 The Department of Justice and Constitutional Development (South Africa) The legislative process (2004) <http://www.
justice.gov.za/legislation/legprocess.htm> (accessed 2014-11-15).
13
Tax Base
Legislation Tax Type Tax Base Silke Chapter
Category
Transfer Duty Act Transfer duty* (2.2.3.7) Value of property acquired
40 of 1949 or property value
Chapter 28
enhancement via
renunciation of rights
Wealth
Estate Duty Act 45 of Estate duty (2.2.3.8) Dutiable amount of estate
Chapter 27
1955
Securities Transfer Securities transfer tax* Taxable amount of
Chapter 29
Tax Act 25 of 2007 (2.2.3.9) transferred security
Customs and Excise Customs tax* Imported goods
Act 91 of 1964 (2.2.3.10)
Excise tax* Specified goods Consumption Chapter 30
(2.2.3.10) manufactured and/or
consumed in South Africa
Unemployment Unemployment Remuneration
Insurance insurance
Chapter 10
Contributions Act 4 of contributions
2002 (2.2.3.11) Income
Skills Development Skills development Remuneration
Chapter 10
Levies Act 9 of 1999 levy (2.2.3.12)
*These taxes are also classified as indirect taxes and are levied on transactions as opposed to direct taxes
(without the *) that are levied on a person
All references in this book to the ‘Act’ are references to the Income Tax Act 58
Please note! of 1962 (referred to as the Act), and all references to sections and Schedules
are references to sections and Schedules of the Act, unless otherwise specified.
2.2.3.1 Normal tax

Normal tax is imposed by the Act and is commonly referred to as income tax.
2.2.3.2 Withholding tax (Fourth Schedule, ss 35A, 47A–47K, 49A–49H, 50A–50H and 64D)
Withholding tax is also a tax imposed by the Act. It is a tax that is deducted at source. Withholding
tax therefore places a responsibility on a person owing an amount of money to another person to
withhold an amount of tax from the amount owed and to pay only the net amount to the other person,
normally a non-resident. The tax withheld by the payer of the amount must be paid over to the South
African Revenue Service (SARS) on behalf of the recipient. The final liability for the amount of tax
rests on the person receiving the amount. The withholding tax can be the full or partial tax liability in
respect of the specific amount. Because of the convenience of collection, several taxes on income
are required to be withheld on payment in South Africa.
(a) Taxes withheld on payments of remuneration by employers to employees

The duty of an employer (as defined) to withhold employees’ tax from any remuneration (as defined)
paid to an employee (as defined) and to pay it over to the SARS, is considered a withholding tax.
Employees’ tax it is not a final tax but rather a prepayment of normal tax and is deducted from normal
tax payable in the calculation of the final normal tax due by or to the natural person on assessment.
The calculation of employees’ tax is contained in the Fourth Schedule. Employees’ tax is discussed in
chapter 10.
(b) Taxes withheld on payments of dividends by companies to beneficial owners

Dividends tax is also a withholding tax and is payable on the amount of any dividend paid by a
resident company to a beneficial owner (as defined. It is also payable on the amount as determined
in s 64E(3) in respect of a dividend in specie paid by a resident company. Dividends tax is a final tax.
It applies in respect of payments to both residents and non-resident beneficial owners. Dividends tax
is discussed in detail in chapter 19.
(c) Taxes withheld on payments to non-residents

Withholding tax is often used by countries to collect income tax in respect of amounts derived by
non-residents from a local source due to the ease of collection. The withholding taxes are withheld by
14
a resident paying an amount to a non-resident and are paid over to SARS by the resident on behalf of
the non-resident. The resident is therefore merely a middle-man; the tax liability is that of the non-
resident. Take note that a reduced rate for withholding taxes may apply depending on the relevant
applicable tax treaty between the countries. The Act provides for four types of payments made by a
resident to a non-resident which are subject to a withholding tax. There is no withholding tax on
service fees paid to a non-resident.
l Withholding tax on payments to non-resident sellers of immovable property: s 35A (see chapter
21)
A non-resident who sells immovable property in the Republic will be liable for withholding tax of
7,5%, 10% or 15% of the amount payable to the non-resident (the selling price). This withholding
tax is different from the other three withholding taxes applicable to amounts payable to non-
residents. The reason is that it is not a final withholding tax, but it reduces the normal tax payable
by the taxpayer in the calculation of the final normal tax due by or to the taxpayer.
l Withholding tax on royalties: ss 49A–49H (see chapter 21)
A non-resident who receives a royalty from a resident or to whom a royalty accrues from a source
in the Republic will be liable to 15% withholding tax on the gross royalty received in terms of
ss 49A–49H. Section 10(1)(l) exempts any royalty or similar amount that has been subject to
withholding tax in terms of the provisions of s 49A. The effect of this exemption is that the
withholding tax is a final tax in the Republic on such royalty income for qualifying non-residents.
l Withholding tax on interest: ss 50A–50H (see chapter 21)
Withholding tax is payable at a fixed rate of 15% of the amount of any interest received by or
accrued to any foreign person from a source in the Republic (in terms of s 9(2)(b)). Exemptions
are available in terms of ss 10(1)(h) and 10(1)(i). This withholding tax is also a final tax.
l Withholding tax on payments to foreign entertainers and sportspersons: ss 47A–47K (see
chapter 21)
Withholding tax is payable at a fixed rate of 15%. Section 10(1)(lA) exempts any amount received
by or accrued to any foreign entertainer or sportsperson that has been subject to withholding tax
in terms of the provisions of ss 47A–47K. This withholding tax is also a final tax.
2.2.3.3 Turnover tax (ss 48–48C)

Normal tax is imposed by the Sixth Schedule to the Act. It provides for an elective turnover tax for
micro businesses with a turnover of R1 million or less. Turnover tax is a tax calculated on the turnover
of a registered micro business, and not on its taxable income. This method eliminates the need for
keeping detailed records of expenditure. An important feature of the turnover tax regime is that the
tax liability that is imposed is aligned with the tax liability under the current income tax regime, but on
a simplified base, with reduced compliance requirements.
2.2.3.4 Dividends tax (ss 64D–64N)

Dividends tax is also a tax imposed by the Act. Because of the method of collection, dividends tax
can also be considered a withholding tax (see 2.2.3.2). Dividends tax is payable at a fixed rate of
20% on the amount of any dividend paid by a company except a headquarter company. The
‘beneficial owner’ (as defined in s 64D) remains liable for the dividends tax although it is the company
that deducts the 20% withholding tax on any dividend paid. Where a dividend in specie is declared,
it is the resident company that is liable for the dividends tax. This withholding tax is a final tax in the
Republic on such dividends. This means that there will be no need to submit an annual return of
income if such dividends are the only income received by the taxpayer (see chapter 19).
2.2.3.5 Donations tax (s 54)

Donations tax is another tax imposed by the Act. In order to prevent the avoidance of estate duty
through the gratuitous distribution of property while the resident is still alive, donations tax is imposed
by s 54 of the Income Tax Act. Donations tax is a tax on the gratuitous transfer of wealth (property)
and not a tax on income. Donations tax is levied on the value of all donations, other than those
specifically exempted, made by a donor who is a resident. Donations tax is calculated at a fixed rate
of 20%. Although donations tax is not a tax on income, it has been incorporated into the Income Tax
Act for administrative convenience.
15
2.2.3.6 Value-added tax

Value-added tax (VAT) is imposed by the Value-Added Tax Act 89 of 1991. It is levied at 14% on the
purchase of goods or services from a vendor in South Africa. It requires tax inclusive pricing,
meaning the selling price has to include VAT. In certain instances, an enterprise registered as a
vendor may claim the VAT it has paid back from SARS. VAT is an indirect tax and a direct cost to the
final consumer, as the consumer cannot claim the amount back from SARS.
2.2.3.7 Transfer duty

Transfer duty is levied in terms of the Transfer Duty Act 40 of 1949 on the cost price of fixed property
using a sliding scale (0%, 5%, 8%, 11% and 13%). It is a wealth tax payable by the purchaser on the
acquisition of fixed property situated in South Africa.
2.2.3.8 Estate duty

A tax called ‘estate duty’ is levied in terms of the Estate Duty Act 45 of 1955. It is levied on the net
value of the estate of a deceased person at a fixed rate of 20% after allowing for an abatement of
R3,5 million against the net value of the estate. Its purpose is to tax the transfer of wealth from the
deceased estate to the beneficiaries. It is usually the estate that is liable for the estate duty. In some
cases, however, the beneficiaries could be held liable for the estate duty on the property they
received.
2.2.3.9 Securities transfer tax

Securities transfer tax is imposed by the Securities Transfer Tax Act 25 of 2007 at the rate of 0,25% of
the value of any shares purchased. It is payable by the purchaser on the transfer of both listed and
unlisted shares in companies incorporated in South Africa, as well as on the transfer of shares of
foreign companies listed on the Johannesburg Stock Exchange. No securities transfer tax is payable
on the issue of shares.
2.2.3.10 Customs and excise tax

Two taxes are imposed in terms of the Customs and Excise Act 91 of 1964:
l Customs taxes are imposed on the importation of goods into a specific territory.
l Excise taxes are imposed on certain goods manufactured and/or consumed in South Africa.
Certain parts of the Customs and Excise Act 91 of 1964 will be replaced by the
Customs Duty Act 30 of 2014, the Customs Control Act 31 of 2014 and the
Please note! Customs and Excise Amendment Act 32 of 2014. The effective dates of said
Acts were not known at the time of writing.
2.2.3.11 Unemployment insurance contributions

Unemployment insurance contributions are determined with reference to remuneration of specified
employees as per the Unemployment Insurance Contributions Act 4 of 2002. The amount contributed
by the employee is deducted from the employee’s gross remuneration. Contributions are made by
both the employer and employee in equal parts (1% of gross remuneration is paid by each). The
calculation thereof is discussed in detail in chapter 10.
2.2.3.12 Skills development levies

Skills development levies are determined with reference to the remuneration of specified employees
as per the Skills Development Levy Act 9 of 1999. Contributions are made by employers only.
2.3 Administration of tax legislation

The Commissioner of SARS is responsible for carrying out the function of collecting taxes and
ensuring compliance with tax laws (s 2(1)). Administrative requirements and procedures for purposes
of the performance of any duty, power or obligation, or the exercise of any right in terms of the tax
laws are regulated by the Tax Administration Act 28 of 2011 (see chapter 33). In essence, SARS is
responsible for administering the relevant tax Acts drafted and legislated by National Treasury.
The Constitution of the Republic of South Africa of 1996 requires national legislation to be enacted to
give effect to the taxpayer’s right to ‘administrative action’ that is lawful, reasonable and procedurally
16
2.3–2.4 Chapter 2: Taxation in South Africa
fair. The legislation must also provide for the review of ‘administrative action’, to impose a duty on the
state to give effect to these rights and to promote efficient administration (s 33(3) of the Constitution).
In order to give effect to this, the Promotion of Administrative Justice Act 3 of 2000 (‘PAJA’) was
promulgated. In terms of PAJA, ‘administrative action’ is any decision made by SARS or any failure of
SARS to make a decision that adversely affects the rights of any person and that has a direct external
effect. Examples of the decisions made by the Commissioner of SARS that constitute administrative
action include the issuing of an assessment, the disallowance of an objection, a denial of a refund
under the VAT Act, etc. In such instances SARS is subject to the provisions of PAJA that requires the
administrative action to be procedurally fair. In determining the fairness of the administrative action
the following should be taken into account (s 3 of PAJA):
l Was adequate notice provided?
l Was there reasonable opportunity to make representation?
l Did SARS provide a clear statement of the administrative action?
l Was adequate notice given of the right of review?
l Was adequate notice given of the right to request reasons?
Where a taxpayer believes that he has not been dealt with fairly, he can commence with procedures
as specified in PAJA. In the end PAJA provides taxpayers with the means to fair administrative
action.
2.4 Interpretation of tax law

In carrying out its function of collecting taxes and ensuring compliance with tax laws, the tax laws of
South Africa needs to be interpreted by SARS. Furthermore, in terms of s 102 of the Tax
Administration Act the burden of proof lies with the taxpayer to claim an exemption, non-liability,
deduction, abatement, set-off or exclusion. The interpretation of tax law is therefore important for both
SARS and the taxpayer. The Constitution of the Republic of South Africa, 1996, is the supreme law of
South Africa. Any law (including an Act) that is inconsistent with it is invalid. No provision in any tax
Act, can therefore contravene the provisions of the Constitution or the Bill of Rights contained in
Chapter 2 of the Constitution. All interpretations of tax legislation must, in terms of s 39(2) of the
Constitution, promote the spirit, purport and objects of the Bill of Rights. Constitutional matters are
heard in the Constitutional Court and its judgments are binding on all other courts.
The two most important sources of tax law are tax legislation and judicial decisions. These two
sources of tax law are interpreted according to certain rules of interpretation (see 2.4.3).
2.4.1 Tax legislation

When interpreting tax legislation, the taxing statutes, briefly discussed in 2.2.3, the regulations
promulgated in terms of these acts, double tax agreements, the definitions in the Tax Administration
Act and the Interpretation Act are essential. The Interpretation Notes and Binding General Rulings are
also useful in providing guidance regarding the interpretation of tax legislation by the Commissioner
of SARS.
Regulations
Section 107(1) of the Act enables the Minister of Finance to make regulations regarding certain
matters, namely
l the duties of all persons engaged in the administration of the Act
l the limits of areas within which such persons are to act
l the nature and contents of the accounts to be rendered by a taxpayer in support of returns
rendered under the Act and the manner in which such accounts must be authenticated
l the method of valuation of annuities or of fiduciary, usufructuary or other limited interests in
property.
These regulations are published in the Government Gazette and have the same power as legislation.
An example is the motor vehicle rate per kilometre in terms of s 8(1)(b)(ii) and (iii).
Double tax agreements

Agreements to avoid the imposition of double tax when residents of a country transact in another
country may be entered into by the governments of the respective countries. Once published in the
17
Government Gazette following its approval by Parliament, a double tax agreement (DTA) has the
effect of law (s 108(2)). This means that where any provision of the Act, as discussed in the rest of
this book, is applied to a transaction to which the double tax agreement also applies, the double tax
agreement must be considered as if it forms part of that provision. Where there is a conflict between
the Act and the double tax agreement, the double tax agreement enjoys preference over the Act.
Definitions
When interpreting the words of tax legislation, it is important to note that the main source of definitions
is contained in the first section of a tax Act, i.e. s 1. At times, a specific section or subsection can also
contain definitions that apply within a particular context.
All sections in the Act are subject to their provisos ‘unless the context otherwise indicates’. Similarly,
the definitions set out in s 1(1) are all subject to their provisos. With regard to the meaning of certain
terms in tax legislation, the following also needs to be considered:
l If there is a definition in the Tax Administration Act but not in the Act, then the definition in the Tax
Administration Act will also apply for the purposes of the Act unless the context indicates
otherwise (s 1(2) of the Act). This also applies to other tax acts, for example the VAT Act.
l If there is a definition in the Act but not in the Tax Administration Act, then the definition in the Act
also applies for purposes of the Tax Administration Act unless the context indicates otherwise
(preamble to s 1 of the Tax Administration Act).
l If there are inconsistencies between the Tax Administration Act and the Act, the Act is applicable
(s 4(3) of the Tax Administration Act).
The Interpretation Act

If a term used in the Income Tax Act is not defined in that Act, it is necessary to look to the
Interpretation Act 33 of 1957 for guidance. The provisions of the Interpretation Act apply only if there
is nothing in the language or context of the Income Tax Act contradictory to those provisions or if no
contrary intention appears in the Income Tax Act. Certain terms, for example ‘person’, are defined in
both the Income Tax Act and the Interpretation Act. If a definition is given in the Income Tax Act that
differs from the definition given in the Interpretation Act, the definition in the Income Tax Act takes
precedence, unless the context indicates otherwise.
If a term is not defined within primary legislation or the Interpretation Act, the normal dictionary
meaning of the word may indicate its meaning. If the meaning is still uncertain or incomplete relevant
case law is examined in order to understand the meaning of the term used. Judicial decisions are an
integral part of the tax law and clarify the law in cases of uncertainty. Many provisions of the Act
contain terms and provisions which are unclear, ambiguous or not defined in the Act, for example
‘capital nature’ and ‘in the production of income’. It is therefore necessary to look to case law for
guidance on the meaning of such terms.
Interpretation Notes and Binding General Rulings

In addition to the regulations, SARS publishes Interpretation Notes (previously Practice Notes) that
set out its interpretation of various provisions of the Act. These Interpretation Notes do not form part
of tax legislation. For example, Interpretation Note No 3 deals with the interpretation of the term
‘ordinarily resident’ used in the definition of a resident (if a natural person) in s 1(1) of the Act. These
Interpretation Notes are simply SARS’s interpretation regarding the relevant provisions and do not
have the force of law. They serve only as guidelines. If challenged in courts of law, they may be
overthrown. A taxpayer may therefore challenge the practice of SARS as set out in a particular
Interpretation Note. It appears that not even the Commissioner is bound by an Interpretation Note
unless it contains a statement that it is a Binding General Ruling in which instance the Commissioner
is bound to its interpretation. An example of an Interpretation Note that states it is a Binding General
Ruling is Interpretation Note No 47 (see discussion below). Although not necessarily binding,
Interpretation Notes are relevant when considering the application of tax legislation.
The Advance Tax Ruling system provides for the issuing of Binding General Rulings (BGRs). BGRs
are issued on matters of general interest or importance in order to promote clarity, consistency and
certainty regarding the Commissioner's application or interpretation of the tax law relating to these
matters. For example, in BGR7, dealing with s 11(e), SARS makes it clear that SARS interprets 'value'
for purposes of the s 11(e) allowance to be the actual cash cost incurred. According to BGR7, 'value'
is not the market value unless the asset is acquired by way of a donation, inheritance, as a
distribution in specie or from a connected person. Although BGR7 (and Interpretation Note No 47)
18
suggest that a taxpayer will have to use ‘cost price’ in the context of a s 11(e) allowance a BGR is not
binding on the taxpayer. The taxpayer may therefore still decide to use market value as ‘value’ where
the market value exceeds the actual cost incurred. Though, in such an instance, the taxpayer may
later have to defend his decision in court.
2.4.2 Judicial decisions

In South Africa judgments of the courts are an important source of tax law.
When will a tax case be heard in a court of law?

Where a taxpayer is dissatisfied with his assessment, he may appeal after an objection has been dis-
allowed. The Tax Administration Act provides for the following route:
Tax Board Ö Tax Court Ö Provincial Divisions of the High Court Ö Supreme Court of Appeal.
The Tax Board deals with appeals where the amount of tax in dispute does not exceed R1 000 000.
The party against whom was decided in the Tax Board hearing can appeal to the Tax Court. The Tax
Court is not a court of law. It has no inherent jurisdiction as is possessed by the Supreme Court of
Appeal. It is bound by a decision of the Provincial Divisions of the High Court and the Supreme Court
of Appeal, although it is not bound by its own decisions. A decision of the Tax Court is only binding on
the parties to the specific case. Although the Commissioner is bound by earlier decisions of the
Supreme Court of Appeal, he is not bound by a decision of the Tax Court given in an earlier case,
since, although the Tax Court is a competent court to decide an issue between the parties, it is not a
court of law.
Provincial Divisions of the High Court are generally bound by their own decisions; however, they are
not bound by decisions of other provincial divisions. The Tax Court is bound by decisions of the
Provincial Divisions of the High Court in terms of the principle of legal precedence (see the
discussion of the meaning of this term below).
The Supreme Court of Appeal is not bound by the decision of any Provincial Division. It is bound by
its own decisions and will generally follow any previous decision it has given. All subordinate courts
are bound by the decisions of the Supreme Court of Appeal in terms of the principle of legal pre-
cedence. Prior to February 1997, the High Court was called the Supreme Court and the Highest
Court of Appeal was called the Appellate Division of the Supreme Court. In this book the courts are
referred to by the name by which they were known at the time of the hearing of the relevant case.
The legal precedence principle

The English stare decisis rule is accepted in South Africa. This rule entails the principle of legal pre-
cedence, meaning that a rule of law established in a previous judgment is binding upon a lower
court, and that courts of equal rankings must follow their own previous decisions. This implies that
there is a hierarchy of courts that can be summarised as follows: a decision of the Provincial Divisions
of the High Court binds the Tax Court and a decision of the Supreme Court of Appeal binds the
Provincial Divisions of the High Court and the Tax Court.
What part of the decision creates legal precedence?

The part of the decision that creates precedent is the ratio decidendi. The ratio decidendi of a case is
the reason or ground for the decision of a court and becomes a principle of law that may have to be
applied in future cases in which the facts are similar, depending on the authority of the court that
gave the decision. However, in passing judgment, the court may make certain observations that do
not affect the reason for the decision. These obiter dicta are not binding on any court even if these
passing remarks originate in the Highest Court of Appeal. It may, however, in the future have
persuasive authority on another court.
Can income tax decisions of foreign countries create legal precedence?

The courts have frequently pointed out that the income tax decisions of other countries must be
cautiously approached, owing to differences in the basis of taxation applicable in foreign countries.
In referring to such decisions, therefore, one must always bear in mind that they may be based upon
a differently worded statute from the statute under consideration. They may, however, be most
valuable and may influence South African courts, particularly when they deal with a point of law that
also occurs in the South African Act.
19
2.4.3 Rules of interpretation

The strict literal approach
The strict literal or textual approach originated from the English law and is also known as the ‘golden
rule of interpretation’. In terms of this rule the interpreter primarily concentrates on the literal meaning
of the words of the provision that must be interpreted to determine the purpose of the legislator.
When the statute is expressed in clear, precise and unambiguous words, the court is not entitled to
do otherwise than interpret those words in their ordinary and natural sense. It therefore makes sense
to equate the grammatical meaning of the words to the intention of the legislator. A literal approach is
thus always the starting point. If the text is, however, ambiguous or unclear, or if a strict literal
meaning will be absurd, the literal meaning may be departed from. Case law that supports the strict
legal approach includes:
l Partington v The Attorney General (1869 House of Lords), in which Lord Cairns described the rule
of interpretation of fiscal legislation as follows (at 375):
If the person sought to be taxed comes within the letter of the law, he must be taxed, however great the
hardship may appear to the judicial mind to be. On the other hand, if the Crown, seeking to recover the
tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within
the law the case might otherwise appear to be. In other words, if there be an equitable construction,
certainly such a construction is not admissible in a taxing statute, where you can simply adhere to the
words of the statute.
l Cape Brandy Syndicate v IRC (1921 King’s Bench), in which Rowlatt J made the following state-
ment (at 71):
It simply means that in a taxing Act one has to look at what is clearly said. There is no room for any
intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read
in, nothing is to be implied. One can only look fairly at the language used.
The purposive approach

The purposive or contextual approach determines the purpose of the legislation by taking into
account all surrounding circumstances and resources. The 1996 Constitution has supreme authority
and, through ss 39(1) and (2), indicates that the purpose underlying the statute must be sought8 This
means not merely seeking the ‘intention of Parliament’ but also considering the history of the
provision, its broad objectives, the constitutional values underlying it and its interrelationship with
other provisions.9 Case law that supports the purposive approach includes:
l Glen Anil Development Corporation Ltd v SIR (1975 A), in which Botha JA, said (at 334):
. . . it is clear from the remarks of Wessels CJ in the Delfos case . . . that even in the interpretation of
fiscal legislation the true intention of the legislature is of paramount importance, and, I should say,
decisive.
l CSARS v Airworld and Another (70 SATC 48), in which it was said (at 51):
In recent years courts have placed emphasis on the purpose with which the Legislature has enacted
the relevant provision and the interpreter must endeavour to arrive at an interpretation which gives
effect to such purpose and the purpose (which is usually clear or easily discernible) is used, in
conjunction with the appropriate meaning of the language of the provision, as a guide in order to
ascertain the legislator’s intention.
The contra fiscum rule

The contra fiscum rule is also in agreement with the spirit and purport of the Bill of Rights. This rule
means that where a provision of the Act is open to more than one meaning, the court must follow the
interpretation that favours the taxpayer (and therefore goes against the fiscus).
The substance over form rule

If problems of interpretation arise in relation to the true meaning of an agreement or a transaction, the
courts will be concerned with the substance rather than the form of the agreement or transaction.
___________
8 Goldswain, GK ‘Hanged by a comma, groping in the dark and holy cows – fingerprinting the judicial aids used in the
interpretation of fiscal statutes’ Meditari 16(3) (2012), 31.
9 Goldswain, G.K. “Hanged by a comma, groping in the dark and holy cows – fingerprinting the judicial aids used in the
interpretation of fiscal statutes”. 2012. Meditari. Vol. 16(3) at 52.
20
2.5 Illustrating the components of normal tax and the interpretation of tax law in
South Africa
In chapter 1 it became clear that, in applying its tax policies, Government will decide on a tax base
(see 1.2), a tax rate structure (see 1.3) and the incidence of the tax liability, which are all guided by
the general principles of taxation (see 1.4). The different taxes and levies implemented in South
Africa are set out in chapter 2 (see 2.2). These taxes and levies are interpreted using tax legislation
and judicial decisions (see 2.4).
The Act currently calls for the annual payment of an income tax, which is referred to as ‘normal tax’
(s 5(1)). Normal tax will now be used as an example to analyse the tax components (set out in
chapter 1) and to illustrate the interpretation of tax law in South Africa (described in chapter 2).
2.5.1 The incidence of normal tax

The incidence of tax refers to the liability of tax. Normal tax is imposed upon any ‘person’ and any
‘company’ (s 5(1)). According to the definition of ‘person’ in s 1(1), a ‘person’ specifically includes
trusts, estates of deceased persons, insolvent estates, and a portfolio of a collective investment
scheme. It does, however, specifically exclude a foreign partnership. Although not specifically
included, a natural person is definitely considered a ‘person’ (in terms of the broad understanding of
a person per dictionary definition). The definition of ‘person’ in the Interpretation Act also includes any
‘body of persons whether incorporated or unincorporated’. This means that irrespective of whether
specifically referred to in the definition of person in s 1(1) of the Act, all companies, close corpora-
tions and even partnerships are considered persons for income tax purposes. Clearly, a partnership
can be considered a person for normal tax purposes (an unincorporated body of persons). The Act,
however, deems the income of the partnership to be received by the partners individually (s 24H).
For income tax purposes the partnership is therefore not taxed. The individual partners are taxed in
their own names.
The collection of normal tax is facilitated through a system of employees’ tax, provisional tax and
withholding tax payments. While the employer is obliged to withhold the employees’ tax, the
employee, as ‘person’, carries the burden of the tax. Payments of employees’ tax and provisional tax
are deducted from the normal tax payable in the calculation of the final normal tax due by or to the
person. Withholding tax paid by non-residents in respect of the sale of immovable property in South
Africa is similarly taken into account for non-resident persons.
2.5.2 The rate structure of normal tax

The tax rate structure for normal tax varies in accordance with the different persons subject to normal
tax.
The same progressive rate structure is used to calculate the normal tax of natural persons, deceased
estates, insolvent estates and special trusts. This progressive rate structure ranges from 18% to 45%.
It is applied to taxable income and increases as the taxable income increases. Taxable income
excludes the taxable income from lump sum benefits and severance benefits of natural persons
(separate tax tables and a cumulative tax system are used – see chapter 9).
Special trusts include
l trusts created solely for the benefit of persons with disabilities, and
l testamentary trusts created for relatives of the deceased person of whom the youngest, at the
end of any year of assessment of the trust, is under 18 years of age (for more detail see 24.3.2).
A fixed rate structure is prescribed for trusts other than special trusts (currently 45%) and for
companies (currently 28%). The current company tax rate of 28% applies in respect of years of
assessment ending during the 12-month period ending on 31 March 2018. The tax rate of 28% has
been applicable to companies since years of assessment ending on or after 1 April 2008. Prior to
this, the rate was set at 29%. For normal tax purposes, close corporations are included in the
definition of ‘company’ in s 1(1) and are taxed in the same way as companies. References in this
book to companies include close corporations, unless otherwise specified.
The tax rates are determined annually. The Minister of Finance announces the rate of tax chargeable
in respect of taxable income in the annual national budget. This announcement includes an indication
of the date or dates from which the changes take effect (s 5(2)(a)). This change in tax rates comes
into effect on the dates announced and applies for a period of 12 months from that date. The change
in tax rates is, however, subject to Parliament passing legislation giving effect to the announcement
21
within that 12-month period (s 5(2)(b)). This legislation is normally in the form of an Act amending the
rates and monetary amounts.
Rebates
All natural persons are entitled to deduct a primary rebate (a saving of normal tax) from the normal
tax per the tax table calculated on taxable income. Natural persons who are or would have been 65
years of age or older on the last day of the year of assessment are also entitled to deduct a
secondary rebate from their normal tax payable. Natural persons who are or would have been 75
years of age or older on the last day of the year of assessment are also entitled to deduct both a
secondary and a tertiary rebate (s 6(2)).
Tax relief
In order to promote investment, growth and job creation in South Africa certain companies would
qualify for normal tax relief in the form of lower tax rates. In line with South Africa’s tax objectives,
relief measures were introduced to stimulate the economic development of selected regions (s 12R),
to promote the development of ‘small business corporations’ (as defined in s 12E) and to stimulate
certain activities, for example s 11D allowances to encourage research and development activities in
South Africa.
2.5.3 The tax base of normal tax for natural persons and companies
The tax base is the amount on which tax is imposed. With normal tax the tax base is the ‘taxable
income’ of a person for a ‘year of assessment’.
Year of assessment
The year of assessment always ends on the last day of February, except in the case of companies,
when it ends on the last day of the financial year of the company. The financial year of a company
can end on the last day of any of the 12 months in a calendar year. The 2018 year of assessment of a
company with a financial year ending on 30 June will generally, for example, begin on 1 July 2017
and end on 30 June 2018 (the date of the end of the financial year therefore indicates which year of
assessment it is). The year of assessment is commonly referred to as the ‘tax year’. A broken period
of assessment arises when a taxpayer is born, dies or is declared insolvent during a year of
assessment.
Taxable income of a natural person

The calculation of the taxable income and normal tax liability of a natural person is shown in the
framework below. In light of the different tax tables applicable to natural persons, chapter 7 suggests
a subtotal method in a comprehensive framework using three different columns in order to determine
the normal tax payable by natural persons. Columns 1 and 2 in that framework contain all the lump
sum benefits and severance benefits and column 3 all the other income of a natural person. The
framework in Table 2.2 provides a broad overview of the determination of the taxable income of
column 3 of that comprehensive framework and the normal tax payable (on the taxable income in
column 3) by a natural person. Refer to chapter 7 for a complete and detailed framework which
incorporates all taxes payable by a natural person.
22
Table 2.2: Framework for calculating ‘taxable income’ and ‘normal tax payable’
Gross income (definition in s 1(1)) (Note 1) ...................................................................... Rxxx
Less: Exempt income (ss 10 and 10A - 10C) ................................................................ (xxx)
Income (definition in s 1(1)) .............................................................................................. Rxxx
Less: Deductions and allowances (ss 11–19, ss 21–24P, excluding s 11F and s 18A) (xxx)
Less: Assessed loss (ss 20–20B).................................................................................. (xxx)
Rxxx
Add: Amounts included in taxable income (for example s 8(1)(a))............................... xxx
Rxxx
Add: Taxable capital gain (s 26A)................................................................................. xxx
Rxxx
Less: Deductions in terms of s 11F ............................................................................... (xxx)
Rxxx
Less: Deductions in terms of s 18A............................................................................... (xxx)
Taxable income (definition in s 1(1)) (Note 2) .................................................................. Rxxx
Normal tax determined per the progressive tax table on taxable income in column 3
(see chapter 7) ................................................................................................................. Rxxx
Less: Tax rebates and tax credits .................................................................................... (xxx)
Normal tax payable .......................................................................................................... Rxxx
Note 1: Gross income

The determination of ‘gross income’ is the first step in the calculation of a taxpayer’s taxable income.
The term ‘gross income’, is defined in s 1(1) of the Act. For a resident, ‘gross income’, in relation to a
year or period of assessment, means the total amount, in cash or otherwise, received by or accrued
to or in his favour, excluding receipts and accruals of a capital nature. For a non-resident, gross
income, in relation to a year or period of assessment, means the total amount, in cash or otherwise,
received by or accrued to or in his favour from a source within the Republic, excluding receipts and
accruals of a capital nature. Residents are therefore subject to normal tax on their worldwide income,
whereas non-residents are subject to normal tax in South Africa only on their income from sources
within the Republic. The residence of a taxpayer is thus crucial in determining his liability for South
African normal tax. (Remember to also consider double tax agreements when dealing with cross-
border transactions.) Some of the terms used in the definition of ‘gross income’, such as ‘amount’,
‘received or accrued’ and ‘of a capital nature’, are not clearly defined for normal tax purposes in the
Act, dictionaries, the Tax Administration Act or in the Interpretation Act. In order to obtain a clear
understanding of these terms, one has to resort to the judicial decisions (see chapter 3 for a discus-
sion of case law on these terms).
Note 2: Taxable income
The term ‘taxable income’ is also defined in s 1(1) of the Act. ‘Taxable income’ is the aggregate of the
following amounts:
l The amount remaining after deducting all the amounts allowed to be deducted or set off from
‘income’ (‘income’ is defined as the ‘gross income’ remaining after deducting all ss 10 and 10A–C
exemptions). Most of the deductions and set-offs are to be found in s 11, which should be read
with s 23.
l All amounts to be included or deemed to be included in taxable income in terms of the Act. The
unexpended portions of s 8(1)(a) allowances are also included in taxable income. The taxable
capital gain, as determined in terms of the Eighth Schedule for a year of assessment, is required
to be included in taxable income in that year of assessment (s 26A).
There is no separate Capital Gains Tax (CGT) system in South Africa. Although
Please note! the term CGT is used in the spoken language, it is not a separate type of tax. The
taxable capital gain is included in taxable income and is subject to normal tax.
Taxable income of a company

The above framework is not used in the calculation of the taxable income of companies. The financial
statements submitted to SARS by a company together with the annual return (ITR14) are used as a
basis in the calculation of the taxable income of the company. The calculation starts with the profit
23
before tax per the statement of comprehensive income, and this figure is adjusted with the
differences between the accounting and tax treatment of all the incomes and expenditures (item for
item) in order to calculate the taxable income. There is no specific sequence in which the items need
to be considered, except that the s 18A deduction for donations will always be the last deduction for
a company due to the limitation placed on the deductible amount by the article.
The tax treatment of an income item is determined by ascertaining whether the item meets all the
requirements of the definition of ‘gross income’ and, if any, s 10 exemption is applicable to it. The tax
treatment of an expense item is determined by ascertaining whether the item meets all the require-
ments of one of the specific sections in the Act allowing an amount as a deduction. It is very import-
ant to determine whether the adjustment (the difference between the accounting and tax treatment of
an item) must increase or reduce the profit before tax. The following process is suggested:
(1) Determine the effect of the accounting treatment of the item on the profit before tax, in other
words did the item increase or reduce the profit before tax?
(2) If the accounting treatment increased the profit before tax, and a greater amount must be
included in gross income in terms of the tax treatment, add the adjustment to the profit before
tax.
(3) If the accounting treatment increased the profit before tax, and a smaller amount must be
included in gross income in terms of the tax treatment, deduct the adjustment from the profit
before tax.
(4) If the accounting treatment reduced the profit before tax, and a greater amount is allowable as
deduction in terms of the tax treatment, deduct the adjustment from the profit before tax.
(5) If the accounting treatment reduced the profit before tax, and a smaller amount is allowable as
deduction in terms of the tax treatment, add the adjustment to the profit before tax.
(6) If the accounting treatment and the tax treatment are the same, no adjustment needs to be
made (it may, however, be required to be shown by students when answering test and exam
papers).
(See Example 13.44 in chapter 13 for a practical calculation of the taxable income of a company.)
2.6 Comprehensive example

The following example illustrates how the framework suggested for the calculation of a natural
person’s normal tax liability (see Table 2.2 in 2.5.5) should be applied. Please ignore the implications
of the double tax agreement in this example.
Example 2.1. Calculating taxable income and normal tax liability of a natural person
Using the following information, calculate the taxable income, normal tax liability and total tax
liability of a 58-year-old taxpayer who is resident in the Republic in respect of the 2018 year of
assessment:
Income:
Commission received in the Republic (gross income) ................................................... R140 000
Legacy from the estate of a deceased uncle (receipt of a capital nature) ..................... 20 000
Rent from property in the Republic (gross income)........................................................ 50 000
Receipts from business in Zimbabwe (gross income) ................................................... 30 000
Dividends received from South African public company (gross income) ..................... 600
Interest received from bank in the Republic (gross income) .......................................... 1 300
Taxable capital gain on the sale of the taxpayer’s investment property in the
Republic ......................................................................................................................... 50 000
South African Zimbabwean
Expenditure:
property business
Rates and taxes ............................................. R1 700 –
Insurance ....................................................... 150 R750
Alterations to property ................................... 7 000 –
Water charges ............................................... 650 350
Repairs .......................................................... 430 2 800
Wages ........................................................... – 6 500
24
SOLUTION
Gross income ....................................................................................... R221 900
Commission ....................................................................................... R140 000
Legacy (receipt of a capital nature) (note 3) ..................................... –
Rent ................................................................................................... 50 000
Business in Zimbabwe (note 1) ......................................................... 30 000
Dividends and interest ...................................................................... 1 900
Less: Exempt income:
Dividends (note 2) ..................................................................... (R600)
Interest (note 4) ......................................................................... (1 300) (1 900)
Income .................................................................................................. R220 000
Less: Allowable deductions:
South African property expenditure (note 5)
Rates and taxes ......................................................................... (R1 700)
Insurance................................................................................... (150)
Water charges ........................................................................... (650)
Repairs ...................................................................................... (430)
(R2 930)
Zimbabwean business expenditure (note 6)
Insurance (R750)
Water charges (350)
Repairs (2 800)
Wages (6 500)
(13 330)
R206 670
Add: Taxable capital gain (s 26A) (note 7) ........................................... 50 000
Taxable income .................................................................................... R256 670
Normal tax determined per tax table (R34 178 + (R66 790 × 26%)) .... R51 543
Less: Rebates (s 6(2)) .......................................................................... (13 635)
Normal tax payable............................................................................... R37 908
Add: Withholding tax on dividends (20% × R600) (note 2) .................. 120
Total tax payable by the taxpayer......................................................... R38 028
Notes
(1) Although it is specifically stated that the double tax agreement should be ignored in this
example, one must always consider the double tax agreement where a resident transacts in
another country. Had the double tax agreement between South Africa and Zimbabwe been
considered in this example, the business income from Zimbabwe would have probably
been taxed exclusively in Zimbabwe. The business income from Zimbabwe cannot then be
taxed in South Africa as well, as the provisions of the double tax agreement prevail in such
an instance.
(2) Dividends from a South African company (whether public or private) are included in gross
income (par (k) of the definition of ‘gross income’) but, in terms of s 10(1)(k)(i), most
dividends are exempt. The company must withhold 20% withholding tax on dividends. This
is a final tax and it remains the liability of the beneficial owner.
(3) A legacy is a receipt of a capital nature excluded from gross income and also not taxed as
a capital gain.
(4) The s 10(1)(i) exemption covers the first R23 800 of RSA interest received by a natural
person younger than 65 years.
(5) Expenditure incurred on the repairs of property from which income is receivable is deduct-
ible (s 11(d)). The other South African property expenditure of R2 500 is deductible, since it
was incurred in the production of the R5 500 rent. Alterations to property are expenditure of
a capital nature and not deductible for normal tax purposes (s 11(a)), but will be added to
the base cost of the property if the improvements are still reflected in its state or nature
when it is eventually disposed of (par 20(1)(e) of the Eighth Schedule).
(6) The Zimbabwean business expenditure is deductible, since the receipts in respect of which
it was incurred are included in income and the receipts exceed the expenditure. If the
expenditure exceeded the income, s 20 would have prohibited the set-off of the foreign loss
against South African income. (The double tax agreement can also affect the deductibility of
the Zimbabwean business expenditure. If the Zimbabwean business income is not taxed in
South Africa, the expenditure will not be tax deductible as it would not have been incurred
in the production of income – see note 1).
(7) The term ‘taxable capital gain’ means that the annual exclusion has been deducted and that
the 40% inclusion rate has been applied.
25
3 Gross income
Redge de Swardt

l demonstrate an in-depth knowledge of each requirement of the definition of ‘gross
income’
l determine whether a natural person or a person other than a natural person is a
resident for income tax purposes
l apply the principles of relevant case law in order to illustrate the meaning of the
terms used in the definition of ‘gross income’
l demonstrate an in-depth knowledge of the criteria to be applied in order to distinguish
between capital and income for purposes of the definition of ‘gross income’
Contents
Page
3.1 The definition of ‘gross income’ (s 1) ............................................................................... 28
3.2 Resident and non-resident ............................................................................................... 29
3.2.1 Residence of natural persons (par (a) of the definition of ‘resident’ in s 1) ...... 29
3.2.2 Residence of persons other than natural persons (par (b) of the definition
of ‘resident’ in s 1) ............................................................................................. 33
3.3 Amount in cash or otherwise ............................................................................................ 34
3.4 Received by or accrued to ............................................................................................... 35
3.4.1 Meaning of ‘received by’ ................................................................................... 36
3.4.2 Meaning of ‘accrued to’..................................................................................... 37
3.4.3 Valuation of receipt or accrual .......................................................................... 39
3.4.4 Unquantified amounts (s 24M) .......................................................................... 39
3.4.5 Accrual rules with the disposal of certain equity shares (s 24N)...................... 39
3.4.6 Blocked foreign funds (s 9A)............................................................................. 40
3.4.7 Disposal of income after receipt or accrual (without prior cession) versus
disposal of a right to future income (prior cession) .......................................... 40
3.4.8 Time of accrual of interest payable by SARS (s 7E) ......................................... 42
3.5 Year or period of assessment .......................................................................................... 42
3.6 Receipts and accruals of a capital nature ....................................................................... 42
3.6.1 Nature of an asset ............................................................................................. 44
3.6.2 Intention of a company ...................................................................................... 44
3.6.3 Business conducted with a profit making purpose........................................... 45
3.6.4 Selling an asset to best advantage ................................................................... 45
3.6.5 Realisation of a capital asset............................................................................. 46
3.6.6 Change of intention ........................................................................................... 46
3.6.7 Mixed purpose................................................................................................... 47
3.6.8 Secondary purpose ........................................................................................... 47
3.6.9 Realisation company ......................................................................................... 48
3.6.10 Damages and compensation ............................................................................ 49
3.6.11 Isolated transactions ......................................................................................... 50
3.6.12 Closure of a business and goodwill .................................................................. 50
3.6.13 Copyrights, inventions, patents, trademarks, formulae and secret processes 51
3.6.14 Debts and loans ................................................................................................ 51
3.6.15 Gambling ........................................................................................................... 51
3.6.16 Horse-racing ...................................................................................................... 51
3.6.17 Gifts, donations and inheritances...................................................................... 52
3.6.18 Interest ............................................................................................................... 52
27
Page
3.6.19 Kruger Rands .................................................................................................... 52
3.6.20 Restraint of trade ............................................................................................... 52
3.6.21 Share transactions ............................................................................................. 52
3.6.18 Subsidies ........................................................................................................... 53
3.1 The definition of ‘gross income’ (s 1)

The basic framework for calculating a person’s taxable income is:
Gross income Rx
Less: Exempt income (x)
Income Rx
Less: Deductions and allowances (x)
Taxable income Rx
The starting point for calculating a person’s taxable income, is to determine the person’s ‘gross
income’. This term is defined as follows in s 1:
“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 the Republic,
during such year or period of assessment, excluding receipts or accruals of a capital nature…
The definition continues to include specific amounts in ‘gross income’. These amounts are referred to
as specific inclusions and are discussed in chapter 4.
All the requirements of the definition of ‘gross income’ must be complied with for an amount to qualify
as gross income. In summary, these requirements are:
l in the case of a resident:
– there must be an amount, in cash or otherwise
– that is received by or accrued to or in favour of such resident
– during a year or period of assessment
– excluding receipts or accruals that are of a capital nature.
l in the case of a non-resident:
– there must be an amount, in cash or otherwise
– that is received by or accrued to or in favour of such resident
– during a year or period of assessment
– from a source within South-Africa
– excluding receipts or accruals that are of a capital nature.
The worldwide receipts and accruals derived by a ‘resident’ as defined in s 1 are included in his or
her gross income. Residents are therefore taxed on a residence-based system of tax. For non-
residents (persons who are not ‘residents’, as defined) only receipts and accruals derived from
sources within the Republic are subject to tax in South Africa, with certain exceptions. Non-residents
are therefore taxed on a source-based system of tax. Liability for South African normal tax is therefore
dependent either upon the place of residence of a person (in the case of a resident) or, in the case of
a non-resident, upon the source of the income. The principles that should be applied when
determining the source of a non-resident’s income are discussed in chapter 21.
Although capital receipts and accruals are excluded from a person’s gross income, a portion of these
amounts may still be subject to income tax by the inclusion of taxable capital gains in taxable
income. This is referred to as capital gains tax and is discussed in chapter 17.
Some of the terms in the definition of ‘gross income’ are defined in the Act. However, the meaning of
most of these terms have been the subject of a number of court cases. These terms and their
interpretations from the most relevant court cases are discussed below.
28
3.2 Chapter 3: Gross income
3.2 Resident and non-resident

The concept of ‘residence’ is fundamental to the residence-based system of taxation. The residence
of a person is determined in terms of the definition of ‘resident’ in s 1. The definition of ‘resident’
distinguishes between natural persons and persons other than natural persons.
The definition of ‘resident’ specifically provides that a person is not a resident if that person is
deemed to be exclusively a resident of another country in terms of a double tax agreement (DTA).
This means that if a DTA between South African and another country is in place, one should first
consider whether the taxpayer is deemed to be exclusively a resident of the other country under the
DTA, before considering whether the person is a resident under the definition of ‘resident’.
3.2.1 Residence of natural persons (par (a) of the definition of ‘resident’ in s 1)

A natural person is a ‘resident’ if he or she is either ordinarily resident in the Republic or meets the
requirements of the physical presence test.
Ordinarily resident
The term ‘ordinarily resident’ is not defined in the Act and the interpretation given by the courts must
be followed.
In Levene v IRC (1928 AC) it was held that the term ‘ordinary residence’ connotes residence in a
place with some degree of continuity, apart from accidental or temporary absences.
In the case Cohen v CIR (13 SATC 362)(1946 AD 174), the taxpayer, who was a South African
resident at the time, was requested by his employer to work in the USA. The taxpayer and his family
lived in New York for a period of 20 months. During this period neither the taxpayer nor his family
returned to South Africa. The court had to consider whether the taxpayer ordinarily resided in South
Africa during this time. In ruling that the taxpayer ordinarily resided in South Africa at the time, the
court established three important principles:
l The first is that a person’s ordinary residence would be the country to which he would naturally
and as a matter of course return from his wanderings. When compared to other countries in
which a person may live, a person’s ordinary residence is the person’s usual or principal
residence, or the person’s real home.
l The second is that one should not only consider the person’s actions during the year of
assessment to determine whether he is ordinarily resident in a particular country. The person’s
mode of life outside the year of assessment under consideration should also be considered.
l The third is that physical absence during the full year of assessment is not decisive. A person
could be absent from a country for the entire year and still qualify as ordinarily resident in that
country.
In CIR v Kuttel (54 SATC 298) (1992 (3) SA 242 (A)), the taxpayer held a majority interest in a South
African company. The taxpayer agreed with his fellow shareholders to move to New York to open an
office for the company from where he could oversee the company’s American business. After being
granted a permanent residence permit in the USA, the taxpayer emigrated to the USA with his family.
The taxpayer rented a house in the USA, established church membership, opened banking
accounts, acquired an office, bought a car and registered with social security. Following his move,
apart from visits to South Africa and other countries, the taxpayer lived and worked in the United
States. During the 31-month period under consideration, the taxpayer made nine visits to South
Africa, staying for up to two months at a time. The visits were to attend to his business interests and
family matters. The taxpayer on average spent just over one-third of the time in South Africa. During
his visits to South Africa, the taxpayer stayed in a house owned by a company in which he and his
wife were the sole shareholders. The house was not let and was available whenever the taxpayer
wanted to live in it. In applying the principle formulated in Cohen v CIR, that a person is ordinarily
resident where he has his usual or principle residence, that is what may be described as his real
home, the court held that the taxpayer was not ordinarily resident in South Africa. The court held that
there was no evidence which indicated that the taxpayer did not set up his usual or principle
residence in the USA. The court also held that the fact that the taxpayer kept his house in South
Africa was in no way inconsistent with his usual or principal residence or home having been in the
USA. He could not take all his assets to the USA because of exchange control regulations and, by
investing in a house, the taxpayer made the most advantageous arrangement in the circumstances
for the substantial assets he retained in South Africa. This, however, did not mean that the taxpayer
ordinarily resided in South Africa.
29
SARS published Interpretation Note No 3 (February 2002) in which the concept of ‘ordinarily resident’
in the definition of ‘resident’ is discussed. According to SARS the following requirements must be
present to ordinarily reside in a country:
l an intention to become ordinarily resident in a country, and
l steps indicative of this intention having been or being carried out.
According to SARS, it is not possible to lay down any clearly defined rule or period to determine
ordinary residence. The purpose, nature and intention of a taxpayer’s absence from a country must
be established to determine whether the taxpayer is still ordinarily resident. According to SARS, the
following factors, although not exhaustive or specific, are a guideline when considering the above
two requirements:
l most fixed and settled place of residence
l habitual abode, meaning present habits and mode of life
l place of business and personal interest
l status of individual in country, meaning immigrant, work permit periods and conditions, etc.
l location of personal belongings
l nationality
l family and social relations (schools, church, etc.)
l political, cultural or other activities
l application for permanent residence
l period abroad; purpose and nature of visits, and
l frequency of and reasons for visits.
Beginning and ending of being ‘ordinarily resident’

A natural person who became ordinarily resident will be a resident from a specific date. A taxpayer
immigrating to the Republic will therefore be treated as being ‘ordinarily resident’ in the Republic from
the day on which he becomes ordinarily resident in the Republic and not for the full year of
assessment in which he becomes ordinarily resident. For the period from the beginning of the year
until the day before he becomes ordinarily resident, he will be seen as a non-resident for tax purposes.
Interpretation Note No 3 determines that a natural person who emigrates from the Republic to another
country will cease to be a resident from the date that he emigrates. This means that the day on which
the natural person flies to the other country (leaves the Republic) is the first day that he will be
regarded as a non-resident.
The first proviso to the definition of ‘resident’ confirms this principle by determining that where any
person that is a resident ceases to be a resident during a year of assessment, that person must be
regarded as not being a resident from the day on which that person ceases to be a resident. A
taxpayer emigrating from the Republic will therefore, for example, be taxed as a resident in the
Republic from the beginning of the year until the day before he ceases to be ordinarily resident in the
Republic (emigrates), and will be taxed as a non-resident from the day he ceases to be ordinarily
resident in the Republic (emigrates) till the end of the year of assessment. A person therefore ceases
to be ordinarily resident on the day he or she emigrates, meaning on the day he or she boards the
aircraft.
In terms of s 9H(2)(b), the year of assessment of a resident who ceases to be a resident ends on the
date immediately before the day on which he or she ceases to be a resident, and in terms of
s 9H(2)(c) the next succeeding year of assessment starts on the day on which the resident ceases to
be a resident. This means, for example, that if a natural person emigrates on 1 October 2018, his
2018 year of assessment as resident will be from 1 March 2017 to 30 September 2017, and his 2018
year of assessment as non-resident will be from 1 October 2017 to 28 February 2018.
Physical presence
A natural person who is not at any time during the relevant year of assessment ‘ordinarily resident’ will
be a ‘resident’ if he is physically present in the Republic for certain periods, that is, if he meets the
requirements of the so-called ‘physical presence’ test. This test therefore only applies to a person
who is not ordinarily resident in the Republic at any time during the year of assessment (referred to
here as ‘the current year of assessment’) but is physically present in the Republic for a period or
periods
l exceeding 91 days in aggregate during the current year of assessment, and
30
l exceeding 91 days in aggregate during each of the five years of assessment preceding the
current year of assessment, and
l exceeding 915 days in aggregate during the five years of assessment preceding the current year
of assessment (par (a)(ii) of the definition of ‘resident’ in s 1).
The effect of the definition of a ‘resident’ is that a natural person who is not ordinarily resident in the
Republic can, in terms of the physical presence test, only become a resident for tax purposes in the
year after a period of five consecutive years of assessment during, which the person is physically
present in the Republic for a qualifying period or periods.
The following rules apply to the ‘physical presence test’:
l for the purposes of determining the number of days during which a person is physically present
in the Republic, a part of a day is included as a day
l a day spent in transit through the Republic is not included as a day, provided that the person
does not formally enter the Republic through a port of entry
l the more than 91 days and more than 915 days’ periods of physical presence in the Republic
need not be continuous. If a person is present for several periods which in aggregate exceed 91
or 915 days, the requirement will be met.
A person who is deemed to be exclusively a resident of another country for the

purposes of a double taxation agreement between the governments of the
Republic and that other country will not be a resident of the Republic, even
Please note! though he meets the qualifying requirements of being a resident (par (A) of the
definition of ‘resident’). This rule will, in many cases, render the physical
presence test irrelevant since the rules in double taxation agreements are more
similar to the ordinary resident test.
Beginning and ending of being a resident in terms of the physical presence test
A person will be a resident with effect from the first day of the relevant year of assessment (that is, the
sixth year) during which all the requirements of the physical presence test are met.
A person who is a resident in terms of the physical presence test will cease to be a resident from the
day that he or she ceases to be physically present in South Africa if the person remains physically
outside South Africa for a continuous period of 330 full days from this date.
The period of at least 330 full days required to terminate a person’s residence must be continuous
and meeting this proviso will therefore stretch over two years of assessment. The at-least-330-days
exception only applies if a person is already a resident in terms of the physical presence test, which
means he must have been physically present in the Republic for more than 91 days in the year that
he ceases to be physically present. The at-least-330-continuous days of absence will commence only
on the day after the period of more than 91 days has been met, and he then ceases to be physically
present.
Paragraph 4.4 of Interpretation Note No 4 confirms that a natural person, who is a resident by virtue
of the physical presence test, ceases to be a resident from the day after the person leaves the
Republic. The 330 days of absence therefore starts on the day after the person leaves the Republic.
If a person, who is ordinarily resident in the Republic, is physically absent for a

continuous period of at least 330 days, for example in order to study in a foreign
Please note!
country, he will not cease to be a resident, as the physical presence test does
not apply to a person who is ordinarily resident in the Republic.
Example 3.1. Temporary secondment to the Republic
Craig, a civil engineer and ordinarily resident outside the Republic, was temporarily seconded to
the Republic by his employer on 1 November 2011 to oversee a major contract that was
expected to last for two years. Due to unforeseen problems on the contract, Craig eventually left
the Republic and returned home only on 30 November 2017. He was physically present in the
Republic throughout the seven-year period except for returning home for his annual leave (35
days) each calendar year from 2013 to 2017.
Is Craig resident in the Republic during the years of assessment ending 28 February 2012 to
28 February 2018?
31
SOLUTION
As Craig was not ordinarily resident in the Republic at any time during his secondment, he will
be resident only if he meets the requirements of the physical presence test.
Year of Number
Period physically present
assessment of days
2012 1 November 2011 to 29 February 2012 (no annual leave taken) .... 121
2013 Entire year of assessment except for 35 days annual leave........... 330
2018 1 March to 30 November 2017 ....................................................... 275
2012 year of assessment
Craig is present in the Republic for more than 91 days in this year of assessment but not in each
of the five prior years of assessment. He is therefore not resident in terms of the physical pres-
ence test.
Craig is present in the Republic for more than 91 days in this year of assessment and in the prior
year but not in each of the four years prior to that. He is therefore not resident in terms of the
physical presence test.
Craig is present in the Republic for more than 91 days in this year of assessment and in the two
immediately prior years, but not in the three years prior to that. He is therefore not resident in
terms of the physical presence test.
Craig is present in the Republic for more than 91 days in this year of assessment, for more than
91 days in each of the three prior years, but not in the two years prior to that. He is therefore not
resident in terms of the physical presence test.
Craig is present in the Republic for more than 91 days in this year of assessment and in the four
immediately prior years, but not in the year prior to that. He is therefore not resident in terms of
the physical presence test.
Craig is present in the Republic for more than 91 days in this year of assessment, for more than
91 days in each of the five prior years and in aggregate for more than 915 days in the five prior
years. He is therefore resident in terms of the physical presence test from 1 March 2016, the first
day of the year of assessment.
Craig also met the requirements of the physical presence test during the 2018 year of
assessment. He will remain a resident for South African tax purposes until he is no longer
physically present in the Republic for more than 330 consecutive days that commence
immediately after 30 November 2017. Since Craig leaves the Republic on 30 November, he will,
in terms of Interpretation Note No 4, cease to be a resident from the day after he leaves the
Republic. He therefore ceases to be a resident on 1 December 2017. His 2018 year of
assessment as a resident will therefore, in terms of s 9H(2)(b), end on 30 November 2017 and he
will be taxed in the Republic as a resident for the period 1 March 2017 to 30 November 2017 and
as a non-resident from 1 December 2017 to 28 February 2018.
Example 3.2. Emigration

Thabiso was born in the Republic. He emigrated to Argentina on 1 July 2015. The periods that he
was inside and outside of the Republic were as follows:
In the Republic Outside the Republic
2012 year of assessment ................................................ 258 108
Calculate and explain whether Thabiso is a resident or a non-resident for each of the 2016, 2017
and 2018 years of assessment, respectively.
32
SOLUTION
2016
Only the ordinarily resident test can apply in the year that Thabiso emigrates. Because Thabiso
is ordinarily resident for a part of the year of assessment, the physical presence test cannot be
applied.
Thabiso is ordinarily resident in the Republic until 30 June 2015. He is therefore a resident from
1 March 2015 to 30 June 2015 and his 2016 year of assessment as resident ends on 30 June
2015 (in terms of s 9H(2)(b)). Thabiso is a non-resident for the period 1 July 2015 to 29 February
2016.
2017
The requirements of the physical presence test must be met:
1 Thabiso is in the Republic for >91 days in the 2017 year of assessment.
2 Thabiso is in the Republic for >91 days in the 2016, 2015, 2014, 2013 and 2012 years of
assessment.
3 Thabiso is in the Republic for > 915 days in total during the 2012 to 2016 years of
assessment.
Therefore, Thabiso is a resident from 1 March 2016.
2018
The requirements of the physical presence test must be met:
1 Thabiso is in the Republic for >91 days in the 2018 year of assessment.
2 Thabiso is in the Republic for >91 days in each of the 2017, 2016, 2015, 2014 and 2013
years of assessment.
3 Thabiso is in the Republic for >915 days in total during the 2013 to 2017 years of
assessment.
Therefore, Thabiso is a resident from 1 March 2017.
3.2.2 Residence of persons other than natural persons (par (b) of the definition of ‘resident’
in s 1)
A person other than a natural person (for example a company, close corporation or trust) is defined
as being ‘resident’ if it
l is incorporated, established or formed in the Republic, or
l has its place of effective management in the Republic (par (b) of the definition of ‘resident’ in s 1).
Where a company is incorporated, established or formed
There is no definition in the Act of the terms ‘incorporated’, ‘established’ or ‘formed’. A company that
is formed and incorporated in South Africa in terms of s 13 of the Companies Act 71 of 2008 is clearly
a resident because of its formation and incorporation in the Republic, irrespective of where it is
managed or where it carries out its business. As a result of being a resident, the company is liable for
tax in South Africa on its worldwide receipts.
Remember
A person who is deemed to be exclusively a resident of another country for the purposes of a
double taxation agreement between the governments of the Republic and that other country will
not be a resident of the Republic, even though he meets the qualifying requirements of being a
resident (par (A) of the definition of ‘resident’). This rule will, in many cases, render the place of
incorporation irrelevant since the rules in double taxation agreements usually refer to the place
of effective management.
Where a company is effectively managed

The Act does not define the expression ‘place of effective management’. According to Interpretation
Note No 6 (Issue 2), SARS regards the place of effective management as the place where key
management and commercial decisions that are necessary for the conduct of its business as a whole
are in substance made. This approach is consistent with the OECD’s commentary on Article 4 of the
Model Tax Convention regarding the term ‘place of effective management’.
All relevant facts and circumstances must be examined to determine the place of effective manage-
ment. A company may have more than one place of management, but it can only have one place of
effective management at any one time. If a company’s key management and commercial decisions
affecting its business as a whole are made at a single location, that location will be its place of
33
effective management. However, if those decisions are made at more than one location, the
company’s place of effective management will be the location where those decisions are primarily or
predominantly made.
Certain activities of foreign investment entities should be disregarded when

determining whether their place of effective management is in South Africa (2nd
proviso to the definition of ‘resident’). Certain foreign investment funds make
use of local fund managers when investing in South African assets or in other
African assets. The South African fund manager is usually given an investment
fund mandate (or a sub-mandate for a certain portion of the fund). The foreign
investment fund typically pays the South African fund manager a management
fee. The purpose of disregarding certain activities of a foreign investment entity
when determining whether its place of effective management is in South Africa,
is to ensure that the activities of the local fund manager do not cause the entire
entity to be subject to income tax in South Africa. The management fees and
performance fees earned by the local fund manager will remain subject to tax in
South Africa.
A foreign investment entity is a person other than a natural person that complies
with all of the following requirements (definition of ‘foreign investment entity’ in
s 1):
l it should not be incorporated, established or formed in South Africa
l its assets should consist solely of a portfolio of one or more of the following
that are held for investment purposes:
– amounts in cash or that constitute cash equivalents
Please note! – financial instruments that are issued by a listed company or by the South
African Government
– if the financial instruments are not issued by a listed company or by the
South African Government, they must be traded by members of the
general public and a market for that trade exists
– financial instruments which values are determined with reference to the
financial instruments mentioned above
– rights to receive any of the above assets
l 10% or less of the entity’s shares, units or other form of participatory interest
are directly or indirectly held by persons that are residents; and
l the entity should have no employees, directors or trustees that are engaged
in managing the entity on a full-time basis.
The activities of a foreign investment entity that should be disregarded when
determining whether its place of effective management is in South Africa, are
the following activities carried on by a financial service provider as defined in
s 1 of the Financial Advisory and Intermediary Services Act in terms of a licence
issued to that financial service provider under s 8 of that Act:
l a financial service as defined in s 1 of the Financial Advisory and
Intermediary Services Act, or
l any service that is incidental to a financial service contemplated above
where the incidental service is in respect of a financial product that is
exempted from the provisions of the Financial Advisory and Intermediary
Services Act as contemplated in s 1(2) of that Act.
Residence of estates, trusts, clubs and associations

Estates, trusts and other entities are resident in the Republic if they are incorporated, established or
formed or have their place of effective management in South Africa. The place of incorporation,
establishment or formation is a matter of fact, and each case must be decided on its own merits. If
the executors, administrators or trustees are resident in South Africa or if the entity is administered
from South Africa, the entity is resident in South Africa. For example, if the trustees of a trust meet to
attend to the affairs of the trust in South Africa, the trust is resident in South Africa. The place where
the assets of the entity are effectively managed is crucial.
3.3 Amount in cash or otherwise

It is not only the receipt or accrual of an amount of cash that should be included in a person’s gross
income. The value of non-cash items should also be included.
In CIR v Lategan (2 SATC 16)(1926 CPD 2013) the taxpayer, a wine farmer, sold wine that he made
during the year of assessment for a specific amount. Part of this amount was paid in cash to him
34
3.3–3.4 Chapter 3: Gross income
before the end of the year of assessment and the balance was paid in instalments during the
following year. The court had to decide whether the full amount qualified as the ‘total amount’ for
purposes of the definition of gross income, or only the part that he received in cash. The court held
that the word ‘amount’ should be given a wider meaning than merely referring to money, and must
include the value of every form of property earned by the taxpayer, whether corporeal or incorporeal,
which has a money value.
Remember
In the Lategan case the court ruled that where a taxpayer acquired a right during a year of
assessment to receive instalments of an amount during subsequent years, the present value of
that right at the end of that year should be included in the taxpayer’s gross income. However, a
proviso was added to the definition of ‘gross income’ in s 1, which provides that where a person
becomes entitled to any amount during a year of assessment, which is payable on a date falling
after the last day of such year, the amount is deemed to have accrued to the person during the
year. This means that the face value of the amount is included in the person’s gross income and
not the present value as what was decided in the Lategan case.
In CIR v Butcher Bros (Pty) Ltd (13 SATC 21)(1945 AD 301) the taxpayer owned a building that was
leased to a tenant for a period of 50 years, which the tenant could renew for a further period of
49 years. In terms of the lease agreement the tenant was required to demolish the existing buildings
and build a new theatre which was worth substantially more than the original buildings. Upon
termination of the lease, the buildings and improvements would revert back to the taxpayer without
compensating the tenant for the costs incurred relating to the buildings and improvements. The court
was asked to rule on whether the improvements to the land qualified as an ‘amount’ received by or
that accrued to the taxpayer for purpose of the definition of ‘gross income’. The court held that no
amount was received by or accrued to the taxpayer by the end of the year of assessment, because
the improvements did not have an ascertainable money value at the time.
Remember
The Act was amended after the Butcher Bros case by including par (h) in the definition of ‘gross
income’. This specific inclusion in gross income now provides that improvements to leasehold
property should be included in the gross income of a lessor. This paragraph also specifies how
the amount should be determined – see chapter 4.
In CSARS v Brummeria Renaissance (Pty) Ltd (2007 SCA) the investors in a retirement village did not
compensate the taxpayer (the developer) in cash for the construction and supply of the residential
units. Instead, the investors granted interest-free loans to the taxpayer as consideration for the
acquisition of the life-interests in the units. The court held that the right to use the loan capital interest-
free was a right that had an ascertainable monetary value. Even though this right could not be
transferred or actually turned into money, the court held that this does not mean that the right does
not have a monetary value. The test that should be applied to determine whether a right has a
monetary value is therefore an objective test and not a subjective test.
Remember
l Interpretation Note No 58 (Issue 2) explains the principles that the court applied in the Brum-
meria Renaissance case.
l The Interpretation Note confirms that the principles applied in this case would only apply in
instances where an interest-free loan is granted in exchange (quid pro quo) for goods sup-
plied, services rendered or any other benefit granted.
l The court in the Brummeria Renaissance case did not decide on how the right to an interest-
free loan should be valued. SARS applied the weighted-average prime overdraft rate of
banks to the average amount of interest-free loans in possession of the taxpayer in the
relevant year of assessment. Since the valuation of the right was not in dispute, the court
neither accepted nor rejected this approach.
3.4 Received by or accrued to

An amount must either be received by or it must accrue to a taxpayer during a year of assessment to
be included in the taxpayer’s gross income for that year. If a taxpayer did not receive an amount or if
35
an amount did not accrue to the taxpayer, the amount is not gross income and therefore not subject
to income tax.
The fact that the value of an asset increased over time does not mean that the value should be
included in its owner’s gross income. The increased value might have an ascertainable monetary
value, but until the asset is sold, the increased value is not received by and has not accrued to the
owner.
Similarly, the interest that a person would have received had he invested an amount of money in an
interest-bearing account instead of keeping it in a safe, cannot be included in the person’s gross
income because the person did not receive the interest and neither did it accrue to him.
The terms ‘received by’ and ‘accrued to’ are not defined in the Act. The most relevant court cases
wherein the meaning of these terms were considered are discussed below.
3.4.1 Meaning of ‘received by’

In Geldenhuys v CIR (14 SATC 419)(1947(3)SA 256(C)) the taxpayer and her husband, who carried
on business as farmers, executed a mutual will under which the surviving spouse was to enjoy the
fruits and income of the joint estate for his or her lifetime and their children to be the heirs of the
estate. A number of years after her husband’s death, the taxpayer, with her children’s consent,
decided to sell a flock of sheep which was included in her and her late husband’s joint estate. The
number of sheep sold was less than the number of sheep at the time of her husband’s death. She
invested the proceeds from the sale in a bond in her favour. The court was required to rule on
whether the amount received from the sale of the flock should be included in her gross income. The
court held that the taxpayer only had the right of use of the flock (that is, she was the usufructuary of
the flock), and since the number of sheep at the date of sale was smaller than at the date when her
usufruct commenced, there was no surplus offspring to which she was entitled. The whole of the
proceeds realised belonged to the heirs. Although the taxpayer received the proceeds from the sale
of the flock, she did not become entitled to the money, and it should therefore not be included in her
“gross income”.
An amount received by a taxpayer on behalf of another person is therefore not gross income for the
taxpayer.
Deposits
The taxpayer in Pyott Ltd v CIR (13 SATC 121)(1945 AD 128) was a biscuit manufacturer. Their
biscuits were sold in tin containers for which the taxpayer charged a fee. The fee was refunded to a
customer if the tin container was returned in good condition. At the end of the relevant year of
assessment, the taxpayer deducted an amount from its gross income as a provision for containers
still to be returned. The court was asked to rule on whether the amount that the taxpayer deducted
should have been included in its gross income. The court ruled that the amount that the taxpayer
received for the sale of the containers should be included in its gross income at its face value
because it was an amount of cash received by the taxpayer. The taxpayer was not entitled to exclude
the amount it was still going to refund customers from its gross income. The court also made an
important observation that the taxpayer, according to the court, correctly conceded that the
proceeds from the sale of the tin containers were not in any way ‘trust moneys’. The court noted that if
it was, it would not form part of the taxpayer's income. See similar decisions in Brooks Lemos Ltd v
CIR (1947 AD) and Greases (SA) Ltd v CIR (1951 AD) (the so-called ‘deposit cases’).
The principle from the Pyott case is that even a deposit received could qualify as gross income if the
taxpayer receives the amount on its own behalf and for its own benefit. If an amount is received as
trust money and the taxpayer is not the beneficial owner, but merely the trustee, the amount does not
qualify as gross income because the taxpayer does not receive it on its own behalf and for its own
benefit.
Example 3.3. Advance payments
A man lets his house and in terms of the contract of lease receives the rent in advance for two
years. The whole amount constitutes gross income for the year in which it is received.
A hotelier receives a non-refundable deposit in terms of a contract to reserve accommodation for
a later date. The deposit is taxable in the year of receipt.
36
Illegal income
In CIR v Delagoa Bay Cigarette Co, Ltd (32 SATC 47) (1918 TPD 391) the taxpayer operated an
illegal lottery. The taxpayer sold cigarettes at an amount much higher than the normal selling price of
the cigarettes and the difference was distributed to the holder of a lucky coupon. The relevance of
this case is that the court found that whether the business carried on by the taxpayer was legal or
illegal is not material for the purpose of determining whether its income should be subject to tax. The
receipts and accruals from illegal activities will therefore still be included in the taxpayer’s gross
income.
In MP Finance Group CC (in liquidation) v CSARS (69 SATC 141) (2007 SCA) the taxpayer operated
an illegal investment pyramid scheme. It promised significant returns on investors' money. Some
investors received repayment of their investments plus returns, but the majority received less or
nothing and the operators of the scheme used some of the money for their own benefit. Throughout
the tax years in question, the operators of the scheme knew that it was insolvent, that it was
fraudulent and that it would be impossible to pay all investors what they had been promised.
The court had to rule on whether the amounts invested in the scheme qualified as gross income for
the taxpayer. The taxpayer argued that it never received the funds within the meaning of the definition
of ‘gross income’ because it was legally obliged to refund the deposits to the investors.
In ruling that the deposits qualified as gross income for the taxpayer, the court made the following
important findings:
l An illegal contract is not without all legal consequences; it can, indeed, have fiscal
consequences.
l Notwithstanding the fact that the taxpayer was legally obliged to refund the deposits to the
investors, and therefore not entitled to retain the amounts, the taxpayer ‘received’ the deposits
within the meaning of the definition of ‘gross income’ because the deposits were accepted with
the intention of retaining them for the taxpayer's own benefit.
Interpretation Note No 80 confirms the application of the principles of the

MP Finance case to the receipt of money stolen through robbery, burglary or
Please note!
other criminal means. The issue is not whether the victim intended to part with
the money, but rather whether the thief intended to benefit from it.
3.4.2 Meaning of ‘accrued to’

It is not only amounts ‘received’ by a taxpayer that are included in gross income, but also amounts
that accrue to a taxpayer. ‘Accrued to’ means that the taxpayer became entitled to an amount. In
other words, at the time that a taxpayer obtains a vested right to a future payment, the amount
accrues to the taxpayer.
In CIR v People's Stores (Walvis Bay) (Pty) Ltd (52 SATC 9) (1990 (2) SA 353(A)) the taxpayer was a
retailer that sold goods to its customers for cash and on credit. The credit sales were made under the
taxpayer's six-months-to-pay revolving credit scheme. The court had to decide whether the
instalments not yet payable and outstanding at the end of a particular year of assessment, accrued to
the taxpayer and should be included in its gross income.
The court, in applying the principles that were established in the Lategan case (see 3.3), held that an
amount does not have to be due and payable to the taxpayer for it to accrue to the taxpayer. The tax-
payer acquired a right during the year of assessment to claim payment of an amount in the future.
Since the right vested in the taxpayer in the year of assessment, it accrued to the taxpayer in that
year. And since the right can be turned into money (that is, it has an ascertainable monetary value),
the right qualifies as an ‘amount’ and should be included in ‘gross income’.
37
Remember
Similarly to the Lategan case, the court in the People’s Stores case said that since it is the right to
receive payment in the future that accrued to the taxpayer (and not the amount itself), it is that
right that has to be valued. The court said that the right to receive future payments does not
necessarily have the same value as the cash amount, since it is affected by its lack of immediate
enforceability. The court held that the right should be valued at its present value. However, a
proviso was added to the definition of ‘gross income’ in s 1, which provides that where a person
becomes entitled to any amount during a year of assessment, which is payable on a date falling
after the last day of such year, the amount is deemed to have accrued to the person during the
year. This means that the face value of the amount should now be included in a person’s gross
income despite the decisions in the Lategan and People’s Stores cases.
The taxpayer in CIR v Witwatersrand Association of Racing Clubs (23 SATC 380) (1960 (3) SA
291(A)) was an association formed by a number of horse racing clubs. The taxpayer decided to hold
a horse racing event for the benefit of two charities. The court had to consider whether the proceeds
from the race should be included in the taxpayer's gross income.
The taxpayer argued that in organising the event, it entered into a number of contracts on behalf of
the charities. However, the court found, based on the facts presented, that it was the taxpayer, and
no one else, that was liable to pay the expenses incurred in holding the event; and that the race was
conducted by the taxpayer itself as principal, and not as an agent for the clubs or for the charities.
The court held that the proceeds from the race were gross income for the taxpayer because it was
the taxpayer, and no one else, who became entitled to the proceeds of the race. The court also said
that although the taxpayer was not going to keep the proceeds from the race for itself, but pay it to
the two charities, the taxpayer was not thereby relieved from liability for tax. A moral obligation to
hand over the proceeds to the charities did not destroy the beneficial character of the receipt of those
proceeds by the taxpayer.
The court in the Witwatersrand Association of Racing Clubs case found that the
taxpayer did not act as agent on behalf of the charities. If the taxpayer had, in
Please note! fact, acted as agent on behalf of the charities, the proceeds from the event
would have accrued to the charities, because the association would not have
been entitled to the amounts.
In Mooi v SIR (35 SATC 1) (1972 (1)( SA 674 (A)) the taxpayer's employer granted him an option to
acquire shares in the company at a specific price. The option was, however, subject to certain condi-
tions, including that the construction of the company's mine should be completed and that the
taxpayer should still be an employee at the time the option is exercised. The taxpayer accepted the
option during a specific year and exercised the option more than three years later. When the option
was exercised, the value of the shares was more than the option price. The court was required to
consider whether the difference between the price of the shares when the option was exercised and
the option price should be included in the taxpayer's gross income. The court made the following
important findings:
l In applying the principle established in the Lategan case (see 3.3), the court said that to
determine the ‘amount’ in the case of a right, one has to establish the value of the right.
l The taxpayer argued that the right accrued to him when the option was granted and the value of
the right at that time should be included in his gross income. However, the court found that the
right granted to the taxpayer was a contingent right, as it was subject to the conditions mentioned
above. The right only accrued to the taxpayer when the conditions were fulfilled and the right
became exercisable.
l Since the taxpayer was not a share-dealer, the amount was of a capital nature. However, par (c)
of the definition of ‘gross income’ specifically included ‘any amount, including any voluntary
award, received or accrued in respect of services rendered or to be rendered’ in the taxpayer’s
gross income, despite being of a capital nature.
An amount accrues to a taxpayer when the taxpayer becomes entitled to the

Please note! amount (Lategan and People’s Stores cases), but only when that entitlement is
unconditional (Mooi case).
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3.4.3 Valuation of receipt or accrual

Valuing an amount received presents little difficulty, since the value of the receipt is the amount that
has been received during the year of assessment. The difficulty lies with the valuation of amounts that
have accrued to a taxpayer in a year of assessment, but which are still outstanding at the end of the
year of assessment.
In CIR v People Stores (Walvis Bay) (Pty) Ltd (1990 A), the court had to decide how the outstanding
amounts should be valued at year-end. The court was asked to consider whether the amounts should
be included at their face value (as they appeared in the records), or whether the amounts had to be
discounted by the inclusion of their present value (remember that the value of money decreases over
time). The court held that the present (discounted) value of the outstanding amounts had to be
included. However, the legal position was changed shortly after this decision by virtue of an amend-
ment to the Act, which introduced a proviso to the definition of ‘gross income’ in s 1.
The proviso provides that when
l a person has become entitled to an amount during the year of assessment, and
l that amount is payable on a date or dates falling after the last day of that year,
the face value (and not the present value) of that amount shall be deemed to have accrued to the
person during such year.
Example 3.4. Value of accrual

A taxpayer sold and delivered goods on 26 February 2018 for R30 000. Payment is only due two
years later. Assume that the present value of the R30 000 receivable after two years is R18 000
at the end of the year of assessment during which the taxpayer sold the goods (28 February
2018).
An amount of R30 000 (and not the discounted present value of R18 000) will be included in the
gross income of the taxpayer in the year of assessment in which the sale was concluded, as he
became entitled to the amount of R30 000, even though the physical receipt thereof will only
occur later.
3.4.4 Unquantified amounts (s 24M)

If an asset is disposed of for a consideration that consist of or includes an amount that cannot be
quantified in that year of assessment, the unquantified amount is deemed not to have accrued to that
person in that year of assessment. The unquantified amount accrues to that person in the year when
it becomes quantifiable (s 24M(1)).
Example 3.5. Unquantified amount
A farmer sells his mealie crop to a co-operative for R2 000 per ton on 15 February 2018 (in terms
of a contract with no suspensive conditions). Assume that the farmer delivers the crop to the co-
operative on 27 February 2018, but that the actual quantity thereof is only established on
3 March 2018. In view of the fact that the amount, which has already accrued to the farmer
according to the general principles, is an unquantified amount at year-end (28 February 2018), it
will be deemed not to have accrued to the farmer in the 2018 year of assessment. The amount of
the mealie crop will only be included in the farmer’s gross income in the 2019 year of
assessment when it is quantified.
3.4.5 Accrual rules with the disposal of certain equity shares (s 24N)
A special accrual rule applies to profit participation sales of equity shares. This applies where the
consideration for the shares is determined with reference to the future profits of the company. The
accrual of the consideration in the seller’s hands is deferred to the extent and until the amounts
become due and payable (s 24N(1)). This rule essentially allows profit participation sales of equity
shares to be subject to normal tax only to the extent that the consideration becomes due and
payable. Similar rules applies to the purchaser (s 24N(2)).
These rules apply when all of the following features are present (s 24N(2)):
l More than 25% of the amount payable for the shares in a company becomes due and payable
after the end of the seller’s year of assessment.
l The amount payable for the shares must be based on the future profits of that company (the so-
called ‘profit participation requirement’).
39
l The value of the equity shares, that have in aggregate been disposed of during the year to which
s 24N applies, exceeds 25% of the total value of equity shares in the company.
l The purchaser and seller are not connected persons after the disposal.
l The purchaser is obliged to return the equity shares to the seller in the event of his failure to pay
any amount when due.
l The amount is not payable by the purchaser to the seller in terms of a financial instrument (see
chapter 16) that is payable on demand and is readily tradeable in the open market.
3.4.6 Blocked foreign funds (s 9A)

A special rule applies where a person’s income includes an amount that accrued to him from a
foreign country, where that country imposes currency or other restrictions which prevent the amounts
from being remitted to South Africa during the year of assessment. These amounts are referred to as
blocked foreign funds. These amounts must be deducted from that person’s income in that year of
assessment (s 9A(1)), and are deemed to be amounts received by or accrued to the person in the
following year of assessment (s 9A(2)). See also Interpretation Note No 63). The effect of this section
is that the taxation of blocked foreign funds is delayed to the year of assessment in which the
restrictions are lifted.
3.4.7 Disposal of income after receipt or accrual (without prior cession) versus disposal
of a right to future income (prior cession)
Once income has been received by a person for his own benefit or it has accrued to him in terms of
the definition of ‘gross income’ in s 1, the ultimate disposal of the income by that person would not
affect his liability for taxation in respect of such receipt or accrual.
If, for example, a dishonest employee embezzles the day’s takings, his act can in no way destroy the
accrual in favour of the employer. The amount forms part of the employer’s gross income the moment
that it has been received. The subsequent loss thereof does not mean that it is no longer gross
income in the employer’s hands.
The same principle applied in the Witwatersrand Association of Racing Clubs case (see 3.4.2). The
taxpayer undertook to hand over the net proceeds of a race meeting to two charitable organisations,
but had to pay tax in respect of the profits that were received. The horse-racing association donated
the proceeds only after they were received by it for its own benefit. The accrual of the income and the
resulting tax liability (in the hands of the association) would have been avoided if the race meeting
had been arranged in terms of a contract which stated that all of the proceeds would be for the
account of the charitable organisations and that the association would only act as an agent of the
charitable organisations. The amounts would then have been received in favour of and on behalf of
the charitable organisations.
The question of the disposal of profits frequently arises when a business is sold during a year of
assessment, and where a seller disposes of all the benefits of the profits earned for the current year
of assessment to the purchaser. The sale to the purchaser cannot alter the seller’s liability for tax on
amounts that have already accrued to him.
Example 3.6. Disposal of income after accrual
The owner of a business disposes of his business on 29 December 2018 (together with the right
to the profits as from 1 March 2018). The profits for the period 1 March 2018 to 29 Decem-
ber 2018 will still accrue to the original owner. The disposal of the profits after the accrual thereof
does not influence the original owner’s tax liability in respect thereof. The new owner will, how-
ever, be liable for tax in respect of the profits from 30 December 2018.
There is, however, a significant difference between the disposal of income after it has accrued to a
person, and the disposal and cession by him of a right under which income will accrue only in the
future. When income is disposed of after it has already accrued to the party who is disposing of it, it
still remains taxable in his hands. Alternatively, when a right to future income is disposed of, the
income will in future accrue to the recipient of the right, provided that the right to such income has
been properly ceded to such recipient (Van der Merwe v SBI (1977 A)). Cession simply means that
one person (the transferor, or cedent) transfers his rights to another person (the cessionary). Delivery of
rights occurs through cession. It should, however, operate in such a way that the transferor divests
himself totally of any right to claim the income when that income accrues in the future (ITC 265 (1932)).
40
The cession of income in respect of an asset of which the cedent retains ownership will in terms of
the definition of gross income accrue to the cessionary, although the ownership has been reserved
(ITC 1378 (1983)). For example, the rental income of a property may be ceded without transferring
the ownership of the property. Section 7(7) of the Act is, however, specifically designed to deem the
income received by the cessionary in such cases to be included in the gross income of the cedent
(owner of the property).
Confusion is sometimes created if a cedent, after he has properly ceded his right to future income to
a cessionary, still physically received the income, where after he duly paid it over to the cessionary. It
is important to note that the cedent, in such a case, actually received the income on behalf and for
the benefit of the cessionary. The mere fact that the cedent received the money physically does not
mean that he received it for his own benefit or that the amount had accrued to him (CIR v Smant
(1973 A), CSARS v Cape Consumers (1999 C)).
Example 3.7. Disposal of income before accrual
Lesedi wrote a book. He sold the book, including all the potential future rights to royalties, to
Faith. The rights were properly ceded to Faith. Faith will be subject to tax on all future royalties
(given that the amount in the hands of Faith complies with all the other requirements of gross
income).
If the publishers paid the royalties to Lesedi (subsequent to the valid cession), whereafter Lesedi
paid them over to Faith, the royalties would still be taxable in Faith’s hands. Lesedi merely
received it on behalf of Faith (the new ‘owner’ of the rights).
It is, however, possible to cede a right to future income in an attempt to avoid a potential tax liability.
There are certain anti-avoidance provisions in the Act which are specifically designed to counteract
such avoidance. For example, par (c) of the definition of ‘gross income’ provides that the
consideration that a person receives for services rendered by such person will be included in his
gross income, although it may have been received by or accrued to another person. The person who
performs services can therefore not evade his tax liability by ceding his right to future income in
respect of such services to another person. Section 7 also contains specific provisions that direct that
income disposed of to a spouse or minor child would still be taxable in the hands of the disposing
spouse or parent (see chapter 7 for further discussion). Furthermore, the application of the general
anti-avoidance measures could result in the cession being ignored for tax purposes (see chapter 32).
A cession of income in order to achieve a tax advantage will therefore not always be successful.
Securities sold cum or ex income rights

Securities, such as shares, debentures or government stocks, are often sold together with a right to a
dividend or interest: the purchaser would then be entitled to receive any forthcoming dividend or in-
terest. The general principles, as discussed above, would be applicable to assess which party
should be liable for the taxation in respect of such dividends or interest.
If the income has already accrued to the seller prior to the sale, it is taxable in his hands. The mere
fact that the purchaser will receive the income is irrelevant. If the income accrues only after the sale,
when the buyer is already the owner of the security, it is taxable in the buyer’s hands. There can be
no question of apportioning the income relating to the period up to the date of sale to the seller and
the income relating to the period after the date of the sale to the buyer. The full income is taxable in
the hands of either the seller or buyer, whichever one of them is entitled to it. This general principle
may, however, be regulated by specific anti-avoidance provisions within the Act, for example, s 24J
may deem interest to accrue on a day-to-day basis, irrespective of the fact that the actual interest is
received in other specified periods (see chapter 16). In such a case the interest should be
apportioned between the seller and the buyer.
41
Example 3.8. Cum and ex income rights
Assume that on 10 June 2017 Lethabo sold shares to Amahle on which a dividend had been
declared on 15 May 2017, payable on 9 June 2017 to holders of shares registered on 1 June
2017. Accept that Lethabo had not yet received the dividend. It is submitted that the dividend is
gross income in the hands of Lethabo, since it accrued to him on 1 June. Even if the shares were
sold cum dividend (in other words inclusive of the dividend), that is, it was agreed on in the
contract that Amahle was to receive the dividend; Lethabo is the party to whose gross income
the dividend would be added. He merely disposed of the dividend after it had accrued to him.
The position would have been different if Lethabo sold the shares prior to the date of accrual of
the dividend and if it was agreed between the parties that Amahle would be entitled to the
forthcoming dividend. The dividend would then have to be included in the gross income of
Amahle.
3.4.8 Time of accrual of interest payable by SARS (s 7E)

Where a person becomes entitled to an amount of interest that is payable by SARS in terms of any
tax Act, the amount is deemed to accrue to the person on the date on which the amount is paid (s
7E). This rule, which applies only from 1 March 2018, overrides the general rule that an amount is
included in a person’s gross income at the earlier of receipt or accrual. The effect of this rule is that
interest payable by SARS is only included in the recipient’s gross income when the amount is actually
paid and not when the person becomes entitled to it.
The circumstances under which a person becomes entitled to interest payable by SARS are
discussed in chapter 33.
The accrual of other amounts of interest is provided for in s 24J and is discussed in chapter 16.
3.5 Year or period of assessment

A ‘year of assessment’ is defined in s 1 as a year or other period in respect of which any tax or duty
leviable under the Act is chargeable. An amount is only income and subject to taxation in a relevant
year if it has been received by or accrued to a taxpayer during that year of assessment. Each year of
assessment stands on its own. When rates of tax or special provisions change from one year to the
next it becomes important from the point of view of both the taxpayer and SARS to ensure that all
amounts received or accrued during a particular year of assessment are included in the assessment
for that year.
Remember
For income tax purposes, a year of assessment of a person differs from a calendar year.
The 2018 year of assessment of a natural person and a trust generally extends from
1 March 2017 until 28 February 2018. The 2018 year of assessment of a company is its financial
year ending during the 2018 calendar year.
The ‘year of assessment’ of all natural persons and trusts generally runs from 1 March of one year to
the last day of February of the following year (s 5(1)(c)). The Commissioner may accept accounts to a
date other than the last day of February, if satisfied that the whole or some portion of the natural
person or trust’s income cannot be conveniently returned for any year of assessment (s 66(13A)).
Interpretation Note No 19 (Issue 4) provides guidance on the Commissioner’s discretionary powers
granted under s 66(13A). The discretionary powers granted to the Commissioner are not subject to
objection and appeal (s 66(13A) read together with s 3(4)(b)).
3.6 Receipts and accruals of a capital nature

The definition of ‘gross income’ excludes receipts and accruals of a capital nature. This, however,
does not mean that receipts and accruals of a capital nature are entirely free from income tax. A
portion of these amounts may still be subject to income tax by the inclusion of taxable capital gain in
taxable income. This is referred to as capital gains tax and is discussed in chapter 17.
The Act contains no definition of the term ‘capital’ and as was mentioned in WJ Fourie Beleggings v
C:SARS (2009 SCA) ‘[w]hether a receipt or an accrual should be regarded as capital or revenue is
probably the most common issue which arises in income tax litigation’. The courts have laid down a
number of guidelines that should be considered when determining whether an amount is of a capital
42
nature or not. But, as the court said in the WJ Fourie Beleggings case, ‘it has not been possible to
devise a definite or all-embracing test to determine whether a receipt or accrual is of a capital nature,
despite the regularity with which the issue has arisen. At the same time, and although common sense
has been described as “that most blunt of intellectual instruments”, it remains the most useful tool to
use in deciding the issue’. Although a decisive test does not exist, the following important principles
have been established over the years:
l The burden of proof that an amount is of a capital nature is on the taxpayer (s 102 of the Tax
Administration Act). The taxpayer must, for example, prove that an asset was acquired for the
purpose of investment and not for the purpose of resale at a profit, if the proceeds are to be
regarded as being capital in nature.
l The inquiry as to whether an amount is of an income or a capital nature is a question of fact, which
has to be decided on the merits of each case. Although the court will consider the guidelines
which have been laid down in earlier decisions, it will have regard to the totality of all the relevant
facts and circumstances of each case.
l The most important test used by the courts in deciding whether a receipt is income or capital in
nature is the intention of the taxpayer. Generally, the proceeds will be income in nature if the
asset was acquired with the purpose of selling it at a profit. However, if the asset itself was
acquired and held, not for the purpose of resale at a profit, but to produce income from that asset
such as rent, interest or dividends, then the proceeds on the disposal of the asset will be capital
in nature. Another person could acquire the same asset, but with the intention to sell it at a profit.
The proceeds on sale of the asset by such person will then be income in nature (CIR v Visser
(1937 TPD)).
l The taxpayer’s own evidence (the ipse dixit of the taxpayer) about his intention and his credibility
will be considered by a court. Due to subjectivity, self-interest, the uncertainties of recollection
and the possibility of mere reconstruction, the evidence given by the taxpayer will not be
decisive. The court will test that evidence against the surrounding facts and circumstances (in
other words, objective factors) in order to establish a taxpayer’s true intention (CIR v Nussbaum
(1996 (A)).
l All receipts and accruals must be categorised as being either of a capital or of an income nature.
An amount cannot be both ‘non-capital’ and ‘non-income’ (Pyott Ltd v CIR (1945 AD)), but single
receipt may be apportioned between its capital and income elements (Tuck v CIR (1988 A)).
l The intention of a company’s shareholders could be attributed to the company itself
(Elandsheuwel Farming (Edms) Bpk v SIB (1978 (A)).
l Amounts received will be revenue if they qualify as receipts made by an operation of business in
carrying out a scheme for profit-making. For a receipt to be of a revenue nature, it is not sufficient
for the taxpayer to be carrying on a business. The business should be conducted with a profit-
making purpose as well (CIR v Pick 'n Pay Employee Share Purchase Trust (1992 (A)).
l A person is entitled to realise an asset to the best advantage and to accommodate the asset to
the exigencies of the market in which he was selling. The fact that he did so could not alter what
was an investment of capital into a trade or business for earning profits (CIR v Stott (1928 AD)).
l The mere decision to sell an asset originally held as an investment is not necessarily to be
regarded as a transformation of the profits from a capital nature into a revenue nature. Something
more than the mere disposal is required for the proceeds to be of a revenue nature (CIR v Nel
(1997 (T)); CIR v Richmond Estates (Pty) Ltd (1956 (A)); John Bell & Co (Pty) Ltd v SIR (1976 A);
Natal Estates Ltd v CIR (1975 (A)).
l From the totality of the facts, one should enquire whether it can be said that the taxpayer had
crossed the Rubicon and gone over to the business of, or embarked upon a scheme for profit,
using the asset as his stock-in-trade (Natal Estates Ltd v CIR (1975 (A)).
l Where the purposes of a taxpayer regarding an asset are mixed, one should seek and give effect
to the dominant factor that induced the taxpayer to acquire the asset (COT v Levy (1952 (A)).
l Where a taxpayer who intends to invest in an asset, has a secondary, profit-making purpose
when the asset is purchased and sold, the proceeds will be of an income nature (CIR v
Nussbaum (1996 (A)).
l Where a taxpayer received an amount as compensation for the cancellation of a contract, the
court held that one should distinguish between a contract, which is a means of producing
income, and a contract directed by its performance towards making a profit. Compensation for
43
cancelling the first would be of a capital nature and the latter of a revenue nature (WJ Fourie
Beleggings v C:SARS (2009 SCA)).
The above principles and court cases are discussed in more detail below.
3.6.1 Nature of an asset

In CIR v George Forest Timber Company Limited (1 SATC 20) (1934 AD 516) the taxpayer was
company that acquired land with a natural forest for business purposes. The taxpayer felled a
quantity of trees each year which were sawn up in its mill and sold as stock-in-trade. The court had
to consider whether the receipts from the sale of the timber were of a revenue or capital nature. The
court found that in selling the timber the company did not realise a capital asset, but created and
sold a new product. The court said that, as a general rule, capital, as opposed to income might be
said to be wealth used for the purpose of producing fresh wealth. The court distinguished between
fixed and floating capital, with the substantial difference being that floating capital was consumed and
disappeared in the very process of production, while fixed capital did not. Fixed capital produced
fresh wealth but remained intact. The receipts from selling the timber were found to be from the sale
of floating capital and not of a capital nature.
In CIR v Visser (1937 TPD) the taxpayer acquired mining options on certain farm properties. The
options, however, lapsed before the taxpayer could start searching for mineral deposits on the farms.
Although the options lapsed, the taxpayer had persuasive influence over the farmers in the area and
was convinced that he could acquire the options again if he wished to do so. The taxpayer then
entered into an agreement with another person whereby the taxpayer agreed to assist the other
person in obtaining the mining options in exchange for shares in the other person's company. The
court had to decide whether the shares that the taxpayer received were of a capital nature and
therefore excluded from his gross income. The court came to the following conclusions:
l The nature of the transaction and the taxpayer's intention when he entered into this transaction
should be considered.
l The taxpayer's intention in regard to any particular transaction, although not necessarily con-
clusive, is always of the utmost importance in deciding whether the profit made on the sale of an
asset is income or merely the enhanced value of a capital asset.
l The taxpayer's intention is not necessarily determined by what he says his intention was, but by
the inference as to the intention to be drawn from the facts of the case.
l If we consider the economic meaning of ‘capital’ and ‘income’, the one excludes the other.
‘Income’ is what ‘capital’ produces, or is something in the nature of interest or fruit as opposed to
principal or tree. This economic distinction is a useful guide, but its application is often difficult, for
what is principal or tree in one person's hands may be interest or fruit in the hands of another.
l ‘Income’ may also be described as the product of a person's wits and energy. The consideration
received by the taxpayer was a product of his wits and energy and therefore of an income nature.
3.6.2 Intention of a company

In Elandsheuwel Farming (Edms) Bpk v SIB (1978 (A)) the taxpayer was a company that acquired a
property that was used for farming purposes. One of its shareholders carried on farming activities on
the property for about four years. The farm was then leased to other tenants who used the property
for farming purposes. About six years after the company acquired the property, its shareholders sold
their shares in the company. The price of the company's shares was based on the value of the
property as agricultural land. The new shareholders were property developers. At that time another
developer was purchasing land in the area at a price significantly more than what the new
shareholders paid for their shares in the company. A year later, the company sold the property to a
local municipality at a significant profit. The court had to rule on whether the proceeds on the sale of
the property were of a capital nature and therefore excluded from the company’s gross income. The
court came to the following conclusions:
l The new shareholders derived a scheme to make a substantial profit by acquiring the shares in
the company at a price based on the agricultural value of the land and then to sell the land to the
municipality for township development.
l The shareholder's intentions should be attributed to the company itself.
l After the new shareholders acquired control of the company, the company's purpose with
regards to the land changed to that of trading stock.
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l The profit realised on sale of the land was of a revenue nature and should be included in the
company's gross income.
3.6.3 Business conducted with a profit making purpose

In CIR v Pick 'n Pay Employee Share Purchase Trust (1992 (A)) the taxpayer was a trust established
by the Pick ’n Pay group of companies to administer a share purchase scheme for the benefit of
employees of the group. The trust was created and maintained to enable employees to purchase
shares in Pick ’n Pay, their employer company. It purchased shares in order to make them available
to employees entitled to them. In terms of its constitution, it was compelled to repurchase shares from
employees who were required to forfeit their holdings. The court had to consider whether the
proceeds on the sale of shares were of a capital nature for the trust. The court held that
l Although there are a variety of tests the courts have laid down for determining whether or not a
receipt is of a revenue or capital nature, they are guidelines only. There is no single infallible test
of invariable application.
l The amounts received by the trust will be revenue if they qualify as receipts made by an
operation of business in carrying out a scheme for profit-making.
l For a receipt to be of a revenue nature, it is not sufficient for the taxpayer to be carrying on a
business. The business should be conducted with a profit-making purpose as well.
l Transactions involving shares are no different from any other transaction and the capital or
revenue nature of a receipt should be determined in the same way as other assets.
l While the trustees might have contemplated the possibility of profits, it was not the purpose of
either the company in founding the trust, or of the trustees, to carry on a profit-making scheme.
l Any receipts accruing to the trust were not intended or worked for but purely fortuitous in the
sense of being an incidental by-product.
l The receipts were of a capital nature.
3.6.4 Selling an asset to best advantage

In CIR v Stott (1928 AD) the taxpayer was a surveyor and architect. On a number of occasions, he
purchased land when he had funds to invest. During a particular year he derived profit from the sale
of plots of land which were subdivided from two properties. The taxpayer acquired the first property
as a seaside residence. The property was larger than what he required, but was only for sale as a
whole. After building a cottage on the land, the taxpayer subdivided half the property into small plots
and sold it. The second property was a small fruit farm which was subject to a long term lease when
acquired. After the tenant defaulted, the taxpayer subdivided the property into plots and sold it.
According to SARS, the taxpayer embarked on a scheme of profit-making when he subdivided the
land into plots and sold it. In considering whether the receipts from the sale of land were of a revenue
or capital nature, the court held that
l The intention with which a taxpayer acquired an article is an important factor to consider and
unless some other factor intervened to show that when the article was sold it was sold in
pursuance of a scheme of profit-making, it was conclusive in determining whether the receipts
were capital or gross income.
l The taxpayer acquired each of the properties as an ordinary investment using surplus funds.
There was no evidence to show that the taxpayer, at any time after purchasing the properties,
considered dealing with them as a part of a business of buying and selling land.
l The mere fact that the land was subdivided into plots rather than sold as a whole could not by
itself alter the character of the proceeds derived from the land from capital to revenue.
l The fact that the taxpayer, as a surveyor, knew somewhat more than the ordinary public about the
value of land made no difference.
l Every person who invested his surplus funds in land or stock or any other asset was entitled to
realise such asset to the best advantage and to accommodate the asset to the exigencies of the
market in which he was selling. The fact that he did so could not alter what was an investment of
capital into a trade or business for earning profits.
l The receipts were of a capital nature.
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3.6.5 Realisation of a capital asset

In CIR v Nel (1997 (T)) the taxpayer purchased Kruger Rands with the intention to hold them as a
long-term investment as a hedge against inflation. He did not plan to sell the Kruger Rands and
thought they would be inherited by his children. The value of the Kruger Rands increased steadily
over the years and although he had the opportunity to sell them, he never did so. During the relevant
year, he urgently had to buy a motor car for his wife and reluctantly exchanged some of his Kruger
Rands for the car. The taxpayer made a gain on the disposal of the Kruger Rands, which he
considered as being of a capital nature. The court held that
l The mere decision to sell an asset originally held as an investment is not necessarily to be
regarded as a transformation of the profits from a capital nature into a revenue nature. Something
more than the mere disposal is required for the proceeds to be of a revenue nature.
l The evidence showed clearly that the taxpayer’s purpose in selling the Kruger Rands was not to
make a profit, but to realise a capital asset.
In CIR v Richmond Estates (Pty) Ltd (1956 (A)) the taxpayer was a company that was formed to
control the investments and savings of its sole shareholder and director. The company's
memorandum of association empowered it to trade with and invest in land. For some time, the
company made profits from trading in land and from receiving rent from properties that were let. Due
to legislative changes, it became difficult for the company to purchase land in the particular area in
which it traded in land, and the shareholder decided that the company would cease trading in land
and develop the properties to receive rental income. This decision was not recorded in a formal
resolution of the company. Two years later the shareholder became aware of further legislative
changes that, according to the shareholder, would have had a negative impact on the value of the
properties. Due to this, the company sold the properties and realised a substantial profit. In
considering whether the profit realised from the sale of the properties was of a capital or income
nature, the court concluded as follows:
l The company’s intention with the properties changed from trading stock to capital assets when it
decided to develop the properties to receive rental income.
l The fact that the change of intention from trading stock to capital was not recorded as a formal
resolution of the company’s directorate, but evidenced only by the sole shareholder's statements,
was no reason for concluding that the taxpayer's intention did not change.
l The capital assets were sold due to the pending legislative changes that would negatively impact
the value of the properties. The mere decision to sell a capital asset at a profit does not per se
mean that the profit is of an income nature.
l The proceeds from the sale of the properties were of a capital nature.
3.6.6 Change of intention

In John Bell & Co (Pty) Ltd v SIR (1976 A) the taxpayer, a company, operated a textile business from
premises that it owned. After the business relocated to other premises, the directors of the company
decided in principle to sell the original premises. In view of the fact that the property market was not
performing well at that point in time, the directors decided to wait until the market had improved. In
the meantime, the property was rented out (for a period of 11 years) and thereafter, once the market
had improved, the property was realised at a profit. The court emphasised the principle that a
taxpayer is entitled to realise his property to his best advantage, and therefore decided that there
was no factual evidence that indicated that the taxpayer had had a change of intention to use the
property as trading stock. The court held that something more than merely selling the asset is
required in order to metamorphose the character of the asset and so render its proceeds gross
income. The taxpayer must embark on some scheme for selling such assets for profit and use the
assets as his stock-in-trade.
In Natal Estates Ltd v CIR (1975 (A)) the taxpayer, a company, owned a large piece of land north of
Durban. It carried on business as a grower and miller of sugar cane and a manufacturer of sugar.
Throughout the years the directors of the company were aware of the possibility that the local author-
ities could expropriate the property for public development. The directors of the company appointed
town planners and surveyors to investigate possible residential development on the land. It was
decided to wait until the market was better developed and the project was temporarily suspended. A
newly elected board of directors decided to proceed with the project. Consulting engineers and
architects, as well as financial advisors and marketers, were appointed to the project. The taxpayer
46
proceeded with the development bit by bit and started to sell developed land directly to the public
and to investors. SARS assessed the taxpayer’s receipts from the sale of land as being revenue in
nature. The court held that
l Although, the original intention with which a taxpayer acquired an asset is an important factor, it is
not necessarily decisive because a taxpayer’s intention can change.
l The mere decision to sell an asset at a profit is not an indication that a taxpayer that acquired an
asset with an investment purpose changed its intention. Something more is required.
l From the totality of the facts, one should enquire whether it can be said that the taxpayer had
crossed the Rubicon and gone over to the business of using the land as his stock-in-trade or
embarked upon a scheme of selling the land for profit.
l A change of intention implies something more than the mere decision to sell an asset of a capital
nature.
l The court considered the fact that the taxpayer had gone over to the business of township
development on a grand scale and held that the company changed its intention to sell the land at
a profit. Consequently, the proceeds of the sales formed part of the company’s gross income and
were subject to normal tax.
The following paragraph from C:SARS v Founders Hill (Pty) Ltd (2011 SCA)
explains the concept of ‘crossing the Rubicon’ referred to in the Natal Estates
case:
‘In 49 BC when Julius Caesar crossed the Rubicon – a small river dividing
Cisalpine Gaul (a province of Rome) from Italy – committing an act of
Please note! treason in so doing (for no Roman general was allowed to enter Italy with
his army without the consent of the Roman Senate), he intended to defy the
Senate and in effect to declare civil war in Rome. Little did he foresee (I
suspect) that his act would come to be a symbol of passing a point of no
return in the general sense, and that it has, in South Africa, become a tax
mantra in cases that attempt to discern the distinction between capital
gains and taxable income upon a disposal of property.’
3.6.7 Mixed purpose

In COT v Levy (1952 (A)) the taxpayer argued that the proceeds realised on the sale of shares in a
company were of a capital nature. The taxpayer acquired 25% of the shares in the company and was
also one of its four directors. The company was formed to acquire and develop land in an area that
was thought likely to develop. The taxpayer had an open mind when he bought the shares as to what
would be the best thing to do with the property. Although he hoped that the property and therefore
the shares would appreciate in value, he was really interested in obtaining a good revenue from the
property and agreed with the other shareholders to develop the property to obtain a better return
from it. Three years after the taxpayer acquired the shares another person purchased all the shares
from the four shareholders. The taxpayer made a substantial profit from the sale. The court had to
consider whether the taxpayer correctly treated the proceeds from the sale of the shares as being of
a capital nature. The court found that
l Where the purposes of a taxpayer regarding an asset are mixed, one should seek and give effect
to the dominant factor that induced the taxpayer to acquire the asset.
l Based on the evidence before the court, the court found that the taxpayer’s dominant intention in
acquiring the shares was to hold the shares as an income-earning investment. The taxpayer
never at any time attempted to sell the shares and only sold the shares when someone made him
an offer. The taxpayer accepted the offer with a view to realise his investment.
l The proceeds from the disposal of the shares were of a capital nature.
3.6.8 Secondary purpose

In CIR v Nussbaum (58 SATC 283) (1996 (4) SA 1156 (A)), a case considered by the Appellate
Division of the High Court, the taxpayer inherited listed shares. With active and careful investment, he
built a substantial portfolio of listed shares over a number of years. For the three years of assessment
under consideration, SARS assessed the taxpayer's profits from the sale of shares as being of a
revenue nature. The taxpayer testified that over the years he used surplus income to consistently add
shares to the portfolio he inherited. When he purchased shares, he did so with an intention to
47
produce dividend income and to protect his capital from inflation. He never purchased shares for a
profitable resale. He would only sell a share if a better dividend yield could be achieved with other
shares, or where his shares in a specific company distorted the balance he aimed to achieve in his
portfolio.
For the three years under consideration, the taxpayer testified that his approach was decidedly
different. He turned 60 and decided to build up readily available cash resources to meet expected
future medical expenses and to buy a house. Over this period, he sold shares ‘bit by bit’ in order to
invest the proceeds in fixed interest investments. His criteria for deciding which shares to sell were
the same as in prior years. He only sold shares with a poor dividend yield, regardless of whether he
would realise a profit or loss on the sale.
SARS argued that, for the years under consideration, the taxpayer changed his intention towards his
shares and had gone over to holding them, if not also buying them, with a dual purpose. Although his
main aim was still investment, his secondary purpose was to use his portfolio as stock-in-trade and to
sell shares for profit whenever he felt it appropriate to do so.
In considering whether the receipts from the disposal of shares were revenue or capital in nature, the
court held that
l It had to consider whether the sale of shares amounted to the realisation of capital assets or the
disposal of trading stock in the course of carrying on a business.
l Although the scale and frequency of the taxpayer's share transactions are not conclusive, they
are of major importance. In this case, the taxpayer entered into a significant number of share
transactions, which were almost, without exception, profitable. His annual profits from selling
shares substantially exceeded his annual dividend income.
l The taxpayer ‘farmed’ his portfolio diligently as evidenced by the number, frequency and profit-
ability of sales, especially of short-term shares.
l Although the taxpayer testified that his intention with buying and selling shares was to invest in
shares, the court held that if one looks beyond the taxpayer's version of his intention to all the
facts, it is clear that the profits in question were not merely incidental to the taxpayer's investment
activities. The taxpayer had a secondary, profit-making purpose when he purchased and sold the
shares.
l Since the taxpayer purchased shares for investment purposes, but contemplated dealing with the
shares for the purpose of making a profit, it cannot be argued that the profit from the sale of
shares is merely incidental. Since the taxpayer had no absolving dominant purpose, the profit
gained from his secondary purpose was of a revenue nature.
3.6.9 Realisation company

The taxpayer in Berea West Estates (Pty) Ltd v SIR (38 SATC 43) (1976 (2) SA 614(A)) was a
company that was formed for the purpose of selling land. At the time of forming the company, the
land was held by a deceased estate and a trust. The administration of the deceased estate had been
running for 22 years and due to a number of reasons the estate could not be wound up. The
executors were pressed to finalise the estate and for this reason the deceased estate and the trust
transferred the land to a company so that the company could sell the land. The beneficiaries of the
deceased estate and the trust became the shareholders of the company and the proceeds from
selling the land were to be distributed to them. Prior to transferring the land to the company, the
executors of the deceased estate obtained approval to establish townships on the land. The
townships were only proclaimed after transferring the land to the company, but were subject to
building roads and a water supply before the individual plots could be sold. At the time the company
was formed, there were no obvious buyers for the land as a whole and the company decided to
develop the land so that it could be sold as individual plots. Over a period of 20 years the company
developed a part of the land, sold the plots, and then used the money to develop a further area. The
court had to consider whether the receipts from selling the plots were of a capital nature. The court
held that
l Where a company is formed with the purpose to sell an asset (that is, a realisation company) and
does so at best advantage, it does not mean that the company traded for profit.
l In deciding whether a company was merely acting as a realisation company or was carrying on
the business of trading for profit, one is entitled to look at the facts leading up to the company’s
incorporation, and to its memorandum and articles, and to its subsequent conduct.
48
l The court had to consider whether, on all the evidence, the taxpayer deviated from its original
intention and went over to trading for profit, and in that sense whether a change of intention had
taken place.
l The fact that the taxpayer incurred a considerable amount of expenses in developing the
property over a period of 20 years was undoubtedly a factor to be taken into account, but should
not be considered in isolation. The taxpayer had to sell a very large piece of undeveloped land
and could only do so by subdividing the land and developing the property, which involved
spending a lot of money. But this does not in itself mean that the taxpayer was trading for profit.
l The facts of this case should be distinguished from the Natal Estates case where the taxpayer,
with its elaborate and sustained scheme and expertise, did much more than merely realising a
capital asset to the best advantage. In the Natal Estates case, the taxpayer carried on a business
of selling land for profit on a grand scale, using the land as its stock-in-trade, which was not the
same in this case.
l The taxpayer, a realisation company, merely sold the land at best advantage and did not change
its original intention to that of trading for profit. The receipts from selling the plots were of a capital
nature.
In CSARS v Founders Hill (Pty) Ltd (2011 SCA) the taxpayer was formed to acquire and realise
surplus land owned by AECI Ltd, which it held as a capital asset. The purpose of the taxpayer, as
was evident from its memorandum of association, was to realise the land at best advantage. The
court had to consider whether the receipts from the sale of land were of a capital nature and held that
l It is an established principle in South African law that a taxpayer is entitled to realise an asset to
best advantage, and, in doing so, its receipts will be capital in nature. However, this principle
only applies to capital assets and the mere fact that a taxpayer refers to an asset as a capital
asset does not make it one.
l The taxpayer was formed solely for the purpose of acquiring the property as stock-in-trade and
then conducted business in trading in the property.
l Calling a company a ‘realisation company’ (and limiting its objects and restricting its selling
activities in respect of the assets transferred to it) is not itself a magical act that inevitably makes
the profits derived from the sale of the assets of a capital nature. The court distinguished this
case from the Berea West case where it said that there was a real justification for the formation of
the realisation company (in addition to the purpose of realising the assets) without which the
realisation of the asset would have been difficult, if not impossible. Where a company was formed
solely for the purpose of facilitating the realisation of property that could not otherwise be dealt
with satisfactorily, the profit achieved on sale would be of a capital nature and would not be
taxable.
l The taxpayer's profits were gains made by an operation of business in carrying out a scheme for
profit-making and was therefore revenue derived from capital productively employed and must
be taxable income.
3.6.10 Damages and compensation

In WJ Fourie Beleggings v C:SARS (2009 SCA) the taxpayer conducted business as a hotelier. The
taxpayer concluded an agreement whereby it would accommodate a substantial number of persons
over an extended period of time. For a number of reasons, this contract was cancelled and the tax-
payer received an amount of money in settlement of all claims it might have arising from the early
termination of the contract. The court had to consider whether the settlement amount received was of
a revenue or capital nature. The taxpayer argued that the contract itself amounted to an asset that
formed part of its income-producing structure and that the settlement amount had been paid for the
loss or ‘sterilisation’ of this income-earning asset and should be regarded as capital. The court held
that
l There is a fundamental distinction between a contract that is a means of producing income and a
contract directed by its performance towards making a profit.
l Although the taxpayer stood to earn a great deal from the contract that was to form the major
source of its income during the period it lasted, this did not transform the contract into part of the
taxpayer's income-producing structure.
l The taxpayer's income-producing structure was made up of its lease of the hotel and the use to
which the hotel was put. The contract under consideration was concluded as part of its business
49
of providing accommodation. It was therefore a product of the taxpayer's income-earning

activities, not the means by which it earned income.
l The contract under consideration could not be construed as being an asset of a capital nature
forming part of the taxpayer's income-producing structure. That being so, the amount paid to the
taxpayer on termination of the contract was not capital in nature.
In Stellenbosch Farmers' Winery Ltd v CIR (2012 SCA) the taxpayer received compensation for the
premature termination of a distribution agreement. In terms of the distribution agreement, the
taxpayer had the exclusive right to distribute certain whiskeys in South Africa for a period of 10 years.
The sale of these products made a significant contribution to the taxpayer’s profit during this time.
Due to a corporate structural changes of the company that granted the distribution right, the taxpayer
agreed to receive a lump sum payment on early termination of the exclusive distribution agreement.
The court had to consider whether the amount received was of a capital nature. The court held that
l The exclusive distribution rights that the taxpayer had in terms of the distribution agreement were
a capital asset. As a result of the termination, the taxpayer therefore lost a capital asset.
l Since the taxpayer did not carry on the business of the purchase and sale of rights to purchase
and sell liquor products, it did not embark on a scheme of profit-making. The compensation that
the taxpayer received for the impairment of the taxpayer's business by the loss of its exclusive
distribution right was a receipt of a capital nature.
l The nature of a receipt for income tax purposes is not determined by the accounting treatment
thereof.
3.6.11 Isolated transactions

As mentioned above, the frequency of a particular transaction may provide a useful guide in dis-
tinguishing between income and capital. If the same type of transaction were concluded
continuously, it would be obvious that there was a scheme of profit-making and the proceeds would
then be income in nature and therefore subject to normal tax. Yet an isolated or once-off transaction
is not necessarily of a capital nature. The real test depends upon the intention behind the transaction
and on whether or not a scheme of profit-making is involved.
l A once-off salvage transaction was held to be subject to normal tax because the motive was
profit-making (Stephan v CIR (1919 WLD)).
l A speculation in futures was held to be subject to normal tax even though it was an isolated trans-
action. The court found that, although this transaction was different from the taxpayer’s normal
transactions, it was within the scope of his business (ITC 43 (1925)).
3.6.12 Closure of a business and goodwill

The proceeds derived from trading stock realised in the course of winding up a business are of an
income nature and will be included in the taxpayer’s gross income. It does not matter that the
business has been sold ‘lock, stock and barrel’, and no enquiry needs to be made as to whether the
proceeds were derived in the ordinary course of trade. Whatever amount is derived by the taxpayer
as a result of the disposal of the stock is in the nature of income and forms part of his gross income.
An amount received for the sale of the goodwill of a business is a receipt of a capital nature. This
will be the case if the seller originally bought the business in order to derive income from the carrying
on of that business, rather than for the purpose of reselling it at a profit. As long as the goodwill is a
fixed amount, it is capital in nature. It does not matter whether it is payable in one sum or in periodic
instalments.
The consideration for the sale of goodwill may, however, take the form of an annuity. In this instance
the annual payment is taxable in terms of par (a) of the definition of ‘gross income’ in s 1.
The sales agreement should therefore contain a clear distinction in respect of the amount of the pur-
chase price representing the trading stock (income), the amount of the purchase price representing
the business assets (capital), and the amount of the purchase price representing the goodwill (cap-
ital, unless paid in the form of an annuity).
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3.6.13 Copyrights, inventions, patents, trademarks, formulae and secret processes

The same tests as are applied to any other asset should be applied to determine whether a
copyright, invention, patent, trade mark, formula or secret process is of an income or a capital nature.
The outcome will depend upon the facts of each case.
Amounts received for the disposal of copyrights, patents, trademarks and similar assets by a person,
who originally acquired and has held such assets as an income-producing investment, are of a
capital nature. However, if the assets were acquired for the purposes of a profitable resale in a profit-
making scheme, their proceeds would be of an income nature.
3.6.14 Debts and loans

If debts are bought with the intention of collecting them at a profit, the receipt thereof is income in
nature. Some finance houses buy debts at a discount and then proceed to collect the outstanding
amount at a profit. This represents a profit-making scheme and the profit made on the collection of
the debts is therefore income in nature.
It may, however, happen that a profit made on the collection of debts is capital in nature. What often
occurs in practice is that a person buys a business as a going concern and, in terms of the
agreement, is required to buy the debts owing to the seller. If a greater amount is collected than what
was paid for the debts, the profit is capital in nature. Here the debts are not acquired with the
intention of deriving a profit therefrom. They are part and parcel of the business bought – the intention
is to generate a profit with the business, not to generate a profit from the collection of the debts.
When a taxpayer sells his business, inclusive of his debtors book, the amount received for the sale of
the debtors would generally be of a capital nature, notwithstanding the fact that a profit was derived
from the sale (of the debts).
3.6.15 Gambling
If gambling activities are systematically undertaken, to the extent that they become a business or
scheme of profit-making, the proceeds are income in nature and therefore part of gross income
(Morrison v CIR (1950 A)).
If, however, the gambling activities are undertaken as a means of entertainment or hobby, the
proceeds are capital in nature.
Remember
The intention of the gambler will again determine the capital or income nature of the proceeds.
Was his intention to entertain himself by gambling? If so, the proceeds will be capital in nature
and not part of his gross income. The gambler will, however, have to convince SARS that this
was indeed his true intention.
Amounts derived by racehorse owners and trainers are subject to normal tax where betting is a
regular practice.
It would be difficult for a professional punter and racehorse owner to distinguish his jackpot winnings
from his other betting activities. His winnings are subject to normal tax, because these activities are
so closely related to his business (ITC 214 (1931)).
In practice, SARS includes the results of betting transactions systematically carried on in gross
income. It is not the practice to tax ordinary punters on the proceeds of betting when they engage in
betting as a means of entertainment, but persons closely connected with racing and possessing
special knowledge, for example owners, trainers and jockeys, will usually be subject to normal tax on
the results of regular betting.
In terms of the practice of SARS, a bookmaker is liable to normal tax on his gambling activities if they
may be regarded as forming part and parcel of his business. His winnings from sweepstakes, lotte-
ries and racing jackpots would be included in his income.
3.6.16 Horse-racing
Racing stakes (prizes for the winners of the horse races) won by racehorse owners are subject to
normal tax in practice, if the activities carried on are undertaken for gain or in pursuance of a scheme
51
of profit-making, rather than a hobby. In ITC 641 (1947) the court refused to accept a taxpayer’s
contention that his receipts from stakes for racing horses did not constitute income because he
participated in racing not as a business, but as a hobby. The facts of the case did not support the
taxpayer’s contention that he was engaged in a hobby.
3.6.17 Gifts, donations and inheritances

A lump sum or an asset received by way of a gift, donation or inheritance is capital in nature.
If the inherited asset is sold, that receipt is also capital in nature, unless the asset is sold in
pursuance of a profit-making scheme or as part of a business carried on.
Remember
Intention may change – the recipient of an inherited asset may decide not to consider that asset
as part of his capital structure. He may decide to dispose of the asset in pursuance of a scheme
of profit-making.
3.6.18 Interest
Interest derived from a loan or investment of money is income in nature.
Remember
The capital investment is the ‘tree’ and the interest is the ‘fruit’ thereof.
3.6.19 Kruger Rands

Proceeds from the sale of Kruger Rands should be subjected to the same tests applicable to other
assets when being classified as of either an income or a capital nature.
In CIR v Nel (1997 T) the taxpayer had purchased Kruger Rands with the intention of holding them as
a long-term investment as a hedge against inflation. Although the Kruger Rands steadily escalated in
value over the years and, despite the fact that he had many opportunities to sell them, he never did
so. Urgently and unexpectedly needing to purchase a motor car for his wife, he realised one third of
the coins to pay for the vehicle. The court accepted the capital nature of the proceeds on the basis
that the Kruger Rands were purchased, as it were, for ‘keeps’ and that the disposal of some of them
was due to some unusual or special circumstances.
3.6.20 Restraint of trade

Payments received in respect of a restraint of trade are capital in nature.
In this instance, a person usually undertakes not to exercise a trade, profession or occupation in a
specified area for a defined period of time in return for some compensation. What he is selling is his
ability to generate further income; in other words, his capital structure. This represents the sterilisation
of a capital asset and is capital in nature (Taeuber and Corssen (Pty) Ltd v SIR (1975 A)). These pay-
ments are, however, expressly included in the gross income of certain taxpayers in certain
circumstances in terms of par (cA) or par (cB) of the definition of ‘gross income’ in s 1 (see chap-
ter 4).
It has been held that a consideration received by a garage proprietor from an oil company for
undertaking to become a one-brand petrol station, that is, to sell only the products of the oil
company, is a capital receipt. The court came to the conclusion that the garage owner in this case
sold his right to also trade in other products or brands. This represented a capital asset (ITC 772
(1953)).
3.6.21 Share transactions

Profits on share transactions are not only subject to normal tax if the frequency and volume of the
number of transactions are so great as to constitute the carrying on of a business. The intention with
regard to which shares are held will determine whether the proceeds on the sale thereof would be
classified as capital or income in nature. Like any other assets, shares may be trading stock. Profits
52
and losses resulting from share transactions are of an income nature if the shares were acquired for
the purpose of resale at a profit (Anglovaal Mining Limited v CSARS (2009 SCA)).
Conversely, shares may be held for a long period with the intention to derive dividend income. If
these shares were then disposed of, the proceeds would be capital in nature. Even where the
taxpayer initially acquired the shares for purposes of investment, but with the ‘secondary purpose’ to
dispose of the shares at a profit if the dividend yield was unsatisfactory, the judiciary has taken the
view that the proceeds would be classified as income in nature (CIR v Nussbaum (1996 A)).
In the recent case, CSARS v Capstone 556 (Pty) Ltd (2016 SCA), the taxpayer disposed of shares in
a company that was acquired to rescue a major business in the retail sector. The court had to
consider whether the proceeds of the sale of shares were of a capital or revenue nature. The
taxpayer’s intention at the time of acquisition of the shares was to make a strategic investment in a
leading company in the furniture industry as part of a large-scale ‘rescue operation’ (and this was
overwhelmingly supported by the objective evidence). The effective date of the transaction as a
whole dated back to 21 June 2002. However, the shares were only finally acquired by the taxpayer
on 5 December 2003 and were then sold less than five months after the acquisition date, for a
substantial profit. It was clear from the evidence that the taxpayer’s decision to sell the shares was
not foreseen, as the circumstances that prevailed at the time of sale were materially different from the
circumstances prevailing during the middle of 2002, when the obligation was incurred. The court held
that it was clear from the evidence that the first and primary purpose of the acquisition of the shares
was to rescue a major business in the retail furniture industry by a long-term investment of capital.
The court held that this involved commitment of capital for an indeterminate period involving
considerable risk and only a very uncertain prospect of a return and that this was consistent with an
investment of a capital nature that was realised sooner than initially expected because of skilled
management and favourable economic circumstances. It was not a purchase of shares as trading
stock for resale at a profit and the proceeds were therefore held to be of a capital nature.
For certain shares that are held by the taxpayer for more than three years, the receipt on the disposal
of the shares is deemed to be capital in nature (s 9C – see chapter 21).
At times, it is difficult to establish the intention underlying certain share transactions, as illustrated by
the following discussion of specific cases:
Employees’ share trusts

A controversial line of cases deals with the position of trusts created by employers as vehicles for
share purchase schemes designed to benefit their employees.
In CIR v Pick ’n Pay Employee Share Purchase Trust (1992 A), the court held that the trust had no
intention of carrying on a business in shares, but operated ‘primarily as a conduit for the acquisition
of shares by employees entitled to them in terms of the scheme’s rules’. It had no profit motive and
did not act as a normal trader in shares would. Even if in a broad sense it was carrying on a
business, it was not a business carried on as part of a scheme of profit-making. While the trustees
might have contemplated the possibility of profits, it was neither their purpose to seek out profits, nor
were profits inevitable. The trust’s receipts were therefore not intended or worked for, but purely
fortuitous, a by-product of the trust’s activities. Consequently, the proceeds were therefore capital in
nature.
Portfolio in a collective investment scheme
There is no reason in principle why units held by a taxpayer in a portfolio of a collective investment
scheme should not be investigated for their income or capital characteristics in the same way as
shares. Therefore, if they are acquired and held for the purposes of a profitable resale in a scheme of
profit-making, any profits realised or losses suffered upon their disposal will be of an income nature.
3.6.22 Subsidies
If a subsidy takes the form of a contribution towards the producer’s cost of production of a certain
commodity, it is submitted that it is of an income nature. The subsidy becomes part of the floating
capital of the producer.
If the subsidy is paid as a contribution towards the cost of fixed capital assets, it is capital in nature.
For example, the Government may contribute towards the cost of a new factory or plant and
machinery. This is a capital receipt that is not subject to normal tax, unless specifically stated
otherwise by the Act.
Certain Government grants are exempt from normal tax (see chapter 5).
53
4 Specific inclusions in gross income
Linda van Heerden

l identify or explain which amounts should specifically be included in ‘gross income’,
even though they may be of a capital nature, and support your opinion with the rele-
vant authority
l demonstrate your knowledge in a practical case study (both in a practical calculation
question and a theoretical advice question).
Contents
Page
4.1 Overview ............................................................................................................................. 55
4.2 Annuities (par (a))............................................................................................................... 56
4.3 Alimony payments (par (b)) ............................................................................................... 57
4.4 Services (par (c))................................................................................................................ 58
4.5 Restraint of trade (paras (cA) and (cB)) ............................................................................ 59
4.6 Services: Compensation for termination of employment (par (d)) ..................................... 60
4.7 Fund benefits (paras (e) and (eA)) .................................................................................... 61
4.8 Services: Commutation of amounts due (par (f)) ............................................................... 62
4.9 Lease premiums (par (g)) .................................................................................................. 62
4.10 Compensation for imparting knowledge and information (par (gA)) ................................. 63
4.11 Leasehold improvements (par (h))..................................................................................... 63
4.12 Fringe benefits (par (i)) ...................................................................................................... 63
4.13 Proceeds from the disposal of certain assets (par (jA)) .................................................... 64
4.14 Dividends (par (k)) ............................................................................................................. 64
4.15 Subsidies and grants (par (l)) ............................................................................................ 64
4.16 Amounts received by or accrued to s 11E sporting bodies (par (lA))............................... 64
4.17 Government grants (par (lC)) ............................................................................................. 64
4.18 Key-man insurance policy proceeds (par (m)) .................................................................. 65
4.19 Amounts deemed to be receipts or accruals and s 8(4) recoupments (par (n)) .............. 65
4.20 Amounts received in terms of certain short-term insurance policies (s 23L(2)) ................ 65
4.1 Overview
Receipts and accruals can be included in gross income in terms of the general definition of ‘gross
income’ (see chapter 2), or in terms of the specific inclusions listed in paragraphs (a) to (n) of the
definition of ‘gross income’. Contrary to the exclusion of receipts or accruals of a capital nature from
the general definition of ‘gross income’, these specific inclusions are included in gross income even
though they may be of a capital nature. The other elements of the general definition also apply to the
specific inclusions, except where otherwise stated. The specific inclusions as listed do not limit the
scope of the general definition of ‘gross income’, but do enjoy priority over the general definition. All
other amounts that must be included in a taxpayer’s income in terms of any other provision of the Act
are included through par (n).
All references to paragraphs in this chapter are references to paragraphs of the ‘gross income’
definition (s 1).
55
The authority for the inclusion of an amount in gross income is either a reference
to the specific paragraph of the definition of gross income (in the case of a spe-
cific inclusion), or the general definition of gross income. Although the use of
Please note!
the subtotal method in chapter 7 facilitates the calculation of taxable income
and the total tax liability, reference to the column in which an amount must be
included is not authority for the inclusion of an amount in gross income.
The specific inclusions in gross income are now discussed separately.
4.2 Annuities (par (a))

Paragraph (a) includes in gross income any amount received or accrued by way of
l an annuity
l a ‘living annuity’
l an ’annuity amount’ as contemplated in s 10A(1).
Paragraph (a) specifically excludes an amount received or accrued from the proceeds of a policy of
insurance where the person is or was an employee or director of the policy holder (par (d)(ii) –
see 4.6). This exclusion eliminates the double inclusion in gross income in respect of compulsory
insurance annuities for the benefit of employees and their dependents. Such annuities are therefore
dealt with solely in terms of par (d)(ii). The exclusion is to the benefit of the taxpayer as the inclusion
under par (d)(ii) means that the compulsory insurance annuity income may be exempt (in terms of
s 10(1)(gG)).
Annuities (except s 10A annuity amounts) are not divided into capital and income, and are taxable in
full under par (a), whether or not they are receipts or accruals of a capital nature. Paragraph (a),
however, does not override the source rules. In order to establish the source of annuities, the place
where the contract was concluded must be determined (as held in Boyd v CIR (1951 AD), the fons et
origo is the formal act giving rise to the annuity).
Annuities
There is no definition of the term ‘annuity’ in the Act, but the meaning of the term has been discussed
in case law. The main characteristics of an annuity, listed in ITC 761 (1952) and confirmed in KBI en
’n ander v Hogan (1993 AD), are:
(1) It is an annual payment (this would probably not be defeated if it were divided into instalments).
(2) It is repetitive: payable from year to year for, at any rate, a certain period.
(3) It is chargeable against some person.
An annuity may arise in a variety of ways:
l It may be bought from an insurance company.
l It may be granted by way of a gift or legacy.
l It may be received as consideration for the sale of a business, or an asset, or for the surrender of
a right.
The following are examples of amounts that do, or do not, constitute annuities:
l The annual payment of instalments due, in terms of a transaction of a capital nature with a definite
ascertainable price, is not an annuity and falls outside the scope of par (a).
l Annual voluntary amounts payable in terms of a discretion are not annuities, but rather individual
gifts and capital in nature.
l A pension paid by an employer to the widow of a deceased employee, terminable at the will of
the employer, cannot be regarded as an annuity. However, a life pension payable to the widow
by an employer who has bound himself to pay the pension for life would constitute an annuity.
l A contractual obligation to make regular monthly or annual maintenance payments for life or for a
fixed period would constitute an annuity.
l Fixed annual amounts payable out of the residue of an estate in terms of a will constitute an
annuity. These amounts would constitute annuities, whether they were payable for a specified
number of years or for the lifetime of the recipient. Even if there were variations in the amounts of
the annual payments because of certain contingencies, they would still constitute annuities. It is
immaterial whether the annuity is payable out of the income or the capital assets of the estate.
56
4.2–4.3 Chapter 4: Special inclusions
However, a beneficiary’s right to a fixed share of the net income of a trust or an estate, for exam-
ple a 50% or 75% share, would not constitute an annuity.
In KBI en ’n ander v Hogan (1993 AD) the taxpayer, a fireman, instituted an action for a lump sum
compensation from the Motor Vehicle Assurance Fund after being seriously injured in a collision. The
Fund undertook to pay his claim for loss of future earning capacity by way of monthly instalments.
The issues were whether these payments constituted an annuity and, if so, whether the Fund should
deduct employees’ tax from them. The Fund’s undertaking made no mention of a lump sum as the
damages for the taxpayer’s loss of future earning capacity; moreover, the payment of each instalment
was conditional on proof that he was still alive. The Fund’s delictual obligation to compensate him
was replaced by a contractual obligation to pay the instalments while he lived, without creating a
liquid or determinable debt capable of being reduced by those instalments.
The payments met all the characteristics of an annuity and, for that reason, it also followed that em-
ployees’ tax had to be deducted, no matter what the contractual arrangements provided. The defini-
tion of the term ‘remuneration’ in par 1 of the Fourth Schedule includes amounts referred to in par (a)
of the definition of the term ‘gross income’. Any person paying any annuity to another person is there-
fore paying remuneration and the person paying the annuity must withhold employees’ tax thereon in
terms of par 2(4) of the Fourth Schedule.
Living annuities
‘Living annuity’ means the right of a member of any retirement fund (see chapter 9), or his or her
dependant or nominee, to an annuity from that fund on or after the retirement date of that member
(s 1). The value of these purchased annuities depends on the value of the assets held for paying the
annuities. The practical working is like an investment account and the possibility therefore exists that
the funds are depleted before the person dies.
The annuity income produced by two-thirds of the retirement interest of a member, being the com-
pulsory annuities for members of pension funds, pension preservation funds and retirement annuity
funds, are included in gross income as living annuities in terms of par (a). If the full remaining value of
the assets is less than the amount determined by the Minister (currently R247 500), or if the member
dies, it may be paid as a lump sum – see chapter 9. Also, see chapter 9 for a discussion of the s 10C
exemption in respect of compulsory annuities.
Annuity amounts
An ‘annuity amount’ is defined as an amount payable by way of an annuity under an ‘annuity contract’
(as defined) and in consequence of the commutation or termination of an annuity contract (s 10A).
These annuity amounts are bought from insurers in return for a lump sum cash consideration (pur-
chased annuity).
In terms of the annuity contract the insurer guarantees an annuity until the death of the annuitant or
the expiry of a specified term. The income is guaranteed for as long as the person lives, or for the
specified term.
An annuity amount under s 10A is divided into capital and income. The total annuity amount is in-
cluded in gross income in terms of par (a) and the capital part, determined by a formula (s 10A(3)), is
exempt from tax (s 10A(2)).
4.3 Alimony payments (par (b))

On separation or divorce, judicial orders or maintenance orders instruct the paying spouse to make
alimony or maintenance payments to the receiving spouse. Such payments are made in respect of the
receiving spouse’s or a child’s maintenance. Alimony payments are normally paid monthly from the
after-taxed income of the paying spouse.
If the paying spouse refrains from paying, the receiving spouse can request the court to grant a
maintenance order instructing the paying spouse’s retirement fund to pay the total maintenance due
out of the minimum individual reserve of the paying spouse’s retirement fund. The minimum individual
reserve of a member of a retirement fund is the balance of all the member’s contributions plus growth
over his or her whole period of membership. Such an order and payment is, however, a once-off
event. Amounts paid in terms of such maintenance orders must be included in the income of the
paying spouse (s 7(11) applies). The receiving spouse has no ‘income’ because of the exemption in
s 10(1)(u).
57
The tax consequences of all alimony or maintenance payments are as follows:

Divorce on or before 21 March 1962 Divorce after 21 March 1962
Paying spouse Section 21 deduction No deduction
Section 7(11) inclusion in income if the
minimum individual reserve was reduced
once-off in terms of a maintenance order
Receiving spouse Paragraph (b) inclusion in gross income Paragraph (b) inclusion in gross income
and s 10(1)(u) exemption (for both
monthly amounts and s 7(11) amounts)
4.4 Services (par (c))

Amounts received or accrued in respect of services rendered or to be rendered, or any employment
or the holding of an office, are included in gross income (par (c)).
Awards for services rendered are taxable in the year of their receipt or accrual, irrespective of the
period to which the services relate. ‘Services rendered’ does not mean services rendered during the
year of assessment but refers to the total period, long or short, of the services of the taxpayer. The
reference to ‘services rendered or to be rendered’ means that the recipient is liable for tax on the full
amount received by or accrued to him, even though the services were rendered in a previous year of
assessment or will be rendered only in a later year of assessment. The full amount of a salary payable
in advance is gross income even though the services may only be rendered in a later year. If an
amount is paid to an employee for entering into a service agreement, it is paid as a consideration for
the rendering of future services and falls within gross income.
There must be a causal relationship between the amount received and the services rendered. The words
‘in respect of’ therefore mean that the income was only received because the services were rendered
(CIR v Crown Mines Ltd (1923 AD)). The causal relationship need not be a direct relationship (ITC
1439 (1987)). The causal relationship does not only exist in an employee-employer relationship. If a
person is, for example, paid for information relating to stolen diamonds given to the police, the
payment is made ‘in respect of’ services rendered and the amount will be taxable in terms of par (c)
(CSARS v Kotze (2002 (C)).
Voluntary awards for services rendered, for example annual bonuses made ex gratia, are included.
The question of whether or not there is any contractual obligation is irrelevant. As long as the amount
is awarded to an employee in respect of services rendered, it is taxable, whether or not it is payable
under a contract of service.
In Stevens v CSARS (2006 SCA) it was held that the ex gratia payment by a company to a taxpayer to
compensate the taxpayer for the loss of a share option when the company went into voluntary liquid-
ation was directly linked to the taxpayer’s services and employment, and such receipt therefore fell
within par (c).
Amounts referred to in s 8(1), for example travel allowances and amounts in terms of ss 8B and 8C,
are excluded from par (c). Such amounts are included in ‘income’ or ‘taxable income’ in terms of s 8,
and are therefore not included in gross income. Benefits or advantages which are included in gross
income in terms of par (i), that is, any fringe benefit in terms of the Seventh Schedule, are also ex-
cluded (proviso (i) par (c)).
If a person (A) receives an amount in respect of services rendered by another person (B), the amount
is expressly included in the gross income of the person who renders services (B) (proviso (ii) par (c)).
This anti-avoidance provision prevents the employee or office-holder from trying to avoid tax by
diverting his salary or rewards for services to other taxpayers, such as family members. The effect of
the proviso is that no matter who might actually receive the remuneration, the person who rendered
those services remains liable for tax thereon.
Certain types of remuneration and benefits connected with employment are specifically exempt from
tax in terms of s 10(1). For example, bursaries awarded to employees or to persons who are required
to enter the employ of a firm upon completion of their studies are ordinarily taxable in terms of par (c)
but may qualify for exemption under s 10(1)(q).
58
Example 4.1. Examples of amounts received or accrued in respect of services rendered
The following amounts are included in gross income by virtue of par (c):
l a pension or retirement allowance received by an ex-employee from an employer, whether
payable in terms of a service contract or awarded voluntarily by an employer
l a salary received in lieu of leave
l a salary received in lieu of the notice required to be given in terms of the service agreement
l a prize won by an employee for excellent services rendered
l a climatic allowance received by a public servant or employee
l an allowance paid by an employer to an employee for the upkeep of the garden of a house
belonging to the employer but occupied by the employee
l amounts received by way of ‘tips’, however small the service might be.
Leave is a condition of service and accrues to the employee as the services are
rendered. Accumulated leave is paid out because a benefit has accumulated in
respect of services rendered. In terms of the Guide for Employers in respect of
Employees’ Tax (PAYE-GEN-01-G10) and based on De Villiers v Commissioner
Please note! for Inland Revenue 1929 AD 227, leave payments (including accumulated leave
payments) are not par (d) lump sums and can therefore also not be a
severance benefit (see 4.6). It is a payment in respect of services rendered and
must be included in gross income in terms of par (c) of gross income. The
employees’ tax on such leave payments must be calculated in the same
manner as employees’ tax on a bonus (and it is also seen as variable remu-
neration in terms of s 7B). See chapters 10 and 12 for detail on s 7B.
The employee is liable for tax on the full amount derived by him, even when the Commissioner has
disallowed a portion of the payment made to the employee as a deduction to the employer (for
example because the requirements of s 11(a) are not met). The taxability in the hands of the receiver
and the deductibility in the hands of the payer are therefore independent of each other.
Most receipts or accruals in respect of services will fall under both the general
‘gross income’ definition and par (c), but the amount cannot be included in
Please note!
terms of both provisions. It can only be taxed once. Specific provisions override
general provisions.
4.5 Restraint of trade (paras (cA) and (cB))

A company’s or a person’s right to trade freely is an incorporeal asset (ITC 1338 (43 SATC 171)) and
compensation paid for the restriction or loss of such right is a receipt of a capital nature. Restraint of
trade payments received by a person who
l is or was a ‘labour broker’ without a certificate of exemption, or
l is or was a ‘personal service provider’, or
l is or was a ‘personal service company’ or ‘personal service trust’
are included in gross income (par (cA)).
Restraint of trade payments received by the above-mentioned persons will therefore be included in
gross income irrespective of whether it is of a capital nature or not. Restraint of trade payments of a
capital nature received by companies and trusts that are not personal service providers will not form
part of gross income (Interpretation Note No 7).
Restraint of trade payments received by any natural person, which are related to any past, present or
future employment or the holding of an office, are specifically included in gross income (par (cB)).
Even though such payments may relate to employment, it is received for the acceptance of a restraint
of trade and not in respect of the termination or variation of any office or employment. It consequently
does not fall within par (d).
A restraint of trade payment received by a natural person that does not relate to employment, for
example if a natural person sells his business as sole proprietor and the buyer places a restraint of
trade on him, will not be included in gross income since it is capital in nature.
59
The payer of the restraint of trade will be allowed to claim a deduction under
s 11(cA) provided that the recipient is taxed under par (cA). The receipt is
Please note!
taxed immediately and in full in the hands of the receiver, but the deduction in
the hands of the payer must be spread over a certain period.
4.6 Services: Compensation for termination of employment (par (d))

Paragraph (d) includes amounts in respect of the termination or variation of any office or employment
(including death) (par (d)(i)), and amounts received as a result of policies of insurance that pay out in
two different situations (par (d)(ii) and (d)(iii)). Paragraph (d) specifically excludes annuities and there-
fore effectively refers to lump sum amounts. Amounts from employer-owned policies of insurance (par
(d)(ii) amounts) are, in turn, specifically excluded from par (a). Such amounts will be included in terms
of par (d) even though they might be paid in the form of annuities. Voluntary amounts are also includ-
ed and the amount therefore does not need to be paid in terms of a contract.
If an employee receives a lump sum in respect of the loss or variation of any office or employment
from an employer who is not a retirement fund (due to proviso (aa)), it must be determined whether it
also meets the requirements of the definition of ‘severance benefit’. This classification is important
since it will determine in which column of the subtotal method the amount must be included (see
chapter 7), and in terms of which tax table the normal tax thereon must be calculated.
The courts have not exhaustively defined the word ‘employment’ in the context of par (d). The domi-
nant criterion in a determination of whether any situation constitutes employment for this purpose is that
of control of the employee (‘servant’) by the employer (‘master’). In other words, the employer must
have control of the conduct of the work in which the employee is employed, and a duty must rest on
the employee to carry out that work in accordance with the instructions of the employer as given from
time to time (SIR v Somers Vine, 29 SATC 179). Similar to par (c) (see 4.4), the words ‘in respect of’
require a causal or direct relationship between the amount received and the employment or office. It
must be clear that the amount is received in consequence of the service or office.
The word ‘office’ has been interpreted to mean a position that
l generally carries with it some remuneration
l has an existence independent of the person who fills it, and
l will, usually, be filled by successive holders.
A director of a company therefore clearly holds an office. A firm of attorneys that receives a monthly
retainer fee will typically not hold an ‘office’ (SIR v Somers Vine, 29 SATC 179).
Lump sums from policies of insurance include both amounts from employer-owned policies of insur-
ance paid out (par (d)(ii) amounts) or ceded (par (d)(iii) amounts) to the employee or director and any
of their dependants or nominees. All such policies of insurance pay-outs are deemed to be received
by or accrued to the employee or director (proviso (cc)). The effect is therefore that the employee or
director will include all such amounts in his or her gross income even though a dependant or a nomi-
nee receives such amount or such policy is ceded to him/her.
The amount of such policies of insurance does not have to be received in the form of cash but must
have a determinable monetary value as required by the general definition of gross income. If the
amount is given in the form of an asset, it could perhaps be reasoned that par 2(a) of the Seventh
Schedule applies. The contra fiscum rule will, however, allow par (d) to be applied.
Any amount that becomes payable in consequence of a person’s death is deemed to accrue to him
immediately prior to his death (proviso (bb)). Such amount must therefore be included in the de-
ceased’s gross income for the period ending on the date of his or her death. This has the effect of
extinguishing any normal tax consequences for the actual recipient of that benefit.
It is submitted that the following amounts would fall within the terms of par (d):
l an amount determined with reference to the unexpired portion of his contract received by an
employee from his employer for breach of his contract of employment
l a payment made by a company to its managing director in consideration of his resignation from
the company
l a payment made by a company to its managing director in consideration of his agreeing to
accept a smaller salary in the future or to surrender his future rights to a pension
l compensation paid to a prospective employee because of the failure of his prospective employer
to enter into a contract of employment
60
l an amount received by a director for surrendering his right to a permanent directorship

l an amount of compensation paid in respect of the death of any person arising out of and in the
course of his employment and to which the s 10(1)(gB) exemption will apply
l an asset given to an employee at retirement as a final benefit from his employer.
Insurance payouts received by employers are included in gross income under

Please note! the provisions of par (m) – see 4.18. Paragraph (d) is aimed at insurance pay-
outs received by employees.
Severance benefits
The concept ‘severance benefit’ includes both lump sums received from an employer and an associ-
ated institution in relation to that employer. It excludes a retirement lump sum benefit, a retirement
lump sum withdrawal benefit and the two policies of insurance in par (d)(ii) and (iii). Therefore, only
lump sums in respect of the termination or variation of any office or employment (including death)
(par (d)(i) amounts) can be severance benefits (but see 4.8 below). To be a severance benefit, the
amount must be a lump sum (in terms of par (d)(i)) and one of the following three requirements must
be met:
(a) the person is 55 years of age, or
(b) the person has become permanently incapable of holding his or her office or employment due to
sickness, accident, injury or incapacity through infirmity of mind or body, or
(c) the person’s employer has ceased to trade or made a general or specific reduction in personnel.
If the person’s employer is a company and he or she at any time held more than five per cent of the
issued share capital or members’ interest in the company, any amount received due to the employer
ceasing to trade or a personnel reduction will not be a severance benefit. Such an amount will still be
included in gross income in terms of par (d)(i), but in column 3 (and not column 1) of the subtotal
method (see chapter 7).
Any severance benefit paid after the death of a person accrues to such person immediately prior to
his or her death (proviso to the definition of severance benefit). The deceased must therefore include
the severance benefit in his gross income.
The taxability of the two types of par (d)(i) amounts can be summarised as follows:
Type Taxability
Paragraph (d)(i) amounts that do not meet the Include in gross income in column 3 (see chapter 7)
requirements of the definition of severance benefit and tax in terms of the progressive tax table applicable
to the taxable income of natural persons
Paragraph (d)(i) amounts that meet the require- Include in gross income in column 1 (see chapter 7)
ments of the definition of severance benefit and tax in terms of the separate table applicable to
severance benefits (see 9.2.1)
Students are strongly advised to keep severance benefits in a separate column (together with retire-
ment fund lump sum benefits) in the calculation of the taxable income of a natural person, since the
same tax table applies to these two types of lump sums. See chapters 7 and 9 for complete details
regarding the three columns of the subtotal method.
4.7 Fund benefits (paras (e) and (eA))

Both a ‘retirement fund lump sum benefit’ and a ‘retirement fund lump sum withdrawal benefit’ are
included in gross income (par (e)). Amounts included in terms of par (eA) (see below) are excluded
from par (e). The taxable amounts to be included in gross income are calculated in terms of the
Second Schedule (definitions in s 1). See chapter 9 for a detailed discussion on retirement fund
benefits.
The taxable portion of lump sum benefits from funds is included in gross income
and not the gross lump sum benefit received. The taxable portion means the
balance remaining after the deduction of the allowable deductions in terms of
Please note!
paras 5 and 6 of the Second Schedule from the gross amount of the lump sum
benefit. The amount included in gross income is also ‘remuneration’ for employ-
ees’ tax purposes (see chapter 10).
61
Lump sums from State or Local Authority pension funds are taxed on a favourable basis (see chap-
ter 9). Until 28 February 2018, a member of a provident fund can take his total retirement interest as a
lump sum instead of only one-third, like in the case of a pension fund. Paragraph (eA) discourages
members of State or Local Authority pension funds to transfer their benefits to a provident fund;
thereby increasing the lump sum benefit. If fund benefits are transferred, two-thirds of the amount
transferred is included in the gross income of members who remain in the service of the same em-
ployer (par (eA)). Two-thirds of the amounts payable from the fund to a member or used to redeem a
debt are also included. These provisions will also apply to State or Local Authority provident funds
with effect from 1 March 2018.
This inclusion is also applicable in the case of a conversion from a pension fund to a provident fund if
a court granted an order during the divorce proceedings of a member, in terms of which any part of
his benefits should be paid to his former spouse (proviso to par (eA)(bb)).
4.8 Services: Commutation of amounts due (par (f))

Amounts received or accrued in commutation of amounts due under a contract of employment or
service are included in gross income (par (f)). ‘Commutation’ means ‘substitution’ and simply means
that the person substituted his right to receive a certain benefit with a right to receive another benefit.
For example, an employee may substitute his right in terms of his service agreement to be given
notice before the termination of his services for a cash payment. Such amount will be included in his
gross income in terms of par (f). Aforementioned amounts can also be severance benefits if the
requirements (see 4.6) are met.
In view of the wide scope of par (d), it seems that there is little need for par (f) (which was enacted
many years prior to the enactment of par (d)). Paragraph (d), however, refers to ‘any office or em-
ployment’, while par (f) refers to ‘any contract of employment or service’.
The taxability of par (f) amounts is exactly the same as lump sum amounts received on the termina-
tion of employment (par (d)(i)) discussed in 4.6.
4.9 Lease premiums (par (g))

Amounts paid for the use of assets are normally called ‘rent’ and are included in terms of the general
definition of gross income. Case law has confirmed that lease premiums are amounts paid by the
lessee to the lessor, whether in cash or otherwise, for the use (or right of use) of certain assets dis-
tinct from and in addition to, or instead of, rent (CIR v Butcher Bros (Pty) Ltd (1945 AD)). Lease
premiums must have an ascertainable monetary value. Such amounts paid in respect of the wide
variety of tangible and intangible assets listed are gross income (par (g)).
The whole amount of the premium is included in gross income in the year in which it is received by or
accrues to the lessor. The Commissioner may make an allowance to the lessor in special circum-
stances (s 11(h) – see chapter 13). In practice, however, s 11(h) is rarely applied in respect of lease
premiums received because the lease premium is received in cash. This is in contrast to lease im-
provements received, where the lessor will only benefit from the improvements after the lease con-
tract has expired – see 4.11.
If a lessee sublets land to a sub-lessee for a lump sum payment of R120 000 plus a monthly rental of
R25 000, it is submitted that the R120 000 is a lease premium, since it is a consideration passing
from the sub-lessee to the sub-lessor (the principal lessee) in addition to the rent. Paragraph (g)
therefore applies to a premium passing from a sub-lessee to a sub-lessor.
If the lessee cedes or sells his rights under the lease to a third person for a payment of R120 000, this
amount is not a lease premium, since it is a consideration passing from a new lessee to a former
lessee and not from a lessee to a lessor. For an amount to qualify as a lease premium, it must meet
the requirement that it is a payment passing from a lessee to a lessor. The R120 000 will therefore not
form part of the gross income of the original lessee, being a receipt or an accrual of a capital nature,
but may be subject to the capital gains tax.
The same amount that is deductible by the lessee paying the lease premium (in terms of s 11(f)), is
the amount that will be taxable in the hands of the lessor (in terms of par (g)). The deduction may,
however, only be claimed by the lessee if the amount is taxable in the hands of the lessor in terms of
par (g) and not, for example, if the lessor is exempt from tax as taxpayer. The deduction for the
lessee is spread over the period of the lease (s 11(f) – see chapter 13), while the amount received by
the lessor is taxed in one year.
62
Lessor: Lessee:
Gross income par (g) Section 11(f ) deduction
Tax full amount in one year Spread the deduction over lease
period
4.10 Compensation for imparting knowledge and information (par (gA))

Any amount received by a person for imparting (disclosing or communicating) any scientific, tech-
nical, industrial or commercial knowledge or information is included in gross income (par (gA)).
Rendering any assistance or service in connection with the application or utilisation of such
knowledge or information is also included.
Such an amount paid for ‘know-how’ is taxable in full in the year of receipt or accrual, whether paid as
a ‘premium or like consideration’ or not. Know-how payments received by non-residents are deemed
to be derived from a source within the Republic if they are paid by a resident or paid for the use of
the knowledge or information in the Republic (s 9(2)(e) and (f)).
4.11 Leasehold improvements (par (h))

The lessor (owner) must include the value of the improvements effected on his land or to his buildings
by the lessee in gross income (par (h)). The inclusion only applies if the lessor has a right to have the
improvements effected to his property. This means that there must be an agreement obliging the
lessee to effect improvements on the land or to the buildings.
A strict interpretation of the wording in the Act leads to an inclusion in the tax year in which the im-
provements (or the right to have them effected) accrue to the lessor. In practice, the inclusion is
made in the year of assessment during which the improvements were completed (this practice must
be followed by students in answering questions). This practice was adopted because the value that
was initially agreed upon may differ from the actual value of the improvements upon completion some
months or years later.
The amount to be included in gross income of the lessor is
l the amount stipulated in the agreement as the value of the improvements, or
l the amount stipulated in the agreement as the amount to be expended on the improvements, or
l if no amount is stipulated, an amount representing the fair and reasonable value of the improvements.
If the lessee voluntarily pays an additional amount, such amount will not be included in the lessor’s
gross income. For example, if a lessee has agreed under a lease of land to erect buildings up to the
value of R500 000 but actually spends R600 000 on the improvements, only R500 000 is included in
the lessor’s gross income. When the contract does not stipulate any amount, the ‘fair and reasonable
value’ of the improvements will usually correspond to their cost.
A lease may obligate a lessee to erect certain specified buildings, such as a hotel or a parking gar-
age, or a building that must meet certain specifications with a certain stated minimum value. The
amount to be included in the lessor’s gross income in such a case is the fair and reasonable value of
the improvements and not merely the minimum amount stated. This is because the lessor does not
merely require the erection of buildings – he requires the erection of a particular building, and the
lessee must meet his requirements even if the cost is in excess of the stated minimum value in the
lease.
If the stipulated amount is contractually varied later, the increased sum will be included in the gross
income of the lessor provided the improvements are still in the course of construction at the date of
the variation of the lease (COT v Ridgeway Hotel Pty Ltd (1961)).
The lessor must include the full amount in the year of receipt or accrual. The Commissioner may,
however, make a special allowance (s 11(h) – see chapter 13), having regard to, amongst other
things, the fact that the lessor will become entitled to the benefit of the improvements only upon the
expiry of the lease.
4.12 Fringe benefits (par (i))

Benefits and advantages that an employee receives from an employer and which normally do not
consist of cash or cannot be turned into money, are referred to as fringe benefits. Gains in respect of
the right to acquire marketable securities that are taxable in terms of s 8A (rights obtained on or
63
before 24 October 2008), are also specifically included. The cash equivalent, as determined under
the Seventh Schedule to the Act, is included in such cases (par (i)), and not the ‘amount’ as in the
case of other amounts in respect of services rendered (par (c)).
Paragraph (i) overrides par (c) and a benefit or an advantage to which par (i) applies is therefore
excluded from the application of par (c) (proviso (i) to par (c)). Paragraph (i), different to par (c), does
not refer to voluntary amounts.
In KBI v Kotze (1992 (T)) it was held that where a new employer releases an employee from an obli-
gation the employee had towards a previous employer, it constitutes a fringe benefit in terms of
par (i). See 8.4.13 for exclusions in respect of such a fringe benefit.
For a detailed discussion on the taxability of fringe benefits, see chapter 8.
4.13 Proceeds from the disposal of certain assets (par (jA))

The proceeds from the disposal by a taxpayer of fixed capital assets are capital in nature and the
capital gain on the disposal may form part of the taxable capital gain that must be included in the
taxable income of the taxpayer in terms of s 26A.
If a company that manufactures vehicles uses certain vehicles that it manufactures as fixed capital
assets within its business operations, the proceeds from the subsequent disposal of these vehicles
are capital in nature. However, if the assets are manufactured, produced, constructed or assembled
by the taxpayer and the assets are similar to any trading stock used for the purposes of manufacture,
sale or exchange by the taxpayer, such proceeds must be included in gross income (par (jA)). The
disposal of such fixed assets does not give rise to a taxable capital gain.
For example: Manufacturer, Alfa Ltd, uses one vehicle manufactured by it (at a cost price of
R250 000 in the 2017 year of assessment) in its business operation as a demonstration model, and
gave the right of use of another similar vehicle to an employee as a fringe benefit (in the 2017 year of
assessment). Alfa Ltd disposes of both the vehicles during the 2018 year of assessment for an
amount of R280 000 per vehicle. This will have the following consequences:
l the assets will be included in closing stock at the end of the 2017 year of assessment and in
opening stock at the beginning of the 2018 year of assessment at the cost price of R250 000 per
vehicle
l the full proceeds from the disposals (R280 000 per vehicle) are included in gross income in the
2018 year of assessment in terms of par (jA) (similar to when trading stock is sold), even though
the vehicles were used as fixed capital assets
l no wear and tear allowances are claimed on these vehicles in the 2017 year of assessment and
no capital gains are calculated on the disposal of the vehicles in the 2018 year of assessment
l no inclusion takes place under s 22(8) in the 2017 year of assessment, and
l no recoupment is included in terms of s 8(4)(a) in the 2018 year of assessment.
4.14 Dividends (par (k))

All dividends and foreign dividends are included in gross income (par (k)). However, s 10(1)(k) and
s 10B provide an exemption from normal tax for certain dividends (see chapter 5).
4.15 Subsidies and grants (par (l))

Any grants, subsidies in respect of any soil erosion works and certain capital development expendi-
ture in terms of par 12(1) of the First Schedule are included in the gross income of farmers (par (l )).
4.16 Amounts received by or accrued to s 11E sporting bodies (par (lA))

Amounts received by or accrued to non-profit sporting bodies must be included in gross income if
another sporting body that is allowed a deduction in terms of s 11E paid the amount.
4.17 Government grants (par (lC))

Any amount received by or accrued to a person by way of a government grant as contemplated in
s 12P must be included in gross income (par (lC)). The list of such government grants exempted in
terms of s 12P is contained in the Eleventh Schedule and is discussed in chapter 5.
64
4.18 Key-man insurance policy proceeds (par (m))

Employers often hedge themselves against risks that relate to the death, disablement or illness of an
employee or director by taking out policies of insurance. Paragraph (m) includes the proceeds of
such policies of insurance paid out to the employer in its gross income. The final amount paid out
must be reduced by the amount of any loan or advance that is or has been included in the employ-
er’s gross income (proviso to par (m)).
4.19 Amounts deemed to be receipts or accruals and s 8(4) recoupments (par (n))
All amounts that are specifically included in a taxpayer’s income through other provisions of the Act
are included in gross income in terms of par (n). Examples of such amounts are the anti-avoidance
provisions of s 7 where certain donations are made, s 8C gains on the vesting of equity instruments
and s 24I foreign exchange gains. Furthermore, it is
l deemed that these amounts are received by or accrued to the taxpayer (even if no actual
amounts were received, for example, since s 24I taxes an unrealised foreign exchange profit that
results in no physical receipt by the taxpayer, it is deemed that he received that amount), and
l deemed that all recoupments under s 8(4) are from a source within South Africa, even if the
amount has been recovered or recouped outside South Africa.
See chapter 13 for a detailed discussion of the various s 8(4) recoupments and chapter 15 for a
discussion of s 24I.
4.20 Amounts received in terms of certain short-term insurance policies (s 23L(2))

For the purposes of s 23L a ‘policy’ means a policy of insurance or reinsurance other than a long-
term policy as defined in the Long-term Insurance Act (s 23L(1)).
No deduction is allowed in respect of premiums paid that are not taken into account as an expense
for ‘IFRS’ (s 23L(2)).
The non-deductibility of any such premiums (see chapter 6) causes a reduced amount to be includ-
ed in gross income when the policy is paid out (s23L(3).
Example 4.2. Gross income

John (33 years old and unmarried) is an RSA resident. He designs websites and is in the full-time
employment of Webdezine CC, an RSA close corporation. Webdezine often sends him to pro-
vide training to its United States of America (USA) clients. John’s receipts and accruals during
the 2018 year of assessment were as follows:
Note R
Salary ....................................................................................................... 1 192 000
Lump sum from employer ........................................................................ 2 32 000
Rent received ........................................................................................... 3 91 300
Leasehold improvements......................................................................... 3 ?
Lease premium received ......................................................................... 3 ?
Interest received ...................................................................................... 4 16 600
Dividends received .................................................................................. 5 49 000
Annuity ..................................................................................................... 6 ?
Leave conditions amended ..................................................................... 7 4 000
Private work ............................................................................................. 8 28 000
Gambling ................................................................................................. 9 12 000
Royalties .................................................................................................. 10 130 000
Notes
(1) John’s salary was divided between the periods that he worked in the RSA and the USA (he
was, however, at all times an RSA resident):
l South Africa R128 000 (8 months)
l USA R64 000 (4 months)
l Total R192 000
(2) In recognition of all his years of faithful service, Webdezine voluntarily paid an amount equal
to two months’ salary to John on 28 February 2018.
continued
65
(3) John owns a house in Stellenbosch, which he let to the Khumalo couple for the whole year.
The lease contract was concluded on 1 August 2016 and specified the following:
l The Khumalos must pay a monthly rent of R8 300 from 1 August 2016. The Khumalos
only paid the February 2018 rental on 15 March 2018.
l The Khumalos are obligated to effect improvements to the house to the value of
R40 000. Due to cash flow problems, the Khumalos only completed the improvements
during April 2017 at an amount of R35 000.
l The lease term expired on 31 July 2017. However, the Khumalos had a preference right
to lease the house again and paid a once-off amount of R6 000 as a lease premium (the
right to occupy the house) on 1 August 2017. The monthly rent remained unchanged at
R8 300.
(4) John has fixed deposits at various banks and received the following interest:
l From South Africa R9 100
l From Switzerland R7 500
l Total R16 600
(5) John owns shares in both RSA and Australian companies and received the following divi-
dends:
l From Australia R17 000
l Total R49 000
(6) John purchased an annuity from Old Mutual Life Insurers at R420 000 on 1 December 2017.
He receives a monthly annuity of R5 000 since 1 December 2017. The capital portion that is
calculated in terms of section 10A amounts to R1 100 per monthly annuity.
(7) Due to the recession, Webdezine amended the leave conditions of all its employees. From
1 June 2017 John is no longer entitled to paid study leave. To compensate him for this,
Webdezine paid a once-off amount of R4 000 to John on 1 June 2017.
(8) John updates the websites of his private clients over weekends. His total fees for the 2018
year of assessment amounted to R28 000.
(9) On his birthday (14 June 2017), John and a few of his friends gambled at the Grandwest
Casino for fun. John won R12 000 that evening.
(10) John wrote a manual on web design that was published during November 2017. The manual
is distributed across the world and he received the following gross royalties:
l From overseas R44 000
l Total R130 000
Calculate John’s gross income for the 2018 year of assessment.

l Indicate for each item whether it complies with the general definition of gross income or a
specific inclusion of the s 1 gross income definition.
l If it is a specific inclusion, provide the paragraph number, e.g. par (c). You do not have to
provide a reason for your answer.
l If an item is not included in gross income, provide a short reason by identifying the element
that is not met.
l You do not have to refer to case law (court cases).
SOLUTION
NB: John must include worldwide amounts, as he is an RSA resident.
Item Amount Reason
Salary 128 000 l Par (c) services rendered
64 000
192 000
continued
66
4.20 Chapter 4: Special inclusions
Item Amount Reason

Lump sum 32 000 l Par (c) services rendered
l Not par (d) as employment conditions were not amended,
nor was the employment terminated.
Rental 99 600 l General definition
l Total = R8 300 × 12 = R99 600
l February’s rental has already accrued
l Practice: earlier of receipt or accrual
Leasehold 40 000 l Par (h) leasehold improvement included at lessor
improvement l Act: in the year contract was concluded (i.e. 2017 year of
assessment)
l Practice: in the year improvements were completed (i.e.
2018 year of assessment)
l The amount is specified and John is taxed on R40 000
(irrespective of amount incurred by lessee)
Lease premium 6 000 l Par (g) lease premium included at Lessor
Interest received 9 100 l General definition
7 500
16 600
Dividends 32 000 l Par (k) dividend and foreign dividends
17 000
49 000
Annuity 15 000 l Par (a) annuity
l = R5 000 × 3 = R15 000
l The capital portion (R1 100 × 3) is later exempt in terms of
s10A
Leave conditions 4 000 l Par (d) lump sum from employer OR
l Par (f) also applies (because in terms of employment
contract). It is not a severance benefit.
Private work 28 000 l Par (c) services rendered
Gambling – l Capital of nature does not meet the general definition of
gross income
Royalties 86 000 l General definition
44 000
130 000
Gross income 612 200
67
5 Exempt income
Redge de Swardt

After studying this chapter you should be able to:
l identify amounts (that were included in gross income) that are exempt from normal
tax
l apply the qualifying criteria to determine whether certain amounts are exempt from
normal tax
l explain why certain amounts are exempt from normal tax.
Contents
Page
5.1 Introduction ........................................................................................................................ 70
5.2 Exemptions incentivising investments ............................................................................... 71
5.2.1 Interest received by natural persons (s 10(1)(i)) .................................................. 71
5.2.2 Interest received by non-residents (ss 10(1)(h) and 50A to 50H) ........................ 71
5.2.3 Amounts received from tax-free investments (ss 12T and 64F) ........................... 72
5.2.4 Purchased annuities (s 10A) ................................................................................. 73
5.2.5 Exemption of non-deductible element of compulsory annuities (s 10C) .............. 75
5.2.6 Collective investment schemes (ss 10(1)(iB) and 25BA) ..................................... 76
5.2.7 Proceeds from insurance policies (s 10(1)(gG), (gH) and (gI)) ........................... 77
5.2.8 Approved funds and associations (ss 10(1)(d) and 30B) .................................... 79
5.3 Exemptions relating to dividends ....................................................................................... 79
5.3.1 Dividends from resident companies (s 10(1)(k)) .................................................. 79
5.3.2 REIT distributions (par (aa) of the proviso to s 10(1)( k)(i)) .................................. 80
5.3.3 Dividends in respect of employee-based share schemes (paras (dd), (ii), (jj)
and (kk) of the proviso to s 10(1)(k)(i)).................................................................. 80
5.3.4 Dividends received by a company in consequence of a cession (par (ee) of
the proviso to s 10(1)(k)(i)) .................................................................................... 82
5.3.5 Dividends received by a company in consequence of the exercise of a
discretionary power by a trustee (par (ee) of the proviso to s 10(1)(k)(i))............ 82
5.3.6 Dividends received in respect of borrowed shares (paras (ff) and (gg) of the
proviso to s 10(1)(k)(i)) .......................................................................................... 82
5.3.7 Dividends applied against deductible financial payments (par (hh) of the
proviso to s 10(1)(k)(i)) .......................................................................................... 83
5.3.8 Foreign dividends and dividends paid by headquarter companies (s 10B)........ 83
5.4 Exemptions relating to employment................................................................................... 89
5.4.1 Foreign pensions (s 10(1)(gC)) ............................................................................ 89
5.4.2 Unemployment insurance benefits (s 10(1)(mB)) ................................................. 90
5.4.3 Uniforms and uniform allowances (s 10(1)(nA)) ................................................... 90
5.4.4 Relocation benefits (s 10(1)(nB)) .......................................................................... 90
5.4.5 Broad-based employee share plan (s 10(1)(nC))................................................. 91
5.4.6 ‘Stop-loss’ provision for share-incentive schemes (s 10(1)(nE)) .......................... 91
5.4.7 Equity instruments awarded to employees or directors (s 10(1)(nD)).................. 92
5.4.8 Salaries paid to an officer or crewmember of a ship (ss 10(1)(o)(i) and (iA)) ...... 92
5.4.9 Employment: Outside South Africa (s 10(1)(o)(ii)) ................................................ 92
5.5 Exemptions that incentives education ............................................................................... 94
5.5.1 Bursaries and scholarships (ss 10(1)(q) and (qB)) .............................................. 94
5.6 Exemptions relating to government, government officials and governmental institutions 98
5.6.1 Government and local authorities (ss 10(1)(a) and 10(1)(bA)) ............................ 98
5.6.2 Foreign government officials (s 10(1)(c)) .............................................................. 98
69
Page
Non-residents employed by the South African government (s 10(1)(p)) .............
5.6.3 99
Pension payable to former State President or Vice President (s 10(1)(c)(ii)) .......
5.6.4 99
Foreign central banks (s 10(1)(j))..........................................................................
5.6.5 99
Semi-public companies and boards, governmental and other multinational
5.6.6
institutions (s 10(1)(bB), (t) and (zE)) .................................................................... 99
5.7 Exemptions for organisations involved in non-commercial activities ................................ 100
5.7.1 Bodies corporate, share block companies and other associations (s 10(1)(e)) 100
5.7.2 Public benefit organisations (ss 10(1)(cN) and 30) .............................................. 101
5.7.3 Recreational clubs (ss 10(1)(cO) and 30A) .......................................................... 102
5.7.4 Political parties (s 10(1)(cE)) ................................................................................. 102
5.8 Exemptions relating to economic development ................................................................ 103
5.8.1 Micro businesses (s 10(1)(zJ)).............................................................................. 103
5.8.2 Small business funding entity (ss 10(1)(cQ), 10(1)(zK) and 30C, and par 63B
of the Eighth Schedule) ......................................................................................... 103
5.8.3 Amounts received in respect of government grants (ss 10(1)(y) and 12P) ......... 104
5.8.4 Film owners (s 12O) .............................................................................................. 104
5.8.5 International shipping income (s 12Q) .................................................................. 107
5.8.6 Owners or charterers of a ship or aircraft (s 10(1)(cG)) ....................................... 107
5.9 Exemptions incentivising environmental protection .......................................................... 107
5.9.1 Certified emission reductions (s 12K) ................................................................... 107
5.9.2 Closure rehabilitation company (s 10(1)(cP)) ....................................................... 107
5.10 Exemptions aimed at amounts that are subject to withholding tax ................................... 108
5.10.1 Royalties paid to non-residents (s 10(1)( l)) .......................................................... 108
5.10.2 Amounts paid to a foreign entertainer or sportsperson (s 10(1)( lA))................... 109
5.10.3 Interest paid to non-residents (ss 10(1)(h)) .......................................................... 109
5.11 Other exemptions ............................................................................................................... 110
5.11.1 Alimony and maintenance (s 10(1)(u)).................................................................. 110
5.11.2 Promotion of research (s 10(1)(cA))...................................................................... 110
5.11.3 Interest received by the holder of a debt (s 10(1)(hA)) ........................................ 110
5.11.4 War pensions and awards for diseases and injuries (s 10(1)(g), (gA) and
(gB)) ...................................................................................................................... 110
5.11.5 Beneficiary funds (s 10(1)(gE)) ............................................................................. 111
5.1 Introduction
The ‘income’ of a taxpayer, as defined in s 1, is the amount of his gross income remaining after the
exclusion of any amounts exempt from normal tax for any year of assessment.
Income is thus calculated as follows:
Gross income Rxxx

Less: Exempt income (xxx)
Income Rxxx
Exempt income refers to amounts received or accrued that are not subject to normal tax. Govern-
ments often use tax exemptions to incentivise investments, to provide relief to the poor and under-
privileged or to ensure that the income of organisations that are not directly involved in commercial
activities, such as religious organisations, amateur sports organisations and charities are not subject
to tax. In some cases, tax exemptions are provided to ensure that the same amount of income is not
subject to double taxation. The exemptions from normal tax provided for in the Act are grouped and
discussed in this chapter based on the purpose of the exemption as aforementioned.
If an amount does not form part of income, no deduction in respect of expenses

relating to the amount may be claimed in terms of ss 11(a) and 23(f). For exam-
Please note! ple, dividends are included in gross income, but certain qualifying dividends are
excluded from income as they are exempt, with the result that no expenses
incurred in the production of these dividends may be claimed under s 11(a).
70
5.2 Chapter 5: Exempt income
5.2 Exemptions incentivising investments

The following types of investment income are exempt from normal tax:
5.2.1 Interest received by natural persons (s 10(1)(i))

Where a natural person receives interest from a source in South Africa, the following amounts qualify
for an exemption:
l where the person has not reached the age of 65, the first R23 800 interest that the person re-
ceived during the year, or
l where the person is 65 years or older (or would have been 65 years old had he lived), the first
R34 500 interest that the person received during the year.
This exemption does not apply to interest received in respect of a tax-free investment (as defined in
s 12T – see 5.2.3).
5.2.2 Interest received by non-residents (ss 10(1)(h) and 50A to 50H)

Only interest that is received from a South African source will be included in a non-resident’s gross
income. The source of interest is in South Africa if the interest is paid by a resident (unless the in-
terest is attributable to a permanent establishment situated outside South Africa), or is received or
accrued regarding any funds used or applied by any person in South Africa (s 9(2)(b); see chap-
ter 3).
Interest received by a non-resident is exempt from normal tax, subject to the exceptions mentioned
below (s 10(1)(h)). Interest received by a non-resident is, however, not tax-free, since it may be sub-
ject to 15% withholding tax on interest (ss 50A–50H; see chapter 16). The withholding tax on interest
rate may be reduced by a double tax agreement between South Africa and the other country
(s 50E(3)).
The normal tax exemption does not apply in the case of a
l a natural person
– who was physically present in South Africa for a period exceeding 183 days in aggregate
during the twelve-month period preceding the date on which the interest is received by or ac-
crues to that person; or
– if the debt from which the interest arises is effectively connected to a permanent establishment
of that person in South Africa, and
l any other person
– if the debt from which the interest arises is effectively connected to a permanent establishment
of that person in South Africa.
Where in the above cases the normal tax exemption does not apply, the foreign person will be exempt
from withholding tax on interest (s 50D(3)).
Example 5.1. Interest received by a non-resident
Oliver Capital Ltd is a company resident in Australia. It has a wholly-owned subsidiary in South
Africa, Sandile Investments (Pty Ltd, and carries on business in South Africa through a branch
that qualifies as a permanent establishment. Oliver Capital Ltd granted an interest-bearing loan to
Sandile Investments (Pty) Ltd (assume that the loan is on market-related terms) and received
R100 000 interest from Sandile Investments (Pty) Ltd on 31 December 2018. Oliver Capital Ltd
further received interest of R80 000 from a South African bank on a current account in its
branch’s name.
What effect does the above have on Oliver Capital Ltd’s South African taxable income for its year
of assessment ending on 31 December 2018?
71
SOLUTION
Interest received from a South African source .......................................................... R180 000
Interest exempt (s 10(1)(h)) (The loan in respect of which Oliver Capital Ltd
received the R100 000 interest is not effectively connected to Oliver Capital Ltd’s
permanent establishment in South Africa and therefore qualifies for the exemp-
tion under s 10(1)(h). The R80 000 interest received on the branch’s current ac-
count is effectively connected to a permanent establishment and does not qualify
for the exemption) ..................................................................................................... (100 000)
Taxable income ......................................................................................................... R80 000
5.2.3 Amounts received from tax-free investments (ss 12T and 64F)
As an incentive to encourage household savings, all amounts received from a ‘tax-free investment’ by
a natural person (or a deceased or insolvent estate of such person) is exempt from normal tax. The
capital gain or loss from the disposal of a ‘tax-free investment’ is also disregarded for CGT purposes
(see chapter 17). A dividend paid to a natural person in respect of a ‘tax-free investment’ is also
exempt from dividends tax (s 64F) (see chapter 19).
Tax-free investment (definition of ‘tax-free investment’, s 12T(1))
A ‘tax-free investment’ is a financial instrument or a policy owned by natural person and administered
by a person designated by the Minister of Finance. A financial instrument or policy in respect of a tax-
free investment may only be issued by
l a bank (as defined in s 1 of the Banks Act, 1990)
l a long-term insurer (as defined in s 1 of the Long-term Insurance Act, 1998),
l a manager as defined in s 1 of the Collective Investment Scheme Control Act, 2002
l a manager as defined in s 1 of the Collective Investment Scheme Control Act, 2002 of a collective
investment scheme in participation bonds that complies with the requirements determined by the
Registrar
l the Government of the Republic of South Africa in the national sphere
l a mutual bank (as defined in s 1 of the Mutual Banks Act, 1993), or
l a co-operative bank (as defined in s 1 of the Co-Operative Banks Act, 2007)
(Regulation 172 (25 February 2015))
Investment contribution limit (s 12T(4)–(7))

A natural person is allowed to contribute up to R30 000 cash during a year of assessment to these
investments and a lifetime contribution limitation of R500 000 will apply. Individuals may open multi-
ple tax-free savings accounts that may each invest in different ‘tax-free investments’; however, the
annual and lifetime limits apply in respect of the total of all tax-free investments held by a person. A
product provider may not accept an amount regarding a tax-free investment from an investor that
exceeds these limits (Regulation 172 (28 February 2015)).
The annual or lifetime limit will not be affected by the following:
l Amounts received from a ‘tax free investment’ and re-invested are not taken into account when
determining whether a person has exceeded the annual or lifetime contribution limits.
l Any transfers of amounts between tax free investments of a person shall not be taken into ac-
count when determining whether a person has exceeded the annual or lifetime contribution limits.
Any transfer of tax free investments from one individual (or his estate) to another will be deemed to be
a contribution and subject to the annual and lifetime contribution limits of the recipient.
Where a person contributes amounts in excess of the above limitations, the person will be penalised
by having 40% of the excess contribution being deemed to be normal tax payable. Therefore, if a
person, during a year of assessment, made contributions in excess of the R30 000 annual contribu-
tion limit, an amount equal to 40% of the excess amount is deemed to be normal tax payable by the
person in respect of that year of assessment. Where the aggregate of a person’s investment exceeds
R500 000, 40% of the excess is deemed to be normal tax payable. In both instances all proceeds
received from the tax free investment will be exempt from tax although the taxpayer contributed in
excess of the limits.
72
Death or insolvency (definition of ‘tax free investment’, s 12T(1))

The deceased or insolvent estate of a natural person may also hold ‘tax free investments’. If a person
dies, the person’s ‘tax-free investments’ will be added to his or her estate for levying estate duty, but
while the investments are held by the estate, the returns from these investments will continue to be
exempt from income and dividends tax.
Example 5.2. Amounts received from tax free investments

During the 2018 year of assessment, Kagiso contributed R2 500 per month to a fund that quali-
fies as a ‘tax-free investment’ as defined in s 12T(1). Kagiso received R1 500 interest and R800
dividends during this year from his investment. He capitalised the interest and dividends that
accrued during the year to the investment.
Determine whether Kagiso exceeded the annual contribution limitation to the tax-free investment
funds and discuss the tax implications for Kagiso relating to the interest and dividends received.
SOLUTION
Total contribution made to the tax free investment
(R2 500 × 12 + R1 500 interest + R800 dividends) ....................................................... R32 300
Less: Amounts received from a tax free investment that is exempt from normal tax
under s 12T(2) (R1 500 interest + R800 dividends) ....................................................... (R2 300)
Contribution subject to limitation .................................................................................... R30 000
Since Kagiso’s total contributions made during this year of assessment did not
exceed R30 000, Kagiso did not exceed the annual contribution limit.
The effect of the amounts received from his tax-free investment on Kagiso’ taxable
income for his 2018 year of assessment will be:
Interest received from tax-free investment ..................................................................... R1 500
Dividends received from tax-free investments ............................................................... 800
Less: Amounts received from tax-free investment exemption – the exemption applies
in respect of interest and dividends (s 12T(2)) .............................................................. (2 300)
Taxable income.............................................................................................................. Rnil
Notes
(1) The R800 dividend that Kagiso received from his tax-free investment will be exempt from
dividends tax in terms of s 64F(1)(o). The amount of interest that is exempt in terms of
s 12T(2) does not affect the interest exemption under s 10(1)(i) (see 5.1.1). Kagiso would still
be entitled to the total interest exemption of R23 800 if he is not yet 65 years old, or R34 500
if he is 65 or older (or would have been 65 years old had he lived).
5.2.4 Purchased annuities (s 10A)

The general rule is that amounts received as an annuity are included in a person’s gross income
(par (a) of the gross income definition). However, the capital portion of certain annuities are in some
cases exempt from normal tax (s 10A(2)). This exemption ensures that the capital payment made by
an investor when purchasing a life annuity product is not subject to normal tax when the amount is
paid back to the investor as part of the annuity. A company purchasing an annuity would not qualify
and the provisions are only applicable regarding natural persons.
The exemption applies to the capital portion of an ‘annuity amount’ payable to a ‘purchaser’, his
spouse or surviving spouse as per the definition of an ‘annuity contract’ (s 10A(2)). These terms are
defined as follows (s 10A(1)):
‘Purchaser’ is
l any natural person or his deceased or insolvent estate, or
l a curator bonis of, or a trust created solely for the benefit of, any natural person. The High Court
should have declared the person to be of unsound mind and incapable of managing his own af-
fairs and ordered the appointment of a curator or creation of a trust.
An ‘annuity amount’ is an amount payable by way of annuity under an annuity contract and any amount
payable in consequence of the commutation or termination of an annuity contract.
73
An ‘annuity contract’ is an agreement concluded between an insurer in the course of his insurance
business and a ‘purchaser’, which meets all the following requirements:
l The insurer agrees to pay to the purchaser or the purchaser’s spouse or surviving spouse an
annuity or annuities until the death of the annuitant or the expiry of a specified term. Payments
may be made either to one of these annuitants or to each of them.
l The purchaser agrees to pay to the insurer a lump sum cash consideration for the annuity or
annuities.
l No amounts are or will be payable by the insurer to the purchaser or any other person other than
amounts payable by way of the envisaged annuity or annuities.
An agreement for the payment by an insurer of an annuity that, under the rules of a pension fund,
pension preservation fund, a provident fund, a provident preservation fund or a retirement annuity
fund is payable to a member of the fund or to any other person is excluded from the definition of an
annuity contract.
Therefore, only annuities that are bought from an insurer for a lump sum cash consideration give rise
to an annuity amount qualifying for division into capital and non-capital elements and for the exemption
of the capital element. Annuities payable under pension, pension preservation, provident, provident
preservation or retirement annuity funds were not acquired from an insurer and therefore do not
qualify for exemption. Similarly, inherited or donated annuities, annuities for services rendered, annui-
ties granted as a consideration for the disposal of a business, asset or right would also not qualify.
Annuities: Calculation of capital element

The capital element of an annuity amount (which is the portion exempt from normal tax) is calculated
by means of the following formula:
A
Y= ×C
B
In this formula:
Y is the capital amount to be determined
A is the amount of the total cash consideration paid by the purchaser of the annuity
B represents the total ‘expected return’ of all the annuities provided for in the annuity contract
C is the annuity amount received of which the exempt capital portion must be calculated (s 10A(3)(a)).
The expected return is the sum of all the annuity amounts that are expected to become payable by
way of the annuity from the commencement of the annuity contract (s 10A(1)).
The calculation of the capital portion of all the annuity amounts to be paid under an annuity contract
must be done by the insurer before the payment of the first annuity amount (s 10A(4)). When a de-
termination has to be made of the life expectancy of a person for the purpose of the calculation of the
expected return of an annuity or the probable number of years during which annuity amounts will be
paid under an annuity contract, the mortality tables must be used (s 10A(5)). The tables are repro-
duced in Appendix D. Furthermore, the age of the person concerned must for the purposes of the
determination be taken to be his age on his birthday immediately preceding the commencement of
the annuity contract (s 10A(5)).
Where an annuity contract is varied to the effect that it no longer qualifies as an “annuity contract” as
defined, the exemption in respect of the capital element will no longer apply to amounts which be-
come due and payable thereafter (s 10A(6)(a)). Where the annuity amount is varied, the capital
element of the annuity must be recalculated (s 10A(6)(b)).
The insurer must give each annuitant under an annuity contract two copies of the calculation (as per
s 10A(4)) or re-calculation (as per s 10A(6)(b)) of the capital amount. This must be done within one
month after the calculation or recalculation, or further period as the Commissioner may allow
(s 10A(7)(a)). The annuitant must submit one copy to the Commissioner (s 10A(7)(b)).
The calculation done under s 10A(4) or recalculation under s 10A(6)(b) shall apply in respect of all
annuity amounts which become due and payable to any person under the annuity contract. It will also
apply to any subsequent year of assessment (s 10A(7)(c)).
74
Example 5.3. Annuities: Capital element

A man (aged 38) purchases a life annuity for R50 000. The annuity is R3 600 a year. His life ex-
pectancy is 30,41 years (based on his age on his birthday preceding the commencement of the
annuity contract). The expected return is therefore R109 476 (R3 600 × 30,41).
The capital element of the annuity that qualifies for the exemption is determined as follows:
A
Y = ×C
B
R50 000
= × R3 600
R109 476
= R1 644,19
or 45,67% of each annuity amount
The percentage calculated, 45,67%, will be applied to all the future annuity amounts to determine
the exempt capital element (s 10A(4) and (10)).
If the cash consideration is paid by the purchaser in a foreign currency, the capital amount must,
after being calculated in the foreign currency, be translated into rand by applying the provisions of
s 25D (the general rule is spot rate on date received or accrued – see chapter 15) to the annuity
amount payable during that year of assessment (a 10A(11)).
Annuities: Calculation of capital element on commutation (amendment) or termination

The capital element of an annuity amount payable in consequence of the commutation or termination
of the annuity contract is calculated by means of the following formula:
X=A–D
In this formula:
X is the amount to be determined
A is the amount of the total cash consideration paid by the purchaser of the annuity contract
D is the sum of the previously exempt capital element of an annuity received prior to the commuta-
tion or termination (s 10A(3)(c)).
Example 5.4. Annuities: Payable on commutation or termination of contract
An annuitant is paid an amount of R33 120 on the commutation of an annuity contract for which
he had initially paid a cash consideration of R60 000. The capital amounts payable under the
contract from its commencement up to the date of commutation totalled R49 680.
The capital element of the annuity amount payable on the commutation of the contract is deter-
mined as follows:
X = A–D
= R60 000 – R49 680
= R10 320
Therefore, of the amount of R33 120 received on the commutation of the contract, R10 320 is the
capital element and is not taxable.
5.2.5 Exemption of non-deductible element of compulsory annuities (s 10C)

The rules of a pension fund, pension preservation fund and retirement annuity fund provide that not
more than two-thirds of the total value of the retirement interest may be commuted for a single pay-
ment (i.e. a lump sum payment). The remainder of the retirement interest must be paid in the form of
an annuity (including a living annuity).
To the extent that a retirement fund member elects to receive a portion of his or her retirement fund
interest in the form of a lump sum upon retirement (or a pre-retirement withdrawal), that lump sum is
subject to tax as per the retirement lump sum tax table (or the retirement lump sum withdrawal tax
table). In calculating the tax due on the lump sum, the former member is afforded an exemption to
the extent the member has made non-deductible contributions to retirement funds (i.e. to the per-
son’s own contributions to the pension fund, pension preservation fund or retirement annuity fund that
did not qualify for a deduction against the person’s income in terms of s 11F (or the repealed s 11(k))
(see chapter 7).
The portion of the retirement interest that must be paid in the form of an annuity is referred to as the
‘compulsory annuity’ for purposes of s 10C. A portion of the compulsory annuity may qualify for an
75
exemption in terms of s 10C(2). This exemption is calculated in respect of the aggregate compulsory
annuities payable to a person. The amount exempt is an amount equal to the person’s own contribu-
tions to the pension fund, provident fund or retirement annuity fund that did not qualify for a deduc-
tion against the person’s income in terms of s 11F (or the repealed s 11(k)). Such amount must be
reduced by any portion thereof that has previously been allowed as a deduction in terms of the
Second Schedule or that has previously been exempted in terms of s 10C. Refer to chapter 9 for a
detailed discussion in this regard.
5.2.6 Collective investment schemes (ss 10(1)(iB) and 25BA)

A collective investment scheme is a scheme in terms of which two or more investors contribute mon-
ey and hold a participatory interest in a portfolio of the scheme through shares, units or any other
form of participatory interest. The investors share the risk and the benefit of investment in proportion
to their participatory interest in a portfolio of a scheme.
Any amount distributed by a portfolio of a collective investment scheme to a holder of a participatory
interest in the portfolio within 12 months of the date of receipt by the portfolio, is deemed to accrue
directly to the holder on the date of distribution. This does not apply to capital amounts distributed or
to a portfolio of a collective investment scheme in property (s 25BA(1)(a)).
If an amount is not distributed by the portfolio within 12 months after its accrual to the portfolio, the
amount is deemed to accrue to the portfolio on the last day of the 12-month period (s 25BA(1)(b)).
The effect of this rule is that since the amount is deemed to accrue to the holder, it will be subject to
normal tax in the holder’s hands. The holder will be entitled to any relevant normal tax exemption,
depending on the nature of the amount. If the amount is not distributed by the portfolio within 12
months after its accrual to the portfolio, the amount is subject to normal tax in the portfolio’s hands.
The portfolio would then be entitled to any relevant normal tax exemption, depending on the nature of
the amount. Where the amount retained by the collective investment scheme is attributable to a
dividend received by or accrued to the portfolio, the amount is deemed to be income of the portfolio.
The effect of this is that the collective investment scheme would be entitled to deduct expenses
against the dividend income, which would otherwise not be the case (a 25BA(1)(b))
Where an amount that is deemed to have accrued to the portfolio (because it was not distributed to a
holder within 12 months after its accrual to the portfolio) is subsequently distributed to a holder, the
amount is exempt in the holder’s hands in terms of s 10(1)(iB). This exemption only applies if the
amount was subject to normal tax in the portfolio’s hands.
Section 25BA is not applicable to a portfolio of a collective investment scheme in property. In fact,
such portfolio is excluded from the definition of ‘person’ in s 1 and since only a ‘person’ could be
liable for normal tax in terms of s 5, a portfolio of a collective investment scheme in property is not
liable for normal tax. Section 25BB provides for the taxation of Real Estate Investment Trusts (REITs).
A portfolio of a collective investment scheme in property would typically qualify as a REIT. The taxa-
tion of REITs is discussed in chapter 19.
The normal tax consequences of amounts received by a portfolio of a collective investment scheme
(other than a portfolio of a collective investment scheme in property and REITs) and distributed to the
holders of participatory interests in such portfolio are summarised in the following table:
Types of Normal tax consequences for the portfolio: Normal tax consequences for the
income received holders of participatory interests in the
by the portfolio: portfolio on amounts distributed:
Local and If distributed within 12 months from the date of If the holder is a resident, the amounts
foreign interest its accrual: Deemed to accrue directly to the are included in gross income. The
holder (s 25BA) (i.e. not included in the port- local interest may be exempt in terms
folio’s gross income). of s 10(1)(i) if the holder is a natural
person.
If the holder is a non-resident, only
local interest is included in gross in-
come (foreign interest is not from a
source in South Africa). The local
interest may be exempt in terms of
s 10(1)(h) or 10(1)(i)).
continued
76
Types of Normal tax consequences for the portfolio: Normal tax consequences for the
income received holders of participatory interests in the
by the portfolio: portfolio on amounts distributed:
If not distributed within the 12-month period: The If these amounts are subsequently
amounts accrue to the portfolio (s 25BA) (i.e. distributed to a holder, the amount is
included in the portfolio’s gross income). exempt in the holder’s hands
(s 10(1)(iB)).
Local dividends If distributed within 12 months from the date of The amount is included in gross in-
its accrual: Deemed to accrue directly to the come and may qualify for the
holder (s 25BA) (i.e. not included in the portfo- s 10(1)(k)(i) exemption.
lio’s gross income).
included in the portfolio’s gross income). The exempt in the holder’s hands
amounts could be exempt under s 10(1)(k)(i). (s 10(1)(iB)).
Foreign If distributed within 12 months from the date of The amount is included in gross in-
dividends its accrual: Deemed to accrue directly to the come and may qualify for the s 10B
holder (s 25BA) (i.e. not included in the portfo- exemption.
lio’s gross income).
included in the portfolio’s gross income). The exempt in the holder’s hands
amounts could be exempt under s 10B. (s 10(1)(iB)).
5.2.7 Proceeds from insurance policies (s 10(1)(gG), (gH) and (gI))

The proceeds from an insurance policy that pays out in the event of the death, disablement or illness
of a person could be exempt from normal tax depending on a number of factors. A distinction is
drawn between
l policies where the proceeds are intended to solely benefit a taxpayer on the death, disablement
or illness of an employee or director of the taxpayer (so called key-person policies); and
l policies where the proceeds are intended to directly or indirectly benefit a person or the person’s
beneficiaries on the death, disablement or illness of that person (for example, life insurance poli-
cies, group life insurance policies, disability insurance policies and income protection policies).
Remember
Where an insurance policy is intended to solely benefit a taxpayer on the death, disablement or
illness of an employee or director, the taxpayer has to be the sole policyholder as well as the
sole beneficiary under the policy.
Where the intention is to benefit a person or the person’s beneficiaries on the death, disable-
ment or serious illness of that person, the person could be the policyholder and beneficiary of
the policy. The person’s employer could also be the policyholder and the person (or the per-
son’s beneficiaries) the beneficiary under the policy, or the person’s employer could be the
policyholder and beneficiary where there is a contractual obligation on the employer to pay the
proceeds received under the policy to the person (or the person’s beneficiaries).
77
The normal tax consequences of proceeds received from these policies are explained by means of
the following diagram:
Policies that are intended to solely benefit Policies in respect of Policies where a person
an employer (or company in the case of a which an employee (or other than an employer (or
director) (that is, the employer is both the director) or his/her company in the case of a
policyholder and the beneficiary) beneficiaries directly or director) is the
indirectly receive a benefit policyholder
The proceeds from an insurance policy If the proceeds accrue to The proceeds from an
relating to the death, disablement or illness the employee, they are insurance policy relating
Tax consequences relating to proceeds
of an employee/director are included in the included in the employee/ to the death, disablement,
employer’s gross income (par (m) of ‘gross director’s gross income illness or unemployment of
income’) (see note 1). (par (d)(ii) of ‘gross any person who is insured
If the premiums did not qualify for a income’) (see note 4), but in terms of the policy are
received or accrued
deduction, the proceeds are exempt in the are then exempt under exempt (s (10(1)(gI)) (see
employer’s hands (s 10(1)(gH)) (see note s 10(1)(gG). note 3).
2).
If the premiums qualified for a deduction,
the proceeds are taxable in the employer’s
hands and are not exempt in terms of s
10(1)(gH) (see note 2).
The proceeds from an insurance policy
relating to the death, disablement, illness
or unemployment of any person who is
insured in terms of the policy, including an
employee of the policyholder are exempt
(s (10(1)(gI)) (see note 3).
Notes:
(1) Paragraph (m) of ‘gross income’ also applies where the policy relates to the death, disablement
or illness of a former employee or director. This paragraph is discussed in detail in chapter 4.
(2) The deductibility of insurance premiums is discussed in chapter 12.
(3) The proceeds from some of these policies are of a capital nature and therefore not taxable.
However, in the case of an income protection policy and annuities paid in terms of the policy,
the proceeds would be included in gross income. Proceeds from life and disability policies are
thus treated in the same manner regardless of whether the policy is aimed at capital or income
protection and regardless of whether the proceeds are paid as an annuity or a lump sum.
The exemption under s 10(1)(gI) also applies in respect of a policy of insurance relating to the
death, disablement, illness or unemployment of a person who is an employee of the policyhold-
er.
The exemption under s 10(1)(gI) does not apply to a policy of which the benefits are payable by
a retirement fund.
(4) Paragraph (d)(ii) of ‘gross income’ provides that an amount received or accrued by or to a
person, or dependant or nominee of the person, directly or indirectly in respect of proceeds
from a policy of insurance where the person is or was an employee or director of the policy-
holder, is included in the person’s gross income. The paragraph specifically provides that any
amount received by or accrued to a dependant or nominee of a person shall be deemed to be
received by or to accrue to that person. This paragraph therefore applies where
l an employer is the policyholder and the employee or dependant or nominee of the employ-
ee is the beneficiary under the policy, or
l a company is the policyholder and a director of the company or its dependent or nominee
is the beneficiary under the policy, or
l an employer (or company in the case of a director) is the policyholder and beneficiary un-
der the policy, but is contractually obliged to pay the proceeds under the policy to the em-
ployee or director, or his or her dependents or nominees.
Since a lump sum award from any pension fund, pension preservation fund, provident fund,
provident preservation fund or retirement annuity fund is not included in the person’s gross in-
come in terms of par (d)(ii) of the definition of ‘gross income’ (it is included in gross income in
terms of par (e) of the definition of ‘gross income’), it does not qualify for the exemption under
s 10(1)(gG).
78
5.2–5.3 Chapter 5: Exempt income
5.2.8 Approved funds and associations (ss 10(1)(d) and 30B)

The receipts and accruals of the following funds and associations are exempt from normal tax:
l any pension fund, pension preservation fund, provident fund, provident preservation fund or
retirement annuity fund (these funds are defined in s 1), or a beneficiary fund defined in s 1 of the
Pension Funds Act (s 10(1)(d)(i))
l a benefit fund, which is defined in s 1 as any friendly society registered under the Friendly Socie-
ties Act of 1956 or any medical scheme registered under the provisions of the Medical Schemes
Act (s 10(1)(d)(ii))
l a mutual loan association, fidelity or indemnity fund, trade union, chamber of commerce or indus-
tries (or an association of such chambers) or local publicity association approved by the Com-
missioner in terms of s 30B (s 10(1)(d)(iii))
l a company, society or other association of persons established to promote the common interests
of persons (being members of such company, society or association of persons) carrying on any
particular kind of business, profession or occupation, approved by the Commissioner in terms of
s 30B (s 10(1)(d)(iv)).
5.3 Exemptions relating to dividends

Dividends received from a South African resident company are generally exempt from normal tax.
Companies are subject to 28% normal tax on their taxable income. Dividends are in essence the
distribution of a company’s after-tax income. Dividends declared by a company are subject to 20%
dividends tax in respect of dividends paid on or after 22 February 2017 (previously 15%), which is
withheld by the company from the dividend and paid to SARS (see chapter 19). Since a company’s
profit distributed to a shareholder is subject to 28% normal tax paid by the company and 20% divi-
dends tax paid by the shareholder (withheld by the company from the dividends declared), divi-
dends are not also subject to normal tax in the shareholder’s hands.
Dividends are, as a general rule, exempt from normal tax. However, a number of exceptions apply,
mainly where the underlying company profit was not subject to normal tax, or to prevent tax avoid-
ance. In the following cases dividends are not exempt from normal tax:
l dividends that form part of an amount that is paid as an annuity (s 10(2)(b))
l amounts distributed by a Real Estate Investment Trust (‘REIT’) or a controlled company in respect
of a REIT (par (aa) of the proviso to s 10(1)(k)(i); see 5.3.2)
l dividends in respect of employee-based share schemes (paras (dd), (ii) and (jj) of the proviso to
s 10(1)(k)(i); see 5.3.3)
l dividends received by a company in consequence of a cession (par (ee)(A) of the proviso to
s 10(1)(k)(i); see 5.3.4)
l dividends received by a company in consequence of the exercise of a discretionary power of
trustee of a trust (par (ee)(B) of the proviso to s 10(1)(k)(i); see 5.3.5)
l dividends received by a company in respect of shares borrowed by the company (paras (ff) and
(gg) of the proviso to s 10(1)(k)(i); see 5.3.6)
l dividends applied against deductible financial payments (par (hh) of the proviso to s 10(1)(k)(i);
see 5.3.7)
l dividends received as part of a dividend-stripping transaction (s 22B; see chapter 20).
Dividends declared by headquarter companies and foreign dividends may qualify for specific ex-
emptions (s 10B; see 5.3.8).
5.3.1 Dividends from resident companies (s 10(1)(k))

Dividends declared by South African resident companies are exempt from normal tax (s 10(1)(k)(i)).
This exemption applies irrespective of whether the recipient is a natural person or a corporate entity
and also irrespective of whether the recipient is a resident or not.
79
l Note that s 10(1)(k)(i) does not state that the exemption applies only to
dividends declared by South African resident companies. The limitation
comes from the definition of ‘dividend’ in s 1 that defines a ‘dividend’ as an
amount distributed by a resident company (see chapter 19).
l Dividends declared by a resident company are regarded as being from a
Please note! source within South Africa (s 9(2)(a); see chapter 3). If a non-resident re-
ceives such dividend, it will be included in the non-resident’s gross income
and then exempt in terms of s 10(1)(k)(i).
l Although these dividends may be exempt from normal tax, they may be
subject to dividends tax (see chapter 19).
5.3.2 REIT distributions (par (aa) of the proviso to s 10(1)(k)(i))

Amounts distributed by a Real Estate Investment Trust (‘REIT’) are fully taxable in the recipient’s
hands. The requirements of REITs and the taxation thereof are dealt with under s 25BB and are
discussed in detail in chapter 19. Where such distribution is in the form of a dividend, the dividend is
not exempt in the recipient’s hands (s 10(1)(k)(i)(aa)). This exclusion from the dividend exemption
also applies regarding dividends distributed by a subsidiary of a REIT, a so-called ‘controlled com-
pany’ (see chapter 19).
The dividend exemption will, however, apply where the REIT or a controlled company
l distributes a dividend to a non-resident, or
l distributes an amount to a holder of a share as consideration for the acquisition of shares in the
REIT or controlled company (that is, a dividend referred to in par (b) of the definition of ‘divi-
dend’).
5.3.3 Dividends in respect of employee-based share schemes (paras (dd), (ii) (jj) and (kk) of
the proviso to s 10(1)(k)(i))
Employee-based share schemes are schemes whereby employees of a company are allowed to
subscribe for shares in the company. As a general rule, where a person receives an amount in cash
or in kind in respect of or by virtue of services or employment, the amount will be taxed as ordinary
revenue. A number of anti-avoidance measures are put in place to ensure that amounts received that
relate to services or employment are
l not subject to capital gains tax (the normal tax consequences for an employee from acquiring
shares in a company are dealt with in s 8B and 8C (see chapter 8), and
l not exempt from normal tax and only subject to dividends tax.
Dividends in respect of services rendered (par (ii) to the proviso to s 10(1)(k)(i))
Dividends received or accrued as result of services rendered or to be rendered would not be exempt
(therefore taxable as akin to remuneration), unless
l the dividend is received in respect of a restricted equity instrument as defined in s 8C (in such a
case, the taxability of the dividend will be determined under par (dd) of the proviso to
s 10(1)(k)(i)), or
l the share is held by the employee.
(Paragraph (ii) to the proviso to s 10(1)(k)(i).)
Some share schemes hold pure equity shares where the sole intent of the scheme is to generate
dividends for employees as compensation for past or future services rendered to the employer,
without the employees ever obtaining ownership of the shares. The dividend yield in these instances
effectively operates as disguised salary for employees even though these dividends arise from equity
shares. These dividends will not be exempt, unless they fall under one of the above exceptions.
Dividends in respect of restricted equity instruments (par (dd) of the proviso to s 10(1)(k)(i))
A restricted equity instrument is an instrument with a number of restrictions imposed on it. The reten-
tion or acquisition by a scheme beneficiary of the benefits flowing from the scheme, for example
dividends, is subject to suspensive or resolutive terms or conditions. These benefits are dependent,
in essence, on continued employment or the rendering of services for a specified period.
80
Section 8C provides for the normal tax consequences of the vesting of restricted equity instruments
acquired by a person by virtue of his employment or office of director of a company or from a person
by arrangement with such employer (this section is discussed in detail in chapter 8).
Dividends from restricted equity instruments forming part of employee share schemes are taxable as
ordinary revenue unless the dividend falls into one of the following three exceptions:
l the restricted equity instrument is an equity share (other than an equity share that would have
been a hybrid equity instrument as defined in s 8E but for the three-year period requirement in
s 8E (see chapter 16)), or
l the dividend is an equity instrument as defined in s 8C, or
l the restricted equity instrument is an interest in a trust. Where the trust holds shares, all those
shares must be equity shares (other than an equity share that would have been hybrid equity in-
struments as defined in s 8E but for the three-year period requirement in s 8E (see chapter 16)).
(Paragraph (dd) of the proviso to s 10(1)(k)(i).)
In effect, the exemption from normal tax of dividends from restricted equity instruments forming part
of share incentive schemes will be respected if the underlying shares have pure equity features (for
example, stem from ordinary shares as opposed to preference shares).
Example 5.5. Dividends received in respect of a restricted equity instrument.

AMC Holdings (Pty) Ltd (‘AMC Holdings’) has given some of its employees and directors the
option to buy equity shares in the company at a value less than its market value on condition that
the shares may not be disposed of within three years of acquisition (the shares are therefore
restricted equity instruments as defined in s 8C during this three-year period).
Ajit Koosal, one of AMC Holdings’ directors, exercised this option and acquired 5 000 equity
shares in AMC Holdings on 1 March 2016. Ajit received a dividend of R100 000 on 28 February
2018 in respect of these shares.
Will the dividend be exempt from normal tax in respect of Ajit’s 2018 year of assessment?
SOLUTION
The dividend is included in Ajit’s gross income in terms of par (k) of the
definition of ‘gross income’ .................................................................................... R100 000
The dividend is exempt in terms of section 10(1)(k)(i)(dd). Although the
dividend is paid in respect of a restricted equity instrument as defined in s 8C,
the restricted equity instrument is an equity share (and not a hybrid equity
instrument as defined in s 8E). The dividend is therefore exempt. ........................ (100 000)
Rnil
Dividends liquidating the underlying value of shares (paras (jj) and (kk) of the proviso to s 10(1)(k)(i))
Dividends in respect of restricted equity instruments acquired by virtue of a person’s employment or
office of director of a company will not be exempt if the value of the underlying shares is liquidated in
full or in part by means of a distribution before the restrictions on the shares fall away. As an anti-
avoidance measure, the dividend exemption will not apply where the dividend constitutes
l an amount transferred or applied by a company as consideration for the acquisition or redemp-
tion of any share in that company
l an amount received or accrued in anticipation of, or in the course of the winding up, liquidation,
deregistration or final termination of a company, or
l an equity instrument that does not qualify as a restricted equity instrument as defined in s 8C at
the time of receipt or accrual of the dividend (s 10(1)(k)(i)(jj))
Dividends received in respect of such restricted equity instruments will also not be exempt if the
dividend is derived directly or indirectly from
l an amount transferred or applied by a company as consideration for the acquisition or redemp-
tion of any share in that company, or
l an amount received or accrued in anticipation of, or in the course of the winding up, liquidation,
deregistration or final termination of a company (s 10(1)(k)(i)(kk)).
Subparagraphs (jj) and (kk) overrides the provisions of par (dd) and (ii) of the proviso to s
10(1)(k)(i)).)
81
5.3.4 Dividends received by a company in consequence of a cession (par (ee) of the

proviso to s 10(1)( k)(i))
A person may cede his right to dividends to another person before or after the declaration of divi-
dends. In terms of such cession, the cedent transfers his right to dividends to the cessionary. The
cessionary would typically pay an amount to the cedent for this right. Where a company receives a
dividend in consequence of a cession (i.e. the company is the cessionary), the dividend is not ex-
empt. This paragraph aims to deny the dividend exemption where the recipient of the dividend is a
company but does not hold the underlying share.
The dividend will, however, be exempt where the dividend is received in consequence of a cession
where the result of the cession is that the company holds all the rights attaching to a share. The only
case where the exemption will not apply is where the company receives dividends in consequence of
a cession without acquiring the underlying share.
5.3.5 Dividends received by a company in consequence of the exercise of a discretionary

power by a trustee (par (ee) of the proviso to s 10(1)(k)(i))
Paragraph (ee) of the proviso to s 10(1)(k)(i) provides that a dividend received by a company in
consequence of the cession of a right to that dividend or in consequence of the exercise of a discre-
tionary power by a trustee of a trust, will not qualify for the dividend exemption. This paragraph aims
to deny the dividend exemption where the recipient of the dividend is a company but does not hold
the underlying share.
The dividend will, however, be exempt where the dividend is received in consequence of the exer-
cise of a discretionary power resulting in the company holding all the rights attaching to a share.
5.3.6 Dividends received in respect of borrowed shares (paras (ff) and (gg) of the proviso
to s 10(1)( k)(i))
Securities lending refers to the practice by which securities (i.e. shares) are transferred temporarily
from one party (the lender) to another (the borrower) with the borrower obliged to return them (or
equivalent securities) either on demand or at the end of any agreed term. The terms of such loan will
be governed by a securities lending agreement. As payment for the loan, the parties negotiate a fee
(a securities lending fee), generally quoted as an annualised percentage of the value of the borrowed
shares.
When a share is borrowed, the title of the share transfers to the borrower. The borrower therefore
becomes the full legal and beneficial owner of the share. An amount equal to the dividends declared
in respect of the borrowed shares is normally paid by the borrower to the lender. This amount is
referred to as a manufactured dividend and will be deductible under s 11(a) since it is an amount
incurred by the borrower in generating taxable income.
Remember
The most common reason for borrowing a security is to cover a short position. Short selling is the
practice of selling shares or other financial instruments, with the intention of subsequently repur-
chasing them at a lower price. In the event of an interim price decline, the short seller will profit,
since the cost of repurchase will be less than the proceeds received upon the initial sale. The short
seller is obliged to deliver the shares upon the initial sale and for this reason borrows the shares.
When the shares are repurchased, the borrower returns the equivalent shares to the lender.
Where a company receives a dividend in respect of a borrowed share held by the company, the
dividend does not qualify for the dividend exemption (s 10(1)(k)(i)(ff)).
Where a company receives dividends in respect of shares that are identical to the shares borrowed
by the company, an amount equal to the manufactured dividend does not qualify for the dividend
exemption (s 10(1)(k)(i)(gg)), except if a dividend in respect of a borrowed share accrued to the
company and was not exempt under s 10(1)(k)(i)(ff). An identical share is a share of the same class
in the same company as the share (definition of ‘identical share’ in s 1).
With effect from 1 January 2017, an identical share also includes a share that is
substituted for a listed share in terms of an arrangement that is announced and
Please note! released as a corporate action, as contemplated in the JSE Limited Listing
Requirements in the SENS (Stock Exchange News Service) (par (b) of the
definition of ‘identical security’).
82
Where the company loaned any other share that is identical to the borrowed shares, the aggregate
amount incurred as compensation for any distributions in respect of the borrowed shares must be
reduced by the aggregate amount accrued to the company as compensation for any distributions in
respect of the loaned shares (s 10(1)(k)(i)(gg)).
5.3.7 Dividends applied against deductible financial payments (par (hh) of the proviso
to s 10(1)(k)(i))
Dividends received will not be exempt if used as an offset against a deductible payment. Financial
intermediary companies sometimes receive dividends that are applied to offset deductible payments
in respect of share derivatives (such as stock futures, contracts-for-difference and total return
swaps). In these cases, a mismatch is created if the dividend received is exempt and the payment
made in respect of the derivative is deductible. A proviso to this subparagraph ensures that the
subparagraph only denies an exemption to the extent that the dividend exceeds the expenditure.
An identical share is a share of the same class in the same company as the share (definition of ‘iden-
tical share’ in s 1).
An identical share also includes a share that is substituted for a listed share in
terms of an arrangement that is announced and released as a corporate action,
Please note!
as contemplated in the JSE Limited Listing Requirements in the SENS (Stock
Exchange News Service) (par (b) of the definition of ‘identical security’).
5.3.8 Foreign dividends and dividends paid by headquarter companies (s 10B)

Foreign dividends and dividends declared by headquarter companies are exempt from normal tax
under certain circumstances.
Foreign dividend
A foreign dividend is an amount paid by a foreign company in respect of a share in that foreign
company. A foreign company is any company that is not a resident. In order for the amount to qualify
as a foreign dividend, the amount must be treated as a dividend or similar payment for purposes of
the laws relating to tax on income on companies of the country in which the foreign company has its
place of effective management (if that country does not have any applicable laws relating to tax on
income, the amount must be treated as a dividend for purposes of the laws relating to companies in
that country). An amount does not qualify as a foreign dividend if it constitutes a redemption of a
participatory interest in a foreign collective investment scheme, or if it constitutes a share in the
foreign company (definition of ‘foreign dividend’ in s 1).
Dividend declared by headquarter company

A headquarter company is a resident company that complies with the following requirements:
l each of the shareholders of the company must hold at least 10% of the equity shares of the
company
l more than 80% of the company’s assets must be attributable to an interest in the equity shares of
a foreign company (or debt owed to, or intellectual property licensed to a foreign company
l the company must hold at least 10% of the equity shares of such foreign companies, and
l where the gross income of the company exceeds R5 million, more than 50% of its gross income
must consist of rental, dividend, interest, royalties or service fees paid by such foreign company
(or from the proceeds of the disposal of equity shares in a foreign company, or intellectual prop-
erty licensed to a foreign company).
A headquarter company is effectively treated as a non-resident company for normal tax purposes.
*
Remember
l Although a dividend declared by a headquarter company is effectively a dividend from a
local company, it is excluded from the exemption under s 10(1)(k)(i), but may be exempt un-
der s 10B.
continued
83
l As foreign dividends are not received from sources in South Africa, they are not included in
a non-resident’s gross income. Foreign dividends are therefore only included in a resident’s
gross income.
l It is important to note that it is the gross amount of a foreign dividend, before any withholding
taxes are deducted, that is included in a person’s gross income. Withholding taxes paid by a
South African resident on foreign dividends that are included in the resident’s gross income
may be allowed as a rebate against the resident’s South African normal tax payable. The re-
bate is limited to the resident’s South African normal tax payable on the foreign dividend in-
cluded in gross income (s 6quat; see chapter 21).
l If a foreign dividend is exempt from normal tax, the taxpayer is not entitled to deduct the
foreign withholding taxes paid in respect of the foreign dividend from its South African nor-
mal tax payable (s 6quat(1B); see chapter 19).
l Foreign dividends should be converted into rand by applying the spot rate on the date on
which the dividend is received or accrued. Individuals and non-trading trusts are allowed to
elect to convert the amount into rand by applying the average rate of exchange for the year
of assessment (s 25D; see chapter 15)
In some cases, foreign dividends and dividends declared by headquarter companies may qualify for
a complete exemption, whereas in other cases the dividends are only partially exempt, as set out in
the following diagram:
Foreign dividend
Complete exemption Partial exemption
Dividend Dividend from

Country-to- Ratio
Participation declared on a controlled
country exemption
exemption JSE listed foreign
exemption
shares company
1
Foreign country
Participation exemption (s 10B(2)(a))

If the person receiving the foreign dividend holds at least 10% of Foreign
the total equity shares and voting rights in the company declaring Company
the foreign dividend, the foreign dividend will be exempt. If the re-
cipient of the foreign dividend is a company, the interest that any
=/>10% equity
share interest
Dividend
other company forming part of the same group of companies as the

recipient has in the company declaring the dividend is added to
the recipient’s interest when determining whether the 10% thresh-
South Africa
old is exceeded.
The participation exemption will not apply
Shareholder
l if the amount of the foreign dividend arises from an amount
paid by one person to another, which is deductible from the
income of the person paying the amount, but not subject to normal tax in the hands of the
person receiving the amount (or net income as contemplated in s 9D(2A) in the case of a
controlled foreign company). The same applies if the amount of the dividend is determined
directly or indirectly with reference to such amount paid. This exclusion does not apply if
the amount is paid as consideration for the purchase of trading stock by the person paying
the amount (s 10B(4)(a))
l if the amount is paid by a foreign collective investment scheme (s 10B(4)(b))
l to the extent that the foreign dividend is deductible by the foreign company in determining
any tax on income of companies of the country in which the foreign company has its place
of effective management (proviso to s 10B(2))
84
l if the foreign dividend is received in respect of a share other than an equity share (second
proviso to s 10B(2)), or
l to any portion of an annuity or payment out of a foreign dividend received by or accrued to
any person (s 10B(5)).
Example 5.6. Participation exemption (s 10B(2)(a))
Multo Ltd, a South African resident, holds 15% of the equity shares and voting interest in BTX
Plc, a foreign company (not a controlled foreign company under s 9D). On 10 June 2018 Multo
Ltd received a dividend of R3 million (converted to rand) from BTX Plc.
Calculate Multo Ltd’s taxable income for its year of assessment ending on 31 December 2018.
SOLUTION
Gross income – foreign dividend received ............................................................ R3 000 000
Less: s 10B(2)(a) exemption (> 10% holding) ....................................................... (R3 000 000)
Taxable income ..................................................................................................... Rnil
Notes
l If the foreign dividend payable to Multo Ltd arose from or was determined with reference to
an amount of interest that BTX Plc received from another South African company. The foreign
dividend will as result not be exempt in Multo Ltd’s hands. This will be the case if the interest
was deductible in the hands of the company paying the interest to BTX Plc and not subject to
normal tax in BTX Plc’s hands.
l If the foreign dividend was received in respect of a non-equity share, the participation exemp-
tion under s 10B(2)(a) will not apply.
l If the foreign dividend does not qualify for the participation exemption under s 10B(2)(a), it
may still qualify for the ratio exemption under s 10B(3) (see below).
1 Country-to-country exemption (s 10B(2)(b))

If the foreign dividend is received by a foreign company,
which is a resident in the same country as the person paying
Residents in same
Foreign
foreign country
the dividend, the dividend is exempt. This exemption applies Company A

irrespective of the interest that the recipient company has in
Dividend
the equity shares and voting interest in the company declar-
ing the foreign dividend. Since foreign dividends received by
foreign companies are normally not included in such a foreign
company’s gross income for South African normal tax pur- Foreign
poses (since such dividend will not be from a South African Company B
source), the country-to-country exemption will only have prac-
tical application where the recipient foreign entity is a con-
trolled foreign company. The foreign dividend received by a controlled foreign company will, if
it is not exempt in terms of s 10B(2)(b), be included in the controlled foreign company’s net in-
come in terms of s 9D(2A) and consequently in the resident shareholder’s income in terms of s
9D(2).
This exemption will, however, not apply
l if the amount of the foreign dividend arises from an amount paid by one person to another,
which is deductible from the income of the person paying the amount, but not subject to
normal tax in the hands of the person receiving the amount (or net income as contemplated
in s 9D(2A) in the case of a controlled foreign company). The same applies if the amount of
the dividend is determined directly or indirectly with reference to such amount paid. This
exclusion does not apply if the amount is paid as consideration for the purchase of trading
stock by the person paying the amount (s 10B(4)(a));
l where the amount is paid by a foreign collective investment scheme (s 10B(4)(b))
l to the extent that the foreign dividend is deductible by the foreign company in determining
any tax on income on companies of the country in which the foreign company has it place
of effective management (proviso to s 10B(2)), or
l to any portion of an annuity or payment out of a foreign dividend (s 10B(5)).
85
1 Controlled foreign company exemption (s 10B(2)(c))

If a resident receives a foreign dividend, it will be exempt to the
CFC
extent that the income of the foreign company declaring the divi- Foreign
dend was included in the resident’s income in terms of s 9D. Company
Dividend
Section 9D(2) includes a proportionate amount of a controlled
foreign company’s (CFC’s) net income in the income of a resident
shareholder. The exemption of this foreign dividend prevents the
double taxation of the same profits, both in terms of s 9D and
again when the profits are distributed as a dividend (section 9D Resident
is discussed in detail in chapter 21).
The controlled foreign company exemption is limited to the following calculation:
The aggregate of the net income of the CFC that is included in the resident’s income in
terms of s 9D (without having regard to the ratio exemption under s 10B(3)) .................... Rx
Add: The aggregate of the net income of any other company which has been
included in the resident’s income in terms of s 9D by virtue of the resident’s
participation rights in the other company held indirectly through the compa-
ny declaring the dividend (without having regard to the ratio exemption un-
der s 10B(3)) ...................................................................................................... Rx
Less: The aggregate amount of foreign tax paid in respect of amounts so included
in the resident’s income ..................................................................................... (Rx)
Less: The aggregate amount of foreign dividends that the resident received from
the above two companies that were exempt in terms of s 10B(2)(a),
10B(2)(b) or (2)(d) .............................................................................................. (Rx)
Less: The aggregate amount of foreign dividends that the resident received from
the above two companies that were not included in the resident’s income
because of a prior inclusion in terms of s 9D (in other words, a dividend that
previously qualified for a s 10(1)(k)(ii)(cc) or a s 10B(2)(c) exemption)............ (Rx)
Dividend exemption in terms of s 10B(2)(c).................................................................. Rx
This exemption will not apply to any portion of an annuity or payment out of a foreign dividend
(s 10B(5)).
Example 5.7. Controlled foreign company exemption (s 10B(2)(c))
Thebogo Baroka (a resident) holds 8% of the equity shares of French Cuisine Ltd (‘French Cui-
sine’) (a controlled foreign company).
During French Cuisine’s year of assessment ending on 28 February 2018, its net income (as
contemplated in s 9D) was R10 million; it paid foreign tax of R2,5 million; and distributed divi-
dends of R2 million to its shareholders.
During French Cuisine’s year of assessment ending on 28 February 2019, its net income (as
contemplated in s 9D) was R2 million; it paid foreign tax of R500 000; and distributed dividends
of R5 million to its shareholders.
What is the effect of the above on Thebogo Baroka’s taxable income for his 2018 and 2019 years
of assessment?
SOLUTION
Thebogo Baroka’s 2018 year of assessment:
Net income imputed in terms of s 9D(2) (R10 000 000 × 8%) .................................. R800 000
Foreign dividend (R2 000 000 × 8%) ........................................................................ 160 000
Less: s 10B(2)(c) exemption: R160 000 foreign dividend limited to:
Aggregate net income imputed in terms of s 9D(2) ............... R800 000
Less: Aggregate foreign tax paid (R2 500 000 × 8%) ............ (200 000)
R600 000
The s 10B(2)(c) exemption is limited to R600 000. Since the foreign divi-
dend was only R160 000, the entire amount is exempt ................................... (160 000)
Taxable income ........................................................................................................ R800 000
continued
86
Thebogo Baroka’s 2019 year of assessment:

Net income imputed in terms of s 9D(2) (R2 000 000 × 8%) .................................... R160 000
Foreign dividend (R5 000 000 × 8%) ........................................................................ 400 000
Less: s 10B(2)(c) exemption: R400 000 foreign dividend limited to:
Aggregate net income imputed in terms of s 9D(2)
(R800 000 in respect of 2018 + R160 000 in respect of 2019) R960 000
Less: Aggregate foreign tax paid (R200 000 in respect of
2018 + R40 000 (R500 000 × 8%) in respect of 2019)........... (240 000)
Less: Aggregate amount of foreign dividends previously not
included in income by reason of a prior inclusion under s 9D (160 000)
R560 000
The s 10B(2)(c) exemption is limited to R560 000. Since the foreign divi-
dend was only R400 000, the entire amount is exempt. .............................. (400 000)
Taxable income ........................................................................................................ R160 000
1 Dividends declared in respect of JSE-listed shares (ss 10B(2)(d) and 10B(2)(e))

If the company declaring the foreign dividend is listed on the JSE, the dividend will be exempt
from normal tax. The exemption applies only if the dividend does not consist of a distribution of
an asset in specie. However, if a foreign dividend in the form of an in specie distribution is re-
ceived in respect of a JSE listed share by a resident company, the foreign dividend will be ex-
empt (s 10B(2)(e)).
This exemption will not apply to any payment out of a foreign dividend received by or accrued
to any person (s 10B(5)).
Remember
Because dividends declared in respect of listed shares are subject to dividends tax, they are
exempt from normal tax.
1 Ratio exemption (s 10B(3))

A foreign dividend may qualify for the ratio exemption to the extent that it does not qualify for
the above exemptions (meaning the participation exemption, country-to-country exemption,
controlled foreign company exemption or JSE-listed share exemption). This exemption is calcu-
lated in terms of the formula
A=B×C
‘A’ represents the amount to be exempted for a specific year of assessment.
‘B’ represents
l the ratio of 25/40 if the person receiving the dividend is a natural person, deceased or
insolvent estate or a trust
l the ratio of 13/28 where the person receiving the dividend is a person other than a natural
person, deceased or insolvent estate or a trust (thus also companies), or is an insurer in re-
spect of its company policyholder fund, corporate fund or risk policy fund, or
l the ratio of 15/30 where the person receiving the dividend is an insurer in respect of its
individual policyholder fund.
‘C’ represents the aggregate of all foreign dividends that the person received during the year of
assessment that did not qualify for the above exemptions.
This exemption will not apply to any portion of an annuity or any payment out of a foreign divi-
dend (s 10B(5)).
87
Example 5.8. Ratio exemption (s 10B(3))
FinCon Holdings (Pty) Ltd (‘FinCon’), a South African resident, received the following dividends
paid by non-resident companies during its 2018 year of assessment ending on 31 December
2018:
l A dividend of R200 000 from XLN Plc, a company resident in the UK. FinCon holds 5% of
XLN’s total equity shares and voting interest. XLN Plc is not a controlled foreign company.
l A dividend of R280 000 from ABL Ltd, a company resident in Ireland. FinCon holds 6% of
ABL Ltd’s total equity shares and voting interest. ABProp (Pty) Ltd, a company forming part of
the same group of companies as FinCon holds 5% of ABL’s total equity shares and voting in-
terest. ABL Ltd is not a controlled foreign company.
l A dividend of R650 000 from DMA Ltd, a company resident in the Netherlands. FinCon holds
15% of DMA Ltd’s total equity shares and voting interest. The dividend declared by DMA Ltd
was allowed as a deduction when calculating DMA Ltd’s income tax liability in the Nether-
lands. DMA Ltd is not a controlled foreign company.
l A dividend of R800 000 from BDS Ltd, a company resident in China. FinCon holds 5% of BDS
Ltd’s total equity shares and voting interest. BDS Ltd is a controlled foreign company and
R300 000 of the dividend qualifies for an exemption under s 10B(2)(c).
Calculate FinCon’s taxable income for its 2018 year of assessment.
SOLUTION
Gross income
The dividends received qualify as foreign dividends since they are paid by non-resident com-
panies; the foreign dividends are included in gross income in terms of par (k) of the definition of
‘gross income’:
l Foreign dividend received from XLN Plc.............................................................. R200 000
l Foreign dividend received from ABL Ltd 280 000
l Foreign dividend received from DMA Ltd ............................................................ 650 000
l Foreign dividend received from BDS Ltd ............................................................. 800 000
Exemptions
l Foreign dividend received from XLN Plc – the foreign dividend is not exempt
under s 10B(2) since FinCon holds less than 10% of XLN Plc total equity
shares and voting interest. ................................................................................... nil
l Foreign dividend received from ABL Ltd – the foreign dividend is exempt under
s 10B(2)(a), since FinCon together with a company forming part of the same
group of companies holds more than 10% of ABL Ltd’ total equity shares and
voting interest. ...................................................................................................... (280 000)
l A foreign dividend received from DMA Ltd – since a deduction was allowed
when calculating DMA Ltd’s income tax liability in the Netherlands, it does not
qualify for a participation exemption (s 10B(2)(a)). .............................................. nil
l Foreign dividend received from BDS Ltd – an amount of R300 000 qualifies for
an exemption under s 10B(2)(c) .......................................................................... (300 000)
Ratio exemption:
Foreign dividends not exempt:
Foreign dividend from XLN Plc ................................................................ R200 000
Amount received from DMA Ltd .............................................................. 650 000
Foreign dividend received from BDS Ltd (R800 000 – R300 000) ........... 500 000
R1 350 000
Ratio exemption (13/28 × R1 350 000) ..................................................................... (626 786)
Taxable income ........................................................................................................... R723 214
Anti-avoidance provisions relating to share schemes (s 10B(6))

Certain measures are put in place to prevent taxpayers from converting taxable salary into exempt
(or low taxed) dividends. Many share schemes hold pure equity shares where the sole intent of the
scheme is to generate dividends for employees as compensation for past or future services rendered
to the employer, without the employees ever obtaining ownership of the shares. The dividend yield in
these instances effectively operates as disguised salary for employees even though these dividends
arise from equity shares.
88
Where a foreign dividend is received or accrued in respect of services rendered or to be rendered or

in respect of or by virtue of employment or the holding of any office, the above exemptions under
s 10B(2) and 10B(3) will not apply, unless
l the share is held by the employee, or
l the foreign dividend is received in respect of a restricted equity instrument as defined in s 8C
held by the employee. A foreign dividend received in respect of a restricted equity instrument will
not be exempt if the shares were acquired in the circumstances contemplated in s 8C and the
dividend is derived directly or indirectly from, or constitutes:
– an amount transferred or applied by a company as consideration for the acquisition or re-
demption of any share in that company
– an amount received or accrued in anticipation or in the course of the winding up, liquidation,
– an equity instrument that does not qualify, at the time of receipt or accrual of the foreign divi-
dend, as a restricted equity instrument as defined in s 8C.
5.4 Exemptions relating to employment
5.4.1 Foreign pensions (s 10(1)(gC))

Any foreign pension, whether it is a government pension or a non-government pension, will be in-
cluded in the gross income of a resident. Certain foreign pensions are, however, exempt from normal
tax, such as
l amounts received by or accrued to any resident from the social security system of any other
country (s 10(1)(gC)(i)), and
l any lump sum, pension or annuity that a resident receives from a source outside South Africa as
compensation for past employment outside South Africa (s 10(1)(gC)(ii)). The exemption from
normal tax is limited to amounts received from foreign funds. Amounts received from any South
African pension fund, pension preservation fund, provident fund, provident preservation fund or
retirement annuity fund do not qualify for the exemption. These funds are all defined in s 1, and
effectively refer to South African funds. Amounts received from a South African long-term insurer
will, with effect from 1 March 2018, also not qualify for this exemption. Amounts transferred to a
South African fund or long-term insurer from a source outside South Africa in respect of a specific
member, will qualify for the exemption.
A pension, annuity, or lump sum is deemed to be received from a source within South Africa if the
services in respect of which the amount relates were rendered within South Africa (s 9(2)(i); see
chapter 3). Where such amount relates to services that were rendered partly in South Africa and
partly outside South Africa, the portion of the amount that is regarded as from a source within South
Africa, is calculated in terms of the following formula:
The period during which the services
Amount received / accrued from Total amount were rendered in South Africa
= ×
a source within South Africa received / accrued The total period during which
the services were rendered
Example 5.9. Foreign pensions
Lerato is a South African resident. From 1 March 2017 she received R7 000 per month from a
foreign pension fund with regard to services rendered to a foreign company from 1 March 1980
until her retirement in February 2017.
She rendered services at the following times in the following places:
1 March 1980 – 28 February 1988 in Amsterdam (8 years)
1 March 1988 – 28 February 1991 in Bloemfontein (3 years)
Explain the South African normal tax implications of Lerato’s pension in respect of her 2018 year
of assessment.
89
SOLUTION
Gross income
Pension received (R7 000 × 12) (since Lerato is a resident, her worldwide income is
included in her gross income ....................................................................................... 84 000
Less: Pension exempt in terms of s 10(1)(gC) (R4 351,35 × 12) (note 1)..................... (52 216,20)
Income .......................................................................................................................... 31 783,80
Note 1
The portion of Lerato’s pension that is received from a source outside South Africa, is exempt in
terms of s 10(1)(gC). Since the services to which the pension relates were rendered partly in
South Africa and partly outside South Africa, a portion of Lerato’s pension will be regarded as
being from a source outside South Africa and exempt in terms of s 10(1)(gC). This portion is
calculated as follows:
The total period during which the services were rendered........................................... 37 years
The period during which the services were rendered in South Africa .......................... 14 years
Portion of monthly pension regarded from a source within South Africa
(R7 000 × 14/37) ........................................................................................................... R2 648,65
Portion of monthly pension exempt in terms of s 10(1)(gC) (R7 000 – R2 648,65) ....... R4 351,35
Note 2
If instead of receiving a pension from a foreign pension fund, Lerato invested in a living annuity
from a South African resident life insurance company (that is a long-term insurer), the capital
portion of the annuity that she received during the months of March 2017 to February 2018 would
be exempt under s 10A (see 5.2.4) and the deemed foreign-sourced portion of the non-capital
portion of the annuity would be exempt under s 10(1)(gC)(ii). However, with effect from 1 March
2018, the non-capital portion will no longer be exempt under s 10(1)(gC)(ii) since the long-term
insurer is a South African resident life insurance company.
5.4.2 Unemployment insurance benefits (s 10(1)(mB))

Any benefit or allowance payable in terms of the Unemployment Insurance Act 63 of 2001 is exempt
from normal tax.
5.4.3 Uniforms and uniform allowances (s 10(1)(nA))

Benefits granted by an employer to an employee could be taxable in the employee’s hands. The
cash equivalent of certain benefits is specifically included in an employee’s gross income (par (i) of
the definition of gross income). Therefore, if an employer supplies an employee with a special uni-
form, the cash equivalent of the uniform will be included in the gross income of the employee. The
value of certain uniforms are, however, exempt from normal tax (s 10(1)(nA)). For the exemption to
apply, the uniform should be clearly distinguishable from ordinary clothing, and the employee should
be required to wear the uniform while on duty. The exemption equally applies to any allowance that
the employer pays to the employee instead of giving the employee a uniform. The allowance must be
reasonable in all instances.
5.4.4 Relocation benefits (s 10(1)(nB))

Where an employer transfers an employee from one place of employment to another place of em-
ployment and pays the employee’s relocation cost, the benefit that accrues to the employee will be
exempt from normal tax (s 10(1)(nB)). Similarly, where an employer pays for the relocation cost of a
person who is appointed as an employee, or the termination of an employee’s employment, the
benefit accruing to the employee will be exempt from normal tax. The exemption applies to the follow-
ing expenses borne by the employer:
l the expense of transporting the employee, members of his household and their personal goods
and possessions from his previous place of residence to his new place of residence
l those costs that have been incurred by the employee in respect of the sale of his previous resi-
dence and in settling-in at his new permanent place of residence
l the expense of hiring residential accommodation in a hotel or elsewhere for the employee or
members of his household for a maximum period of 183 days after his transfer took effect or after
he took up his appointment. The rented accommodation must be temporary while the employee
is in search of permanent residential accommodation.
90
The employer must have borne these expenses, that is, he must either have incurred them himself or
have reimbursed his employee.
In practice, SARS allows the exemption for the reimbursement of the expenditure incurred by the
employee on the following:
l new school uniforms
l the replacement of curtains
l the registration of a mortgage bond and legal fees
l transfer duty
l motor-vehicle registration fees
l telephone, water and electricity connection
l the cancellation of a mortgage bond, and
l an agent’s fee on the sale of the employee’s previous residence.
It will not accept a loss incurred by the employee on the sale of his previous residence or an architect’s
fees for the design or alteration of a residence.
l Only actual expenses incurred by the employer, or reimbursed by the em-

ployer, qualify for the exemption. Where an employer pays an allowance to
an employee, such as a relocation allowance equal to a number of months’
salary, the allowance will be fully taxable in the employee’s hands if the pur-
pose is not to reimburse the employee for actual relocation expenses in-
Please note!
curred.
l The exemption is not subject to a monetary limitation. As long as the expense
is actually incurred (either by the employer, or the employee who is then re-
imbursed by the employer for the expense), the benefit that accrues to the
employee is exempt from normal tax.
5.4.5 Broad-based employee share plan (s 10(1)(nC))

Employee share incentive schemes are ordinarily implemented by employer companies in order to
incentivise and retain employees, and for such employees to receive indirect benefits from the ap-
preciation in the growth of such company. Where an employer company gives an employee shares in
the company, a tax implication will generally arise for the employee. However, shares received in
terms of a broad-based employee share plan are exempt from normal tax until the employee dispos-
es of such shares (s 10(1)(nC)). The exemption is effectively limited to shares received with a market
value of R50 000 over a five-year period. The normal tax consequences for employees receiving
shares in terms of a broad-based employee share plan are provided for in s 8B (see chapter 7).
See also Interpretation Note No 62 (30 March 2011) that deals with the taxation of broad-based
employee share plans.
5.4.6 ‘Stop-loss’ provision for share-incentive schemes (s 10(1)(nE))

As mentioned above, employee share-incentive schemes are designed to incentivise and retain
employees. It may, however, happen that the value of the employer company shares decline, which
could result in a loss for the employee. Amounts received by a person under these circumstances
may be exempt from normal tax (s 10(1)(nE)). This exemption is referred to as a stop-loss provision,
and applies in the following circumstances:
l where a person receives an amount when the transaction in terms of which the person acquired
the shares is cancelled, or
l where the shares are repurchased from the employee at a price not exceeding the original pur-
chase price.
The above exemption only applies if the taxpayer has not received or become entitled to any consid-
eration or compensation other than the repayment of the original purchase price.
The exemption does not apply in respect of equity instruments in respect of which s 8C applies (see
chapter 7).
91
5.4.7 Equity instruments awarded to employees or directors (s 10(1)(nD))

An employer could also issue equity instruments, which are not in terms of a broad-based employee
share plan, to employees (5.4.5), for example when shares are only awarded to certain employees
and not to at least 80% of permanent employees. An employer could award shares to an employee
subject to a condition that the share only vests in the employee after a period of time, or after certain
conditions are met. An employer would normally do this to incentivise retention of key employees, or
to award employees for specific performance. Where an employer gives shares to an employee,
which do not vest in the employee at the time of acquisition, the amount accruing to the employee will
be exempt from normal tax in the employee’s hands (s 10(1)(nD)(i)).
This exemption will apply regarding equity shares that the person receives by virtue of his employ-
ment, or because the person is a director of the company, or in respect of equity shares received
from any other person by arrangement with the person's employer.
Where the person disposes of such shares before they vest in his or her hands, the amount received
will similarly be exempt from normal tax (s 10(1)(nD)(ii)).
Although the benefit that accrues to a person when he or she receives the above shares is exempt
from normal tax, the shares may have tax implications for the person at the time when the shares vest
in the person (that is when the restrictions imposed on the share are lifted). Section 8C determines
the amount that should be included in or deducted from the person’s income at the time when the
shares vest in the person’s hands (see chapter 7).
Also see Interpretation Note No 55 (30 March 2011) that deals with the taxation of directors and
employees on the vesting of equity instruments.
5.4.8 Salaries paid to an officer or crew member of a ship (ss 10(1)(o)(i) and (iA))
The remuneration of a person earned as an officer or crew member of a ship is exempt from normal
tax if the person was outside South Africa for a period or periods exceeding 183 full days in aggre-
gate during the year of assessment. The remuneration referred to here is remuneration as defined in
par 1 of the Fourth Schedule. This exemption only applies if
l the ship is engaged in the international transport of passengers or goods, or
l the ship is engaged in prospecting, exploration or mining for, or production of, any minerals
(including natural oils) from the seabed outside South Africa, or
l the ship is a South African ship engaged in international shipping (as defined in s 12Q), or in
fishing outside South Africa.
In the case of a South African ship engaged in international shipping or in fishing outside South
Africa, the requirement that the person should be outside South Africa for a period or periods ex-
ceeding 183 days in aggregate, does not apply. The remuneration received by an officer or crew
member on such ship is exempt from normal tax regardless of the period that the person was outside
South Africa.
5.4.9 Employment: Outside South Africa (s 10(1)(o)(ii))

The remuneration received by an employee for services rendered outside South Africa, for or on
behalf of any employer, is exempt from normal tax under certain circumstances (s 10(1)(o)(ii)).
The exemption applies to any salary, leave pay, wage, overtime pay, bonus, gratuity, commission,
fee, emolument or allowance. The exemption also applies to any fringe benefit (under the Seventh
Schedule, included in gross income by par (i) of the definition in s 1) and amounts under s 8 (allow-
ances), 8B (broad-based employee share plans) and 8C (restricted equity shares).
The exemption only applies if
l the employee was outside South Africa for more than 183 full days in total during any period of
12 months
l the period outside South Africa includes a continuous period of absence of more than 60 full days
during that period of 12 months
l the services were rendered during the period of absence from South Africa
l the services were rendered for or on behalf of an employer, who can be situated in or outside
South Africa, and
92
l with effect from 1 March 2020 the exemption will only apply to the extent that the person’s remu-
neration for services rendered outside South Africa does not exceed R1 000 000 in respect of a
year of assessment.
Where a person is in transit through South Africa between two places outside South Africa and does
not formally enter South Africa through a designated port of entry, the person is deemed to be out-
side of South Africa for purposes of this exemption (proviso (A) to s 10(1)(o)(ii)).
Where an employee receives remuneration during a year of assessment which relates to services that
the employee rendered in more than one year of assessment, the remuneration is deemed to have
accrued to the employee over the period that the services were rendered (proviso (C) to
s 10(1)(o)(ii)). This is relevant, for example, where an employee becomes entitled to benefits under
share incentive schemes. Where an employee receives a taxable amount in relation to such scheme,
the amount is deemed to have accrued to the employee over the period that the services were ren-
dered. The portion of the amount that is allocated to years of assessment for which the taxpayer
complied with the requirements of s 10(1)(o)(ii) will be exempt from normal tax.
This exemption is not applicable to remuneration
l derived from the holding of any public office to which the person was appointed in terms of an
Act of Parliament, or
l received in respect of services rendered or work or labour performed of an employer
– in the national, provincial or local sphere of government of South Africa
– that is a constitutional institution listed in Schedule 1 of the Public Finance Management Act,
1 of 1999
– that is a public entity listed in Schedule 2 of the Public Finance Management Act, 1 of 1999,
or
– that is a municipal entity as defined in s 1 of the Local Government: Municipal Systems Act,
32 of 2000.
(Proviso (B) to s 10(1)(o)(ii))
l In calculating the number of days during which a person is outside South

Africa, weekends, public holidays, vacation leave and sick leave spent out-
side South Africa are considered to be part of the days during which ser-
vices are rendered. These should therefore be included in the calculation of
the 183-day and 60-day periods of absence (Interpretation Note No 16 (27
March 2003)).
Please note! l The 12-month period need not correspond with a financial or tax year – in
other words, any 12-month period may be used to establish whether the per-
son was outside South Africa for more than 183 days (the services which
generated the exempt income should, however, have been rendered during
that period).
l This exemption applies only to the normal tax on the person’s remuneration.
It does not extend to other income earned by the taxpayer during his ab-
sence, nor does it extend to other taxes (for example the Skills Development
L bl ti )
Example 5.10. Foreign employment income
Karabo is a resident who conducts a business as a sole proprietor.

l During the 2018 year of assessment he was awarded a contract to construct a building in Ni-
geria. The construction of the building will take nine months to complete. Karabo will not be re-
turning to South Africa any time during these nine months (not even over weekends).
l 15 of his employees are going to render services on the site in Nigeria. These employees are
all South African residents.
– Eight have agreed not to return to South Africa during the nine-month period.
– Seven have agreed only to work on the contract if they can return to South Africa during
the last weekend of every month in order to visit their families.
continued
93
Explain the tax implications for:

(a) Karabo
(b) The eight employees that do not return to South Africa
(c) The seven employees that return to South Africa once a month.
Assume for purpose of this example that there is no double tax agreement between South Africa
and Nigeria.
SOLUTION
(a) Because Karabo is a resident, he will be taxed on his worldwide receipts and accruals. As
he is not an employee, he will be taxed on the profit of the contract. The s 10(1)(o)(ii) ex-
emption is not available to him.
(b) Because the eight employees comply with the requirements of s 10(1)(o)(ii), they qualify for
the exemption and will not be taxed in South Africa on the salary which they earn during the
period that they work in Nigeria.
(c) The seven employees who return to South Africa once a month do not qualify for the
s 10(1)(o)(ii) exemption. They do not comply with the requirements to be outside of South Af-
rica for more than 183 full days, of which 60 days must be continuous during the period of
12 months. They will thus be taxed in South Africa on the salary which they earn while working
in Nigeria.
5.5 Exemptions that incentives education
5.5.1 Bursaries and scholarships (s 10(1)(q) and (qB))

Any bona fide scholarship or bursary granted to enable or assist any person to study at a recognised
educational or research institution is exempt from normal tax (s 10(1)(q)). The following requirements
must be met for a bursary or scholarship to qualify for this exemption:
l The scholarship or bursary must be a bona fide scholarship or bursary.
l It must be granted to enable or assist a person to study.
l The person must study at a recognised educational or research institution.
l Where a bursary is awarded to an employee or a relative of an employee, further requirements
apply, which are discussed below.
With effect from 1 March 2018, a specific provision exempts bona fide scholarships or bursaries
granted to enable or assist any person who is a person with a disability to study at a recognised
educational or research institution (s 10(1)(qB)). The requirements for this exemption are the same as
under s 10(1)(q) discussed above. ‘Disability’ is defined in s 6B and is discussed in chapter 7. Prior
to 1 March 2018, bona fide scholarships or bursaries granted to enable or assist any person who is a
person with a disability qualified for an exemption under s 10(1)(q). The only difference brought
about by s 10(1)(qB) is that bursaries granted to an employee or a relative of an employee are sub-
ject to a higher threshold (see below).
Scholarships or bursaries to non-employees

These scholarships or bursaries are exempt from normal tax. They refer to scholarships or bursaries
that are competed for by, or are awarded on merit (academic or otherwise) to anyone applying for
them and are not, to any extent, confined to the employees or relatives of employees of a particular
employer, organisation or other institution.
Scholarships or bursaries granted by an employer to an employee

A bursary or scholarship granted by an employer to an employee is exempt from normal tax as long
as the employee agrees to reimburse the employer if he or she fails to complete his or her studies
(except if failure to complete occurs as a result of death, ill-health or injury) (s 10(1)(q) and in respect
of an employee who is a person with a disability, s 10(1)(qB)).
Scholarships or bursaries granted by an employer to relatives of an employee
Where a scholarship or bursary is granted by an employer to enable a relative of an employee to
study at a recognised educational or research institution, the amount will be exempt from normal tax
if the following conditions are met:
94
l The remuneration proxy (see below) of the employee in relation to a year of assessment may not
exceed R600 000.
l The amount of any scholarship or bursary awarded to a relative during the year of assessment
that is exempt, is limited to the following:
– R20 000 in respect of grades R to 12,
– R20 000 in respect of a qualification to which an NQF level from 1 up to and including 4 has
been allocated in accordance with Chapter 2 of the National Qualifications Framework Act,
2008, and
been allocated in accordance with Chapter 2 of the above Act.
The amounts mentioned above apply in respect of the 2018 year of assessment
for a natural person. For the 2017 year the maximum remuneration proxy was
Please note! R400 000. The amounts exempt were limited to R15 000 in respect of grades R
to 12; R15 000 in respect of NQF level 1 to 4 qualifications; and R40 000 in
respect of NQF level 5 and above qualifications.
Where an employer grants a bursary to a person with a disability who is a member of the family of an
employee in respect of whom the employee is liable for family care and support, the amount will be
exempt from normal tax if the following conditions are met:
l The remuneration proxy (see below) of the employee in relation to a year of assessment may not
exceed R600 000.
l The amount of any scholarship or bursary awarded to a relative during the year of assessment
that is exempt, is limited to the following:
– R30 000 in respect of grades R to 12
been allocated in accordance with Chapter 2 of the National Qualifications Framework Act,
2008, and
been allocated in accordance with Chapter 2 of the above Act.
(Section 10(1)(qB), which only applies with effect from 1 March 2018.)
‘Remuneration proxy’ is the remuneration that the employee received from the employer during the
immediately preceding year of assessment (definition of remuneration proxy in s 1). If the employee
was only employed by a specific employer (or associated institution to the employer) for a portion of
the preceding year, the remuneration proxy must be determined with reference to the number of days
in that year that the employee was employed. If the employee was not employed by the employer
during the immediately preceding year, the employee’s remuneration proxy is determined with refer-
ence to the number of days in the first month of the employee’s employment.
An employee’s remuneration excludes the cash value of employer-provided

Please note! accommodation (as contemplated in par 9(3) of the Seventh Schedule) when
determining the employee’s remuneration proxy.
95
The requirements that must be complied with in order for a bursary or scholarship to be exempt from
normal tax are summarised in the following diagram:
Is the bursary or NO
scholarship a bona fide The bursary or
bursary or scholarship? scholarship is not exempt
YES
NO
Was the bursary granted
to enable a person to NO Did the employee agree to
study at a recognised Bursary or reimburse the employer if he
educational or research scholarship granted to failed to complete his studies for
institution? an employee reasons other than death, ill
health or injury?
YES
The bursary or
scholarship is exempt in
terms of s 10(1)(q)
YES Bursary or Did the employee’s

scholarship granted to remuneration proxy for the year
a relative of an of assessment exceed
Was the bursary granted
employee R600 000?
by an employer (or associ- YES
ated institution) to an
employee or relative of an
employee?
YES NO NO NO
NO The bursary If the bursary If the bursary is If the bursary is

or is awarded awarded in awarded in
The bursary or scholarship is in respect respect of a respect of a
scholarship is exempt in not exempt of grades R NQF 1 to 4 NQF 5 to 10
terms of s 10(1)(q) to 12 qualification, qualification,
then then
the first the first the first

R20 000 R20 000 R60 000
of the bursary of the bursary of the bursary
awarded to awarded to awarded to
such relative is such relative is such relative is
exempt exempt exempt
Example 5.11. Bursaries and scholarships
Pretend (Pty) Ltd awarded various bursaries during the 2018 year of assessment ending on
28 February 2018. The details of these awards are as follows:
l Nomatema: An employee who was awarded a bursary of R20 000 to study at a prestige uni-
versity for an NQF level 5 qualification. The bursary was granted on condition that she would
reimburse Pretend if she fails to complete her studies for reasons other than death, ill-health
or injury.
On her way to the exam venue she was in a fatal accident.
l Sibiwe: An employee who successfully completed a qualification at a university of technology
for an NQF level 4 qualification was reimbursed for his study expenses of R15 000. Pretend
was unaware that Sibiwe was studying, until he brought his new qualification to the Human
Resources Department of Pretend to record in his personnel file.
continued
96
l Nelson: Nelson, a child of Joe, was awarded a bursary of R70 000 to study an NQF level 6
qualification at a university. Joe has been in Pretend (Pty) Ltd’s employment since
1 September 2016. During the period from 1 September 2016 to 28 February 2017, Joe’s re-
muneration was R90 000. During the period 1 March 2017 to 28 February 2018, Joe’s remu-
neration was R216 000.
l Kate: Julia’s daughter, Kate, received a scholarship of R18 000 for her primary school fees.
Kate is in grade 5. Julia has been employed at Pretend (Pty) Ltd since 1 June 2017. Her re-
muneration was R50 000 per month during the period 1 June 2017 to 28 February 2018.
Calculate all the tax implications of the receipt of the bursaries by the bursary holders.
SOLUTION
Nomatema: Exempt from normal tax under s 10(1)(q). Failure to complete her studies
due to death does not disqualify her from the exemption.................................................... Rnil
Sibiwe: Reimbursement of expenses after completion of studies is not exempt, but a
taxable benefit under par 2(h) of the Seventh Schedule in Sibiwe’s hands......................... R15 000
Nelson: The bursary awarded to Nelson is deemed to be a taxable benefit in the hands
of Joe (par 16 of the Seventh Schedule) and will not be taxable in Nelson’s hands ........... Rnil
Joe: Joe’s remuneration proxy is R180 495 (R90 000/182 days × 365 days). Since this
is less than R600 000 and since the NQF level of the qualification that his child will
study towards is higher than level 4, R60 000 of the bursary awarded to his child will be
exempt in his hands and he will be taxed on R10 000 (R70 000 – R60 000)) ..................... R10 000
Kate: Julia’s remuneration proxy is R608 333 (R50 000/30 days × 365 days). Since this
is more than R600 000, the scholarship is not exempt in Julia’s hands............................... R18 000
Interpretation Note No 66 (1 March 2012)

Interpretation Note No 66, which deals with the taxation of scholarships and bursaries provides the
following guidelines:
l The phrase ‘bona fide scholarship or bursary granted’ refers to financial or similar assistance
granted to enable a person to study at a recognised educational or research institution. A bona
fide scholarship or bursary could include the cost of the following:
– tuition fees
– registration fees
– examination fees
– books
– equipment (required in that particular field of study, for example, financial or scientific calcu-
lators)
– accommodation (other than the person’s home)
– meals or meal voucher/card
– transport (from residence to campus and vice versa).
l A direct payment of fees, for example, to a university for the purpose of an employee’s studies, is
regarded as falling within the ambit of a bona fide scholarship or bursary.
l A recognised educational or research institution is a ‘college’ or ‘university’ as defined in s 18A of
the Act, or a school or any other educational or research institution, wherever situated, which is of
a permanent nature, open to the public generally and offering a range of practical and academic
courses.
l The payment received by a person who undertakes research for the benefit of another person will
be subject to normal tax in his or her hands and he or she will not qualify for the exemption in
terms of s 10(1)(q).
l A loan does not constitute income for tax purposes and is therefore not taxable. Personal study
loans obtained from a financial institution or from any other source unrelated to employment are
not taken into consideration for purposes of s 10(1)(q), nor are study expenses (including the in-
terest payable) incurred by the holder of the loan deductible from the income of the borrower.
Such privately funded loans are therefore neither taxable nor tax deductible. In terms of
par 11(4)(b) of the Seventh Schedule to the Act, no value is placed on a taxable benefit derived
by an employee in consequence of the grant of a loan by any employer for the purpose of en-
abling that employee to further his own studies.
97
l Any scholarship or bursary which is granted subject to repayment due to non-fulfilment of con-
ditions stipulated in a written agreement will be treated as a bona fide scholarship or bursary until
such time as the non-compliance provisions of the agreement are invoked. In the year of as-
sessment in which these provisions are invoked, the amount or amounts of the scholarship or
bursary will be regarded as a loan and, if relevant, any benefit which an employee may have re-
ceived by way of an interest-free or low-interest loan will constitute a taxable benefit in terms of
par 2(f ) of the Seventh Schedule and will not qualify for the exemption contained in par 11(4)(b)
of the Seventh Schedule, as such loan was not granted to enable the employee to study.
l Where an employee who had obtained a loan from his employer to enable him to study is absolved
from repaying the loan, he will have received a taxable benefit in terms of par 2(h) of the Seventh
Schedule.
l A reward, or reimbursement of study expenses borne by a person, after completion of his studies
does not constitute a scholarship or bursary, as the grant must have been made to enable or
assist the person to study. Where an employer rewards an employee for a qualification or for
having successfully completed a course of studies or reimburses him for study expenses borne
by him, the reward or reimbursement of study expenses will represent, in the case of the reward,
taxable remuneration, and in the case of the reimbursement of expenses, a taxable benefit in
terms of par 2(h) of the Seventh Schedule to the Act.
l A scholarship or bursary granted to a visiting academic for the purpose of lecturing students
does not satisfy the study requirement as the object of the grant will be to impart knowledge, not
to gain it.
l Expenditure in connection with in-house or on-the-job training or courses presented by other un-
dertakings for or on behalf of employers does not represent a taxable benefit in the hands of the
employees of the employer if the training is job-related and ultimately for the employer’s benefit.
l It is common practice for certain educational institutions, notably universities, to allow their em-
ployees and such employees’ close relatives to study free of charge or at greatly reduced fees at
these institutions. While the marginal cost of the education of such employees and their relatives
represents a taxable benefit under the Seventh Schedule, the exemption under s 10(1)(q) will ap-
ply, subject to the limitations provided for.
5.6 Exemptions relating to government, government officials and governmental

institutions
5.6.1 Government and local authorities (ss 10(1)(a) and 10(1)(bA))

The receipts and accruals of the Government of the Republic is exempt from normal tax (s 10(1)(a)).
This exemption applies to the national, provincial and local governments. The receipts and accruals
of any sphere of government of any country other than South Africa are also exempt from tax
(s 10(1)(bA)(i)).
5.6.2 Foreign government officials (s 10(1)(c))

The salaries (and amounts for services rendered, referred to as emoluments) payable to certain
foreign government officials are exempt from normal tax in the following cases:
l If the person holds office in South Africa as an official of a foreign government. The person must
be stationed in South Africa and may not be ordinarily resident in South Africa (s 10(1)(c)(iii)).
Diplomats, consuls and ambassadors representing foreign countries in South Africa qualify for
this exemption.
l The person is a domestic or personal servant of the above foreign government official. The per-
son may not be a South African citizen or ordinarily resident in South Africa (s 10(1)(c)(iv)).
l The person is a subject of a foreign state and is temporarily employed in South Africa. The ex-
emption must be authorised by an agreement entered into by the governments of the foreign
state and South Africa (s 10(1)(c)(v)).
l The person is a subject of a foreign state and not a resident in South Africa, and the salary is paid
by a government agency or multinational organisation providing foreign donor funding
(s 10(1)(c)(vi)).
98
5.6.3 Non-residents employed by the South African government (s 10(1)(p))

Any amount that a non-resident receives for services rendered or work done outside South Africa will
be exempt from normal tax if the services are rendered or work is done for or on behalf of any em-
ployer in the national or provincial sphere of Government (s 10(1)(p)). The exemption will also apply if
the work is done for or on behalf of any South African municipality or any national or provincial public
entity if at least 80% of the expenditure of such entity is defrayed directly or indirectly from funds
voted by Parliament.
This exemption will only apply if the amount received or accrued is subject to normal tax in the coun-
try in which the person is ordinarily resident. The normal tax must also be borne by the person himself
and not paid on his behalf by the government, municipality or public entity.
5.6.4 Pension payable to former State President or Vice President (s 10(1)(c)(ii))

A pension that is payable to any former State President or Vice State President or his or her surviving
spouse is exempt from normal tax (s 10(1)(c)(ii)).
5.6.5 Foreign central banks (s 10(1)(j))

The receipts and accruals of any bank are exempt from tax if all the following requirements are ful-
filled:
l the bank is not resident in South Africa
l the bank is the central bank of another country (that is, the bank is entrusted by the government
of a territory outside South Africa with the custody of the principal foreign-exchange reserves of
that territory), and
l the Minister of Finance must have granted this exemption to the specific bank for the particular
year of assessment; the exemption is therefore granted annually.
5.6.6 Semi-public companies and boards, governmental and other multinational institutions
(s 10(1)(bB), (t) and (zE))
The receipts and accruals of the following semi-public companies and boards are exempt from
normal tax:
l the Council for Scientific and Industrial Research (s 10(1)(t)(i))
l the South African Inventions Development Agency (s 10(1)(t)(ii))
l the South African National Roads Agency (s 10(1)(t)(iii))
l any traditional council or traditional community (established or recognised in terms of the Tradi-
tional Leadership and Governance Framework Act 41 of 2003) or any tribe as defined in s 1 of
that Act (s 10(1)(t)(vii))
l the Armaments Corporation of South Africa Limited contemplated in s 2(1) of the Armaments
Corporation of South Africa, Limited Act, 2003 (s 10(1)(t)(v))
l the compensation fund or reserve fund established in terms of s 15 of the Compensation for
Occupational Injuries and Diseases Act 130 of 1993 (COIDA). This Act regulates the compensa-
tion relating to the death or personal injury suffered by an employee in the course of employment.
A mutual association licensed in terms of COIDA may also be exempt from normal tax. Such mu-
tual association should be licensed in terms of COIDA to carry on the business of insurance of
employers against their liabilities to employees. The mutual association will only qualify for the
exemption to the extent that the compensation paid by the mutual association is identical to com-
pensation that would have been payable in circumstances in terms of COIDA (s 10(1)(t)(xvi)
l any water service provider (s 10(1)(t)(ix))
l the Development Bank of Southern Africa (s 10(1)(t)(x))
l the National Housing Finance Corporation established in 1996 by the National Department of
Human Settlements (s 10(1)(t)(xvii)) (this exemption applies regarding amounts received or ac-
crued on or after 1 April 2016)
l amounts received by or accrued to the Small Business Development Corporation Limited by way
of any subsidy or assistance payable by the state (s 10(1)(zE))
l institutions established by a foreign government that perform their functions in terms of an official
development assistance agreement which provides that the receipts and accruals of such
99
organisation is exempt. The agreement must be binding in terms of s 231(3) of the Constitution of
the Republic of South Africa (1996) (s 10(1)(bA)(ii))
l multinational organisations providing foreign donor funding in terms of an official development
assistance agreement that is binding in terms of s 231(3) of the Constitution of the Republic of
South Africa (1996) (s 10(1)(bA)(iii))
l the following multilateral development financial institutions (s 10(1)(bB)):
– African Development Bank, established on 10 September 1964
– World Bank, established on 27 December 1945 including the International Bank for Recon-
struction and Development and International Development Association
– International Monetary Fund, established on 27 December 1945
– African Import and Export Bank, established on 8 May 1993
– European Investment Bank, established on 1 January 1958 under the Treaty of Rome, and
– New Development Bank, established on 15 July 2014.
5.7 Exemptions for organisations involved in non-commercial activities
5.7.1 Bodies corporate, share block companies and other associations (s 10(1)(e))
Certain amounts received by body corporates, share block companies and other associations are
exempt from normal tax (s 10(1)(e)). The amounts that qualify for the exemption are
l levies received by these entities from its members (or from holders of shares in the case of a
share block company), and
l any amount received other than levies to the extent that it does not exceed R50 000.
The exemption applies only to
l bodies corporate established in terms of the Sectional Titles Act 95 of 1986
l share block companies as defined in the Share Blocks Control Act 59 of 1980
l any other association of persons that was formed solely for purposes of managing the common
collective interest of its members. To qualify, the association may not be permitted to distribute
any of its funds to any person other than a similar association of persons. Such association of
persons may not be a company as defined in the Companies Act, any co-operative, close corpo-
ration or trust. The association may, however, be a non-profit company as defined in s 1 of the
Companies Act.
This exemption is nullified if the body, share block company or association knowingly becomes a
party to any tax avoidance scheme.
(Refer to 5.7.3 with regard to the exemption available to recreational clubs.)
Example 5.12. Bodies corporate, share block companies and other associations
The statement of comprehensive income of the ABC Association for the 2018 year of assessment
is as follows. The association qualifies for exemption in terms of s 10(1)(e).
Statement of profit or loss
Administrative expenses –
member transactions ....................... R8 000 Income from members:
Net surplus ....................................... 60 000 Levies ............................................. 10 000
Interest on investments ................... 58 000
R68 000 R68 000
SOLUTION
Levies from members – exempt (s 10(1)(e)) .................................................................. –
Interest on investment (R58 000 – R50 000 (s 10(1)(e) exemption)) ............................. R8 000
Less: Administrative expenses (not allowed as it relates to exempt income received
(s 23(f)) .......................................................................................................................... –
Taxable income ............................................................................................................. R8 000
100
5.7.2 Public benefit organisations (ss 10(1)(cN) and 30)

The receipts and accruals resulting from any ‘public benefit activity’ (non-trading activities) of any
approved ‘public benefit organisation’, as defined in s 30(1) are exempt from normal tax
(s 10(1)(cN)). Public benefit activities are listed in Part I of the Ninth Schedule to the Act or are de-
termined by the Minister of Finance and published in the Gazette. Examples of public benefit activi-
ties according to the different categories are (subject to certain criteria) the following:
l Welfare and Humanitarian. The provision of services to homeless children, elderly people,
abused persons or people in distress, and the development of poor and needy communities.
l Health care. The provision of health care services to poor and needy persons, education on
family planning and services in connection with HIV/Aids.
l Land and Housing. The development of stands and housing units for low income groups, residen-
tial care for certain elderly people and the building of certain buildings used by the community.
l Education and Development. The provision of education on all levels and training to the unem-
ployed, disabled persons or government officials.
l Religion, belief or philosophy. The promotion or practice of a belief or philosophical activities or
any religion that involves acts of worship, witness, teaching and community service.
l Cultural. The promotion and protection of the arts, cultures, customs, libraries and buildings of
historical and cultural interest. The development of youth leadership is included under this cate-
gory.
l Conservation, environment and animal welfare. The protection of the environment and the care
and rehabilitation of animals, as well as environmental awareness programmes and clean-up pro-
jects.
l Research and consumer rights. Research in certain fields and the protection of consumer rights
and improvement of products or services.
l Sport. The managing of amateur sport or recreation.
l Providing of funds, assets or other resources. If assets, resources or money are donated or sold
at cost to a public benefit organisation, government department or person conducting one or
more public benefit activities.
l General. Supporting or promoting public benefit organisations, as well as the bid to host or the host-
ing of any international event where foreign countries will participate and that will have an eco-
nomic impact on the country.
The provision of funds to foreign public benefit organisations, which are exempt from tax in the for-
eign country, with the sole or principal object of the carrying on of one or more PBO activity listed in
Part 1 of the Ninth Schedule to the Income Tax Act has also been classified as a public benefit activity.
What is a public benefit organisation?
A public benefit organisation is defined in s 30(1) as any organisation
l that is a non-profit company as defined in s 1 of the Companies Act, or a trust or association of
persons that has been incorporated, formed or established in South Africa, or
l a South African agency or branch of a non-resident company, association or a trust, that is ex-
empt from tax in its country of residence.
The sole or principle objective of the organisation must be the carrying on of one or more public
benefit activities. These activities must be carried on in a non-profit manner and with an altruistic or
philanthropic intent. The activities may not be intended to directly or indirectly promote the self-
interest of any fiduciary or employee of the organisation other than by way of reasonable remunera-
tion. The activities of the organisation must be carried on for the benefit of, or must be widely acces-
sible to, the general public at large, including any sector thereof.
All of the above requirements must be met. In addition, the Minister must approve the public benefit
organisation before the exemption will apply.
Exempt from normal tax
The following receipts and accruals of a public benefit organisation are exempt from normal tax
(s 10(1)(cN)):
l the receipts and accruals derived otherwise than from any business undertaking or trading activ-
ity, or
101
l the receipts and accruals derived from any business undertaking or trading activity, if
– the undertaking or activity is integral and directly related to the sole or principle object of the
organisation (the basis on which the activity is carried out must substantially be directed at
the recovery of costs and may not result in unfair competition in relation to taxable entities),
– the undertaking or activity is of an occasional nature and undertaken substantially with assist-
ance on a voluntary basis without compensation, or
– the undertaking or activity is approved by the Minister by notice in the Gazette, or
l where the receipts and accruals are derived from any business undertaking or trading activity
other than the above, the receipts and accruals will be exempt from normal tax to the extent that it
does not exceed the greater of 5% of the total receipts and accruals of the organisation during
the relevant year of assessment and R200 000.
See Interpretation Note No 24 (Issue 3) (4 February 2014) for the practical application and provisions
of s 10(1)(cN) regarding the trading rules of Public Benefit Organisations.
5.7.3 Recreational clubs (ss 10(1)(cO) and 30A)

Certain receipts and accruals of a recreational club approved by the Commissioner will be exempt from
normal tax. (The club exemption is not automatic. Clubs have to apply for the exemption.) A recreation-
al club is defined in s 30A as any non-profit company as defined in s 1 of the Companies Act, society
or other association of which the sole or principal object is to provide social and recreational ameni-
ties or facilities for the members of that company, society or other association.
These receipts and accruals must be derived in the form of
l membership fees or subscriptions paid by members
l from any business undertaking or trading activity that
– is integral and directly related to the provision of social and recreational amenities (or facilities)
to its members
– substantially carried out only to recover cost, and
– does not create unfair competition for taxable entities
l occasional fundraising undertaken substantially with voluntary assistance without compensation,
and
l any other source, if the receipts and accruals in respect of ‘other sources’ are not in total more
than the greater of
– 5% of the total membership fees and subscriptions due and payable by its members during
the relevant year of assessment, or
– R120 000.
Section 30A provides the conditions to which a club must adhere to qualify for the exemption:
l The club will have at least three unconnected persons who accept fiduciary responsibility for the
club. One person may never directly or indirectly control the decision-making of the club.
l The club will carry on its activities solely in a non-profit manner.
l The club will not distribute any surplus funds.
l All assets and funds will be transferred to another club that qualifies for the exemption on club
dissolution or a public benefit organisation approved under s 30(3). The funds may also be trans-
ferred to an institution that is exempt from tax under s 10(1)(cA)(i) (an institution, board or body
which has as its sole or principle object the carrying on of any public benefit activity) or the gov-
ernment of South Africa in the national, provincial or local sphere.
l The club will not pay excessive remuneration.
l All members must be entitled to annual or seasonal membership.
l Members cannot sell their membership rights.
l A copy of any amendment to the constitution must be submitted to the Commissioner.
l The club may not be part of a tax avoidance scheme (s 30A(2)).
5.7.4 Political parties (s 10(1)(cE))

The receipts and accruals of any political party registered in terms of the Electoral Commission Act
51 of 1996 are exempt from normal tax.
102
5.8 Exemptions relating to economic development
5.8.1 Micro businesses (s 10(1)(zJ))

Any amount received by or accrued to or in favour of a registered micro business (as defined in the
Sixth Schedule; see chapter 23) from a business carried on in South Africa, will be exempt from
normal tax. The exemption does not include any amount received by or accrued to a natural person if
it constitutes
l investment income as defined in par 1 of the Sixth Schedule (see chapter 23), or
l remuneration as defined in the Fourth Schedule.
Although the receipts and accruals of micro businesses are exempt from normal tax, these business-
es are not completely exempt from tax since they will be subject to turnover tax (see chapter 23).
5.8.2 Small business funding entity (ss 10(1)(cQ), 10(1)(zK) and 30C, and par 63B of the
Eighth Schedule)
The receipts and accruals of any small business funding entity are exempt from normal tax under
certain circumstances (s 10(1)(cQ)). A small business funding entity is an entity approved by the
Commissioner under s 30C. An entity will qualify as a small business funding entity if it complies with
the following requirements (s 30C(1)):
l It must either be a trust, an association of persons or a non-profit company as defined in s 1 of
the Companies Act incorporated, formed or established in the South Africa.
l The sole or principal object of the entity must be to provide funding for small, medium and micro-
sized enterprises. A small, medium and micro-sized enterprise is a person that qualifies either as
a micro business as defined in par 1 of the Sixth Schedule (see chapter 23) or as a small busi-
ness corporation as defined in s 12E(4) (see chapter 19) (definition of small, medium and micro-
sized enterprises in s 1).
l The entity must provide funding for the benefit of, or must be widely accessible to small, medium
and micro-sized enterprises.
l The funding must be provided on a non-profit basis and with an altruistic or philanthropic intent.
l The funding should not be intended to directly or indirectly promote the self-interest of any fiduci-
ary or employee of the entity, other than reasonable remuneration.
l The entity’s constitution or written instrument under which it was established must be submitted to
the Commissioner and must comply with specific requirements set out in s 30C(1)(d).
Exempt from normal tax

Section 10(1)(cQ) exempts the following receipts and accruals of a small business funding entity
from normal tax:
l the receipts and accruals derived otherwise than from any business undertaking or trading activ-
ity, or
l the receipts and accruals derived from any business undertaking or trading activity, if
– the undertaking or activity is integral and directly related to the sole or principle object of the
organisation (the basis on which the activity is carried out must substantially be directed at
the recovery of costs and may not result in unfair competition in relation to taxable entities),
– the undertaking or activity is of an occasional nature and undertaken substantially with assis-
tance on a voluntary basis without compensation, or
– the undertaking or activity is approved by the Minister by notice in the Gazette, or
l where the receipts and accruals are derived from any business undertaking or trading activity
other than the above, the receipts and accruals will be exempt from normal tax to the extent that it
does not exceed the greater of
– 5% of the total receipts and accruals of the organisation during the relevant year of assess-
ment, or
– R200 000.
Amounts received from a small business funding entity
Any amount received by or accrued to a small, medium or micro-sized enterprise from a small busi-
ness funding entity is exempt from normal tax (s 10(1)(zK)).
103
CGT exemption
A small business funding entity must disregard any capital gain or loss determined in respect of the
disposal of
l an asset that the small business funding entity did not use in carrying on any business undertak-
ing or trading activity, or
l an asset where substantially the whole of the use of the asset was directed at a purpose other
than carrying on any business undertaking or trading activity or a business undertaking or trading
activity in respect of which the receipts and accruals qualified for an normal tax exemption under
s 10(1)(cQ).
What are the consequences if an approved small business funding entity fails to comply with the s 30C
requirements?
The Commissioner may withdraw its approval of a small business funding entity if it fails to comply
with the s 30C requirements (s 30C(3)). Such entity must within six months after the withdrawal trans-
fer the remainder of its assets to another small business funding entity, a public benefit organisation,
an institution, body or board exempt from tax under s 10(1)(cA)(i) or the government of South Africa
(s 30C(4)). This also applies in the case where a small business funding entity is wound up or liqui-
dated (s 30C(5)). If it fails to transfer its assets as required, an amount equal to
l the market value of its remaining assets
l less an amount equal to the bona fide liabilities of the entity
is deemed to be an amount of taxable income that accrued to the entity in the year of assessment in
which the approval is withdrawn or the winding up or liquidation took place (s 30C(6)).
Any person who is in a fiduciary capacity responsible for the management of a small business fund-
ing entity and who intentionally fails to comply with the above requirements or with the provisions of
the small business funding entity’s constitution, is guilty of an offence and liable on conviction to a
fine or imprisonment for a period not exceeding 24 months (s 30C(7)).
5.8.3 Amounts received in respect of government grants (ss 10(1)(y) and 12P)
The following government grants are exempt from normal tax (s 12P):
l a grant in aid, subsidy or contribution by the Government in the national, provincial or local
sphere that
– is listed in the Eleventh Schedule, or
– is identified by the Minister of Finance in the Gazette (s 12P(2)), and
l an amount received from the Government in the national, provincial or local sphere for the per-
formance of that person’s obligations pursuant to a Public Private Partnership. This amount is ex-
empt if the person is required to spend at least an equal amount on improvements on land or to
buildings owned by any sphere of the Government, or over which any sphere of the Government
holds a servitude (s12P(2A)).
A person can receive the government grant funding or a government grant in kind. Where the person
receives a government grant in kind, which is exempt from normal tax in terms of s 12P(2), the base
cost of the asset received will be zero. Other than this, the grant in kind will have no further normal tax
consequences.
Special rules apply where a person receives government grant funding that is exempt in terms of
s 12P(2) or s 12P(2A). The purpose of these rules is to avoid a further tax benefit from applying the
government grant funding. Where a government grant (other than a grant in kind) is received for the
purpose of acquisition, creation or improvement or as a reimbursement for expenditure incurred in
respect of the acquisition, creation or improvement of
l trading stock – any expenditure allowed as a deduction in terms of s 11(a) (or the amount taken
into account for purpose of opening stock in terms of s 22(1) or (2)) must be reduced to the ex-
tent that the government grant is so applied (s 12P(3)(a)). If the government grant exceeds the
expenditure incurred in respect of acquiring the trading stock, the excess amount is deemed to
be an amount recovered or recouped by the taxpayer for purpose of s 8(4)(a) (s 8(4)(o)). The ex-
cess amount will therefore be included in the taxpayer’s income.
l an allowance asset – the base cost of the allowance asset must be reduced to the extent that the
government grant is so applied (s 12P(3)(b)). Furthermore, the aggregate of any deductions or
104
allowances allowable in respect of the allowance asset may not exceed an amount equal to
(s 12P(4)):
The aggregate The aggregate amount

The amount of
amount incurred in of all deductions and
LESS the government PLUS
respect of the allowances previously allowed in
grant
allowance asset respect of that allowance asset
If the government grant exceeds the expenditure incurred in respect of acquiring the allowance
asset, the excess amount is deemed to be an amount recovered or recouped by the taxpayer for
purpose of s 8(4)(a) (s 8(4)(p)). The excess amount will therefore be included in the taxpayer’s
income.
l any other asset (i.e. other than trading stock or an allowance asset) – the base cost of the asset
must be reduced to the extent that the government grant is so applied (s 12P(5)).
Where a person received a government grant (other than a grant in kind) during the year of assess-
ment otherwise that for the purpose of acquiring, creating or improving any of the assets above (or as
a reimbursement for such acquisition, creation or improvement) any allowable deductions in terms of
s 11 for that year of assessment must be reduced by the amount of the government grant. Where the
government grant exceeds the allowable deductions in terms of s 11 for that year of assessment, the
excess must be carried forward to the following year of assessment and deemed to be a government
grant received during that year (s 12P(6)).
Grants or scrapping allowances received in terms of approved programs

Any government grant or government scrapping payment received or accrued in terms of any pro-
gramme or scheme which has been approved in terms of the national annual budget process and
has been identified by the Minister by notice in the Gazette (after taking prescribed factors into
account) qualifies for an exemption under s 10(1)(y). Grants and scrapping allowances that qualify
for an exemption under s 10(1)(y) are not subject to the anti-double-dipping-rules of s 12P.
Example 5.13. Government grants
On 1 August 2017, Pumbela Enterprises received a R4 million government grant from the De-
partment of Trade and Industry as part of the Small, Medium Enterprise Development Pro-
gramme. The grant was paid in order to reimburse Pumbela Enterprises for capital equipment
that it acquired during December 2016 for R5 million. During its 2018 year of assessment that
ended on 28 February 2018, Pumbela Enterprises claimed a capital allowance of R2 million for
the assets acquired.
On 1 October 2018, JayJay Clothing (Pty) Ltd (‘JayJay Clothing’) received a R500 000 govern-
ment grant from the Department of Trade and Industry as part of the Clothing and Textiles Com-
petitiveness Programme. JayJay Clothing had to use the government grant to purchase clothing
material from South African suppliers. During its 2018 year of assessment that ended on
31 December 2018, JayJay Clothing expended R450 000 of the government grant on purchasing
clothing material.
On 1 November 2017, Food4Africa (Pty) Ltd (‘Food4Africa’) received a R1 million Food Fortifica-
tion Grant from the Department of Health. Food4Africa was not required to purchase any specific
assets with the grant. During its 2018 year of assessment that ended on 30 June 2018,
Food4Africa incurred expenses of R5 million that qualify for a deduction in terms of s 11.
What effect does the above have on the respective taxpayers’ taxable income for the relevant
years of assessment? Assume that the grants were not approved for purpose of s 10(1)(y).
105
SOLUTION
Pumbela Enterprises
Government grant. .................................................................................................... R4 000 000
Government grant exempt from normal tax in terms of s 12P(2), since the Small,
Medium Enterprise Development Programme is listed in the Eleventh Schedule .... (4 000 000)
Capital allowance in respect of the capital asset (see note 1).................................. (nil)
Effect on Pumbela Enterprises’ taxable income in respect of its 2018 year of
assessment. .............................................................................................................. Rnil
JayJay Clothing
Government grant ..................................................................................................... R500 000
Government grant exempt from normal tax in terms of s 12P(2), since the Cloth-
ing and Textiles Competitiveness Programme is listed in the Eleventh Schedule .... (500 000)
Trading stock acquired (s 11(a)) (R450 000 less R500 000) .................................... Rnil
Closing stock (s 22) (R450 000 less R500 000) ........................................................ Rnil
Recoupment in terms of s 8(4)(a) (see note 2) ......................................................... 50 000
Effect on JayJay Clothing taxable income in respect of its 2018 year of
assessment. .............................................................................................................. R50 000
Food4Africa
Government grant ..................................................................................................... R1 000 000
Government grant exempt from normal tax in terms of s 12P(2), since a Food
Fortification Grant is listed in the Eleventh Schedule ................................................ (1 000 000)
Section 11 deductions (R5 000 000 less R1 000 000) (see note 3) .......................... (4 000 000)
Effect on Food4Africa’s taxable income in respect of its 2018 year of
assessment ............................................................................................................... (R4 000 000)
Notes
(1) The aggregate of any allowance or deduction in respect of an allowance
asset may not exceed:
The aggregate amount incurred in respect of the allowance asset .................. R5 000 000
Less: The amount of the government grant (R4 000 000) plus the aggregate
amount of all deductions and allowances previously allowed in respect of
that allowance asset (R2 000 000). ................................................................... (6 000 000)
Since this amount is less than Rnil, Pumbela Enterprises may not claim any
further capital allowances in respect of the asset. ............................................ (R1 000 000)
The base cost of this asset is reduced by R4 000 000. Since the base cost
was R3 000 000 (R5 000 000 cost price less R2 000 000 capital allowance in
respect of the 2017 year of assessment) at the time of receiving the grant,
the base cost is reduced to Rnil.
(2) Since the government grant exceeds the expenditure incurred in respect of acquiring the
trading stock by R50 000, this amount is deemed to be an amount recovered or recouped
by the taxpayer for purpose of s 8(4)(a) and therefore included in JayJay Clothing’s income
(s 8(4)(p)).
(3) Since Food4Africa received a government grant during its 2018 year of assessment for the
purpose of acquiring, creating or improving any of the assets above (or as a reimbursement
for such acquisition, creation or improvement), any allowable deductions in terms of s 11 for
that year of assessment must be reduced by the amount of the government grant.
5.8.4 Film owners (s 12O)

Section 12O(2) provides for the exemption of all income derived from the exploitation rights of a film.
Exploitation rights are defined in s 12O(1) as the right to any receipts or accruals in respect of the
use of, right of use of, or the grant of permission to use any film to the extent that those receipts and
accruals are wholly dependent on profits and losses in respect of the film. Film is defined for purpose
of s 12O as a feature film, a documentary or documentary series, or an animation, conforming to the
requirements stipulated by the Department of Trade and Industry in the Programme Guidelines for
the South African Film and Television Production and Co-production Incentive.
106
The following requirements have to be complied with in order to qualify for the exemption:
l The National Film and Video Foundation must approve the film as a local production or co-pro-
duction whereby the film is produced in terms of an international co-production agreement be-
tween the Government of South Africa and the government of another country.
l If income is derived from the exploitation rights of the film by a person who acquired the exploita-
tion rights in respect of that film:
– prior to the date that the principal photography of the film commenced, or
– after the principal photography of the film commenced, but before the completion date of the
film if no consideration was directly or indirectly paid to the person who acquired the exploita-
tion rights of the film prior to the date that the principal photography of the film commenced).
l The income must be received by or must have accrued to the person within 10 years of the
completion date.
Completion date is defined for purpose of s 12O as the date on which the film is in a form for the first
time in which it can be regarded as ready for copies of it to be made and distributed for presentation
to the general public.
The exemption in terms of s 12O is not allowed to a person who is a broadcaster as defined in s 1 of
the Broadcasting Act, No 4 of 1999.
Section 12O(5) provides that a taxpayer may claim a deduction in respect of any expenditure in-
curred to acquire exploitation rights in respect of a film. This deduction is allowed despite the provi-
sions of s 23(f), which provides that expenses incurred in respect of exempt income are not
deductible. Such deduction is equal to the amount of any expenditure incurred to acquire exploitation
rights in respect of a film less any amount received or accrued during any year of assessment in
respect of the film. The deduction may not be made to the extent that the expenditure was funded
from a loan, credit or similar funding. Furthermore, the deduction may only be made in any year of
assessment commencing at least two years after the completion date of the film to the extent that the
expenditure incurred exceeds the total amount received or accrued in respect of the exploitation
rights. The exemption under s 12O(2) ceases to apply to any income derived from a film in any year
of assessment subsequent to the date that a deduction is made in terms of s 12O(5).
5.8.5 International shipping income (s 12Q)

International shipping income received by an international shipping company is exempt from normal
tax. The purpose of this exemption is for the industry to remain competitive internationally. The inter-
national trend has been to reduce the taxation of international shipping transport due to the highly
mobile nature of this activity.
In order to qualify for this exemption, the international shipping company must be a South African
resident that operates one or more South African ships that are used in international shipping. Inter-
national shipping is defined in s 12Q(1) as the conveyance for compensation of passengers or goods
by means of the operation of a South African ship mainly engaged in international traffic. A South
African ship is a ship which is registered in South Africa in accordance with Part 1 of Chapter 4 of the
Ship Registration Act, 1998.
Tax regime for qualifying international shipping companies includes exemptions from normal tax,
capital gains tax (see chapter 17), dividends tax (see chapter 19) as well as cross-border withholding
tax on interest (see chapter 21).
5.8.6 Owners or charterers of a ship or aircraft (s 10(1)(cG))

The receipts and accruals of a non-resident that carries on business as the owner or charterer of a
ship or aircraft are exempt from normal tax. The exemption, however, only applies if a similar or
equivalent exemption is granted for South African residents carrying on the same type of business in
the country where the non-resident resides.
5.9 Exemptions incentivising environmental protection
5.9.1 Certified emission reductions (s 12K)

The Kyoto Protocol, which is the most important environmental instrument of the United Nations
Framework Convention on Climate Change (UNFCCC), provides mechanisms to ensure that devel-
oped countries can meet their emission (for example electricity and motor vehicles) reduction targets.
107
At the same time, the Clean Development Mechanism (CDM) ensures the participation of developing
countries (including South Africa) to help reduce emissions.
This is accomplished through CDM projects (which focuses on development in renewable energy,
energy efficiency and other related fields designed to achieve emission reductions) which are only
available within developing countries. If the participants in these CDM projects can demonstrate that
the project would not have been viable without Kyoto Protocol support, the Kyoto Protocol will issue
certified emission reductions (CERs). These CERs can then be sold by the developing country to a
developed country (that is technically the only one that can use the CERs) to assist them to meet their
legally binding Kyoto Protocol emission reduction obligations. The sale of the CERs ensures a stream
of revenue for the CDM projects in developing countries, assisting to make these projects viable.
An activity can only be treated as a qualifying CDM project if it is approved by the Department of
Minerals and Energy (‘Designated National Authority’) and UNFCCC registration is obtained (from the
UNFCCC Executive Board of the CDM after validation of the project by the UNFCCC approved Des-
ignated Operational Entity (DOE)) (s 12K(1) and the Explanatory Memorandum on the Taxation Laws
Amendment Act, 2009).
Any amount received by or accrued to or in favour of any person
l in respect of the disposal on or after 11 February 2009
l of any CER issued
l in the furtherance of a qualifying CDM project
l registered on or before 31 December 2020 (the date on which the Kyoto Protocol expires)
will be exempt from taxation (s 12K(2)).This exemption applies to amounts of a capital and revenue
nature (including in specie distributions) received or accrued upon disposal of CERs.
Example 5.14. Certified emission reductions (S 12K)
Greener than Green Ltd is involved in a CDM project. They receive CERs worth R3,5 million from
the UNFCCC Executive Board on 30 April 2018. Greener than Green decides to sell these CERs
for R5 million to Emissions Plc (a foreign company) on 30 September 2018 (Greener than Green
Ltd’s year-end).
Discuss the tax implications for Greener than Green Ltd of the disposal of the CERs to Emissions
Plc.
SOLUTION
The mere receipt of CERs from the UNFCCC Executive Board is a not a taxable event. The pro-
ceeds of the disposal (R5 million) of the CERs will be exempt from tax under s 12K.
Since the proceeds are exempt, no deduction for any expenditure (prohibited under s 23(f))
incurred by Greener than Green Ltd will be allowed under s 11(a) (and it will also not be taken
into account as trading stock (s 22)).
5.9.2 Closure rehabilitation company (s 10(1)(cP))

The receipts and accruals of a closure rehabilitation company or trust (as contemplated in s 37A) are
exempt from normal tax. The sole object of such company or trust must be the rehabilitation of land
following the closure and decommissioning of a mine. The constitution of the company or the instru-
ment that established the trust must incorporate the provisions of s 37A.
5.10 Exemptions aimed at amounts that are subject to withholding tax

Certain amounts paid to non-residents are subject to withholding tax. Withholding tax is imposed on
the recipient of an amount, but the payer of the amount is required to deduct the tax from the pay-
ment and pay the tax to the government. The amount subject to withholding tax should not be subject
to normal tax as well. For this reason, exemption from normal tax is provided for.
5.10.1 Royalties paid to non-residents (s 10(1)(l))

A royalty paid to a foreign person is subject to 15% withholding tax on royalties to the extent that the
royalty is regarded as being from a South African source (s 49B; see chapter 21). If a double taxation
108
agreement applies in the specific circumstances, the withholding tax rate might be reduced by the
double tax agreement.
The source of royalty income is in South Africa if the royalty is paid by a resident (unless the royalty is
attributable to a permanent establishment situated outside South Africa), or is received in respect of
the use of any intellectual property in South Africa (s 9(1)(d) and (c); see chapter 3).
A royalty paid to a non-resident is exempt from normal tax, unless
l the person is a natural person who was physically present in South Africa for longer than 183
days in aggregate during the 12-month period before the royalty is received or accrued, or
l the intellectual property or the knowledge or information in respect of which it is paid is effectively
connected with the permanent establishment of the person in South Africa (s 10(1)(l)).
For purpose of this exemption, royalty means any amount that is received for the use or right of use of
or permission to use any intellectual property, or the imparting of or the undertaking to impart any
scientific, technical, industrial or commercial knowledge or information, or the rendering of or the
undertaking to render any assistance or service in connection with the application or use of such
knowledge or information (definition of royalty in s 49A).
Example 5.15. Royalty or similar payments to non-residents (s 10(1)(l))
Mr Collins, who is not a resident of South Africa, received a gross royalty payment of R300 000
for the use of a trademark in South Africa by ABC Limited on 10 May 2017.
What is the effect of this on Mr Collins’ taxable income in respect of his 2018 year of assess-
ment?
SOLUTION
The ‘income’, as defined, of Mr Collins will be calculated as follows:
Gross Income:
Royalty ............................................................................................................................ 300 000
Less: Exempt income:
Royalty – exempt in terms of s 10(1)(l)............................................................................ (300 000)
Income ............................................................................................................................ –
Note
Unless the relevant double tax agreement prescribes a reduced rate, ABC Limited must withhold
15% of the gross royalty (R45 000) as a withholding tax (s 49B) and pay the net amount of
R255 000 to Mr Collins.
5.10.2 Amounts paid to a foreign entertainer or sportsperson (s 10(1)( lA))

Amounts paid to foreign entertainers and sport persons in respect of specified activities are subject
to 15% tax on foreign entertainers and sport persons (s 47A to 47K; see chapter 21). To the extent
that such amount is subject to tax on foreign entertainers and sport persons, the amount is exempt
from normal tax (s 10(1)(lA)).
5.10.3 Interest paid to non-residents (ss 10(1)(h))

Interest paid to a foreign person is subject to 15% withholding tax on interest to the extent that the
interest is regarded as being from a South African source (s 50B; see chapter 21). If a double taxa-
tion agreement applies in the specific circumstances, the withholding tax rate might be reduced by
the double tax agreement. The source of interest is in South Africa if the interest is paid by a resident
(unless the interest is attributable to a permanent establishment situated outside South Africa), or is
received or accrued in respect of any funds used or applied by any person in South Africa (s 9(2)(b);
see chapter 3). Interest received by a non-resident is exempt from normal tax, subject to certain
exceptions (s 10(1)(h); see 5.2.2).
109
5.11 Other exemptions
5.11.1 Alimony and maintenance (s 10(1)(u))

An amount received by or accrued to a person from or on behalf of his or her spouse or former
spouse by way of an alimony or allowance granted in consequence of proceedings instituted after
21 March 1962, or under an agreement of separation entered into after that date, is exempt from
normal tax. This exemption is not applicable when s 7(11) deems the reduction of a person’s mini-
mum individual reserve in terms of a maintenance order in favour of another person (the person’s
former spouse) to be income received by the person. The s 10(1)(u) exemption, in effect, can only be
claimed by a person if his or her former spouse paid the alimony or maintenance from after-taxed
income.
5.11.2 Promotion of research (s 10(1)(cA))

The receipts and accruals of any institution, board or body established under any law will be exempt
from normal tax if its sole or principal object is to
l conduct scientific, technical or industrial research, or
l provide necessary or useful commodities, resources or services to the State or members of the
general public, or
l carry on activities (including the rendering of financial assistance by way of loans or otherwise)
designed to promote commerce, industry or agriculture.
Companies (as defined in the Companies Act), co-operatives, close corporations, trusts and water
service providers are specifically excluded from this exemption. The receipts and accruals of any
association, corporation or company will qualify for the exemption if all its shares are held by an
institution, board or body mentioned above and only if the operations of such association, corporation
or company are ancillary or complimentary to the object of the institution, board or body.
The institution, board or body has to be approved by the Commissioner. Also, by law or under its
constitution, it may not be permitted to distribute any of its profits or gains to any person other than, in
the case of a company, to the holders of shares in the company. It is also required to use its funds
solely for investment or the objects for which it has been established.
5.11.3 Interest received by the holder of a debt (s 10(1)(hA))

This exemption is aimed at avoiding double taxation. Where a company acquires an asset in terms of
a reorganisation transaction and funds the acquisition with debt, the amount of interest that the com-
pany may claim as a deduction is limited under certain circumstances (s 23K; see chapter 20). A
reorganisation transaction for this purpose refers to an intragroup transaction, or a liquidation distri-
bution (as defined in ss 45(1) and 47(1) respectively; see chapter 20).
Interest will be exempt from normal tax in the recipient’s hands if the person receiving the interest
and the person paying the interest forms part of the same group of companies and the interest de-
duction was limited in terms of s 23K (s 10(1)(hA).
5.11.4 War pensions and awards for diseases and injuries (s 10(1)(g), (gA) and (gB))
The following are exempt from normal tax:
l amounts received as a war pension or as an award or benefit relating to compensation in respect
of diseases contracted by persons employed in mining operations (s 10(1)(g))
l disability pensions paid under s 2 of the Social Assistance Act 59 of 1992 (s 10(1)(gA))
l compensation paid in terms of the Workmen’s Compensation Act 30 of 1941 or the Compensation
for Occupational Injuries and Diseases Act 130 of 1996 (s 10(1)(gB)(i))
l pensions paid in respect of occupational injuries or disease sustained by an employee before
1 March 1994 if the employee would have qualified for compensation under the Compensation for
Occupational Injuries and Diseases Act, 1993, had the injury or disease been sustained or con-
tracted on or after 1 March 1994 (s 10(1)(gB)(ii))
l any compensation paid by an employer in respect of the death of an employee. The employee’s
death must arise out of and in the course of his or her employment. The compensation must be
paid in addition to the compensation that is paid in terms of the Workmen’s Compensation Act
110
30 of 1941 or the Compensation for Occupational Injuries and Diseases Act 130 of 1996. This
exemption only applies to the extent that the compensation paid does not exceed R300 000
(s 10(1)(gB)(iii))
l any compensation paid in terms of s 17 of the Road Accident Fund Act 56 of 1996
(s 10(1)(gB)(iv)). Section 17 of the Road Accident Fund Act 56 of 1996 provides that the Road
Accident Fund (RAF) has to compensate any person for any loss or damage which the person
has suffered as a result of any bodily injury to himself or the death of or any bodily injury to any
other person, caused by or arising from the driving of a motor vehicle by any person at any place
within South Africa.
5.11.5 Beneficiary funds (s 10(1)(gE))

Any amount awarded to a person by a beneficiary fund is exempt from normal tax. A beneficiary fund
is defined in the Pension Fund Act as a fund established with the object of receiving, administering
and investing death benefits on behalf of beneficiaries. These funds are set up as a last resort to
safeguard benefits that were paid from employer funds for the benefit of a minor on the death of an
employer-fund member, where no other suitable guardian, trust or other mechanism exists. All re-
maining funds will be paid to the minor when he or she reaches majority.
111
6 General deductions
Linda van Heerden

l demonstrate an in-depth knowledge of the general deduction formula in practical
case studies and theoretical advice questions (supporting your opinion by relevant
authority)
l apply the criteria that disallow an item to qualify for a tax deduction to both practi-
cal case studies and theoretical advice questions.
Contents
Page
6.1 Overview ........................................................................................................................... 114
6.2 The meaning of ‘carrying on a trade’ ................................................................................ 115
6.2.1 Pre-trade expenditure and losses (s 11A) ........................................................ 116
6.3 General deduction formula (s 11(a))................................................................................. 117
6.3.1 ‘Expenditure and losses’ ................................................................................... 117
6.3.2 ‘Actually incurred’ .............................................................................................. 117
6.3.2.1 Unquantified amounts: Acquisition of assets (s 24M) ....................... 119
6.3.2.2 Disposal or acquisition of equity shares (s 24N) ............................... 119
6.3.3 ‘During the year of assessment’ ........................................................................ 119
6.3.4 ‘In the production of the income’ ....................................................................... 120
6.3.5 ‘Not of a capital nature’...................................................................................... 121
6.4 Prepaid expenditure (s 23H)............................................................................................. 122
6.5 Section 23 prohibited deductions ..................................................................................... 125
6.5.1 Private maintenance expenditure (s 23(a)) ....................................................... 125
6.5.2 Domestic or private expenditure (s 23(b)) ........................................................ 125
6.5.3 Recoverable expenditure (s 23(c)) ................................................................... 125
6.5.4 Interest, penalties and taxes (s 23(d)) .............................................................. 126
6.5.5 Provisions and reserves (s 23(e)) ...................................................................... 126
6.5.6 Expenditure incurred to produce exempt income (s 23(f)) ............................... 126
6.5.7 Non-trade expenditure (s 23(g))........................................................................ 126
6.5.8 Notional interest (s 23(h)) .................................................................................. 127
6.5.9 Deductions claimed against any retirement fund lump sum benefits
and retirement fund lump sum withdrawal benefits (s 23(i)) ............................. 127
6.5.10 Expenditure incurred by labour brokers and personal service providers
(s 23(k)) ................................................................................................................... 127
6.5.11 Restraint of trade (s 23(l )) ................................................................................. 128
6.5.12 Expenditure relating to employment or an office (s 23(m)) ............................... 128
6.5.13 Government grants (s 23(n)) ............................................................................. 128
6.5.14 Unlawful activities (s 23(o)) ............................................................................... 128
6.5.15 The cession of policies by an employer (s 23(p)) ............................................. 129
6.5.16 Expenditure incurred in the production of foreign dividends (s 23(q))........... 129
6.5.17 Premiums in respect of insurance policies against illness, injury, disability,
unemployment or death of that person (s 23(r)) ............................................... 129
6.6 Prohibition against double deductions (s 23B) ................................................................ 129
6.7 Limitation of deductions in respect of certain short-term insurance policies (s 23L) ...... 129
6.8 Excessive expenditure ...................................................................................................... 130
6.9 Cost of assets and VAT (s 23C) ........................................................................................ 130
113
Page
6.10 Specific transactions ......................................................................................................... 131
6.10.1 Advertising ......................................................................................................... 131
6.10.2 Copyrights, inventions, patents, trade marks and know-how ........................... 131
6.10.3 Damages and compensation ............................................................................ 131
6.10.4 Education and continuing education ................................................................ 132
6.10.5 Employment and services rendered ................................................................. 132
6.10.6 Fines .................................................................................................................. 133
6.10.7 Goodwill ............................................................................................................. 133
6.10.8 Legal expenditure .............................................................................................. 133
6.10.9 Legal expenditure: Of a capital nature .............................................................. 133
6.10.10 Losses: Fire, theft and embezzlement .............................................................. 134
6.10.11 Losses: Loans, advances and guarantees ....................................................... 134
6.10.12 Losses: Sale of debts ........................................................................................ 135
6.10.13 Provisions for anticipated losses or expenditure .............................................. 135
6.1 Overview
‘Taxable income’ is the amount remaining after deducting all allowable deductions and allowances
from the ‘income’ as determined. The main sections of the Act dealing with deductions are ss 11 to
18A, 22 and 23.
Most deductions are allowed by virtue of a so-called general deduction formula comprising
l s 11(a), which sets out what may be deducted (the positive test), and
l s 23(g), which stipulates what may not be deducted (the negative test).
No deductions may be claimed in terms of the general deduction formula (and s 11 as a whole),
however, if the taxpayer is not carrying on a trade.
Prerequisite: Trade
l Definition
l Pre-trade expenditure
General deduction
formula
Positive test Negative test

Section 11(a) Section 23(g)
Always consider
Five requirements l section 23(a)–(r)
l section 23B
l section 23C
l section 23H
114
6.2 Chapter 6: General deductions
6.2 The meaning of ‘carrying on a trade’

The opening words of s 11 permit a deduction only if the taxpayer is carrying on a trade. The implica-
tion is that expenditure incurred prior to the commencement of that trade is not deductible in terms of
s 11. Certain pre-trade expenditure is allowed as deductions (s 11A – see 6.2.1).
The term ‘trade’ is given a very wide meaning in s 1 and 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, or any
design as defined in the Designs Act, or any trade mark as defined in the Trade Marks Act, or any copyright
as defined in the Copyright Act, or any other property which is of a similar nature.
In Burgess v CIR (1993 A) the principle that this definition should be given a wide interpretation was
described as being well established. It was further held that the taxpayer, who laid out money to
obtain a bank guarantee, which he risked in the hope of making a profit, was engaged in a ‘venture’,
‘a speculative enterprise par excellence’. Grosskopf JA said that a taxpayer carrying on what, stand-
ing on its own, amounts to the carrying on of a trade does not cease to carry on a trade simply be-
cause one of his purposes or even his main purpose is to enjoy a tax advantage.
‘If he carries on a trade, his motive for doing so is irrelevant.’
It was also pointed out that the definition is not necessarily exhaustive and that the term ‘trade’ was
intended to embrace every profitable activity.
It is very important to note that, although the term ‘trade’ is defined, the Act requires the carrying on of
a trade before a s 11 deduction can be claimed. While the views of SARS contained in Interpretation
Note No 33 (Issue 5) provide direction in interpreting this requirement, it states that SARS will consid-
er each case on its own and that much will depend upon the nature and extent of the taxpayer’s
activities. The ‘carrying on of a trade’ might imply that there must be a continuity of activities, but in
the case of Stephan v CIR (32 SATC 54) a single venture was held to be the ‘carrying on of a busi-
ness’ (which term is included in the definition of ‘trade’).
The principle of continuity may result in the denial of deductions against rental income earned from a
single residential property. Although the letting of property is included in the definition of ‘trade’, it
does not necessarily constitute the carrying on of a trade. In practice, the Commissioner may allow
deductions, but limit them to the income, so that it does not result in an assessed loss. If a natural
person has an assessed loss from rental activities, it may be ring-fenced if s 20A is applicable – in
other words, other taxable income may not be offset against the assessed loss (see chapter 7).
Continuity and the profit motive are not prerequisites, however, for the carrying on of a trade. The
activities concerned should be examined as a whole in order to establish whether the taxpayer is in
fact carrying on a trade (Estate G v COT (1964 SR)). It is submitted that in appropriate circumstances
a taxpayer will be carrying on a trade even if he has no objective to make a profit, or even if he delib-
erately sets out to make a loss. In De Beers Holdings (Pty) Ltd v CIR (1985 AD) it was stated that a
taxpayer may elect to trade for some other commercial advantage for his business or that he may be
compelled to sell at a loss. This principle was established in the earlier case of Modderfontein Deep
Levels Ltd v Feinstein (1920 TPD).
In spite of its wide meaning, the term ‘trade’ does not include all activities that might produce income,
for example income in the form of interest, dividends, annuities or pensions (the so-called ‘passive’
earning of income). Interpretation Note No 33 (Issue 5) (par 4.1.6) explains this as the ‘active step’
requirement and states that it means something more than watching over existing investments that
are not income producing and are not intended or expected to be so.
A person who accumulates his savings and invests them in interest-bearing securities or shares held
as assets of a capital nature does not derive the income from carrying on any trade (ITC 1275
(1978)). In practice, SARS accepts that if capital is borrowed specifically to reinvest, such a trans-
action results in trade income and the expenditure is, therefore, allowable. On this basis, it will allow
interest incurred in order to earn interest income as a deduction. The Commissioner’s practice is set
out in Practice Note No 31, the relevant portion of which reads:
While it is evident that a person (not being a moneylender) earning interest on capital or surplus funds in-
vested does not carry on a trade and that any expenditure incurred in the production of such interest can-
not be allowed as a deduction, it is nevertheless the practice of Inland Revenue to allow expenditure in-
curred in the production of interest to the extent that it does not exceed such income. This practice will also
be applied in cases where funds are borrowed at a certain rate of interest and invested at a lower rate.
Although, strictly in terms of the law, there is no justification for the deduction, this practice has developed
over the years and will be followed by Inland Revenue.
115
In Robin Consolidated Industries Ltd v CIR (1997 A, 59 SATC 199), two issues had to be considered
by the court. The first issue was whether the taxpayer had ‘carried on a trade’ during a particular year
of assessment.
The taxpayer was a manufacturer, wholesaler and retailer of stationery and associated products,
operating throughout the country via subsidiary companies. The taxpayer became insolvent and was
placed in provisional liquidation. The liquidators sold the taxpayer’s business ‘lock, stock and barrel’,
except for the exclusion of certain assets. Goods and stock in bond were excluded from the sale.
Whilst in liquidation, two sale transactions, i.e. the sale of goods in bond and stock in bond respect-
ively, were undertaken by the liquidators. The court held that transactions concluded by the liquid-
ators involving the realisation of the taxpayer’s stock during liquidation do not constitute the carrying
on of a trade by the taxpayer himself.
6.2.1 Pre-trade expenditure and losses (s 11A)

Expenditure and losses are generally only deductible if incurred after the commencement of a trade.
In the process of commencing a trade and setting up an income-producing structure, a taxpayer
incurs various expenditure in preparation for the carrying on of that trade before trading starts. Such
pre-trade expenditure normally includes assets bought and salaries or rent paid and is regarded as
capital expenditure because they relate to the setting up of an income-producing structure (the
business or trade). Section 11A allows certain qualifying expenditure and losses, incurred before the
commencement of that trade and not previously claimed or allowed as a deduction, as a deduction
once that specific trade is carried on. Only expenditure qualifying for a specific deduction in terms of
s 11(a) to (w) (not s 11(x)), s 11D (research and development expenditure) or s 24J (interest in-
curred) can be deducted as pre-trade expenditure.
Section 11(x) brings within the scope of s 11 all amounts allowed to be deducted in terms of other
provisions of Part I of the Act, which deal with normal tax. If such amounts (amounts in ss 11D and
24J excluded), however, were incurred before the commencement of the carrying on of the tax-
payer’s trade, it will not qualify for deduction in terms of s 11A being specifically excluded.
If the pre-trade expenditure and losses qualifying for this deduction exceed the income from that
trade, such excess may not be set off against income from another trade (s 11A(2)). Such excess
may be carried forward to the following year and may then be set off against income from that same
trade (s 11A(1)(c)).
Interpretation Note No 51 (Issue 3) describes SARS’s interpretation of s 11A in more detail.
Example 6.1. Pre-trade expenditure
Assume that the following events took place within the year of assessment ending on 31 December
2017.
A vacant administration building was purchased on 25 January 2017. Transfer costs amounted
to R30 000. The building was renovated at a cost of R250 000. The renovations were completed
on 1 July 2017, the same date on which the occupants moved in and became liable for rent to
the property owner. The property owner therefore commenced with the carrying on of this trade
on 1 July 2017. Rental income of R50 000 and royalty income (not related to the rental trade) of
R10 000 accrued to the property owner during the year of assessment.
Rates and taxes in respect of the building amounted to the following:
l for the period 25 January 2017 to 30 June 2017 – R60 000
l in respect of the remainder of the year of assessment – R33 000.
What amounts will qualify for a deduction in terms of s 11A?
SOLUTION
Transfer costs as well as renovation expenditure are not deductible, because these are expendi-
tures of a capital nature. Both ss 11(a) and 11A do not allow for a deduction of expenditure of a
capital nature.
The expenditure of R60 000 in respect of rates and taxes was incurred before a trade was car-
ried on. It is for this reason that this expenditure will not qualify as a deduction in terms of any
provision other than s 11A.
continued
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6.2–6.3 Chapter 6: General deductions
The calculation of taxable income is as follows:

Taxable income from the rental trade:
Gross income – rental received ...................................................................................... R50 000
Less: Deductions
Expenditure incurred whilst carrying on the trade (s 11(a)) ........................................... (33 000)
Pre-trade expenditure (s 11A)(R60 000 limited to R17 000) ........................................... (17 000)
Taxable income .............................................................................................................. Rnil
The R43 000 (R60 000 – R17 000) excess of pre-trade expenditure may be carried forward to the
next year, when it will qualify for a deduction against his rental trade income.
Taxable income from non-rental trade:
Gross income – royalty income ...................................................................................... R10 000
The property owner will be subject to tax on the royalty income. He may not set off the excess of
R43 000 against this income in terms of s 11A(2).
6.3 General deduction formula (s 11(a))

The courts have laid down a general deduction formula by holding that ss 11(a) and 23(g) must be
read together when one considers whether an amount may be deducted (Port Elizabeth Electric
Tramway Co Ltd v CIR (1936 CPD)).
The general deduction formula may therefore be broken down into the following elements:
l expenditure and losses
l actually incurred
l during the year of assessment (from case law – see 6.3.3)
l in the production of the income
l not of a capital nature
l either in part or in full laid out or expended for the purposes of trade (s 23(g)).
The above elements, all of which must be satisfied before an amount can be deducted in terms of the
general deduction formula, are discussed in the following paragraphs.
6.3.1 ‘Expenditure and losses’

The courts have not defined the word ‘losses’. In Joffe & Co (Pty) Ltd v CIR (1946 AD) the court
considered that the word had several meanings; that, in the context of a provision almost identical to
s 11(a), its meaning was ‘somewhat obscure’; and that it was not clear whether it meant anything
different from ‘expenditure’. Watermeyer CJ, who delivered the judgment of the Appellate Division of
the Supreme Court, said (at 360) that:
. . . in relation to trading operations the word is sometimes used to signify a deprivation suffered by the loser,
usually an involuntary deprivation, whereas expenditure usually means a voluntary payment of money.
In Port Elizabeth Electric Tramway Co Ltd v CIR (1936 CPD) the court considered that, in the context,
the word appeared ‘to mean losses of floating capital employed in the trade which produces the
income’.
In CSARS v Labat (2011 SCA) the Supreme Court of Appeal held that the terms ‘obligation’ or ‘liabil-
ity’ and ‘expenditure’ are not synonyms. The ordinary meaning of ‘expenditure’ refers to the action of
spending funds; disbursement or consumption; and hence the amount of money spent. In the context
of the Act, it would also include the disbursement of other assets with a monetary value. Expenditure,
accordingly, requires a diminution (even if only temporary) or at the very least movement of assets of
the person who expends.
6.3.2 ‘Actually incurred’

The use of the words ‘actually incurred’ rather than the words ‘necessarily incurred’ widens the field of
deductible expenditure. For instance, one man may conduct his business inefficiently or extravagant-
ly, incurring expenditure that another man does not incur; such expenditure is therefore not ‘neces-
sary’, but it is incurred and is therefore deductible (Port Elizabeth Electric Tramway Co Ltd v CIR
(1936 CPD)).
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In Caltex Oil (SA) Ltd v SIR (1975 A) it was held that ‘expenditure actually incurred’ does not mean
expenditure actually paid during the year of assessment. It was said to mean ‘all expenditure for
which a liability has been incurred during the year, whether the liability has been discharged during
that year or not’. Actual payment is therefore not essential for the deduction of expenditure.
The meaning of ‘incurred’ was addressed by Corbett JA, in delivering the judgment of the majority of
the Appellate Division in Edgars Stores Ltd v CIR (1988 A), it was stated (at 90):
[I]t is clear that only expenditure (otherwise qualifying for deduction) in respect of which the taxpayer has
incurred an unconditional legal obligation during the year of assessment in question may be deducted in
terms of s 11(a) from income returned for that year . . . if the obligation is initially incurred as a conditional
one during a particular year of assessment and the condition is fulfilled only in the following year of assess-
ment, it is deductible only in the latter year of assessment (the other requirements of deductibility being
satisfied). (Own emphasis.)
There must therefore be an unconditional legal liability before an amount is ‘actually incurred’. A
limitation is placed on the amount of certain deductions that may be claimed for tax purposes even
though the expenditure was ‘actually incurred’ in the year of assessment (s 23H – see 6.4)).
The words ‘actually incurred’ rule out the deduction of
l provisions for expenditure or losses that are uncertain, or
l expenditure or losses that may arise in the future, or
l expenditure or losses that are no more than impending or expected.
Therefore, estimates of contingent (uncertain) liabilities are not expenditure actually incurred. If an
expenditure was incurred (an unconditional liability) but cannot be quantified, the amount must be
estimated based on available information and claimed in that tax year (CIR v Edgars Stores Ltd (1986
TPD)). Moreover, a deduction of income carried to any reserve fund or capitalised in any way is
prohibited (s 23(e)). If there is no definite and absolute liability during the year of assessment to pay
an amount, expenditure has not been ‘actually incurred’ (Nasionale Pers Bpk v KBI (1986 A)).
Example 6.2. Actually incurred

ABC Ltd has a June financial year end. Due to an expected price increase, trading stock
amounting to R500 000 was bought on 25 June 2017. The invoice was issued on 26 June 2017
but delivery only occurred on 3 July 2017.
ABC Ltd may not claim the R500 000 in terms of s 11(a) in the 2017 year of assessment as the
expenditure is not an ‘unconditional legal obligation incurred’. The expenditure is only actually
incurred when the trading stock is delivered in the 2018 year of assessment.
When a taxpayer has originally acquired any asset with the purpose of holding it as an asset of a
capital nature, such expenditure will not be deductible in terms of s 11(a). If the taxpayer subse-
quently changes his intention and deals with it in such a way as to convert it into an asset of an
income nature (therefore becoming trading stock), the expenditure may qualify for the s 11(a) deduc-
tion.
The deduction that he may claim upon the disposal of the asset is the original cost actually incurred
by him and not the market value of the asset at the time of his change of intention (Natal Estates Ltd v
SIR (1975 A)). If, however, it is trading stock that is treated as having been acquired at a cost equal
to the market value (in terms of par 12(2)(c) of the Eighth Schedule), that market value constitutes the
cost price of the trading stock (s 22(3)(a)(ii)).
If a taxpayer disputes the validity of a claim against him, the disputed expenditure is not actually
incurred since the liability for the expenditure is not unconditional. To permit the deduction of disput-
ed expenditure would encourage abuse. This situation went on appeal in CIR v Golden Dumps (Pty)
Ltd (1993 A), where Nicholas AJA, who delivered the judgment of the Appellate Division, dealt with
the issue (at 206) in the following manner:
Where at the end of the tax year in which a deduction is claimed, the outcome of the dispute is undeter-
mined, it cannot be said that a liability has been actually incurred. The taxpayer could not properly claim
the deduction in that tax year, and the Receiver of Revenue could not, in the light of the onus provision of
s 82 of the Act, properly allow it. (Section 82 has since been repealed and replaced by s 102 of the Tax
Administration Act, 2011.)
It has been held that the issue of shares by a company does not mean that the company incurred an
expenditure (ITC 1783 (66 SATC 373)). The implication is that if, for example, a company issues a
share in exchange for a service, no cost was incurred in respect of the service and no deduction may
be claimed. The later judgment in ITC 1801 stated that ‘. . . the decision in ITC 1783 was clearly wrong
and not a reflection of the law . . .’. It was held that expenditure is actually incurred if a company issues
118
shares in order to discharge a liability that arose when it was obtained. An example of this is where
an asset is given in exchange for those shares (ITC 1801 (68 SATC 57)). This was confirmed by the
High Court in CSARS v Labat Africa Ltd (72 SATC 75) when shares were issued for the acquisition of
a trade mark. The SCA, however, disagreed with the court a quo in CSARS v Labat (2011 SCA) and
held that an allotment or issuing of shares does not involve a shift of assets of the company even
though it might, but not necessarily, dilute or reduce the value of the shares in the hands of the exist-
ing shareholders. The allotment or issuing of shares in exchange for the acquisition of an asset can
therefore not qualify as an expenditure.
Transactions where assets are acquired in exchange for shares issued, are now contained in
ss 24BA and 40CA of the Act (see chapter 19).
6.3.2.1 Unquantified amounts: Acquisition of assets (s 24M)

If a person acquires an asset for a consideration that cannot be quantified in that year of assessment,
the part of the consideration that cannot be quantified is deemed not to be incurred by that person in
that year of assessment. The unquantified portion is deemed to be incurred only in the year of as-
sessment in which it can be quantified (s 24M(2)).
6.3.2.2 Disposal or acquisition of equity shares (s 24N)

Section 24N applies when a person sells equity shares to another person during the year of assess-
ment at a quantified or quantifiable amount but the amount is not yet payable by the purchaser to the
seller. The amount is deemed to accrue and to be incurred to the extent to which it becomes due and
payable (s 24N(1)) if the following requirements are met:
l More than 25% of the amount payable for the shares becomes due and payable after the end of
the seller’s year of assessment and is based on the future profits of that company. It is important
to note that, even though the future profits have to be determined before the amount payable can
be quantified, the date on which such amount becomes due and payable triggers taxability and
deductibility.
l The value of all the equity shares sold during the year to which s 24N applies exceeds 25% of the
total value of equity shares in the company.
l The purchaser and seller are not connected persons after the disposal.
l The purchaser is obliged to return the equity shares to the seller in the event of his failure to pay
any amount when due.
l The amount is not payable by the purchaser to the seller in terms of a financial instrument that is
payable on demand and is readily tradeable in the open market (s 24N(2)).
6.3.3 ‘During the year of assessment’

Although s 11(a) does not specifically require it, the courts have held that expenditure is only deduct-
ible in the year of assessment in which it is incurred (Concentra (Pty) Ltd v CIR (1942 CPD)). Expend-
iture cannot be carried forward to a subsequent year or carried back to a previous year. This is so
even though it may properly relate to the income of those particular years. However, this rule is subject
to the provisions of s 23H (see 6.4), which may in certain instances allow a deduction of expenditure
which was incurred in a previous year of assessment.
Remember
If an amount is not claimed as a deduction in the correct year of assessment, the deduction may
not be claimed in a later year.
Example 6.3. Incurred during the year of assessment
Directors’ fees were authorised but not paid during a specific year of assessment (Year 1). The
s 11(a) deduction in respect of this expenditure was claimed only in the following year of assess-
ment, during which the directors’ fees were paid (Year 2).
As the expenditure was actually incurred in Year 1 after being authorised, the s 11(a) deduction
should have been claimed in Year 1. The deduction will not be allowed in Year 2.
Expenditure incurred during the year of assessment must be quantified and brought into account at
the end of that year. If an asset is acquired for an unquantifiable amount, such expenditure is
deemed to be incurred only in the year that the amount can be quantified (s 24M(2)(b)).
119
6.3.4 ‘In the production of the income’

The ‘income’ referred to in the phrase ‘in the production of income’ is income (as defined in s 1)
namely, the gross income less the exempt income. Section 23(f), which prohibits a deduction of
expenditure incurred in respect of any amounts received or accrued that are not included in the term
‘income’ as defined in s 1, achieves the same result.
Remember
No deduction can be claimed if it does not relate to the production of income as defined.
Example 6.4. In the production of income
ABC Ltd incurred R3 000 of expenditure in order to receive local dividends of R5 000. Since
dividends are exempt from income in terms of s 10(1)(k), it does not form part of ‘income’ as
defined. The expenditure of R3 000 cannot be claimed as a deduction in terms of s 11(a).
The meaning of the expression ‘in the production of the income’ was considered in Port Elizabeth
Electric Tramway Co Ltd v CIR (1936 CPD). The taxpayer concerned was a transport company. The
driver of one of its cars was involved in an accident and, as a result, the driver suffered injuries and
eventually died. The company was compelled to pay compensation to the deceased’s dependants.
To determine whether the expenditure was in the production of income, two questions were asked:
(1) What action gave rise to the expenditure?
In this case, the action of the employment of an employee as a driver gave rise to the expend-
iture.
(2) Is this action so closely connected with (or a necessary concomitant of) the income-earning
activities from which the expenditure arose as to form part of the cost of performing it?
The earning of income-earning activity is the transporting of passengers. The action that gave
rise to the expenditure is the employment of drivers. There is an inherent potential risk of an ac-
cident and a potential liability when driving any vehicle. The two elements are closely connect-
ed with each other.
The expenditure was considered to be closely connected with each other (a necessary concomitant
of the business activities) and was therefore allowed as a deduction.
Example 6.5. Incurred in the production of income
XYZ (Pty) Ltd, a construction company, had to pay damages to the dependants of deceased
employees who were killed when the roof of a building under construction collapsed. Will the
damages be allowed as a s 11(a) deduction?
l Question 1: What action gave rise to the expenditure?
The erection of a defective roof by an employee who is employed as a builder.
l Question 2: Is this action closely connected with the income-earning activities?
The erecting of defective roofs is not closely connected to any construction business. (See
Joffe & Co (Pty) Ltd v CIR (1946 AD) (6.10.3) for a similar finding.) It is not a necessary con-
comitant of the construction business but rather an avoidable expenditure. The damages will
therefore not be deductible in terms of s 11(a).
It is not necessary that expenditure produces income in the year that it was incurred before it is
deductible (Sub-Nigel Ltd v CIR (1948 A)). The income may be earned only in a future year, but as
long as the expenditure was incurred for the purpose of earning that income, it is deductible. In light
of this principle, it was held in the aforementioned case that premiums paid on insurance policies
against loss of income and losses due to fire are incurred in the production of income.
Amounts paid to former employees when they retire, in recognition of prior services rendered, will not
qualify as a deduction. This expenditure is not in the production of any current or future income
(Johnstone & Co Ltd v CIR (1951 A)). If, however, as in the case of Provider v COT (1950 SR), the
expenditure is incurred to induce the employees to enter and remain in the service of the taxpayer,
the expenditure may qualify as a deduction since the purpose is to produce current or future income.
Amounts paid in terms of a service agreement will be deductible (see 6.10.5).
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In CSARS v Mobile Telephone Networks Holdings (Pty) Ltd (2014 SCA) the Commissioner only allow-
ed a portion of the audit fees as a deduction. Mobile Telephone Networks Holdings lent money to its
subsidiaries and earned dividends from investments made. The High Court referred to ITC 1589 57
SATC 153 (Z) where it was held that expenses relating to the portion of the accountancy work relating
to dividend income should be disallowed (being exempt income) and the remainder of the account-
ancy work relating to income producing activities should be allowed. The Highest Court of Appeal
held that the apportionment must be fair and reasonable. The court held that the value of the
taxpayer’s equity and dividend activities were much bigger than the more limited income-generating
activities, and, with this as yardstick, only 10% of the audit fees was allowed as a deduction in terms
of s 11(a). (This in contrast with the decision of the court a quo to use the amount of work done during
the audit as the yardstick and in terms thereof allowing 94% of the audit fees as a deduction. This
was held based on the basis that only 6% of the time was spent on the audit of the dividend section.)
The apportionment of expenditure incurred with a dual purpose, namely to produce moneys on resale
(income) and dividends (exempt income) was considered in CIR v Nemojim Pty (Ltd) (45 SATC
241).The court held that the expenditure had to be apportioned since the purpose could not accurately
be appropriated either to income or to exempt income.
6.3.5 ‘Not of a capital nature’

It is often difficult to distinguish between capital and non-capital or ‘revenue’ expenditure. Although
there is a mass of judicial decisions on the subject, it is impossible to extract a universal test that will
provide for all situations. One has to look at the facts of each case and the purpose of the expendi-
ture concerned in order to ascertain whether the expenditure is on capital or revenue account. De-
spite the principle that there is no half-way house between capital and revenue, apportionment
between expenditure incurred with a dual purpose has been allowed by the courts in, for example,
SIR v Guardian Assurance Holdings (SA) Ltd (38 SATC 111).
The courts have nevertheless laid down the following very useful tests for distinguishing between capi-
tal and revenue expenditure:
New State Areas Ltd v CIR (1946 AD) (at 163):
The fixed v floating capital test laid down in an earlier case was used for assistance, but the main test
used in the decision was, the "operations v structure" test.
l Floating capital (being capital that frequently changes its form from money to goods and vice
versa, for example the purchase cost of stock) is income in nature.
l Fixed capital (being capital employed to acquire or improve property, plant, tools, etc., which
may qualify for capital allowances) is capital in nature.
l Expenditure incurred to perform the income-earning operations is income in nature.
l Expenditure incurred to establish, improve or add to the income-earning structure is capital in
nature.
SIR v Cadac Engineering Works (Pty) Ltd (1965 A):
There must be a sufficiently close link between the expenditure and the taxpayer’s income-earning
operations in order to warrant the conclusion that it formed part of the cost of performing the tax-
payer’s income-earning operations, rather than the cost of expanding his income-producing structure.
If the expenditure is more closely related to the taxpayer’s income-earning structure than to his in-
come-earning operations, it is capital expenditure.
Rand Mines (Mining & Services) Ltd v CIR (1997 A):
The facts of this case revealed that millions of rands were spent in acquiring a contract to manage a
mine. This expenditure was held to be capital in nature because it was a cost expended to acquire
that income-earning right or structure. The acquisition was intended to provide an enduring benefit.
BP Southern Africa (Pty) Ltd v CSARS (69 SATC 79):
Where no new capital asset for the enduring benefit of the taxpayer has been created (enduring in the
way that fixed capital endures), the expenditure naturally tends to assume more of a revenue charac-
ter.
The question arises: how long must the asset or advantage endure in order to constitute a capital
asset? The fact that an asset will endure for a very short period will support a view that a payment for
that asset or right is of a revenue nature and may therefore qualify for a deduction in terms of the
general deduction formula. On the other hand, when a right is acquired for a substantial period,
it constitutes an enduring benefit. This was the position in ITC 1036 (1964), in which a right was
121
granted for three years, with a right of renewal for a further two years. This type of expenditure will
therefore not qualify for deduction in terms of the general deduction formula. The degree of longevity
of the right or asset is a question of fact, and each case must be considered on its own merits.
Based on the facts of particular cases, the following expenditure has been found to be of a capital
nature and is thus not deductible:
l Money spent in the acquisition of fixed capital assets for use in a business (for example factory
premises and plant and machinery). Included here would be all expenditure connected with or
attached to the acquisition of capital assets (for example transfer duty on factory premises ac-
quired, railage paid on plant acquired for use in a business, and installation costs).
l Money spent in order to create a source of income, for example, the purchase price of the good-
will of a business.
l Expenditure incurred by a company in obtaining share capital (for example by way of underwriting
commissions, advertising and legal costs in connection with an offer of shares to the public).
l Transfer fees paid on the transfer of a liquor licence from one set of premises to another.
l The cost of erecting a model house on a hired site for the exhibition of the goods of a furniture
dealer. Although the purpose of the erection is to advertise the dealer’s products, the advertising
is of a permanent nature and results in the creation of a capital asset.
l Amounts paid to extinguish competition in order to expand the goodwill of a business.
l Losses incurred by a freelance journalist in building up a part-time business in journalism.
Losses of a capital nature are also prohibited as a deduction in terms of the general deduction formula.
The following are examples of losses of a capital nature that are not deductible under the general
deduction formula:
l the loss of money lent, except where the money is lost by moneylenders, financiers or others
whose business it is to make loans
l losses on fixed capital assets (for example as a result of the destruction of plant or premises by
fire or the theft of machinery, furniture or other capital assets)
l the loss incurred by a tenant on the termination of his lease in connection with improvements
effected by him to the hired premises
l losses on the realisation of shares, except when it is the business of the taxpayer to deal in shares.
Although expenditure may be deductible in terms of the general deduction formula, the expenditure
must still pass the negative test contained therein. Section 23 contains a list of items that may not be
claimed as a deduction (see 6.5).
6.4 Prepaid expenditure (s 23H)

Section 23H provides exceptions to the normal rule that expenditure is only deductible in the year of
assessment in which it is incurred (see 6.3.3). It limits the allowable deductions for certain prepaid
expenditure to the extent that only the expenditure relating to the goods supplied, the services ren-
dered or the benefits enjoyed during the year of assessment will be deductible in that year of as-
sessment.
Section 23H can only apply if two conditions are met and none of the four exceptions listed in the
provisos is applicable. The two conditions that must be met are:
l the expenditure must be allowable as a deduction in terms of the provisions of s 11(a) (general
deduction formula (excluding the acquisition of trading stock)), s 11(c) (legal expenditure),
s 11(d) (repairs), s 11(w) (premiums in respect of key-man policies) or s 11A (qualifying pre-trade
expenditure and losses), and
l the expenditure must be in respect of
– goods or services, but all the goods or services will not be supplied or rendered during the
year of assessment, or
– any other benefits, but the period to which the expenditure relates extends beyond the year of
assessment.
122
Unless any of the exceptions in the four provisos below are applicable, the allowable deduction in the
year in which the expenditure is incurred and subsequent years of assessment will be limited as
follows:
l Expenditure incurred in respect of goods to be supplied: only expenditure in respect of goods
actually supplied in a particular year will be deductible in that specific year of assessment.
l Expenditure incurred in respect of services to be rendered: the amount to be deducted in any
year will be determined as follows:
Months in the year during which the services are rendered
× Total expenditure on the service
Total number of months during which services are to be rendered
l Expenditure incurred in respect of any other benefit that the person will enjoy: the amount to be
deducted in any year will be determined as follows:
Months in the year during which the person will enjoy the relevant benefit
Total number of months during which he will enjoy the benefit × Total expenditure on the benefit
The deductibility of the prepaid portion in respect of which the benefits will only be received or en-
joyed in a future year is postponed to that future year (s 23H(1)). If the above-mentioned apportion-
ment does not reasonably represent a fair apportionment in respect of the goods, services or benefits
to which it relates, the apportionment must be made in such manner as is fair and reasonable
(s 23H(2)).
Section 23H does not apply in the following situations (meaning that the deduction of the amount
actually incurred will therefore not be limited and the full amount will be deductible):
l If all the goods or services are to be supplied or rendered or enjoyed within six months after the
end of the year of assessment during which the expenditure was incurred, unless the expenditure
is allowable under s 11D(2)) (research and development expenditure) (proviso (aa)). The Act is
unclear about whether the six-month rule must be applied to each individual prepaid expenditure,
or to all prepaid expenditure in total. The contra fiscum rule should be followed and therefore
every prepaid expenditure should be measured separately.
l If the aggregate of all the amounts of expenditure incurred by the person, which may otherwise
have been limited by s 23H, does not exceed R100 000 (proviso (bb)). The total of all the prepaid
portions of all the expenditure to which s 23H could have been applied (meaning amounts which
are not subject to another exception in proviso (aa), (cc) or (dd)) must be measured against the
R100 000.
l Any expenditure to which the provisions of s 24K (interest-rate agreements) or 24L (option con-
tracts) apply (proviso (cc)).
l Any expenditure actually paid in respect of any unconditional liability to pay an amount imposed
by legislation. For example, if municipal law requires a person to pay property tax upfront, this
expenditure will not be subject to the limitations of s 23H (proviso (dd)).
Remember
The exceptions in provisos (aa), (cc) or (dd) must first be considered. Only amounts not
subject to any of them will be taken into account for the purposes of the R100 000 exception in
proviso (bb).
If a person can show during any year of assessment that the goods or services will never be received
by or rendered to him, or that he will never enjoy the benefit, the expenditure can be claimed as a
deduction during that year to the extent that it has actually been paid by the person (s 23H(3)).
Example 6.6. Prepaid expenditure

An individual signed a contract on 1 January of the current year of assessment ending on 28 Feb-
ruary 2018. The contract entitles him to the use of a machine for a period of five years. The lease
expenditure qualifies for a deduction in terms of s 11(a). The contract provides for a once-off lease
payment of R600 000, which becomes due and payable on the date of signature of the contract.
continued
123
Section 23H could apply because the two conditions are met. Since none of the exceptions are
applicable, s 23H will limit the amount that may be deducted in terms of s 11(a) in each of the
years of assessment as follows:
2018 year of assessment:
1 January to 28 February
2 600000
u .......................................... R20 000
12 5
2019–2022 years of assessment:

12 600 000
u ...................................... R120 000
12 5
2023 year of assessment:

10 600 000
u ...................................... R100 000
12 5
Example 6.7. Prepaid expenditure

X Ltd incurred the following expenditure during the year of assessment ending on 30 June 2018:
On 1 February 2018 Annual rent of the office premises ............................................ R90 000
On 1 March 2018 Annual fee for security services ................................................ 120 000
On 1 May 2018 Goods (3 months’ supply – R8 000 worth of goods will be
received on each of 31 May 2018, 30 June 2018 and
31 July 2018) ............................................................................ 24 000
TOTAL ........................................................................................................................... R234 000
What amount will be deductible during the current year of assessment?
SOLUTION
All the expenditures are deductible in terms of s 11(a). Not all of the goods will be supplied
during the year and the period to which benefits (from renting the office and the rendering of
security services) relate extends beyond the year of assessment. Section 23H therefore applies.
The current year portion and prepaid portion of the expenditures are calculated as follows:
Current
Prepaid
year
Rent R90 000 × 5/12 ........................................................... R37 500
Rent R90 000 × 7/12 ........................................................... R52 500
Security services R120 000 × 4/12 ......................................................... 40 000
Security services R120 000 × 8/12 ......................................................... 80 000
Goods R24 000 × 2/3 ............................................................. 16 000
Goods R24 000 × 1/3 ............................................................. 8 000
Total ............................................................................................................ R93 500 R140 500
Test whether one of the provisos would render s 23H inapplicable.
Proviso (aa) (test each expenditure separately)
All the goods will be supplied within six months after year end and proviso (aa) will therefore be
applicable to that expenditure and the total amount of R24 000 can be deducted.
All the benefits from the rent of the office and the security services will not be enjoyed within six
months after year end. Proviso (aa) will therefore not apply to those expenditures and the s 23H
limitation might be applicable. Test for proviso (bb) in respect of the rent expenditure and the
security services.
Proviso (bb) (test prepaid portions together)
The total expenditure actually incurred that may otherwise have been limited by s 23H (meaning
amounts not subject to another exception) relates to the prepaid portion, and amounts to R132 500
(R80 000 + R52 500). Since this amount does exceed the R100 000 threshold, s 23H will apply and
only the current year portions of the rent expenditure (R37 500) and the security services (R40 000)
will be deductible.
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6.5 Section 23 prohibited deductions

Section 23 provides that no deduction may be made in respect of the following expenditure, irre-
spective of the fact that the general deduction formula might allow for a deduction:
6.5.1 Private maintenance expenditure (s 23(a))

The costs incurred in the maintenance of any taxpayer, his family or establishment (his home) are not
allowed as a deduction.
In CIR v Hickson (1960 A) Beyers JA, who delivered the judgment of the Appellate Division of the
Supreme Court, said (at 249):
I take ‘maintenance of the taxpayer, his family or establishment’ to mean feeding and clothing himself and
his family, providing them with the necessities of life, and comforts, and, as it were, maintaining a certain
standard of living, and keeping up his establishment.
6.5.2 Domestic or private expenditure (s 23(b))

Domestic or private expenditure, including the rent of, cost of repairs, or expenditure in connection
with any private home, is not allowed as a deduction except for any part (usually based on floor area)
occupied for the purposes of trade.
In CIR v Hickson (1960 A) Beyers JA said (at 249):
‘Domestic and private expenditure’ are, I should say, without attempting an exhaustive definition, expend-
iture pertaining to the household, and to the taxpayer’s private life as opposed to his life as a trader.
The cost of employment of a household servant to enable a taxpayer’s spouse to take up a job, a
taxpayer’s expenditure incurred in travelling from his residence to his place of business and medical
expenditure incurred are all examples of domestic or private expenditure.
A part of any private home only qualifies as being occupied for the purposes of trade if it is
l specifically equipped for the purposes of the taxpayer’s trade, and
l regularly and exclusively used for trade purposes
(proviso (a)).
If the trade for which such part of a private house is occupied does not constitute any employment or
office, the taxpayer must only meet the aforementioned two requirements in order to claim a deduc-
tion of costs relevant to such part.
Apart from the aforementioned requirements, if the trade constitutes any employment or office, the
taxpayer must also comply with one of the following two conditions before a deduction is allowed:
l in the case where the income from that employment or office is derived mainly (‘mainly’ means
more than 50%) from commission or other variable payments based on his work performance: the
taxpayer’s duties are mainly performed otherwise than in an office provided to him by his or her
employer, or
l in the case where the income from employment is not derived mainly from commission: the tax-
payer’s duties are performed mainly in the qualifying part of the private home
(proviso (b)).
The effect of the provisos is that a portion of the taxpayer’s relevant domestic or private expenditure
incurred in respect of that part of his or her private home used for the purpose of trade, will be al-
lowed as a deduction if the aforementioned requirements are met. Examples of such expenditure are
property rates and interest on a mortgage loan. Section 23(b) must be read together with s 23(m)
(see 6.5.12).
6.5.3 Recoverable expenditure (s 23(c))

Any loss or expenditure that is recoverable under any contract of insurance, guarantee, security or
indemnity is not allowed as a deduction. The meaning of the word ‘recoverable’ is unsure. The opin-
ion (without giving a definite decision) that the word means ‘capable of being sued for’ was given in
Oosthuizen v Standard Credit Corporation (1993 A) (on 350).
Since the general recoupment provision (s 8(4)(a)) will in any event bring any recovery or recoup-
ment of a previously deducted amount back into income, this prohibition seems to be superfluous.
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6.5.4 Interest, penalties and taxes (s 23(d))

The deduction of any tax imposed under the Act or any interest or penalty imposed under any other
Act administered by the Commissioner (for example the VAT Act) is disallowed.
6.5.5 Provisions and reserves (s 23(e))

Income carried to any reserve fund or capitalised in any way (for example a provision made out of in-
come to provide for a contingent liability) is denied as a deduction.
This provision underlines the ‘actually incurred’ requirement in terms of the general deduction for-
mula. The creation of a provision definitely does not represent the ‘incurrence’ of expenditure. Sec-
tion 23(e) will not apply where the Act specifically allows for the creation of a reserve, for example the
provision for doubtful debt (in s 11(j)).
6.5.6 Expenditure incurred to produce exempt income (s 23(f ))

Expenditure incurred in respect of any amounts that are not included in the term ‘income’ as defined
in s 1 will not qualify as a deduction. ‘Income’ is defined as gross income less exempt income.
The purpose of this prohibition is to prevent the deduction of expenditure incurred in the production
of gross income that is exempt in terms of s 10 or amounts excluded from the definition of ‘gross
income’, because such amounts are consequently excluded from the definition of ‘income’.
A typical example is expenditure incurred to produce dividends that are exempt from tax (see 6.3.4).
It is submitted that expenditure of a general character that cannot accurately be appropriated either
to income or to non-taxable amounts should be apportioned.
Corbett JA suggested a method for the application of this prohibition in delivering the judgment of the
Appellate Division in CIR v Nemojim (Pty) Ltd (1983 A) (at 256):
It seems to me . . . that when considering whether moneys outlaid by the taxpayer constitute expenditure
incurred in respect of amounts received or accrued which do not constitute ‘income’ as defined (for the
sake of brevity I shall call this ’exempt income‘), the court must assess the closeness of the connection be-
tween the expenditure incurred and the exempt income received or accrued, having regard to the purpose
of the expenditure and what the expending thereof actually effects. (Own emphasis.)
In CIR v Standard Bank of SA Ltd (1985 A) it was stated that the same general test applies to this
prohibition as to the general deduction formula, the general test referred to here being the purpose of
expenditure and the closeness of the connection between the expenditure and the income-earning
operations.
6.5.7 Non-trade expenditure (s 23(g))

Much expenditure is incurred with mixed motives. Expenditure may be incurred partly for the purpose
of trade and partly for private purposes. The so-called negative test of the general deduction formula
(s 23(g)) prohibits the deduction of any moneys ‘to the extent to which such moneys were not laid out
or expended for the purposes of trade’. The words ‘to the extent’ indicate that it is possible to appor-
tion any expenditure and claim the trade portion of the expenditure as a deduction. Section 23(g)
must always be read together with s 11(a) when the deductibility of an amount is being ascertained in
terms of the general deduction formula.
In Warner Lambert SA (Pty) Ltd v C: SARS (2003 SCA) the taxpayer, a South African subsidiary of an
American company and a signatory to the Sullivan Code, involved its senior management in ‘social
responsibility projects’. When the principles of this Code became enshrined in legislation, the Com-
prehensive Anti-Apartheid Act, it compelled the parent company to ensure that its South African
subsidiary complied with the principles, or fines or imprisonment for the directors could be imposed.
These costs fell into two broad categories: wage improvements and similar expenses, which were
clearly incurred in the production of income; and social responsibility expenditure incurred outside
the workplace.
The taxpayer argued that the reason for incurring the social responsibility expenditure was to prevent
the loss of its status as a subsidiary of the US parent, with all the concomitant privileges, which was
crucial to its trading success. The court held that it was unthinkable that the taxpayer should not
comply with the Sullivan Code and concluded that the expenses were incurred for the performance
of the taxpayer’s income-producing operations and formed part of the cost of performing it. This
meant that the expenditure had been ‘incurred for the purposes of trade and for no other’, and was
therefore incurred in the production of income.
126
In C: SARS v Scribante Construction (62 SATC 443) the taxpayer company had sufficient funds
available to pay the dividend without borrowing, but for good business reasons elected to pay only a
portion as dividend and to credit a portion of the dividend to interest-bearing loan accounts of the
shareholders. The Supreme Court of Appeal found that the ‘borrowing’ was to enable the company to
earn income and that the loans of the shareholders were used for the purposes of trade and in fact
produced income directly and indirectly. The distinguishing feature in this case was that the funds,
which were available to pay the dividend, were surplus to the taxpayer’s business requirements and
hence the only reason for their retention was to enable the company to earn interest. The interest
paid on the loans was therefore deductible.
6.5.8 Notional interest (s 23(h))

A taxpayer cannot claim a deduction for hypothetical interest forfeited due to the taxpayer employing
his capital in his trade rather than investing it in a bank.
6.5.9 Deductions claimed against any retirement fund lump sum benefits and retirement
fund lump sum withdrawal benefits (s 23(i))
A taxpayer cannot claim any expenditure, loss or allowance to the extent to which it is claimed as a
deduction from any retirement fund lump sum benefit or retirement fund lump sum withdrawal benefit.
Paragraphs 5 and 6 of the Second Schedule allow certain unclaimed contributions made by the
taxpayer to a fund as deductions in the calculation of the taxable portion of lump sum benefits.
Section 23(i) prohibits a deduction in terms of s 11 of the same contributions.
6.5.10 Expenditure incurred by labour brokers and personal service providers (s 23(k))
In the past, a popular tax-saving method for employees was to offer their services to their employers
through the medium of private companies or close corporations. This effectively enabled them
l to avoid the monthly payment of employees’ tax
l to be taxed at the company rate of taxation as opposed to the higher marginal tax rates applic-
able to individuals, and
l to avoid the limitations placed on the deduction of expenditure incurred by employees.
Section 23(k) places a limitation on allowable deductions in order to discourage the use of a cor-
porate entity in an attempt to avoid being classified as an employee. It limits the deductions allowable
for expenditure incurred by
l labour brokers (as defined in the Fourth Schedule) who do not possess an employees’ tax ex-
emption certificate, and
l personal service providers (as defined in the Fourth Schedule).
Labour brokers are natural persons, and personal service providers can be either companies or
trusts. Remuneration paid or payable by both labour brokers and personal service providers to an
employee for services rendered can be deducted. In the case of a personal service provider, the
following expenditure incurred is also not prohibited as deductions:
l legal expenditure (s 11(c)), bad debts (s 11(i)), qualifying pension, provident or benefit fund
contributions (s 11(l)), the refund of amounts received in respect of any employment or office
(s 11(nA)) and the refund of any restraint of trade payment (s 11(nB))
l expenditure in respect of premises, finance charges, insurance, repairs, fuel and maintenance in
respect of assets if such premises or assets are wholly and exclusively used for trade purposes.
Example 6.8. Expenditure incurred by personal service providers
John rendered services to his employer, Delta Limited, for 15 years. He resigned during the 2018
year of assessment and established a company. The company now renders the service that
John used to render. John is the only holder of shares and employee of the company. The
company incurred the following expenditure:
l rental of office space (used wholly and exclusively for trade purposes)
l lease expenditure in respect of motor vehicle used by John. The vehicle is used for trade
and private purposes
l salary paid to John (the only employee and holder of shares of the company).
Which deductions can the company claim in respect of the expenditure incurred?
127
SOLUTION
The company is a personal service provider (see chapter 10) and may claim deductions in re-
spect of the office rental expenditure as well as the salary paid to John (not prohibited in terms of
s 23(k)).
Since the asset is not used wholly and exclusively for trade purposes as required by s 23(k), the
motor vehicle lease expenditure may not be claimed. John cannot claim any of the expenditure
because he did not incur it.
Note that Delta Limited is obliged to withhold employees’ tax at a flat rate of 28% from the pay-
ments made to the company because a personal service provider is an ‘employee’ as defined.
6.5.11 Restraint of trade (s 23(l))

Section 23(l) prohibits the deduction of restraint of trade payments, except those allowable in terms
of s 11(cA), being payments to natural persons, labour brokers and personal service providers al-
lowed over the lesser of the term of the contract and three years (see chapter 12).
6.5.12 Expenditure relating to employment or an office (s 23(m))

Section 23(m) prohibits the deduction of expenditure that relates to any employment or office held in
respect of which remuneration is earned other than the specific amounts listed below. This prohibition
does not apply to an agent or representative whose remuneration is derived mainly in the form of
commission based on sales or turnover (mainly means more than 50%). Only the following expendi-
ture may be claimed as a deduction against remuneration:
l any contributions to any retirement fund (s 11F)
l any legal expenditure (s 11(c)), wear-and-tear allowance (s 11(e)), bad debt (s 11(i)) or provision
for doubtful debt (s 11( j))
l refund of amounts received in respect of services (s 11(nA)) or refunds of amounts received as a
restraint of trade payment (s 11(nB))
l qualifying rent, repairs or expenditure (in terms of s 11(a) or (d)) in connection with any private
home to the extent that the deduction is not prohibited in terms of s 23(b) as being domestic or
private expenditure (see 6.5.2).
An employee who earns remuneration that does not mainly consist of commission, can claim deduc-
tions in respect of that part of a private home used as a home office if
l that part is specifically equipped for purposes of his trade (proviso (a) to s 23(b)), and
l that part is regularly and exclusively used for his trade (proviso (a) to s 23(b)), and
l the employee’s duties are mainly performed in that home office (proviso (b)(ii) to s 23(b))
(ss 11(a), 11(d) and 23(b) read together).
Section 23(m) is subject to the limitation placed on the expenditure incurred by labour brokers and
personal service providers (s 23(k) – see 6.5.10). In terms of Interpretation Note No 13 (Issue 3) it
means that the aforementioned limitations imposed upon labour brokers and personal service pro-
viders (‘employees’ as defined), will apply despite the provisions of s 23(m).
6.5.13 Government grants (s 23(n))

Government grants received or accrued in respect of goods or services provided to beneficiaries in
terms of an official development assistance agreement are exempt (s 10(1)(yA)). If such exempt
grant is used to fund the acquisition of any asset or expenditure, no deduction or allowance can be
claimed (s 23(n)).
6.5.14 Unlawful activities (s 23(o))

Expenditure incurred in respect of unlawful activities (for example the payment of a bribe) is not
deductible.
Unlawful activities include activities referred to in the Prevention and Combating of Corrupt Activities
Act. Fines and penalties imposed as a result of unlawful activities, even if carried out in any other
country, may also not be claimed as deductions.
Interpretation Note No 54 (Issue 2) describes SARS’s interpretation of s 23(o) in more detail.
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6.5.15 The cession of policies by an employer (s 23(p))

An employer who cedes a policy of insurance to an employee, director, a dependant or nominee of
the employee or director, or any retirement fund for the benefit of any of the aforementioned may not
deduct the value in respect of such cession. In the case of a cession to a retirement fund, the mem-
ber of such fund will only be taxed when the fund cedes such policy to the member (par 4(2)bis of
the Second Schedule).
6.5.16 Expenditure incurred in the production of foreign dividends (s 23(q))

The deduction of any expenditure incurred in the production of income in the form of foreign
dividends is prohibited (s 23(q)).
6.5.17 Premiums in respect of insurance policies against illness, injury, disability,

unemployment or death of that person (s 23(r))
The deduction of premiums paid by a person in terms of a policy of insurance, which covers a person
against illness, injury, disability, unemployment or death of that person, is prohibited. The proceeds
of such policies are also exempt from tax (s 10(1)(gI)).
6.6 Prohibition against double deductions (s 23B)

Even though an amount may qualify for a deduction under more than one provision, no amount may
reduce the taxable income of a taxpayer more than once (s 23B(1)).
If a particular section expressly allows a deduction on the condition that the amount is also deduct-
ible under any other section, such a specific double deduction is allowed (s 23B(2)). The intention of
this exception is clear, but since a double deduction is prohibited by the rule in s 23B(1), it is unclear
how such exception will work. The Act contains no such specific provisions.
Specific deductions take precedence over the general deduction formula. If a specific deduction is
allowed, no deduction in terms of the general deduction formula is available, even if there is a limita-
tion on the amount of the specific deduction or allowance, or if it is available in a different year of
assessment (s 23B(3)). The general deduction formula can therefore not be used to claim the bal-
ance of any expenditure for which there is a specific deduction, but which is limited to a certain
amount, as a deduction.
An employer (as policyholder) can claim no deduction in terms of the general deduction formula for
premiums paid under a policy of insurance where the policy relates to death, disablement or illness
of an employee or director, or former employee or director of the employer (S 23B(5)). If the death,
disablement or illness arises solely from and in the course of employment of the employee or director,
the employer may deduct such premiums paid (exclusion in s 23B(5)). Last-mentioned policies are
taken out to safeguard an employer in the case of events happening in the course of employment, for
example travel insurance and general work-related disability insurance for all employees collectively.
6.7 Limitation of deductions in respect of certain short-term insurance policies

(s 23L)
An insurance contract is viewed as an investment contract if the short-term insurer fails to accept
significant risk from the policyholder in the case of a specified uncertain event. An insurance contract
is a ‘policy’ for income tax purposes if it is a policy of insurance or reinsurance. The policyholder must
therefore have an insurable interest.
No deduction is allowed in respect of any insurance premiums incurred in respect of a policy if such
premiums are not taken into account as an expense in terms of IFRS in either the current year of
assessment or a future year of assessment (s 23L(2)).
Any premiums not allowed as a deduction reduce the taxable amount of any benefits received from
such policies (s 23L(3)).
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6.8 Excessive expenditure

Expenditure can be excessive if it is not actually incurred in the production of the income, as required
by the general deduction formula, or if it is not laid out or expended for the purposes of trade, as is
required by s 23(g), but is inspired by some other motive.
If the Commissioner disallows the excessive portion of expenditure, the recipient is nevertheless
subject to tax on the full amount (ITC 792 (1954)). It does not follow that, because any particular
amount is not allowed as a deduction from the income of the payer, it is not taxable in the hands of
the recipient (W F Johnstone & Co Ltd v CIR (1951 A)).
There are a number of reported cases in which the Special Court has had to decide whether remu-
neration alleged to be excessive was or was not paid in the production of income. In these cases, the
court took into account various factors, for example
l the open market value and the nature of the services rendered
l the nature of the business
l the relationship between the employer and the employee
l the amount of the remuneration in relation to the net profit earned by the employer
l the dependence of the remuneration paid on the profits earned, and
l the presence of motives other than ordinary commercial ones (for example the avoidance of tax
or the expression of family feelings) (ITC 1518 (1989)).
Employers must take care that travel allowances paid to an employee are not out of all proportion to
the amount that the employee would be likely to use for business purposes. It then indicates that the
employer, in arranging, was inspired by some ulterior motive, such as a desire to evade tax. In such
a situation, the Commissioner is entitled to challenge the deduction of the whole or portion of the
travel allowance as not being expenditure incurred in the production of income (ITC 575 (1944)).
Salaries and bonuses paid to members of firms practising in corporate form, such as lawyers, public
accountants, consulting engineers, architects and stockbrokers, were allowed in full as a deduction
to the companies concerned (withdrawn Practice Note No 29). It is submitted that such companies
will now have to provide proof that salaries are market related and meet the requirements of ‘in the
production of income’.
6.9 Cost of assets and VAT (s 23C)

The VAT portion of the cost of an asset or an expenditure incurred has the following impact:
l If the taxpayer is a ‘vendor’ and an input tax deduction is claimed, the amount of the actual input
tax must be excluded from the cost (or the market value) of the asset or the amount of the ex-
penditure (s 23C(1)).
l If the taxpayer is a non-vendor and no input deduction is claimed, the VAT portion must be in-
cluded in the cost (or the market value) of the asset or the amount of the expenditure.
This also applies to the notional input tax claimable as a deduction by a vendor when he acquires
‘second-hand goods’ (as defined in s 1 of the VAT Act) in qualifying circumstances. Where a VAT
vendor leases an asset under an ‘instalment credit agreement’, a portion of the input tax paid must
reduce each lease rental payment. The portion is calculated as the amount of the rental divided by
the total rental and multiplied by the amount of the input tax (proviso to s 23C(1)).
Example 6.9. Cost of assets and VAT

XYZ Ltd leased a delivery vehicle in terms of an instalment credit agreement for R30 600 per
month (VAT inclusive) for a period of 36 months. The cash price of the delivery vehicle is
R513 000 (including VAT). Discuss the VAT and normal tax implications of the transaction.
SOLUTION
VAT implication of the transaction:
Total VAT claimable R63 000 (R513 000 × 14/114)
The VAT input credit of R63 000 is claimable in full on the earliest of date of payment of any
consideration or the date of delivery of the vehicle.
continued
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Normal tax implication of the transaction:

The monthly lease payment (exclusive of VAT) is claimable in terms of s 11(a) and s 23C. This
amounts to R28 850 per month, calculated as:
[Instalment inclusive of VAT – (VAT input × (instalment this period/(total instalments))]
[R30 600 – (R63 000 × (R30 600/(R30 600 × 36))].
The VAT portion of R1 750 (R30 600 – R28 850) cannot be claimed for normal tax purposes.
6.10 Specific transactions

The remainder of this chapter is devoted to the distinction between expenditure and losses that are
allowable in terms of the general deduction formula, and those that are not. It is important to note that
each case is decided upon by the courts, based on the specific circumstances of that case.
6.10.1 Advertising
Advertising expenditure incurred by a business already in existence will be allowed if the expenditure
qualifies as a deduction in terms of the general deduction formula (the most important requirements
in this regard are the ‘in the production of income’ and ‘not of a capital nature’ requirements).
When advertising costs result in the acquisition of an asset of a permanent nature (a direct enduring
benefit), they are of a capital nature. For example, in ITC 469 (1940) the taxpayer, a furniture dealer,
erected a model house on a hired site in order to exhibit his goods. This advertising expenditure was
held to be of a permanent nature and to have created a capital asset, and was not allowed as a
deduction.
A celebrated case involving large donations was CIR v Pick ’n Pay Wholesalers (1987 A). The principle
that arose was that if a donation is made for moral reasons (to support a good cause) without any
business purpose whatsoever, no deduction will be allowed. The expenditure will not be in the pro-
duction of income.
6.10.2 Copyrights, inventions, patents, trade marks and know-how

The cost of taking out a patent is capital expenditure unless a dealer in patent rights incurs it. Similar-
ly, a trader or manufacturer’s costs of registering a trade mark or trade name constitute capital ex-
penditure.
The cost incurred for the outright acquisition of a patent or trade mark is capital expenditure unless it
is acquired for the purpose of speculation. It does not matter, it is submitted, that the purchase price
is paid by annual instalments, whether fixed or variable (ITC 1365 (1982)). In these circumstances, the
taxpayer expends an amount to obtain an enduring right to use (and own) an asset. Although the
deduction of the aforementioned costs of a capital nature will not be deductible in terms of the gen-
eral deduction formula, other specific deductions are allowed in respect of these costs (ss 11(gB),
11(gC) and 11D – see chapter 13).
An outright acquisition must be distinguished from the situation where the taxpayer makes a repeti-
tive payment for the use of an asset. In this situation, the payment is of a revenue nature and will be
deductible in terms of the general deduction formula. Examples are lease payments or renta ex-
penditure for the use of an asset, as opposed to capital expenditure for the outright acquisition of the
asset.
Annual royalty payments for the use of a patent or trade mark are clearly deductible, whether they are
paid in fixed or variable amounts, depending, for example, upon the number of articles sold. Once
again, the expenditure relates to the right of use and not to the obtaining of enduring ownership. This
principle was confirmed in BP Southern Africa (Pty) Ltd v CSARS (69 SATC 79).
6.10.3 Damages and compensation

Payments for damages or compensation resulting from negligence will only be deductible if the negli-
gence constitutes an ‘inevitable concomitant’ of the trade. A very close connection between the trade or
business carried on and the cause of the liability for damages must exist.
In Joffe & Co (Pty) Ltd v CIR (1946 AD) the taxpayer carried on business as engineers in reinforced
concrete. The death of a worker was caused by the negligence of the company in carrying out one of
its contracts, and it was required to pay damages and costs. The company claimed a deduction of
the amount paid. The claim was disallowed, because the construction of a building does not
131
necessarily lead to its collapse during that construction process. Watermeyer CJ, who delivered the
judgment of the Appellate Division of the Supreme Court, said (at 360):
There is nothing . . . to show that the appellant’s method of conducting his business necessarily leads to
accidents, and it would be somewhat surprising if there were.
This case did not decide that losses occasioned by a taxpayer’s negligence are not deductible. It
merely decided that there was no evidence that losses arising from the negligence of the particular
taxpayer concerned were necessary concomitants of the specific trade carried on by him.
If a taxpayer sells petrol lamps (under a guarantee) as his principal business, there is an inherent risk
of injuries if one of the lamps explodes. Payments for consequential damages and compensation are
incurred in the production of income due to the risk being an ‘inevitable concomitant’ of the trade.
6.10.4 Education and continuing education

The deduction of expenditure incurred by a taxpayer in improving his knowledge or education has
been disallowed on the grounds that either the expenditure is of a capital nature or it is not incurred
in the production of income, or both.
It is nevertheless suggested that circumstances could arise in which expenditure of this nature would
be incurred in the production of income and would not be of a capital nature (ITC 1433 (1984)). It
was held in Smith v SIR (1968 A) by Steyn CJ (who delivered the judgment of the majority of the
Appellate Division of the Supreme Court) that all expenditure incurred by a taxpayer in the acquisition
of knowledge or education cannot be of a capital nature.
In practice, SARS has ruled that the fees paid by practising attorneys for attending courses conduct-
ed as part of the continuing legal education programme of the Association of Law Societies of South
Africa will be allowed under s 11(a) (De Rebus 332 (1975)). SARS has also ruled that the costs in-
curred by practising chartered accountants in attending courses conducted by the South African
Institute of Chartered Accountants in its programme of continuing education will be allowed on the
same basis under s 11(a) (Accountancy SA (August 1987)).
SARS considers ‘on their merits’ submissions by other taxpayers claiming expenditure of a similar
nature, but insists that it be shown that the expenditure is so closely linked with the earning of their
income that it warrants a deduction in terms of s 11(a).
6.10.5 Employment and services rendered

All amounts payable by an employer to an employee in terms of a service agreement are deductible
from the employer’s income, if all the requirements of the general deduction formula are met. If the
amount payable is excessive in relation to the services performed by the employee, SARS is entitled
to disallow such portion as being incurred for some other purpose than ‘in the production of income’
or for purposes other than ‘trade’.
It is the practice of SARS to allow the deduction of bursaries awarded by an employer if the holder of
the bursary binds himself to work for the employer for a certain period after completing his studies,
provided that it is not ‘unduly generous’. SARS cannot give an employer an assurance that a deduc-
tion will be allowed when he operates a bursary scheme that is only open to dependants of employ-
ees, retired employees or the children of deceased employees. SARS considers it advisable to
review all schemes of this nature annually, having regard, amongst other things, to the position held
by the parent of a student when a bursary is granted to a child of an employee, the nature of the course
being followed, the educational institution attended and the amount of the bursary. Based on this infor-
mation, it will decide whether or not to challenge the deduction claimed by the employer.
The deductibility of voluntary awards (not provided for in a service contract) made by an employer to
an employee will depend on the circumstances surrounding the payment. For example, reasonable
annual bonuses paid to staff are allowed in practice, since their purpose is usually to secure a happy
and contented staff and so spur them on to greater efforts in future; future income will thus be gener-
ated. In a case in which a bonus payable to employees bore a relation to the services they rendered
over a number of prior years, its deduction was refused (ITC 618 (1946)).
A problem also arises when the employer has taken out policies of insurance on the lives of employ-
ees to compensate their heirs or dependants upon their death. Unless the employer can show that it
is his established practice to provide such benefits for the heirs or dependants of the employees in
order to promote a settled and contented staff, he will not be entitled to a deduction of the amount he
pays out. This is the case even if the proceeds of the policies will be taxable in the employer’s hands
in terms of par (m) of the definition of ‘gross income’ in s 1. The provisions of s 11(m), however, allow
132
a deduction in respect of annuities paid to retired employees and dependants of retired employees
(see chapter 12).
6.10.6 Fines
In practice SARS does not allow the deduction of fines attaching to unlawful acts of the taxpayer (for
example fines for speeding and parking offences).
This practice is supported by ITC 1490 (1990), in which it was held that fines for criminal conduct in
the carrying out of business operations cannot be regarded as constituting expenditure incurred in
the production of income and may therefore not be deducted under the general deduction formula.
To do otherwise ‘would be contrary to public policy in that it would frustrate the legislative intent and
allow a punishment imposed to be diminished or lightened’ (per Melamet J at 114).
6.10.7 Goodwill
An amount paid for the acquisition of the goodwill of a business is expenditure of a capital nature and
is not deductible from income. This is the case if the business is purchased in order to derive an
income and not for the purpose of resale at a profit (ITC 1073 (1965)). If the purpose is a profitable
resale of the business, the cost of acquisition is properly deductible from the proceeds derived from
a resale of the goodwill.
If the purpose of the acquisition is to derive an income, the fact that the purchase price is payable in
monthly or annual instalments does not affect the position. The amount laid out is for the acquisition
of a capital asset and is therefore of a capital nature. The terms of the agreement can stipulate that
the annual payments are not made for the outright purchase of the goodwill but merely for the right of
use of the goodwill for a certain period and that, on the expiry of the period, the goodwill is to revert
to its owner. In such a situation, the payments would be in the nature of rent and would be deductible
from income (ITC 140 (1929)).
6.10.8 Legal expenditure

It was held in Port Elizabeth Electric Tramway Co Ltd v CIR (1936 CPD) that, for legal expenditure to
be deductible under s 11(a), the taxpayer must show that the legal expenditure is linked to an opera-
tion undertaken with the object of producing income and not to operations that merely serve to pro-
tect an existing source of income.
If legal expenditure is not deductible under s 11(a), it may nevertheless still be deductible under
s 11(c). For example, legal costs incurred in the protection of income, to prevent a diminution of
income, to prevent an increase in deductible expenditure or to avoid a loss or resist a claim for com-
pensation may be deductible under s 11(c).
In African Greyhound Racing Association (Pty) Ltd v CIR (1945 TPD) legal expenditure incurred in
connection with the taxpayer’s representation before a commission into whether dog-racing should
be abolished or curtailed was disallowed by SARS as a deduction from its income. It was held that
the expenditure incurred in making its representation was not incurred for the production of income
but for preventing the total or partial extinction of the business from which the taxpayer’s income was
derived; therefore, it was not deductible. Similarly, legal costs incurred in the defence of a taxpayer’s
good name to protect the existence of his business are also not deductible, being not incurred in the
production of income.
6.10.9 Legal expenditure: Of a capital nature

Both ss 11(a) and (c) require that the legal expenditure should not be of a capital nature. If the pur-
pose of legal costs is to protect trade marks, designs or similar assets and to eliminate competition,
the legal costs are of a capital nature and do not qualify for deduction, even though the overall object
is to increase profits. In SIR v Cadac Engineering Works (Pty) Ltd (1965 A) the court held that legal
costs incurred in order to protect a design and eliminate competition constituted expenditure of a
capital nature and were not deductible under either s 11(a) or (c).
Legal expenditure incurred in the acquisition of a capital asset is not deductible. All such expenditure
bears a distinct relationship to the capital asset and is consequently expenditure of a capital nature,
specifically prohibited as a deduction by s 11(a).
133
For example, legal costs paid for the cost of transfer of an income-producing property into the name
of a taxpayer is a capital expenditure. If the property is trading stock for the taxpayer, however, the
legal costs paid for the transfer are deductible.
Legal expenditure laid out to secure an enduring benefit for a trade is of a capital nature. A distinc-
tion must be drawn between
l legal expenditure incurred in the creation of a right to receive income (capital in nature), and
l legal expenditure incurred in the actual earning of the income itself (income in nature).
6.10.10 Losses: Fire, theft and embezzlement
Trading stock
Opening and closing stock are taken into account in the determination of taxable income. Goods lost
or destroyed by fire or theft are not on hand at the end of the year of assessment and the taxpayer
therefore automatically enjoys a deduction of goods lost in these ways.
SARS will allow a loss arising from the theft or destruction of stock by fire only to the extent to which it
exceeds the amount recoverable under any insurance policy or indemnity. This is because no deduc-
tion may be made for any loss that would otherwise be allowable to the extent to which it is recovera-
ble under a contract of insurance, guarantee, security or indemnity (s 23(c)).
Fixed assets
Losses owing to theft or destruction of fixed assets such as plant, machinery or vehicles by fire
clearly do not rank for deduction under the general deduction formula, since they are of a capital
nature.
Cash
The principle regarding embezzlements and theft of cash is the following:
l If the loss is due to defalcations by the managing director or owner of the business, it will not be
allowed as a deduction (Lockie Bros Ltd v CIR (1922 TPD)).
l Losses suffered due to defalcations by subordinate employees will be allowed as a deduction,
since the risk of theft by such employees can be regarded as being a necessary concomitant of
the business activities. These losses generally arise from a risk that is always present when sub-
ordinate employees are engaged in performing the duties entrusted to them.
6.10.11 Losses: Loans, advances and guarantees
Amounts advanced to a third party (invested amounts)

If it is the custom of a trade or business to make loans or advances to customers as an integral part
of the business carried on for securing business, any losses of moneys lent to someone will be de-
ductible. In Stone v CIR (1974 A) the inquiry to be answered was whether the capital lost was fixed or
floating (circulating) capital. Corbett AJA, said at (129):
If it was fixed capital, then the loss was of a capital nature; if floating (or circulating) capital, then it was a
non-capital loss. These conclusions would be in conformity with the dicta of Watermeyer CJ [in Port Elizabeth
Electric Tramway Co Ltd v CIR (1936 CPD)] in which the concept of a ‘loss’ is identified with a loss of float-
ing capital.
The question of whether a taxpayer carries on a business of moneylending is a question of fact, to be
decided from the surrounding circumstances and transactions pertaining to the taxpayer. Factors
that have a bearing on the inquiry are, for example, whether there is any degree of continuity of the
transactions, the frequency of the turnover stipulated for by the lender and the rate of interest on the
loans.
A loss sustained by an employer on a loan or an advance made to an employee that proves to be
irrecoverable is one of a capital nature and not deductible (ITC 249 (1932)). It is submitted that, when
it is the custom of an employer to make advances to employees to meet expenditure necessarily in-
curred by them in the course of carrying out their duties, any consequential irrecoverable losses are
deductible in terms of the general deduction formula.
Losses sustained by lending or advancing money may be refused a deduction when the moneys are
recoverable from some other person under a guarantee or arrangement of suretyship. A loss that
134
would otherwise be allowable as a deduction, to the extent to which it is recoverable under a contract
of insurance, guarantee, security or indemnity is prohibited (s 23(c)).
Amounts borrowed from a third party

Where losses arise on amounts borrowed from a third party, the purpose of the borrowing must be
taken into account (CIR v General Motors SA (Pty) Ltd (1982 T)). The purpose could be one of the
following:
l To hold the amounts on revenue account. If the amounts are held on revenue account, as working
capital employed for purposes of being turned over at a profit, any loss is deductible. The Gen-
eral Motors case dealt with foreign exchange losses incurred, amongst other things, to purchase
trading stock. A deduction was allowed because of the connection between the purchase of trad-
ing stock and the production of income.
l To hold the amounts as fixed capital. If the amounts are raised for capital purposes only, and
losses arise on the loan, no deduction will be allowed (Plate Glass and Shatterprufe Industries Fi-
nance Co (Pty) Ltd v SIR (1979 T)).
6.10.12 Losses: Sale of debts

When a person sells his business, ceases trading and incurs a loss on the sale of the debts due to
him, the loss is not deductible from his income, as this loss is not incurred in the production of in-
come but after the income has been earned.
It often happens that a trader who requires cash sells the debts due to him to a finance company at a
discount, and in so doing incurs a loss. In practice, SARS will permit the deduction of such a loss as
being a loss incurred in the production of income in terms of s 11(a).
A loss sustained by a taxpayer who buys debts to sell them at a profit or in order to make a profit on
their collection would be allowable as a deduction, while any profits made would be taxable.
6.10.13 Provisions for anticipated losses or expenditure

Provisions made for anticipated losses or expenditure are not deductible, since no loss or expendi-
ture has been actually incurred as is required by the general deduction formula. Moreover, such a
provision is expressly prohibited by s 23(e). There are, however, provisions that do provide for certain
allowances under specified circumstances. Examples are the allowance granted for doubtful debt
(s 11(j) (see chapter 12) and the deduction of future expenditure on contracts, which is permitted by
s 24C (see chapter 12).
135
7 Natural persons
Linda van Heerden
Assisted by Liza Coetzee
/
l calculate the normal tax payable by a natural person using the framework for the
calculation of taxable income
l explain and practically apply the assessed loss provisions of s 20 and 20A
l calculate the deductions in respect of expenditure of a private nature that can be
claimed by natural persons in respect of contributions to retirement funds and do-
nations to Public Benefit Organisations
l apply the anti-avoidance provisions of the Act in ss 7(2), (2A), (2B), (3) and (4) in
respect of married persons and minor children
l apply the provisions of the Act in respect of backdated salaries
l demonstrate your knowledge by means of an integrated case study or theoretical
advice questions.
Contents
Page
7.1 Overview and framework ................................................................................................ 137
7.1.1 Assessed losses (ss 20 and 20A) ..................................................................... 140
7.2 Calculation of normal tax payable .................................................................................. 147
7.2.1 The s 6(2) rebates.............................................................................................. 148
7.2.2 The ss 6A and 6B medical tax credits............................................................... 149
7.3 Recovery of normal tax payable ..................................................................................... 154
7.4 Deductions ..................................................................................................................... 155
7.4.1 Contributions by members to retirement funds (s 11F)..................................... 155
7.4.2 Donations to Public Benefit Organisations (s 18A) ........................................... 159
7.5 Taxation of married couples ........................................................................................... 164
7.5.1 Deemed inclusion (s 7(2)) ................................................................................. 165
7.5.2 Marriages in community of property (ss 7(2A), 7(2C) and 25A) ....................... 166
7.5.3 ‘Income’ for the purpose of the deeming provisions ......................................... 168
7.5.4 Expenditure and allowances (s 7(2B)) .............................................................. 168
7.6 Separation, divorce and maintenance orders (ss 21, 10(1)(u) and 7(11)) .................... 168
7.7 Minor children (ss 7(3) and (4)) ...................................................................................... 169
7.8 Antedated salaries and pensions (s 7A) ........................................................................ 171
7.1 Overview and framework

The determination of taxable income for a year of assessment is the first step in the calculation of a
taxpayer’s liability for normal tax. The year of assessment for a natural person always runs from the
first day of March in a year to the last day of February of the following year. The year of the February
date indicates the year of assessment; for example, the 2018 year of assessment will be 1 March
2017 to 28 February 2018.
The Act follows a specific sequence in the calculation of a natural person’s taxable income and the
terms ‘gross income’, ‘income’ and ‘taxable income’ lead the way. The Act contains provisions on
deemed inclusions in ‘income’ (for example gains on the vesting of equity instruments in s 8C) and in
‘taxable income’ (for example taxable capital gains in s 26A). The Act also contains provisions on
137
deemed accruals (for example variable remuneration in s 7B) as well as on specific deductions relat-
ing only to natural persons.
Some of these deductions are calculated as a percentage of a specific amount or subtotal that needs
to be calculated first. The sequence of the deductions therefore affects the taxable income after each
deduction, which, in turn, affects the value of the next deduction. The use of the following compre-
hensive framework (the so-called subtotal method) can facilitate the calculation of the taxable income
and the normal tax payable by natural persons. Note that three separate columns are used. The
subtotals in column 3 can then be used as is, or with minor adjustments, to calculate some of the
percentage-based allowable deductions. Apart from normal tax, natural persons can also be liable for
certain withholding taxes (for example the withholding tax on interest in s 50B).
Three different tax tables are applicable to the taxable income of natural persons:
l the ‘R500 000’ tax table applies to column 1, namely severance benefits and retirement fund
lump sum benefits
l the ‘R25 000’ tax table applies to column 2, namely retirement fund lump sum withdrawal bene-
fits, and
l the progressive tax table for natural persons, deceased estates, insolvent estates and special
trusts applies in respect of column 3. This is the remainder of taxable income.
Remember
Although the use of the subtotal method facilitates the calculation of taxable income and the total
tax liability, reference to the column in which an amount must be included is not authority for the
inclusion of an amount in gross income. The correct authority is the specific paragraph of the
definition of gross income.
Natural persons can carry on more than one trade and can also receive non-trade income, for
example interest. In light of the provisons regarding the set-off of assessed losses (s 20) and the ring-
fencing of losses from certain trades (s 20A), it is adivisable to first calculate the taxable income from
the various trades separately in order to determine the impact of ss 20 and 20A. Also note that
s 23(m) limits deductions if the trade is employment (except for agents and representatives –
see 7.4).
The following abbreviations are used in the comprehensive framework of the

subtotal method:
Please note! SB = Severance benefit
RLB = Retirement fund lump sum benefit
RLWB -= Retirement fund lump sum withdrawal benefit
138
7.1 Chapter 7: Natural persons
Subtotal method: Comprehensive framework for 2018 year of assessment

Column 1 Column 2 Column 3
RLB RLWB Other
and income and
SB deductions
Gross income – general and specific inclusions s 1
(note 1)........................................................................ Rxxx Rxxx Rxxx
Add: Deemed inclusions in ‘income’, for example
ss 7 and 8(4)(a) ....................................................... xxx
Less: Exempt income ss 10 and 10A – 10C ............ (xxx)
Income – Subtotal 1 .................................................... Rxxx
Less: Deductions (all the s 11 and other deductions
except ss 11F and 18A) .......................................... (xxx)
Subtotal 2 .................................................................... Rxxx
Less: Assessed loss from a previous year of assess-
ment – s 20 .............................................................. (xxx)
Subtotal 3 .................................................................... Rxxx
Add: Other amounts included in ‘taxable income’
for example s 8(1)(a) ............................................... xxx
Subtotal 4 .................................................................... Rxxx
Add: Taxable capital gains (note 2) ........................ xxx
Subtotal 5 .................................................................... Rxxx
Less: Section 11F contributions to any retirement
fund ........................................................................ (xxx)
Subtotal 6 .................................................................... Rxxx
Less: Section 18A – donations to PBO .................... (xxx)
Taxable income per column .................................... Rxxx Rxxx Rxxx
Total taxable income (sum of columns 1, 2 and 3) ............................................................ Rxxx
Normal tax determined per the progressive tax table on taxable income in column 3 ..... Rxxx
Less: Section 6(2) and 6quat rebates ............................................................................... (xxx)
Add: Additional tax in terms of s 12T(7)(a) – see chapter 5 ............................................. xxx
Normal tax payable on the taxable income in columns 1 and 2 .............................. xxx
Less: Section 6A and 6B credits ....................................................................................... (xxx)
Normal tax payable by the natural person (A) .................................................................. Rxxx
Less: PAYE, provisional tax and s 35A withholding tax in respect of non-residents ........ (xxx)
Normal tax due by or to the natural person on assessment ............................................. Rxxx
Withholding taxes (in terms of ss 47A–47K, 49A–49G and 50A–50H) in respect of
non-residents .................................................................................................................... Rxxx
Add: Withholding tax on dividends (s 64EA(a)) in respect of ‘beneficial owners’ ............ xxx
Total withholding tax payable by the natural person (B) .................................................. Rxxx
Total tax payable by the natural person (A + B) ............................................................... Rxxx
Note 1
It is proposed that the taxable amounts of severance benefits, retirement fund lump sum benefits
and retirement fund lump sum withdrawal benefits must be kept in separate columns (columns 1
and 2) when the taxable income of a natural person is calculated. One reason for this is that
such amounts are specifically excluded when the deductions in respect of ss 11F and 18A are
calculated. Another reason is that an assessed loss cannot be set off against these lump sum
amounts (proviso (c) to s 20(1)). A last reason is that the normal tax payable on these lump sum
amounts is calculated separately (see 7.2 and chapter 9). The amounts included in gross in-
come in columns 1 and 2 are therefore also the final taxable income for these columns and no
subtotals are necessary for columns 1 and 2.
Application of this proposal will mean that the subtotals in column 3 can be used in the calcu-
lation of the deductions in respect of contributions to retirement funds (s 11F) and donations
(s 18A). This is because the subtotals already exclude all these lump sum amounts. The total
taxable income of the natural person will be the sum of the final amounts in the three columns.
continued
139
Note 2
The taxable capital gain of a natural person is determined as follows in accordance with the pro-
visions of the Eighth Schedule:
Sum of a natural person’s capital gains for the year of assessment .................................... Rxxx
Less: Sum of his capital losses for the year of assessment ............................................. (xxx)
Less: Annual exclusion of R40 000 (or R300 000 in the year of death) ............................ (xxx)
Less: Any assessed capital loss brought forward from the previous year ....................... (xxx)
Net capital gain for the year ................................................................................................. Rxxx
Taxable capital gain: 40% × net capital gain ...................................................................... Rxxx
(See chapter 17.)
It is very important to note that the net capital gain is the amount after the deduction of the annu-
al exclusion and assessed capital loss. The 40% must be applied to this net capital gain in order
to calculate the taxable capital gain. Students frequently swop the sequence of the annual exclu-
sion and the 40%.
7.1.1 Assessed losses (ss 20 and 20A)

The provisions of ss 20 and 20(2A)(a) read together make it clear that, when the taxable income of a
natural person is calculated, the following amounts can be set off against the income derived by him
from any trade or the taxable income from non-trade activities:
l a balance of assessed loss incurred by him in any previous year that has been carried forward
from the preceding year of assessment (ss 20(1)(a) and 20(2A)(a))
l an assessed loss incurred by him during the same year of assessment in carrying on any other
trade, either alone or in partnership with others, otherwise than as a member of a company whose
capital is divided into shares (ss 20(1)(b) and 20(2A)(a)).
The effect of the last-mentioned exclusion is that a natural person holding shares in a company may
not claim an assessed loss incurred by the company as a deduction in the determination of his
taxable income (s 20(1)(b)).
Since a close corporation is a ‘company’ as defined in s 1, a member of a close

Please note! corporation also may not claim an assessed loss incurred by the close corpora-
tion as a deduction in the determination of his taxable income.
An ‘assessed loss’ is defined as an amount by which the deductions admissible under s 11 exceeds
the income from which they are so admissible (s 20(2)). An assessed loss therefore arises when the
‘taxable income’ of a taxpayer for a specific year of assessment is a negative amount (and an as-
sessment was issued to this effect).
The term ‘balance of assessed loss’ is not defined. It is submitted that, for a natural person, it means
the excess of any assessed losses incurred in the carrying on of trade over the taxable income
derived from the carrying on of trade plus any other non-trade taxable income.
140
The following diagram illustrates the working of s 20A:
Does the maximum tax bracket apply to the natural

person?
YES NO
Is this trade listed as a suspect trade?
YES NO
Did the natural person incur losses in this trade for

at least three out of five years?
YES NO
Escape hatch: The escape hatch is not available if the natural

Is there a reasonable expectation of taxable person incurred losses in his suspect trade (as
income within a reasonable period? listed in s 20A(2)(b)) for at least six out of ten
years, except for farmers.
YES
NO
S 20A IS APPLICABLE S 20A IS NOT APPLICABLE
The set-off is against ‘income derived’ by the taxpayer. In Conshu (Pty) Ltd v CIR (1994(4) SA 603
(A), 57 SATC 1) Harms JA indicated that in the context the word ‘income’ is not used in its defined
sense (in s 1, that is, gross income less exempt income). It should be read as ‘income taxable but for
the set-off of assessed losses’. He further stated that this all simply means that a set-off in terms
of s 20 can only arise if there would otherwise have been taxable income i.e. pre-tax profit.
Natural persons may carry forward a balance of assessed loss even through a year without income.
In practice, a person whose non-trade expenditure in a particular year of assessment exceeds his
non-trade income for that year is entitled to establish a ‘non-trade’ assessed loss. Subject to s 20(1),
he will not be prevented from carrying forward any balance of assessed loss merely because he has
not derived any income during a particular year of assessment (s 20(2A)(b)).
Consequently, even though he derives no income in Year 2, he may still carry forward the balance of
the assessed loss established in Year 1 to Year 3. He need not be carrying on a trade in a
particular year in order to carry forward to that year any balance of assessed loss established in the
previous year. The concession therefore overrides the decision in SA Bazaars (Pty) Ltd v CIR (1952
AD), which, however, still applies to companies.
141
Example 7.1. Balance of assessed loss
In Year 1 Mr Nobuntu has an assessed loss from trading of R50 000, in Year 2 a taxable income
of R30 000 from non-trade sources and in Year 3 an assessed loss of R60 000.
Calculate the balance of assessed loss for each year of assessment.
SOLUTION
In Year 1, the balance of assessed loss is R50 000, and in Year 2, R20 000 (R50 000 less R30 000).
In Year 3, the balance of assessed loss is R80 000 (R20 000 + R60 000).
Example 7.2. Set-off of assessed loss against income from another trade
In the current year of assessment, Mr Zoleka has derived a taxable income of R450 000 from the
carrying on of a profession, but is an equal partner in another business that has an assessed
loss of R420 000 for the same year.
What is his taxable income for the current year of assessment?
SOLUTION
Mr Zoleka is entitled to set off his half-share of the partnership loss, namely R210 000, against
the taxable income of R450 000 derived from his profession. His final taxable income is therefore
R240 000.
Limitations regarding the set-off of assessed losses

An assessed loss incurred prior to the date of sequestration of a natural person (the insolvent) can be
set off against the income of the insolvent estate from the carrying on of any trade in South Africa
(proviso to s 20(1)(a)). This is because, in terms of s 25C, the insolvent prior to sequestration and the
insolvent estate are deemed the same person for the purposes of determining any deduction or set-
off to which the insolvent estate may be entitled.
An assessed loss of the insolvent cannot be carried forward to the insolvent as a natural person for
the period subsequent to sequestration, unless the order of sequestration has been set aside. If this
happens, the amount to be carried forward will be reduced by the amount that was allowed to be set
off against the income of the insolvent estate from the carrying on of a trade (proviso to s 20(1)(a)).
For example, if Mr Alfonso had an assessed loss of R120 000 on sequestration, and R40 000 thereof
was set off against the income of the insolvent estate carrying on a trade, R80 000 will be carried
forward to Mr Alfonso if the sequestration order has been set aside.
Foreign losses are fully ring-fenced. Assessed losses and any balance of assessed loss incurred in
carrying on any trade outside South Africa cannot be offset against any taxable income (whether from
trade or passive income (for example rentals) from a South African source (proviso (b) to s 20(1) read
with s 20(2A)(a)).
An assessed loss or any balance of assessed loss cannot be offset against any amount (included in
taxable income) received by or accrued to a person as a retirement fund lump sum benefit, a retire-
ment fund lump sum withdrawal benefit or a severance benefit (proviso (c) to s 20(1)). Such amounts
are taxed separately in terms of the specific tax tables and this is why separate columns are used in
the comprehensive framework.
Setting off an assessed loss from one trade against income from another or against non-trade income
is subject to the ring-fencing provisions in s 20A (s 20(1)(b) and 20A(1) read together).
Assessed losses: Ring-fencing of assessed losses from certain trades (s 20A)

The ring-fencing of an assessed loss from a certain trade applies only to natural persons (not to
companies or trusts). Before ring-fencing can apply, the natural person’s taxable income must be
equal to or exceed a certain amount and it must meet one of the requirements of the so-called ‘sus-
pect trade’ test (s 20A(2)).
142
The heart of the ring-fencing doctrine lies in s 20A(1), which provides that
l when the requirements in s 20A(2) apply to a trade (see below)
l a natural person is prohibited
l from setting off an assessed loss incurred by him in that trade
l against the income derived by him during the same year of assessment from another trade or a
non-trading activity (s 20A(1)).
According to the Explanatory Memorandum on the Revenue Laws Amendment Bill, 2003, s 20A was
introduced to prevent expenditure and losses associated with suspect trades, such as ‘hobby activ-
ities’, from being deducted as a means to reduce taxable income. Offsetting assessed losses from
suspect trades against other taxable income (from both trade and non-trade activities) is restricted
by ring-fencing the losses of suspect trades.
Ring-fenced losses are ring-fenced forever and may only be set off against income from that same
suspect trade (s 20A(5)). Natural persons may not use ring-fenced losses against income from other
trades or against non-trade income either during the current tax year during which the ring-fenced
losses occur or in a subsequent year (in the form of a carry-forward). This rule applies ‘notwithstand-
ing s 20(1)(a)’, confirming that s 20A overrides s 20(1)(a).
Example 7.3. Permanent ring-fencing
An accountant maintains a guesthouse that qualifies as a listed suspect trade. In 2018, he gen-
erates R730 000 taxable income as an accountant and R12 000 as an assessed loss from the
guesthouse. He is unable to demonstrate a reasonable prospect of generating taxable income.
The assessed loss of R12 000 from the guesthouse activities is ring-fenced in 2018. This treat-
ment of the R12 000 assessed loss will continue for all subsequent years after 2018.
The s 20A(2) requirements

The s 20A(2) requirements involves an enquiry into two matters:
l The first enquiry focuses on the taxpayer’s level of taxable income. The taxable income of the
natural person for the year of assessment, before setting-off any current or preceding years’ as-
sessed losses from any trade, is looked at. It must equal or exceed the amount at which the max-
imum marginal rate of tax becomes applicable per the progressive tax table. For the year of
assessment ending on 28 February 2018, the maximum marginal rate of tax of 45% becomes
payable when the taxable income of a natural person exceeds R1 500 000.
If the taxable income is below the aforementioned amount, there is no need to

Please note!
proceed to the second enquiry and s 20A will not be applicable.
l The second enquiry focuses on the loss-generating activity. Only losses from suspect trades are
subject to potential ring-fencing. This aspect represents an ‘either/or’ test. Under this test, the
taxpayer is engaged in a ‘suspect trade’ either if:
– he has incurred losses in at least ‘three-out-of-five-years’ in this trade (s 20A(2)(a)), or
– this trade has been explicitly listed as a suspect trade in s 20A(2)(b).
Ring-fencing will apply if any one of the ‘either/or’ tests is applicable.
‘Three-out-of-five-year’ trade loss

A loss-generating activity is treated as a suspect trade if assessed losses arise during any three out
of the past five years. The current year of assessment is included in the five years. Assessed losses
in three consecutive years will therefore render a trade a suspect trade at the end of year three. Loss
years are determined without regard to any loss carried forward (s 20A(2)(a)).
The Explanatory Memorandum on the Revenue Laws Amendment Bill, 2003 states that ‘sustained
losses of this kind are frequently an indicator of a suspect trade because natural persons would
rarely continue with a trade generating losses on a long-term scale, as it does not make sense from
an economic perspective unless tax motives are present’.
143
Example 7.4. Three-out-of-five-year trade loss
Mr Mabena carries on a trade during the 2016 to 2020 tax years, generating assessed losses of
R12 000, R15 000, R20 000, R6 000 and R3 000 in each of the years in question. The trade is a
suspect trade from year 2018 onwards as Mr Mabena has incurred assessed losses for three
years.
If, however, Mr Mabena’s trade results in an assessed loss of R12 000 in 2016, R4 000 taxable
income in 2017, R2 000 taxable income in 2018, and assessed losses of R20 000 and R3 000 in
2019 and 2020 respectively, the position would be different. In this instance, his trade becomes
a suspect trade in 2020. The taxable income arising in 2017 and 2018 counts in his favour, thereby
delaying the ‘suspect trade’ treatment, even if the R12 000 assessed loss in 2016 remains par-
tially unused as a loss carry-over in 2017 and 2018.
Specific suspect trade list

Ring-fencing will apply if the trade constitutes any one of the following list of eight specified activities
(s 20A(2)(b)):
l Sport practised by the taxpayer or any relative. This will include, for example, any form of sport,
hunting, yachting or boat racing, water-skiing and scuba diving.
l Dealing in collectibles by the taxpayer or any relative. This will include, for example, cars,
stamps, coins, antiques, militaria, art and wine.
l The rental of residential accommodation unless
– at least 80% of such residential accommodation is used by persons who are not relatives of
the taxpayer for at least half of the year of assessment.
This will include the rental of holiday homes, bed-and-breakfast establishments, guesthouses
and dwelling houses.
l The rental of vehicles, aircraft or boats as defined in the Eighth Schedule, unless
– at least 80% of the vehicles, aircraft or boats are used by persons who are not relatives of the
taxpayer for at least half of the year of assessment.
l The showing of animals in competitions by the taxpayer or his relative is suspect and includes, for
example, the showing of horses, dogs and cats.
l Farming or animal breeding, unless the taxpayer carries on farming, animal breeding or activities
of a similar nature on a full-time basis. In other words, farming or animal breeding by the taxpayer
other than on a full-time basis, such as weekend or casual farming, is suspect. One notable activ-
ity within this suspect class would be game farming.
l Performing or creative arts practised by the taxpayer or his relative scores as a suspect activity
and includes, for example, acting, singing, film-making, photography, writing, pottery and car-
pentry. Since the art must be practised, mere passive investment in these activities would not
generally fall within the suspect class.
l Gambling or betting by the taxpayer or any relative. This will include trying one’s luck at a casino
regularly, card playing, lottery purchases and sports betting. It does not include the owning of
racehorses.
A ‘relative’ is specifically defined for the purposes of s 20A, and means ‘a spouse, parent, child, step-
child, brother, sister, grandchild or grandparent of that person’ (s 20A(10)). The definition in s 1 does
therefore not apply.
All farming activities carried on by a person are deemed to constitute a single trade carried on by him
or her (s 20A(7)). The Explanatory Memorandum on the Revenue Laws Amendment Bill, 2003 pointed
out that assessed losses from a single trade can be set off only against income from the same trade.
Whether one or more related activities constitute the same trade or multiple trades is a question of
fact. However, since multiple farming activities are deemed to constitute a single trade for the pur-
poses of s 20A, this unified treatment (or concession) is appropriate, since farming typically entails
multiple diverse activities.
The s 20A(3) ‘Facts and circumstances’ escape clause

There is an ‘escape route’ if the taxpayer can prove that the activity at issue is a legitimate trade
despite suspect classification. The escape clause applies to any suspect trade that constitutes a
business in respect of which there is a reasonable prospect of deriving taxable income (other than a
taxable capital gain) within a reasonable period (s 20A(3)).
144
The use of vague expressions such as a ‘business’, ‘reasonable prospect’ and ‘reasonable period’
creates uncertainty. Determinations in this regard must take the surrounding facts and circumstances
listed in the six objective factors (s 20A(3)(a)–(f)), into account. The burden of proof rests upon the
taxpayer in terms of s 102 of the Tax Administration Act 28 of 2011. What is clear is that for an activity
to escape the ‘suspect taint’, it must constitute a business in contradistinction to a mere hobby or
isolated venture.
The six objective factors are:
l The proportion of the gross income derived from that trade in relation to the amount of the allow-
able deductions incurred in carrying on that trade during a year of assessment (s 20A(3)(a)). This
factor focuses on the proportion of gross income that the taxpayer derives from the activity in re-
lation to the deductions arising. If a taxpayer derives relatively small amounts of gross income
and incurs large deductions, this disproportionate result highlights a risk to the fiscus (and vice
versa).
l The level of activities carried on or the amount of expenses incurred on advertising, promoting or
selling while carrying on the trade (s 20A(3)(b)). Trading requires regular selling and marketing
initiatives in terms of time and expense. More often than not, hobby activities tend to involve large
amounts of expenses or losses, while the level of selling activity is minimal. The taxpayer must
demonstrate selling or advertising efforts in terms of activities performed or expenses incurred.
l Whether the trade is carried on in a commercial manner, taking into account the following:
– the number of full-time employees appointed for purposes of his trade; employees providing
services of a domestic or private nature, such as domestic servants and residential gardeners,
are excluded for this purpose, regardless of whether or not they are also involved in the trade
– the commercial setting of the premises where the trade is carried on; for example, whether the
business is located in a commercial district and the business-like nature of its appearance
– the amount and value of the equipment used exclusively for the business: mixed-use property,
for example a yacht, is excluded from qualifying, and
– the time that the taxpayer concerned spends at the premises conducting the business
(s 20A(3)(c)).
l The number of years of assessment during which assessed losses have been incurred by the
person while carrying on the relevant trade in relation to the total period of carrying on that trade
taking into account:
– any unexpected or unforeseen events that may give rise to losses, such as heavy rains or
droughts that would provide grounds for mitigating sustained losses for farmers, and
– the nature of the activity, for example whether the activity typically has a long start-up period,
such as olive farming (s 20A(3)(d)).
l The business plans of the person concerned, together with changes thereto, to ensure that future
income is derived from carrying on the trade. Favourable consideration will be given to the busi-
ness plans and steps put in place by the taxpayer concerned to prevent or limit further losses.
Consideration will also be given to whether the taxpayer intervened strategically to ensure that
the activity will ultimately be profitable (s 20A(3)(e)).
l The extent to which any asset attributable to the trade is used, or is available for use, by the per-
son concerned, or any relative, for recreational purposes or personal consumption (s 20A(3)(f)).
The Explanatory Memorandum on the Revenue Laws Amendment Bill, 2003, points out that this
factor goes to the heart of the matter, but is often the most difficult to prove or disprove. The onus
rests upon the taxpayer to prove that the asset was generally unavailable or not actually used by
the taxpayer or his relative for recreational use or personal enjoyment. For example, in the case of
a holiday home at the coast, the taxpayer will have to prove that the property was not readily
available for personal use. He will also be required to provide details of periods when persons
other than the taxpayer or his relatives occupied the home during the year of assessment.
Limitation on the escape clause: the ‘six-out-of-ten-year’ trade loss prohibition

The facts and circumstances escape route is not altogether absolute. It does not apply to any trade
on the specific suspect trade list (in s 20A(2)(b)) if the individual has incurred an assessed loss in at
least six of the last ten years, including the current year of assessment. Any balance of assessed loss
carried forward is ignored in these calculations. Meeting the six-out-of-ten-year prohibition means
that the ring-fencing provisions of s 20A(1) will apply.
145
This automatic ring-fencing from year six onwards assumes that, from an economic perspective, a
person cannot afford a legitimate trade indefinitely if continuous losses are sustained. Such trading
will indicate that motives other than profit were present. Farming is excluded from the ‘six-out-of-ten-
year’ prohibition (s 20A(4)) since many forms of legitimate farming entail long-term losses before the
expectation of profit can be realised.
Only assessed losses for tax years commencing on or after 1 March 2004 are taken into account for
both the ‘three-out-of-five-years’ requirement and the ‘six-out-of-ten-year’ prohibition (s 20A(9)).
Miscellaneous provisions
Set-off against recoupment
Generally, as noted above, ring-fenced losses can be freely used against income from that specific
trade. The income derived from any suspect trade includes the recoupment under s 8 of allowances
from the disposal of assets used in carrying on that trade. These disposals can occur while still
trading or after cessation of that trade (s 20A(6)).
This provision ensures that, for example, losses of a suspect trade can similarly be used against
income from recoupments under s 8(4)(a) associated with that trade, even if the disposal took place
after cessation of the trade.
This use of ring-fenced losses against recoupment income stems from the assumption that any re-
coupment most likely originates from depreciation or other losses that were ring-fenced.
In contrast, ring-fenced losses cannot be offset against capital gains associated with the same trade,
since capital gains represent investment profits as opposed to trading profits.
Reporting requirement
Natural persons with a suspect trade to which s 20A applies must indicate the nature of the business
in his annual return as referred to in s 66 (s 20A(8)). Under this rule, a taxpayer is obliged to report a
suspect trade under the ‘three-out-of-five-year’ test or the ‘suspect activity’ list in his annual return.
Example 7.5. Ring-fencing of assessed losses
Rara, the manager/owner of a flower shop, is also an enthusiastic tennis player and a partner in a
biltong shop (all of which are South African trades). She estimates that her share of the taxable
income (or assessed loss) stemming from each of these businesses for the 2017 until the 2019
years of assessment, is as follows:
Taxable income or (assessed loss) Salary from
Tennis Biltong shop
for the year of assessment: flower shop
R R R
2017 690 000 *(25 000) 30 000
2018 1 525 000 *(15 000) *(5 000)
2019 1 530 000 2 000 *(20 000)
* Assume Rara will be unable to prove to SARS a reasonable prospect of earning taxable income within a
reasonable period during that specific year of assessment.
Calculate Rara’s taxable income for the 2017 until the 2019 years of assessment. Assume that the
maximum marginal tax rate of 45% will also apply to a taxable income above R1 500 000 per
annum for the 2019 year of assessment.
SOLUTION
2017
Taxable income:
R690 000 + R30 000 = R720 000
Ring-fenced assessed loss in terms of s 20A(1):
R25 000 from the tennis tournaments – only to be used against future taxable income from tennis.
Section 20A(1) will be applicable and the assessed loss of R25 000 will be ring-fenced, because:
l The taxpayer is a natural person
l carrying on a trade with an assessed loss.
continued
146
7.1–7.2 Chapter 7: Natural persons
l The taxpayer is taxed at the maximum marginal rate (taxable income of (R690 000 (flower
shop) less R25 000 (tennis) plus R30 000 (biltong shop) plus R25 000 (tennis)) = R720 000
versus R701 300 (the maximum tax bracket in the 2017 tax table). The assessed loss of
R25 000 is not taken into account when the taxable income is calculated) (s 20A(2)).
l Although the three-out-of-five-year rule does not apply, it is a listed suspect trade (s 20A(2)(b))
as it relates to a sport practised by the taxpayer and therefore s 20A(1) will apply.
l It is not a trade, which constitutes a business in respect of which there is a reasonable prospect
to derive taxable income (not a taxable capital gain) within a reasonable period (s 20A(3))
(given in question).
2018
Taxable income:
R1 525 000 – R5 000 = R1 520 000
Section 20A(1) will not apply to the assessed loss of R5 000 from the biltong shop. The taxpayer
is a natural person, carrying on a trade with an assessed loss and the taxpayer is taxed at the
maximum marginal rate (taxable income of ((ignore tennis loss as ring-fenced since 2017)
R1 520 000 versus R1 500 000). The three-out-of-five-year rule does however not apply
(s 20A(2)(a)) (first year in which an assessed loss is made) and it is also not a listed suspect
trade (s 20A(2)(b)).
The general rule contained in s 20(1)(b) will therefore apply, that is, the set-off of an assessed
loss incurred in the same year of assessment from one trade (biltong shop) of a taxpayer against
the taxable income from another trade (flower shop) will be allowed.
Ring-fenced assessed loss in terms of s 20A(1):
R25 000 (2017) + R15 000 (2018) = R40 000 from the tennis – only to be used in future against
taxable income from the tennis.
2019
Taxable income:
R1 530 000 + R0 (R2 000 – R2 000) – R20 000 = R1 510 000
Balance of assessed loss from tennis = R38 000 (R40 000 – R2 000).
l R40 000 assessed loss from tennis will be limited to the taxable income of R2 000 from the
tennis as it was ring-fenced in terms of s 20A(1) in a previous year of assessment (s 20A(5))
The balance of R38 000 will be carried forward to the 2020 year of assessment.
l Section 20A(1) will not apply to the assessed loss of R20 000 from the biltong shop. The tax-
payer is a natural person, carrying on a trade with an assessed loss and the taxpayer is taxed
at the maximum marginal rate (taxable income of R1 510 000 versus R1500 000). The three-
out-of-five-year rule does however not apply (s 20A(2)(a)) (second year in which an assessed
loss is made) and it is also not a listed suspect trade (s 20A(2)(b)).
The general rule contained in s 20(1)(b) will therefore apply, that is, the set-off of an assessed
loss incurred in the same year of assessment from one trade (biltong shop) of a taxpayer against
the taxable income from another trade (flower shop) will be allowed.
7.2 Calculation of normal tax payable

The normal tax payable on the taxable incomes of an individual as calculated in columns 1 to 3 of the
subtotal method is calculated using different tax tables. In light of the wordings of ss 6, 6A and 6B, it
is advised that the normal tax payable on the taxable income in column 3 be calculated first. The first
step is to determine the tax per the progressive tax table applicable to natural persons, deceased
estates, insolvent estates and special trusts. The primary, secondary and tertiary rebates in s 6(2)
only reduce normal tax calculated on the taxable income in column 3. If the individual is a resident
whose taxable income includes amounts from countries other than South Africa, the s 6quat rebate
for foreign taxes must also be deducted in determining the normal tax payable on the taxable income
in column 3 (see chapter 21). The amount remaining after the deduction of all such rebates is the
normal tax payable on the taxable income in column 3.
The normal tax payable on the taxable income from any lump sum benefits (as defined) and sever-
ance benefits in columns 1 and 2 is calculated separately and in terms of separate tax tables (see
chapter 9) applying the cumulative principle. The s 6(2) rebates cannot reduce the normal tax paya-
ble on lump sum benefits and severance benefits (s 6(1)). The normal tax payable on all the afore-
mentioned lump sums must be added to the normal tax payable on the taxable income in column 3
after the s 6(2) and 6quat rebates have been deducted.
Any additional tax in terms of s 12T(7)(a) (see chapter 5) is deemed to be normal tax payable. A
natural person can deduct the medical tax credits (s 6A and 6B) in determining the ‘normal tax
147
payable by a natural person’. This means that the medical tax credits also reduce the normal tax
payable on any lump sum benefits and severance benefits, as well as any additional tax in terms of s
12T(7)(a).
The normal tax payable by a natural person is therefore the net result of all the aforementioned. The
specific sequence as indicated in the comprehensive framework of the subtotal method in 7.1 is an
application of all the aforementioned provisions read together.
7.2.1 The s 6(2) rebates

The s 6(2) rebates are non-refundable (they cannot be used as the basis for a refund) and cannot be
carried forward to the next year of assessment. The s 6(2) rebates are as follows:
2018 2017
Primary rebate .................................................... R13 635 R13 500
Secondary rebate (65 years or older) ................ R7 479 R7 407
Tertiary rebate (75 years or older) ..................... R2 493 R2 466
The primary rebate is available to any taxpayer who is a natural person. If a taxpayer was or would
have been, had he lived, 65 years or older on the last day of the year of assessment, he is also en-
titled to the secondary rebate. If a taxpayer was or would have been, had he lived, 75 years or older
on the last day of the year of assessment, he is entitled to the primary, secondary and tertiary re-
bates. The secondary and tertiary rebates are allowed, albeit on a pro rata basis, in the year of as-
sessment that the natural person dies if the applicable ages would have been attained on the last
day of February of that year of assessment.
Broken periods of assessment (that is, periods shorter than 12 months) only arise in a year of assess-
ment in which a natural person is born, dies or is declared insolvent. The primary, secondary and
tertiary rebates must be apportioned in such cases according to the same ratio as the period as-
sessed bears to 12 months (s 6(4)). (Take note that it is the practice of SARS to use the number of
days in the period of assessment relative to the total number of days in the year.)
There is no broken period in the year of assessment that a natural person starts employment, emi-
grates or immigrates and therefore no proportionate reduction in the rebates.
*
Remember
(1) When answering questions, students must clearly indicate that the s 6(2) rebates are only
deductible against the normal tax payable on the taxable income in column 3. The s 6A and
6B medical tax credits are deductible against any normal tax payable.
(2) The s 6(2) rebates and the s 6A and 6B medical tax credits reduce normal tax payable, but
all deductions in terms of the Act reduce taxable income.
Example 7.6. Proportionate reduction of rebates
Mr Y died on 30 April 2017 at the age of 57 years. Calculate Mr Y’s rebates for his 2018 year of
assessment.
SOLUTION
Primary rebate........................................................................................................... R13 635.00
Since Mr Y was a taxpayer from 1 March to 30 April (61 days), the rebate
61
must be reduced to × R13 635 ..................................................................... R2 278.73
365
148
Example 7.7. Computing tax liability: Natural person
Marie, who is a resident aged 67, received and paid the following amounts during the year of
assessment ended 28 February 2018:
Salary .............................................................................................................................. R150 000
Interest (from a source within South Africa) .................................................................... 38 000
Dividends accrued (from South African companies) ..................................................... 12 000
Deductible expenditure .................................................................................................. 3 000
Taxable capital gain (40% of net capital gain of R12 500) ............................................. 5 000
Calculate Marie’s total tax liability for the year of assessment ended 28 February 2018.
SOLUTION
Salary ............................................................................................................................. R150 000
Interest ........................................................................................................................... 38 000
Dividends ....................................................................................................................... 12 000
Gross income ................................................................................................................. R200 000
Less: Exempt income
Interest (s 10(1)(i)) .............................................................................................. (34 500)
Dividends (s 10(1)(k)(i)) ...................................................................................... (12 000)
Income ........................................................................................................................... R153 500
Less: Deductions.......................................................................................................... (3 000)
R150 500
Add: Taxable capital gain ........................................................................................... 5 000
Taxable income.............................................................................................................. R155 500
Normal tax determined per the tax table:

On R155 500 @ 18% ...................................................................................................... R27 990
Less: Primary rebate .................................................................................................... (13 635)
Secondary rebate ............................................................................................... (7 479)
Normal tax payable .......................................................................................... R6 876
Add: Withholding tax on dividends (20% × R12 000) (already paid over to SARS by
the South African companies) ........................................................................................ 2 400
Total tax liability ............................................................................................................ R9 276
7.2.2 The ss 6A and 6B medical tax credits

The medical tax credits (s 6A and 6B) are non-refundable (they cannot be used as the basis for a
refund) and cannot be carried forward to the next year of assessment.
The medical scheme fees tax credit – s 6A

The natural person who paid the fees to the medical scheme must deduct the s 6A medical tax credit
in the calculation of normal tax payable. The s 6A medical tax credit applies in respect of fees paid to
a registered South African (or similarly registered) foreign medical scheme (s 6A(2)(a)).
Fees paid by the estate of a deceased person are deemed to have been paid by the deceased on
the day before his or her death (s 6A(3)(a)). Fees paid by the employer of a natural person are in-
cluded in gross income (par (i) read with par 12A of the Seventh Schedule) and are consequently
deemed to have been paid by that natural person (s 6A(3)(b)). The practical implication of this is that
the total of all fees paid by the natural person, his estate and his employer are regarded as fees paid
by the natural person for the s 6A medical tax credit.
The person can deduct the following amounts for each month in respect of which fees are paid:
(i) R303, if fees are paid in respect of the taxpayer
(ii) R606, if fees are paid in respect the taxpayer and one dependant, or
(iii) R606, if fees are paid in respect of the taxpayer and one dependant, plus R204 in respect of
fees paid in respect of each additional dependant
(s 6A(2)(b)).
149
1. Section 6A(2) merely requires that fees must be paid by the person, and
not that the full fees for every month must be paid by the person. This
means that
l as long as any part of the fees is paid or deemed to have been paid by
the person, the full s 6A medical tax credit for that month will be al-
lowed
l the s 6A medical tax credit is not limited to the actual fees paid by the
person.
Please note! 2. If an employer continues to pay fees to a medical scheme after an employ-
ee has retired, it is still a ‘taxable benefit’ (par 2 of the Seventh Schedule)
even though it has no value as fringe benefit (par 12A(5)(a) of the Seventh
Schedule). If the employer pays the total fees of such an ex-employee after
retirement, the taxable benefit will have no value and the ex-employee is
consequently deemed to have paid Rnil for those months in terms of s
6A(3)(b). In such a case, the ex-employee cannot claim any s 6A(2)(b)
credit for the months after retirement. If the ex-employee, however, has paid
any portion of the fees during the months after retirement, he will be able to
claim the s 6A(2)(b) credit for those months. This is because the s 6A(2)(b)
credit is granted irrespective of the amount of the fees paid by the person.
The following definition of ‘dependant’ in s 1 of the Medical Schemes Act applies for the purposes of
s 6A (s 6A(4)). This means that the s 6A medical tax credit can be claimed if fees are paid in respect
of the following persons:
l the spouse or partner, dependent children or other members of the member’s immediate family in
respect of whom the member is liable for family care and support, or
l any other person (therefore a person other than the aforementioned persons) who, under the rules
of a medical scheme, is recognised as a dependant of a member.
The word ‘child’ is defined in s 1 and includes an adopted child but not a stepchild. If the child is
adopted under the law of any other country, the adoptive parent must have been ordinarily resident in
such other country at the time of adoption. In practice, SARS accepts that the deduction may also be
claimed for illegitimate children, if the taxpayer can prove that an illegitimate child is his child.
The additional tax credit for medical expenses – s 6B

Taxpayers are grouped into three categories for the s 6B tax credit, namely (i) persons who are
65 years or older, (ii) persons with a disability factor, and (iii) all remaining taxpayers. The s 6B medi-
cal tax credit is calculated in the same manner for the first two categories, but differently for the last
category – see the summary in the table after the discussion of relevant theory.
The person who paid the qualifying medical expenses can claim the s 6B medical tax credit. Two
amounts are taken into account for the tax credit in terms of s 6B:
l excess medical scheme fees (calculated in terms of s 6B(3)), and
l ‘qualifying medical expenses’ paid by a person (or his or her estate or employer – see s 6B(4)) in
respect of the person or a dependant.
In order to know which persons are ‘dependants’, who is seen as the ‘child’ of a person, what is
‘qualifying medical expenses’ and what a ‘disability’ means, the following definitions in s 6B(1) are
relevant:
A ‘dependant’ of a person is:
(a) his or her spouse
(b) his or her child (as defined in s 6B(1)) and the child of his or her spouse
(c) any other member of his or her family in respect of whom he or she is liable for family care and
support (for example the member’s mother who lives with them), and
(d) any other person (therefore not persons in (a) to (c)) who is recognised as a dependant of that
person in terms of the rules of a medical scheme or fund at the time the fees or the ‘qualifying
medical expenses’ were paid or the expenditure in respect of the disability was necessarily in-
curred and paid.
The definition of ‘child’ distinguishes between four categories with different requirements. The child
must be alive for a portion of the year and must be the taxpayer’s child or that of his or her spouse.
The requirements must be met on the last day of the year of assessment before a taxpayer can claim
medical expenses incurred in respect of such a child as a deduction. If the child dies during the year
150
of assessment, it must be determined whether the requirements would have been met had the child
lived. If the taxpayer dies during the year of assessment, the age of any child must be determined on
the date of death of the taxpayer since that is the last day of the taxpayer’s year of assessment.
The following table summarises the requirements and categories of children:
Definition of ‘child’ in s 6B(1) Par (a)(i) Par (a) (ii) Par (a) (iii) Par (b)
Age 18 21 26 Any
Status Unmarried Unmarried Unmarried Any
Dependent for maintenance (wholly or partially) N/a Yes Yes Yes
Liable for normal tax N/a No No No
Full-time student at an educational institution of a N/a Yes/No Yes Yes/No

public nature
Disability No No No Yes
A taxpayer’s 27-year-old child (without a disability) is therefore not a ‘child’ as defined and is
consequently not a ‘dependant’ in terms of par (b). If such child is recognised by the medical
scheme as a dependant, the taxpayer can take the qualifying medical expenses of that child into
account in terms of par (d) of the definition of ‘dependant’, but not in terms of par (b) of that definition.
‘Qualifying medical expenses’ are:
l all amounts paid by the person in respect of the person or any dependant of the person during
the year of assessment to various doctors, hospitals and pharmacies (for prescribed medicine).
These amounts include expenditure incurred both inside and outside South Africa, but exclude
recoverable amounts (paras (a) and (b) of the definition of ‘qualifying medical expenses’).
l expenditure, as prescribed by the Commissioner (recoverable amounts excluded), necessarily
incurred and paid by the person in consequence of any physical impairment or disability in re-
spect of the person or any dependant of the person (par (c) of the definition of ‘qualifying medical
expenses’). ‘Prescribed by the Commissioner’ refers to a list of qualifying physical impairment or
disability expenditure that is available on the SARS website.
The terms ‘necessarily incurred’ and ‘in consequence of’ are not defined in the Act. They retain
their ordinary dictionary meaning. This means that a prescribed expense does not automatically
qualify as a deduction by mere reason of its inclusion in the list. The expense must also be ne-
cessary for the alleviation of the restrictions on a person’s ability to perform daily functions.
A ‘disability’ is defined is s 6B(1) and means a moderate to severe limitation of a person’s ability to
function or perform daily activities as a result of a physical, sensory, communication, intellectual or
mental impairment, if the limitation
l has lasted longer or has a prognosis of lasting more than a year, and
l is diagnosed by a duly registered medical practitioner in accordance with criteria prescribed by
the Commissioner.
Form ITR-DD must be completed by the medical practitioner and is valid for five years if the disability
is of a more permanent nature. In the case of a temporary (shorter than five years) disability, the form
is valid only for one year (Guide on the determination of medical tax credits and allowances
(Issue 6)).
If the impairment, after maximum correction through the use of therapy, medication and the use of
devices is less than a moderate to severe limitation, it is a physical impairment as meant in par (c) of
the definition of ‘qualifying medical expenses’ (Guide on the determination of medical tax credits and
allowances (Issue 6)).
The combined effect of the ss 6A and 6B medical tax credits for the 2018 year of assessment can be
summarised as follows:
151
Category Section 6A medical tax credit Section 6B medical tax credit

Person is 65 years or older R303 (only the person), or 33,3% of
(s 6B(3)(a)) R606 (person plus one [excess of (s 6A(2)(a)
OR dependant), or contributions paid
The person, his or her spouse or R606 (person plus one less
his or her child is a person with a dependant) + R204 per further (3 × s 6A(2)(b) credit))
disability dependant plus
(s 6B(3)(b)) for each month in respect of which all the amounts in par (a), (b) and
fees are paid (c) of the definition of ‘qualifying
medical expenses’]
All other cases R303 (only the person), or 25% of
(s 6B(3)(c)) R606 (person plus one [excess of (s 6A(2)(a)
dependant), or contributions paid
R606 (person plus one less
dependant) + R204 per further (4 × s 6A(2)(b) credit))
dependant plus
for each month in respect of which all the amounts in par (a), (b) and
fees are paid (c) of the definition of ‘qualifying
medical expenses’
less
7,5% of the taxpayer’s taxable
income (excluding any RLB,
RLWB or SB)]
The ‘taxable income’ in this calcu-
lation is therefore the taxable
income in Column 3 of the subtotal
method.
1. Even though the definition of ‘qualifying medical expenses’ includes a

physical impairment or disability in respect of any dependant, only a
disability (and not a physical impairment) in respect of the person, his
or her spouse and his or her child (therefore persons in par (a) and (b)
of the definition of ‘dependant’) will cause the person to qualify for the
increased 33,3% in s 6B(3)(b). If a par (c) or (d)-type dependant is the
person with the disability, the 25% in terms of the s 6B(3)(c) credit
applies.
Please note! 2. Medical expenses in respect of a disability or a physical impairment
must be both necessarliy incurred and paid to qualify for deduction.
3. Married couples under the age of 65 with no disability factor will obtain
the biggest tax advantage if the spouse with the lowest taxable
income pays the qualifying medical expenses.
4. The s 6A medical tax credit must be deducted from the employees’ tax
to be withheld (par 9(6)(a) of the Fourth Schedule). If the taxpayer is
65 years or older, the s 6B medical tax credit must also be deducted
from the employees’ tax to be withheld (par 9(6)(b) of the Fourth
Schedule).
Remember
The fact that only the ’excess’ medical scheme fees are taken into account for the s 6B medical
tax credit means that the amount of the difference between the s 6A contributions paid and three
or four times the s 6A medical tax credit may not be negative and it is therefore limited to Rnil.
Example 7.8. Medical tax credits
Gary is a 44-year-old employee. He is married and has no children. His only source of income is
his salary, which amounted to R136 000 for the current year of assessment. During the year he
paid qualifying medical expenses of R11 000 and fees of R21 760 to a medical scheme. His wife
is a dependant on his medical scheme. His employer contributed R9 240 to the medical scheme
on his behalf. Calculate the taxable income of and normal tax payable by Gary for the 2018 year
of assessment.
152
SOLUTION
Salary .......................................................................................................................... R136 000
Add: Fringe benefit – par 12A Seventh Schedule ...................................................... 9 240
Taxable income ................................................................................................. R145 240
Normal tax determined per table
R145 240 × 18% .......................................................................... R26 143
Less: Primary rebate ................................................................. (13 635)
Section 6A credit R606 × 12 = ....................................... (7 272)
Section 6B credit (note 1) ................................................ (505)
Normal tax payable ..................................................................... R4 731
Note 1
Fees paid to a medical scheme = R31 000 (R21 760 by Gary plus
R9 240 by employer) ................................................................................ R31 000
Less: 4 × s 6A medical tax credit
= 4 × R7 272 (R606 × 12) .............................................................. (29 088)
Subtotal .................................................................................................... R1 912
Plus: Qualifying medical expenses .......................................................... 11 000
R12 912
Less: 7,5% × R145 240 ............................................................................ (10 893)
R2 019
Section 6B medical tax credit (25% × R2 019) ....................................... R505
Example 7.9. Medical tax credits and s 11(k)

Nobuntu, aged 40, is divorced with a child aged 10. Her child is a dependant on her medical
scheme. During the year of assessment, she received a salary of R150 000, paid fees of R18 000
to a medical scheme and paid qualifying medical expenses of R10 000. She is a member of a
provident fund, to which she contributed R12 000 during the year. Her employer made no contri-
butions to the provident fund. Calculate the taxable income of and normal tax payable by No-
buntu for the 2018 year of assessment.
SOLUTION
Salary .......................................................................................................................... R150 000
Less: Provident fund contributions (s 11F): Actual R12 000, limited to the lesser of
l R350 000 (s 11F(2)(a))
l 27,5% × R150 000 = R41 250 (s 11F(2)(b))
l R150 000 (s 11F(2)(c))
Therefore limited to actual ................................................................................. (R12 000)
Taxable income ................................................................................................. R138 000
R138 000 × 18% .......................................................................... R24 840
Less: Primary rebate .................................................................. (13 635)
Section 6A medical tax credit (R606 × 12) ...................... (7 272)
Section 6B medical tax credit (note 1) ............................ (Rnil)
Normal tax payable ................................................................. R3 933
Note 1
Fees paid to a medical scheme R18 000
Less: 4 × s 6A medical tax credit = 4 × R7 272 (R606 × 12) ................ (29 088)
Subtotal limited to.................................................................................. Rnil
Add: Qualifying medical expenses ....................................................... 10 000
R10 000
Less: 7,5% × R138 000 ......................................................................... (10 350)
Total is negative therefore it is limited to ............................................... Rnil
There will therefore be no s 6B medical tax credit.
153
Example 7.10. Medical tax credits and retirement
Edgar is a 65-year-old employee. He is married and has no children. His spouse is a dependant
on his medical scheme. He paid qualifying medical expenses of R76 800 during the year of as-
sessment. His employer paid 50% of his total monthly fees of R6 500 to the medical scheme and
he paid 50%. Edgar retired on 31 May 2017. He remained a member of the medical scheme and
his employer continued to pay the previously mentioned fees. Calculate Edgar’s s 6A and 6B
medical tax credits for the 2018 year of assessment.
SOLUTION
The s 6A medical tax credit is granted for the number of months in respect of which the person
pays fees. Edgar has paid 50% of the fees for 12 months and will therefore qualify for a s 6A
medical tax credit of R7 272 (12 × R606).
The s 6B medical tax credit is calculated as follows:
Fees paid to medical scheme
l paid by Edgar (12 × R3 250)............................................................................... R 39 000
l paid by employer and taxed as fringe benefit (3 × R3 250)................................ 9 750
l paid by employer but no value in terms of par 12A(5)(a) of the Seventh
Schedule (9 × R0) ............................................................................................... –
Subtotal ..................................................................................................................... R48 750
Less: 3 × s 6A medical tax credit (3 × R7 272) (21 816)
Subtotal ..................................................................................................................... R26 934
Add: Qualifying medical expenses ........................................................................... 76 800
Total .......................................................................................................................... R103 734
Section 6B medical tax credit = 33,3% × R103 734 = R34 951
7.3 Recovery of normal tax payable

The normal tax payable by an individual is recovered through
l employees’ tax in the form of PAYE (see chapter 10)
l provisional tax payments (see chapter 11)
l withholding tax on the sale of immovable property in South Africa if the individual is a non-
resident (see chapter 21), and
l a final settlement on assessment, if necessary.
The final amount is either due to the taxpayer by SARS or due by the taxpayer to SARS.
Example 7.11. Final assessment of normal tax payable
During the year of assessment ended 28 February 2018 Zoleka, aged 30 and a resident, re-
ceived a salary of R200 000 and rental from a source within South Africa of R84 300. Employees’
tax amounting to R23 460 was withheld from her salary during the year, and she made provision-
al tax payments of R23 000. Calculate the outstanding amount of tax that will be payable or re-
fundable once her final assessment is issued for the year.
154
SOLUTION
Tax payable by Zoleka
Salary ....................................................................................................... R200 000
Rental ....................................................................................................... 84 300
Taxable income .......................................................................... R284 300
Normal tax determined per the tax table on R284 300:
On R189 880 ............................................................................................ R34 178
On R94 420 (26% of R94 420) ................................................................. 24 549
R58 727
Less: Primary rebate ................................................................................ (13 635)
Normal tax payable .................................................................... R45 092
Less: Provisional tax paid ........................................................................ R23 000
Employees’ tax paid....................................................................... 23 460 (46 460)
Balance receivable on assessment (due to Zoleka)................... (R1 368)
7.4 Deductions
Individuals can carry on various trades and may therefore claim all the deductions discussed in
chapters 6 and 12 to 16.
Employment is included in the definition of ‘trade’ in s 1. The deduction of any expenditure, loss or
allowance that relates to any employment is limited in terms of s 23(m). The limitation does not apply
to agents or representatives who normally earn remuneration mainly in the form of commission based
on their sales or the turnover attributable to them. Only the following expenditure may be deducted
against remuneration from employment:
l any contributions to any retirement fund (s 11F) (see 7.4.1)
l any legal expenditure (s 11(c)) (see chapter 12), wear-and-tear allowance (s 11(e)) (see chap-
ter 13), bad debts (s 11(i)) (see chapter 12) or doubtful debts (s 11(j)) (see chapter 12)
l so much of any amount received in respect of services or as a restraint of trade payment as is
refunded by that person (ss 11(nA) and 11(nB)) (see chapter 12), and
l qualifying rent, repairs or expenditure (in terms of s 11(a) or (d)) in respect of all expenses in
connection with any private home, to the extent that such a deduction is not prohibited under
s 23(b) as being domestic or private expenditure.
Sections 11(a), 11(d), 23(m) and 23(b) read together entail that an employee who earns remuneration
that does not consist mainly of commission, can claim a deduction in respect of certain expenses
that relate to the part of a private home used as a home office if
l that part is specifically equipped for purposes of his trade (proviso (a) to s 23(b)), and
l that part is regularly and exclusively used for his trade (proviso (a) to s 23(b)), and
l the employee’s duties are mainly performed in that home office (proviso (b)(ii) to s 23(b)).
In the case of an employee who earns remuneration that mainly consists of commission, the first two
requirements above must also be met. A third requirement for such employee is that the employee’s
duties must mainly be performed otherwise than in an office provided to him by his employer (provi-
so (b)(i) to s 23(b)).
Interpretation Notes No 13 and 28 provides more clarity regarding this deduction. If a deduction for a
home office was claimed, the provision, which allows a capital gain to be disregarded if the proceeds
do not exceed R2 million, is not applicable when the house is disposed of (par 45(4)(b) of the Eighth
Schedule).
The prohibition in s 23(m) applies to s 11 deductions only and does not affect deductions for dona-
tions (s 18A). Agents and representatives who derive more than 50% of their monthly total remunera-
tion in the form of commission may deduct expenditure incurred under any relevant provision of the
Act, if the specific requirements of that provision have been met.
7.4.1 Contributions by members to retirement funds (s 11F)

Before 1 March 2016, contributions made to a provident fund were not allowable as a deduction.
Contributions to pension funds and retirement annuity funds were, subject to certain limits, allowed as
155
a deduction (s 11(k) and (n)). As part of the wider retirement reform objectives, the tax deductibility of
contributions to all retirement funds were harmonised through a replacement of s 11(k) and the
deletion of s 11(n) from 1 March 2016. Due to a retrospective amendment in 2017, which deleted s
11(k) from 1 March 2016, the deduction is now allowed in terms of s 11F(2). It applies to all amounts
contributed to any pension fund, provident fund and retirement annuity fund during a specific year of
assessment.
The previous inclusion of this deduction in s 11(k) created technical complications since the opening
words of s 11 state that s 11 deductions relate to taxable income from the carrying on of a trade. The
2017 amendments removed the anomalies by deleting s 11(k) and inserting a new s 11F. Section 11F
also applies ‘notwithstanding s 23(g)’, which confirms that the s 11F deduction can be claimed
against both trade and non-trade income.
Any amount contributed to any fund during any previous year of assessment and which has been dis-
allowed solely because the amount contributed exceeded the amount of the allowable deduction
(this can be called the ‘unclaimed balance’), is carried forward to a next year of assessment (s
11F(3)).
Contributions made to a provident fund until 29 February 2016 have never been allowed as deduc-
tions and it can therefore not be said to have been disallowed solely because the contributions
exceed the amount of the allowable deduction. Consequently, such contributions cannot be taken
into account as part of the unclaimed balance for the s 11F deduction for any year of assessment.
However, any provident fund contributions made during the 2017 year of assessment and unclaimed
at the end of the 2017 year of assessment can form part of the unclaimed balance at the start of the
2018 year of assessment.
This ‘unclaimed balance’ at the end of a year of assessment is only deemed to be contributed in the
following year of assessment if it was not previously
l allowed as a deduction in any year of assessment
l taken into account in terms of par 5(1)(a) or 6(1)(b)(i) of the Second Schedule, or
l exempted in terms of s 10C.
Following the normal reduction process in the calculation of taxable income (gross income less
exemptions less deductions as in the subtotal method), the ‘unclaimed balance’ at the end of the
2017 year of assessment is applied or used in the following sequence during the 2018 year of as-
sessment:
l firstly, to claim a deduction in terms of par 5(1)(a) or 6(1)(b)(i) of the Second Schedule when the
par (e) gross income amount in respect of any applicable lump sum benefit received during the
2018 year of assessment is calculated,
l secondly, to claim an exemption in terms of s 10C against any ‘compulsory annuities’ received
during the 2018 year of assessment, and
l lastly, any remaining unclaimed balance will be added to the current contributions made during
the 2018 year of assessment before the deduction in terms of s 11F(2) is calculated.
The s 11F(2) deduction

Please note that due to a full stop used in the 2017 Bill after s 11F(2)(b)(ii), instead of a semicolon, it
is not clear that the s 11F(2) deduction is the lesser of the three limits in s 11F(2)(a)–(c). The intention
to propose a new limiting criterion to avoid circumstances that can create an assessed loss is, how-
ever, clear from the Draft Explanatory Memorandum.
It can be interpreted that the use of the full stop means that the lesser of the s 11F(2)(a) and the
s 11F(2)(b) limits must first be determined (therefore similar to the previous s 11(k)). This lesser limit
must then, as a further step, be compared to the taxable income before s 11F and any taxable capital
gains (the s 11F(2)(c) limit). The lesser of these amounts will then be the final deduction allowed in
terms of s 11F(2). It is submitted that this process will render the same deductible amount as when
the lesser of the three amounts is taken as the deduction.
The total deduction in terms of s 11F(2) is the actual contributions, limited to the lesser of
l R350 000 (this limit is never apportioned) (s 11F(2)(a)), or
l 27,5% of the higher of the person’s
– ‘remuneration’ (excluding any retirement fund lump sum benefits, retirement fund lump sum
withdrawal benefits and severance benefits) as defined in the Fourth Schedule (therefore the
156
total ‘remuneration’ from all employers included in column 3 of the comprehensive framework
in 7.1) (s 11F(2)(b)(i)), or
– ‘taxable income’ (excluding any retirement lump sum benefits, retirement fund lump sum with-
drawal benefits and severance benefits) as determined before allowing deductions for contri-
butions to retirement funds (s 11F(2)) and donations to PBOs (s 18A) (s 11F(2)(b)(ii)). This is
therefore the taxable income in subtotal 5 of the comprehensive framework in 7.1. Please see
note 1 below.
l the taxable income of that person before allowing the s 11F(2) deduction and before including
any taxable capital gain (s 11F(2)(c)). Please see notes 2 and 3 below. This is therefore the taxa-
ble income in subtotal 4 of the comprehensive framework in 7.1.
Notes
(1) The fact that no specific mention is made of taxable capital gains when using the word ‘taxable
income’ in s 11F(2)(b)(ii) seems to indicate that such gains must be included in this ‘taxable in-
come’. This is because taxable capital gains are included in ‘taxable income’ in terms of
s 26A. This would mean that any taxable capital gain must be added in column 3 of the com-
prehensive framework in 7.1 before the s 11F deduction is calculated (therefore after subtotal 4
in the comprehensive framework). This view was confirmed by the response from National
Treasury to comments on the 2017 Draft Bill.
(2) The wording of the new limit in s 11F(2)(c) does in effect forbid the creation or increase of an
assessed loss through the s 11F deduction. The wording in the Draft Explanatory Memorandum
seems to indicate that the final amount to be allowed as a s 11F deduction must be limited to
the ‘taxable income’ before the s 11F(2) deduction and excluding any taxable capital gain. This
could have the effect that a loss for the current year of assessment (after taking into account an
assessed loss brought forward from a previous year of assessment, but ignoring any taxable
capital gain) cannot be increased by the s 11F(2) deduction (see Example 7.12 (b)). It would
also have the effect that a loss for the current year of assessment (ignoring any taxable capital
gain) cannot be created by a s 11F(2) deduction (see Example 7.12(c)).
(3) The wording of the new limit in s 11F(2)(c) does not refer to the s 18A deduction. It is clear that
the s 11F deduction must be subtracted before the s 18A deduction. It is therefore submitted
that, by implication, the taxable income in this limit is also before the s 18A deduction. A further
effect is that the s 18A deduction will be limited to 10% of any taxable capital gain if the limit in
s 11F(2)(c) is applied. This is because the subtotal after the s 11F deduction will then be equal
to the taxable capital gain (see Example 7.12(c)). Any excess unclaimed donation under s 18A
can be carried forward to the following year of assessment.
In terms of s 11(l), employers can claim deductions in respect of all actual contributions to any re-
tirement fund on behalf of any employee, former employee and the dependent of any deceased
employee. The cash equivalent of such contributions is included as a fringe benefit in the hands of
the employees in terms of paras 2(l) and 12D of the Seventh Schedule. Due to this inclusion, the cash
equivalent of such contributions are deemed to be made by the employee (s 11F(4)).
A partner in a partnership is deemed an employee of the partnership, and a partnership is deemed
an employer of a partner for the purposes of s 11F (s 11F(5)), s 11(l) and par 12D of the Seventh
Schedule. This means that
l a partner’s contributions to retirement funds will be allowed as deductions in terms of s 11F
l a partnership’s contributions on behalf of partners will be included as a fringe benefit in terms of
par 12D of the Seventh Schedule, and
l the partnership can claim a deduction in terms of s 11(l) in respect of such contributions made.
Please refer to chapter 15 for a more detailed discussion and examples regarding partnerships.
Example 7.12(a). Deductions in terms of s 11F(2))
During the year of assessment ended 28 February 2018 Zurelda, aged 30 and a resident, re-
ceived a salary of R300 000 and rental from a source within South Africa of R264 300. Her
monthly contributions to the pension fund amounted to R4 500 and she contributed R10 000 to a
retirement annuity fund monthly. Her employer made no contributions to any fund. She realised a
taxable capital gain of R58 000. The balance of unclaimed contributions to all her retirement
funds on 28 February 2017 amounted to R8 000. Calculate Zurelda ’s taxable income for the
157
SOLUTION
Salary .......................................................................................................................... R300 000

Rental .......................................................................................................................... 264 300
Subtotal 1 ................................................................................................................... R564 300
Subtotal 2 .................................................................................................................... R622 300
Less: Section 11F(2) deduction:
Actual contributions = R54 000 (R4 500 × 12) + R120 000 (R10 000 × 12) + R8 000
= R182 000
Limited to the lesser of
l R350 000, or
l 27,5% × the higher of
– R300 000 (remuneration) or
– R622 300 (taxable income in subtotal 2 of R622 300.
Therefore 27,5% × R622 300 = R171 133, or
l R564 300 (subtotal 1)
The deduction is therefore limited to ........................................................................... (171 133)
(The excess of R10 867 (R182 000 – R171 133) is carried forward to the 2019 year
of assessment (s 11F(3))
Taxable income ................................................................................................ R451 167
Example 7.12(b). Deductions in terms of s 11F(2)
During the year of assessment ended 28 February 2018 Zurelda, aged 30 and a resident, re-
ceived rental from a source within South Africa of R400 000. Her monthly contributions to the
retirement annuity fund amounted to R14 500. Her assessed loss from the 2017 year of
assessment amounted to R550 000 and she realised a taxable capital gain of R200 000. The
balance of unclaimed contributions to all her retirement funds on 28 February 2017 amounted to
R8 000. Calculate Zurelda ’s taxable income for the 2018 year of assessment.
SOLUTION
Rental .......................................................................................................................... R400 000
Less: Assessed loss brought forward ......................................................................... (550 000)
Subtotal 1 .................................................................................................................... (R150 000)
Subtotal 2 .................................................................................................................... R50 000
Actual contributions = R174 000 (R14 500 × 12) + R8 000 = R182 000
l R350 000, or
– R0 (remuneration), or
– R50 000 (taxable income in subtotal 2).
Therefore 27,5% × R50 000 = R13 750, or
l (Rnil) (because subtotal 1 is a loss and s 11F(2)(c) only refers to taxable
income)
The deduction is therefore limited to R0………………………………………………….. (–)
(The total contribution of R182 000 is carried forward to the 2019 year of
assessment (s 11F(3).)
Taxable income ................................................................................................... R50 000
158
Example 7.12(c). Deductions in terms of s 11F(2)
During the year of assessment ended 28 February 2018, Zurelda, aged 30 and a resident, re-
ceived rental from a source within South Africa of R400 000. Her monthly contributions to the
retirement annuity fund amounted to R14 500. Her assessed loss from the 2017 year of assess-
ment amounted to R380 000 and she realised a taxable capital gain of R200 000. The balance of
unclaimed contributions to all her retirement funds on 28 February 2017 amounted to R8 000.
Zurelda made a R50 000 donation to a PBO and received the required certificate. Calculate
Zurelda ’s taxable income for the 2018 year of assessment.
SOLUTION
Rental ......................................................................................................................... R400 000
Less: Assessed loss brought forward ......................................................................... (380 000)
Subtotal 1 .................................................................................................................... R20 000
Subtotal 2 ................................................................................................................... R220 000
Actual contributions = R174 000 (R14 500 × 12)) + R8 000 = R182 000
l R350 000, or
– R0 (remuneration), or
– R220 000 (taxable income in subtotal 2)
Therefore 27,5% × R220 000 = R60 500, or
l R20 000 (subtotal 1)
The deduction is therefore limited to ........................................................................... (20 000)
(The excess of R162 000 (R182 000 – R20 000) is carried forward to the 2019 year
of assessment (s 11F(3))
Subtotal 3 .................................................................................................................... R200 000
Less: Section 18A deduction: R50 000 limited to 10% x R200 000 = R20 000........... (20 000)
The excess of R30 000 (R50 000 – R20 000) can be carried forward to the 2019
year of assessment
Taxable income ................................................................................................ R180 000
7.4.2 Donations to public benefit organisations and other qualifying beneficiaries (s 18A)
Section 18A(1) permits a deduction for bona fide donations, in cash or property in kind, made by any
taxpayer to specified beneficiaries. The donations must actually be paid or transferred during the
year of assessment. It is submitted that a donation is made not when the subject matter is delivered
to the donee, but when the legal formalities for a valid donation have been completed. No deduction
can be claimed unless a receipt meeting certain specifications is issued to the taxpayer (s 18A(2)).
No deduction shall be allowed for the donation of
l any property in kind that consists of, or is subject to any fiduciary right, usufruct, or other similar
right, or
l which consists of an intangible asset, or
l a financial instrument, unless that financial instrument is a share in a listed company, or is issued
by a financial institution (s 18A(3B)).
Beneficiaries
The beneficiaries to whom a donation may be made are
l approved public benefit organisations (PBO)
l an institution, board or body (contemplated in s 10(1)(cA)(i) – see below) that carries on certain
activities and has been approved by the Commissioner (see below)
l approved PBOs that provide for funds or assets to any PBO, institution, board or body (a conduit
PBO) and has been approved by the Commissioner
159
l any specialised agency (of the United Nations) that carries on certain activities (see below) and
that has furnished SARS with a written undertaking that the agency will comply with the s 18A re-
quirements and waives diplomatic immunity, or
l any department or government of the Republic on the national, provincial or local sphere contem-
plated in s 10(1)(a) which has been approved by the Commissioner to be used for the purposes of
certain activities (see below) (s 18A(1)).
Each of these beneficiaries must comply with the requirements set in its constitution or founding docu-
ment and any additional requirements prescribed by the Minister (in terms of s 18A(1A)).
The activities referred to above are
l public benefit activities contemplated in Part II of the Ninth Schedule under the headings:
– welfare and humanitarian
– health care
– education and development
– conservation, environment and animal welfare
– land and housing, or
l any other activity determined by the Minister of Finance by notice in the Gazette.
An approved institution, board or body established under s 10(1)(cA)(i) is
l one established by law
l that, in the furtherance of its sole or principal object
– conducts scientific, technical or industrial research, or
– provides necessary or useful commodities, amenities or services to the State or members of
the general public, or
– carries on activities (including financial assistance) to promote commerce, industry or agriculture.
The Minister may by regulation prescribe additional requirements with which a PBO or other qualify-
ing entity must comply before donations to it will be allowed as a deduction (s 18A(1A)).
The s 18A deduction

The deduction of all qualifying donations made by the taxpayer during the year of assessment is
limited to
l 10% of the taxable income (excluding any retirement fund lump sum benefit, any retirement fund
lump sum withdrawal benefit or any severance benefit) of the taxpayer
l as calculated before allowing any deduction under s 18A (donation).
This deduction is a deduction from ‘taxable income’ and therefore a taxpayer with
Please note! no taxable income or an assessed loss will not be allowed to claim the deduc-
tion (10% × Rnil = Rnil). The excess unclaimed donation under s 18A can be
carried forward to the next year of assessment.
For years of assessment commencing on or after 1 January 2012, the s 18A deduction available to a
portfolio of a collective investment scheme is calculated using a special formula (s 18A(1)(A)). All
other taxpayers will continue to calculate the s 18A deduction by using the 10% limitation discussed
above.
Example 7.13. Donations made during the year of assessment
During the current year of assessment, Mr Gratuity promises to pay R5 000 to a PBO in 10 equal
annual instalments of R500. The PBO accepts the donation during the current year and all the
other legal formalities are completed in the same year.
Determine the amount of the donation made by Mr Gratuity during the year of assessment.
160
SOLUTION
It is considered that the donation has been made during that year of assessment and that it can-
not be contended that a separate donation is being made in each of the subsequent years as
each instalment is paid.
This situation must be distinguished from that in which Mr Gratuity promises to pay R500 a year
for 10 years but retains the right to revoke the payment of any instalment. In such a situation, it is
considered that a donation is made only as Mr Gratuity pays each year’s instalments.
On this basis, persons who in past years may have signed revocable stop orders in favour of a quali-
fying beneficiary are entitled to deduct their current instalments under s 18A. When an irrevocable
contract of donation has been concluded in a particular year subject to payment in annual instal-
ments, it is considered that payment of any instalment in any of the subsequent years would not
constitute a donation made in that year for the purposes of s 18A.
Any unclaimed balance of donations can be carried forward and will be allowed as a deductible
donation in the following year (subject to the limits set out above). The excess can be carried forward
from year to year until it is fully deductible (proviso to s 18A(1)).
Example 7.14. Excess deductible donations
Emily donated R100 000 to an approved public benefit organisation (a PBO) on 1 June 2016.
She donated another R50 000 to the same PBO on 1 April 2017.
She had taxable income of R850 000 for the 2017 year of assessment and R950 000 for the 2018
year of assessment before any s 18A deduction was taken into account.
Calculate the s 18A deduction available to Emily for the 2017 and 2018 years of assessment. You
can assume that she was in possession of the relevant s 18A certificates.
SOLUTION
Year ended 28 February 2017
Donation of R100 000, but maximum s 18A deduction limited to 10% × R850 000 =
R85 000 (excess deductible donation of R15 000 rolled over to the 2018 year of
assessment (proviso to s 18A(1))) .................................................................................. (R85 000)
Total deductible donations of R50 000 (2018) plus R15 000 (excess deductible
donation rolled over from 2017) = R65 000. The maximum deduction will be limited
to 10% of taxable income of R950 000 = R95 000, but limited to total deductible
donations of R65 000. ..................................................................................................... (R65 000)
The s 18A deduction is the last deduction when calculating taxable income according to the subtotal
method for natural persons (s 18A(1)(B)). This implies that a taxable capital gain will increase the
deduction that a taxpayer can claim for donations, since it will be included before the s 18A deduc-
tion.
Donations in kind
Section 18A(3) deals with the valuation of donations in kind. It states that if a deduction is claimed by
a taxpayer under s 18A(1) in respect of a donation of property in kind, other than immovable property
of a capital nature where the lower of market value or municipal value exceeds cost (s 18A(3A) – see
below), the amount of the deduction must be determined as follows:
161
Type of property donated Amount of donation for s 18A purposes

A financial instrument (if taxpayer’s trading stock) The lower of
l fair market value on the date of the donation, or
l the amount that has been taken into account for
the purposes of s 22(8)(C).
Trading stock (including livestock or produce of a The amount that has been taken into account for
farmer) the purposes of
l s 22(8)(C), or
l par 11 (for livestock or produce).
Asset used by the taxpayer for the purposes of his The lower of
trade (not trading stock) l fair market value on the date of the donation, or
l cost to the taxpayer of the property less any
allowance allowed to be deducted from his in-
come under the Act.
Asset not used by the taxpayer for the purposes of The lower of
his trade (not trading stock) l fair market value on the date of the donation, or
l cost.
For movable property that has deteriorated in con-
dition, the fair market value or cost must be re-
duced by a depreciation allowance calculated
using the reducing-balance depreciation allowance
at the rate of 20% a year.
Purchased, manufactured, erected, assembled, in- The lower of
stalled or constructed by or on behalf of the taxpayer l fair market value of the property on the date of
in order to form the subject of the donation the donation, or
l cost.
Other No deduction is allowed for the donation.
l subject to any fiduciary right, usufruct or other This prohibition applies unless the financial instru-
similar right, or ment is a share in a listed company or is issued by a
l that constitutes an intangible asset, or qualifying financial institution (s 18A(3B)).
l financial instrument.
Deduction for qualifying donations of immovable property of a capital nature where the lesser of mar-
ket value or municipal value exceeds cost (appreciated immovable property)
The s 18A(1) deduction available for any donation of appreciated immovable property is calculated
using a special formula. The deduction is limited to
A = B + (C × D)
Where:
l A is the allowable donation.
l B is the cost of the immovable property being donated.
l C is the amount of a capital gain (if any) that would have been determined in terms of the Eighth
Schedule had it been disposed of for an amount equal to the lesser of the market value or the
municipal value (to prevent excessive deductions as a result of artificial valuations) on the day of
the donation.
l D is 66,6% in the case of a natural person or special trust or 33,3% in all other instances (s
18A(3A)).
(It is submitted that the percentages should have been changed to 60% (100% less 40%) for nat-
ural persons or special trusts and 20% (100% less 80%) in all other instances due to the change
in the inclusion rates of capital gains tax (see chapter 28).)
Thus, the deductible donations will be limited to the cost of the immovable property plus the portion
of the capital gain (which would have realised had the property been sold at the lesser of market
value or the municipal value) left after deducting the taxable portion of the capital gain.
Often landowners own land for long periods before they decide to donate it (many consider making a
99-year private endorsement for the promotion of a national park or nature reserve). The tax deduc-
tion for the donation was limited to the lesser of cost or fair market value, with fair market value
162
in most instances far in excess of the cost. Thus, most of the tax benefit of the donation for environ-
mental conservation was therefore eliminated. This amendment tries to rectify this situation and
enhances the incentive to donate land for environmental conservation purposes (Explanatory Memo-
randum on the Taxation Laws Amendment Bill, 2013).
Binding General Ruling No 24 (issued 2 September 2014) gives an exception to

the rule that no deduction will be allowed if a s 18A certificate (required under
s 18A(2)) has not been issued.
Please note! If an amount qualifies under s 37C(3) or (5) (expenditure actually incurred to
conserve or maintain land, which is deemed to be a donation for s 18A – see
chapter 13), a deduction will be allowed irrespective of whether a certificate was
issued.
Example 7.15. Donation of appreciated immovable property
Jessica Wilbert owns a farm with a cost (and base cost) of R350 000. Jessica undertakes a 99-
year endorsement of the farmland in terms of the Department of Environmental Affairs’ biodiver-
sity stewardship programme. At the time of the donation, the farm had a market value of
R4 500 000 and a municipal value of R4 000 000. Jessica has taxable income of R2 500 000 for
the year of assessment during which the endorsement was undertaken.
Calculate the s 18A deduction available to Jessica for the year of assessment.
(Adapted from the Explanatory Memorandum on the Taxation Laws Amendment Bill, 2013.)
SOLUTION
Deductible donation (A) = B + (C × D)
A = R350 000 + ((R4 000 000 – R350 000) × 66,6%)
A = R350 000 + R2 430 900 = R2 780 900 (s 18A(3A)), but maximum s 18A
deduction limited to 10% × R2 500 000 = R250 000 (excess deductible donation
of R2 530 900 (R2 780 900 – R250 000) rolled over to the following year
(proviso to s 18A(1))) ...................................................................................................... (R250 000)
Section 22(8) requires that the market value of the property must be included in
Please note! the income of the taxpayer who donated trading stock. If the donation qualifies
for a s 18A deduction, the cost price is included (s 22(8)(C)).
Example 7.16. Donations to public benefit organisations and other qualifying beneficiaries
Albert donates (a) R400, (b) R1 200, and (c) R3 300 to a PBO. His taxable income or assessed
loss before any deduction under s 18A for donations is (i) taxable income of R100, (ii) taxable
income of R30 000, (iii) assessed loss of R1 000. What is his final taxable income or assessed
loss in each instance?
(a) Actual donation R400 (i) (ii) (iii)
Taxable income or assessed loss before deduction ........................... R100 R30 000 (R1 000)
The deduction is limited to 10% of taxable income.
In this instance the limit will therefore be................................. (R10) (R400) R0
Final taxable income or assessed loss ................................... R90 R29 600 (R1 000)
(b) Actual donation R1 200
Taxable income or assessed loss before deduction ........................... R100 R30 000 (R1 000)
In instance (ii) 10% of taxable income is R3 000 and
the limit will therefore be the amount donated ........................ (R10) (R1 200) R0
Final taxable income or assessed loss ................................... R90 R28 800 (R1 000)
(c) Actual donation R3 300
Taxable income or assessed loss before deduction ..................... R100 R30 000 (R1 000)
In instance (ii) 10% of taxable income is R3 000 .................... (R10) (R3 000) R0
Final taxable income or assessed loss .......................................... R90 R27 000 (R1 000)
163
Documentation
A claim for a deduction under s 18A for a donation will not be allowed unless supported by a receipt
issued by the PBO or other qualifying entity concerned. The receipt must contain:
l the reference number of the PBO, institution, board, body or agency
l the date of the receipt of the donation
l the name and address of the PBO or other qualifying entity that received the donation
l the name and address of the donor
l the amount of the donation or the nature of the donation (if not made in cash)
l a certificate to the effect that the receipt is issued for the purposes of s 18A and that the donation
has been or will be used exclusively for the object of the PBO or other qualifying entity concerned
(s 18A(2)(a)).
An employee can make a donation to a qualifying entity by way of a deduction from his salaries or
wages. The employer then makes the donation on behalf of the employee. The employee will be able
to rely on the employer tax certificate (IRP 5) to substantiate the deductible donation for purposes of
his annual tax return (the original receipt will be in possession of his employer) (s 18A(2)(b)). The
employer will take such a donation into account in the calculation of the employees’ tax so as to
provide the employee with a cash flow benefit (par 2(4)(f) of the Fourth Schedule – see chapter 10).
The amount taken into account for employees’ tax purposes is based on 5% of the balance of remu-
neration and is therefore not calculated in the same way as the s 18A deduction.
Legal obligations, offences and punishment

The details regarding this are not discussed and can be found in s 18A(2A)–(2D) and 18A(5)–(7).
7.5 Taxation of married couples

Each spouse in a marriage is taxed separately on his or her taxable income for a particular year of
assessment, unless one of the deemed inclusion rules of s 7(2) or 7(2A) applies. Marriage, separa-
tion, divorce or the death of a spouse during the year will therefore have no effect on the determi-
nation of the normal tax payable by a natural person unless s 7(2) or 7(2A) applies.
The word ‘spouse’ is defined in s 1 of the Act and, apart from a marriage in terms of the Laws of the
Republic, it includes unions recognised as a marriage in terms of religion as well as live-together unions
of a permanent nature. In the absence of proof to the contrary, a marriage in terms of religion and live-
together unions are deemed to be out of community of property (proviso to the definition). A marriage
in terms of the Laws of the Republic is by default in community of property. If a prenuptial contract
exists, it will be out of community of property.
Example 7.17. Husband and wife
Mervin’s salary for the 2018 year of assessment is R164 600 and his interest income from a
source in the Republic is R35 000. He is 68 years old. His wife, Wanda, aged 53, derives income
from a business of R115 500 for the year of assessment, while her interest income from a source
in the Republic is R5 500. They are married out of community of property.
Calculate the normal tax payable by Mervin and Wanda for the 2018 year of assessment.
SOLUTION
Mervin:
Salary ..................................................................................................................... R164 600
Interest ............................................................................................... R35 000
Less: Interest exemption (s 10(1)(i) .................................................. (34 500) 500
Taxable income ..................................................................................... R165 100
On R165 100 @ 18% .............................................................................................. R29 718
Less: Primary rebate ............................................................................................. (13 635)
Secondary rebate ....................................................................................... (7 479)
Normal tax payable ............................................................................... R8 604
continued
164
Wanda:
Business income ................................................................................................... R115 500
Interest ............................................................................................... R5 500
Less: Interest exemption (s 10(1)(i) ................................................. (5 500) –
Taxable income .................................................................................... R115 500

On R115 500 @ 18% ............................................................................................. R20 790
Less: Primary rebate ............................................................................................ (13 635)
Normal tax payable .............................................................................. R7 155
7.5.1 Deemed inclusion (s 7(2))

Section 7(2) is an anti-avoidance provision aimed at preventing married couples (irrespective of
whether they are married in or out of community of property) from reducing their liabilities for normal
tax by arranging for taxable income to be split between the spouses.
If a spouse (the recipient spouse) receives income in consequence of a donation, made by his or her
spouse (the donor spouse) with the sole (100%) or main (>50%) purpose to reduce, postpone or
avoid tax, the donor spouse will be taxed on that income of the recipient spouse (s 7(2)(a)).
Example 7.18. Deemed inclusion: S 7(2)(a)
Alfred (aged 53 years) donated money to his wife Betty (aged 50 years) that enabled her to earn
interest. His sole purpose was to reduce his own normal tax liability. They are married out of
community of property.
Salary: Alfred .................................................................................................................... R82 000
Business profits: Betty ...................................................................................................... 40 000
Interest received from a source in the Republic: Alfred ................................................... 8 500
Betty ..................................................... 19 000
Director’s fees: Alfred ....................................................................................................... 4 800
Calculate the normal tax payable by Alfred and Betty for the 2018 year of assessment.
SOLUTION
Alfred:
Salary .............................................................................................................................. R82 000
Director’s fees ................................................................................................................. 4 800
Interest: Own .............................................................................................. R8 500
Betty’s (deemed to accrue to Alfred in terms of s 7(2)(a)) ........... 19 000
R27 500
Less: Interest exemption (s 10(1)(i)) ........................................................... (23 800) 3 700
Taxable income ................................................................................................. R90 500
Normal tax determined per the tax table on R90 500 @ 18% ......................................... R16 290
Less: Primary rebate ....................................................................................................... (13 635)
Normal tax payable ........................................................................................... R2 655
Betty:
Business profits............................................................................................................... R40 000
Taxable income ................................................................................................. R40 000
Normal tax determined per the tax table on R40 000 @ 18% ......................................... R7 200
Normal tax payable ........................................................................................... Rnil
If the recipient spouse receives income exceeding ‘reasonable income’ from

l a trade connected to that of the donor spouse, or
l a trade that the recipient spouse carries on in partnership or association with the donor spouse,
or
165
l the donor spouse or a partnership of which the donor spouse was a member, or
l a private company of which the donor spouse was the sole or main shareholder or one of the
principal shareholders
the donor spouse will be taxed on any excessive income and the recipient spouse on the ‘reasonable
income’ (s 7(2)(b)). This ‘reasonable income’ must be established in the light of the nature of the rele-
vant trade concerned, the extent of the recipient’s participation in that trade, the services rendered
by the recipient or any other relevant factor.
For example, if Mrs A works as secretary for her husband and earns R400 000 annually while the
reasonable income for her services amounts to R180 000, Mrs A will be taxed on the R180 000 and
Mr A on the excessive R220 000. Unless a deduction is disallowed due to being excessive and not in
the production of income, Mrs A’s husband will be allowed a deduction of R400 000. The net deduc-
tion (R400 000 – R220 000) equals the R180 000 included in Mrs A’s hands.
Section 7(2)(b) ensures that married couples who genuinely work together in a trade are treated in
the same way as other couples engaged in separate trades. Section 7(2)(b) is therefore an effective
anti-avoidance rule directed against the diversion of income and is in place to discourage the erosion
of the tax base.
7.5.2 Marriages in community of property (ss 7(2A), (2C) and 25A)

A joint estate exists in marriages in community of property and each spouse has a 50% interest
therein. Assets (and income earned therefrom) can, however, fall outside the joint estate if the will or
act of grant through which the spouse obtains the asset is correctly worded. It is important to note
that the will or act of grant must specify an independent title to the asset and to the income before
both will be excluded from the joint estate.
According to common law principles, income accruing to spouses married in community of property
accrues equally to each spouse, except in certain circumstances. The taxable incomes of spouses
married in community of property, but separated in circumstances which indicate that the separation
is of a permanent nature, is calculated as if the marriage was out of community of property (s 25A)).
To avoid confusion, s 7(2A) and (2C) sets out the rules that determine in whose hands the income will
be taxed.
Trade income
Income (excluding income from the letting of fixed property) derived from the carrying on of a trade is
deemed to accrue to the spouse who is carrying on the trade. Although the letting of any property is
included in the definition of ‘trade’ in s 1, income from letting fixed property is, for the purposes of
s 7(2A), excluded from the carrying on of a trade. Income from letting movable assets will, for the
purposes of s 7(2A), still be income from the carrying on of a trade.
Where both spouses carry on the trade jointly, the income is deemed to have accrued to both spous-
es in the proportions determined by the agreement. In the absence of an agreement the income is
deemed to have accrued in the proportions to which each spouse would reasonably be entitled,
taking into account the nature of the trade, the extent of each spouse’s participation, the services
rendered by each spouse or any other relevant factor (s 7(2A)(a)). This provision is subject to
s 7(2)(b) (see 7.5.1); that is, the trading income will be apportioned between the spouses to the
extent that the split is substantiated by their bona fide separate efforts and earning powers.
Certain types of income are deemed to be income derived by a spouse from a trade carried on by
him or her (s 7(2C)). These incomes are any benefits from funds or preservation funds (meaning both
lump sums and annuities), s 10A annuities and income from patents, designs, trademarks, copyrights
and property of a similar nature.
Rental from fixed property and non-trade income

Income derived from the letting of fixed property and any income derived other than from the carrying
on of a trade is deemed to have accrued in equal shares to both spouses (s 7(2A)(b)). Examples of
non-trade income are interest, dividends and annuities other than s 10A annuities and annuities from
funds. If the spouses divorce during the year of assessment, non-trade income is split 50-50 up to the
date of divorce only.
Income from fixed property and other non-trade income which does not fall into the joint estate is
deemed to have accrued to the spouse who is entitled to it (proviso s 7(2A)(b)).
166
The tax implications of three types of provisions in wills and acts of grant in respect of assets and
income bequeathed or donated to a person married in community of property can be summarised as
follows:
Provision Asset falls outside the Income falls outside Asset and income falls
joint estate the joint estate outside the joint estate
Effect on capital gain Capital gain on Capital gain on Capital gain on disposal
when assets so obtained disposal falls outside disposal is split 50-50 falls outside the joint
are subsequently the joint estate and is estate and is not split
disposed of not split 50-50 50-50
Effect on income Income from asset is Income falls outside Income falls outside the
received on assets so split 50-50 the joint estate and is joint estate and is not
obtained not split 50-50 split 50-50
Capital gains
Disposal of assets by spouses married in community of property is discussed in par 14 of the Eighth
Schedule (see chapter 17) and donations tax in s 57A (see chapter 26).
Example 7.19. Marriage in community of property

Calculate the taxable income of Patricia and Quincy, who are married in community of property
and are both 40 years old. Their receipts for the 2018 year of assessment were as follows:
Salary: Patricia ............................................................................................................. R60 000
Profit from trade carried on by Quincy ........................................................................ 14 000
Interest received by Patricia from a source in the Republic ........................................ 45 600
Rental received by Quincy (fixed property) ................................................................ 6 000
Rental received by Patricia (movable property) .......................................................... 5 000
Proceeds from the sale of their primary residence, the base cost of which is
R300 000 ..................................................................................................................... 3 000 000
SOLUTION
Patricia
Salary ...................................................................................................... R60 000
Interest received (R45 600 × 50%) ....................................................... R22 800
Less: Interest exemption (s 10(1)(i))(limited to interest received) ......... (22 800) nil
Rental received fixed property (R6 000 × 50%).................................... 3 000
Rental received movable property ........................................................ 5 000
Taxable capital gain (note 2) ................................................................ 124 000
Taxable income ......................................................................... R192 000
Quincy
Profit from trade .................................................................................... R14 000
Interest received (R45 600 × 50%) ....................................................... R22 800
Less: Interest exemption (s 10(1)(i))(limited to interest received) ......... (22 800) nil
Rental received (R6 000 × 50%) ........................................................... 3 000
Taxable capital gain (note 2) ................................................................ 124 000
Taxable income ......................................................................... R141 000
Notes
1. Both spouses are entitled to a s 10(1)(i) exemption.
2. The taxable capital gain is determined as follows:
Patricia Quincy Total
Proceeds ................................................................. R1 500 000 R1 500 000 R3 000 000
Less: Base cost....................................................... (150 000) (150 000) (300 000)
R1 350 000 R1 350 000 R2 700 000
Less: Primary residence exclusion ......................... (1 000 000) (1 000 000) (2 000 000)
Capital gain ............................................................. R350 000 R 350 000 R700 000
Less: Annual exclusion ........................................... (40 000) (40 000)
Net capital gain ....................................................... R310 000 R310 000
Taxable capital gain (40%) ..................................... R124 000 R124 000
167
7.5.3 ‘Income’ for the purpose of the deeming provisions

The term ‘income’ in s 7(2), (2A) and (2C) must be given its ordinary meaning, that is, profits or gains,
and not its meaning as defined in s 1 (gross income less exempt income) (CIR v Simpson (1949
AD)). For example, if the income from a business ostensibly carried on by a wife is to be included in
the husband’s income in terms of s 7(2)(b), it is submitted that it is the net income or gain derived
from the business that must be deemed to accrue to him.
7.5.4 Expenditure and allowances (s 7(2B))

Section 7(2B) ensures that an expenditure or allowance which relates to a portion of income in s 7(2)
and (2A) which is taxed in the donor spouse’s hands is matched with such income. In other words,
when income of the recipient spouse is deemed the income of the donor spouse, the expenditure or
allowances relating to that income will also be deemed available for the benefit of the donor spouse.
If the amount of income has to be split between the spouses, the expenditure or allowances will be
split accordingly.
7.6 Separation, divorce and maintenance orders (ss 21, 10(1)(u) and 7(11))
A change in marital status during a year of assessment does not affect the tax situation of a natural
person, unless there is an application of s 7(2) or (2A).
Alimony payments are normally paid monthly from the after-taxed income of the paying spouse. If the
paying spouse refrains from paying, the receiving spouse can request the court to grant a mainte-
nance order instructing the paying spouse’s retirement fund to pay the total maintenance due out of
the minimum individual reserve of the paying spouse’s retirement fund. Such an order and payment
are, however, a once-off event.
The tax consequences of all alimony or maintenance payments are as follows:
Divorce on or before 21 March 1962 Divorce after 21 March 1962
Paying spouse Section 21 deduction No deduction
Section 7(11) inclusion in income if the
minimum individual reserve was
reduced in terms of a maintenance
order – this is a once-off event
Receiving spouse Paragraph (b) inclusion in gross income Paragraph (b) inclusion in gross income
and s 10(1)(u) exemption
Example 7.20. Separation and divorce after 21 March 1962
Altus and Berta were divorced on 10 September 2016. There were three children out of the mar-
riage, all of them under 18 years of age. Two of the children lived with Altus, their father, and
were maintained by him. The other child lived with Berta, the mother, and was partly maintained
by her. Altus derived a salary of R90 000 and dividend income (from a South African company)
of R3 000, and Berta derived a salary of R46 500 and interest from a source in the Republic of
R1 500 for the year of assessment. Altus paid alimony of R6 000 to Berta during the year, in
terms of the divorce order.
Calculate the normal tax payable by Altus and Berta for the 2018 year of assessment. Both are
under 65 years of age.
SOLUTION
Altus
Salary ...................................................................................................................... R90 000
Dividends ................................................................................................................ 3 000
Gross income .......................................................................................................... R93 000
Less: Dividend exemption (s 10(1)(k)(i)) ................................................................ (3 000)
Taxable income ...................................................................................... R90 000
(Altus cannot deduct the R6 000 maintenance paid.)
continued
168
Normal tax determined per the tax table on R90 000 @ 18%................................... 16 200
Less: Primary rebate ................................................................................................ (13 635)
Normal tax payable ................................................................................. R2 565
The company paying the dividend to Altus must withhold 20% dividend tax in
terms of s 64E.
Berta
Salary ....................................................................................................................... R46 500
Alimony..................................................................................................................... 6 000
Interest ..................................................................................................................... 1 500
Gross income ........................................................................................................... R54 000
Less: Alimony exemption (s 10(1)(u)) ...................................................................... (6 000)
Interest exemption (s 10(1)(i)) ........................................................................ (1 500)
Taxable income ....................................................................................... R46 500
Normal tax determined per the tax table on R46 500 @ 8%..................................... R8 370
Normal tax payable ................................................................................. Rnil
In the case of non-residents who receive alimony, allowance or maintenance payments, the same
rules apply, if the source of the alimony is in South Africa. The source of the alimony or maintenance
is determined in terms of the originating cause principle (see chapter 5 and the Lever Bros case). It is
in South Africa if the order of divorce or judicial separation was granted in South Africa or the written
agreement of separation was entered into in South Africa.
The minimum individual reserve of a paying spouse can be reduced by both a maintenance order
and a divorce order. Section 7(11) only affects a once-off deduction from a member’s minimum indi-
vidual reserve in terms of a maintenance order (and not in terms of a divorce order). The member of
the fund must include the sum of following amounts deducted from his or her minimum individual
reserve in his or her income:
l the amount by which the minimum individual reserve of the member was reduced in terms of the
maintenance order, and
l the employees’ tax withheld by the fund in respect of the aforementioned amount.
There is also a par (b) inclusion in the gross income of the non-member spouse receiving the amount,
but the same amount is exempt in terms of s 10(1)(u).
The full amount included in the member’s income in terms of s 7(11) (the aforementioned sum) is
‘remuneration’ as defined (par (f) of the definition of ‘remuneration’ in the Fourth Schedule) and the
fund is therefore an employer. The fact that the employees’ tax deducted from the minimum individual
reserve also constitutes ‘remuneration’ creates a ‘tax-on-tax’ effect. The fund must therefore deduct
employees’ tax in respect of s 7(11) amounts by following the special steps laid out in Interpretation
Note No 39 (see chapter 10).
A deduction from a member’s minimum individual reserve in terms of a divorce order is not taxed in
the hands of the paying spouse. It is taxed as a retirement fund lump sum withdrawal benefit in the
hands of the receiving spouse (par 2(1)(b)(iA) of the Second Schedule) (see chapter 9).
7.7 Minor children (ss 7(3) and (4))

When a minor child or stepchild receives income in his own right, the income is subject to tax in his
own hands, unless s 7(3) or (4) applies. Aforementioned sections only apply if the income is received
by the minor by reason of any ‘donation, settlement or other disposition’ by a parent. Paragraph 69 of
the Eighth Schedule contains an attribution rule similar to s 7(3) and (4) in respect of any capital gain
as a result of a donation, settlement or other disposition to a minor child (but no reference is made to
a minor stepchild in par 69).
In terms of the Children’s Act, children become majors at the age of 18 years. In terms of the Mar-
riage Act, a person must be 18 years of age to enter into a legal marriage. Permission to marry may
however be granted to persons younger than 18 in certain specific circumstances. If a person enters
into a legal marriage, that person becomes a major.
For the purposes of s 7(3) and (4), it has to be established whether the child has reached the age of
18 years on the date of receipt or accrual of the income (and not on the date of the donation). The
169
courts concluded that the expression ‘donation, settlement or other disposition’ should be read as
‘donation, settlement or other similar disposition’. The word ‘disposition’ was interpreted to mean any
disposal of property made wholly or to an appreciable extent gratuitously out of the liberality or gen-
erosity of the disposer. The s 7 anti-avoidance rules do not apply to dispositions made at full value or
settlements made for full consideration.
For details regarding ss 7(5)–(10) and s 7C also dealing with donations and interest-free or low-
interest loans made to trusts, please refer to chapter 24. Any donations tax implications because of a
donation, settlement or other disposition of property can still apply – see chapter 26.
Section 7(3)
Section 7(3) provides that the parent of a minor child or stepchild is taxed on the income received by
that child by reason of any donation, settlement or other disposition by the parent to that child or
stepchild.
Therefore, if a father donates an interest-bearing investment to his minor child, any interest derived
on this investment will be deemed the income of the father in terms of s 7(3) and is therefore taxed in
the parent’s hands. By contrast, income from a donation made by a parent to a major child is taxable
in the child’s hands, unless some other anti-avoidance provision is brought into effect, such as s 80A.
Case law confirms that the question of whether such income is received by reason of such a donation,
settlement or other disposition has to be determined from the facts in each particular instance. There
are, however, contradictory decisions regarding such reinvestment income. In one case it was held
that the provision did not apply to income received by the minor from the use or reinvestment of the
income that had been derived. In another case it was held that the income upon income was a result
of the original donation.
Section 7(4)
Section 7(4) is intended to prevent avoidance of s 7(3), where the parent attempts to escape liability
for tax through the intervention of a third party via a cross donation. Section 7(4) taxes income re-
ceived by a minor child or stepchild from a donation, settlement or other disposition made by a third
party in the hands of his parent, if the parent or his or her spouse has made a cross-donation, settle-
ment or other disposition to the third party or his or her family.
For example, A donates R10 000 to the minor child or stepchild of B and B or his spouse recipro-
cates by donating R10 000 to A or his family. Any income received by the minor child or stepchild of
B would be taxed in B’s hands. The tax implications of any income accruing to A or his family be-
cause of the donation made by B is determined by the status of the person who receives the income.
If B’s major child, for example, receives income because of the donation by B, the major child will be
taxed thereon.
Example 7.21(a). Minor children

In the following instances, determine in whose hands the income will be assessed:
(1) A father gratuitously transferred a sum of money into a savings account for the benefit of
and in the name of his child M, aged 17, and a further sum in the name of his stepchild N,
aged 16. In this manner, the child M received R4 500 interest, while the stepchild N re-
ceived R6 000 interest.
SOLUTION
Both M’s interest of R4 500 and N’s interest of R6 000 are deemed to be the income of the father
(s 7(3)).
Example 7.21(b). Minor children – continued

(2) A minor child received R5 000 interest during a year on a donation of R100 000 made to him
by his father. The R5 000 was used to purchase shares in a company, and the child re-
ceived a dividend of R2 000 from the company.
170
SOLUTION
The R5 000 interest received by the minor child is deemed to be the income of the father (s 7(3)).
Whether s 7(3) also applies to the dividend will depend on the specific facts. It must be proved
that the income on the reinvested money was received ‘as a result of’ the donation of the father.
Example 7.21(c). Minor children – continued

(3) A father donated R100 000 to trustees. In terms of the trust deed, the income was to be
accumulated for the benefit of his minor child, who would receive the income only when he
reached the age of 25. His wife would succeed to the capital of the trust. During the year
the trustees received R6 000 interest, which was accumulated.
SOLUTION
The R6 000 interest received by the trustees is deemed to be the income of the father. Sec-
tion 7(3) applies, since the income is being accumulated for the benefit of the minor child. The
fact that the capital is not donated to the child or that the child has only a contingent right to the
income is irrelevant.
Example 7.21(d). Minor children – continued

(6) A minor child works in her father’s business and received a salary of R30 000 for the year.
She received a cash legacy during the year from a deceased uncle and received R1 000
interest on the investment of this sum.
SOLUTION
The salary of R30 000 received from the father is assessed in the hands of the minor child, since
it has not been received by reason of any gift or donation made by the father. Section 7(3) is not
applicable. The R1 000 interest received on the investment of the cash legacy is taxed in the
hands of the child. Section 7(3) is not applicable since the amount has not been received by
reason of a donation, settlement or other disposition.
Example 7.21(e). Minor children – continued

(7) X (aged 17) and Y (aged 23) received donations from K. The interest from these donations
was R7 500 for X, and R6 000 for Y during a tax year. Z, the father of X and Y, reciprocated
and donated a sum of money to K’s child M, aged 16. M received interest amounting to
R4 500 for the year of assessment on the investment of this sum.
SOLUTION
X’s interest of R7 500 is deemed the income of Z (s 7(4)). Y’s interest of R6 000 is assessed in his
own hands. Section 7(4) does not apply, since Y is a major child. M’s interest of R4 500 is
deemed the income of K (s 7(4)).
7.8 Antedated salaries and pensions (s 7A)

Section 7A provides for the spread, in arrears, of an ‘antedated salary or pension’.
An ‘antedated salary or pension’ is a salary (excluding any bonus) or pension payable with retrospec-
tive effect in respect of a period ending on or before the date of the grant (s 7A(1)).
If the accrual period dates back to before 1 March of the current year of assessment, the taxpayer
can elect as follows to spread the taxability of the payment:
l Accrual period commences not more than two years before 1 March of the current year of as-
sessment: apportion the total accrual period on the basis of the number of months in each year of
assessment (s 7A(2)(a)).
171
l Accrual period commences more than two years before 1 March of the current year of assess-
ment: the antedated salary or pension will be deemed to have been received or accrued in three
equal annual instalments. One-third will be taxed in each of the current and previous two years of
assessment (s 7A(2)(b)). The previous two years’ assessments will be reopened and reassessed.
The employer who pays a s 7A amount must obtain a directive from SARS regarding the amount of
employees’ tax that must be withheld and paid over to SARS in respect of the s 7A amount. If the
employee makes no election, the full amount will be taxed in the year of receipt. A taxpayer will make
the election if his average tax rate in the previous years of assessment is lower than the current year
of assessment.
Example 7.22. Antedated salaries and pensions

Mrs A, the widow of the late Mr A, is awarded a permanent grant, made with retrospective effect,
of an increase in the pension she receives from the employer of the late Mr A. The increase in
pension, which amounts to R4 500, becomes effective and is paid to Mrs A on 28 February 2018.
The retrospective increase relates
(a) to the period 1 September 2016 to 28 February 2018, and
(b) to the period 1 September 2014 to 28 February 2018.
What amount is deemed to accrue to Mrs A in terms of s 7A for the years of assessment ending
on the last day of February 2015, 2016, 2017 and 2018 if she elects to enjoy the application of
the section?
SOLUTION
‘Antedated pension’ = R4 500
‘Accrual period’
Under (a): 1 September 2016 to 28 February 2018 (18 months).
Commences not more than two years before 1 March 2017 (commencement of
year of assessment during which actual receipt takes place).
Under (b): 1 September 2014 to 28 February 2018 (42 months).
Commences more than two years before 1 March 2017.
The antedated pension is deemed to have accrued as follows:
Years of assessment
2015 2016 2017 2019
(year of actual accrual)
Under (a) ......................... – – R1 500 (6/18) R3 000 (12/18)
Under (b)......................... – R1 500 (1/3) R1 500 (1/3) R1 500 (1/3)
Example 7.23. The tax calculation of a natural person

ABC Limited employs Kelvin, aged 32 and unmarried, as a sales manager. He also carries on a
small business as a sole trader. His income and expenditure for the year of assessment that
ended 28 February 2018 were as follows:
Income:
Salary from ABC Limited ................................................................................ R150 000
Non-pensionable commission from ABC Limited .......................................... 50 000
Interest received
From a source outside the Republic........................................................... R4 800
From a source in the Republic .................................................................. 4 000 8 800
Income from trade.......................................................................................... 29 400
Expenses:
Deductible expenses related to trade............................................................ 24 550
Pension fund contributions made by Kelvin................................................... 18 000
Retirement annuity fund contributions ........................................................... 9 000
Donations to an approved public benefit organisation (the required re-
ceipt was obtained) ....................................................................................... 7 000
Qualifying medical expenses (not a member of a medical scheme) ............. 24 400
Other:
Aggregated capital gains .............................................................................. 51 000
Assessed loss ................................................................................................ 10 000
Calculate Kelvin’s normal tax liability for the year of assessment ended 28 February 2018.
172
SOLUTION
Salary ....................................................................................................... R150 000
Commission ............................................................................................. 50 000
Interest received ...................................................................................... 8 800
Income from trade .................................................................................... 29 400
Gross income ........................................................................................... R238 200
Less: Exempt income
Interest exemption (s 10(1)(i))
– interest from a source in the Republic ....................................... 4 000 (4 000)
Income (Subtotal 1) .................................................................................. R234 200
Less: Deductions
Deductible expenses related to trade............................................ (24 550)
Subtotal 2 ................................................................................................. R209 650
Less: Assessed loss ................................................................................ (10 000)
Subtotal 3 ................................................................................................. R199 650
Add: Taxable capital gain R11 000 (R51 000 – R40 000) × 40% ............ 4 400
Subtotal 4 ................................................................................................. 204 050
Less: Contributions to retirement funds = R27 000 (R18 000 +R9 000)
l R350 000 (s 11F(2)(a)), or
– Remuneration of R200 000 (R150 000 + R50 000)
– Taxable income of R204 050 (subtotal 4)
Therefore 27,5% × R204 050 = R56 114 (s 11F(2)(b)), or
l R199 650 (s 11F(2)(c)) (subtotal 3)
But limited to actual ................................................................................. (27 000)
Subtotal 5 ................................................................................................. R177 050
Less: Donation to public benefit organisations
Limited to
l 10% × R177 050 = R17 705 (limited to actual donation) .......... (7 000)
Taxable income ................................................................................ R170 050
Normal tax determined per the tax table on R170 050 @ 18% ........ R30 609
Less: Primary rebate ...................................................................... (13 635)
Section 6B credit (note 3) .................................................... (2 912)
Normal tax liability ............................................................................ R14 062
Notes
(1) It is submitted that taxable capital gains is taken into account in determining the taxable
income for the 27,5% limit – see 7.4.1.
(2) The limitation in s 18A refers to taxable income, which therefore also includes taxable capital
gains.
(3) There is no s 6A medical tax credit (not a member of a medical scheme) and the s 6B medi-
cal tax credit is calculated as follows: (R24 400 – R12 754 (7,5% × R170 050)) = R11 646 ×
25% = R2 912
173
8 Employment benefits
Linda van Heerden

l apply the provisions of the Act, the Seventh Schedule and the VAT Act in respect of
service benefits in both practical calculation questions and theoretical advice
questions
l demonstrate your knowledge with regard to employment benefits by means of an
integrated case study.
Contents
Page
8.1 Overview ....................................................................................................................... 176
8.2 Allowances (s 8(1)) ....................................................................................................... 176
8.3 Specific allowances ...................................................................................................... 177
8.3.1 Travel allowances (s 8(1)(b)) ...................................................................... 177
8.3.2 Subsistence allowances (s 8(1)(c)) ............................................................ 182
8.3.3 Allowances to public officers (s 8(1)(d)) ..................................................... 184
8.4 Seventh Schedule benefits ........................................................................................... 184
8.4.1 Benefits granted to relatives of employees and others .............................. 185
8.4.2 Consideration paid by employee ................................................................ 185
8.4.3 Employer’s duties ........................................................................................ 186
8.4.4 Assets acquired at less than actual value (paras 2(a) and 5) .................... 186
8.4.5 Use of sundry assets (paras 2(b) and 6) .................................................... 188
8.4.6 Right of use of motor vehicles (paras 2(b) and 7) ...................................... 189
8.4.7 Meals, refreshments and meal and refreshment vouchers
(paras 2(c) and 8) ....................................................................................... 195
8.4.8 Residential accommodation (paras 2(d) and 9) ......................................... 195
8.4.9 Holiday accommodation (paras 2(d) and 9) .............................................. 197
8.4.10 Free or cheap services (paras 2(e) and 10) ............................................... 198
8.4.11 Low-interest debts (paras 2(f), 10A and 11) ............................................... 199
8.4.12 Subsidies in respect of debts (paras 2(g), (gA) and 12)............................ 202
8.4.13 Release from or payment of obligation (paras 2(h) and 13) ...................... 202
8.4.14 Contributions to medical schemes (paras 2(i) and 12A) ............................ 204
8.4.15 Costs relating to medical services (paras 2(j) and 12B) ............................ 205
8.4.16 Benefits in respect of insurance policies (paras 2(k) and 12C) ................. 206
8.4.17 Contributions by an employer to retirement funds (paras 2(l) and 12D).... 207
8.5 Right to acquire marketable securities (s 8A) .............................................................. 208
8.6 Broad-based employee share plans (s 8B) ................................................................. 208
8.7 Taxation of directors and employees at the vesting of equity instruments (s 8C) ....... 211
8.7.1 Restricted versus unrestricted instruments ................................................ 212
8.7.2 Vesting as the tax event .............................................................................. 212
8.7.3 Calculation of gain or loss upon vesting ..................................................... 212
8.7.4 Impact of s 8C on capital gains tax ............................................................ 215
175
8.1 Overview
The employment benefits of employees can consist of a combination of a cash salary, fringe benefits,
allowances and advances. Benefits or assets given by employers to employees, in a form other than
cash, are defined as ‘taxable benefits’ in par 1 of the Seventh Schedule (see 8.4 for detail), and are
generally referred to as fringe benefits. The taxable value of fringe benefits (referred to as the ‘cash
equivalent’) is included in gross income through the application of par (i) of the definition of ‘gross
income’ in s 1 of the Act.
Receipts in respect of services rendered (par (c) of the definition of gross income – see chapter 4) are
subject to par (i) (proviso (i) to par (c)). This means that if a ‘taxable benefit’ is received, par (c) will
not apply since par (i) already applies. It is therefore important to determine whether a benefit is a
‘taxable benefit’, and also whether the Seventh Schedule excludes a specific type of benefit as taxable
benefit, or gives a nil value to it.
If the Seventh Schedule excludes a benefit, it means that par (c) can still be considered. Benefits or
amounts that are exempt from tax in terms of s 10 (see ss 10(1)(nA) to (nE), (o) and (q) in chapter 5)
are, for example, specifically excluded from the definition of ‘taxable benefit’ in the Seventh Schedule.
Such benefits or amounts are therefore excluded from par (i) and must be included in gross income in
terms of par (c) but will be exempt again. If the Seventh Schedule gives a nil value to a benefit (for
example if the employer continues to pay the employee’s contributions to the medical scheme after
retirement in par 12A(5)(a)), it means that par (i) is applicable and par (c) cannot apply to such benefit.
The gross amounts of any allowances other than the three types discussed hereafter must be included
in taxable income. The net amounts (meaning the gross allowance or advance received less any
portion spent for business purposes) of travel allowances, subsistence allowances and allowances for
holding a public office are included in the taxable income of that person (s 8(1)(a)(i)(aa)–(cc)). These
allowances are therefore taken into account in the calculation of ‘taxable income’ for the purposes of
the deduction for contributions to retirement funds in s 11F – see the comprehensive framework and
the subtotal method in chapter 7.
Employees also obtain equity shares as remuneration in certain instances. Section 8B (which replaced
s 8A) and s 8C contain the rules regarding the tax implications of the acquisition of such equity shares
by employees.
The following table sums up the differences and similarities regarding the aforementioned employment
benefits:
Include in gross income Include in income Include in taxable income
Cash equivalent of any taxable Section 8B(1): gain at disposal of a The gross amount of an allowance
benefit in terms of the Seventh qualifying equity share (except or advance or the net amount (after
Schedule (taxable benefits with a specific exclusions) deducting any portion thereof
nil value included) (par (i) of the expended for specified purposes)
definition of gross income) in the case of
The applicable value of benefits l travel allowances
excluded from the definition of l subsistence allowances
‘taxable benefit’ (if par (c) of the l allowances for holding a public
definition of gross income applies) office
(s 8(1)(a)(i))
Section 8A gain (only valid in re- Section 8C(1): gain on the vesting
spect of rights acquired before of an equity instrument obtained
26 October 2004) (par (i) of the by virtue of employment or office
definition of gross income) as a director
Except where otherwise stated, references to paragraphs in this chapter are references to paragraphs
of the Seventh Schedule and the employer is a registered VAT vendor. The rules contained in the Fourth
Schedule that must be applied by employers in order to calculate remuneration (the amount on which
employees’ tax must be withheld) are also briefly discussed at each taxable benefit.
8.2 Allowances (s 8(1))

All amounts paid or granted as an allowance or advance must be included in taxable income
(s 8(1)(a)(i)). An employer can grant an allowance or advance to an employee to incur business-related
expenditure, or can merely reimburse an employer for such expenditure. The difference is that the
employee only has an obligation to prove or account for such expenditure in the case of an advance
176
8.2–8.3 Chapter 8: Employment benefits
or a reimbursement (Interpretation Note No 14). In the case of travel allowances, subsistence allow-
ances and public officers’ allowances, a net amount is included in the taxable income of any person
(see 8.3.1–8.3.3).
An amount paid as reimbursement or advance is not included in the recipient’s taxable income if it will
be used
l for expenditure incurred or to be incurred by him
l on the instruction of his principal in the furtherance of the principal’s trade, and
l if the recipient is required to account to his principal for the expenditure incurred and must provide
proof that the expenditure was wholly so incurred (s 8(1)(a)(ii)).
Where the expenditure is incurred to acquire an asset, the ownership of the asset must vest in the
principal. ‘Principal’ is defined in s 8(1)(a)(iii) and includes an employer, as well as the authority,
company, body or other organisation in relation to which an office is held, or any associated institution
in relation to the aforementioned (see 8.4).
Any allowance or advance to government employees who are stationed outside South Africa or persons
rendering services for an employer in the public service are excluded from the provisions of s 8(1) if
they are attributable to services rendered by that person outside South Africa (s 8(1)(a)(iv)).
8.3 Specific allowances

The recipient of the following three specific allowances or advances must first deduct certain expend-
iture against the gross allowance or advance and only include the net amount in gross income. Only
the expenditure listed in s 8(1)(b) to (d) and explained below may be deducted.
8.3.1 Travel allowances (s 8(1)(b))

An employer can pay two types of travel allowance:
l a fixed travel allowance, which means that the employee receives the same amount as an
allowance monthly, irrespective of how many kilometres he or she travels for business purposes,
or
l a reimbursive travel allowance or advance based on the actual distance travelled for business by
the receiver of the allowance or advance. The employee therefore first travels for business and
employer then pays the reimbursive allowance based on actual data.
Fixed travel allowance

Where a fixed allowance or advance is paid monthly, the portion of the allowance that is expended for
business purposes is effectively tax-free. Only that part associated with private use will therefore fall
into the recipient’s taxable income. Travelling between the recipient’s place of residence and his or her
place of employment is not regarded as business travel (s 8(1)(b)(i)). There are two possible ways to
calculate the portion of the allowance expended for business expenses. For both ways, expenses for
business purposes can only be claimed if the taxpayer keeps an accurate logbook of his business
travels. Any motor vehicle can be used for this purpose. The Act does not define the term ‘motor
vehicle’; students must attach the normal dictionary meaning to it, and not the meaning given to the
word ‘motor car’ in the VAT Act.
Please note the following exception if the travel allowance is received in respect of a par 7 company
car:
Remember
If a taxpayer has the right of use of a par 7 company car and he receives a fixed travel allowance
in respect of the same vehicle, the net amount of the travel allowance is not included. In such a
case
l the full travel allowance will be included in taxable income
l no deductions are allowed against the travel allowance (see Interpretation Note No 14 (Issue 3),
par 5.4.1)
l the company car is taxed in terms of par 7 and the par 7(7) and 7(8) reductions will be allowed
against the value of private use of that company car (see 8.4.6).
177
The two ways to calculate the portion of the allowance or advance expended for business purposes
are as follows:
l Actual business kilometres travelled during the year multiplied by the deemed rate per kilometre
which is determined by reference to the table in Appendix C.
l Actual business kilometres travelled during the year multiplied by the actual rate per kilometre as
supported by accurate records kept.
The table of rates prescribed from 1 March 2017 (PAYE-GEN-01-G03-A01 and/or Notice 195 of
GG 40660, dated 3 March 2017) is reproduced in Appendix C.
Where the expenditure claimed is based on accurate data,
l in the case of a vehicle that is leased (financial lease or operating lease), the total payments for the
year may not exceed the amount of the fixed cost in the table in Appendix C for the category of
vehicle used, and
l in any other case, the wear and tear must be determined over a period of seven years from the
date of acquisition of the vehicle. The cost of the vehicle is currently limited to R595 000 and the
finance charges must be limited to an amount as if the original debt had not exceeded R595 000
(s 8(1)(b)(iiiA)). Please note that the five-year period of wear and tear in Interpretation Note No 47
therefore does not apply.
The ‘value’ of the vehicle is used to determine the correct amounts for the three cost components of
the deemed rate per kilometre from the table in Appendix C. Please note that the fixed cost component
is given in rand, while the fuel and maintenance components are given in cents per kilometre. Ensure
that the three cost components are all either in cent per kilometre or rand before they are added
together.
The ‘value’ of the vehicle (see Appendix C) is:
l the original cost, including VAT but excluding any finance charges, where the vehicle was acquired
under a bona fide agreement of sale or exchange
l the cash value, including VAT paid under the lease, if the vehicle was held by the recipient of the
allowance under a lease under which the rent consists of a stated amount of money, which includes
finance charges, or was held by him under a financial lease, or
l the market value of the vehicle at the time when the recipient first obtained it or the right of use of
it, plus VAT on the market value, in any other case.
The deemed rate per kilometre is determined as the sum of the following three components:
l The fixed cost component
This is the fixed cost divided by the total kilometres travelled in the vehicle (for both private and
business purposes) during the period in which the travel allowance was received.
The fixed cost component represents the cost of wear-and-tear, interest, licence and insurance for
both private and business kilometres for a full year of assessment. It must therefore be apportioned
on a daily basis (365 or 366 days) to calculate the fixed cost for the period if the travel allowance
is received for less than the full year. Thereafter it is divided by the total kilometres travelled during
the period that the travel allowance was received in order to calculate a cost per kilometre.
l The fuel cost component
This is the fuel cost per the table (where the recipient of the allowance has borne the full cost of the
fuel used in the vehicle).
l The maintenance cost component
The maintenance cost per the table (where the recipient has borne the full cost of maintaining the
vehicle including the cost of repairs, servicing, lubrication and tyres).
Remember
(1) The ‘value’ of the vehicle used in calculating the taxable portion of a travel allowance includes
VAT because the employee is not a vendor who could claim a VAT input (proviso (iii) of the
definition ‘enterprise’ in s1 of VAT Act) but excludes finance charges.
(2) The total kilometres used in the fixed cost component is the total kilometres travelled for both
business and private purposes during the period in which the travel allowance was received.
(3) The recipient of the travel allowance must pay the full fuel costs and/or maintenance cost
before that cost component can be taken into account in the calculation of the total deemed
cost per kilometre.
178
8.3 Chapter 8: Employment benefits
Example 8.1. Travel allowance

Xolani owns a motor vehicle that cost him R120 000, inclusive of VAT but exclusive of any finance
charges. He received a travel allowance of R1 600 a month from his employer during the year of
assessment. He travelled 22 000 km in the vehicle during the 2018 year of assessment of which
4 000 km was travelled for business purposes. Xolani kept an accurate logbook. The following
actual costs (which include VAT where applicable) were incurred by Xolani:
l Fuel costs ........................................................................... R8 000
l Maintenance costs ............................................................. 4 000
l Insurance ........................................................................... 2 400
l Finance costs ..................................................................... 12 000
l Licence cost ....................................................................... 400
Calculate the taxable amount of the travel allowance to the greatest benefit of Xolani.
SOLUTION
Allowance received ....................................................................................................... R19 200
Total kilometres travelled ......................................................................... 22 000 km
Less: Private kilometres ........................................................................... (18 000 km)
Business kilometres ................................................................................. 4 000 km
Fixed cost component according to table for vehicle costing R120 000 ... R50 924
R50 924
Fixed cost per kilometre
(
22 000 km )
.................................................. 231,5c
Fuel cost per kilometre (as per table) ...................................................... 101,8c

Maintenance cost per kilometre (as per table) ........................................ 41,2c
Total cost per kilometre ........................................................................... 374,5c
Deduction for business use (4 000 kilometres × R3,745 per kilometre) ........................ (14 980)
Taxable amount if deemed costs are claimed ................................................. R4 220
Allowance received ................................................................................. R19 200

Less: Deduction for business use 4 000 km/22 000 km × R43 943............................. (7 990)
l Wear-and-tear R120 000/7 ................................................................. R17 143
l Fuel costs ........................................................................................... 8 000
l Maintenance costs ............................................................................. 4 000
l Insurance ........................................................................................... 2 400
l Finance costs ..................................................................................... 12 000
l Licence cost ....................................................................................... 400
R43 943
Taxable amount if actual costs are claimed............................................. R11 210
Mr X must claim deemed costs since the taxable amount of the travel allowance will then be
smaller.
Notes
(1) The fixed-cost component is based on the value of the vehicle, which is the cost including
VAT but excluding finance charges or interest.
(2) Mr X is not obliged to use the table and is entitled instead to furnish an acceptable calculation
based upon accurate data. If actual costs are used it will include the following
l wear and tear on the vehicle (take s 8(1)(b)(iiiA)(bb)(A) into account)
l actual fuel costs
l actual maintenance cost
l insurance
l finance charges (take s 8(1)(b)(iiiA)(bb)(B) into account)
l licence cost, and
l toll fees.
The total actual costs are added together and the deductible amount = total cost × business
kilometres/total kilometres.
179
Example 8.2. Travel allowance: Vehicle used for less than a full year
Barry owns a motor vehicle that cost him R46 500, inclusive of VAT but exclusive of any finance
charges. He used his motor vehicle for business during the last seven months of the 2018 year of
assessment and received a travel allowance of R22 000 from his employer for the seven months.
He travelled a distance of 24 000 km during the seven months of which his business mileage
amounted to 13 500 km.
Calculate the taxable amount of the travel allowance.
SOLUTION
Allowance received ................................................................................. R22 000
Business kilometres ................................................................................. 13 500 km
Fixed cost component according to table for vehicle with a value of
R46 500 ................................................................................................... R28 492
Fixed cost per kilometre (R28 492

24 000
)×
212
365
...................................... 69,0c
Fuel cost per kilometre (as per table) ...................................................... 91,2c

Maintenance cost per kilometre (as per table) ........................................ 32,9c
Total cost per kilometre ........................................................................... 193,1c
Deduction for business use (13 500 kilometres × R1,931 per km) .......... (26 069)
Taxable amount (limited to Rnil) ................................................. Rnil
Reimbursive travel allowance

When an allowance or advance is based upon the actual distance already travelled by the recipient, it
is a reimbursive allowance. The amount expended on business is, unless the contrary appears,
deemed to be the cost per the table in Appendix C (or Notice 195 of GG 40660 dated 3 March 2017)
(s 8(1)(b)(iii)). The words ‘unless the contrary appears’ might indicate that the taxpayer can use the
actual costs, supported by accurate records, if the actual costs exceeds the deemed cost.
However, if the taxpayer meets the following two requirements, he may also choose to use a simplified
method to calculate the cost of the business kilometres. This choice is explained in par 4 of Notice 195
of GG 40660, dated 3 March 2017. In terms thereof a fixed rate per business kilometre (as determined
by the Minister of Finance by notice in the Government Gazette) may be deducted from the allowance.
This rate is currently 355 cents per kilometre. The two requirements that must be met are:
l The total business kilometres during the year of assessment may not exceed 12 000 kilometres.
Where more than one vehicle has been used during the year of assessment, the total distance
travelled in such vehicles for business purposes must not exceed 12 000 kilometres. Neither the
Act nor the Guide for Employers in respect of Allowances provides for the pro rata apportionment
of the 12 000 kilometres in the case of a period of less than a year.
l No other travel allowance or reimbursement (other than for parking or toll fees) is payable by the
employer to the employee.
If both a fixed travel allowance and a reimbursive travel allowance are received, both amounts will be
combined on assessment and treated as a travel allowance. It will then not be possible to use the
simplified method.
Example 8.3. Reimbursive travel allowance

Brent owns a motor vehicle that cost him R21 000, inclusive of VAT but exclusive of any finance
charges. He received a travel allowance of R3,60 per kilometre travelled on business from his
employer during the 2018 year of assessment. He travelled 16 000 km in the vehicle during the
year, and he maintained an accurate logbook of business travels.
Calculate the taxable amount of the travel allowance on the assumption that Brent would elect the
simplified method where possible and that he
(a) travelled 9 000 km for business purposes
(b) travelled 13 000 km for business purposes.
180
SOLUTION
(a) Since he travelled less than 12 000 km, he qualifies for the simplified method. The deemed
cost per kilometre is R3,022 (see (b)) and the rate per kilometre for business travelling in terms
of the simplified method is R3,55. The simplified method is therefore more beneficial. The
amount applicable to business travelling is therefore R31 950 (9 000 km × R3,55), and the
taxable amount is accordingly R450 (R32 400 (R3,60 per km × 9 000 km) – R31 950). With
effect from 1 March 2018, the R450 will be ‘remuneration’ in terms of par (cC) of the definition
in the Fourth Schedule.
(b) Since he travelled 13 000 km, which is more than 12 000 km, he does not qualify
for the simplified method.
Allowance received (R13 000 km × R3,60 per km) ........................... R46 800
Fixed cost element according to table for vehicle with a value of
R21 000 ............................................................................................. R28 492
Fixed cost per kilometre ( R28 492

16 000
) ............................................ 178,1c
Fuel cost per kilometre (as per table) ............................................... 91,2c

Maintenance cost per kilometre (as per table).................................. 32,9c
Total cost per kilometre ..................................................................... 302,2c
Deduction for business use
(13 000 km × R 3,022 per km) .......................................................... (39 286)
Taxable amount ................................................................ R7 514
Anti-avoidance rule
The anti-avoidance rule in s 8(1)(b)(iv) is aimed at preventing an employee from letting his own motor
vehicle to his employer and then being awarded the right of use of the same vehicle as a fringe benefit.
Where a motor vehicle owned or hired by an employee, his spouse or his child (the lessor) has been
let to the employer or an associated institution in relation to the employer
l the sum of the rental paid and any expenditure incurred by the employer is deemed to be a travel
allowance paid to the employee,
l the rental paid by the employer will be deemed not to have been received by the employee (and
therefore no costs will be deductible against such ‘rental’), and
l it will be deemed that the employee has not received the right of use of the vehicle (therefore no
par 7 fringe benefit).
Such employee is taxed as if he received a travel allowance, and not as if he was granted the right of
use of a vehicle.
Example 8.4. Travel allowance

Zanele leases a car with a cost price of R100 000 (VAT included) for R5 000 per month. He then
leases the car to his employer for R5 000 per month and is granted the right of use of the car by
his employer. Zanele bears the full fuel cost and cost of maintenance in respect of the car. Zanele
travelled 28 000 km during the 2018 year of assessment of which 10 000 km was travelled for
business purposes.
Explain (with supporting calculations) to Zanele what the tax implications are for him in this
situation.
181
SOLUTION
Rental income (rental paid by employer is deemed not to have been
received – s 8(1)(b)(iv)) ................................................................................. –
Lease rental (expenditure incurred by employee is not deductible -
s 8(1)(b)(iv)) ................................................................................................... –
Use of the car (It will be deemed that the employee has not received a
fringe benefit in terms of par 7 of the Seventh Schedule) ........................ –
Travel allowance (R5 000 × 12) (rental paid by employer is deemed to be a
travel allowance – s 8(1)(b)(iv)) ............................................................... R60 000
Less: Deduction for business use 10 000 km × R 3,249 per km (see below) (32 490)
Taxable amount ............................................................................................. R27 510
Fixed cost per km R50 924/28 000 km .......................................................... 181,9c
Fuel per km.................................................................................................... 101,8c
Maintenance per km ...................................................................................... 41,2c
Total cost per km (per table) ......................................................................... 324,9c
Business km: 28 000 km – 18 000 km = 10 000 km
Employees’ tax
The employees’ tax implications are as follows:
l 80% of a fixed travel allowance is included in remuneration (par (cA) of the definition of ‘remuner-
ation’ in the Fourth Schedule)
l only 20% of a fixed travel allowance is included in remuneration (par (cA) of the definition of
‘remuneration’ in the Fourth Schedule) if the employer is satisfied that at least 80% (therefore 80%
or more) of the use of the motor vehicle for a year of assessment will be for business purposes. In
terms of the Guide for emplyers iro Allowances (PAYE-GEN-01-G03), this determination must be
done on a monthly basis. An employee’s accurate logbook can be used to prove his business use.
The wording of par (cA) of the definition of ‘remuneration’ in the Fourth Schedule was amended and
now excludes a reimbursive travel allowance. A new inclusion in par (cC) of the definition of ‘remune-
ration’ includes 100% of the excess reimbursive allowance as remuneration with effect from 1 March
2018. The excess is the difference between the rate paid by the employer and the rate of the simplified
method of R3.55, multiplied by the business kilometres travelled. This inclusion is therefore irrespective
of how much business kilometres were travelled.
Employees’ tax will therefore only be deducted in respect of a portion of a reimbursive travel allowance
from 1 March 2018, but the full amount of the allowance must be reflected on the employee’s tax
certificate (IRP 5). Until 29 February 2018 a reimbursive travel allowance was not subject to employees’
tax.
If both a fixed travel allowance and a reimbursive travel allowance are received, both amounts will be
combined on assessment and treated as a taxable travel allowance. It will then not be possible to use
the simplified method (par 4(c) of the Notice 195 of GG 40660, dated 3 March 2017). The full travel
allowance must be disclosed on the IRP 5.
8.3.2 Subsistence allowances (s 8(1)(c))

Most employers grant subsistence allowances to employees who spend at least one night away from
their usual place of residence in South Africa for business purposes. Such allowances are paid to cover
personal subsistence and incidental costs. Only the portion of the allowance that exceeds the actual
costs or deemed costs is included in the recipient’s taxable income (s 8(1)(a)(i)(bb)). The deduction is
always limited to the amount of the allowance paid.
The expenditure actually incurred in respect of accommodation, meals or other incidental costs can
be claimed if proved to the Commissioner.
A deemed amount, based on rates annually published in the Government Gazette, can be claimed in
respect of meals and incidental costs for each day or part of a day that the employee spends away
from his usual place of residence in South Africa. This applies where the employee has not provided
proof of actual expenditure. Please note that only actual proven costs, and not deemed costs, can be
claimed in respect of accommodation.
182
The following rates apply for the 2018 year of assessment:

l For travel within South Africa:
– R122 per day if the allowance is granted to defray incidental costs only, or
– R397 per day if the allowance is granted to defray the cost of meals and incidental costs.
l For travel outside South Africa and if the allowance covers the cost of meals and incidental costs,
an amount per day determined in terms of the table in Appendix F (or Notice 194 of GG 40660,
dated 3 March 2017) for the country where the accommodation is situated. The amounts laid down
in respect of travelling abroad will only apply to employees who are ordinarily resident in the Republic
in respect of continuous periods spent outside the Republic. See chapter 21 for a discussion of the
s 25D translation rules for foreign exchange amounts.
Remember
(1) The fact that the amount deemed to be expended without proof of actual expenditure is given
as ‘per day or part of a day’, and not per night spent away from home, is beneficial to the
employee. It means that an employee can, for example, receive R794 (2 × R397) for one night
spent away from his usual place of residence as required in terms of s 8(1)(a)(i)(bb), without
having a taxable inclusion.
(2) Deemed unproven costs can only be claimed in respect of meals and incidental costs, and
not in respect of accommodation.
Any expenditure borne by the employer (other than the granting of the allowance) cannot be seen as
part of the employee’s actual or deemed expenditure (s 8(1)(c)(ii)(aa)).
The requirement that the recipient must be away from his usual place of residence in South Africa
implies, first, that he must have a usual place of residence in South Africa in order to qualify for the
application of this provision. It cannot apply if, for example, he receives a subsistence allowance after
he has given up his usual place of residence in order to move to a new place of residence. Secondly,
the provision cannot apply if his usual place of residence is not in South Africa.
An employee can only claim expenditure against a subsistence allowance if the allowance is paid on
an ad hoc basis. A deduction will not be allowed if an employee’s remuneration package is structured
to include a fixed amount for subsistence purposes. In terms of the Guide for employers iro Allowances
(PAYE-GEN-01-G03) a subsistence allowance is intended for abnormal circumstances and therefore
an allowance of this nature cannot form part of the remuneration package of an employee. It is an
amount paid by an employer to the employee in addition to the employee’s normal remuneration.
It is essential that the taxpayer must actually have received a subsistence allowance before any relief
can be claimed under the provisions of s 8(1)(c).
Employees’ tax
No employees’ tax is deducted from a subsistence allowance (subsistence allowances are excluded
from the definition of ‘remuneration’ in the Fourth Schedule (par (bA)(ii)). Any unexpended portion will
be subject to normal tax on assessment. The full allowance (100%) must, however, be reflected on the
IRP 5 (usually as non-taxable), even if it does not exceed the deemed expenditure on subsistence.
If the employee has not by the last day of the month following the payment of a subsistence allowance,
either
l spent a night away from his usual place of residence, or
l paid the allowance back to his employer,
that amount is not seen as a subsistence allowance. It will then be deemed that he has received a
payment for services rendered (proviso to subpar (ii) of par (bA) of the definition of ‘remuneration’ in
the Fourth Schedule) and must be included in gross income in terms of par (c). The amount will then
also be remuneration (in terms of par (a) of the definition), and employees’ tax must be deducted. The
full amount must then be included as part of the salary on the IRP 5.
183
Example 8.5. Subsistence allowances

Sipho is obliged to spend one night away from his usual place of residence for business purposes
during the 2018 year of assessment. He receives an allowance of R1 580 from his employer.
Calculate the taxable amount of the allowance assuming that:
(a) Sipho travels within South Africa and is able to prove that he incurred actual expenditure of
R1 650 on meals, accommodation and other incidental costs.
(b) The employer pays for Sipho’s accommodation within South Africa and Sipho pays R350 for
meals and other incidental costs, but he does not keep the documentation to prove this
expenditure.
(c) The employer pays for Sipho’s accommodation in Angola and Siphp pays the equivalent of
R700 for meals and other incidental costs, but he does not keep the documentation to prove
this expenditure. Assume the exchange rate is US$1 = R10.
SOLUTION
(a) Allowance received ..................................................................................................... R1 580
Less: Actual expenditure incurred by Sipho ................................................................ (1 650)
Taxable amount (limited to Rnil) .................................................................................. Rnil
(b) Allowance received ..................................................................................................... R1 580
Less: Deemed expenditure by Sipho (2 × R397) ........................................................ (794)
Taxable amount ........................................................................................................... R786
(c) Allowance received ..................................................................................................... R1 580
Less: Deemed expenditure by Sipho (2 × $303 (see Appendix F) × R10) = R 6 060 (6 060)
Taxable amount (limited to Rnil) .................................................................................. Rnil
8.3.3 Allowances to public officers (s 8(1)(d))

The holder of a public office can claim a deduction in his return of certain listed expenditure actually
incurred by him and not recovered (s 8(1)(a)(cc)).
Numerous persons falling under the heading ‘holder of a public office’ over a wide spectrum, including
the national, provincial and local government, as well as non-profit organisations, are listed (s 8(1)(e)).
A wide range of expenditure relevant to the holding of a public office is listed. Examples are expend-
iture in respect of secretarial services, stationery and travelling. It is required that this expenditure must
have been actually incurred by the holder of the office for the purposes of the office in order to be
deductible (s 8(1)(d)).
An allowance is deemed to be paid to holders of a public office (as listed in s 8(1)(e)(i)), when they
must incur the listed expenditure out of their salaries (s 8(1)(f)). A certain amount of their salaries is
then automatically deemed to be an allowance against which they can claim qualifying expenditure.
The National Assembly or the President must determine this ‘deemed allowance’. For Premiers, Mem-
bers of Executive Councils and Members of the Provincial Legislature the allowance is deemed to be
R120 000 (effective from 1 April 2009 as per Proclamation R97 GG 32739). The R120 000 is appor-
tioned if the public office is held for less than a year (s 8(1)(g)).
Employees’ tax
SARS requires the deduction of employees’ tax from 50% of the allowance and the disclosure of the
full allowance (100%) on the IRP 5 (par (c) of the definition of ‘remuneration’ in the Fourth Schedule).
8.4 Seventh Schedule benefits

The cash equivalent of the taxable benefits listed in par 2 are included in gross income. The definition
of ‘taxable benefit’ in par 1 excludes certain benefits, namely
l benefits that are exempt in terms of s 10
l medical services and other benefits provided by a benefit fund
l lump sum benefits from a retirement fund or a benefit fund
l benefits received by government employees stationed outside the Republic in respect of services
rendered outside the Republic, and
l severance benefits.
184
Paragraph 2 describes the different types of taxable benefits and the cash equivalents of the various
taxable benefits are then determined in terms of par 5 to 13. Taxable benefits in terms of par 2 are
generally referred to as ‘fringe benefits’. It is clear from par 2 that an employer-employee relationship
is a prerequisite to the application of the Seventh Schedule. The taxable benefit must be granted
because of this relationship or as a reward for services rendered. This means that benefits granted on
compassionate grounds or grounds unrelated to employment of services rendered might arguably not
be taxable.
The Act contains ‘no value’ provisions in respect of each type of taxable benefit.
This means that the specific benefit is a par (i) fringe benefit, but that the cash
Please note!
equivalent thereof is in effect Rnil. Such ‘no value’ benefits cannot be included in
gross income in terms of par(c).
The concepts ‘employer’, ‘employee’ and ‘associated institution’ are all defined in par 1. The concept
‘employer’ is also defined in par 1 of the Fourth Schedule, where the payment of remuneration renders
a person an employer. Both the definitions of ‘employer’ and ‘employee’ refer to this definition in the
Fourth Schedule. The definition of ‘employee’ in terms of the Seventh Schedule only excludes
employees who retired due to age, ill health or other infirmity before 1 March 1992. If a taxpayer’s
previous employer therefore continues to grant a fringe benefit to him or her after his or her retirement,
he or she is taxed thereon. The only exception is if one of the ‘no value’ provisions in the Seventh
Schedule is applicable and the taxable value is Rnil.
There is no employment relationship between a partner and a partnership. A

partner in a partnership is, however, for the purposes of par 2, deemed to be an
employee of the partnership (par 2A). This means that any par 2 taxable benefit
(fringe benefit) received by a partner from a partnership must be included in the
partner’s gross income in terms of par (i) of the definition of gross income.
The partnership is however not specifically deemed to be an employer for the
purposes of par 2 (par 2A) or for purpose of the Fourth Schedule. The definition
of ‘remuneration’ does not per se require that an employer must pay the amount
Please note!
to an employee. This means that, even though a fringe benefit received by a
partner is ‘remuneration’ as defined in the hands of the partner, no employees’
tax needs to be withheld by the partnership from fringe benefits granted to
partners.
Note, however, that the wording in ss 11F and (l) and par 12D deems a partner-
ship to be the employer of the partner and a partner to be an employee of the
partnership. It consequently seems that it was the intention of the Legislator to
allow a partner to claim a s 11F deduction based on the ‘remuneration’ paid to
the partner. Please refer to chapter 18 for a more detailed discussion and
examples regarding partnerships.
Any benefit granted to an employee by an associated institution in relation to the employer is deemed
to be granted by the employer (par 4). Associated institutions include companies managed or con-
trolled by substantially the same persons as the employer, or by the employer or a partnership of which
the employer is a member. It also includes funds established for the benefit of the employees of the
employer or aforementioned companies.
8.4.1 Benefits granted to relatives of employees and others

Taxable benefits received by a relative (as defined in s 1) of an employee or any other person because
of the employee’s employment or services rendered, are taxed in the hands of the employee. These
benefits are not taxed in the hands of the person receiving the benefits (par 16).
8.4.2 Consideration paid by employee

When the cash equivalent of taxable benefits is calculated, any consideration paid by the employee is
deducted from the value determined in terms of the valuation rules in par 5 to par 13. Any consideration
in the form of services rendered or to be rendered by the employee is not deducted (par 1).
185
8.4.3 Employer’s duties

The employer who granted the taxable benefit has the responsibility to determine the cash equivalent
(par 3(1)). If no determination is made or if the determination appears to be incorrect, the Commissioner
may re-determine the cash equivalent. The Commissioner may then issue an assessment in terms of s
96 of the Tax Administration Act for the outstanding employees’ tax that was required to be deducted
or withheld from such cash equivalent (par 3(2)).
The employer must prepare and furnish a fringe-benefit certificate to every employee within thirty days
after the end of a year or period of assessment during which the employee has enjoyed a taxable
benefit (par 17(1)). The Commissioner may allow a further period during which the certificate may be
delivered. The certificate must show the nature of the taxable benefit and the full cash equivalent. The
employer must also deliver a copy of this fringe-benefit certificate to the Commissioner within the same
30-day period or authorised extended period (par 17(3)). Fringe-benefit certificates need not be pre-
pared if an IRP5 containing the cash equivalents of such remuneration is issued to the employee and
employees’ tax was deducted by the employer. If the cash equivalent was understated in the IRP 5, a
fringe-benefit certificate must be issued for the understated amount (par 17(6)).
A penalty of 10% of the cash equivalent of taxable benefits not recorded or understated in a fringe-
benefit certificate is imposed upon an employer who fails to comply with these requirements
(par 17(4)). The procedure for remittance of administrative non-compliance penalties is dealt with in
Chapter 15 of the Tax Administration Act.
An employer must make a declaration of fringe benefits on the employee’s tax reconciliation called for
by par 14 of the Fourth Schedule. The employer must declare that all taxable benefits enjoyed by his
employees during the period are declared on the IRP5s (par 18(1)). The return submitted by a
company must be certified as being correct by one of its directors (par 18(2)).
The various taxable benefits listed in the Seventh Schedule below.
8.4.4 Assets acquired at less than actual value (paras 2(a) and 5)
Reference in the Act

Type of taxable benefit Asset acquired for no consideration or for a Par 2(a)
consideration less than market value
Exclusions from taxable If the asset is one of the following:
benefit l money Par 2(a)
l meals and refreshment benefits Par 2(a)(i), (c) and (d)
l marketable securities Section 8A
l qualifying equity share Section 8B
l equity instruments Section 8C
Definitions Long service: first unbroken period of service Par 5(4)
of 15 years or subsequent unbroken period of
service of 10 years
Remuneration proxy: Section 1
l remuneration derived in preceding year of
assessment or
l annual equivalent of current year’s remu-
neration, or of first month’s remuneration if
applicable
Cash equivalent Value of the asset less consideration paid by Par 5(1)
– general rule employee
Value of the asset = market value on the date
of acquisition by employee
Cash equivalent Movable asset acquired in order to dispose of it Par 5(2) and par 18(3) VAT Act
– special rules to the employee: value = cost price (VAT
excluded) (see below)
continued
186

Marketable securities (irrespective of whether Par 5(2)
they are trading stock) and assets used by the
employer prior to the employee acquiring
ownership thereof (for example lease discon-
tinued): value = market value
Trading stock: value = lower of cost or market Par 5(2)
value
Asset given as an award for bravery or long Par 5(2)(a), 5(2)(b) and 5(4)
service: value is reduced by the lesser of cost
price and R5 000
No values (a) Fuel or lubricants supplied by an em- Par 5(3)
ployer to his employee for use in a com-
pany car
(b) Immovable property acquired by the Par 5(3A)
employee. This no value exception does
NOT apply if
l remuneration proxy of employee Section 1: definition of
exceeds R250 000; or remuneration proxy
l market value of immovable property
exceeds R450 000; or
l employee is a connected person in
relation to the employer
(c) The acquisition of accommodation by the Par 10A(2)
employee, his spouse or minor child in
terms of an agreement at a price which is
not less than the market value of the
accommodation
VAT implications VAT is excluded from the ‘cost to the employer’ Section 18(3) of the VAT Act
(in the case of both the cost price and the
market value) since there is a deemed supply
in terms of s 18(3)of the VAT Act, and output
tax thereon must be paid by the employer (and
therefore the employer can claim the VAT paid
on aquisition as input tax)
Remuneration for PAYE Cash equivalent Par (b) of the definition of ‘remu-
neration’ in the Fourth Schedule
Amount on IRP 5 Cash equivalent
Example 8.6. Assets acquired at less than actual value

Determine the cash equivalent in respect of the following dispositions of property:
(1) A computer was acquired by the employer at a cost of R10 000 (excluding VAT) and used in
the business for three years. It is sold to an employee for R2 000 (excluding VAT). The market
value (excluding VAT) of the computer on the date of sale is R3 000.
(2) A gold watch, which cost the employer R6 270 (including VAT) was bought for an employee
as a long-service award after he had completed 20 years of service. The market value
(including VAT) of the watch on the date of the presentation is R6 840.
SOLUTION
(1) Value of the asset (market value, VAT is excluded because the employer could
have claimed it (s 23C)) ......................................................................................... R3 000
Less: Consideration (VAT levied by the employer in terms of s 7(1)(a) of the VAT
Act is excluded) ........................................................................................... (2 000)
Cash equivalent ..................................................................................................... R1 000
(2) Value of the asset (cost to the employer, excluding VAT: R6 270 × 100/114) ....... R5 500
Less: Exempt portion ............................................................................................. (5 000)
Cash equivalent ..................................................................................................... R500
187
8.4.5 Use of sundry assets (paras 2(b) and 6)

Type of taxable benefit Free private use of various assets (or for a Par 2(b)
consideration less than the cash equivalent)
Right of use of a company car (see 8.4.6 for Par 2(b)
discussion)
Exclusions from taxable Residential accommodation or household Par 2(b)
benefit goods supplied with such accommodation
Cash equivalent Value of private use less consideration given Par 6(1)
– general rule by the employee or any amount spent by the
employee on the maintenance or repair of such
asset
Cash equivalent Asset is leased by the employer: Value of Par 6(2)(a)
– special rules private use = rent paid by employer
Asset is owned by employer: Value of private use Par 6(2)(b) and par 4.3 of the
= 15% × lesser of cost price and market value Guide for Employers in respect
of asset × (period used/ 365 (or 366) days) of Fringe Benefits (PAYE-GEN-
01-G02).
Employee has the sole right of use of an asset Par 6(2)(b)
for its useful life: Value of private use = cost
price of asset
No values (a) Private use of asset is incidental to the use Par 6(4)(a) (with effect from
thereof for the purposes of the employer’s 1 March 2018 this item does not
business apply in respect of clothing)
(b) Asset is provided as an amenity to be Par 6(4)(a) (with effect from
enjoyed 1 March 2018 this item does not
– at the employee’s place of work, or apply in respect of clothing)
– for recreational purposes at the
employee’s place of work, or
– at a place of recreation provided by
the employer for the use of his
employees in general
(c) Asset can be used by employees in gen- Par 6(4)(b)
eral for short periods and the value of the
private use does not exceed an amount
determined on a basis as set out in a
public notice issued by the Commissioner
(d) Asset is a telephone or computer which Par 6(4)(bA)
the employer uses mainly (> 50%) for
purposes of the employer’s business.
(e) Asset consists of books, literature, Par 6(4)(c)
recordings or works of art
Remuneration for PAYE Cash equivalent (an appropriate portion is cal- Par 6(3) and par (b) of the defi-
culated monthly) nition of ‘remuneration’ in the
Fourth Schedule
Example 8.7. Use of sundry assets

Gert has the right of use of a personal computer, which is owned by his employer, for private
purposes. The computer cost the employer R11 400 (including VAT at 14%). Gert does not pay
anything for the use of the computer.
Calculate the taxable amount of the fringe benefit if:
(a) Gert uses the computer at home continuously for three months.
(b) Gert uses the computer at home for its useful life or over a major portion of its useful life.
188
SOLUTION
(a) Cash equivalent = R10 000 × 15% × 3/12 = R375 (R125 per month).
(b) Cash equivalent = R10 000 (the whole amount is included in remuneration in the first month
of use).
8.4.6 Right of use of motor vehicles (paras 2(b) and 7)
The meanings of the core terms used in par 7 are as follows:

Value of private use (par 7(4)) (3,5% or 3,25% × determined value) per
month
Cash equivalent (par 7(2)) Value of private use less consideration given
by employee
Please note!
Par 7(7) adjustment Value of private use × business km/total km
Taxable income from a par 7 Cash equivalent less par 7(7) adjustment
fringe benefit less par 7(8) adjustment
Remuneration Cash equivalent × 80% or 20% (depending
on the extent of business travels)

Type of taxable benefit Free private use (or for a consideration less Par 2(b)
than the value of private use) of a motor vehicle
(company car)
Exclusions from None
taxable benefit
Definitions Determined value* of motor vehicles owned or Par 7(1)(a), s 23A(1): definition of
leased (other than an ‘operating lease’ in terms operating lease
of s 23A) by the employer = The retail market Par 7(1)(b). In terms of par 7(3)
value (excluding finance charges) as this value also applies if an em-
determined by the Minister by Regulation ployer transfers his rights and
duties in terms of a lease agree-
ment to the employee
*The determined value is reduced by 15% per Proviso (a) of par 7(1)
year (reducing balance method) for every
completed 12-month period between acqui-
sition and granting the right of use to the
employee for the first time
This reduction does not apply if both the Proviso (b) of par 7(1)
employee and the asset are transferred to an
associated institution
Maintenance plan = contract covering all main- Par 7(11). If a question does not
tenance costs for not less than three years and clearly state that the motor vehicle
a distance of not less than 60 000 km is subject to a maintenance plan
at the time of acquisition by the
employer, the 3,5% must be
applied. One cannot assume that
there was a maintenance plan
The retail market value of the motor vehicle at
the time when the employer first acquired the
vehicle, or the right of use thereof, or manu-
factured the vehicle is used
continued
189

Please note the following in respect of the retail
market value: Par 7(1)(c)
Regulation R.362 in GG 38744 dated See Silke 2015 for the rules
23 April 2015 contains the provisions in applicable to motor vehicles
respect of the retail market value applicable acquired before 1 March 2015
with effect from 1 March 2015.
Because the retail market value will be given to
students in terms of the SAICA syllabus, the
regulation is not discussed in detail, but take
note of the following:
l Distinction is made between the different
industries
l Distinction is made between new and
second hand motor vehicles
l It is specified which percentage of the retail
market value must be used as the
determined value and in which year of
assessment it must be used and whether
VAT must be included or excluded
Cash equivalent – Value of private use (see below) less consid- Par 7(2)
general rule eration paid by employee (other than consid- The cash equivalent, which is
eration paid by an employee in respect of calculated by the employer
licence, insurance, maintenance or fuel) monthly, is not influenced by the
par 7(7) and 7(8) adjustments
Value of private use – In all cases other than vehicles acquired under
special rules an operating lease:
Value of private use = 3,5% × Determined Par 7(4)(a)(i)
value × number of months used
OR
Value of private use = 3,25% × Determined Par 7(4)(a)(i): the 3,25% is only
value × number of months used used if a ‘maintenance plan’ was
automatically included in the cost
price of the motor vehicle at the
time of acquisition
Please note that
1. The private use of a vehicle includes travels Par 7(4)(a)(i). Please see the
between the employee’s place of residence exception to the rule in par 7(8A)
and place of employment, as well as all
other private travels
2. If the employee is only entitled to use the Par 7(4)(b) and 7(5)
motor vehicle for a part of a month, the value
of the private use is apportioned on a daily
basis. No reduction is made simply
because the vehicle is for any reason
temporarily not used by the employee
3. If an employee uses more than one com- Par 7(6). Please note that a tax-
pany car primarily for business purposes, payer cannot apply for par 7(6) if
he will, on application to the CIR, only be par 7(7) or 7(8) is applied. This
taxed on the value of private use of the car means that par 7(6) cannot apply
with the highest determined value if the employee keeps an accurate
logbook of business and private
kilometres. This is because the
Commissioner must apply
par 7(7) and 7(8) if an accurate
logbook is kept. In practice, SARS
requires the fact that if more than
one vehicle is made available to
an employee at the same time, to
be reported, and, if the
concession is applied for,
requires full details of the reasons
why it was necessary to make
more than one vehicle available to
the employee.
continued
190

In the case of vehicles acquired under an
operating lease:
Value of private use = sum of actual cost for Par 7(4)(a)(ii) and s 23A(1)
employer in terms of operating lease and cost See the Please Note number 2
of fuel in respect of the motor vehicle below regarding the applicability
of par 7(7) and 7(8)
Reduction of value of If the employee keeps an accurate logbook of Par 7(7) (reduction for business
private use the distances travelled for both business purposes) and 7(8) (reduction if
purposes and private purposes, the value of employee bears the full cost of
private use must be reduced on assessment specific expenses)
with the calculated adjustments in terms of par
7(7) and 7(8)
The calculation of the par 7 fringe benefit is Remember: The value of private
based on the employee being entitled to use a use is the amount before the com-
company car for private purposes. The cal- pensation paid by the employee is
culation in par 7 is therefore, as a convenient deducted
starting point, based on the implicit assumption
that there has been no business use of the
vehicle and that all operating expenses are
incurred by the employer
It will usually happen that such a company car
is also used for business purposes. The em-
ployee is then entitled to a reduction in the
value of the private use to take account of
actual business use in terms of par 7(7)
Where the employee bears (pays) the FULL
cost of the licence, insurance or maintenance
of such car, the part related to the private use
can be deducted in terms of par 7(8). If only a
part of the expenses is paid and not the full
cost, he is, presumably, not entitled to any
deduction. If the employee pays the full cost of
fuel for private purposes, an adjustment is
made based on the fuel cost in the deemed
cost table
Par 7(7) adjustment (business kilometres must
be proved) = Value of private use × (business
kilometres/total kilometres)
Par 7(8) adjustments (private kilometres must
be proved) =
Full cost paid by Reduce value of
employee private use with
Cost of licence, Cost × (private
insurance, and kilometres/total kilo-
maintenance metres)
Cost of fuel for Private kilometres × Remember that the ‘value’ in
private use deemed cost per Appendix C always includes VAT
kilometre in respect
of fuel as per the
deemed cost table
for travel
allowances
Please note that:

1. The par 7(7) and 7(8) adjustments must be
made only when the taxable income is
calculated and not also when the cash
equivalent or the ‘remuneration’ for PAYE
purposes is calculated
continued
191

2. The par 7(8) adjustments do not apply to
company cars acquired in terms of an
‘operating lease’ as defined in s 23A. The
par 7(7) adjustment can, however, still
apply for such vehicles
3. The par 7(7) adjustment is based on the
value of private use and not on the cash
equivalent
4. Paragraph 7(8A) makes an exception in Par 7(8A)
respect of certain private kilometres
travelled by a ‘judge’ or a ‘Constitutional
Court judge’ (as defined in s 1 of the
Judges’ Remuneration and Conditions of
Employment Act 47 of 2001). The kilo-
metres travelled between the judge’s
place of residence and the court over
which the judge presides is deemed to be
kilometres travelled for business purposes
and not for private purposes
No values a. If the vehicle is available to and used by Par 7(10)(a)
employees in general, and the private use
of the vehicle by the specific employee is
infrequent or is merely incidental to its
business use, and the vehicle is not nor-
mally kept at the employee’s residence
(this is normally called a pool car)
b. If the nature of the employee’s duties Par 7(10)(b)
regularly requires him to use the vehicle for
his duties outside his normal hours of work
and his private use thereof is limited to
travel between his place of residence and
his place of work
Remuneration for l 80% of the cash equivalent if the employer Par (cB) of the definition of ‘remu-
PAYE is satisfied that the business use will be neration’ in the Fourth Schedule.
less than 80% The words in the Act ‘taxable
l 20% of the cash equivalent if the employer benefit calculated in terms of
is satisfied that the business use will be at par 7’ means the cash equivalent
least than 80% before it is adjusted for par 7(7)
and 7(8) where applicable. This is
because those adjustments must
only be made by the Commis-
sioner on assessment and the
employer calculates remuneration
monthly
It is submitted that the employee
will have to provide an accurate
logbook to the employer in order
to ‘be satisfied’ regarding the per-
centage business use. The
determination regarding the per-
centage use for business pur-
poses is made monthly
Remember
The 3,5% or 3,25% is per month, and it must therefore be multiplied by the number of months that the
benefit was granted in the year of assessment (and not by the number of months divided by 12).
192
Example 8.8. Use of a motor vehicle granted more than 12 months after employer
obtained the vehicle
Reaboka was granted the right to use the employer-owned motor vehicle with effect from 1 June
2017. The employer originally acquired the vehicle on 1 March 2016 at a retail market value of
R91 200. Calculate the cash equivalent of the value of the taxable benefit to Reaboka for the 2018
year of assessment.
SOLUTION
Retail market value ................................................................................................... R91 200
Less: R91 200 × 15% ............................................................................................... (13 680)
Adjusted determined value ...................................................................................... R77 520
Cash equivalent = R77 520 × 3,5% = R2 713 per month × 9 months ..................... R24 417
Example 8.9. Use of motor vehicle

Tertius enjoys the right to use a motor vehicle that was acquired by his employer, A Ltd, on 1 March
2017. The retail market value was R114 000. Tertius is transferred to B Ltd, a subsidiary of A Ltd.
B Ltd purchases the motor vehicle of which Tertius has the right of use for R80 000 (excluding
VAT).
Calculate the cash equivalent of the value of the taxable benefit if Tertius retains the right of use of
the motor vehicle.
SOLUTION
Cash equivalent = R114 000 × 3,5% = R3 990 per month or R47 880 per year.
Example 8.10. Use of a motor vehicle for part of a month

With effect from 1 March 2017, Nomsa is granted the right to use a motor vehicle bought by the
employer on 1 March 2017. The retail market value of the vehicle is R100 000.
The cash equivalent of the value of the taxable benefit for March will be:
R100 000 × 3,5% = R3 500 × 17/31 = R1 919.
(15 March to 31 March is 17 days)
Example 8.11. Use of two motor vehicles

Mbali is granted the right to use two motor vehicles that were acquired by her employer at a cost
of R114 000 (Vehicle 1) and R171 000 (Vehicle 2). Both amounts include VAT and no maintenance
plan was taken out in respect of the vehicles. Mbali bears no costs in respect of the vehicles.
Calculate the monthly cash equivalent of the value of the taxable benefit, as well as the taxable
amount (on assessment) if Mbali is granted the right of use of both vehicles and if
(a) Mbali uses both vehicles primarily for business purposes and kept an accurate logbook
proving that 12 000 km of the total 23 000 km travelled with each of the vehicles was travelled
for business purposes
(b) Mbali uses both vehicles primarily for business purposes. She kept no accurate logbook of
her travels and did apply for the application of par 7(6).
193
SOLUTION
(a) Since an accurate logbook was kept, par 7(7) must be applied. Therefore, par 7(6) cannot be
applied and the cash equivalent for both vehicles must be calculated.
Cash equivalent each month is the sum of
R171 000 × 3,5% = ............................................................................................... R5 985
R114 000 × 3,5% = ............................................................................................... 3 990
(Par 7(4)(a) and 7(6)) ............................................................................................ R9 975
Taxable amount on assessment = R57 248 (R119 700 (R9 975 × 12) – (R119 700 ×
12 000/23 000))
(b) Because Mbali applied and no accurate logbook is kept, the cash equivalent each month is
based on the vehicle having the highest determined value.
Monthly cash equivalent = R171 000 × 3,5% = R5 985 (par 7(6)))
Taxable amount on assessment = R5 985 × 12 = R71 820
Example 8.12. Paragraph 7(7) and 7(8) adjustments
Jan had the right of use of a luxury employer-owned motor vehicle with a retail market value of
R741 000 up and until his retirement on 30 September 2017. A maintenance plan (as defined) in
respect of the motor vehicle was included in the cost price of the vehicle. Jan travelled 21 000
kilometres with the motor vehicle from the beginning of the year of assessment until his retirement
and the accurate logbook proves that 11 000 kilometres thereof was travelled for business
purposes. Assume all travels were evenly spread over the year and that Jan provided his logbook
to his employer for PAYE purposes. Jan had to bear the total fuel cost of private use and paid the
full licence cost of R890 (including VAT). The Commissioner accepted the logbook as accurate.
Jan monthly pays R200 (excluding VAT in terms of s 8(14)(a) of the VAT Act) as consideration for
the right of use of the company car.
Calculate the value of private use, the cash equivalent, the amount that must be included in Jan’s
taxable income and the remuneration in respect of the right of use of the company car.
SOLUTION
Value of private use: 3,25% × R741 000 × 7 .......................................................... R168 578
Cash equivalent = R168 578 less R1 400 (R200 × 7) ............................................ R167 178
Paragraph 7(7) adjustment (R168 578 × 11 000/21 000) ....................................... (88 303)
Paragraph 7(8) adjustments (R424 + R15 090) ...................................................... (15 514)
Licence cost: R890 × 10 000/21 000 = R424
Fuel: 10 000 km × R1,509 = R15 090
Taxable income = Cash equivalent of R167 178 less par 7(7) and 7(8) adjustments
= R167 178 – R103 817 (R88 303 + R15 514) = R63 361
Because his business use is only 52% (11 000 km/21 000 km), his remuneration is 80% × the cash
equivalent of R167 178 = R133 742.
Example 8.13. Operating lease
Jabu had the right of use of a luxury motor vehicle with a retail market value of R741 000 since
1 March 2017. This vehicle was leased by his employer, Protea Ltd, at R15 000 per month under
an operating lease. Jabu travelled 21 000 kilometres in total with the motor vehicle and the
accurate logbook proves that 11 000 kilometres thereof was travelled for business purposes.
Protea Ltd also paid the fuel cost amounting to R2 500 per month. The Commissioner accepted
the logbook as accurate. Jabu bears no costs in respect of the vehicle.
Calculate the amount that must be included in Jabu’s taxable income in respect of the right of use
of the company car in the 2018 year of assessment.
194
SOLUTION
Taxable income in respect of the right of use of the company car:
Cash equivalent: 12 × (R15 000 + R2 500) ............................................................ R210 000
Less: Paragraph 7(7) adjustment (R210 000 × 11 000/21 000) ........................... (110 000)
Taxable income ...................................................................................................... R100 000
Alternative calculation: R210 000 × 10 000/21 000 = R100 000
8.4.7 Meals, refreshments and meal and refreshment vouchers (paras 2(c) and 8)

Type of taxable benefit Free meals, refreshments and refreshment Par 2(c)
vouchers (or for a consideration less than the
cash equivalent)
Exclusions from taxable Board or meals provided with residential accom- Par 2(c)
benefit modation in par 2(d)
Definitions None
Cash equivalent Value of free meals, refreshments and Par 8(1)
– general rule refreshment vouchers less compensation by
employee
Cash equivalent Value = cost of free meals, refreshments and Par 8(2)
– special rules refreshment vouchers for employer
No values A meal or refreshment supplied by an employer
to his employee:
l in a canteen, cafeteria or dining room wholly Par 8(3)(a)
or mainly used by his employees
l on the business premises of the employer Par 8(3)(a)
l during business hours or extended working Par 8(3)(b)
hours
l on a special occasion Par 8(3)(c)
A meal or refreshment enjoyed by an employee Par 8(3)(c)
when he must entertain someone on behalf of
the employer
8.4.8 Residential accommodation (paras 2(d) and 9)

Type of taxable benefit Free residential accommodation (or for a con- Par 2(d)
sideration less than the cash equivalent)
Exclusions from taxable None
benefit
Cash equivalent Rental value (determined in terms of sub- Par 9(2)
– general rule par (3), (3C), (4) or (5)) of the accommodation
less any amount paid by the employee
Cash equivalent Accommodation owned by employer:
– special rules Rental value = Formula value (subject to the The definition of ‘remuneration
provisions of par 9(3C) and 9(4) (holiday proxy’ in s 1 is the remuneration
accommodation)) in terms of the Fourth Schedule
excluding the cash equivalent of
residential accommodation in
terms of par 9(3)
continued
195

Formula value = (A –B) x C/100 x D/12 Par 9(3)
A = the ‘remuneration proxy’ The Commissioner may deter-
B = R75 750 (and Rnil if the employee or his mine a lower rental value if he is
spouse controls the private company or they or satisfied that the rental value is
their minor child have the option to become the lower than the cash equivalent
owner of the accommodation) (par 9(5))
C = a quantity of 17, or 18 (the house has four
rooms and is either furnished or electricity is
supplied) or 19 (the house has four rooms and
is furnished and electricity is supplied)
D = the number of months entitled to the
accommodation
In terms of par 9(3B), the formula
also applies when an employee
has an interest in
accommodation. Par 9(10) dete-
rmines that such interest in-
cludes ownership, an increase in
value and an option to acquire.
Par 9(9) determines that the rent
paid by the employer is deemed
not to be received by the
employee in such a case, and
therefore the employee cannot
claim any expenses in respect of
such accommodation
Accommodation rented by employer or associ- Par 9(3C)
ated institution in terms of an arm’s length
transaction from a non-connected person: The formula value does not take
Rental value is the lower of into account where the house is
l Formula value situated. This is addressed by
l Expenditure paid by employer or associated using the lower of the formula
institution value and the actual expendi-
ture.
Accommodation consists of two or more units Par 9(6)
situated at different places Rental value = high-
est rental value of the units
No values (a) Any accommodation (therefore inside or Par 9(7). Par 9(7) cannot apply if
outside South Africa) supplied while the the residential accommodation
employee (a resident) is away from his consists of two or more units
usual place of residence in South Africa for
work purposes
(b) Any accommodation in South Africa sup- Par 9(7A)
plied to an employee (a non-resident)
away from his usual place of residence
outside South Africa
l for a period two years after date of Par 9(7A)(a)
arrival in South Africa; or
l for a period < 90 days in the year of Par 9(7A)(b)
assessment
Exception to No values The aforementioned two years-exception for Par 9(7B)
non-resident employees is not applicable
(a) if the employee was present in South Africa If the 90 days are exceeded, the
for a period exceeding 90 days during the accommodation will have a tax-
year of assessment immediately able value, even if the period is
preceding the date of arrival, or two years
(b) to the excess of the cash equivalent over Example: employer pays rent of
an amount of R25 000 multiplied by the R40 000 per month for one year.
number of months during which the Even though it is less than two
accommodation is supplied years, 12 × R15 000 (R40 000 –
R25 000) will be taxable
continued
196

Example 8.14. Residential accommodation
Ayize’s employer provided him with residential accommodation for the entire 2018 year of assess-
ment at an annual rental of R4 000. Ayize is not a shareholder in the employer company. The
accommodation is unfurnished and is provided without any services. Ayize’s remuneration from
his employer in the previous year of assessment comprised a cash salary of R103 024 only.
Calculate the cash equivalent of the taxable benefit arising from Ayize’s right of occupation of the
accommodation, if
(a) the accommodation is owned by the employer
(b) the employer rents the accommodation from the owner at a cost of R10 000 per year.
SOLUTION
Cash equivalent = Rental value less Rent payable
C D
(a) Rental value = (A – B) × ×
100 12
A = Remuneration proxy = R103 024 (Ayize’s remuneration for the previous year of assess-
ment excluding residential accommodation)
B = R75 750
C = 17 (the accommodation is unfurnished and provided without services)
D = 12
17 12
? Rental value = (R103 024 – R75 750) × ×
100 12
= R4 637
? Cash equivalent = R4 637 – R4 000
= R637
(b) Taxable benefit is the lower of
C D
l the formula value: (A – B) × × (as calculated above) ................. R4 637
100 12
l the total amount paid by the employer ............................................................. 10 000
Taxable benefit = .................................................................................................. 4 637
Less: Consideration paid by employee ................................................................. (4 000)
Cash equivalent of the taxable benefit .................................................................. R637
8.4.9 Holiday accommodation (paras 2(d) and 9)

Type of taxable benefit Free holiday accommodation (or for a consid- Par 2(d)
eration less than the cash equivalent )
benefit
Definitions None
Cash equivalent Rental value of holiday accommodation Par 9(4)
– general rule
Cash equivalent Rental value if the employer rents it from a Par 9(4)(a)
– special rules person other than an associated institution in
relation to him = costs for employer in respect
of rental, meals, refreshments and other
services
continued
197

Rental value in any other case = prevailing rate Par 9(4)(b)
per day at which the accommodation could The words ‘any other case’
normally be let to a person who is not an includes the employer being the
employee owner
No values None
Example 8.15. Holiday accommodation

Thabo’s employer provided him, his wife and two children with free holiday accommodation in its
cottage at the coast for ten days. The employer owns the cottage.
Calculate the cash equivalent of the taxable benefit to Thabo if
(a) the cottage is normally let for R5 000 a day
(b) the cottage is normally let for R800 per person per day.
SOLUTION
The cash equivalent of the taxable benefit is therefore:
(a) R5 000 × 10 = R50 000
(b) R800 × 10 × 4 = R32 000.
Remember
If the rate is given per person per day, the employee’s family member’s benefit will be taxed in
the employee’s hands in terms of par 16.
8.4.10 Free or cheap services (paras 2(e) and 10)

Type of taxable benefit Free or cheap services (utilised by the em- Par 2(e)
ployee for his private or domestic purposes)
Exclusions from taxable Services relating to residential accommodation Cash equivalent
benefit (par 9(4)(a)), medical services (subpar (j)) and
payments to insurers for the benefit of
employees (subpar (k))
Definitions None
Cash equivalent Travel facility granted to an employee or the Par 10(1)(a)
– general rule employee’s relative to travel to a destination
outside the Republic:
l lowest fare less any consideration given by
the employee or his relative
All other cases: Par 10(1)(b)
l cost to the employer less any consideration (Sometimes it is the marginal

given by the employee cost for the employer such as in
the case where a lecturer’s child
studies free of charge at a
university)
Cash equivalent None
– special rules
continued
198

No values (a) A travel facility granted to enable an Par 10(2)(a)
employee or the employee’s spouse or
minor child to travel to
l any destination in the Republic
l overland to any destination outside the
Republic, or
l any destination outside the Republic if
the travel was undertaken on a normal
flight and no firm advance reservation of
the seat could be made
(b) A transport service between home and Par 10(2)(b)
work rendered to employees in general
(c) Any communication service which is used Par 10(2)(bA)
mainly for the purposes of the employer’s
business
(d) Services rendered by an employer to his Par 10(2)(c)
employees at their place of work
l for the better performance of their
duties, or
l as a benefit to be enjoyed by them at
that place, or
l for recreational purposes at that place or
a place of recreation provided by the
employer for the use of his employees in
general
(e) Any travel facility granted to the spouse or Par 10(2)(d)
minor child of an employee to travel
between the employee’s home and the
business place where the employee is
stationed if
l the employee is stationed further than
250 km away from his home, and
l the employee is required to work at that
place for more than 183 days of the year
8.4.11 Low-interest debts (paras 2(f), 10A and 11)

Type of taxable benefit Debt owed by employee to employer or asso- Par 2(f)
ciated institution at no interest or at a lower rate (This provision applies if the
than the official interest rate debt is granted due to services
rendered. If the debt is granted
due to the holding of shares, the
deemed dividend provisions in
s 64E(4) will apply.)
Exclusions from taxable Debts to enable employees to buy qualifying Par 2(a)
benefit equity shares in terms of s 8B or to pay stamp
duty or securities transfer tax thereon
Debts in respect whereof par 2(gA) subsidies
are payable (see 8.4.12)
continued
199

Definitions Official interest rate: South African repurchase Section 1:
rate + 1% (debt in rand) and equivalent of The South African repurchase
South African repurchase rate + 1% (debt in rate is not defined for the pur-
other currency) poses of the Act. The South
African Reserve Bank (SARB) in
terms of its monetary policy fixes
this interest rate. It is the rate
levied by the SARB when
lending to other local banks (see
Appendix B)
Where a new repurchase rate or
equivalent repurchase rate is
determined, the new rate
applies from the first day of the
month following the date on
which the amendment came into
operation
Cash equivalent – Interest on the outstanding balance at the Par 5(1)
general rule applicable official interest rate less actual In terms of par 11(3), the Com-
interest paid during the year missioner may, on application
by the taxpayer, approve
another method to calculate the
cash equivalent if such method
achieves substantially the same
result
The taxpayer can claim a s 11(a)
deduction for the same amount
of the cash equivalent if he or
she has used the debt in the
production of income (par 11(5))
This taxable benefit is an anti-
avoidance provision. In terms of
s 7D, neither the statutory nor the
common law in duplum rule (see
chapter 24) applies in respect of
any loan where the official
interest rate is used to calculate
the taxable benefit. The general
rule will therefore apply in
respect of years of assessment
ending on or after 1 January
2018 despite the limitations of
the in duplum rule.
Cash equivalent – Cash equivalent accrues to employee Par 11(2)(a)
special rules l on each date on which interest is payable
(if interest in respect of the debt is payable
at regular intervals)
l on the last day of each period in respect of
which cash remuneration is payable (if
irregular intervals or no interest)
Deemed loan Residential accommodation is taxed as a low Par 10A(1)
interest loan if:
1. the employee lives in an employer-owned
house
2. the employee, his spouse or minor child is
entitled or obliged to acquire the house
from the employer at a future date at a
price stated in an agreement, and
3. the employee is required to pay for his
occupation a rental calculated wholly or
partly as a percentage of the future pur-
chase price stated in the agreement.
continued
200

The employer is deemed to have granted the
employee a loan equal to the future purchase
price. Interest is deemed to be payable at the
percentage in (3)
Cash equivalent = price x (official interest rate
less interest rate in (3))
No values (a) A debt owed by an employee to his or her Par 11(4)(a)
employer if such debt or the aggregate of ‘Such debt’ refers to short-term
such debts does not exceed R3 000 at any debt granted to employees on
relevant time irregular basis and not to all
debts purely because it is less
than R3 000
(b) A debt owed by an employee to his or her Par 11(4)(b)
employer for the purpose of enabling the
employee to further the employee’s own
studies
Example 8.16. Debts
A company made the following loans to its employees during the year of assessment ending on
28 February 2018:
(1) an interest-free loan of R20 000 to Alfons on 1 September
(2) a loan of R50 000 at an interest rate of 4% to Bert on 1 September to enable him to buy a
small rent-producing investment
(3) an interest-free loan of R1 500 to Carol on 15 October in order to help her meet unexpected
medical bills, which was repaid in November
(4) an interest-free loan of R6 000 to Don on 7 January to enable him to pay his university fees.
Calculate the cash equivalent of the taxable benefit, if any, from each of these loans, assuming
that all the loans except that made to Carol were still outstanding at the end of the year. The
repurchase rate has been 7% since 1 April 2016.
SOLUTION
(1) The cash equivalent of the taxable benefit to Alfons will be:
R20 000 × 8% × 6/12 = R 800
(2) The cash equivalent of the taxable benefit to Bert will be:
R50 000 × (8% – 4%) × 6/12 = R 1 000
The cash equivalent of the taxable benefit included in Bert’s income is deemed for the pur-
poses of s 11(a) of the Act to be interest actually incurred by him in respect of the loan. If he
had actually incurred this amount as interest, it would have been incurred in the production
of his income. While a taxable benefit of R1 000 will be included in his income, the same
amount will be allowed as a deduction under s 11(a) against rental income earned (par 11(5)).
The 4% paid by him will also be allowed as a deduction under s 11(a).
(3) There will be no taxable benefit to Carol, since the amount is less than R3 000 and therefore
does not give rise to a taxable benefit (par 11(4)(a)).
(4) The loan to Don does not give rise to a taxable benefit, since it was granted to him for the
purpose of enabling him to further his studies (par 11(4)(b)).
201
Example 8.17. Residential accommodation: Employee has an option to acquire

the accommodation
Wandile is granted an option to acquire a house owned by his company at a price of R160 000 at
a time when its market value is R140 000. In the meantime, he is granted the right to occupy the
house on 1 March 2015 at a fixed annual rental of 4% of the option price. The house cost the
company R110 000. Calculate the cash equivalent of the taxable benefit arising from Wandile’s
right of occupation of the house and the taxable benefit, if any, that will arise if he exercises his
option and buys the house for R160 000 when the market value amounted to R230 000. The
repurchase rate has been 7% since 1 April 2016.
SOLUTION
Wandile is deemed by par 10A(1) to have been granted a loan of R160 000 and to have paid
interest at the rate of 4% a year on this loan. The cash equivalent of the taxable benefit arising from
the deemed loan each year will therefore be R6 400 ((8% – 4%) × R160 000) (that is, the difference
between interest calculated at the official rate (repurchase rate of 7% plus 100 basis points (or
1%)) and the deemed interest paid (4%).
There will be no taxable benefit when Wandile exercises his option, since the purchase price of
the house will not be less than its market value at the time of the agreement (R140 000)
(par 10A(2)).
8.4.12 Subsidies in respect of debts (paras 2(g), (gA) and 12)

Type of taxable benefit Subsidies paid by an employer in respect of Par 2(g) and (gA)
interest or repayment of capital payable by
employee in respect of a debt of the employee
to a third party
benefit
Definitions None
Cash equivalent Pay subsidy to employee: Amount of the sub- Par 12 and 2(g)
ದgeneral rule sidy
Pay subsidy to a third party: Amount of the sub- Par 12 and 2(gA)
sidy
(In terms of par 2(gA) this is only applicable if Par 4.8 of the Guide for Em-
the sum of the subsidy and the actual interest ployers in respect of fringe
paid by the employee is more than the interest benefits explains that a
on the debt at the official interest rate. The tax par 2(gA) fringe benefit occurs if
consequences if the aforementioned sum is an employer pays a subsidy to a
less are not addressed in the Act or in the third party in respect of a low
Guide for Employers in respect of fringe interest loan or interest free loan
benefits) granted by the third party to the
employee
No values None
8.4.13 Release from or payment of obligation (paras 2(h) and 13)

Type of taxable benefit Release from an obligation to pay a debt owing Par 2(h)
by the employee to the employer
The direct or indirect payment of a debt owing Indirect payment is when the
by the employee to a third person employer make the payment to
the third party via somebody
else (including the employee)
continued
202

Exclusions from taxable Contributions by an employer to a benefit fund Par 2(h)
benefit (par 2(i)) fringe benefit)
Costs in respect of medical services paid by There are no CGT conse-
employer (par 2(j) fringe benefit) quences in respect of the dis-
charge of a debt – par 12A(6)(c)
of the Eighth Schedule
Definitions The definition of ‘employee’, for the purpose of Par 1 – see definition of ‘em-
par 2(h) and 13, includes a person who retired ployee’ for other exclusions
prior to 1 March 1992 and after his retirement
is released by his employer from an obligation
that arose before his retirement
Cash equivalent The amount released or paid by the employer Par 13(1)
– general rule
Cash equivalent Deemed release of debt if the debt is extin- Proviso to par 2(h)
– special rules guished by prescription A debt prescribes three years
after the debt became claimable
or payable
No values (a) Employees’ subscriptions paid by an Par 13(2)(b)
employer to a professional body if mem-
bership is a requirement of the employee’s
employment
(b) Insurance premiums paid by the employer Par 13(2)(bA)
indemnifying an employee solely against
claims arising from negligent acts or
omissions of the employee
(c) The value of a benefit paid by a ‘former Par 13(2)(c)
member of a non-statutory force or service’
to the ‘Government Employees’ Pension
Fund’
(d) The payment of an employee’s bursary or Par 13(3)
study loan debt by the employee’s current
employer to the employee’s previous
employer
The benefit will have no value if the em-
ployee has undertaken to work for the
second employer at least for the unexpired
period that had not been worked for the
first employer
Example 8.18. Payment or release of obligation
A company paid or waived the following amounts during the year of assessment:
(1) It paid R5 000 in settlement of debts owing by a director (but not a shareholder), Themba.
(2) It paid Fezile’s subscriptions due to SAICA. Fezile is the financial accountant and it is a con-
dition of his employment that he is registered as a CA(SA).
(3) It waived a debt of R300 owing by Dumisa, a wage clerk, who had resigned and taken up
alternative employment.
Calculate the cash equivalent of the taxable benefits, if any, involved in these transactions.
SOLUTION
(1) The cash equivalent of the taxable benefit to Themba will be R5 000 (par 13(1)).
(2) The payment of Fezile’s subscription to SAICA has no taxable value (par 13(2)(b)).
(3) There will be no taxable benefit, because Dumisa was no longer an ‘employee’ (as defined in
par 1) of the company when his debt was waived.
203
8.4.14 Contributions to medical schemes (paras 2(i) and 12A)

Type of taxable benefit Direct or indirect contributions to par (b) ‘ben- Par 2(i)
efit funds’ as defined by an employer for the
benefit of an employee or his dependants
benefit
Definitions Benefit fund: Medical schemes are included in Section 1 and par 2(i)
par (b) of this definition
Cash equivalent The amount of the contributions paid Par 12A
– general rule
Cash equivalent If the contributions by the employer in respect Par 12A(2)
– special rules of an employee and his dependants cannot
specifically be attributed, it is deemed that the
contribution is equal to the total contributions
by the employer divided by the number of
employees in respect of whom the con-
tributions were made
The Commissioner can, on application by the Par 12A(3)
taxpayer, allow an alternative fair and reason-
able manner of apportionment
No values (a) A person who has retired from employ- Par 12A(5)(a)*
ment by reason of old age, ill health or
other infirmity, or
(b) The dependants of a deceased employee, Par 12A(5)(b)
or
(c) The dependants of a retired employee Par 12A(5)(c)
after his death * Please refer to chapter 7
regarding the link between
par 12A(5)(a) and the s 6A
medical tax credit.
Remember that the employer
must take the s 6A medical tax
credit into account when cal-
culating the employees’ tax
(par 9(6)(a) of the Fourth Sched-
ule)
Example 8.19. Contributions to medical schemes
FGH Limited pays R1 500 a month to a medical scheme for the benefit of one of its employees,
Khwezi, who turned 65 during the year of assessment. Khwezi himself does not contribute to the
scheme. He does not have any dependants.
(a) Khwezi worked for the full 2018 year of assessment. Calculate the cash equivalent of the
taxable benefit that must be included in the taxable income of Khwezi for the 2018 year of
assessment.
(b) Explain the tax implications if Khwezi retired on 1 July 2017 due to old age and FGH Limited
paid his full contributions for the full 2018 year of assessment.
204
SOLUTION
(a) Cash equivalent = Contributions paid by FGH Limited (R1 500 × 12) ............... R18 000
The fringe benefit does not have ‘no value’ because Khwezi has not retired.
Khwezi will qualify for the medical scheme fees tax credit. The fringe benefit
for employees’ tax purposes is R1 500 per month and the employer must
deduct the medical scheme fees tax credit of R303 monthly in the calculation
of the employees’ tax.
(b) Khwezi is an ‘employee’ as defined in the Seventh Schedule for the whole of
the 2018 year of assessment.
The cash equivalent in terms of par 12A will be R6 000 ((R1 500 × 4) + (R0 × 8)
(par 12A(5)(a)).
Khwezi will be deemed to have paid the R6 000 in terms of s 6A(3(b) and will
therefore qualify for a medical scheme fees tax credit of R303 for the first four
months of the year of assessment. He will not qualify for a medical scheme fees
tax credit for the last eight months because he is deemed to have paid Rnil.
FHG Limited can only deduct the R303 per month as a medical scheme fees
tax credit in the first four months when calculating the monthly employees’ tax
of Khwezi.
8.4.15 Costs relating to medical services (paras 2 (j) and 12B)

Type of taxable benefit Costs in respect of various medical services Par 2(j)
supplied to employee, spouse, child, family
member or dependant paid by employer
benefit
Definitions None
Cash equivalent Amount incurred by employer Par 12B(1)
– general rule
Cash equivalent If the payment by the employer in respect of an Par 12B(2)
– special rules employee or his dependants cannot specific-
ally be attributed, it is deemed that the payment
is equal to the total payments by the employer
divided by the number of employees in respect
of whom the contributions were made
No values (a) Treatments listed by the Minister of Health Par 12B(3)(a)
as prescribed minimum benefits provided
to an employee, his or her spouse or
children in terms of a medical scheme run
by the employer as a business.
If not run as a business, the afore-
mentioned persons must not be bene-
ficiaries of another medical scheme, or, if
they are, the employer must recover the
total cost of such treatment from such
medical scheme before the no value will
apply.
(b) Services rendered or medicines supplied Par 12B(3)(aA)
for the purposes of complying with any law
of the Republic (for example HIV/AIDS
medicine)
(c) Benefits derived by
l a person who retired by reason of age, Par 12B(3)(b)(i)
ill health or other infirmity
continued
205

l dependants of an employee (who was Par 12B(3)(b)(ii)
an employee at the date of death) after
his death
l dependants of a deceased retired Par 12B(3)(b)(iii)
employee, or
l a person entitled to the over 65 rebate Par 12B(3)(b)(iv)
(d) Services rendered to employees in general Par 12B(3)(c)
at their place of work for the better per-
formance of their duties
Example 8.20. Medical services

Employer A has a scheme (which does not constitute the business of a medical scheme) in terms
whereof medical services are provided to employees, spouses and dependants. The following
payments are made by employer A:
R
Employee Barry: Payment of dental services ................................................................... 4 000
(Employee Barry is a member of a medical scheme and employer A
recovered the full R4 000 from employee Barry’s medical scheme.)
Employee Candice: Payment of hospital account for open heart operation ................... 26 000
(Employee Candice is 66 years old).
Employee Driaan: Payment of medicine for epilepsy ....................................................... 3 000
(Employee Driaan was employed by employer A, but died during the year.
The R3 000 was paid on behalf of his wife after employee Driaan’s death.)
Calculate the cash equivalent of the taxable benefits as a result of employer A’s payments on
behalf of the respective employees.
SOLUTION
Employee Barry
The payment of the R4 000 has no taxable value for employee Barry since employer A has
recovered the full R4 000 from employee Barry’s medical scheme (par 13(3)(a)(ii)(bb)).
Employee Candice
The payment of the R26 000 has no taxable value for employee Candice since he is entitled to the
above-65 rebate (par 13(3)(b)(iv)).
Employee Driaan
The payment of the R3 000 on behalf of employee Driaan’s wife has no taxable value since
employee Driaan was employed by employer A at his death and his wife is dependent on employee
Driaan (par 13(3)(b)(ii)).
8.4.16 Benefits in respect of insurance policies (paras 2(k) and 12C)

Type of taxable benefit Any payment to any insurer under an insurance Par 2(k)
policy directly or indirectly for the benefit of the
employee or his or her spouse, child, depend-
ant or nominee
Exclusions from taxable An insurance policy that relates to an event Proviso to par 2(k)
benefit arising solely out of and in the course of An example of this is a policy that
employment of the employee pays out if the employee is
injured in an accident at work
Definitions None
Cash equivalent Amount of premiums paid Par 12C(1)
– general rule
continued
206

Cash equivalent Where it cannot be determined which pre- Par 12C(3)
– special rules miums paid by an employer relates to a
specific employee, the amount attributed to
that employee is deemed to be an amount
equal to the total expenditure divided by the
number of employees in respect of whom the
expenditure is incurred
No values None
Amount on IRP 5 Remuneration for PAYE Cash equivalent
8.4.17 Contributions by an employer to retirement funds (paras 2( l) and 12D)

Type of taxable benefit Contributions by employer to any retirement Par 2(l)
fund for the benefit of an employee
A defined contribution fund is a fund where the
contributions and the benefits at retirement
correlate
A defined benefit fund is a fund where the con-
tributions are based on the retirement funding
employment income but the benefits at retire-
ment are calculated per fund member category
in terms of a formula
Exclusions from None
taxable benefit
Definitions Benefit: any amount payable to a member, a Par 12D(1)
dependant or nominee of the member by the
fund
Defined benefit component: a benefit receiv-
able from a retirement fund other than a
defined contribution component or underpin
component
Defined contribution component: a benefit
receivable from a retirement fund based on the
contributions paid by the member and the
employer plus any fund growth and other
credits to the member’s account less expenses
determined by the board; or a benefit that
consists of a risk benefit if it is provided solely
by means of a policy of insurance
Fund member category: any group of members
where the employers and members make con-
tributions in the same equal rate and the value
of the benefits are calculated using the same
method
Member: any member or former member, but
not a person who has received all the benefits
that may be due by the fund and thereafter
terminated membership
Retirement-funding income is that part of the
employee’s income taken into account in the
determination of the contributions made. In the
case of a partner in a partnership, it is that part
of the partner’s share of profits taken into
account in the determination of the contribu-
tions made
Risk benefit: a benefit payable in respect of the
death or permanent disablement of a member
continued
207

Underpin component: a benefit receivable
from a retirement fund the value of which is the
greater of a defined contribution component or
a defined benefit component other than a risk
benefit
Cash equivalent Where the benefits payable to a fund member Par 12D(2)
– general rule category of the fund consists solely of defined
contribution components: the total amount
contributed by the employer in respect of the
employee.
Where the taxable benefits payable to a fund Par 12D(3)
member category of the fund consists of Par 12D(4): the board of a fund
components other than only defined contri- must provide contribution certifi-
bution components: an amount determined in cates which contain the fund
accordance with the following formula: member category factor to the
X = (A × B) – C employer in respect of this
Where benefit
A = the fund member category factor of the
employee
B = the retirement funding employment income
of the employee
C = the contributions by the employee
excluding voluntary contributions and buyback
contributions
Par 12D(5) states that the
Minister may make regulations
prescribing the manner in which
funds must determine the fund
member category factor and the
information that the contribution
certificate must contain
Cash equivalent None
– special rules
No values The taxable benefit derived from any contri- Par 12D(6)
bution made by an employer for the benefit of
a member of a fund that has retired from that
fund or in respect of the dependants or
nominees of a deceased member of that fund
8.5 Right to acquire marketable securities (s 8A)

Section 8A read with par (i ) of the definition of gross income in s 1 provides that gains made by a
director or employee by virtue of the exercise, cession or release, in whole or in part, of a right to
acquire any marketable security (as defined in s 8A(10)) must be included in gross income. This
inclusion will be applicable if the right was obtained by the taxpayer as a director or former director of
a company or in respect of services rendered or to be rendered by him as an employee to an employer.
Section 8A is only applicable to a right obtained by a taxpayer before 26 October 2004. In light of the
long lapse of time, this section will no longer be discussed in detail. The 2014 version of Silke can be
studied for a full discussion thereof. Section 8A was replaced by s 8C and the taxation of rights
obtained on or after 26 October 2004 is discussed in 8.7.
8.6 Broad-based employee share plans (s 8B)

The acquisition of shares by employees (over standard salary) can motivate productivity because
employees obtain a stake in the future growth of the entity. Section 8B was originally introduced to
lighten the tax burden where shares are transferred to employees on a broad basis. Section 8B applies
to ‘qualifying equity shares’ (as defined) acquired in terms of a broad-based employee share plan (as
defined). In order to prevent an employee, who leaves the services of an employer, from not being
208
taxed on the gain on disposal, the word ‘employee’ was substituted by the word ‘person’ substituted
the word ‘employee.
A ‘qualifying equity share’ is defined as an equity share acquired in terms of a ‘broad-based employee
share plan’. The total market value of all such shares acquired in the current year and the four
immediately preceding years of assessment, on the date of the grant, does not exceed R50 000. This
limit can be interpreted in different ways. One interpretation is that s 8B will apply to the extent that the
market value of the qualifying shares does not exceed R50 000. Another is that, if a grant will cause
the R50 000 limit to be exceeded, s 8B will not apply in respect of the total of such grant and that s 8C
must then be considered. The value of qualifying equity shares acquired because the person already
held other qualifying equity shares (for example through a capitalisation issue or at unbundling) are
not taken into account in calculating the R50 000 limit (s 8B(2A) and the definition of ‘qualifying equity
share’ read together).
A ‘broad-based employee share plan’ (as defined in s 8B(3)) must meet the following requirements:
l Equity shares in that employer or in any company that is an associated institution as defined in the
Seventh Schedule in relation to the employer, are acquired by the employee for no consideration
or at the nominal value of unissued shares (s 8B(3)(a)).
l Employees who participate in any other equity scheme are not entitled to participate and at least
80% of all other employees employed on a full-time basis for at least one year on the date of grant
are entitled to participate (s 8B(3)(b)).
l The employees who acquire the equity shares are entitled to all dividends, foreign dividends and
full voting rights in relation to those equity shares (s 8B(3)(c)), and
l No restrictions have been imposed in respect of those equity shares, other than
– a restriction imposed by legislation
– a right retained by another person to acquire the shares from the employee or former employee
at the lower of market value on the date of grant and the market value on the date of acquisition
by the person, or
– a right of any employer to acquire the equity shares from the employee or former employee at
the market value on the date of the grant, if the employee or former employee is or was guilty of
misconduct or poor performance, or
– a restriction that the employee or former employee is not permitted to dispose of the share for a
period which may not extend beyond five years from the date of grant (s 8B(3)(d)).
The gain made by a person from the disposal of any qualifying equity share or any right or interest in
a qualifying equity share within five years from the ‘date of grant’ is included in his or her income
(s 8B(1)). The date of grant is the date on which the granting of the equity share is approved (s 8B(3)).
If the person sells the shares after this five-year period, s 8B will not apply and the person’s gains will
generally be of a capital nature and will therefore attract CGT in terms of the Eighth Schedule. The
intention of the taxpayer will be defining.
Section 8B contains no provision in respect of the tax implication if the disposal of a s 8B share leads
to a loss. It is suggested that such a loss is of a capital nature since deduction thereof will be prohibited
in terms of s 23(m).
The provisions of s 8B are applicable notwithstanding the provisions of s 9C, which deems income
from the sale of equity shares to be of a capital nature if the shares were held for at least three
consecutive years. This means that the provisions of s 8B override those of s 9C and that a disposal of
a qualifying equity share after three years but before five years will still result in a s 8B inclusion in
income and not in CGT. Section 8C does not apply if s 8B is applicable (s 8C(1)(b)(ii)).
The following disposals within five years from the date of grant are excluded from the provisions of
s 8B:
l disposals in exchange for another qualifying equity share as contemplated in s 8B(2) (s 8B(1)(a))
(these disposals are also seen as ‘no disposal’ in terms of par 11(2)(m) of the Eighth Schedule)
l disposals on the death of that person (s 8B(1)(b)), and
l disposals on the insolvency of that person (s 8B(1)(c)).
Section 9HA causes a deemed disposal of s 8B shares in the case of death on or after 1 March 2016.
The provisions of s 25 are not applicable in respect of a disposal on death (s 8B(4)). As a general rule,
if a person ceases to be a resident, the person is deemed to have immediately disposed of all his
assets in terms of s 9H. There is, however, no deemed disposal of s 8B qualifying equity shares
allocated to a person less than five years before the person ceases to be a resident (s 9H(4)(d)).
209
Paragraph 2(a) excludes the acquisition of any qualifying equity share from taxable benefits. The
amount is therefore not included in gross income in terms of par (i) of the ‘gross income’ definition.
With effect from 1 March 2017 the amount (being the market value of the equity share less any
consideration paid by the employee) is also specifically excluded from gross income in terms of par
(c) of the ‘gross income’ definition so as to avoid a possible scenario of double taxation. The amount
is, however, exempt from tax in terms of s 10(1)(nC) – refer to chapter 5. There must be an inclusion in
gross income before an amount can be exempt, and it is therefore submitted that the amount must be
included in gross income in terms of the general definition of gross income. The s 10(1)(o)(ii) appor-
tionment can exempt a part of the amount if the services were rendered both inside and outside the
RSA. A debt incurred by an employee in favour of the employer or an associated institution in order to
pay the consideration for the s 8B shares, is excluded as a fringe benefit (par 2(f) of the Seventh
Schedule).
If a person disposes of qualifying equity shares solely in exchange for any other equity share in the
employer or an associated institution, the new equity shares are deemed to be qualifying equity shares
acquired on the date the first qualifying equity shares were obtained, and for the same consideration
(s 8B(2)).
If a person sells his right or interest in qualifying equity shares, the acquisition cost attributable to that
right or interest is calculated as follows:
Acquisition cost multiplied by (the amount received for the disposal divided by the market value of the
qualifying equity shares immediately before the disposal) (s 8B(2B)).
Section 11(lA) provides for a deduction for the employer in respect of the qualifying equity shares
issued. This deduction is limited to R10 000 per employee per year (see chapter 12 for details).
Section 56(1)(k)(ii) exempts any gain in terms of s 8A, 8B or 8C from donations tax. Section 8B is
discussed in Interpretation Note No. 68.
Employees’ tax
The employer is subject to special PAYE and reporting requirements in terms of qualifying equity
shares (see par 11A of the Fourth Schedule). This is to ensure that the gain on the disposal of qualifying
equity shares within five years from the date of the grant is taxed. The gain on disposal of qualifying
equity shares by an employee within five years from date of grant is ‘remuneration’ (par (d) of the
definition of ‘remuneration’ in the Fourth Schedule). The employer must therefore withhold PAYE on the
gain (see chapter 10 for details) and the gain on disposal must also be shown on the IRP 5.
Example 8.21. Broad-based employee share plan
XYZ Ltd grants 2 500 of its shares to each of its permanent employees on 23 February 2017. The
shares are trading at R5,50 each on the date on which the grants are approved. The employees
paid R1 per share, being the nominal value thereof. No restrictions apply to these shares, except
that these shares may not be sold before 23 February 2022 unless the employee is retrenched or
resigns. If an employee leaves the employment of XYZ Ltd before 23 February 2022, the employee
must sell all 2 500 shares back to XYZ Ltd at the market value of the shares on the date of
departure. XYZ Ltd appoints a trust to administer all the shares administered under the plan.
Aviwe, an employee of XYZ Ltd, resigns on 15 January 2023 and subsequently disposes of his
shares on the open market for R16 250.
Benno, an employee of XYZ Ltd, resigns on 1 February 2019. The market value of the equity shares
was R5 on 1 February 2019. Mr B sold his shares back to XYZ Ltd as agreed by the parties.
Discuss the tax consequences of the above transactions. Assume that XYZ has a February year-end.
SOLUTION
All the shares constitute qualifying equity shares under s 8B(2), and there is therefore no taxable
fringe benefit in terms of par 2(a) of the Seventh Schedule on the issue of the shares to the
employees. Any amount received in the form of qualifying equity shares (R4,50 (R5,50 – R1 paid)
per share) is included in gross income but also exempt in the hands of the employees in terms of
s 10(1)(nC).
continued
210
8.6–8.7 Chapter 8: Employment benefits
XYZ Ltd can claim a deduction in terms of s 11(lA) in respect of all the shares granted at (R5,50 –
R1) = R4,50 per share, therefore 2 500 × R4,50 = R11 250 per employee. The deduction for the
2017 year of assessment is limited to R10 000 per employee. The excess of R1 250 (R11 250 –
R10 000) is transferred to the 2018 year of assessment and is deemed to be the market value of
shares granted in that year to that specific employee. XYZ Ltd can deduct the R1 250 in the 2018
year of assessment.
Aviwe: The proceeds from the disposal of the shares in 2022 do not constitute income (capital in
nature) since they were not disposed of within five years from the date of the issue of the shares,
and therefore s 8B is not applicable. The disposal will result in a capital gain of R13 750 (R16 250
proceeds less R2 500 nominal value paid) in terms of the Eighth Schedule.
Benno: Section 8B will apply since the shares were sold within five years from the date of grant.
The disposal of the equity shares by Benno on 1 February 2019 results in a profit of R10 000 (2 500
× (R5 – R1)). This profit must be included in Benno’s income and XYZ Ltd must withhold
employees’ tax on it in terms of par 11A(2) of the Fourth Schedule.
8.7 Taxation of directors and employees at the vesting of equity instruments

(s 8C)
The vesting of equity instruments acquired on or after 26 October 2004 by directors and employees
triggers s 8C. Section 8C includes the gain (or allows a deduction for a loss) on an equity instrument
in income when it vests in a director or employee of a company. Interpretation Note No 55 (Issue 2),
issued on 31 March 2010, describes SARS’ interpretation of s 8C in more detail.
Paragraph 2(a) of the Seventh Schedule excludes any equity instrument as contemplated in s 8C as a
fringe benefit (see 8.4.4 for detail). With effect from 1 March 2017 the amount (that is, the market value
of the equity share less any compensation paid by the employee) is specifically excluded from gross
income in terms of par (c) of the ‘gross income’ definition so as to avoid a possible scenario of double
taxation. This amount is, however, exempt in terms of s 10(1)(nD) as long as vesting has not taken
place – see chapter 5. There must be an inclusion in gross income before an amount can be exempt,
and therefore it is submitted that the amount must be included in gross income in terms of the general
definition of gross income. A fringe benefit may arise in relation to a debt granted by an employer in
order to buy s 8C shares (in contrast with s 8B shares) since par 2(f) of the Seventh Schedule only
excludes s 8B.
The term ‘equity instrument’ in s 8C(7) covers the following:
l a share (both equity and non-equity shares – see par 4.2(a)(ii) of Interpretation Note No. 55
(Issue 2)
l a member’s interest in a company
l share options or an option to obtain a member’s interest
l any financial instrument that is convertible to a share or member’s interest (for example a convert-
ible debenture), and
l any contractual right or obligation the value of which is determined directly or indirectly with ref-
erence to a share or member’s interest (for example a contingent or vested right in a trust that holds
shares).
The equity instruments must have been obtained
l by reason of his service or office as director or from any person as a result of an agreement with
his employer, or
l by virtue of the fact that he held any restricted qualifying equity instruments (for example as a
capitalisation issue or at the unbundling of the company), or
l as a restricted equity instrument during the period of his or her employment by or office of director
of any company from
– that company or any associated institution in relation to that company (remember, a trust is not
an associated institution in relation to a company), or
– any person employed by or that is a director of that company or any associated institution in
relation to that company (this is an anti-avoidance provision in order to prevent employees from
selling to each other in order to prevent vesting).
(Section 8C(1)(a)(i)–(iii).)
The provisions of s 8C are applicable notwithstanding the provisions of ss 9C and 23(m) which means
that the provisions of s 8C override those of the said sections (s 8C(1)(a)). This means that s 8C will
211
apply even though vesting takes place after three years (s 9C) and that losses are deductible irre-
spective of the prohibition of s 23(m).
The ‘equity instrument’ is taxed when it ‘vests’ in an employee or director. To establish when an ‘equity
instrument’ ‘vests’ in an employee or director, it is important to first establish if it is a ‘restricted equity
instrument’ or an ‘unrestricted equity instrument’, as different rules regarding the vesting of these
instruments apply.
8.7.1 Restricted versus unrestricted instruments

A ‘restricted equity instrument’ is an instrument with any number of restrictions imposed on it. Sec-
tion 8C(7) lists the following instruments that fall within the restriction status (also see the examples in
par 4.2 of Interpretation Note 55):
l Disposal restrictions. This means that the employee or director cannot freely dispose of that
instrument at fair market value at any given time.
l Forfeiture restrictions. This means that the restriction could result in forfeiture of the instrument or
the right to obtain the instrument, or that the taxpayer can be penalised financially in any other
manner. If the employee or director must, for example, sell the instrument back at cost (or surrender
the instrument for nothing) if employment terminates before a specific date, it is a restricted
instrument.
l Right to impose disposal or forfeiture restrictions. This means that any person has a right to impose
a ‘disposal restriction’ or a ‘forfeiture restriction’ on the disposal of that equity instrument.
l Options on restricted equity instruments. An option will be viewed as a restricted instrument if the
equity instrument, which can be acquired in terms of that option, is a restricted instrument.
l Financial instruments convertible into restricted equity instruments. Financial instruments
(qualifying as equity instruments) that are convertible into a share will be restricted if convertible
only into a restricted share.
l Employee escape clauses. This means that the employer, an associated institution or other person
in arrangement with the employer undertakes to cancel or repurchase the equity instrument at a
price exceeding its market value if there is a decline in the value of the equity instrument.
l Event. This means that the equity instrument is not deliverable to the taxpayer until the happening
of an event, whether fixed or contingent.
An ‘unrestricted equity instrument’ means an equity instrument that is not a ‘restricted equity
instrument’.
8.7.2 Vesting as the tax event

An ‘unrestricted equity instrument’ will ‘vest’ at the time of acquisition of the instrument (s 8C(3)(a)). A
‘restricted equity instrument’, as per s 8C(3)(b), will ‘vest’ at the earliest of the following five events:
l when all restrictions causing ‘restricted equity instrument’ status are lifted
l immediately before the employee or director disposes of the ‘restricted equity instrument’ (unless
it is exchanged for another equity instrument or sold to a connected person)
l immediately after an option that qualifies as a ‘restricted equity instrument’ or a financial instrument
terminates
l immediately before the employee or director dies, if the restrictions relating to that equity instrument
are or may be lifted after death
l on disposal of a restricted equity instrument for an amount that is less than the market value or if a
disposal by way of release, abandonment or lapse of an option or financial instrument occurs.
8.7.3 Calculation of gain or loss upon vesting

The vesting of an equity instrument will result in an ordinary income gain or loss as if the vested amount
were an adjustment to the salary of the employee or director. The taxable gain or loss will be calculated
as the difference between the market value of the equity instrument at vesting and any compensation
paid by the taxpayer for the equity instrument (s 8C(2)(a)(ii) and (b)(ii)). A special rule applies if an
option or financial instrument is disposed of by way of release, abandonment or lapse, namely amount
received, less the consideration paid (s 8C(2)(a)(i)(bb) and (b)(i) (bb)).
212
A return of capital or foreign return of capital in respect of a restricted equity instrument is also, subject
to certain exclusions, included in his or her income (s 8C(1A)). The policy intent underlying the inclusion
of a return of capital or a foreign return of capital is that capital distributions will generally trigger
ordinary revenue, except if the capital distribution consists of another restricted equity instrument. If
this is the case, the capital distribution will be treated as a non-event. In terms of s 8C(1A), a taxpayer
must, with effect from 1 March 2017, include any amount received by or accrued to him or her in
respect of a restricted equity instrument if that amount does not constitute:
l a return of capital or foreign return of capital by way of a distribution of a restricted equity
instrument)
l a dividend or foreign dividend in respect of that restricted equity instrument, or
l an amount that must be taken into account in determining the gain or loss in respect of that
restricted equity instrument.
If, for example, an employee holds restricted equity shares and 90 per cent of the shares are bought
back before the date that the restrictions will end, the amount received as a dividend in respect of this
buy-back will not be exempt as it consists of consideration paid in respect of the share buy-back.
The s 10(1)(k)(i) dividend exemption does not apply to dividends received in respect of services
rendered other than a dividend received in respect of a restricted equity instrument (proviso (ii) to
s 10(1)(k)(i)). This prevents an employer from paying an employee’s salary as a dividend.
Two specific provisos deal with the situations where restricted instruments held by employees are
liquidated in return for an amount qualifying as dividend. With effect from 1 March 2017, the dividend
exemption does not apply to any dividend in respect of a restricted equity instrument acquired in the
circumstances of s 8C(1) if that dividend constitutes
l an amount transferred or applied by a company as consideration for the acquisition or redemption
of any share in that company
l an amount received or accrued in anticipation or in the course of the winding up, liquidation,
l an equity instrument that does not qualify, at the time of the receipt or accrual of that dividend, as
a restricted equity instrument as defined in s 8C
(proviso (jj) to s 10(1)(k)(i), which applies notwithstanding the provisions of par (dd) and (ii)).
The dividend exception further does not apply in respect of a restricted equity instrument acquired in
the circumstances of s 8C(1) if that dividend constitutes
l an amount transferred or applied by a company as consideration for the acquisition or redemption
of any share in that company, or
l an amount received or accrued in anticipation or in the course of the winding up, liquidation,
deregistration or final termination of a company
(proviso (kk) to s 10(1)(k)(i), which applies notwithstanding the provisions of par (dd) and (ii)).
The terms ‘market value’ and ‘consideration’ are defined in s 8C(7). ‘Market value’, in relation to an
equity instrument, means
l In the case of a private company an amount determined in terms of a method of valuation which
gives a fair value and which is used consistently. This method must be used to determine the price
for both purchases and sales of such equity instruments, or
l In the case of any other company, the price at which an instrument could be obtained between a
willing buyer and a willing seller on the open market at arm’s length.
‘Consideration’ in respect of an equity instrument means any amount given (other than in the form of
services rendered)
l by the taxpayer in respect of the equity instrument
l by the taxpayer in respect of another restricted equity instrument which has been disposed of by
the taxpayer in exchange for that equity instrument
l by any person not dealing at arm’s length or any connected person limited to the amount the
taxpayer would have given to acquire that restricted equity instrument.
If an employee exchanges a restricted equity instrument in his employer or an associated institution for
another restricted equity instrument, for example as a result of a corporate restructuring, a roll-over
relief is provided. The new instrument is deemed to have been acquired as a result of employment,
and is therefore taxable (s 8C(4)(a)).
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A taxable gain or deductible loss arises where, in addition to the exchange of shares, the employer
pays the employee cash to balance the exchange of instruments (s 8C(4)(b)). A portion of the con-
sideration that the employee paid for the original instrument must be apportioned to the cash received.
The employee will be taxed on the profit from the cash received less the consideration attributable to
the cash received.
No specific deduction is available to employers, and only a s 11(a) deduction can therefore be claimed
if all the requirements are met. Section 56(1)(k)(ii) exempts any gain in terms of s 8A, 8B or 8C from
donations tax.
Employees’ tax
Any amount referred to in s 8C which must be included in the income of the employee, is included in
the definition of ‘remuneration’ in the Fourth Schedule (par (e)). Such amounts will therefore be subject
to employees’ tax (see chapter 10 and par 11A of the Fourth Schedule for detail). The full gain must be
shown on the IRP 5. With effect from 1 March 2017, any dividend received in respect of a restricted
equity instrument is included in ‘remuneration’ in terms of par (g). The employees’ tax implications in
respect of these dividends are contained in par 11A of the Fourth Schedule and applies from 1 March
2018.
Example 8.22. Vesting of equity instruments
CCC Ltd employs Brendon. In the 2016 tax year Brendon acquires a share in CCC Ltd in exchange
for a R100 note when that share had a value of R100. Brendon may not sell the share until after
leaving the employment of CCC Ltd. Brendon eventually leaves the employment of CCC Ltd in
2021 when the market value of the share is R250, but does not sell the shares.
Discuss the tax consequences of the above transactions.
SOLUTION
The share in CCC Ltd will be a restricted share in terms of s 8C as Brendon is not entitled to sell
the share before he leaves the company. The share therefore only vests in Brendon in 2021 when
he leaves the company as all restrictions are lifted on that date. Brendon must include in his 2021
income an amount of R150 (R250 market value of the share less the R100 consideration paid). The
R250 is the base cost for future disposals by Brendon.
Example 8.23. Vesting of equity instruments
Anja, an employee of X Ltd, is granted an option in Year 1 to acquire 1 000 shares in X Ltd for a
consideration of R10 per share. The value of the option at the time is R15 per share. The award is
subject to a restriction in that having exercised the option, she may not sell the shares for a period
of three years thereafter. The shares are therefore treated as restricted equity instruments and the
option qualifies as a restricted equity instrument.
Anja exercises the option in Year 3 when the shares have a market value of R27 per share. In Year 6
when the restriction falls away and she becomes entitled to sell the shares, their value is R48 per
share. She holds the shares on capital account and sells them in Year 8 for R60 000.
What are the tax consequences to Anja?
SOLUTION
(1) Year 1
On receipt of the option, Anja is not subjected to tax as s 10(1)(nD) exempts from tax the
receipt of an equity instrument which has not vested.
(2) Year 3
On the exercise of the option, Anja makes a gain of R17 (R27 less R10) which is not taxable
as the instruments have not vested (and s 10(1)(nD) will be applicable). Nor is she taxed on
the exercise of the option as she has disposed of one restricted instrument (the option) for
another restricted instrument (the shares), which does not amount to a vesting (of the option).
continued
214
(3) In Year 6 when the restriction falls away, Anja is liable for tax on the gain, calculated as follows:
Market value on vesting date (1 000 × R48) ......................................................... R48 000
Less: Consideration paid (1000 × R10) ................................................................ 10 000
Inclusion in taxable income .................................................................................. R38 000
It should be noted that this treatment differs from s 8A, which would have resulted in an inclusion
in taxable income of R17 per share (R27 less R10) × 1 000 shares, or R17 000.
(4) On disposal of the shares which were held on capital account, there is a capital gain or loss
calculated with reference to the difference between the proceeds and the market value of the
shares at vesting date, which must be treated as the base cost in terms of par 20(1)(h) of the
Eighth Schedule. The capital gain therefore amounts to R60 000 less R48 000 (1 000 × R48)
= R12 000.
Example 8.24. Swap of restricted equity instruments
As a result of a corporate restructuring an employee disposes of a restricted equity instrument

held by him to his employer and in return receives another restricted equity instrument worth R140
and cash of R60. When the employee had exercised his option to acquire the original equity
instrument he paid a consideration of R100.
The new restricted equity instrument is deemed to be acquired by virtue of the employee’s
employment and will be subject to tax when the restrictions on it are lifted. A gain is determined
because of the receipt of the cash of R60. The portion of the consideration attributable to the cash
received is calculated as follows:
R60/R200 × R100 = R30.
Gain R60 – R30 = R30.
The non-arm’s-length disposal of a restricted equity instrument or the disposal to a connected person
will not be regarded as vesting of the equity instrument. It will therefore not attract a taxable gain or
loss (s 8C(5)(a)). The connected person or non-arm’s-length person will therefore step into the shoes
of the employee or director. This means that any vesting event in the hands of the transferee creates a
taxable income or loss for that employee or director (and therefore not for the connected person or
non-arm’s-length person). Aforementioned does not apply where a taxpayer disposes of a restricted
equity instrument (including by way of forfeiture, lapse or cancellation) to his employer for an amount
that is less than the market value (s 8C(5)(c)).
For example, say an employee acquires 1 000 restricted equity instruments from his employer for a
total cost of R2 000 in Year 1. He thereafter disposes of the instruments to his daughter for R3 000
while they remain restricted. The instruments vest in Year 3 when their market value is R5 000. A taxable
gain of R3 000 arises in Year 3, calculated as the difference between the market value (at vesting date)
less the consideration (R5 000 less R2 000). Moreover, the employee will be deemed to have made a
donation to his daughter amounting to R2 000 (R5 000 less R3 000) by virtue of s 58(2), which is subject
to donations tax.
The same deeming rule applies where the instrument is acquired by a person other than the taxpayer
by virtue of the taxpayer’s employment or office of director, without a transfer from the taxpayer, for
example, by his spouse. In such a case, the equity instrument is deemed to have been so acquired by
the taxpayer and disposed of to the other person, and the taxpayer will be treated as obtaining the
gain or sustaining the loss at vesting date (s 8C(5)(b)).
What happens if an employee or a director transfers a restricted instrument (by way of a non-event) to
a person (A) and thereafter A transfers the restricted equity instrument to another person (B)? The
second transfer is also treated as a non-event and on vesting of the instrument in B the employee or
director will be taxable on the gain or entitled to deduct a loss (s 8C(6)).
8.7.4 Impact of s 8C on capital gains tax

The rule that equity instruments within s 8C do not trigger a disposal event for capital gains tax
purposes before the date of vesting (par 11(2)(j) of the Eighth Schedule) was deleted form 1 March
2016. Paragraph 13(1)(a)(iiB) now defers the time of disposal of an equity instrument by a share
incentive trust to the employee beneficiary until the equity instrument is unrestricted and vests in the
hands of the employee beneficiary for the purposes of s 8C. If the equity instrument is disposed of after
vesting, the base cost will be equal to market value on the date that instrument vests (par 20(1)(h)(i) of
the Eighth Schedule). Please note that, in terms of the amended par 80(1), the trust
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is subject to capital gains tax where the trust vests an interest in an equity instrument in terms of s 8C
in an employee. If, however, par 80(2) applies, the employee is subject to capital gains tax. See
chapter 17 for more detail.
As a general rule, if a person ceases to be a resident, that person is subject to immediate deemed
disposal of all assets in terms of s 9H. However, unvested s 8C equity instruments are exempt from
this provision, because these instruments will only be subject to ordinary gain or loss when vesting
takes place (s 9H(4)(e)).
216
9 Retirement benefits
Linda van Heerden
/
l apply the provisions of the Act in respect of lump sums received from an employer
in both practical calculation questions and theoretical advice questions
l apply the provisions of the Second Schedule in respect of retirement fund lump
sum benefits and retirement fund lump sum withdrawal benefits in both practical
calculation questions and theoretical advice questions
l demonstrate your knowledge of the topic in a case study.
Contents
Page
9.1 Overview ......................................................................................................................... 217
9.2 Lump sums from employers that are not retirement funds ............................................ 219
9.2.1 Compensation for termination of employment or office (par (d) definition
of gross income and definition of severance benefits in s 1) and the
cumulative principle ........................................................................................ 219
9.2.2 Commutation of amounts due (par (f) definition of gross income) ................. 220
9.3 Fund benefits (par (e) definition of gross income and Second Schedule) .................... 220
9.3.1 Retirement fund lump sum benefits (paras 2(1)(a), 2(1)(c), 4, 5, 6 and
6A) ................................................................................................................... 226
9.3.2 Retirement fund lump sum withdrawal benefits (paras 2(1)(b), 4 and 6)....... 230
9.3.3 Public sector pension funds .......................................................................... 237
9.3.3.1 Transfers to provident fund (par (eA) definition of gross
income) ......................................................................................... 237
9.3.3.2 Lump sums from a public sector pension fund (par 2A) .............. 237
9.4 Exemption of compulsory annuities (s 10C exemption)................................................. 239
9.5 Rating concession (average rating formula) (s 5(10)) ................................................... 240
9.5.1 Member of a proto-team (s 5(9))..................................................................... 240
9.1 Overview
All paragraph references in this chapter are references to the Second Schedule, except where indi-
cated otherwise.
On termination of services and/or membership of retirement funds, benefits can become payable by
employers and/or funds. Retirement funds include pension funds, provident funds, retirement annuity
funds and preservation funds. Benefits can include annuities, lump sums, lump sum benefits and
receipts from policies.
Annuities
Any annuities, living annuities or annuity amounts in s 10A received are included in gross income (in
column 3 of the comprehensive framework in chapter 7) (par (a) of the definition of ‘gross income’ in
s 1(1)). The normal tax payable thereon is calculated in terms of the progressive tax table applicable
to natural persons. Only compulsory annuities (as defined in s 10C) can be exempt in terms of s 10C
if all the requirements in s 10C(2) are met (see 9.4).
Lump sums from an employer that is not a fund

Lump sums paid by an employer that is not a fund are included in the gross income of the employee
in terms of paras (d)(i)–(iii) and (f) of the ‘gross income’ definition in s 1(1). Only lump sums received
217
in respect of the termination of employment (par (d)(i)) and in commutation of amounts due under an
employment contract (par (f)) can qualify as severance benefits (see chapter 4.6). The gross amounts
of severance benefits received are included in gross income (in column 1 of the comprehensive
framework in chapter 7). The normal tax payable thereon is calculated in terms of the separate tax
table applicable to severance benefits and retirement fund lump sum benefits, based on the cumula-
tive principle (see 9.2.1). If such a lump sum does not qualify as a severance benefit, the gross
amount is included in gross income (in column 3 of the comprehensive framework in chapter 7), and
it is taxed in terms of the normal progressive tax table applicable to natural persons.
The payment of the proceeds of a policy of insurance (par (d)(ii)) or the cession of a policy of insur-
ance (par (d)(iii)) can never be a severance benefit. The cession of a policy of insurance (par (d)(iii))
is also not necessarily received on the termination of services.
Lumps sum benefits from a retirement fund

The Second Schedule only applies to ‘lump sum benefits’ paid by retirement funds. The definition of this
term (in s 1(1)) merely distinguishes between two groups of lump sum benefits from funds, namely a
‘retirement fund lump sum benefit’ and a ‘retirement fund lump sum withdrawal benefit’. Similarly,
par (e) of the definition of gross income also merely includes these two groups of lump sum benefits in
gross income. The specific definitions for these two groups of lump sum benefits explain how the
amount to be included in terms of par (e) is determined by stating that the lump sum benefit is the
‘amount determined’ in terms of par 2(1)(a) or (c) (in the case of a retirement fund lump sum benefit),
and in terms of par 2(1)(b) (in the case of a retirement fund lump sum withdrawal benefit) (s 1(1)). It is
therefore clear that the provisions of the Second Schedule in effect determine the type of lump sum
benefit as well as the amount to be included in gross income. The term ‘lump sum benefits’ is also
defined in par 1 of the Second Schedule – please see the discussion in 9.3.
The type of lump sum benefit is determined on the grounds of the type of event leading to the receipt
of the lump sum. There are four specific events in respect of retirement fund lump sum benefits
(par 2(1)(a)(i)–(iii) and par 2(1)(c) (with effect form 1 March 2018)). There are two specific events
(par 2(1)(b)(iA) and (iB)) and one general catch-all event (par 2(1)(b)(ii)) in respect of retirement fund
lump sum withdrawal benefits. See the discussions in 9.3, 9.3.1 and 9.3.2 for more detail in this
regard.
The ‘amount determined’ is in effect the net amount, being the amount of the lump sum received less
the allowable deductions calculated in terms of par 5, 6 or 6A (with effect from 1 March 2018)
(par 2(1)). The net amount must be included in gross income (in either column 1 or 2 of the compre-
hensive framework in chapter 7) in terms of par (e) of the ‘gross income’ definition in s 1(1). The
normal tax payable in respect of all lump sum benefits is calculated in terms of either the separate tax
table applicable to severance benefits and retirement fund lump sum benefits, or the separate tax
table applicable to retirement fund lump sum withdrawal benefits, based on the cumulative principle.
The tax implications of all the aforementioned lump sums and lump sum benefits can be summarised
as follows:
Receive a severance Receive a lump sum Receive a retirement Receive a retirement
benefit (as defined) from an employer that is fund lump sum benefit fund lump sum with-
from an employer that is not a fund and which is from a retirement fund drawal benefit from a
not a fund not a severance benefit retirement fund
(as defined)
Gross amount in gross Gross amount in gross Net amount in gross Net amount in gross
income in column 1 of the income in column 3 of the income in column 1 of the income in column 2 of the
Comprehensive frame- Comprehensive frame- Comprehensive frame- Comprehensive frame-
work in chapter 7 work in chapter 7 work in chapter 7 work in chapter 7
Paragraph (d)(i) or (f) of Paragraph (d)(i)–(iii) or Paragraph (e) of the Paragraph (e) of the def-
the definition of gross (f) of the definition of definition of gross in- inition of gross income
income gross income come and par 2(1)(a)(i)– and par 2(1)(b)(iA),(iB)
(iii) and 2(1)(c) and (ii)
The tax table applicable The progressive tax The tax table applicable The tax table applicable
to severance benefits table applicable to natu- to severance benefits to retirement fund lump
and retirement fund ral persons is applied to and retirement fund lump sum withdrawal benefits
lump sum benefits is taxable income in col- sum benefits is used to is used to calculate the
used to calculate the umn 3 calculate the normal tax normal tax payable
normal tax payable payable
The cumulative principle The cumulative principle The cumulative principle
applies when calculating applies when calculating applies when calculating
normal tax normal tax normal tax
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9.2 Chapter 9: Retirement benefits and the rating formula
9.2 Lump sums from employers that are not retirement funds
The provisions of the Second Schedule are only applicable to lump sum bene-
fits received from retirement funds. They are not applicable to lump sums re-
Please note! ceived from employers that are not retirement funds. The Second Schedule can
therefore never apply to severance benefits since severance benefits are lump
sums received from employers that are not retirement funds.
9.2.1 Compensation for termination of employment or office (par (d)(i) definition of gross
income and definition of severance benefits in s 1) and the cumulative principle
The provisions relating to the taxability of lump sums received for the termination of employment or
office in terms of par (d ) was discussed in detail in chapter 4. Only lump sums envisaged in par (d)(i)
can be a severance benefit as defined, and it is only such lump sums that are taxed on the cumula-
tive basis using a special table applicable to retirement fund lump sums benefits and severance
benefits.
The cumulative principle

Severance benefits, retirement fund lump sum benefits (see 9.3.1) and retirement fund lump sum
withdrawal benefits (see 9.3.2) are taxed on a cumulative basis.This means that the taxable amounts
of previous severance benefits and lump sum benefits received after specific dates, but before the
current severance benefit or lump sum benefit, influence the tax on the current severance benefit or
lump sum benefit. This causes the current severance benefit or lump sum benefit to be taxed at a
higher marginal rate. The date sequence in which severance benefits and lumps sum benefits are
received is very important when calculating the tax on the current severance benefit or lump sum
benefit.
There is one tax table that appplies to both severance benefits and retirement fund lump sum bene-
fits (the first R500 000 is taxed at 0%), and one table that applies to retirement fund lump sum with-
drawal benefits (the first R25 000 is taxed at 0%). The application of the cumulative system ensures
that a maximum of R500 000 in respect of all severance benefits, retirement fund lump sum benefits
and retirement fund lump sum withdrawal benefits can be taxed at 0% over a natural person’s entire
life time.
The following previous severance benefits and lump sum benefits are taken into account in the
cumulative system and are added to the current severance benefit or lump sum benefit:
l retirement fund lump sum benefits received or accrued on or after 1 October 2007
l retirement fund lump sum withdrawal benefits received or accrued on or after 1 March 2009, and
l severance benefits received or accrued on or after 1 March 2011.
Application of the cumulative principle to the calculation of normal tax payable on a severance benefit
Place all qualifying severance benefits, retirement fund lump sum benefits and retirement fund lump sum
withdrawal benefits in sequence according to the dates of accrual or receipt.
Calculate the sum of
l the current severance benefit, and
l all previous severance benefits, retirement fund lump sum benefits and retirement fund lump sum
withdrawal benefits received by or accrued to the person on or after the specified dates in the tax table
(Please note: The taxable amounts included in gross income in terms of par (d)(i) or (e) are used.)
The tax table applicable to the current severance benefit is used for both the calculations in step 1 and
step 2.
l STEP 1 Calculate the normal tax payable on the sum as determined above.
l STEP 2 Calculate the hypothetical tax on the sum of all previous severance benefits, retirement fund
lump sum benefits and retirement fund lump sum withdrawal benefits.
(Please note: The hypothetical tax will not necessarily be equal to the actual tax paid on these severance
benefits and lump sum benefits.)
Normal tax payable on current severance benefit = tax in step 1 less tax in step 2.
The normal tax payable on severance benefits, retirement fund lump sum benefits and retirement
fund lump sum withdrawal benefits is calculated in the sequence of accrual during a year of
219
assessment. SARS has confirmed that, should a severance benefit and a retirement fund lump sum
benefit be received on the same date, the taxable amounts of the two lump sums will be added
together when calculating the normal tax on these lump sums using the cumulative principle. This
can be done because the same table applies to these two types of benefits. This means that an
amount of R500 000 of the combined taxable amount of the two benefits will be tax-free. See
Example 9.5 for a practical illustration of the aforementioned.
The table applicable to severance benefits and retirement fund lump sum benefits is set out below:
Taxable income Rate of tax
Not exceeding R500 000 0% of taxable income
Exceeding R500 000 but not exceeding R700 000 R0 plus 18% of taxable income exceeding R500 000
Exceeding R700 000 but not exceeding R36 000 plus 27% of taxable income exceeding
R1 050 000 R700 000
Exceeding R1 050 000 R130 500 plus 36% of taxable income exceeding
R1 050 000
Examples 9.6 and 9.8 illustrate the calculation of the tax liability on a severance benefit.
Amounts included in gross income in terms of par (d) or (e) (see 9.3) are ‘remu-
neration’. Employers that are not funds, as well as retirement funds are therefore
‘employers’ for employees’ tax purposes. The employer that is not a fund paying
the lump sum, or the retirement fund paying the lump sum benefit, is required to
obtain a directive from the Commissioner as to the amount to be deducted
(par 9(3) of the Fourth Schedule). If the directive, for example, specifies a rate
of 25%, the employees’ tax to be withheld is 25% of the amount of the remuner-
ation (the amount included in gross income in terms of par (d) or par (e)).
When calculating normal tax payable, the primary, secondary and tertiary
Please note! rebates (s 6(2)) cannot be set off against the normal tax payable on a sev-
erance benefit or any lump sum benefit (s 6(1)). Students must clearly indicate
that these s 6(2) rebates are only deductible against the normal tax payable on
the taxable income in column 3 of the comprehensive framework in chapter 7.
Also clearly indicate that the s 6A and 6B medical tax credits may be deducted
from the normal tax payable on the taxable income in columns 1, 2 and 3 of the
comprehensive framework in chapter 7 (wording of s 6A and 6B in contrast to
the wording of s 6(1)). The sequence as used in the comprehensive framework
in chapter 7, clearly illustrates the correct treatment of the s 6(2) rebates and
the s 6A and 6B credits.
9.2.2 Commutation of amounts due (par (f) definition of gross income)

Any amount received or accrued in commutation of amounts due under a contract of employment or
service must be included in gross income (par (f) of the definition of that term in s 1). ‘Commutation’
means ‘substitution’. An employee may, for example, commute (or substitute) his right to have a
coffee break into a cash payment that will be included in his gross income in terms of par (f). Para-
graph (f) amounts can also be severance benefits if the requirements of the definition thereof are met.
It may therefore happen that an amount falls into both par (d) and par (f). It may, however, be taxed
only once.
The taxability of par (f) amounts is exactly the same as lump sum amounts received on the termina-
tion of employment (par (d)(i)) discussed in chapter 4.
9.3 Fund benefits (par (e) definition of gross income and Second Schedule)
Retirement funds include pension funds, pension preservation funds, provident funds, provident
preservation funds and retirement annuity funds. The Commissioner must approve all these funds
and all the requirements in terms of the respective definitions in s 1(1) and in par 1 must be met.
Pension funds and provident funds are employer funds, meaning that only employees of the specific
employer can be members of that specific fund. Pension funds and provident funds can be ‘private
sector’ funds or ‘public sector’ funds depending on the sector in which the employer falls. Retirement
annuity funds, for example Allan Gray or Coronation, are normally funded by independent individuals
220
and any person can be a member of these funds. Membership of preservation funds is limited to
former members of pension funds, provident funds and other preservation funds. Only certain
amounts can be transferred to preservation funds, not more than one amount can be paid to a mem-
ber during the period of membership of preservation funds, and members of preservation funds only
become entiteld to benefits on his or her date of retirement.
Funds keep separate records of the contributions made by members. The ‘minimum individual re-
serve’ of a member of a fund is the balance of all the member’s contributions plus growth over his or
her whole period of membership at any given stage of his or her membership. The ‘retirement in-
terest’ of a member is the member’s share in the value of a fund as determined in terms of the rules of
the fund on the date he or she elects to retire from that fund. With effect from 1 March 2018, the
retirement interest is also determined on the date on which the member elects to transfer to a retire-
ment annuity fund (after normal retirement age but before retirement date) (s 1(1)). The two values
(minimum individual reserve and retirement interest) will be only be equal on these elected dates.
Benefits payable by retirement funds

The Commissioner may not approve any pension fund, provident fund or retirement annuity fund
unless he is satisfied that the fund is a permanent fund, bona fide established for the sole or main
purpose of
l providing annuities for employees on retirement from employment or for the dependants or nom-
inees of deceased employees (in the case of a pension fund) (proviso (i) to par (c) of the defini-
tion of pension fund)
l providing benefits for employees on retirement from employment or for the dependants or nom-
inees of deceased employees (in the case of a provident fund) (proviso (a) of the definition of
pension fund), or
l providing life annuities for the members of the fund or annuities for the dependants or nominees
of deceased members (in the case of a retirement annuity fund) (proviso (a) of the definition of
retirement annuity fund).
A further purpose contained in both the definitions of pension funds and provident funds is to provide
benefits contemplated in par 2C of the Second Schedule or s 15 or 15E of the Pension Funds Act.
In line with this sole or main purpose of funds, it is therefore the right to annuities that accrue to
members of pension funds and retirement annuity funds on retirement (the day that the member
elects to retire). Even though the right to annuities accrues to members, the definitions of a pension
fund, pension preservation fund and retirement annuity fund give members an option to commute a
part of the retirement interest for a lump sum. These definitions provide that ‘not more than one-third
of the total value of the retirement interest may be commuted for a single payment’ (please see the
exceptions below). The use of the words ‘retirement interest’, read in conjunction with the afore-
mentioned exceptions, indicates that this limitation is only applicable when a member elects to retire.
A member who has elected to retire must therefore elect to commute a part of the retirement interest
payable by the fund for a single payment (lump sum), before a ‘lump sum benefit’ as defined in par 1
arises. Until the member makes such election, no lump sum benefit on retirement arises or is payable
by the fund. The definition of ‘lump sum benefits’ in par 1 includes:
l any amount in respect of the commutation of an annuity or portion of an annuity, and
l any fixed or ascertainable amount (other than an annuity)
payable by or provided in consequence of membership of any of the five funds.
The remainder of the retirement interest of a member of a pension fund, pension preservation fund
and retirement annuity fund is payable in the form of compulsory annuities, as defined in s 10C (in-
cluding a living annuity – see chapter 4.2). The practical effect is that the choice to commute a part of
the retirement interest for a lump sum has an immediate tax effect for a member who elected to retire,
since a lump sum benefit is created and is received by or accrues to the member (par 4(1)). There is,
however, no immediate tax effect regarding the remainder of the retirement interest of such a mem-
ber. All the annuities payable out of the remainder of the retirement interest will be included in gross
income in terms of par (a) of the definition of gross income as and when such compulsory annuities
are received by or accrue to the member.
The Second Schedule only applies to lump sum benefits elected by the member, and received by or
accrued to the member or persons in consequence of, or following upon, the various circumstances
in par 2. It does not apply to annuities payable out of the remainder of the retirement interest after the
member has elected to retire. This will be the case irrespective of whether such remainder is left in
the fund of which the person was a member to be taken as in-fund living annuities, or whether it is
transferred to another fund (for example Alan Gray) to buy annuities.
221
Exceptions to the one-third rule

Despite the aforementioned one-third limitation on lump sum benefits from pension funds, pension
preservation funds and retirement annuity funds, the definitions of these funds provide that
l if two-thirds of the total value of the retirement interest does not exceed R165 000, or
l where the employee is deceased, or
l where the employee elects to transfer the retirement interest to a retirement annuity fund after
normal retirement age but before retirement date (with effect from 1 March 2018),
the full amount can be taken as a lump sum.
The words ‘if two-thirds of the retirement interest does not exceed R165 000’ in effect means if the
total retirement interest does not exceed R247 500 (R165 000 × 3 ÷ 2). Taking the full retirement
interest as a lump sum in any of these circumstances means that all the future compulsory annuities
are commuted for a lump sum. Such a commuted lump sum in any of these circumstances is taxed
as a specific type of retirement fund lump sum benefit (in terms of par 2(1)(a)(iii) in the case of the
first two events, or in terms of par 2(1)(c) in the case of an election to transfer (with effect from
1 March 2018)).
A member of a retirement annuity fund cannot resign or withdraw from the fund before his normal
retirement date, but can in effect only retire from it (proviso (b)(x)(aa) of the definition of ‘retirement
annuity fund’ in s 1). If a member discontinues contributions prior to retirement, he or she will only be
entitled to an annuity or lump sum payable on the date of retirement. Members of retirement annuity
funds may, however, withdraw a lump sum in the following two circumstances
l When the member is or was a resident who emigrated and the emigration is recognised by the
South African Reserve Bank for purposes of exchange control, or
l When the member departs from the Republic upon the expiry of a visa obtained to work in or visit
the Republic and the member is not recognised as a resident by the South African Reserve Bank
for purposes of exchange control
(proviso (b)(x)(dd) of the definition of ‘retirement annuity fund’).
Provident funds and provident preservation funds
It is submitted that the definition of provident funds uses the word ‘benefits’ rather than ‘annuities’ as
the sole or main purpose because members of provident funds can still (until 28 February 2019) elect
to have their total retirement interest paid out as a lump sum. The one-third limitation in respect of the
commutation of annuities for a single payment (lump sum) still does not apply to members of provi-
dent funds who elect to retire.
In the case of a provident fund and a provident preservation fund, the total value of the retirement
interest may be commuted for a lump sum (until 28 February 2019). This date has been amended
various times. In order to eliminate the consequential differences in the tax treatment of benefits from
the various funds, members of provident funds and provident preservation funds will, with effect from
1 March 2019, also
l not be able to commute more than one-third of their retirement interest for a lump sum, and
l be forced to take compulsory annuities in respect of the remaining two-thirds of the retirement
interest.
The existing retirement interests of such members on 28 February 2019 will be protected. This is
done by adding a proviso to the definitions of all retirement funds stating that the following must not
be taken into account when calculating the value of the retirement interest:
l any contributions to a provident fund before 1 March 2019 (in the case of members of a provident
fund who are 55 years or older on 1 March 2019, all contributions to a provident fund of which the
person was a member on 1 March 2019 are excluded)
l any other amounts credited to the member’s individual account prior to 1 March 2019, and
l any fund return in respect of the aforementioned contributions and amounts credited
reduced by
l any amounts permitted in terms of law to be deducted from the member’s individual account of
the provident fund.
As a result of the aformentioned, all the retirement interests in respect of which members already
obtained a vested right to on 28 February 2019, are protected and can still be commuted for a lump
sum. The one-third limitation is therefore not applicable thereto. In the case of members who have
already reached the age of 55 years on 1 March 2019, the one-third limitation is not applicable at all.
This means that such members can always commute their full retirement interest for a lump sum
irrespective of when they retire.
222
Lump sum benefits

The type of event, and not the type of fund, in general, determines the type of lump sum benefit as
well as the tax implications. Public Sector Pension Funds have a separate rule (see 9.3.3). The six
specific events and one general event are summarised in the table below. It is submitted that it must
first be determined whether one of the six specific events is applicable before the general event will
apply.
Event Retirement fund lump sum bene- Retirement fund lump sum with-
fit in terms of drawal benefit in terms of
Specific events
Retirement or death Par 2(1)(a)(i)
Termination of employment due Par 2(1)(a)(ii)
to personnel reduction, etc.
Commutation of an annuity for a Par 2(1)(a)(iii)
lump sum
Transfer after normal retirement Par 2(1)(c)
age but before retirement date
(with effect from 1 March 2018)
Divorce order Par 2(1)(b)(iA)
Transfer between funds Par 2(1)(b)(iB)
General event
All other cases Par 2(1)(b)(ii)
Limitations to par 2(1)

The amounts to be included in gross income in terms of par (e) are determined by the provisions in
par 2(1). The provisions of par 2(1) are subject to the source rule in s 9(2)(i) (see chapter 3), the
special formula applicable to Public Sector Pension Funds (par 2A) and the rule for surplus alloca-
tions (par 2C). These last-mentioned provisions therefore override the provisions of par 2(1).
Any lump sum benefit, pension or annuity payable by a pension fund, pension preservation fund,
provident fund or provident preservation fund (as defined, which means that it is a fund registered in
the Republic), to a non-resident for services rendered in the Republic, is from a source in the Repub-
lic (s 9(2)(i)). If the non-resident has rendered services partly within and partly outside the Republic,
only a portion of the amount is from a source within the Republic (see chapter 3). The Republic
portion is the ratio of the period during which services were rendered in the Republic to the total
period during which services were rendered (s 9(2)(i)). Please take note that s 9(2)(i) does not in-
clude a retirement annuity fund since membership to such a fund is not linked to services rendered.
The source of income received by a non-resident from a retirement annuity fund registered in the
Republic will always be in the Republic.
Lump sum benefits, pensions or annuities received by or accrued to a resident from any source are
included in gross income since residents are taxed on a worldwide basis. If a resident receives such
amount from a source outside the Republic in respect of services rendered outside the Republic, it is
exempt (s 10(1)(gC)(ii)). The term ‘source outside the Republic’ refers to the originating cause that
gives rise to the pension income, namely where the services have been rendered (par 3 of Binding
General Ruling 25). Such amounts will include amounts received from foreign employers or foreign
funds and the causal link to services rendered outside the Republic must exist. If the resident has
rendered services partly within and partly outside the Republic, it is important to note that only the
portion relating to the services rendered outside the Republic is exempt. Amounts received from any
fund in the Republic will not be exempt.
The exemption will also apply if the amount is transferred to an RSA fund from a source outside the
Republic in respect of the resident member and is then paid out by the RSA fund (s 10(1)(gC)(ii)).
With effect from 1 March 2018, amounts received from a company that is a resident and that is regis-
tered as a long-term insurer, will also not be exempt. However, if the amount is transferred to the
resident insurer from a source outside the Republic in respect of the resident member, the amount
will be exempt (s 10(1)(gC)(ii)).
223
Remember
The source provisions are relevant only to non-residents, as residents are taxed on a worldwide
basis, and source plays no part in the inclusion of an amount in a resident’s gross income. Resi-
dents may, however, possibly qualify for an exemption in terms of s 10(1)(gC)(ii).
Example 9.1. Deemed source provision

Bongani celebrated his 60th birthday on 5 September 2017 and elected to retire from his em-
ployment at the end of that month. He is a non-resident. During his 40 years of service he spent
ten years (between 1 January 1995 and 31 December 2004) working in Switzerland and the rest
in the Republic. On his retirement, a lump sum of R500 000 accrued to him from the South Afri-
can pension fund. The deductible portion of the lump sum in terms of the Second Schedule is
R200 000.
Calculate the amount to be included in the gross income of Bongani for the year of assessment
ended 28 February 2018.
SOLUTION
Lump sum received ..................................................................................................... R500 000
Less: Second Schedule deduction ............................................................................. (200 000)
R300 000
Gross income = Amount from a source within the Republic (s 9(2)(i)):
R300 000 × 30/40 =…………………………………………………………………………. R225 000
If Bongani was a resident, the gross income amount would have been R300 000.
Bongani would only have qualified for a s 10(1)(gC)(ii) exemption of R75 000
(R300 000 × 10/40) if the pension fund was a foreign fund.
The actual lump sum received from a Public Sector Pension Fund is not taken into account when
calculating the taxable amount of such lump sum benefit. An amount calculated in accordance with
the formula in par 2A is deemed the lump sum benefit (see 9.3.3.2). The deemed amount is further
reduced by the par 5, 6 or 6A deductions (see Example 9.8).
Any surplus distributions by any fund to a member subsequent to the member’s death, retirement or
withdrawal are excluded from gross income, effectively making the payment free of tax (par 2C). A
surplus may occur when a fund did not pay out the member’s full minimum individual reserve when
the member withdrew from a fund prior to retirement, which caused a surplus to build up in the fund.
However, legislation has been amended since and such surplus distributions rarely occur.
Lump sum benefits in the form of life policies

It may happen that the lump sum payment is not a cash payment but represents a policy of insurance
ceded or made over to the taxpayer by the fund on retirement or cessation of membership. The
surrender value of the policy is deemed to be a lump sum benefit as if it were a cash payment accru-
ing to the member on the date of its cession or making over (par 4(2bis)). These policies must be
distinguished from the policies of insurance under par (d)(ii) and (iii) which are linked to an employer
that is not a fund.
If the policy of insurance is
l ceded or otherwise made over to the person by any retirement fund (A), and then
l ceded or otherwise made over by the person to any other such fund (B), or
l if the person pays an amount to the other fund in the place of or representative of the surrender
value or a part thereof
l the surrender value is deemed to have been paid into the other fund (B) by the first fund (A) for
the benefit of the person (par 5(3) and 6(3)).
224
Example 9.2. Lump sum benefits in the form of life policies
A taxpayer derives a retirement fund lump sum withdrawal benefit from a pension fund in the form
of an insurance policy with a surrender value of R400 000 and suitably reinvests R100 000 in
another pension fund. R290 000 of his own contributions to the fund was not deductible initially.
Of the total retirement fund lump sum withdrawal benefit of R400 000 (par 4(2)bis), R100 000
is transferred and is therefore a ‘transfer between funds’ in terms of par 2(1)(b)(iB) and a
par 6(1)(a)(ii)(aa) deduction of R100 000 can therefore be deducted against this (par 6(3)). The
taxable amount is therefore R100 000 less R100 000 = Rnil.
The R300 000 not transferred falls under ‘other’ retirement fund lump sum withdrawal benefits in
par 2(1)(b)(ii) and the par 6(1)(b)(i) deduction for unclaimed contributions is available. The con-
tribution of R290 000 not previously allowed as deduction therefore reduces the R300 000 and
R10 000 (R400 000 – R390 000) is included in gross income in terms of par (e).
Date of accrual of lump sum benefits

Notwithstanding the rules of any retirement fund, and subject to paras 3 and 3A (see below), any
lump sum benefit shall be deemed to have accrued to a person who is a member of such fund on the
earliest of the date
l on which an election is made in respect of which the lump sum benefit becomes recoverable
l on which any amount is deducted from the minimum individual reserve of a member for the
benefit of the member’s spouse in terms of a divorce order
l on which the benefit is transferred to another retirement fund, or
l of death of the member
and shall be assessed to tax in the year of assessment during which such lump sum benefit is
deemed to accrue (par 4(1)).
A lump sum benefit paid after the death of a person is deemed to have accrued to that person imme-
diately prior to the death of that person (par 3). Such a lump sum will therefore be included in the
gross income of his or her last assessment. Since a death benefit will often be paid directly to a
beneficiary, the tax payable on the lump sum may be recovered from the person to whom the lump
sum benefit accrues (proviso (i) to par 3). In this way, the ultimate tax burden is made to fall upon the
beneficiary of the benefit. In practice, the executor will do this recovery.
A person (heir) may receive the right to an annuity or living annuity after the death of a member. If the
heir may commute the annuity for a lump sum, such a lump sum will be deemed a lump sum benefit
that has become recoverable in consequence of or following the death of the member (proviso (ii) to
par 3). The lump sum will be taxed as a retirement fund lump sum benefit in the hands of the de-
ceased.
No lump sum benefit is deemed to accrue to the deceased on death if
l the dependants or nominees of such a deceased person elected to receive an annuity or living
annuity (proviso (iii) to par 3), or
l where the lump sum is paid into a preservation fund as an unclaimed benefit (proviso (iv) to
par 3).
The same rules as in par 3 will apply if the first heir dies and a lump sum benefit becomes recover-
able by a second heir. It is deemed to have accrued to the first heir immediately prior to his or her
death (par 3A).
Example 9.3. Date of accrual of lump sum benefits

An employee resigns from both his employment and his pension fund and he is entitled to a
withdrawal benefit, but the rules of the fund stipulate that it is payable to him on the date on
which he would normally have retired. The benefit will be deemed to accrue to him on the date
on which an election is made that the amount must be paid (he can only elect on the date on
which he would normally have retired). It will be seen as if it were a lump sum benefit derived by
him upon his retirement, and the deduction allowable on retirement from a pension fund will
apply. Should he die prior to that date, the withdrawal benefit will be deemed to have accrued
immediately prior to his death; it will be assessed as if it were a lump sum benefit derived by him
immediately prior to his death and the deduction allowable on death will apply (see 9.4.1).
continued
225
However, if the rules of the fund simply provide that, on a member’s resignation, a lump sum benefit
is payable in five years’ time, the withdrawal benefit will be deemed to have accrued on that later
date after five years on which an election can be made that the amount must be paid. It will be
seen as if it were a lump sum benefit derived upon withdrawal or resignation, and the limited de-
ductions allowable on withdrawal or resignation will apply. Should he die prior to the expiry of this
five-year period, the withdrawal benefit will be deemed to have accrued on the date of his death as
if it were a lump sum benefit derived immediately prior to his death, and the deductions allowable
on death will apply. This would remain the outcome even if the withdrawal benefit were payable to
his dependants at the end of the five-year period only, irrespective of his earlier death.
l Students please note that the amount given as a lump sum benefit received
from a pension fund or a retirement annuity fund in a question, is the amount
that the taxpayer has elected to commute in terms of the rules of the fund
and will never exceed one-third of that member’s retirement interest.
l Even though pension funds and provident funds are linked to a specific
employer, the fund is a separate employer for employees’ tax purposes
when a lump sum benefit or annuity is paid out to a member by the fund
(see the definitions of ‘employer’ and ‘remuneration’ in the Fourth Schedule).
Please note!
l An annuity received from an ‘annuity contract’ concluded with an insurer
(see s 10A for definition) differs from an annuity received from a retirement
fund – see chapter 4.
l The ‘minimum individual reserve’ of a member of a fund is the balance of all
the member’s contributions plus growth over his or her whole period of
membership at any given stage of his or her membership. The ‘retirement in-
terest’ is the member’s share in the value of a fund as determined in terms of
the rules of the fund on the date he or she elects to retire or to transfer to a
retirement annuity fund (with effect from 1 March 2018). It is therefore only
on these elected dates that the two values will be equal.
9.3.1 Retirement fund lump sum benefits (paras 2(1)(a), (2(1)(c), 4, 5, 6 and 6A)
As shown in the table in 9.3, four specific events will qualify as retirement fund lump sum benefits.
Retirement or death
‘Retire’ means that a person becomes entitled to the annuity or lump sum benefits contemplated in
the definition of ‘retirement date’ (par 1).
‘Retirement date’ is the date on which a member elects to retire and becomes entitled to an annuity
or a lump sum benefit contemplated in par 2(1)(a) or (c) on or after attaining the ‘normal retirement
age’ in terms of the rules of the fund (definition in s 1). In the case of a nominee of a deceased mem-
ber, it is the member’s date of death.
The ‘normal retirement age’ (par (a) of the definition in s 1) of members of a pension fund and a
provident fund is the date on which the member is entitled to retire (in terms of the rules of the fund)
for reasons other than sickness, accident, injury or incapacity through infirmity of mind or body.
Reading the aforementioned three definitions together, it is clear that a member of a pension fund or
a provident fund can only elect to retire on or after attaining the specific age stated as ‘normal retire-
ment age’ in the rules of that specific fund. Various funds can have different normal retirement ages.
However, if a member of a provident fund retires from the fund before the age of 55 years on grounds
other than ill-health, the lump sum received as a result thereof will be taxed as a retirement lump sum
withdrawal benefit unless the Commissioner, on application by the fund, directs otherwise (par 4(3)).
The ‘normal retirement age’ in the case of members of a retirement annuity fund, pension preservation
fund or provident preservation fund is always the attainment of the age of 55 (par (b) of the definition in
s 1(1)).
‘Normal retirement age’ is also reached, irrespective of age, if a member becomes permanently in-
capable of carrying on his or her occupation due to sickness, accident, injury or incapacity through
infirmity of mind or body (par (c) of the definition in s 1(1)). This means that any lump sum benefit
received by a person due to reaching normal retirement age in this way, will be taxed as a retirement
fund lump sum benefit in terms of par 2(1)(a)(i) irrespective of the person’s age.
226
Loss of office or employment

Since 2008, withdrawal benefits received by members who lost their employment due to retrench-
ment are taxed as retirement fund lump sum benefits (even though it is, in essence, a retirement fund
lump sum withdrawal benefit). This is the reason why the par 6 deductions (and not the par 5 deduc-
tions) reduce the lump sum benefits received on the loss of office or employment (in terms of
par 2(1)(a)(ii)). If such a member, however, at any time held more than 5% of the equity shares of the
employer-company, the lump sum benefit will be taxed as a retirement fund lump sum withdrawal
benefit (proviso to par 2(1)(a)(ii)).
Commutation of an annuity
As explained in 9.3, there are exceptions to the one-third limitation on lump sums from pension funds,
pension preservation funds and retirement annuity funds. If one of these exceptions applies and the
remainder of the retirement interest is commuted for a lump sum, it will be a retirement fund lump sum
benefit in terms of par 2(1)(a)(iii).
Transfers after normal retirement age but before retirement date

With effect from 1 March 2018, the new provision in par 2(1)(c) caters for transfers after attaining
normal retirement age but before retirement date (meaning before the member elects to retire). Being
entitled to retire on reaching ‘normal retirement age’ does not mean that the member must automati-
cally retire. Individuals are allowed to elect their retirement date. The date on which the lump sum
benefit accrues to the individual depends on the date on which the individual elected to retire and not
on the ‘normal retirement age’.
As a result, individuals who postponed the election of the retirement date were allowed to keep their
benefits within their funds past ‘normal retirement age’. While members retain their benefits within
such a fund, they may no longer contribute to those funds and are therefore effectively inactive. This
left the employer with the burden of having to keep in touch with an inactive member and deal with
additional administration. The employee may also wish to sever ties with the employer. To address
these concerns, par 2(1)(c) allows employees, with effect from 1 March 2018, to transfer their bene-
fits to a retirement annuity fund on or after normal retirement age but before retirement date. It was
stated that the reason why the new amendment does not include transfers to preservation funds, is
because ‘it would create a situation where members of pension funds can transfer their benefits into
preservation funds and withdraw all the benefits in a lump sum withdrawal, thereby going against
preservation’ (Explanatory Memorandum on the Taxation Laws Amendment Bill, 2017 (Draft)).
The calculation of the taxable portions of retirement fund lump sum benefits, which must be included
in gross income in terms of par (e), can be illustrated as follows:
Retirement fund lump sum benefits
Transfer on or
after normal
retirement age
Retirement Loss of office or Commutation but before
or death employment of an annuity* retirement date**
(par 2(1)(a)(i)) (par 2(1)(a)(ii)) (par 2(1)(a)(iii)) (par 2(1)(c))
less less less less
Par 5(1)(a)–(e) Par 6(b)(i)–(v) Par 5(1)(a)–(e) Par 6A
* This is where two-thirds of the total value of the retirement interest does not exceed R165 000, or where the
employee dies and the full amount of the retirement interest can be taken as a lump sum. The compulsory
annuities are therefore commuted for a lump sum.
** With effect from 1 March 2018.
The wordings of the five deductions in par 5(1)(a)–(e) and par 6(b)(i)–(v) respectively are exactly the
same. Any such deduction can, however, only be taken into account once in terms of either par 5 or
6, or s 10C. The deductions in terms of par 5 or 6 may not exceed the lump sum benefit (par 5(2) and
6(2)).
227
The following table summarises the provisions of retirement fund lump sum benefits:
Retirement fund lump sum benefits

Paragraph 2(1)(a)(i)–(iii):
Amount received as retirement fund lump sum benefit less par 5(1)(a)–(e) or 6(1)(i)–(v) deductions = gross
income in terms of par (e)
Paragraph 2(1)(c):
Amount transferred for the benefit of a person less par 6A deduction = gross income in terms of par (e)
Amount received or accrued Deductions – so much of amounts below as was not previously
allowed as a deduction in terms of the Second Schedule or as an
exemption in terms of s 10C:
Par 5(1)(a)–(e) or 6(1)(i)–(v) deductions (the wordings of the two
paragraphs are the same and therefore only the wording of
par 5(1)(a)–(e) are listed):
Par 2(1)(a)(i): Retirement or death Par 5(1)(a): Own contributions to any fund not deducted in terms of
Par 2(1)(a)(ii): Termination of services s 11F;
Because employer ceases to carry on Par 5(1)(b): Amounts previously transferred to a fund for the benefit
trade or of the person because of an election made after a divorce order
allocation (therefore the transfer was from the minimum individual
Person is redundant because of per- reserve of the person’s former spouse to a fund of which the per-
sonnel reductions son is a member);
Par 2(1)(a)(iii): Commutation of an an- Par 5(1)(c): Amounts deemed to have accrued because an amount
nuity or portion of an annuity for a lump was previously transferred to a fund for the benefit of the person
sum from another fund of which that person is or was a member (there-
fore a transfer was made between two funds of which the same
person was a member and the member was previously taxed on
the transfer due the fact that a par 6(1)(a)(ii) deduction was not
allowed);
Par 5(1)(d): Transfers to a preservation fund of an already taxed
unclaimed benefit; and
Par 5(1)(e): The exempt portion of a public sector pension fund
lump sum in respect of service years before 1/3/1998
l paid into any other fund by a public sector pension fund for the
benefit of the person, or
l transferred into any other fund for the person’s benefit directly
from the fund into which the public sector pension fund paid
the amount into (with effect from 1 March 2018).
Par 2(1)(c): Transfer on or after normal Par 6A: Amount transferred for the benefit of that person from a
retirement age but before retirement pension fund or a provident fund into any retirement annuity fund
date (with effect from 1 March 2018)
Students are advised to keep retirement fund lump sum benefits in a separate
column (column 1 together with severance benefits) in the calculation of the tax-
Please note! able income of a natural person, because the same tax table is applicable to
these types of lump sums. See chapter 7 for complete detail regarding the sub-
total method in the comprehensive framework.
Remember
Although the taxable portion of a retirement fund lump sum benefit must be included in gross
income in terms of par (e) of the gross income definition, the normal tax payable thereon is cal-
culated separately from the normal tax payable on taxable income in column 3. A retirement fund
lump sum benefit is also not taken into account in the calculation of the allowable deductions in
terms of s 11F and 18A (see chapter 7).
228
Application of the cumulative principle to the calculation of tax on a retirement fund lump sum benefit
l the current retirement fund lump sum benefit, and
withdrawal benefits received by or accrued to the person on or after the specified dates in the tax table.
The tax table applicable to the current retirement fund lump sum benefit is used for both the calculations in
step 1 and step 2.
Normal tax payable on current retirement fund lump sum benefit = tax in step 1 less tax in step 2.
The retirement fund lump sum benefit table is set out below:
Taxable income from lump sum benefits Rate of tax
Exceeding R500 000 but not exceeding R0 plus 18% of taxable income exceeding R500 000
R700 000
Exceeding R700 000 but not exceeding R36 000 plus 27% of taxable income exceeding
R1 050 000 R700 000
Exceeding R1 050 000 R130 500 plus 36% of taxable income exceeding
R1 050 000
Example 9.4. Retirement from pension fund

Andile elects to retire from a pension fund on 28 February 2018. A lump sum benefit of R600 000
accrues to him. During his 20 years of service, contributions of R18 600 were not allowed as a
deduction in terms of s 11F. Calculate the amount that must be included in gross income as well
as the normal tax payable thereon.
SOLUTION
Lump sum benefit ..................................................................................................... R600 000
Less: Contributions not previously allowed (par 5(1)(a)) ......................................... (18 600)
Gross income ............................................................................................................ R581 400
Normal tax payable per table 1 above on (R581 400 – R500 000) @ 18% .................. R14 652
Example 9.5. Lump sums from an employer and a fund combined

Okkie van Zyl is 59 years old, a resident of the RSA and has worked for Heights Properties Ltd in
Cape Town as a property manager for the past 25 years.
Okkie elected to retire on 31 December 2017 from Heights Properties Ltd and received the fol-
lowing as a result of his retirement:
l R120 000 as a lump sum from Heights Properties Ltd
l R800 000 as a lump sum from H PF (Heights Properties Ltd requires that all its employees
must be members of H PF)
l R12 000 per month as an annuity from H PF with effect from 1 January 2018.
Since 1 March 2017, Okkie received a cash salary of R15 000 per month from Heights Properties
Ltd.
Okkie owns an investment property since 2014 and he leased it out during the last two years of
assessment for R8 000 per month.
continued
229
Except for the items listed above, Okkie did not have any other income or expenditure for the last
two years of assessment. All his contributions to the PF have been allowed as deductions in the
past.
Calculate the total normal tax payable by Okkie van Zyl for the 2018 year of assessment.
SOLUTION
(The format in chapter 7 is used)
Retirement
fund lump
sum benefit
Other
and
(column 3)
severance
benefit
(column 1)
Salary ....................................................................................................... R150 000
Lump sum from employer (severance benefit because older than
55 years) .................................................................................................. R120 000
Rental income .......................................................................................... 96 000
Retirement fund lump sum benefit .......................................................... 800 000
Annuity ..................................................................................................... 24 000
Taxable income ....................................................................................... R920 000 R270 000
Normal tax determined in terms of the progressive tax table on other R55 009
taxable income (column 3) (calc 1) .........................................................
Less: Primary rebate ................................................................................ (13 635)
Normal tax payable on other taxable income .......................................... R41 374
Normal tax payable on retirement fund lump sum benefit and severance
benefit (column 1) in terms of the applicable table (calc 2)........................... 95 400
Total normal tax payable for the 2018 year of assessment...................... R136 774
Calculation 1 Normal tax on other income
Normal tax on R189 880 ............................................................................................. R34 178
Normal tax on (R270 000 – R189 880) @ 26% ............................................................ 20 831
Total normal tax .......................................................................................................... R55 009
Calculation 2 Tax on retirement fund lump sum benefit and severance benefit
Since the two amounts are received on the same date and the same table applies
in respect of both, only one calculation is done. There is therefore also no
hypothetical amount of tax. The same answer will be obtained if one amount is
taken as being received ‘first’ and a hypothetical tax is claimed against the
‘second’ amount.
On first R700 000 ........................................................................................................ R36 000
On R220 000 (R920 000 – R700 000) @ 27% ............................................................. 59 400
Total normal tax payable............................................................................................. R95 400
9.3.2 Retirement fund lump sum withdrawal benefits (paras 2(1)(b), 4 and 6)
As shown in the table in 9.3, there are two specific events, and one general event that will qualify as
retirement fund lump sum withdrawal benefits.
Awards in terms of a divorce order
The ‘clean-break’ principle means that a retirement fund may deduct any amount, awarded to a non-
member in terms of a divorce order or a maintenance order, from a member’s minimum individual
reserve. The deduction in terms of these orders can be made by the fund from the date on which the
divorce order or maintenance order is granted. Paragraph 2(1)(b)(iA) only applies in the case of an
award in terms of a divorce order. An award in terms of a maintenance order is taxed in terms of
s 7(11) and the Second Schedule does not apply to it (please note that s 7(11) falls outside the tax
examinable pronouncements).
230
The non-member spouse to whom such an award accrues, has a choice between having the award
paid out to him or her, and having it transferred to a fund for his or her benefit. It is the non-member
spouse’s duty to submit the divorce order to the fund. The fund must request the non-member
spouse within 45 days from receiving the divorce order to choose between payment and transfer of
the amount awarded. The non-member spouse must choose within 120 days. The fund must effect
the payment or transfer within 60 days after the non-member spouse has notified them of his or her
choice. If the non-member spouse fails to choose or indicate the fund to which the transfer must be
made within the 120-day period, the fund must pay the amount directly to the non-member spouse 30
days after the 120-day period has expired.
The following summary highlights the differences between reducing the minimum individual reserve
in terms of a maintenance order and reducing the minimum individual reserve in terms of a divorce
order:
Reduce minimum individual Reduce minimum individual

reserve in terms of a maintenance reserve in terms of a divorce order
order
Applicable sections Section 7(11), par (b) definition of Par (e) definition of gross income,
gross income and s 10(1)(u) par 2(1)(b)(iA) and par 6(1)(a)(i) of
the Second Schedule
Taxable in whose hands The member of the minimum The non-member of the minimum
individual reserve individual reserve
(It is also gross income (par (b)) (the spouse to whom the amount
for the non-member but is then was awarded)
also exempt income (s 10(1)(u)))
What is included in income and Amount awarded to the Amount awarded less the applic-
what is ‘remuneration’? non-member plus employees’ tax able par 6 deductions
thereon (calculated taking into
account the tax-on-tax principle in
chapter 10)
Reduce minimum individual re- Reduce minimum individual re-
serve in terms of a maintenance serve in terms of a divorce order
order
Included in which column? Column 3 Column 2 (retirement fund lump
sum withdrawal benefit)
Employees’ tax consequences Fund must apply the tax-on-tax Fund must obtain a directive from
effect as contained in Interpreta- the Commissioner in terms of
tion Note No 89 on Maintenance par 9(3) of the Fourth Schedule.
Orders and the Tax-on-tax Prin- The tax table applicable to a
ciple. The normal progressive tax retirement fund lump sum with-
table of natural persons will be drawal benefit will apply.
applicable (see chapter 10).
Transfer between funds

Paragraph 2(1)(b)(iB) refers to ‘any amount that is transferred for the benefit of a person to a fund
from a fund of which that person is or was a member’. Such transfers normally happen when the
member resigns and leaves the employ of the employer before the retirement date, and then elects
that his or her minimum individual reserve must be transferred to another fund. It is important to note
that the same person must be the member of the two funds between which the transfer is made.
Please remember that this paragraph does not include any transfer of ‘the remainder of a retirement
interest’ as explained in 9.3 to another fund after a member has elected to retire. The election to retire
and to commute a portion of the retirement interest for a lump sum is a retirement fund lump sum
benefit in terms of par 2(1)(a). The transfer of any remainder of the retirement interest of such a
retired person in effect represents annuities, and the Second Schedule is not applicable to annuities.
Other cases
All other amounts received by a person by way of a lump sum benefit in consequence of member-
ship of a fund, except those explained in the six specific events, falls under the general event in
par 2(1)(b)(ii). This is typically when a member withdraws from a fund or resigns from employment
before the retirement date, but does not elect to transfer the minimum individual reserve from that
fund to another fund of which he or she is or was a member, as explained above, for example if a
231
member resigns from employment and elects that his or her minimum individual reserve be paid out
to him or her.
The calculation of the taxable portions of retirement fund lump sum withdrawal benefits, which must
be included in gross income in terms of par (e), can be illustrated as follows:
Retirement fund lump sum withdrawal benefits
Award in terms of Transfer between Other cases (for

a divorce order funds example withdrawal)
(par 2(1)(b)(iA)) (par 2(1)(b)(iB)) (par 2(1)(b)(ii))
less less less
Par 6(1)(a)(i) Par 6(1)(a)(ii) Par 6(1)(b)(i)–(v)
The following table summarises the provisions of retirement fund lump sum withdrawal benefits:
Retirement fund lump sum withdrawal benefits
Paragraph 2(1)(b)
Amount received as retirement fund lump sum withdrawal benefit less par 6(1)(a) or (b) deductions = gross
income
Amount received or accrued Deduction
Paragraph 2(1)(b)(iA): Amounts Paragraph 6(1)(a)(i) and 6(1)(a)(ii) applies in respect of divorce or-
awarded in terms of a divorce ders (par 2(1)(b)(iA)) and transfers between funds (par 2(1)(b)(iB)):
order and deducted from the So much of the benefit that is paid or transferred to the funds listed in
minimum individual reserve of the the table below. The words ‘so much of the benefit’ contemplated in
member par 2(1)(b)(iA) or 2(1)(b)(iB) means so much of the specific lump sum
(The date of accrual is the date on that the taxpayer elected to transfer. This means that the taxpayer’s
which the amount became due application of the funds can lead to a par 6(1)(a)(i) or (ii) deduction.
and payable by the fund
(par 2(2)(a).) Fund from which the Funds to which specific
benefit is received transfer can be made
Paragraph 2(1)(b)(iB): amounts Pension fund Pension fund, Pension preserva-

transferred to a fund for the bene- tion fund, Retirement annuity fund
fit of the person from another fund Pension preservation fund Pension fund, Pension preserva-
of which the person is or was a tion fund, Retirement annuity fund
member
(The date of accrual is the date of Provident fund Pension fund, Pension preserva-
transfer (par 2(2)(b).) tion fund, Provident fund, Provi-
dent preservation fund,
Retirement annuity fund
Provident preservation fund Pension preservation fund, Provi-
dent fund, Provident preservation
fund, Retirement annuity fund
Retirement annuity fund Retirement annuity fund
continued
232
Amount received or accrued Deduction

Paragraph 2(1)(b)(ii): A lump sum Paragraph 6(1)(b) applies in respect of other retirement fund lump
benefit received by or accrued to sum withdrawal benefits (par 2(1)(b)(ii)).
a person from membership of any So much of amounts below as was not previously allowed as a deduc-
fund except a retirement fund tion in terms of the Second Schedule or as an exemption in terms of
lump sum benefit (par 2(1)(a)) or a s 10C:
retirement fund lump sum with-
drawal benefit in terms of Paragraph 6(1)(b)(i): Own contributions to any fund not deducted in
par 2(1)(b)(iA) or 2(1)(b)(iB) (that terms of s 11F;
means all other cases for example Paragraph 6(1)(b)(ii): Amounts previously transferred to a fund for the
withdrawal or resignation) benefit of the person because of an election made after a divorce
order allocation (therefore the transfer was from the minimum individ-
ual reserve of the person’s former spouse to a fund of which the per-
son is a member);
Paragraph 6(1)(b)(iii): Amounts deemed to have accrued because an
amount was previously transferred to a fund for the benefit of the
person from another fund of which that person is or was a member
(therefore a transfer was made between two funds of which the same
person was a member and the member was previously taxed on the
transfer due the fact that a par 6(1)(a)(ii) deduction was not allowed);
Paragraph 6(1)(b)(iv): Transfers to a preservation fund of an already
taxed unclaimed benefit; and
Paragraph 6(1)(b)(v): The exempt portion of a public sector pension
fund lump sum in respect of service years before 1/3/1998
l paid into any other fund by a public sector pension fund for the
benefit of the person, or
l transferred into any other fund for the person’s benefit directly
from the fund into which the public sector pension fund paid the
amount into (with effect from 1 March 2018).
Example 9.6. Paragraph 6(1)(a) and (b) deductions

Nomsa receives a retirement fund lump sum withdrawal benefit of R39 000 on withdrawal from a
pension fund. R12 000 is transferred to a retirement annuity fund. R20 000 of the taxpayer’s own
contributions to the fund have not previously qualified for deduction from his income.
Of the total retirement fund lump sum withdrawal benefit of R39 000, R12 000 is transferred to a
retirement annuity fund. This is a ‘transfer between funds’ in terms of par 2(1)(b)(iB) and a
par 6(1)(a)(ii) deduction of R12 000 (qualifying transfer pension fund to retirement annuity fund)
can be claimed against it. The taxable amount is therefore R12 000 less R12 000 = Rnil.
The R27 000 paid out falls under ‘other’ retirement fund lump sum withdrawal benefit in terms of
par 2(1)(b)(ii). The par 6(1)(b)(i) deduction is available, namely R20 000 contributions not previ-
ously allowed as deductions. The taxable amount is therefore R27 000 less R20 000 = R7 000.
The R7 000 is included in column 2 in terms of par (e) of the gross income definition.
233
Application of the cumulative principle to the calculation of the tax on retirement fund lump sum with-
drawal benefits
l the current retirement fund lump sum withdrawal benefit, and
withdrawal benefits received by or accrued to the person on or after the specified dates in the tax table.
The tax table applicable to the current retirement fund lump sum withdrawal benefit is used for both the cal-
culations in step 1 and step 2.
Normal tax payable on current retirement fund lump sum withdrawal benefit = tax in step 1 less tax in step 2.
The retirement fund lump sum withdrawal benefit table is set out below:
Taxable income from RLWB Rate of tax
Exceeding R25 000 but not exceeding R660 000 18% of taxable income exceeding R25 000
Exceeding R660 000 but not exceeding R990 000 R114 300plus 27% of taxable income exceeding
R660 000
Exceeding R990 000 R203 400 plus 36% of taxable income exceeding
R990 000
Students are advised to keep retirement fund lump sum withdrawal benefits in a
separate column (column 2) in the calculation of the taxable income of a natural
Please note! person, because a different tax table applies to this type of lump sum benefit. See
chapter 7 for complete detail regarding the comprehensive framework and the
subtotal method.
Example 9.7. Retirement fund lumps sum benefit, retirement fund lump sum withdrawal
benefit and severance benefit
Morné (55 years, resident) was left paralysed after a car accident on his birthday on 6 March
2017. He was married out of community of property to Marieke and was divorced on 17 March
2017. Their 23-year-old daughter, Melissa, is a full-time student at University of Stellenbosch.
Morné is an employee of Alfa Ltd.
The following information is relevant to the 2018 year of assessment:
Note
Cash salary .................................................................................................. R140 000
Lump sum from Alfa Ltd ............................................................................... 1 480 000
Award in terms of divorce order................................................................... 2 800 000
Gross lump sum benefit accruing from pension fund .................................. 3 550 000
Air ticket ....................................................................................................... 4 15 000
Pension fund contributions........................................................................... 5 11 200
Retirement annuity fund contributions ......................................................... 6 79 500
Contributions to a medical scheme and medical expenses ........................ 7 58 350
Donation to Public Benefit Organisation ...................................................... 8 60 000
Notes
(1) Morné elected to retire on 28 February 2018. Alfa Ltd paid a lump sum of R480 000 (pre-tax)
to Morné on 1 February 2018. Alfa Ltd must withhold employees’ tax at a rate of 22% on the
taxable portion of the lump sum in terms of the directive from SARS.
continued
234
(2) In terms of the divorce order, Marieke had to pay an amount of R800 000 to Morné out of her
pension fund. Morné elected that R100 000 must be paid into his pension fund, R200 000 into
his retirement annuity fund and that the rest must be paid out to him. The minimum individual
reserve of Marieke was reduced by R800 000 on 1 April 2017, The R300 000 was transferred
to Morné’s chosen funds, and the R500 000 paid out to him on the same date.
(3) The pension fund paid out the lump sum benefit on 28 February 2018. Contributions of
R15 000 were not allowed as s 11(k) or s 11F deductions up and until 28 February 2017.
(4) Alfa Ltd bought an air ticket at a cost of R15 000 for Morné’s best friend on 1 May 2017 so
that he could come to assist Morné. Alfa Ltd and Morné agreed that Morné would write a de-
tailed manual about the complicated processes of his work in exchange.
(5) Morné made a monthly contribution of 8% of his cash salary to the pension fund (his employ-
er made no contributions).
(6) Alfa Ltd contributed R1 000 to a retirement annuity fund monthly for the benefit of Morné.
Morné also contributed R67 500 (from the lump sum received from Alfa Ltd, refer note 1) to
the retirement annuity fund.
(7) Alfa Ltd monthly paid Morné’s contributions of R1 200 to the medical scheme up and until
28 February 2018. Morné is the main member; Marieke and Melissa are not registered as de-
pendants of Morné in terms of the medical scheme. Morné paid non-refundable hospital ex-
penses of R29 450 and also paid all Melissa’s doctor’s expenses and prescribed medicine
amounting to R14 500 during the year. On 28 February 2018, medical doctors were not yet
willing to make a prognosis that Morné’s paralysis would continue longer than a year.
(8) Alfa Ltd made a donation of R60 000 to a Public Benefit Organisation on behalf of Morné in
terms of a payroll giving scheme and obtained the required s 18A certificate in respect of the
donation.
Calculate Morné’s taxable income and the normal tax payable by him for the 2018 year of as-
sessment. Morné has never received a lump sum or lump sum benefit before.
SOLUTION
(The format of chapter 10 is used) Column 1 Column 2 Column 3
Retirement
Retirement
lump sum
lump sum
Calc benefit and Other
withdrawal
severance
benefit
benefit
Cash salary ..................................................... R140 000
Lump sum from Alfa Ltd (par (d)) ................... 1 R480 000
Divorce order (par (e)) .................................... 2 R500 000
Lump sum benefit from pension fund (par 3 535 000
(e)) ..................................................................
Air ticket .......................................................... 4 15 000
Retirement annuity fund contributions by
Alfa Ltd (par 2(l) and par 12D of the Seventh
Schedule) ........................................................ 12 000
Contributions to medical scheme by Alfa Ltd
(par 2(j) and par 12A of the Seventh
Schedule) ........................................................ 14 400
Subtotal 1 (Gross income) .............................. R181 400
Less: Contributions to retirement funds ......... 5 (49 885)
Subtotal 2 ........................................................ R131 515
Less: Section 18A donation ........................... (13 152)
Limited to 10% × R131 515 = R13 152
(Therefore R60 000 limited to R13 152).
The excess of R46 848 (R60 000 – R13 152)
can be carried forward to the 2019 year of
assessment.
Taxable income............................................... R1 015 000 R500 000 R118 363
Calculations
1 This is a severance benefit because Morné is 55 years old and the requirement of par (a) of
the definition of severance benefit is met.
continued
235
2 Amount in terms of divorce order (retirement fund lump sum withdrawal benefit
par 2(1)(b)(iA)) ....................................................................................................... R800 000
Less: Par 6(1)(a)(i)(aa): Qualifying transfers from a pension fund to a pension
fund and a retirement annuity fund .............................................................. (300 000)
Gross income (par (e)) ............................................................................... R500 000
3 Lump sum benefit received (retirement fund lump sum benefit par 2(1)((a)(i)) ..... R550 000
Less: Par 5(1)(a): Contributions to retirement funds not previously allowed ....... (15 000)
Gross income (par (e)) ........................................................................................... R535 000
4 The payment of the air ticket is in exchange for a service rendered by Morné and
although the ticket is for his friend, par 16 of the Seventh Schedule includes it as
a fringe benefit in Morné’s hands. Par (c) can also be applied.
5 Contributions to retirement funds = R90 700 (R11 200 + R12 000 + R67 500)
In terms of s 11F the deduction limited to the lesser of
l R350 000; and
– remuneration of R181 400, and
– taxable income of R 181 400
therefore: 27,5% × R181 400 = R49 885; and
l the taxable income before this deduction = R181 400
The lesser amount is therefore R49 885.
The non-deductible contributions of R40 815 (R90 700 – R49 885) must be carried
forward to the 2019 year of assessment as ‘contributions not previously deducted’.
6 Because the medical doctors were not willing to make a prognosis that Morné’s
paralysis would continue longer than a year, he does not have a ‘disability’.
Total contributions (R1 200 × 12) (s 6A(4)(b)) ....................................................... R14 400
Less: 4 × s 6A medical tax credit 4 × (R303 × 12) ................................................ (14 544)
Excess.................................................................................................................... nil
Add: Hospital expenses ...................................................................................... 29 450
Melissa’s expenses ..................................................................................... 14 500
R43 950
Less: 7,5% of R118 363 ....................................................................................... (8 877)
R35 073
Section 6B medical tax credit 25% × R35 073 ...................................................... R8 768
The normal tax on the lump sums is calculated in date sequence. Therefore: the re-
tirement fund lump sum withdrawal benefit on 1 April 2017, then the severance benefit
on 1 February 2018 and lastly the retirement fund lump sum benefit on 28 February
2018.
Normal tax on divorce order retirement fund lump sum withdrawal benefit of R500 000
Taxable amount = R500 000
Normal tax = (R500 000 – R25 000) × 18% .......................................... R85 500
Normal tax on severance benefit of R480 000
Taxable income = R980 000 (R480 000 severance benefit +
R500 000 retirement fund lump sum withdrawal benefit)
Normal tax = R36 000 + (27% × R280 000 (R980 000 – R700 000)).... R111 600
Less: Hypothetical tax on R500 000 retirement fund lump sum
withdrawal benefit in terms of severance benefit table
On R500 000 .................................................................................. (Rnil)
R111 600
Normal tax on pension fund retirement fund lump sum benefit of R535 000
Taxable amount = R1 515 000 (R535 000 RLB + R500 000 retirement fund lump
sum withdrawal benefit + R480 000 severance benefit)
Normal tax = R130 500 + (36% × R465 000 (R1 515 000 – R1 050 000)).................. R297 900
Less:
Hypothetical tax on R980 000 (sum of retirement fund lump sum withdrawal benefit
and severance benefit) in terms of retirement fund lump sum benefit table
(hypothetical tax is the same because actual tax was calculated in terms of the
same table) ............................................................................................................. (111 600)
R186 300
continued
236
Calculate total normal tax payable

Tax determined on taxable income in column 3 per table: R118 363 @ 18%............ R21 305
Less: Primary rebate .................................................................................................. (13 635)
Normal tax payable on taxable income in column 3 R7 670
Add: Normal tax on retirement fund lump sum withdrawal benefit .......................... 85 500
Normal tax on severance benefit .................................................................... 111 600
Normal tax on retirement fund lump sum benefit ............................................ 186 300
Less: Section 6A medical tax credit (R303 × 12) ..................................................... (3 636)
Section 6B medical tax credit ......................................................................... (8 768)
Total normal tax payable R378 666
9.3.3 Public sector pension funds

A public sector pension fund is a fund referred to in paras (a) or (b) of the definition of ‘pension fund’
in s 1 (for example the Government Employees Pension Fund or GEPF). The Act contains specific
provisions relating to the taxation of public sector pension fund benefits.
9.3.3.1 Transfers to provident fund (par (eA) definition of gross income)
Annuities paid by public sector pension funds are included in gross income (par (a) definition of gross
income in s 1). By converting a fund of this nature to a provident fund, or by the member’s transferring
to a provident fund, tax could possibly be avoided on a portion of the benefits. This is because provi-
dent funds permit the full retirement interest to be taken as a lump sum. Paragraph (eA) will also apply
to public sector provident funds with effect from 1 March 2018.
A member who effectively remains in the employment of the same employer in the public sector, or
the dependants or nominees of a deceased member, must include an amount in gross income
(par (eA)). The amount included is equal to two-thirds of
l an amount transferred from a public sector pension fund to a public or private sector provident
fund, or
l an amount converted for the benefit or ultimate benefit of the member or the dependants or nom-
inees of a deceased member, where a public sector pension fund is wholly or partially converted,
by way of an amendment to its rules or otherwise, to a provident fund, or
l an amount payable to a member or utilised to redeem a debt of the member.
In the case of a conversion, the amount is deemed to have accrued to the member or the depend-
ants or nominees of a deceased member. If the former spouse of a member receives the amount in
terms of a divorce order, the amount still accrues to the member (par (eA)(iii)(bb)). The effect of
par (eA) is particularly severe, in that amounts included in gross income under this provision
l are not subject to the Second Schedule to the Act, and therefore do not qualify for any deduc-
tions in terms of the Second Schedule, and
l also do not qualify for the rating concession under s 5(10).
The amount included in gross income in terms of par (eA) is deemed to be remuneration for employ-
ees’ tax purposes even though no amount is actually paid to the employee when an amount is trans-
ferred from one fund to another or when a fund is converted. The employer is required to obtain a
directive from the Commissioner as to the amount of employees’ tax to be deducted or withheld from
the member’s salary (par 9(4) Fourth Schedule).
9.3.3.2 Lump sums from a public sector pension fund (par 2A)
Public sector pension fund benefits in general have only become subject to tax since 1998. This can
be illustrated with the following timeline:
PSPF benefits tax-free PSPF benefits taxable
1 March 1998
With the above general principle in mind, the details and formulae that follow below become much
easier to understand.
Remember
The actual lump sum benefit received from a public sector pension fund as a retirement fund lump
sum benefit or retirement fund lump sum withdrawal benefit is not taken into account in calculating
the taxable amount. An amount determined in accordance with a formula in par 2A is deemed the
lump sum benefit. The par 5 or par 6 deductions must then be deducted.
237
The effect of the formula is to separate the actual lump sum benefit into two distinct portions and to
deem only part of it to be taxable:
l The amount attributable to pensionable service after 1 March 1998. This amount is the taxable
portion. It is reduced by the deductions available for private sector funds (par 5(1)(a)–(e)) (see
9.3.1) in the case of death or retirement. In the case of withdrawal or resignation, it is reduced by
the amount determined in terms of par 6(1)(b)(i)–(v) (see 9.3.2). The amount determined using
the formula will be subject to tax only under par (e) of the definition of ‘gross income’ in s 1 if
there is a balance remaining after the deduction of the aforementioned amounts.
l The amount attributable to pensionable service prior to 1 March 1998. This amount retains the
tax-free status it had before 1998.
The formula is expressed in par 2A as:
B
A= ×D
C
Very simply stated, the formula equates to the following:
Years’ service after 1 March 1998
Potential taxable amount (A) = × Lump sum
Total years’ service
In this formula
A is the deemed lump sum benefit.
B is
– the number of completed years of employment of the taxpayer after 1 March 1998, or
– the number of completed years after 1 March 1998 during which the taxpayer had, until the
date of accrual of any benefit, been a member of any public sector fund
C is
– the total number of completed years of employment taken into account, or
– the number of completed years during which the taxpayer had, until the date of accrual of any
benefit, continuously been a member of any public sector fund
D is the actual lump sum benefit payable.
The amount represented by symbol A is deemed to be the lump sum and qualifies for deductions in
terms of par 5(1)(a) – (e) and par 6(1)(b)(i) – (v).
Example 9.8. Retirement from a PSPF

Amber taxpayer retires as member of a Government pension fund on 28 February 2018. He re-
ceives a lump sum of R1 500 000. He completed 41 years of service and the number of com-
pleted service years after 1 March 1998 is 20 years. Contributions of R10 800 were not pre-
viously allowed as a deduction in terms of s 11(k) or s 11F. Calculate the amount that must be
included in gross income as well as the normal tax payable thereon.
SOLUTION
Apply the formula
B = 20 years
C = 41 years
D = R 1 500 000
A = B/C × D
= 20/41 × R1 500 000
= R731 707
Deemed lump sum benefit............................................................................................. R731 707
Less:
Contributions not previously allowed (deductible in full – not apportioned on the
same basis as the lump sum that was received) ........................................................... (10 800)
Gross income ................................................................................................................. R720 907
Normal tax payable = R36 000 + tax on R20 907 (R720 907 – R700 000) @ 27%
(see 9.3.1 for table) ........................................................................................................ R41 645
238
9.4 Exemption of compulsory annuities (s 10C exemption))

Section 10C provides for an exemption in respect of ‘compulsory annuities’, which are defined as the
remainder of the retirement interest of a member of a pension fund, a pension preservation fund or a
retirement annuity fund payable in the form of compulsory annuities (meaning the two-thirds portion
that cannot be commuted for a lump sum) (s 10C(1)). Taking compulsory annuities will only apply to
members of provident funds with effect from 1 March 2019.
Section 10C(2) allows an exemption equal to so much of the person’s own contributions to any pen-
sion fund, provident fund and retirement annuity fund that did not rank for a deduction against the
person’s income in terms of s 11F or has not previously been
l allowed to the person as a deduction in terms of the Second Schedule (meaning in terms of
par 5(1)(a) or 6(1)(b)(i)), or
l allowed as an exemption in terms of s 10C(2).
Therefore, following the normal reduction order in the calculation of taxable income (gross income
less exemptions less deductions), the unclaimed balance carried forward from the 2017 year of
assessment, is applied or used in the following sequence during the 2018 year of assessment:
l firstly to claim a deduction in terms of par 5(1)(a) or 6(1)(b)(i) of the Second Schedule when the
par (e) gross income amount in respect of any applicable lump sum benefit received during the
2018 year of assessment is calculated, and
l secondly to claim an exemption in terms of s 10C against any ‘compulsory annuities’ received
during the 2018 year of assessment, and
l lastly any remaining unclaimed balance will be added to the current contributions made during
the 2018 year of assessment before the deduction terms of s 11F is calculated.
The s 10C(2) exemption is limited to the total amount of compulsory annuities received in a specific
year of assessment. The exemption is only available in respect of a natural person’s own non-deduct-
ible contributions and will not be available to subsequent holders of the annuity.
The unclaimed balance can be applied against any lump sum or any annuities received from any
retirement fund. The aforementioned application is therefore made on a ‘first-come, first-use’ basis.
Example 9.9.
At the end of the 2017 year of assessment, retirement annuity fund current contributions amount-
ing to R200 000 were not previously allowed as a deduction in the calculation of Jabu’s taxable
income (the unclaimed balance).
Jabu contributed R5 000 per month to his employer’s pension fund until 30 September 2017.
Jabu elected to retire in October 2017 and his total retirement interest from his employer’s pen-
sion fund amounted to R300 000. Jabu received a lump sum benefit of R100 000 (before any
employees’ tax was deducted) on 31 October 2017 and an annuity of R5 000 per month from 31
October 2017.
Explain the tax consequences for Jabu in respect of the amounts he received from the pension
fund during the 2018 year of assessment.
SOLUTION
Jabu must include the taxable amount in respect of the retirement fund lump sum benefit from
the pension fund in his gross income in terms of par (e) of the definition of gross income. Jabu
can deduct R100 000 of the unclaimed balance against the lump sum benefit in terms of
par 5(1)(a).The taxable lump sum benefit will therefore be R0 (R100 000 – R100 000).
Jabu must include the R25 000 (R5 000 × 5) compulsory annuities received in his gross income
in terms of par (a) of the definition of gross income. Jabu will be entitled to a s 10C exemption.
The unclaimed balance of Jabu’s retirement annuity fund contributions currently amounts to
R100 000 (R200 000 – R100 000 (used in terms of par 5(1)(a)). A s 10C exemption of R25 000
can be claimed.
The unclaimed balance now amounts to R75 000 (R200 000 – R100 000 – R25 000). This bal-
ance is deemed to be current contributions made to the retirement annuity fund during the 2018
year of assessment. This R75 000 is therefore added to the R35 000 (R5 000 × 7) current contri-
butions to the pension fund made during the 2018 year of assessment (s 11F(3)). The deduction
in terms of s 11F(2) is then calculated as the lesser of the three normal limits of the s 11F deduc-
tion (and is, as always, limited to the actual contributions of R110 000).
239
A natural person’s tax returns contain the information regarding the contributions made to retirement
funds, and the deductions granted in terms of s 11F. SARS keeps a record of the unclaimed contribu-
tions made by natural persons. When a retirement fund (as employer) applies for a tax directive (in
terms of par 9(3) of the Fourth Schedule) regarding the employees’ tax to be withheld in respect of a
lump sum, SARS can take the balance of unclaimed contributions into account. The unclaimed bal-
ance is not taken into account when an employer is calculating employees’ tax on a monthly basis.
An employer can only take information known to him into account. Please see chapter 10 for a more
detailed discussion about how an employer will calculate the amount of contributions to retirement
funds to be taken into account in terms of par 2(4) of the Fourth Schedule.
1. Any contributions to any retirement fund made on or after 1 March 2015

that were not previously allowed as a deduction or exemption, as
discussed above, must be included in the property of the estate if the
person died on or after 1 January 2016 (s 3(2)(b) of the Estate Duty Act).
Please note! 2. The definition of ‘remuneration’ in the Fourth Schedule includes amounts
that are ‘income’. It is submitted that the information regarding the s 10C
exemption of a specific member will not be available to the fund when
employees’ tax must be calculated in respect of annuities paid. The s 10C
exemption can therefore not be taken into account by the fund in the
calculation of such employees’ tax.
9.5 Rating concession (average rating formula) (s 5(10))

The average rating formula was amended with effect from 1 March 2011 and the new average rating
formula applies to the following types of income (referred to as ‘irregular income’):
l ‘special remuneration’ paid to mineworkers as members of so-called proto-teams (s 5(9); see 9.3.1)
l excess income derived by farmers on the disposal of plantations (par 15(3) of the First Schedule;
see chapter 22)
l excess income derived by farmers whose sugar cane fields have been damaged by fire (par 17
of the First Schedule; see chapter 22)
l excess of taxable farming income over the average farming income determined for that year in
terms of par 19(2) of the First Schedule when the provisions of par 19(1) of the First Schedule
apply (see chapter 22).
If a taxpayer’s taxable income in a particular year of assessment includes any of the above amounts,
the normal tax (excluding tax on any lump sum benefits or severance benefits) payable by the tax-
payer on B, before the deduction of any rebates, is calculated in accordance with the formula:
A
Y = × B
B+D–C
All the elements in this formula are defined in s 5(10) and should be studied in detail before attempt-
ing any practical examples. In short, the elements in the formula have the following meanings:
Y = amount of normal tax to be determined
A = normal tax (before rebates) on B + D – C (calculated in terms of the progressive tax table)
B = total taxable income for the year (excluding lump sum benefits from funds and from an employer)
C = the sum of the irregular income above included in taxable income
D = so much of any current contribution to any pension fund, provident fund or retirement annuity
fund as is allowable as a deduction under s11F solely by reason of the inclusion of the irregular
income above in the taxpayer’s income.
The proviso to s 5(10) states that the average rate may not be less than the lowest scale in the pro-
gressive table (namely 18%).
9.5.1 Member of a proto-team (s 5(9))

Section 5(9) defines the term ‘special remuneration’ as
l an amount received by or accrued to a mineworker over and above his normal remuneration and
regular allowances, and
240
l any regular allowance for special services rendered by him (otherwise than in the course of his
normal duties) in combating any fire, flood, subsidence or other disaster in a mine, in rescuing
persons trapped in a mine or in performing any hazardous task during an emergency in a mine if
– such services are rendered by him as a member of a team recognised by the management of
the mine, and
– the members of the team have been appointed for the purpose of rendering such services.
Any special remuneration included in the taxpayer’s income is, together with any other receipts or
accruals that are subject to the rating concession, represented by item ‘C’ in the formula in s 5(10)
(s 5(10)(d)(i)).
Remember
The rating formula (s 5(10)) is still applicable to ‘special remuneration’ as defined for years of
assessment commencing on or after 1 March 2011.
Example 9.10. Retirement benefits, special remuneration and the average rating
formula
Lerato elected to retire from employment on 31 August 2016, the day after he celebrated his 60th
birthday. His income and deductions for the year of assessment ended 28 February 2018 were
as follows:
Salary (March to August 2017) ..................................................................................... R90 000
Lump sum gratuity received from his employer on his retirement
on 31 August 2017 (severance benefit) ....................................................................... 50 000
Retirement fund lump sum benefit on commutation of annuities from pension fund
on 31 August 2017 ........................................................................................................ 542 500
Special remuneration received as a member of a proto-team ...................................... 25 000
Pension fund contributions (March to August 2017) ..................................................... 6 750
Capital gain (proceeds less base cost) ........................................................................ 60 000
Lerato had never previously received any lump sum benefits. He had been a member of the pen-
sion fund for 35 years, and all of his contributions to the fund had previously been allowed as
deductions for tax purposes. His taxable income for the previous year of assessment was
R124 000, including taxable capital gains of R4 000.
Calculate the normal tax payable by Lerato for the year of assessment ended 28 February 2018.
SOLUTION
(The format in chapter 7 is used)
Retirement Other
fund lump
sum benefit
and
severance
benefit
Calculate taxable income:
Salary .......................................................................................................... R90 000
Lump-sum gratuity (severance benefit) ...................................................... R50 000
Retirement fund lump sum benefit ............................................................. 542 500
Special remuneration received as a member of a proto-team .................... 25 000
Gross income .............................................................................................. R115 000
Add: Taxable capital gain of R8 000 (40% × R20 000 (R60 000 –
R40 000 annual exclusion)) ........................................................................ 8 000
Subtotal 1 .................................................................................................... R123 000
Less: Deductions:
Contributions to retirement fund (lesser of R350 000; 27,5% of the higher
of remuneration (R90 000) and taxable income (R123 000), therefore
27,5% × R123 000 = R33 825; and R115 000. Therefore R33 825, limited
to the actual contributions of R6 750)) ........................................................ (6 750)
Taxable income........................................................................................... R592 500 R116 250
continued
241
The normal tax on the retirement fund lump sum benefit and severance benefit are calculated in
terms of a separate table (see 9.4.1). Since both the lump sums are received on the same day
and the same table applies to both, only one calculation is done. The tax on the taxable amount
of R592 500 is calculated at 18% in terms of that table and the normal tax payable thereon
amounts to R16 650 ((R592 500 – R500 000) × 18%).
The average rating formula is applied in respect of the special remuneration.
A
Y = × B
B+D–C
Where: A = normal tax on B + D – C (R91 250 (R116 250 – R25 000)) ..................... R16 425
B = total taxable income (excluding retirement fund lump sum benefit and 116 250
severance benefit) ...................................................................................
C = special remuneration as a member of a proto team ................................ R25 000
D = retirement annuity fund contribution on lump sum .................................. Rnil
Y = R16 425/(R116 250 – R25 000) × R116 250 = R20 925
Less: Primary rebate ...................................................................................................... (13 635)
Normal tax payable on taxable income excluding retirement fund lump sum R7 290
benefit and severance benefit ..............................................................................
Add: Normal tax payable on retirement fund lump sum benefit and severance 16 650
benefit ...................................................................................................................
Total normal tax payable....................................................................................... R23 940
242
10 Employees’ tax
Linda van Heerden

l demonstrate knowledge of the Fourth Schedule by calculating the employees’ tax
liability of a taxpayer in a case study
l identify the tax implications of labour brokers and personal service providers, and
to apply it in a practical case study or a theoretical advice question.
Contents
Page
10.1 Introduction ..................................................................................................................... 243
10.2 Remuneration (par 1)...................................................................................................... 245
10.2.1 Fringe benefits .............................................................................................. 249
10.2.2 Directors’ fees ............................................................................................... 250
10.2.3 Right to acquire shares (par 11A)................................................................. 250
10.2.4 Annuities and royalties .................................................................................. 251
10.3 Employee (par 1) ............................................................................................................ 251
10.4 Employer (par 1) ............................................................................................................. 252
10.5 Employees’ tax (paras 2, 9 and 11) ............................................................................... 252
10.6 Standard Income Tax on Employees (SITE) (par 11B(2)).............................................. 257
10.7 Part-time, casual and temporary employees ................................................................. 257
10.8 Independent contractors , labour brokers and personal service providers (par 1) ....... 258
10.8.1 Independent contractors (definition of remuneration:
exclusion in par (ii)) ....................................................................................... 258
10.8.2 Labour brokers (paras 1 and 2(5)) .............................................................. 259
10.8.3 Personal service providers (par 1)............................................................... 261
10.9 Directors of private companies (par 11C) ...................................................................... 261
10.10 Directors of public companies (par 1) ........................................................................... 261
10.11 Duties of an employer..................................................................................................... 262
10.11.1 Registration (par 15) ..................................................................................... 262
10.11.2 Obligation to deduct and pay over tax (paras 2, 5, 6 and 7) ....................... 262
10.11.3 Irregular remuneration (par 9(3)) .................................................................. 263
10.11.4 Directives to employer (par 11) .................................................................... 263
10.11.5 Records (par 14(1)) ...................................................................................... 263
10.11.6 Annual returns (paras 14(3) and (6)) ............................................................ 264
10.11.7 Employees’ tax certificates (par 13) ............................................................. 264
10.12 The Employment Tax Incentive Act, 2013 ...................................................................... 264
10.13 Skills Development Levy and Unemployment Insurance Fund ..................................... 266
10.1 Introduction
Except where otherwise stated, all references to paragraph numbers in this chapter are references to
the Fourth Schedule.
In terms of the Fourth Schedule to the Act (par 2(1) of the Fourth Schedule), employees’ tax is with-
held monthly from ‘remuneration’ paid or payable by an ‘employer’ to an ‘employee’. The definitions
of ‘remuneration’, ‘employer’ and ‘employee’ are interdependent. The definition of ‘remuneration’ is
the central definition that drives the application and relevance of the other two definitions. This is
because both the definitions of ‘employee’ and ‘employer’ require that an amount of ‘remuneration’ is
either received or paid. If an amount of ‘remuneration’ is paid, the person paying it becomes an
243
‘employer’ and if it is received, the person receiving it becomes an ‘employee’. The definitions of the
three terms are discussed in 10.2, 10.3 and 10.4 respectively.
The employer must pay the employees’ tax withheld to the Commissioner within seven days after the
end of the month during which it was withheld (par 2(1) of the Fourth Schedule). A monthly employer’s
declaration (EMP 201) must accompany the payment to SARS. The office of SARS maintains an ac-
count for each employer, to which the monthly payments are credited. At the end of the year of assess-
ment, after employees’ tax reconciliation (EMP 501 reconciliation) of the employer has been made, the
total employees’ tax withheld from a specific employee’s remuneration can be identified and quantified.
Employers must also submit a reconciliation for the six-month period 1 March to 31 August to SARS.
The employer must also deduct a compulsory Skills Development Levy and a compulsory contribution
to the Unemployment Insurance Fund monthly and must remit the amounts on which the aforemen-
tioned are based to SARS with the monthly EMP 201 (see 10.13).
The employee’s normal tax payable is reduced by the employees’ tax that has been deducted from
his remuneration during the year. Employees’ tax is therefore not an additional tax but merely upfront
payments of the normal tax payable on remuneration earned. See 10.11.3 for directives which must
be obtained in terms of par 9(3), and 10.7 for the fixed rate for temporary employees.
Calculation of employees’ tax
Remuneration (per month)

(Separate per employer for each employee)
(Def in par 1 of Fourth Schedule – see 10.2)
Includes:
14 types of income
16 specific inclusions
4 specific exclusions
Annual payment separately
Less:
Par 2(4)(a)–(f) deductions
(See 10.5)
Balance of
remuneration
(BoR)
Annual equivalent of Annual equivalent of

BoR (excluding annual BoR plus annual
payment) payment (see 10.5)
Tax per table after Tax per table after

rebates and the rebates and the Total employees’
PLUS =
s 6A and 6B(3)(a)(i) s 6A and 6B(3)(a)(i) tax payable
medical tax credits medical tax credits
(par 9(6)) (par 9(6))
=A =B
A × 1/12 = month’s less: A (see left)
employees’ tax = Tax on annual pay-
ment
244
10.2 Chapter 10: Employees’ tax
10.2 Remuneration (par 1)

The definition of ‘remuneration’ does not per se require that the amount must be paid by an employer
to an employee, but specifies specific types of amounts payable as well as a list of specific inclu-
sions and exclusions. An amount that is not ‘remuneration’ as defined is not subject to employees’
tax. The definition of ‘remuneration’ is therefore fundamental to the whole issue of employees’ tax,
and it is therefore the starting point of this discussion.
‘Remuneration’ is defined in par 1 as an amount of income that is paid or is payable to a person by
way of any
l salary, leave pay, wage, overtime pay, bonus, gratuity, commission, fee, emolument, pension,
superannuation allowance, retiring allowance or stipend (salary or study allowance of a minister)
l whether in cash or otherwise, and
l whether or not for services rendered.
An amount must therefore be ‘income’ as defined in s 1 before it can constitute remuneration. Ac-
cordingly, the remuneration must be gross income in the nature of income, as opposed to capital,
and it must also not be exempt in terms of any of the provisions of s 10. Section 10 provides for the
following relevant exemptions (these amounts are therefore not remuneration):
l uniforms (s 10(1)(nA))
l transfer costs (s10(1)(nB))
l section 8B and 8C share schemes ((ss 10(1)(nC),10(1)(nD) and 10(1)(nE))
l remuneration in specific cases (s 10(1)(o)), and
l study bursaries (s 10(1)(q)).
Apart from the aforementioned general part of the definition of ‘remuneration’, there are also specific
inclusions and exclusions discussed below. Non-residents will only be subject to employees’ tax on
remuneration earned from a source within the Republic (see 10.3).
The definition of ‘remuneration‘ refers to various sections in the Act. The following table summarises
the specific inclusions and exclusions in the definition of ‘remuneration’:
Normal tax Employees’ tax

Paragraph in the Amounts specifically excluded
Section in the Type of remuneration specifically
definition of from the definition of
Act included
‘remuneration’ ‘remuneration’ in par 1
Par (a) of ‘gross Par (a) Annuities, an ‘annuity amount’ in Government pensions and grants
income’ in s 1 s 10A(1) and living annuities under the Aged Persons Act, the
received Blind Persons Act, the Disability
Grants Act or s 89 of the Chil-
dren’s Act (exclusion in par (iii) of
‘remuneration’)
An annuity under a divorce order
or decree of judicial separation or
under an agreement of separa-
tion (exclusion in par (viii) of
‘remuneration’)
Par (c) of ‘gross Par (a) Amounts received for services Travel allowances, subsistence
income’ in s 1 rendered or to be rendered allowances and other allowances
(including a voluntary award) (in referred to in s 8(1) (see par (bA),
terms of par 2(1B) the em- (c) and (cA) of the definition of
ployees’ tax on variable remune- ‘remuneration’ for special rule)
ration must be deducted on the Fringe benefits to which par (i)
date of payment) applies (see par (b) of the def-
inition of ‘remuneration’ for
special rule)
An amount paid or payable to an
independent contractor in re-
spect of services rendered or to
be rendered (see 10.8.1)
(exclusion in par (ii) of ‘remune-
ration’)
continued
245

Act included
Par (cA) of Par (a) A restraint of trade payment
‘gross income’ received by a
in s 1 l LB who does not have an
exemption certificate, or
l PSP
Par (cB) of Par (a) A restraint of trade payment
‘gross income’ in received by a natural person in
s1 respect of or by virtue of
l employment or the holding of
any office
l any past or future employ-
ment, or the holding of an
office
Par (d ) of ‘gross Par (a) The gross lump sum received In terms of the Guide for Em-
income’ in s 1 from an employer who is not a ployers in respect of Employees’
retirement fund (irrespective Tax (PAYE-GEN-01-G11) any
whether it is a severance benefit payment of retained leave is a
or not) payment in respect of services
rendered and does not form part
of a lump sum benefit. Such
payment must be treated similar
to a bonus for employees’ tax
purposes (and is also seen as
variable remuneration)
Par (e) of ‘gross Par (a) The net taxable amount of a retire-
income’ in s 1 ment fund lump sum benefit and
retirement fund lump sum with-
drawal benefit received from
retirement funds (see chapter 9)
Par (eA) of Par (a) In the case of the conversion
‘gross income’ from a Public Sector Pension
in s 1 Fund to a private or public provi-
dent fund, two thirds of an
amount
l transferred from the Public
Sector Pension Fund to the
private or public provident
fund
l converted from a right to an
annuity to a right to a lump
sum
l paid to a member or used to
redeem a debt
Par (f ) of ‘gross Par (a) An amount received in commuta-
income’ in s 1 tion of an amount due under a
contract of employment or service
Par (i ) of ‘gross Par (b) The cash equivalent of any fringe Right of use of a motor car (par 7
income’ in s 1 benefit and gains in terms of s 8A of the Seventh Schedule – see
(also see 10.2.3) par (cB) of the definition of ‘remu-
neration’ for the special rule in this
regard)
No employees’ tax need to be
deducted from benefits that are
exempt income (for example
uniform allowances and transfer
costs). The value of the benefit
must be shown on the IRP 5
continued
246

Act included
Section 8 Par (bA) An allowance or advance includ- A travel allowance, subsistence
General ed in taxable income under allowance or an allowance grant-
s 8(1)(a)(i) (for example computer ed to a holder of public. (See
allowances and entertainment par (cA), proviso to par (bA)((ii)
allowances). The full allowance and par (c) of ‘remuneration’ for
must be shown on the em- the special rule in this regard)
ployee’s IRP 5 Qualifying reimbursive allowances
in terms of s 8(1)(a)(ii) (exclusion
in par (vi))
Section 8 Proviso to A subsistence allowance re- Employees’ tax is not withheld
Subsistence par (bA)(ii) ceived but the employee does from a subsistence allowance.
allowance not The total amount of the allowance
l spend a night away from his must, however, be shown on the
usual place of residence in employee’s IRP 5, irrespective of
the Republic before the last whether the allowance exceeds
day of the following month, or the deemed cost as determined
l pay the allowance back to his in s 8(1)(c)
employer,
is deemed to be an amount paid
for services rendered in the fol-
lowing month (therefore it is seen
as a par (c) amount and not as a
subsistence allowance in terms of
s 8)
Section 8 Public Par (c) 50% of an allowance given to the
officer holder of a public office to enable
him to defray expenditure incur-
red in connection with his public
office The full allowance (100%)
must, however, be shown on the
employee’s IRP 5
Section 8 Fixed Par (cA) 80% of the amount of any travel Paragraph (cA) specifically ex-
travel allowance allowance other than one that is cludes travel allowances in terms
based on the actual distance of s 8(1)(b)(iii). In terms of the
travelled (therefore 80% of any Guide for employers iro Allow-
fixed travel allowance) received ances (PAYE-GEN-01-G03) an
in terms of s 8(1)(b) allowance or advance which is
The aforementioned 80% be- based on the actual distance
comes 20% if the employer is travelled for business purposes
satisfied that at least 80% of the (reimbursive allowance), is never
use of the motor vehicle will be subject to employees' tax, but the
for business purposes unexpended portion may be
subject to normal tax when the
employee’s income tax assess-
ment is finalised. The full amount
of the fixed and the reimbursive
allowances must be shown on the
IRP 5. Reimbursive travel allow-
ances are also not specifically
included in the definition of
‘variable remuneration’. This will
change from 1 March 2018 due
to the new par (cC).
continued
247

Act included
Par 7 of the Par (cB) 80% of the taxable benefit
Seventh calculated in terms of par 7 of the
Schedule and Seventh Schedule (this means
par (i) of ‘gross the cash equivalent of the right of
income’ in s 1 use of the motor car which = the
value of the private use as
calculated in terms of par 7 less
the consideration given by the
employee) (therefore before the
adjustments for par 7(7) and 7(8))
The aforementioned 80% be-
comes 20% if the employer is
satisfied that at least 80% of the
use of the motor vehicle will be
for business purposes
Section 8 Par (cC) 100% of the difference between Excessive reimbursive travel
Reimbursive the allowance paid and the allowances (amount exceeding
travel allowance amount determined by the rate the amount fixed by notice) are
per kilometre according to the included in remuneration with
simplified method (actual busi- effect from 1 March 2018
ness kilometres travelled × the
rate per kilometre in respect of
the simplified method)
Section 8B Par (d) Gain determined in terms of s 8B
(broad-based employee share
plan) (also see 10.2.3)
Section 8C Par (e) An amount as referred to in s 8C
(vesting of equity instruments)
and which must be included in
the income of the person, (also
see 10.2.3)
Section 7(11) Par (f) Any amount deemed to be in-
come accrued to that person in
terms of s 7(11) (amounts re-
ceived in terms of a maintenance
order) (see 7.6 and the ‘Please
note!’ below)
Various provisos Par (g) Any amount received or accrued
to s 10(1)(k)(i) to a person by way of a dividend
in respect of a restricted equity
instrument as contemplated in
par (dd) (ii) and (jj) of the provi-
sos to s 10(1)(k)(i)
The amount which constitutes ‘remuneration’ in respect of a s 7(11) mainte-

nance order, is the amount which is deemed to be income in terms of s 7(11).
This amount is the sum of the amount in terms of the maintenance order and the
employees’ tax on such an amount. This creates a tax-on-tax effect. The follow-
ing tax-on-tax formula and example in Interpretation Note No. 89 on Mainte-
nance Orders and the Tax-on-tax Principle can be used to simplify the calcu-
Please note! lation of the tax-on-tax effect of each additional layer of tax:
X=A/C×B
Where
X = total tax payable as a result of tax-on-tax effect
A = tax payable on maintenance order
B = 100
C = 100 minus the member’s marginal rate of tax
continued
248
Example – Tax-on-tax calculation of amount payable in terms of a maintenance

order
The amount payable to the non-member in terms of a maintenance order is
R242 534 for the 2018 year of assessment.
The tax to be withheld is determined as follows:
Maintenance to be paid R 242 534
(a) Tax on maintenance:**
Tax on R189 880 = R34 178,00
26% on R52 654 (R242 534 – R189 880) = 13 690,04
Total tax payable R47 868,04
** If the member receives a salary or pension, the rebate should not be taken
into account as the rebate is already taken into account when the employer
is deducting employees’ tax from his or her salary or pension.
(b) R47 868,04 (a) x 100 / (100 – 26 marginal rate of taxpayer) = R 64 686,54
Please note! (c) Maintenance order after tax is adjusted = R307 220,54 (R242 534 +
R64 686,54)
(d) R307 220,54 falls in higher tax bracket (above R296 540) and therefore
steps (e)–(h) must be followed
(e) Tax on adjusted amount of maintenance order (R307 220,54) = R65 220,97
(R61 910 + 31% × (R307 220,54 – R296 540))
(f) Tax in (e) – tax in (b) = R65 220,97 – R 64 686,54 = R543,43
(g) R543,43 (f) ×100/(100 – 31 marginal rate of taxpayer) = R774,53
(h) Tax benefit for member = tax in (b) + tax in (g) = R65 461,07
Total income of member = R307 995,07 (R 242 534 (amount in terms of
s 7(11)(a) + R65 461,07 (amount in terms of s 7(11)(b))
The IRP5 certificate of the member must be completed as follows:
Code 3601 (deemed income) = R 242 534
Code 3810 (deemed benefit) = R65 461,07
Code 4102 (Employees’ tax) = R65 461,07
Employees’ tax must be deducted, not only from remuneration that is actually paid to an employee,
but also from remuneration that the employer becomes liable to pay to him (except in the case of
variable remuneration). Consequently, remuneration credited to an employee’s or director’s account
in the books of the employer or company, against which the employee or director is free to draw,
constitutes an amount subject to the deduction of employees’ tax.
Remember
If an amount is ‘remuneration’ as defined, any person paying such an amount to any other person
is defined as an employer, and employees’ tax therefore needs to be withheld by that person, but
see 10.4 regarding fringe benefits paid to partners.
If a taxpayer receives ‘remuneration’ amounts from various employers, each employer must cal-
culate the employees’ tax to be withheld separately. These calculations are therefore based on
the balance of remuneration in respect of the information available to each specific employer. A
fund as employer will, for example, only take the information regarding the lump sum benefit or
the pension into account, while another employer will take the salary and fringe benefits into
account.
The net amount of a lump sum benefit from a retirement fund is included in gross income in
terms of par (e). The gross amount of paras (d) and (f) severance benefits received from an em-
ployer who is not a retirement fund is included in gross income. These net and gross amounts
are also ‘remuneration’ on which employees’ tax must be withheld. Please see 10.11.3 regarding
the directives that must be obtained in this regard.
10.2.1 Fringe benefits

Benefits given by associated institutions
Taxable benefits given to an employee by an associated institution in relation to an employer are
deemed to be taxable benefits granted by the employer (par 4 of the Seventh Schedule).
Consequently, it is the employer, rather than the associated institution, who is required to deduct
employees’ tax from the cash equivalent of such a taxable benefit.
249
Benefits granted to relatives of employees and others

Taxable benefits granted to an employee’s relative or any person other than the employee under any
agreement, transaction or arrangement with the employer is deemed to be granted to the employee
(par 16 of the Seventh Schedule).
The cash equivalent of these taxable benefits will be included in the employee’s remuneration and
will be subject to the deduction of employees’ tax.
10.2.2 Directors’ fees

Directors of private and public companies are included in the definition of ‘employee’ in terms of
paras (a) en (g). Directors of public companies must receive remuneration before employees’ tax
must be withheld. The provisions of s 7B apply to the variable remuneration received by directors of
private companies. It is deemed to accrue to the directors on the date that it is paid and this is also
the date on which the expenditure becomes claimable by the company. The directors’ fees of resi-
dent non-executive directors are not regarded as remuneration and are not subject to employees’
tax. The directors’ fees of non-resident non-executive directors are regarded as remuneration and are
subject to employees’ tax.
10.2.3 Right to acquire shares (par 11A)

Gains made in terms of s 8A, 8B and 8C are deemed to be paid to the employee by the person who
granted the right or from whom the equity instrument or qualifying equity share that gave rise to the
gain was acquired. Such gains are included in remuneration (paras (b), (d) and (e) of the definition of
remuneration and par 11A(1)). Similarly, any amount received or accrued to a person by way of a
dividend in respect of a restricted equity instrument as contemplated in par (dd), (ii), (jj) and (kk) of
the provisos to s 10(1)(k)(i) is included in remuneration with effect from 1 March 2018 (par (g) of the
definition of remuneration and par 11A(1)).
Unless the Commissioner has granted authority to the contrary, the person by whom the right was
granted or such dividends were distributed are employers and must deduct employees’ tax. It must
be deducted from the consideration paid by the employee, or from any cash remuneration payable to
the employee in respect of the cession or release of that right or the disposal of the qualifying equity
share or the dividend that accrued to the employee (par 11A(2)). Before deducting the employees
tax, the employer or associated institution must ascertain the amount of employees’ tax from the
Commissioner and the Commissioner issues a directive in this regard (par 11A(4)). If the person who
granted the right or paid the dividend is an ‘associated institution’ in relation to the employer and
l that person is not a resident nor has a representative employer, or
l that person is unable to withhold the full amount of employees’ tax from that remuneration be-
cause the amount of employees’ tax which needs to be withheld exceeds the amount of remu-
neration, or
l the amount of the dividend consists of an equity instrument referred to in s 8C
the associated institution and the employer are jointly and severally liable to withhold the employees’
tax in respect of the gain or dividend from the total remuneration payable to that employee during
that year of assessment (proviso par 11A(2)). The Commissioner must be notified if the employer is
unable to withhold the full amount of employees’ tax (par 11A(5)).
An employee who has made a gain under a transaction to which the person by whom the right was
granted and the employer are not parties, must immediately inform both such persons of the disposal
and also of the amount of the gain (par 11A(6)). An employee who, without just cause shown by him,
fails to comply with this requirement is guilty of an offence and is liable on conviction to a fine not
exceeding R2 000 (par 11A(7)).
Section 8B applies to qualifying equity shares acquired in terms of a broad-based employee share
plan approved on or after 26 October 2004 by the directors of the company. The employer must
withhold Employees’ Tax from the ordinary income generated on the disposal of qualifying equity
shares occurring within five years (see chapter 8).
Section 8C deals with the taxation on the vesting of equity instruments in directors and employees,
and applies to any equity instrument acquired on or after 26 October 2004. The gain is included in
the definition of ‘remuneration’ on the date of vesting (also see Interpretation Note No 55 (Issue 2))
(see chapter 8).
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10.2–10.3 Chapter 10: Employees’ tax
10.2.4 Annuities and royalties

Annuities, including ‘annuity amounts’ contemplated in s 10A(1) and living annuities, are included in
the definition of remuneration. The payer of an annuity is therefore an employer as defined in par 1. It
is immaterial how the annuity arises. Whether it is a purchased annuity, a testamentary annuity, an
annuity granted in return for the acquisition of an asset or right, or a living annuity, the payer must
deduct employees’ tax before making payments to the annuitant. The payer is also liable to carry out
all the duties and responsibilities of an employer. Only annuities payable under an order of divorce or
decree of judicial separation or under any agreement of separation are excluded from the definition
of remuneration.
It is submitted that royalties do not fall within the definition of remuneration if they are received for the
use or grant of permission to use a patent, design, trade mark or copyright. They do not fall within
any of the specific items referred to in the definition of the term remuneration; namely salary, leave
pay, wage, overtime pay, bonus, gratuity, commission, fee, emolument, pension, superannuation
allowance, retiring allowance or stipend. These items clearly do not include amounts received for
permission to use an asset or right. Moreover, royalties are not referred to in paras (a), (c), (cA), (d),
(e), (eA), (f) or (i) of the definition of the term gross income in s 1 (which are included in the definition
of remuneration). The payer of royalties therefore need not deduct employees’ tax from an amount
paid by way of royalties. Royalties paid to non-residents are liable for withholding tax in terms of
s 49A (see chapter 5). The receipt of royalties may cause registration as a provisional taxpayer by the
person (par (a) of the definition of ‘provisional taxpayer’ in par 1 of the Fourth Schedule read with
par 18 of the Fourth Schedule).
10.3 Employee (par 1)

The term ‘employee’ is defined in par 1 as any one of the following:
l a person other than a company who receives any remuneration or to whom any remuneration
accrues
l a person who receives remuneration or to whom remuneration accrues by reason of services
rendered by that person to or on behalf of a ‘labour broker’
l a labour broker (see 10.8.2)
l a personal service provider (see 10.8.3)
l a person or a class or category of persons whom the Minister of Finance declares to be an
employee for the purposes of the definition by notice in the Government Gazette (referred to as a
‘declared employee’)
l a director of a private company (see 10.9).
Non-residents as employees
Employees’ tax need not be deducted from the remuneration of non-residents who render services
outside the Republic on behalf of a South African employer, since the source of the services is out-
side the Republic. Non-residents are taxed on a source basis and there is therefore no amount in-
cluded in ‘income’. Employees’ tax must be deducted if the income is from a source within the
Republic in terms of s 9(2)(g) (the holding of a public office if the person has been appointed in terms
of an Act of Parliament) or s 9(2)(h) (service rendered in the public sector). The reason for this is that
it is not the place where the services are rendered that determines the source in these two cases, but
the entity to which it is rendered.
South African employers may from time to time employ non-residents for short periods. When their
services are rendered outside South Africa, their income is clearly from a source outside the Republic
and employees’ tax need not be deducted. When their services are rendered in the Republic,
employees’ tax will have to be deducted, since the source of their income from remuneration will be
in the Republic. In certain instances, a double taxation agreement between the Republic and the
country of residence of the employee may relieve an employee of liability to South African tax, in
which event employees’ tax need not be deducted. Section 10(1)(c)(v) provides an exemption for
salaries paid to any subject of a foreign state who is temporarily employed in the Republic, provided
that the exemption is authorised by an agreement entered into by the governments of the foreign state
and the Republic (see chapter 6).
Difficulties will arise when a non-resident who renders services in the Republic is paid his remune-
ration by a person resident in another country, because the Commissioner has no jurisdiction over
the non-resident employer and cannot enforce the deduction of employees’ tax. If remuneration is
251
paid or is liable to be paid by a resident representative employer, that is, by an agent of such foreign
employer having authority to pay remuneration, such representative employer must deduct or with-
hold employee’s tax, unless the Commissioner grants authority to the contrary (par 2(1)).
10.4 Employer (par 1)

The definition of ‘employer’ must not be interpreted through the lens of the common law or in terms of
Labour Law definitions of an employer. Although the concept ‘employer’ is a legal concept, the
Fourth Schedule extends this concept to any person who pays or is liable to pay ‘remuneration’. The
words ‘liable to pay’ indicates a contractual liability to incur the amount. The employee must therefore
have an enforceable right to the amount of remuneration.
The term ‘employer’ is defined in par 1 as
l a person (excluding a person not acting as a principal, for example, an agent) who pays or is
liable to pay to any person an amount by way of remuneration. A person acting in a fiduciary
capacity, or his capacity as a trustee of an insolvent estate, an executor or as an administrator of
any fund is also included, and
l a person who is responsible for the payment of remuneration to any person under the provisions
of any law or out of public funds or out of funds voted by Parliament or a provincial council.
Please remember that the word ‘person’ is defined in s 1.
In terms of par 2A of the Seventh Schedule, a partner in a partnership is, for the
purposes of par 2 of the Seventh Schedule, deemed an employee of the part-
nership. This new deeming provision causes a taxable benefit to arise in the
hands of the partner since there is no employment relationship between a part-
ner and a partnership. This means that any par 2 of the Seventh Schedule tax-
able benefit (fringe benefit) received by a partner from a partnership must be
included in the partner’s gross income in terms of par (i) of the definition of
gross income.
It is important to note that, unlike the wording in the ss 11F and (l) and par 12D
of the Seventh Schedule, the wording in par 2A of the Seventh Schedule does
not also deem a partnership to be an employer for the purposes of par 2 of the
Please note! Seventh Schedule. The Fourth Schedule has also not been amended to deem a
partnership to be the employer of a partner. The deeming provision in respect of
a partner under par 2 of the Seventh Schedule cannot be extended to the
Fourth Schedule.
Although all fringe benefits will therefore be included in a partner’s gross in-
come, and although a fringe benefit is ‘remuneration’ as defined (because that
definition does not per se requires that the amount must be paid by an employ-
er to an employee), no employees’ tax must be withheld from fringe benefits
granted to partners.
Please refer to chapter 18 for a more detailed discussion and examples regard-
ing partnerships.
10.5 Employees’ tax (paras 2, 9 and 11)

Any employer who is a resident, or a representative employer in the case of an employer who is a
non-resident, who pays or is liable to pay ‘remuneration’ to an employee must, on a monthly basis,
deduct employees’ tax from it and pay it over to the Commissioner (par 2(1)). With effect from
1 January 2014, the amount to be paid over is subject to the Employment Tax Incentive Act, 2013 (see
10.12).
Employees’ tax on any ‘variable remuneration’ must only be withheld on the date on which the
amount is paid to the employee (par 2(1B)). This is because variable remuneration is deemed to
accrue to the employee on the date on which the employer pays the amount to the employee.
‘Variable remuneration’ is defined in s 7B(1) and includes
l overtime pay, bonus or commission
l travel allowances or advances paid
l any amount paid in respect of any period of leave not taken by the employee during that year.
Section 7B also applies to the variable remuneration paid to a director of a private company. See
chapter 12 for a detailed discussion s 7B.
252
Employees’ tax must also be withheld in respect of

l lump sum benefits paid in terms of a divorce order (this employees’ tax is determined in terms of
a directive issued by the Commissioner in terms of par 9(3) and is deducted from the employee’s
benefit or the minimum individual reserve), and
l remuneration paid to an employee who is married but which is taxable in the hands of the
employee’s spouse in terms of s 7(2). The liability for employees’ tax on such an amount is that of
the employee’s spouse. For example, if the excessive salary paid by Employer B to the wife of
Mr A must be included in Mr A’s income in terms of s 7(2), Employer B must deduct employees’
tax from the salary paid to Mrs A in respect of the ‘fair salary’ (Mrs A’s liability) and in respect of
the ‘excessive salary’ (Mr A’s liability).
If a person receives remuneration from more than one employer, the employees’ tax calculation of
remuneration earned from each employer must be done separately.
The employees’ tax monthly withheld by the employer, is in practice calculated by using the tax
deduction tables issued by SARS (weekly, biweekly, monthly or annual tables), or one of many com-
puter programs. Both the aforementioned are drawn up taking into account the provisions of the Act,
the rebates in s 6(2), the s 6A credit, the s 6B(3)(a)(i) credit and the prescribed table for the calculation
of an individual’s normal tax liability.
The monthly employees’ tax must be calculated on the balance of remuneration (par 2(4)). Since the
rebates and prescribed tax table are based on annual taxable incomes, the annual equivalent of the
balance of remuneration must first be calculated before the employees’ tax can be calculated.
If remuneration during a month includes an annual payment, the employees’ tax thereon must be cal-
culated separately. The annual payment need not be converted to an annual equivalent like the
balance of remuneration since it already is an annual amount. An annual payment is an amount of net
remuneration which, in terms of the employee’s service conditions or in accordance with the
employer’s practice, is payable to the employee as a lump sum or which is determined without refer-
ence to any period (Guide for employers in respect of employees’ tax PAYE-GEN-01_G11). An annual
bonus is an example of an annual payment.
It is important to note that a fringe benefit is not an annual payment even if it is only received once
during a year of assessment. This means that the fringe benefits must be included in remuneration in
the specific months in which an employee is entitled thereto and in this way become part of the
balance of remuneration of which the annual equivalent must be calculated before the employees’
tax can be calculated. For practical purposes, students can group the months together in which an
employee has the same balance of remuneration in a calculation question, and then take the number
of months into account when calculating the annual equivalent (see Example 10.1).
The balance of remuneration is the remuneration remaining after deducting the following amounts
paid during the month in respect of the employees’ tax therefrom:
l any contribution made by the employee concerned to a pension fund or provident fund ), limited
to the allowable deductions in terms of s 11F having regard to the remuneration and the period in
respect of which it is payable (par 2(4)(a))
l at the choice of the employer (and if proof of payment has been furnished to him), any contribu-
tions to a retirement annuity fund made by the employee, limited to the allowable deduction in
terms of s 11F having regard to the remuneration and the period in respect of which it is payable
(par 2(4)(b))
l any contribution made by the employer to any retirement annuity fund for the benefit of the em-
ployee, but limited to the deduction to which the employee is entitled under s 11F having regard
to the remuneration and the period in respect of which it is payable (par 2(4)(bA)), and
l so much of any donation made by the employer on behalf of the employee
– as does not exceed 5% of that remuneration after deducting therefrom the aforementioned
amounts, and
– for which the employer will be issued a receipt as contemplated in s 18A(2)(a) (par 2(4)(f)).
253
The wording of par 2(4)(f) in effect requires that a subtotal must be calculated
after the deduction of all the contributions to all retirement funds from ‘remune-
ration’ in order to calculate the 5% on that subtotal.
The words ‘having regard to the remuneration’ in par 2(4)(a), (b) and (bA) mean
that the specific employer may not take any other income apart from the
remuneration he or she paid into account.
The words ‘having regard to the period in respect of which it is payable’ in
par 2(4)(a), (b) and (bA) mean that the employer must take into account wheth-
er it is current or arrear contributions (this distinction was only relevant until
29 February 2016 because there is no distinction between current and arrear
contributions from 1 March 2016).
Employees’ tax is calculated monthly but the limits in the s 11F deduction apply
annually. In order to calculate the allowable deduction that an employer can
Please note! take into account on a monthly basis, he must therefore
l divide the amount of R350 000 in the s 11F(2)(a) deduction by 12 (proviso to
par 2(4))
l base the 27,5% in the s 11F deduction on the remuneration paid by the
employer in that specific month.
An employer can only base his calculation of the s 11F deduction to be taken
into account for employees’ tax purposes on information available to him. Due to
a lack of information, an employer will consequently not be able to do the calcu-
lation for the 27,5% of the ‘taxable income’ limit (s 11F(2)(b)(ii)) and will also not
be able to do the calculation where taxable capital gains must be taken into
account (in terms of s 11F((2)(c)). The employer can similarly never take any
balance of unclaimed contributions into account when the s 11F deduction is
calculated for employees’ tax purposes and will only take current contributions
into account.
No other amounts may be taken into account in the determination of the ‘balance of remuneration’.
Union dues, industrial council levies or similar payments cannot be taken into account in the determi-
nation of the balance of remuneration.
Any other deductions against income will be brought to account by the employee when the employee
is assessed for tax based on a return submitted by him after the end of the year of assessment. To
this extent, the employees’ tax paid by an employee might exceed his normal tax liability for a year of
assessment.
Example 10.1. Basic example of calculation of employees’ tax
Jan (45 years and unmarried) receives a monthly salary of R20 000 and a bonus of R20 000 each
year in February. Jan monthly contributes R1 500 to a pension fund based only on his cash sala-
ry. Jan received a monthly taxable fringe benefit of R3 000 from 1 August 2017. He is not a
member of a medical scheme. Jan contributes R500 a month to a retirement annuity fund and
supplied his employer with proof thereof.
Calculate the amount of the employees’ tax that his employer must withhold during the 2018 year
of assessment.
SOLUTION
Months March to July 2017
Salary ........................................................................................................................ R20 000
Less: Contributions to retirement funds
Actual contributions = R2 000 (R1 500 + R500) limited to the lesser of
l R350 000/12 = R29 167 and
l 27,5% × R20 000 = R5 500 ...................................................................... (R2 000)
Balance of remuneration ........................................................................................... R18 000

Annual equivalent (R18 000 × 12) ............................................................................ R216 000
continued
254

On R189 880 ............................................................................................................. R34 178
On R26 120 @ 26% ................................................................................................... 6 791
R40 969
Less: Primary rebate ................................................................................................. (13 635)
Normal tax/Employees’ tax payable for the year ...................................................... R27 334
Employees’ tax for 1 month (R27 334/12) ................................................................. R2 277,83
Employees’ tax for the 5 months (R27 334 × 5/12) or (R2 277,83 × 5) ..................... R11 389,17
Months August 2017 to January 2018
Salary ........................................................................................................................ R20 000
Fringe benefit ............................................................................................................ 3 000
Actual contributions = R2 000 limited to the lesser of
l R350 000/12 = R29 167 and
l 27,5% × R23 000 = R6 325 ...................................................................... (2 000)
Balance of remuneration ........................................................................................... R21 000
Annual equivalent [(R21 000 × 7) + (R18 000 × 5) (note 1)] .................................... R237 000
On R189 880 ............................................................................................................. R34 178
On R47 120 @ 26% ................................................................................................... 12 251
R46 429
Normal tax/Employees’ tax payable for the year ...................................................... R32 794
Employees’ tax for 1 month (R32 794/12) ................................................................. R2 732,83
Employees’ tax for 6 months (R32 794 × 6/12) or (R2 732,83 × 6) ........................... R16 397
February 2018
Balance of remuneration EXCLUDING bonus:
Salary ........................................................................................................................ R20 000
Fringe benefit ............................................................................................................ 3 000
Actual contributions = R 2 000 limited to the lesser of
l R350 000/12 = R29 167 and
l 27,5% × R23 000 = R6 325 ...................................................................... (2 000)
Balance of remuneration excluding bonus ............................................................... R21 000
Annual equivalent [(R21 000 × 6) + (R18 000 × 5) + R21 000 (note 1)] ................... R237 000
On R189 880 ............................................................................................................. R34 178
On R47 120 @ 26% ................................................................................................... 12 251
R46 429
Normal tax/Employees’ tax payable for the year on balance of remuneration.......... R32 794
Employees’ tax for February on balance of remuneration ........................................ R2 732,83
Balance of remuneration INCLUDING bonus:

Annual equivalent of balance of remuneration (R18 000 × 5) + R21 000 × 6) +
(R21 000) (note 1) ..................................................................................................... R237 000
Bonus ........................................................................................................................ 20 000
Balance of remuneration including bonus ................................................................ R257 000
On R189 990 ............................................................................................................. R34 178
On R67 120 @ 26% ................................................................................................... 17 451
R51 629
Normal tax/Employees’ tax payable for the year on total balance of remuneration .. R37 994
Tax on bonus (R37 994 – R32 794) .......................................................................... R5 200
continued
255
Employees’ tax for February 2018

l on balance of remuneration ................................................................................. R2 732,83
l on bonus .............................................................................................................. 5 200,00
Total .......................................................................................................................... R7 932,83
Note 1
The actual year-to-date balance of remuneration is used to calculate the employees’ tax since
employees’ tax is based on the actual remuneration paid in the period worked.
Total employees’ tax for the 2018 year of assessment
l For March 2017 – July 2018 ................................................................................. R11 389,17
l For August 2017 – January 2018 ......................................................................... 16 397,00
l For February 2018 ................................................................................................ 7 932,83
R35 719,00
Note 2
In practice, the employer will have to adjust the total employee’s tax withheld during the previous
11 months, in the last month of the year of asssessment (February 2018). An employee working
for a single employer needs not submit a tax return to SARS if that employee’s remuneration is
R350 000 or less. The total remuneration is R257 000. The employee’s tax withheld during the
entire year should therefore be as accurate as possible.
Therefore the employee’s tax for February 2018 should actually be:
Employees’ tax on total actual remuneration for the year .......................................... R37 994,00
Less employee’s tax already withheld ....................................................................... (R27 786,17)
Adjusted employee’s tax to be withheld in February 2018 ........................................ R10 206, 83
Paragraph 9(6) provides that the employer must deduct the s 6A medical tax credit from the amount
to be withheld or deducted by way of employees’ tax, both when the employer pays the medical
scheme fees or when proof of payment of those fees has been furnished to the employer.
The employer must also deduct the additional medical expenses tax credit (s 6B(3)(a)(i)) if the
employee is entitled to the secondary rebate (meaning he or she is 65 years or older). This means
that 33,3% × (the total contributions paid less (3 × the s 6A(2)(b) credit)) must be deducted by the
employer.
Example 10.2. Calculation of employees’ tax (with par 9(6))
Jabu (65 years and unmarried with no dependents or children) receives a monthly salary of
R20 000. Jabu contributes R1 500 a month to a pension fund and R1 000 to a medical scheme
(proof was furnished to employer). Jabu’s employer paid R500 a month in respect of a policy of
insurance against the loss of income for the benefit of Jabu.
Calculate the employees’ tax that his employer must withhold each month of the 2018 year of
assessment.
SOLUTION
Salary .......................................................................................................................... R20 000
Plus: Paragraph 2(k) of the Seventh Schedule fringe benefit ..................................... 500
20 500
Less: Contributions to retirement fund
Actual contributions = R1 500 limited to the lesser of
– R350 000/12 = R29 267 and
– 27,5% × R20 500 = R5 637,50 ................................................................... (1 500)
Balance of remuneration ............................................................................................ R19 000
Annual equivalent (R19 000 × 12) .............................................................................. R228 000
continued
256
10.5–10.7 Chapter 10: Employees’ tax
Normal tax determined per the tax table

On R189 880 ............................................................................................................... R34 178
On R38 120 @ 26% ..................................................................................................... 9 911
R44 089
Secondary rebate ........................................................................................... (7 479)
Paragraph 9(6)(a) deduction (R303 × 12 – s 6A tax credit) ........................... (3 636)
Paragraph9(6)(b) deduction (33.3% × R1 092 (R12 000 – R10 908 (3 ×
R3 636)) .......................................................................................................... (364)
Normal tax liability/Employees’ tax for the year .......................................................... R18 975
Employees’ tax for the month (R18 975 × 1/2) ............................................................ R1 581,25
10.6 Standard Income Tax on Employees (SITE) (par 11B(2))

Paragraph 11B was repealed by the Tax Administration Act Amendment Bill, 2015 with effect from
1 March 2016.
10.7 Part-time, casual and temporary employees

Part-time, casual and temporary employees are not in standard employment. The Act contains no
definition of ‘standard employment’, but the Guide for Employers in respect of Employees’ Tax issued
by SARS still indicate that the term refers to employment where the employee is required to render
services to one employer for at least 22 hours per week. An employee who works for less than 22
hours per week and declares in writing that he has no other employment, is in ‘standard employment’
and must be treated in the same way as an employee paid weekly or monthly.
The employees’ tax to be deducted from the remuneration payable to employees who are not in
standard employment and receive part-time remuneration is not calculated in terms of the normal
rules. A flat rate of 25% is used instead of the normal tax tables and rebates. This rate applies wheth-
er these employees are paid on a daily, weekly or monthly basis, if they derive part-time remuneration
(par 14.4 of the Guide for Employers in respect of Employees’ Tax issued by SARS).
An employer who ceased to be an employee’s employer must issue an IRP 5 to the employee within
14 days (par 13(2)(b)). The Commissioner may direct that an employer is deemed not to have
ceased to be an employer in relation to casual employees who are likely from time to time to be re-
employed by the employer (par 13(3)). This means that when regular use is made of the part-time
services of casual employees, such as waiters in a catering business, the employer, with the approv-
al of the Commissioner, needs to issue only one IRP 5 at the end of the year of assessment covering
all the deductions for the year. Note, however, the following:
Examples of part-time remuneration are:
l casual commissions paid, such as ‘spotter’s’ fees
l casual payments to casual workers for irregular or occasional services rendered
l fees paid to part-time lecturers
l honoraria paid to office-bearers of organisations and clubs.
A full-time student or scholar employed on a casual basis will therefore be subject to employees’ tax
at a flat rate of 25%, unless he is in standard employment.
The following table is given in par 14.4 of the Guide for Employers in respect of Employees’ Tax
issued by SARS:
Scenario Deduction method

Employee is not in standard employment and works at least five hours per day at No tax deducted
less than R287 for that day
Employee is required to work at least 22 hours per week and is in standard em- Use deduction
ployment and earns remuneration which exceeds the annual threshold tables
Employee is not in standard employment and works less than five hours per day at 25% deduction
less than R287 for that day
Employee is not in standard employment and works at least five hours per day at 25% deduction
more than R287 for that day
257
10.8 Independent contractors, labour brokers and personal service providers (par 1)
10.8.1 Independent contractors (definition of remuneration: exclusion in par (ii))
If a person renders services in the course of a trade carried on independently of the person by whom
the amount is paid or payable, and independently of the person to whom the services are rendered,
such a payment is not ‘remuneration’. Consequently, these amounts are not subject to employees’ tax
and the classification of a person as an independent contractor is therefore very important to ensure
that an employer meets all his duties in terms of the Act (see 10.11.2). The wording of the exclusion in
par (ii) makes it clear that the following persons can never be independent contractors:
l a person who is not a resident
l a natural person who is a labour broker (par (c) of the definition of ‘employee’) (see 10.8.2) or
who works for a labour broker (par (b) of the definition of ‘employee’) or who is declared to be an
employee by the Minister of Finance by notice in the Gazette (par (d) of the definition of ‘employ-
ee’)
l a personal service provider (par (e) of the definition of ‘employee’) (see 10.8.3).
A person will be deemed not to carry on a trade independently (and therefore he could perhaps be
an employee – see the ‘employee test’ below) if
l the services are required to be performed mainly at the premises of the person by whom pay-
ment is made or the person to whom the services are rendered, and
l the person rendering the services is subject to the control or supervision of any other person as
to the manner in which his duties are performed or as to his hours of work (first proviso to par (ii)
of the definition of ‘remuneration’).
A person is deemed to carry on a trade independently if, throughout the year of assessment, he or
she employs three or more employees who are engaged on a full-time basis in the business of the
independent contractor. Aforementioned employees must not be connected persons in relation to the
independent contractor (the ‘independence’ test) (second proviso to par (ii) of the definition of remu-
neration).
SARS issued Interpretation Note No 17 (Issue 3) to give guidance to employers on the classification of
independent contractors. Apart from discussing the tests above, the common law dominant impres-
sion test is also explained. The common law dominant impression test is essentially an analytical tool
that is designed for application in the employment environment to establish the dependence or
independence of a person. The common law dominant impression test makes use of several indica-
tors, of differing significance or weight, which have to be applied in the relevant context. The indica-
tors are interrelated and point to whether or not there has been the ‘acquisition of productive
capacity’ (that is, of labour power, capacity to work, or simply effort).
258
See Interpretation Note No 17 (Issue 3) for more detail in this regard. The sequence in which the tests
must be applied can be illustrated as follows:
Person rendering services
l Resident, and
l Non-resident, or l Par (a) of ‘employee’ definition
l Par (b), (c), (d) or (e) of ‘employee’ (any person (except a company) receiving
definition remuneration)
‘Independence test’
Exclusion, therefore par (ii) is not applicable (second proviso to the exclusion in par (ii))
Remuneration therefore subjected
to employees’ tax Three or more full-time unconnected employees?
Yes No
‘Employee test’
(first proviso to the exclusion in par (ii))
l Premises element, and
l Control or supervision element present?
No Yes
‘Dominant impression test’

Independent contractor Employee
(applied as tiebreaker)
In general, professional fees payable to independent contractors or self-employed persons such as

medical practitioners, public accountants and auditors, architects, quantity surveyors, attorneys and
advocates are not subject to the deduction of employees’ tax.
10.8.2 Labour brokers (paras 1 and 2(5))

Paragraph (c) of the definition of ‘employee’ in par 1 includes a labour broker. A person (client) who
pays remuneration to a labour broker is therefore an employer as defined.
A labour broker is defined in par 1 as a natural person who conducts or carries on any business
whereby such person, for reward, provides a client with his own employees to perform work for the
client or procures workers for a client. The client pays the labour broker and the labour broker pays
the workers. It is the provision or procurement of workers (that is, persons) and not the providing of a
service. In short, a labour broker differs from an independent contractor in the following respects:
Labour broker Independent contractor
Labour broker provides persons who get instructions Independent contractor and client agree on specific
from the client outcomes to be achieved
Client pays labour broker (and withholds employees’ Client pays Independent contractor but does not
tax unless an exemption certificate was obtained in withhold any employees’ tax
terms of par 2(5))
Labour broker pays persons employed by him and Independent contractor pays his employees and
withholds employees’ tax withholds employees’ tax
259
The Commissioner may issue an exemption certificate (IRP 30) to a labour broker (par 2(5)). This will
absolve the client (employer) from having to deduct employees’ tax from any payments made to the
labour broker. The following requirements must be met by the labour broker before an exemption
certificate will be granted (par 5(a) Fourth Schedule):
l He must carry on an independent trade and be registered as a provisional taxpayer.
l He must be registered as an employer.
l He must have submitted all returns required to be submitted in terms of the Act.
l He must not receive more than 80% of his gross income during the year of assessment from any
one client or an associated institution in relation to that client. The 80% test is not applicable if the
labour broker, throughout the year of assessment, employed three or more full-time employees
(other than shareholders, members or connected persons in relation to the labour broker) who
are engaged, on a full-time basis, in the business of the labour broker of rendering the relevant
service.
l He must not provide the services of another labour broker to any of his clients.
l He must not be contractually obliged to provide a specified employee to render any service to
the client.
The IRP 30 is only applicable for the period indicated thereon by the Commissioner (par 2(5)(b)).
Clients (employers) making payments to a labour broker holding an exemption certificate must retain
a certified copy of the exemption certificate for inspection purposes. If no valid exemption certificate
can be produced, employees’ tax must be deducted according to the table applicable to natural
persons. In cases where the Commissioner has issued a tax directive, employees’ tax must be de-
ducted in accordance with the directive.
Any employees’ tax withheld in respect of remuneration may be set off by the labour broker against
his or her provisional tax payments (paras 21 and 23).
Example 10.3.
Ntombi works as a typist for a company whenever the company informs Phumlani that the com-
pany has suitable work for her. The company pays Phumlani directly.
Phumlani is a labour broker. Ntombi is in his service. Any remuneration paid or payable to
Ntombi by Phumlani is subject to employees’ tax. Phumlani (the labour broker) should be in pos-
session of an exemption certificate, which will absolve the company from deducting employees’
tax from the fees paid to Phumlani.
Example 10.4.
Dingani, a systems analyst, contracts his services to Themba, who in turn supplies workers to
perform specialised computer services to ABC (Pty) Ltd. Dingani supplies his services to Them-
ba via a close corporation known as P CC.
ABC (Pty) Ltd pays Themba for the services rendered by Dingani via the close corporation.
Themba invoices ABC (Pty) Ltd for the services supplied and in turn pays P CC.
Themba is in effect a labour broker’s office that supplies a specific type of specialised labour to
one of its clients. ABC (Pty) Ltd will not be required to deduct employees’ tax if Themba has ob-
tained an exemption certificate.
Had Dingani supplied his service in his individual capacity, Themba would be required to deduct
employees’ tax from any remuneration paid to him. The fact that Dingani provides his services to
Themba via a close corporation does not detract from the fact that employees’ tax must be deduct-
ed by the labour broker (Themba) from the amount paid to the close corporation (P CC). It will be
calculated at 28%.
The close corporation (P CC) cannot apply for an exemption certificate because it is not a natural
person.
Section 23(k) limits the deduction of expenses incurred by labour brokers who do not have exemption
certificates. This provision prohibits the deduction of any expenses incurred by such labour brokers,
other than any salary paid to an employee and taxed in the employee’s hands (see 6.5.10).
260
10.8ದ Chapter 10: Employees’ tax
10.8.3 Personal service providers (par 1)

The definition of ‘employee’ in par 1 includes a personal service provider.
A personal service provider is any company or trust where any person, who is a connected person in
relation to such company or trust, personally renders services on behalf of the company or trust to a
client. One of the following requirements must also be met:
(a) such person would be regarded as an employee of the client if the service was rendered by
such person directly or indirectly to such client, other than on behalf of such company or trust. In
terms of Interpretation Note No 35 (Issue 3) this would be met if the person receives ‘remunera-
tion’ as defined, or
(b) where the service or duties must be performed mainly at the premises of the client, such person
or such company or trust is subject to the control or supervision of the client as to the manner in
which the duties are to be performed or in rendering such service, or
(c) where more than 80% of the income of such company or trust from services rendered, consists
of amounts received from any one client or an associated institution. According to Interpretation
Note No 35 (Issue 3) the reference to ‘income’ in the test is a reference to ‘income’ as defined in
s 1.
A client of a company or trust which might be a personal service provider will know whether require-
ments (a) or (b) are met. This is not the case with requirement (c). The company or trust might there-
fore supply the client with an affidavit stating that no more than 80% of the income was received from
one client (or associated institution) (par 2(1A)). The client may then bona fide trust the affidavit and
therefore not withhold any employees’ tax.
A company or trust is excluded from the definition of a personal service provider where, throughout
the year of assessment, three or more employees who are on a full-time basis engaged in the busi-
ness of such company or trust are employed. These employees may not be holders of shares in the
company or a settlor or beneficiary of the trust or be a connected person in relation to that person.
Where the definition is met and remuneration is paid to a personal service provider and is subject to
the deduction of employees’ tax, the employees’ tax withheld may be set off against the company or
trust’s provisional tax payments (paras 21 and 23).
Section 23(k) limits the deduction of expenses incurred by a personal service provider. This provision
prohibits the deduction of any expenses incurred by these taxpayers, other than any salaries paid to
employees of the personal service provider and certain specific deductions. These are deductions
for legal costs (s 11(c)), bad debts (s 11(i)), employer contributions to funds (s 11(l)), repayment of
employee benefits (s 11(nA)) and repayment of restraint of trade payment (s 11(nB)). Expenses in
respect of premises, finance charges, insurances, repairs and fuel and maintenance in respect of
assets, if such premises or assets are used wholly and exclusively for purposes of trade, can also be
deducted (see 6.5.10).
The taxable income of a personal service provider that is a company will be taxed at the rate of 28%,
and if the personal service provider is a trust, at 45% (41% in 2017). Employers making payments to
personal service providers must also use the aforementioned rates to deduct employees’ tax. In
addition, dividends tax will be payable on any dividends declared by personal service providers who
are companies. If the personal service provider is a trust the normal principles of ss 7 and 25B will
apply.
10.9 Directors of private companies (par 11C)

Paragraph 11C is repealed with effect from 1 March 2017. Please refer to the 2017 Silke for details in
this regard. See 10.2.2 for an explanation of the employees’ tax implications regarding directors’
fees.
10.10 Directors of public companies (par 1)

Directors of public companies are included in the definition of ‘employee’ in terms of subpar (a) being
a person receiving remuneration.
Employees’ tax is withheld from the monthly remuneration of executive directors according to the tax
tables.
261
SARS considers non-executive directors to be directors who are not involved in the daily manage-
ment or operations of a company, but simply attend, provide objective judgment, and vote at board
meetings (Binding General Ruling 40).
SARS considers both the ‘premises test’ and the ‘control or supervision test’ in respect of resident
non-executive directors. SARS accepts that no control or supervision is exercised over the manner in
which a non-executive director performs his duties and therefore such a director is not a common-law
employee. Directors’ fees paid to resident non-executive directors are therefore not ‘remuneration’,
not subject to employees’ tax and not subject to the limitations in s 23(m).
It follows that a non-executive director is an ‘independent contractor’ for VAT purposes in respect of
such activities (see proviso (iii)(bb) to the definition of ‘enterprise’). A non-executive director who
carries on an enterprise in the Republic must therefore register for VAT purposes if the value of the
directors’ fees exceeds R1 million in a 12-month period (Binding General Ruling 41).
A non-resident non-executive director is always an employee for employees’ tax purposes. The fact
that such non-executive directors earns remuneration does not affect the independent nature of the
services (Binding General Ruling 41). Non-resident non-executive directors will therefore be carrying
on an enterprise if the services are physically rendered in the Republic and must register for VAT in
such a case.
10.11 Duties of an employer

10.11.1 Registration (par 15)
A person who is an employer must in accordance with Chapter 3 of the Tax Administration Act (see
chapter 35) apply for registration as an employer (par 15(1)). An employer need not register as an
employer, if he has no employees or directors who are liable for normal tax (proviso to par 15(1)).
An employer is also required to notify the Commissioner (within 14 days after ceasing to be an em-
ployer) if he has ceased to be an employer (par 15(3)).
10.11.2 Obligation to deduct and pay over tax (paras 2, 5, 6 and 7)

Paragraph 2 imposes upon an employer who is a resident, or a representative employer in the case
of an employer who is not a resident, the obligation to deduct and pay over employees’ tax.
Every person, whether or not he is registered as an employer, who pays or becomes liable to pay an
amount of remuneration must, unless the Commissioner has granted authority to the contrary, deduct
or withhold from that amount the appropriate amount of employees’ tax. The deduction of employees’
tax is made in respect of the employee’s liability for normal tax. If the remuneration is paid or payable
to a married person and the remuneration is deemed to be income of the employee’s spouse under
s 7(2), the deduction is to be made in respect of the normal tax liability of the employee’s spouse.
The amount of employees’ tax deducted or withheld must be paid to the Commissioner within seven
days after the end of the month during which it was deducted or withheld (par 2(1)). An employer
may deduct the amount of the employment tax incentive for which the employer is eligible from the
amount of employees’ tax to be paid to the Commissioner, unless s 8 of the Employment Tax Incen-
tive Act, 2013 applies (par 2(2A)).
An employer can be personally liable for the payment of employees’ tax under Chapter 10 of the Tax
Administration Act. Such employer must pay that amount to the Commissioner not later than the date
on which payment should have been made if the employees’ tax had in fact been deducted or with-
held in terms of par 2 (par 5(1) and Interpretation Note No 27)). The par 2 liability to withhold employ-
ees’ tax is deemed to be discharged if the employer made payment of the outstanding employees’
tax to the Commissioner (par 5(1A)).
An employer can, on application in the prescribed form and manner and if he or she is satisfied that
there is a reasonable prospect of ultimately recovering the tax from the employee, be absolved from
the employer’s personal liability. This will be the case if the failure was not due to an intent to post-
pone the payment of tax or to evade the obligations of the employer (par 5(2)). An employer has the
right to recover any tax paid by him in terms of par 5(1) from the employee in such manner as the
Commissioner, on application in the prescribed form and manner by the employer, decides
(par 5(3)). Any amount paid by the employer in terms of par 5(1) but not recovered from the employ-
ee, shall, for purposes of s 23(d) be deemed to be a penalty due and payable by the employer and
therefore not deductible for income tax purposes (par 5(5)).
262
Should the employer fail to pay the amount for which he is liable within the period allowed, SARS
must in terms of Chapter 15 of the Tax Administration Act (see chapter 35), impose a penalty of 10%
of the amount due (par 6(1)).
An agreement between an employer and an employee under which the employer undertakes not to
deduct or withhold employees’ tax will be void (par 7). An employer may deduct more employees’ tax
if a written request was received from the employee (par 2(2)). The employer’s obligation to deduct
the tax is therefore absolute. Furthermore, the employee may not recover from an employer an
amount of employees’ tax deducted or withheld from his remuneration in terms of par 2.
10.11.3 Irregular remuneration (par 9(3))

SARS generally treats monthly overtime and production bonuses and quarterly commissions in the
same way as other remuneration, although it does allow for more complex calculations in specific
instances.
In the case of a 13th cheque or an annual bonus, the employees’ tax may, for example, be deducted
either at once or in 12 equal monthly instalments from such a bonus. If the employee was not in the
employer’s employment on 1 March, the employees’ tax must be deducted over the remaining
months in the year of assessment. The full amount of employees’ tax attributable to the bonus must
be deducted during the year of assessment in which it accrues to the employee. Whether the em-
ployees’ tax is deducted at once or in instalments, the amount to be deducted must be determined
using the annual tax deduction tables.
The amount of employees’ tax to be deducted or withheld from
l lump sums from employers (par (d)) or retirement fund lump sum benefits and retirement fund
lump sum withdrawal benefits (par (e)), or
l antedated salary or pension or lump sums from employers (s 7A)
must be ascertained by the employer from the Commissioner (i.e. a directive must be obtained),
whose determination of the amount is final (par 9(3)). The Commissioner will take into account the
table that is applicable to the specific amount (the progressive table in respect of par (d), and the
specific tax tables in respect of par (e)).
The employer must multiply the percentage in the directive with the amount of remuneration (which
will be the gross amount of a par (d) severance benefit and the net amount after the paras 5 and 6
deductions in respect of a par (e) retirement fund lump sum benefit or a retirement lump sum with-
drawal benefit) to calculate the employees’ tax.
10.11.4 Directives to employer (par 11)

The Commissioner, having regard to the particular circumstances, is empowered to issue a directive
in terms of par 11 to authorise the employer to
l refrain from deducting or withholding employees’ tax from remuneration due to employees, or
l deduct or withhold a specified amount of employees’ tax, or
l deduct or withhold an amount of employees’ tax calculated at a specified rate.
The directive may be issued
l to provide relief for an employee suffering hardship due to circumstances beyond his control (this
is deleted with effect from 1 March 2017), or
l where the employee’s remuneration is in the form of commission, or
l where the remuneration is received by a personal service provider, or
l to correct an error made by the employer in the calculation of employees’ tax (par 11(a)).
A directive is valid for only the tax year for which it is issued.
10.11.5 Records (par 14(1))

In addition to the records required in accordance with Part A of Chapter 4 of the Tax Administration
Act (see chapter 33), every employer must maintain a record showing the amounts of remuneration
paid by him to each employee and the amount of employees’ tax deducted from each amount of re-
muneration. Record must also be kept of the income tax reference numbers of registered employees
as well as such additional information as the Commissioner may prescribe. The record must be
retained by the employer for a period of five years from the date of the last entry and must be availa-
ble for scrutiny by the Commissioner.
263
10.11.6 Annual returns (par 14(3) and (6))

By such date as prescribed in the Gazette, or within 14 days after the employer ceases to be an
employer in relation to an employee or ceases to be an employer in total, or whatever longer period
the Commissioner may approve, an employer must render a return (form EMP 501) to the Commis-
sioner.
An employer is also obliged to render an annual statement of taxable benefits (par 18(1) of the Sev-
enth Schedule). This provision requires an employer to declare on the annual return (form EMP 501)
that all taxable benefits enjoyed by his employees during the period for which the return is furnished
are declared on the employees’ tax certificates delivered to his employees.
If the employer fails to submit a par 14(3) return, the Commissioner may impose on that employer a
penalty, which is deemed to be a percentage based penalty under Chapter 15 of the Tax Administra-
tion Act (see chapter 33). This penalty will be imposed for each month that the employer fails to
submit a complete return and in total may not exceed 10% of the total amount of employees’ tax
deducted or withheld or which should have been deducted or withheld by the employer from the
remuneration of employees for the period (par 14(6)). This decision of the Commissioner is subject to
objection and appeal (s 3(4)(e)).
10.11.7 Employees’ tax certificates (par 13)

An employer who deducts or withholds an amount of employees’ tax is obliged to deliver an em-
ployee’s tax certificate (the IRP 5 form) to each employee or former employee to whom remuneration
has been paid or has become payable by him. The certificate must show the total remuneration of the
employee or former employee and the amount of employees’ tax deducted or withheld by the em-
ployer from remuneration during the year of assessment (par 13).
If the employer did not cease to be an employer in relation to the specific employee, the employees’
tax certificates must be delivered to employees within 60 days after the end of the period to which the
certificate relates. If the employer ceased to be an employer in relation to the specific employee or
ceased to be an employer in total, the IRP5s must be delivered within 14 days of the day when he so
ceased.
Unless the Commissioner otherwise directs, no employer may deliver IRP5s to his employees until
such time that he has rendered his annual return (IRP 501) to the Commissioner. A percentage-
based penalty (a maximum rate of 10% of the employees’ tax withheld) becomes payable in terms of
Chapter 15 of the Tax Administration Act if the employer fails to render the IRP 501 within the pre-
scribed period.
When no employees’ tax has been deducted from the remuneration paid to an employee, a form
IT 3(a) should be issued to the employee.
10.12 The Employment Tax Incentive Act, 2013

The Employment Incentive Act, 2013 is contained in item 19A of Schedule 1 to the South African
Revenue Services Act, 1997. It aims to encourage employers to hire young and less experienced
work seekers in an effort to reduce unemployment in our country, as stated in the National Develop-
ment Plan. Section references in 10.12 are to ‘The Employment Tax Incentive Act’ unless otherwise
indicated.
The employment tax incentive (ETI) commences on 1 January 2014 and will cease on 28 February
2019. It brings relief to all ‘eligible employers’ in respect of ‘qualifying employees’. Eligible employers
may reduce the monthly employees’ tax withheld from employees and payable to SARS in terms of
the Fourth Schedule with the amount of the ETI (s 2(2)). The employer must therefore still withhold the
correct employees’ tax, but has the benefit that he does not have to pay the whole amount over to
SARS. The idea is that he uses that saving to fund the salaries of qualifying employees. Such amount
is gross income for the employer but is also exempt in terms of s 10(1)(s) of the Income Tax Act. The
ETI is based on the monthly remuneration of ‘qualifying employees’ and is explained below.
264
The following table summarises the meaning of ‘eligible employers’ and ‘qualifying employees’:
EMPLOYER EMPLOYEE
Eligible Non-eligible Qualifying Non-qualifying
Section 3(a) Section 3(b) and (c) Section 6(a), (b) and (e) Definition of ‘employee’
and s 6(c), (d) and (f)
Registered as an l The government in l 18 years and 29 years, l An independent con-
employer for em- any sphere or tractor
ployees’ tax pur- l Employed by an employer
poses with a fixed place of busi-
ness in a special economic
zone, or
l Employed by an employer
in a designated industry as
listed in the Gazette, and
l Receives remuneration of
less than R6 000 per month
l A public entity l In possession of either an l A connected person
(except if listed by identity card or an applica- in relation to the em-
Minister in the tion for an asylum permit or ployer
Gazette) an identity document
issued in terms of the
Refugees Act
l A municipal entity l Employed on or after l A domestic worker
1 October 2013
l Disqualified from l An employee in re-
receiving the ETI due spect of which an
to the displacement of employer is ineligible
an employee or due to receive the ETI by
to not meeting certain virtue of s 4
conditions prescribed
by regulation
It is clear from s 4 that adherence by employers to amounts payable by virtue of any wage regulation
measure (as defined in s 4(3)) and to a minimum wage of R2 000 per month (if there is no wage regu-
lation measure) is important. An employer is not eligible to receive the ETI if the wage paid is less
than the aforementioned.
An employer is deemed to have displaced an employee if the dismissal constitutes an automatically
unfair dismissal and the employer replaces the dismissed employee with an employee in respect of
which the employer is eligible to claim an ETI (s 5(2)). Such deemed displacements cause a penalty
of R3 000 and a possible disqualification of the employer from receiving the ETI (s 5(1)).
The relief that the ETI brings commenced on 1 January 2014 and is set out in s 7(2) and (3). The
effect of s 7(4) and (5) on the ETI must be borne in mind. An eligible employer must take any previ-
ous period of employment of a qualifying employee on or after 1 January 2014 by an associated
person (as defined) into account as if the eligible employer had been the employer for that previous
period. If a qualifying employee is only employed for a part of a month, the calculated ETI must be
apportioned in the ratio of remuneration for that month divided by the remuneration for a full month.
The ETI is based on the monthly remuneration of the qualifying employee and can be summarised as
follows:
First 12 months in respect of which an eligible Second and third 12 months after the first
employer employs a qualifying employee: Where 12 months in respect of which an eligible employer
the monthly remuneration of the qualifying employs a qualifying employee:
employee is Where the monthly remuneration of the qualifying
employee is
l less than R2 000: 50% × monthly remuneration l less than R2 000: 25% × monthly remuneration
l R2 000 or more but < R4 000: R1 000 l R2 000 or more but < R4 000: R500
l R4 000 or more but < R6 000: apply the formula l R4 000 or more but < R6 000: apply the formula
in s 7(2)(c) in s 7(3)(c)
l R6 000 or more: Rnil l R6 000 or more: Rnil
265
The number of hours for which an eligible employee is employed is taken into account in the defini-
tion of ‘monthly remuneration’. If the eligible employee is employed and paid remuneration for at least
160 hours in a month (with effect from 1 March 2017), the monthly remuneration means the amount
paid in a month. If employed and paid remuneration for less than 160 hours in a month, the ETI as
calculated above must be multiplied by the number of hours employed and divided by the number
160 (s 7(5)). The minimum monthly remuneration of R2 000 also applies only if the employee is em-
ployed for more than 160 hours in a month (s 4(1)(b)). The same apportionment as previously men-
tioned must be done if the person is employed for less than 160 hours in a month.
Section 8 prohibits an eligible employer to claim an ETI in a specific month if the eligible employer, on
the last day of the month,
l has failed to submit any tax return, or
l has any outstanding tax debt except if the debt can be paid in instalments in terms of an agree-
ment with SARS, the debts is suspended due to an objection or appeal, or the debt does not ex-
ceed R100.
An employer cannot deduct more than the total employees’ tax that is due to SARS in a particular
month. Sections 9 and 10 provide for a rollover of the ETI to the next month in this case, as well as in
the case where the ETI is unavailable to the eligible employer in a specific month due to s 8. An
eligible employer can claim a reimbursement from SARS of the excess of the amount of the ETI at the
end of each employees’ tax reconciliation period on a date to be announced in the Gazette.
10.13 Skills development Levy and Unemployment Insurance Fund

The Skills Development Levy (SDL)
The SDL is a compulsory levy scheme for the purposes of funding education and training. SDL is
payable by employers monthly at a rate of 1% of the leviable amount.
The leviable amount is the total amount of remuneration paid or payable by an employer to its em-
ployees during a month, as determined for the purposes of determining the employer’s liability for
employees’ tax. This means that the SDL is determined on the ‘balance of remuneration’ as explained
in 10.5 (also see par 2(4)).
Remuneration for SDL purposes does exclude certain amounts and these should be excluded from
the ‘balance of remuneration’ for SDL purposes. The following amounts are excluded:
l any amounts paid to labour brokers and employees declared by the Minister to be employees
l any amounts paid as pension, superannuation allowances or retiring allowances
l any annuities, lump sums from employers (par (d), lump sums from retirement funds (par (e) or
(eA))
l any amount payable to a learner.
The employer must remit the SDL liable amount to SARS with his monthly EMP 201 form.
The Unemployment Insurance Fund (UIF)

The monthly compulsory contributions to the UIF made by employers and employees are collected
by SARS and are paid over to the UIF, which is managed by the Unemployment Insurance Commis-
sioner. Both the employer and the employee must each contribute 1% of the remuneration paid to a
relevant employee during any month to the UIF.
The Minister of Finance determines the threshold for determining the UIF contributions, which is
R14 872 per month since 1 October 2012. The UIF contributions are based on the total amount of
remuneration, therefore before the deductions allowed in the calculation of the ‘balance of remunera-
tion’ (in terms of par 2(4)).
The employer must remit the UIF liable amount to SARS with his monthly EMP 201 form.
266
11 Provisional tax
Redge de Swardt

l identify taxpayers that should register for provisional tax
l determine the dates on which corporate and natural provisional taxpayers should
submit provisional tax returns and make provisional tax payments
l calculate the provisional tax liability for corporate and natural provisional taxpayers
l complete a provisional tax return for a corporate person and natural person
l identify the circumstances under which a provisional taxpayer will be liable for pen-
alties and interest on provisional tax payments
l calculate the amount of penalties and interest that a provisional taxpayer is liable for
under the above circumstances.
Contents
Page
11.1 Introduction .................................................................................................................. 267
11.2 Important definitions (par 1 of the Fourth Schedule) ................................................... 268
11.3 Registering for provisional tax (S 22 of the TAA) ......................................................... 268
11.4 Provisional tax periods (paras 21, 23 and 23A) .......................................................... 268
11.5 Estimate of taxable income (par 19) ............................................................................ 269
11.6 Normal tax rate used to calculate provisional tax payments (par 17) ......................... 270
11.7 Provisional tax payments for persons other than companies (par 21) ........................ 271
11.8 Provisional tax payments for companies (par 23) ....................................................... 273
11.9 Penalties in respect of provisional tax ......................................................................... 274
11.9.1 Late payment penalty (par 27 and s 213 of the TAA) ............................... 274
11.9.2 Underpayment penalty (par 20)................................................................. 274
11.10 Interest in respect of provisional tax ............................................................................ 277
11.10.1 Interest in respect of the late payment of provisional tax (s 89bis(2)) ...... 277
11.10.2 Interest on the underpayment and overpayment of provisional tax
(s 89quat) ................................................................................................... 278
11.10.3 Additional provisional tax payments (par 23A).......................................... 279
11.11 Offences in respect of provisional tax ......................................................................... 280
11.1 Introduction
Provisional tax is a method of paying income tax in advance for a particular year. Like employees’ tax
(see chapter 10), provisional tax is not a separate tax. Employees’ tax and provisional tax are pay-
ment mechanisms in terms of which a person pays income tax in instalments during a year. Where
employees’ tax is generally paid monthly, provisional tax is paid twice a year.
A taxpayer is assessed for income tax for a particular year of assessment after submitting an income
tax return. Provisional tax and employees’ tax payments made during the year of assessment are
deducted from the taxpayer’s income tax liability for that year to determine the amount payable by or
refundable to the taxpayer.
The rules relating to provisional tax are set out in Part III of the Fourth Schedule to the Act.
267
11.2 Important definitions (par 1 of the Fourth Schedule)

Provisional taxpayer is defined in par 1 of the Fourth Schedule. Certain persons are included in the
definition of provisional taxpayer, while others are specifically excluded. Those included as provision-
al taxpayers are:
l persons, other than a company, who receive income
– that does not qualify as remuneration, or an advance or an allowance (see chapter 8), or
– that qualifies as remuneration, but is paid by an employer that is not registered as an employer
for employees’ tax purposes
l any company, and
l any person who is notified by SARS that he or she is a provisional taxpayer.
Persons excluded from the definition of provisional taxpayer are:
l public benefit organisations
l recreational clubs
l body corporates, share block companies and income tax exempt associations (see s 10(1)(e))
l non-resident owners or charterers of ships and aircraft
l a natural person who does not receive income from carrying on a business and whose taxable
income for the year does not exceed the tax threshold
l a natural person who does not receive income from carrying on a business and the taxable
income of the person from interest, dividends, foreign dividends, fixed property rentals or remu-
neration from an employer that is not registered as an employer for employees’ tax purposes
does not exceed R30 000
l a small business funding entity, and
l a deceased estate.
The fees paid to non-executive directors of companies generally do not qualify

Please note! as remuneration and are not subject to employees’ tax (see BGR 40). Non-
executive directors should register for provisional tax purposes.
11.3 Registering for provisional tax (s 22 of the TAA)

When a person is obliged to register as a provisional taxpayer, he or she must apply for registration
within 21 business days of becoming obliged. SARS may approve an extension of this period (s 22 of
the TAA). A person who wilfully and without just cause fails to register for provisional tax when
obliged to, is guilty of an offence. The person may, upon conviction, be fined or imprisoned for a
period up to two years (s 234(a) of the TAA).
11.4 Provisional tax periods (paras 21, 23 and 23A)

All provisional taxpayers are required to make at least two provisional tax payments during a year of
assessment. The first provisional tax payment must be made within six months from the commence-
ment of the taxpayer’s year of assessment. The second provisional tax payment must be made on or
before the last day of the taxpayer’s year of assessment (paras 21 and 23).
Example 11.1. Provisional tax periods for a natural person

Julie receives rental income in addition to her salary. For this reason, she is a provisional taxpay-
er. Since Julie is a natural person, her year of assessment commences on 1 March of a year and
ends on 28 or 29 February the next year. For the 2018 year of assessment, Julie’s first provisional
tax payment must be made by 31 August 2017. Her second provisional tax payment must be
made by 28 February 2018.
268
11.4–11.5 Chapter 11: Provisional tax
Example 11.2. Provisional tax periods for a company
Pro-Sound (Pty) Ltd is a South African company and for this reason, a provisional taxpayer. Its
financial yearend is 31 December. Its year of assessment therefore commences on 1 January of
a year and ends on 31 December that year. For the 2018 year of assessment, Pro-Sound’s first
provisional tax payment must be made by 30 June 2018. Its second provisional tax payment
must be made by 31 December 2018.
Provisional taxpayers may make a third voluntary provisional tax payment to avoid (or reduce) paying
interest in respect of its tax liability for a particular year (par 23A). For provisional taxpayers with a
February year-end, a third provisional tax payment could be made within seven months after the end
of the year of assessment (that is, on or before 30 September). For all other provisional taxpayers, a
third provisional tax payment could be made within six months after the end of the relevant year of
assessment. This is discussed in more detail in 11.10.3 below.
11.5 Estimate of taxable income (par 19)

A provisional tax payer is required to estimate its taxable income for the year of assessment for which
a provisional tax return has to be submitted.
In the case of a natural person, the estimate should exclude any retirement fund lump sum benefit,
retirement fund lump sum withdrawal benefit or any severance benefit received during the year of
assessment (par 19(1)(a)).
For the first provisional tax payment, the estimate may not be less than the basic amount (see below),
unless the circumstances of the case justify a lower estimate (par 19(1)(c)). A second provisional tax
payment may be less than the taxpayer’s basic amount; however, the taxpayer may be subject to an
understatement penalty in such case (see 11.9.2).
A provisional tax return must be submitted even if the provisional tax payment is Rnil.
The basic amount is the person’s taxable income as assessed for the latest preceding year of assess-
ment, less the following amounts (par 19(1)(d)):
In the case of a person other than a company: In the case of a company:
The amount of any taxable capital gain The amount of any taxable capital gain
The taxable portion of any retirement fund lump
sum benefit, retirement fund lump sum withdrawal
benefit or severance benefit
Any amount contemplated in par (d) of the definition
of ‘gross income’. This paragraph includes certain
once-off benefits received from an employer in a
person’s gross income (see chapter 7).
*
Remember
A provisional taxpayer’s estimate of his taxable income for a year should include estimated taxa-
ble capital gain. The amount of taxable capital gain is only excluded when determining the tax-
payer’s basic amount.
Where a provisional taxpayer’s latest preceding year of assessment ended more than 18 months
before a provisional tax return has to be submitted, the basic amount must be increased by 8% per
year. The basic amount must be increased for the number of years calculated from the end of the
year of assessment to which the latest preceding year of assessment relates, to the end of the year of
assessment for which the estimate is made (proviso to par 19(1)(d)).
For the purpose of determining the basic amount, the latest preceding year of assessment is the
latest year of assessment for which the Commissioner issued an assessment longer than 14 days
before the provisional taxpayer submits the provisional tax return (par 19(1)(e)).
269
Example 11.3. Determining a taxpayer’s basic amount
A provisional taxpayer with a year of assessment ending on 28 February 2018 is submitting its
first provisional tax return for the year on 31 August 2017. If the taxpayer received a notice of
assessment for its 2016 year of assessment on 31 July 2016 and a notice of assessment for its
2017 year of assessment on 20 August 2017, its latest preceding year of assessment is its 2016
year of assessment. This is the latest preceding year of assessment for which it received a notice
of assessment 14 days or more before it has to submit its first provisional tax return for its 2018
year of assessment. The taxpayer’s basic amount for this provisional tax payment will be based
on its taxable income for its 2016 year of assessment.
Example 11.4. Determining a taxpayer’s basic amount

In example 11.3, the taxpayer’s latest year of assessment was its 2016 year of assessment. The
period between 28 February 2016 (the end of the taxpayer’s 2016 year of assessment) and
31 August 2017 (the day on which it has to submit its first provisional tax return for its 2018 year
of assessment) is 18 months. Since this period is not more than 18 months, it is not required to
increase its 2016 taxable income by 8%.
However, if the taxpayer did not submit its tax return for the 2016 year of assessment and, at the
time that it has to submit its first provisional tax return for the 2018 year of assessment (i.e.
31 August 2016), its latest year of assessment would have been its 2015 year of assessment,
twenty-eight (28) months would have passed between the last day of its latest year of assess-
ment (28 February 2015) and the day it has to submit the provisional tax return (31 August 2017).
The taxpayer has to increase its taxable income for its 2015 year of assessment by 8% per year
for the number of years between 28 February 2015 (the end of its latest year of assessment) and
28 February 2018 (the end of the year of assessment for which it submits the provisional tax re-
turn). Since three years passed between 28 February 2015 and 28 February 2018, the taxpayer
has to increase its 2015 taxable income by 24% (3 × 8%). If its taxable income for its 2015 year
of assessment was, for example, R600 000, its ‘basic amount’ for the first provisional tax payment
for its 2018 year of assessment would be R744 000 (R600 000 × 24% + R600 000).
The Commissioner my estimate a provisional taxpayer’s taxable income if the taxpayer fails to submit
an estimate (par 19(2)). The Commissioner may require the provisional taxpayer to provide further
detail relating to its provisional tax payment. If the Commissioner is dissatisfied with the provisional
taxpayer’s estimate, he or she may increase the amount. Such increased estimate is not subject to
objection and appeal (par 19(3)). Any estimate or increase by the Commissioner is deemed to take
effect in respect of the relevant period within which the provisional taxpayer is required to make a
provisional tax payment (par 19(5)). Where SARS has increased a taxpayer’s estimate of taxable
income, any additional provisional tax that becomes payable must be paid within a period deter-
mined by SARS (par 25).
Where a provisional taxpayer has failed to submit an estimate of his taxable income by the last day of
a period of four months after the last day of the year of assessment, the provisional taxpayer is
deemed to have submitted an estimate of nil taxable income (par 19(6)). The Commissioner may still
estimate the provisional taxpayer’s taxable income in the circumstances. The provisional taxpayer will
be subject to penalties and interest in respect of any late and, or underpayment of provisional tax
(see 11.9 and 11.10).
SARS may excuse a provisional taxpayer from making a first provisional tax payment if satisfied that
the taxpayer’s taxable income for the relevant year of assessment cannot be estimated on the facts
available at the time when the payment has to be made (par 24). If SARS decides not to absolve a
provisional taxpayer from making a first provisional tax payment, the taxpayer may object to SARS’
decision under Chapter 9 of the Tax Administration Act (see chapter 35).
11.6 Normal tax rate used to calculate provisional tax payments (par 17)
The normal tax rate to be used when calculating a provisional tax payment is the rate in force for the
year of assessment on the date of making the provisional tax payment. If the rate of tax has not been
promulgated for the year of assessment, the rate announced by the Minister of Finance in his budget
statement for the year must be used. If a rate has not yet been promulgated or announced in a
budget statement, the rate that applied for the latest preceding year of assessment must be used
(par 17(4)).
270
SARS may prescribe tables that a provisional taxpayer may elect to use instead of the above rates
when calculating provisional tax payments. These tables take the relevant tax rates for the year and
rebates where applicable into account (par 17(5)).
The above rates apply in cases where the taxpayer makes an estimate of its taxable income, where
SARS increases such estimate or where SARS estimates the provisional taxpayer’s taxable income
(par 17(3)).
11.7 Provisional tax payments for persons other than companies (par 21)
First payment (within six months from the commencement of the year of assessment in question)
The first provisional tax payment for a provisional taxpayer other than a company is calculated as
follows (par 21(1)(a)):
Estimated taxable income for the year of assessment .............................................................. XXXX
Normal tax on estimated taxable income................................................................................... XXXX
Less: Primary, secondary and tertiary rebates under s 6 .......................................................... (XXXX)
Less: Tax credit for medical scheme fees under s 6A .............................................................. (XXXX)
Less: Additional medical expenses tax credit under s 6B ........................................................ (XXXX)
Total tax payable (A) .................................................................................................................. XXXX
Half of the normal tax payable on estimated taxable income (A / 2) ......................................... XX
Less: Employees’ tax deducted from the provisional taxpayer’s remuneration during
the first period .................................................................................................................. (X)
Less: Foreign tax credits under s 6quat proved to be payable by the end of the first
period ............................................................................................................................... (X)
First provisional tax payment...................................................................................................... XXXX
Second payment (not later than the last day of the year of assessment in question)
The second provisional tax payment for a provisional taxpayer other than a company is calculated as
follows (par 21(1)(b)):
Less: Primary, secondary and tertiary rebates under s 6 ........................................................ (XXXX)
Less: Tax credit for medical scheme fees under s 6A ............................................................. (XXXX)
Less: Additional medical expenses tax credit under s 6B ....................................................... (XXXX)
Total tax payable ...................................................................................................................... XXXX
the year ............................................................................................................................ (X)
Less: First provisional tax payment (if actually paid) ............................................................... (X)
Less: Foreign tax credits under s 6quat proved to be payable for the year ............................ (X)
Second provisional tax payment ............................................................................................... XXXX
Example 11.5. Provisional tax payment for a natural person

Tsela submitted her first provisional tax return for her 2018 year of assessment on 31 August
2017 and paid an amount of R25 000. Her income consists of her salary, income from a part-time
business and certain investment income. Employees’ tax of R49 350 was withheld from her salary
during the period from 1 March 2017 to 28 February 2018. Tsela received her assessment for the
2017 year of assessment on 30 November 2017, which indicated her final assessed taxable in-
come for the 2017 year as R430 000. She turned 28 on 10 October 2017. When Tsela calculated
her second provisional tax payment on 28 February 2018, she wasn’t yet sure what her taxable
income for the 2018 year would be and she decided to base her payment on her basic amount.
Calculate Tsela’s second provisional tax payment for her 2018 year of assessment.
271
SOLUTION
Tsela’s basic amount on 28 February 2018 was R430 000. This was the taxable income as per
her most recent assessment at the time, being her 2017 assessment. Since this assessment did
not end more than 18 months before she had to make her second provisional tax payment for
her 2018 year of assessment, she is not required to increase this amount by 8% (see 11.5). Tsela
can therefore base her 2018 second provisional tax payment on her basic amount of R430 000.
This payment is calculated as:
Estimated taxable income for the year of assessment (basic amount)......................... R430 000
Normal tax on R430 000 (R430 000 – R410 460) × 36% + R97 225) ........................... 104 260
Less: Primary rebate (only the primary rebate applies since Tsela is not yet
65 years old) ...................................................................................................... (13 635)
Total tax payable........................................................................................................... 90 625
Less: Employees’ tax deducted from the provisional taxpayer’s remuneration
during the year .................................................................................................. (49 350)
Less: First provisional tax payment ............................................................................. (25 000)
Second provisional tax payment ................................................................................... R16 275
Notes:
(1) If Tsela realises before 30 September 2018 that her taxable income for the 2018 year of
assessment was more than R430 000, she can make an additional provisional tax payment.
If she makes an additional provisional tax payment before 30 September 2018, she will not
incur interest on underpayment of provisional tax (see 11.10). If, for example, she realises
that her taxable income was R480 000 for the 2018 year of assessment, she should make
an additional provisional tax payment on or before 30 September 2018, calculated as fol-
lows in order to avoid paying interest on underpayment of provisional tax:
Normal tax on R480 000 (R480 000 – R410 460) × 36% + R97 225) ................. 122 259
65 years old) ............................................................................................ (13 635)
Total tax payable ................................................................................................. 108 624
Less: Employees’ tax deducted from the provisional taxpayer’s remuneration
during the year......................................................................................... .. (49 350)
Less: First provisional tax payment .................................................................. (25 000)
Less: Second provisional tax payment............................................................. (16 275)
Additional provisional tax payment ..................................................................... R17 999
(2) Since Tsela based her second provisional tax payment on her basic amount (and based on
the assumption that her final assessed taxable income for her 2018 year of assessment
does not exceed R1 million), Tsela will not be subject to an underpayment penalty (see
11.9.2).
272
Example 11.6. Provisional tax payment for a natural person making contributions to a
medical scheme
Refer to example 11.5.
If Tsela contributed R3 500 per month to a medical scheme of which she is the only beneficiary
(and she is not a person with a disability), calculate the amount of her second provisional tax
payment (assume that she incurred no other qualifying medical expenses during the year):
Estimated taxable income for the year of assessment (basic amount)........................ R430 000
Normal tax on R430 000 (R430 000 – R410 460) × 36% + R97 225) .......................... 104 260
65 years old) .................................................................................................... (13 635)
Less: Medical scheme fees tax credit under s 6A (see chapter 7) (R303 × 12) ........ (3 636)
Subtotal ........................................................................................................................ 86 989
Less: Additional medical expenses tax credit under s 6B (see chapter 7)
Contributions to medical scheme (R3 500 × 12) .................................... R42 000
Less: 4 × medical scheme fees tax credit under s 6A (303 × 12 × 4) .. (14 544)
27 456
Less: 7,5% of taxable income (R86 989 × 7,5%) .................................. (6 524)
20 932 (20 932)
Total tax payable.......................................................................................................... 66 057
Less: Employees’ tax deducted from the provisional taxpayer’s
remuneration during the year ........................................................................... (49 350)
Less: First provisional tax payment ............................................................................ (25 000)
Second provisional tax payment (since the amount is negative, Tsela’s second
provisional tax payment will be null) ............................................................................ (R8 293)
Note:
Although the amount calculated as Tsela’s second provisional tax payment was negative, Tsela
will not receive a refund of provisional tax. She has to submit a second provisional tax return that
will indicate a payment of null. When Tsela submits her tax return for the 2018 year of assess-
ment and receives her final assessment for the 2018 year, she will receive a refund (on the as-
sumption that her taxable income, as finally assessed, was R430 000).
11.8 Provisional tax payments for companies (par 23)

First payment (within six months from the commencement of the year of assessment in question)
The first provisional tax payment for a provisional taxpayer that is a company is calculated as follows
(par 23(a)):
Normal tax on estimated taxable income (A)
Half of the normal tax payable on estimated taxable income (A / 2)
the first period .................................................................................................................. XX
Less: Foreign tax credits under s 6quat proved to be payable by the end of the
first period ........................................................................................................................ (X)
First provisional tax payment...................................................................................................... XXXX
Second payment (not later than the last day of the year of assessment in question)
The second provisional tax payment for a provisional taxpayer that is a company is calculated as
follows (par 23(b)):
Total tax payable ...................................................................................................................... XXXX
the year ............................................................................................................................ (X)
Less: First provisional tax payment (if actually paid) ............................................................... (X)
Less: Foreign tax credits under s 6quat proved to be payable for the year ............................ (X)
Second provisional tax payment ................................................................................................ XXXX
273
Example 11.7. Provisional tax payment for a company
Lesego Construction (Pty) Ltd has a June year-end. At the time it had to submit its first provision-
al tax return for its 2018 year of assessment, the taxable income for its 2016 year of assessment,
which was its latest assessed year of assessment at the time, was R1 200 000. It received its
2016 assessment more than 14 days before its second provisional return for 2018 was due. The
taxable income for its 2016 year of assessment includes R300 000 taxable capital gain. Calculate
the amount of Lesego Construction (Pty) Ltd’s first provisional tax payment if this payment was
based on its basic amount.
SOLUTION
First provisional tax payment (due on 31 December 2017)
Basic amount
Taxable income for latest assessed year of assessment .............................................. 1 200 000
Less: Taxable capital gain included in the taxable income .......................................... (300 000)
900 000
Normal tax on estimated taxable income (R900 000 × 28%) ....................................... R252 000
First provisional tax payment (half of the normal tax payable on estimated taxable
income) (R252 000 × 1/2) ............................................................................................. R126 000
On 30 June 2018 Lesego Construction (Pty) Ltd estimates that its taxable income for its 2018
year of assessment is R1 100 000. Calculate the amount of Lesego Construction (Pty) Ltd’s sec-
ond provisional tax payment if this payment was based on the estimate of R1 100 000.
Second provisional tax payment (due on 30 June 2018)
Estimated taxable income for the year of assessment.................................................. 1 100 000
Normal tax on estimated taxable income (R1 100 000 × 28%)..................................... 308 000
Less: First provisional tax payment ............................................................................... (126 000)
Second provisional tax payment ................................................................................... R182 000
11.9 Penalties in respect of provisional tax

11.9.1 Late payment penalty (par 27 and s 213 of the TAA)
If a provisional taxpayer fails to make its first or second provisional tax payments on or before the
respective due dates, a 10% penalty is levied on the unpaid amounts. These due dates are as fol-
lows:
Provisional tax period Due date

First provisional tax period End of six months after beginning of the year of assessment
Second provisional tax period Last day of the year of assessment
Where SARS has increased a taxpayer’s estimate of taxable income, any additional provisional tax
that becomes payable must be paid within the period determined by SARS (par 25). If the additional
provisional tax is not paid within such period, the 10% penalty will be levied on the unpaid amount.
11.9.2 Underpayment penalty (par 20)

An underpayment penalty is imposed when a provisional taxpayer underestimates its taxable income
for a particular year of assessment. The penalty is only imposed if the estimated taxable income used
for purposes of a taxpayer’s second provisional tax return is less than
l 80% of its final taxable income for that year of assessment in cases where the taxpayer’s taxable
income is more than R1 million, or
l 90% of its final taxable income for that year of assessment in cases where the taxpayer’s taxable
income is equal to or less than R1 million and also less than the basic amount applicable to the
estimate.
274
11.9 Chapter 11: Provisional tax
l An underpayment penalty can only be imposed on a second provisional tax

payment. A first provisional tax payment cannot be subject to an understate-
ment penalty.
l Where a taxpayer’s taxable income for a year exceeds R1 million, the tax-
Please note! payer could be subject to an underpayment penalty even if its second provi-
sional tax payment was based on its basic amount. The same does not apply
to a taxpayer whose taxable income is equal to or less than R1 million. In
such case, if the taxpayer based its second provisional tax payment on its
basic amount, the taxpayer will not be subject to an underpayment penalty.
The understatement penalty is calculated as follows:
Where a taxpayer’s taxable income for a year Where a taxpayer’s taxable income for a year is less
exceeds R1 million than or equals R1 million
20% of the difference between: 20% of the difference between:
l the normal tax on 80% of the taxpayer’s taxable l the lesser of:
income (after taking rebates into account), and – the normal tax on 90% of the taxpayer’s
l the employees’ tax and provisional tax paid by taxable income (after taking rebates into
the end of the year of assessment. account), and
– the normal tax on the taxpayer’s basic
amount (after taking rebates into account),
and
l the employees’ tax and provisional tax paid by
the end of the year of assessment.
When determining whether a taxpayer is subject to an underpayment penalty and when calculating
such penalty, the following amounts should be excluded from the taxpayer’s taxable income if re-
ceived or accrued to during the relevant year:
l retirement fund lump sum benefit
l retirement fund lump sum withdrawal benefit, and
l severance benefit.
The understatement penalty should be reduced by the 10% late payment penalty imposed in respect
of a taxpayer’s second provisional tax payment for a particular year of assessment, if in addition to
being understated, the payment was also made late (par 20(2B).
SARS may remit the underpayment penalty in the following circumstances:
l if SARS is satisfied that the taxpayer’s estimate was seriously calculated with due regard to all
factors having a bearing thereon and was not deliberately or negligently understated, the penalty
may be remitted in whole or in part (par 20(2)), and
l if the taxpayer failed to submit a second provisional tax return within four months after the end of
its year of assessment, and is consequently deemed to have submitted a nil return (see 11.5),
SARS may remit the penalty in whole or in part if satisfied that the failure was not due to an intent
to evade or postpone the payment of provisional tax or normal tax (par 20(2C)).
Example 11.8. Understatement penalty – natural person
Nwabisa submitted her second provisional tax return for her 2018 year of assessment on
28 February 2018 and paid an amount of R206 990. She was 38 years old at the time. She esti-
mated her taxable income for the 2018 year of assessment at R1 200 000 and her basic amount
was R1 150 000. Her first provisional tax payment was made on 31 August 2017 for R190 000.
She received her assessment for the 2018 year of assessment on 15 November 2018, which
indicated her final assessed taxable income for the year as R1 650 000.
Determine whether Nwabisa is liable for an understatement penalty, and, if so, calculate the
amount of the penalty. Assume that Nwabisa did not qualify for any medical rebates or credits.
275
SOLUTION
Since Nwabisa’s taxable income for the year exceeded R1 million, she will be subject to an un-
derstatement penalty if her estimated taxable income used for her second provisional tax return
was less than 80% of her taxable income for the year. Her taxable income for the year was
R1 650 000 and 80% of this is R1 320 000. Since her estimated taxable income (R1 200 000) was
less than R1 320 000, she will be subject to an understatement penalty calculated as:
80% of her taxable income ......................................................................................... R1 320 000
Normal tax on R1 320 000 (R1 320 000 – R708 310) x 41% + R209 032 – R13 635
(primary rebate)) ......................................................................................................... 446 190
Less: Employees tax and provisional tax paid by the end of the year of
assessment: R190 000 (first provisional tax payment) + R206 990
(second provisional tax payment) ................................................................... (396 990)
49 200
Understatement penalty (20% × R49 200) ................................................................. R9 840
Example 11.9. Understatement penalty – natural person

Craig submitted his second provisional tax return for his 2018 year of assessment on
28 February 2018 and paid an amount of R40 348. He was 32 years old at the time. He estimat-
ed his taxable income for the 2018 year of assessment at R400 000 while his basic amount was
R450 000. His first provisional tax payment was made on 31 August 2017 for R40 000. He re-
ceived his assessment for the 2018 year of assessment on 15 November 2018, which indicated
his final assessed taxable income for the year as R480 000.
Determine whether Craig is liable for an understatement penalty, and, if so, calculate the
amount of the penalty. Assume that Craig did not qualify for any medical rebates or credits.
SOLUTION
Since Craig’s taxable income for the year was less than R1 million, he will be subject to an un-
derstatement penalty if his estimated taxable income used for his second provisional tax return
was less than 90% of his taxable income for the year and less than his basic amount. His taxable
income for the year was R480 000 and 90% of this is R432 000. Since his estimated taxable
income (R400 000) was less than R432 000 and less than his basic amount of R450 000, he will
be subject to an understatement penalty calculated as:
The lesser of 90% of his taxable income (R432 000) and his basic amount
(R450 000) .................................................................................................................... R432 000
Normal tax on R432 000 (R432 000 – R410 460) × 36% + R97 225 – R13 635
(primary rebate)) ........................................................................................................... 91 344
Less: Employees’ tax and provisional tax paid by the end of the year of
assessment: R40 000 (first provisional tax payment) + R40 348
(second provisional tax payment)...................................................................... (80 348)
10 996
Understatement penalty (20% × R10 996) ................................................................... R2 199
Example 11.10. Understatement penalty – company
Perfect Plumbing (Pty) Ltd submitted its second provisional tax return for its 2018 year of as-
sessment on 30 June 2018 and paid an amount of R120 800. Its estimate for its taxable income
for the 2018 year of assessment, which ended on 30 June 2018, was R860 000 while its basic
amount was R880 000. Its first provisional tax payment was made on 31 December 2017 for
R120 000. It received its assessment for the 2018 year of assessment on 15 February 2019,
which indicated its final assessed taxable income for the year as R900 000.
Determine whether Perfect Plumbing (Pty) Ltd is liable for an understatement penalty, and, if so,
calculate the amount of the penalty.
276
SOLUTION
Since Perfect Plumbing (Pty) Ltd’s taxable income for the year was less than R1 million, it will be
subject to an understatement penalty if its estimated taxable income used for its second provi-
sional tax return was less than 90% of its taxable income for the year and less than its basic
amount. Its taxable income for the year was R900 000 and 90% of this is R810 000. Since its
estimated taxable income (R860 000) was more than R810 000, it will not be subject to an un-
derstatement penalty, despite the fact that its estimated taxable income for the year was less
than its basic amount.
Although Perfect Plumbing (Pty) Ltd is not subject to an understatement penalty

on its second provisional tax payment, it will be subject to interest on the under-
payment of provisional tax for the 2018 year of assessment. See 11.10.2.
Interest will be calculated on the difference between Perfect Plumbing (Pty) Ltd’s
normal tax liability for the year (R900 000 × 28% = R252 000) and its ‘credit
Please note! amount’ (R120 000 (first provisional tax payment) + R120 800 (second provision-
al tax payment)). Interest will be calculated from the ‘effective date’ (31 Decem-
ber 2018, which is 6 months after the end of its 2018 year of assessment) until its
date of assessment (15 February 2019). If we assume that the prescribed rate of
interest is 10,5%, Perfect Plumbing (Pty) Ltd will be liable for R148 interest, cal-
culated as R252 000 (normal tax liability) – R240 800 (credit amount) × 10,5% ×
(31 (days in January) + 15 (days in February)/365.
11.10 Interest in respect of provisional tax

The provisions discussed in this paragraph relating to interest will be replaced by provisions of the
Tax Administration Act (TAA) once they become effective. When the TAA became effective on
1 October 2012, its provisions relating to interest did not become effective. This will only happen on a
date still to be announced.
11.10.1 Interest in respect of the late payment of provisional tax (s 89bis(2))

Provisional tax payments must be made in full on or before the end of a provisional tax period (see
11.4). These due dates are as follows:
Provisional tax period Due date

First provisional tax period End of six months after beginning of the year of
assessment
Second provisional tax period Last day of the year of assessment
Additional provisional tax (voluntary third provision- The ‘effective date’, which in the case of a natural
al tax period) person and companies with a February year-end is
seven months after the end of the year of assess-
ment. In all other cases the ‘effective date’ is
six months after the end of the year of assessment.
If a provisional taxpayer fails to pay the amount in full within this period, interest is levied at the pre-
scribed rate on the unpaid amount for the period starting at the end of the relevant provisional tax
period and ending on the day that the amount is paid.
The prescribed rate is determined by the Minister of Finance (see definition of ‘prescribed rate’ in
s 1). The current prescribed rate is 10,25% per annum (effective from 1 November 2017). If the
prescribed rate changes during the period that a provisional taxpayer has to pay interest, the interest
is calculated at the previous rate up to the day before the rate changes and thereafter at the new rate
(s 89quin).
The prescribed rate of interest is set in terms of the Public Finance Management
Act of 1999. Where the Minister of Finance sets a new rate for purposes of that
Please note! Act, it only applies to the Income Tax Act from the first day of the second month
following the date on which the new rate becomes effective.
277
Example 11.11. Interest on late payment of provisional tax

Gwyn is a provisional taxpayer because she receives rental income. Her second provisional tax
payment of R50 000 for the 2018 year of assessment was due on 28 February 2018. She only
paid the amount on 15 April 2018. Because the amount was not paid in full on 28 February 2018
(the last day of her second provisional tax period for her 2018 year of assessment), she has to
pay interest on the outstanding amount. If the prescribed rate of interest is 10,25%, the amount
of interest is R645,89, calculated as R50 000 × 10,25% × (46 (the number of days the payment
was outstanding)/365 (the number of days in the year)).
11.10.2 Interest on the underpayment and overpayment of provisional tax (s 89quat)

Where a provisional taxpayer underestimates its taxable income for a particular year and, because of
that, underpays provisional tax, interest is levied on the underpayment in addition to any understate-
ment penalties that may be levied (see 11.9.2). Interest is only levied on an underpayment of provi-
sional tax if the taxpayer’s taxable income finally determined for the year of assessment exceeds
R20 000 in the case of a company, or R50 000 in the case of a person other than a company. The
underpayment is calculated as the difference between the normal tax payable in respect of the
taxpayer’s taxable income finally determined for the year of assessment and an amount referred to as
the ‘credit amount’.
The ‘credit amount’ is the sum of the following amounts:
l the taxpayer’s first and second provisional tax payments made for the year of assessment
l additional provisional tax payments made (see 11.10.3)
l employees’ tax withheld by the taxpayer’s employer during the year, and
l any foreign taxes that are deductible from the taxpayer’s tax payable for the year.
To determine the underpayment amount, any underpayment penalty levied (see

Please note! 11.9.2) should be added to normal tax. Effectively the provisional taxpayer will
also pay interest on the underpayment penalty.
Interest is levied at the prescribed rate from the ‘effective date’ in relation to the particular year until
the relevant date of assessment. The prescribed rate is currently 10,25% per annum (effective from
1 November 2017). The ‘effective date’ is 30 September of a particular year in the case of companies
with February year-ends and all natural persons. In any other case, the ‘effective date’ is six months
after the last day of the taxpayer’s second provisional tax period.
If the Commissioner is satisfied that the reason why the taxpayer paid its provisional tax late was due
to circumstances beyond the taxpayer’s control, the Commissioner may decide that the full or part of
the amount of interest is not payable (s 89quat(3)). The Commissioner may also decide that interest is
not payable for the first year of assessment that a natural person became a provisional taxpayer if the
circumstances warrant such decision (s 89quat(3A)). Any of these decisions by the Commissioner
are subject to objection and appeal (s 89quat(5)).
Where a provisional taxpayer overpaid provisional tax, interest, calculated at 4% below the rate
mentioned above, is paid to the taxpayer. Interest is only paid on an overpayment of provisional tax if
the excess amount exceeds R10 000, or if the taxpayer’s taxable income finally determined for the
year of assessment exceeds R20 000 in the case of a company, or R50 000 in the case of a person
other than a company. The excess amount is calculated as the difference between the credit amount
and the normal tax payable on the taxpayer’s taxable income finally determined for the year of assess-
ment. Interest will be paid from the effective date until the excess amount is refunded (s 89quat(4)).
The definition of ‘prescribed rate’ in s 1 provides that where interest is payable to

Please note! a provisional taxpayer on provisional tax overpaid, the rate of interest is deter-
mined at 4 percentage points below the rate that would apply in the case where
a provisional taxpayer underpaid provisional tax.
278
11.10 Chapter 11: Provisional tax
Example 11.12. Interest in underpayment of provisional tax
Jones Construction (Pty) Ltd made its second provisional tax payment of R180 000 for the 2017
year of assessment on 31 August 2017 (the last day of its financial year). Its first provisional tax
payment for the 2017 year of assessment of R150 000 was made on 28 February 2017. Its taxa-
ble income for its 2017 year of assessment, as finally assessed on 15 August 2018, was
R1 500 000 with a normal tax liability of R420 000.
Calculate any interest that Jones Construction (Pty) Ltd may be liable for. Disregard any under-
statement penalties that may be levied for purpose of this example. Assume that the prescribed
rate of interest was 10,5% at all relevant times.
SOLUTION
Jones Construction (Pty) Ltd’s first and second provisional tax payments were made on time. It is
therefore not subject to interest due to the late payment of provisional tax.
However, Jones Construction (Pty) Ltd underpaid its provisional tax for its 2017 year of assess-
ment by R135 000 and is liable for interest on this underpayment. The underpayment amount
and interest liability are calculated as:
Normal tax liability on amount assessed (R1 500 000 × 28%) .................................... R420 000
Less: Credit amount
First provisional tax payment ....................................................... R150 000
Second provisional tax payment ................................................. 180 000
R330 000 (330 000)
Underpayment ............................................................................................................. R90 000
Interest calculated from (6 months after 31 August 2017, the end of the
second provisional tax period) ................................................................ 28 February 2018
Interest calculated to (date of assessment) ............................................. 15 August 2018
Interest (R90 000 × 10,5% × (31 (March) + 30 (April) + 31 (May) +
30 (June) + 31 (July) + 15 (August))/365 ................................................ R4 350
11.10.3 Additional provisional tax payments (par 23A)

A provisional taxpayer may make additional provisional tax payments in respect of a year of assess-
ment. These payments are referred to as third top-up payments and are in addition to the amounts
that must be paid at the end of the provisional taxpayer’s first and second provisional tax periods.
Additional provisional tax payments may be made to reduce any interest payable on underpayment
of provisional tax (see 11.10) (par 23A(1)). Additional provisional tax payments are included in the
‘credit amount’ when determining whether interest is due on the underpayment of provisional tax.
Where an additional provisional tax payment is made in respect of a year of assessment but after the
‘effective date’ in respect of such year, the payment is deemed to be made before the ‘effective date’
for purposes of determining whether interest is due on the underpayment of provisional tax.
279
Example 11.13. Interest in underpayment of provisional tax
Refer to example 11.12.

If Jones Construction (Pty) Ltd made an additional provisional tax payment of R135 000 on or
before 28 February 2018, the last day for making an additional provisional tax payment, it will
not be liable for interest on underpayment of provisional tax.
If Jones Construction (Pty) Ltd made an additional provisional tax payment of R80 000 on or
before 28 February 2018, the last day for making an additional provisional tax payment, it will be
liable for interest on the underpayment calculated as follows:
Normal tax liability on amount assessed (R1 500 000 × 28%)..................................... R420 000
Less: Credit amount
First provisional tax payment ....................................................... R150 000
Second provisional tax payment.................................................. 180 000
Additional provisional tax payment .............................................. 80 000
R410 000 (410 000)
Underpayment ............................................................................................................. R10 000
Interest calculated from (6 months after 31 August 2017, the end of the
second provisional tax period)................................................................. 28 February 2018
Interest calculated to (date of assessment) ............................................. 15 August 2018
Interest (R10 000 × 10,5% × (31 (March) + 30 (April) + 31 (May) + 30
(June) + 31 (July) + 15 (August))/365 ...................................................... R483
If Jones Construction (Pty) Ltd made an additional provisional tax payment of R135 000 on
31 March 2018, it will not be liable for interest on underpayment of provisional tax (because for
purpose of s 89quat, the payment is deemed to be made before the effective date), but it will be
liable for interest on the late payment of the additional provisional tax (that is s 89bis interest –
see 11.10) of R1 204 (calculated as R135 000 × 10,5% × 31 (the days between last day for mak-
ing an additional provisional tax payment and the day on which the payment was made)/365).
11.11 Offences in respect of provisional tax

A person who wilfully and without just cause fails to register for provisional tax when obliged to, is
guilty of an offence. The person may, upon conviction, be fined or imprisoned for a period up to two
years (s 234(a) of the TAA).
A person who fails to submit an estimate of his taxable income for provisional tax purposes, is also
guilty of an offence and may, upon conviction, be fined or imprisoned for a period up to one year
(par 30(1)(m)).
280
12 Special deductions and assessed losses
Jolani Wilcocks

After studying this chapter you should:
l be able to establish which expenses are deductible for tax purposes
l be able to follow the rules for the deduction of restraint of trade payments
l be able to calculate the amounts an employer may deduct in respect of his contri-
butions to funds
l know when a deduction is available for medical lump sum payments
l be able to calculate the deduction allowed to an employer in respect of shares
issued to employees in terms of s 8B
l understand how annuities to former employees, life insurance policies and variable
remuneration are dealt with
l apply the provisions pertaining to learnership agreements
l be able to determine which legal expenses are deductible
l understand what expenditure on repairs may be deducted
l be able to calculate the deductions allowed for bad and doubtful debts
l be able to identify and calculate the deduction for the repayment of employee
benefits
l understand and be able to apply the provisions relating to deductions available on
the issue of venture capital company shares
l be able to identify which donations are deductible and to calculate the allowable
deduction in this regard
l calculate the special allowance for suspensive sales
l know when a deduction is available for future expenditure
l know how to deal with assessed losses.
Contents
Page
12.1 Overview and core concepts (ss 11(a), 11(x) and 23)....................................................... 282
12.2 Employee-related expenses ................................................................................................. 283
12.2.1 Restraint of trade payments (s 11(cA)) ............................................................ 283
12.2.2 Fund contributions by employers (s 11(l)) ....................................................... 284
12.2.3 Deduction of medical lump sum payments (s 12M) ........................................ 284
12.2.4 Shares issued by employers in terms of s 8B (s 11(lA)).................................. 285
12.2.5 Annuities to former employees or partners and their dependants (s 11(m)) .. 286
12.2.6 Life insurance premiums (s 11(w)) .................................................................. 287
12.2.7 Variable remuneration (s 7B) ........................................................................... 288
12.2.8 Learnership agreements (s 12H) ..................................................................... 289
12.3 Legal expenses (s 11(c))................................................................................................. 296
12.4 Repairs: Introduction (s 11(d)) ........................................................................................ 297
12.4.1 Repairs: Meaning ............................................................................................. 298
12.4.2 Repairs: Occupied for the purpose of trade or in respect of which
income is receivable ........................................................................................ 300
12.5 Bad debt (s 11(i)) ............................................................................................................ 301
12.6 Doubtful debt (s 11(j)) ..................................................................................................... 303
12.7 Repayment of employee benefits (s 11(nA) and 11(nB)) ............................................... 305
281
Page
12.8 Deductions in respect of the issue of Venture Capital Company shares (s 12J) ........... 306
12.8.1 Defining a Venture Capital Company and a qualifying company........................ 306
12.8.2 Deductions available on investment in a Venture Capital Company .............. 308
12.9 Donations to public benefit organisations and other qualifying beneficiaries (s 18A) ... 310
12.10 Allowance for outstanding debt: Credit agreements and debtors’ allowance (s 24) ..... 311
12.11 Future expenditure on contracts (s 24C) ........................................................................ 314
12.12 Assessed losses (s 20).................................................................................................... 316
12.12.1 Assessed losses: Balance set off by taxpayers other than companies .......... 317
12.12.2 Assessed losses: Balance set off by companies ............................................ 318
12.12.3 Assessed losses: From trade carried on outside South Africa........................ 321
12.13 Comprehensive example................................................................................................. 321
12.1 Overview (ss 11(a), 11(x) and 23)

Apart from the deductions allowed under the general deduction formula in s 11(a), the Act sets out
certain special deductions in s 11(c) to (w). These special deductions will be the main focus of this
chapter. The purpose of the special deductions is to permit deductions that would not ordinarily be
available under the general deduction formula, either because they are of a capital nature or be-
cause they cannot satisfy the restrictive test that the expenditure should be incurred in the production
of income. Section 11(x) also brings within the scope of s 11 all other amounts allowed to be deduct-
ed from the income of the taxpayer in terms of any other provision in Part I of the Act, which deals
with normal tax. Section 23, in turn, prohibits the deduction of certain expenditure and losses.
Section 23B contains a prohibition against double deductions under more than one provision of the
Act.
*
Remember
As a rule, when an amount qualifies for deduction under both the general deduction formula and
a special deduction, it must be deducted only under the special deduction, even if this deduc-
tion is more limited than the deduction that would have been allowed under the general deduc-
tion formula.
Section 23H limits the amount that may be deducted in any year of assessment for certain expendi-
ture that will produce a benefit only in later years of assessment (see chapter 6).
*
Remember
If a small, medium or micro-sized enterprise (SMME) uses an amount received from a small busi-
ness funding entity to fund an expense (in part or in total)
l any deduction for such funded expense under s 11
l should first be reduced with the amount of the funding received from the small business fund-
ing entity and which was applied to fund the expense, before deducting the remaining
amount.
If the amount received or accrued from the small business funding entity exceeds the allowable
deduction in the current year of assessment, any excess should be carried forward to the follow-
ing year of assessment and should be used to reduce the deductions for such funded expenses
(including s 11(a)) in the following year (s 23O(6) – see chapter 19).
282
12.1–12.2 Chapter 12: Special deductions and assessed losses
This chapter will first cover employee-related expenses and their deductibility by the employer, after
which a range of special deductions and allowances, amongst others deductions relating to donations
(s 18A) and the allowance for future expenditure on contracts (s 24C), will be covered. The chapter will
conclude with a discussion on the tax treatment of assessed losses (under s 20) (for ring-fencing of
assessed losses – see chapter 7).
12.2 Employee-related expenses
12.2.1 Restraint of trade payments (s 11(cA))

Section 11(cA) deals with the deduction of restraint of trade payments. It provides an allowance in
respect of an amount actually incurred by a person
l in the course of the carrying on of his trade
l as compensation in respect of a restraint of trade
l imposed on any person who
– is a natural person,
– is or was a ‘labour broker’ as defined in the Fourth Schedule to the Act (other than a labour
broker who has been issued an employees’ tax exemption certificate), or
– is or was a ‘personal service provider’ as defined in the Fourth Schedule (previously a personal
service company or trust, which will also still qualify).
*
Remember
The deduction is, however, allowable only to the extent that the restraint of trade payment
incurred constitutes or will constitute income of the person to whom it is paid under par (cA) (for
labour brokers or personal service providers) or under par (cB) (for natural persons who
received it as a result of their current, past, or future employment or the holding of any office) of
s 1 of the gross income definition. Restraint of trade payments made to a company (that is not a
‘personal service provider’) will therefore not be deductible and will also not be included in gross
income of that company (see chapter 4).
The amount to be deducted for a year of assessment may not be more than the lesser of
l the amount of the restraint of trade divided by the number of years, or part year, during which the
restraint of trade applies, or
l one-third of the amount incurred.
It will follow then that a restraint of trade payment will be deductible over the period for which the
restraint is applicable, but never over a period of less than three years.
To prevent taxpayers from trying to claim restraint of trade payments under any other provision, for
example s 11(a) (which would allow a once-off deduction of the total amount), s 23(l) prohibits the
deduction of restraint of trade payments under any section other than s 11(cA).
Example 12.1. Restraint of trade payment
Xenidy Ltd made a restraint of trade payment of R120 000 to a retiring executive, Mr Yeng, on
1 September 2017. Mr Yeng was restrained from competing with the company for four years from
the date of the payment.
Calculate how and when the payment will be deductible. The financial year of Xenidy Ltd ends
on the last day of February.
283
SOLUTION
Amount paid ................................................................................................................... R120 000
Deductions to be allowed:
Year ended 28 February 2018 ........................................................................................ (R30 000)
The payment is deductible in equal instalments over the period to which it relates, that is, four
years (no apportionment). If the period of the restraint had been less than three years, the payment
would have been deductible in equal instalments of R40 000 each over three years.
12.2.2 Fund contributions by employers (s 11(l))

Employer contributions made on or after 1 March 2016 to all approved (South African) retirement
funds will be deductible against income under s 11(l).
In the determination of taxable income, s 11(l) permits an employer
l to deduct any amount contributed by him during the year of assessment
l for the benefit of his employees or former employees or for any dependant or nominee of a de-
ceased employee or former employee
l to any pension, provident or retirement annuity fund (in terms of the rules of the fund).
The deduction will effectively be unlimited. The expressions ‘pension fund’, ‘provident fund’ and
‘retirement annuity fund’ are defined in s 1.
* Remember
Contributions to benefit funds (including medical schemes) are no longer allowed under s 11(l)
and need to meet the requirements of s 11(a) to qualify for a deduction.
Example 12.2. Employer’s contributions to funds

Swartzel Ltd (with a February year-end) contributed R1 290 000 on behalf of its employees to a
pension fund during the 2018 year of assessment.
Determine the amount which Swartzel Ltd can claim as a deduction in terms of s 11(l) in the 2018
year of assessment.
SOLUTION
Swartzel Ltd can deduct the full R1 290 000 in terms of s 11(l) since it is paid on behalf of the
employees to an approved pension fund.
If an employer’s contributions to a pension, provident or retirement annuity fund are returned to him,
the amount returned would be regarded as a taxable recoupment in terms of s 8(4)(a).
(For the taxation treatment of contributions made before 1 March 2016, see the 2017 edition of Silke.)
For purposes of s 11(l), a partner in a partnership will be deemed to be an

employee of the partnership and the partnership will be deemed to be the
employer of the partner. A deduction of contributions by the partnership to a
Please note! qualifying fund for the benefit of a partner will therefore qualify for possible
deduction in terms of s 11(l). However, no s 11(a) will be available to a partner-
ship making medical scheme (benefit fund) contributions on behalf of any part-
ner, as s 11(a) is not adjusted to provide for the deemed employer-employee
relationship between a partner and a partnership (see chapter 18).
12.2.3 Deduction of medical lump sum payments (s 12M)

Some employers, in order to attract and retain a high standard of employees, cover (either fully or
partially) medical scheme contributions of former employees after retirement. Previously the tax
treatment of these payments were uncertain, being viewed as either capital in nature (providing an
284
12.2 Chapter 12: Special deductions and assessed losses
enduring benefit) and not deductible, or revenue in nature, requiring the taxpayer to spread the tax
deduction over the expected remaining life of the retired employee. Section 12M seeks to prescribe
the tax treatment of these lump sum payments by employers.
The provisions of section 12M will be applicable if an employer makes a lump sum payment
l during the year of assessment
l to any former employee who retired (due to old age, ill health or infirmity) or their spouses or
dependants (as defined in s 1 of the Medical Schemes Act) (s 12M(2)(a)), or
l under a policy of insurance taken out with an insurer in respect of one or more former employees
or dependants (as described above) (the employer therefore purchase an annuity from an insurer
(any long-term insurer as defined in s 1 of the Long-term Insurance Act paying a once-off lump
sum payment, covering future medical scheme contributions) (s 12M(2)(b))
l so that the retired employee or dependant can use the lump sum for purposes of making a con-
tribution to
– any medical scheme or fund registered under the Medical Schemes Act, or
– any foreign fund which is registered under any similar law in any other country where the
medical scheme is registered (refer s 6A(2)(a)(i) and (ii)).
In determining the taxable income of the taxpayer (the employer), from carrying on any trade, a
deduction of the full lump sum will be allowed from the income of the taxpayer (s 12M(2)).
No deduction will however be allowed if the employer making the payment (or a connected person of
the employer) retains any further obligation (actual or contingent) in respect of the mortality risk of
any former employee (or dependant). This will be the case where the employer is expected, under
the rules of the insurance policy, to make future top-up payments to the insurer to cover shortfalls due
to medical inflation. (The insurer therefore have to take responsibility for the mortality risk, that is the
risk concerning the longevity of the employee – thus if the policy was taken out on the premise that
the employee would live to be 80 and he/she then dies only at 90, the risk of covering the unforeseen
10 years should fall on the insurer.)
Example 12.3. Deduction of medical lump sum payments
Nice (Pty) Ltd covers, as part of their retirement benefit plan for employees, post-retirement med-
ical scheme contributions. This is done by paying a lump sum amount directly to the retired em-
ployee out of which the employee then funds his post-retirement medical scheme contributions.
Calculate the tax deduction available under s 12M to Nice (Pty) Ltd if the company paid a lump
sum (to fund post-retirement medical scheme contributions) of R200 000 on 31 March 2018 to
Tired Joe who retired at the age of 65. Nice (Pty) Ltd has a June year-end.
SOLUTION
Nice (Pty) Ltd can deduct from their income for the 2018 year of assessment the full lump sum of
R200 000 paid to cover post-retirement medical scheme contributions (s 12M(2)).
12.2.4 Shares issued by employers in terms of s 8B (s 11(lA))

The tax consequences of shares received by an employee in terms of a ‘broad-based employee
share plan’ are dealt with in s 8B (see chapter 8). Section 11(lA), on the other hand, allows for the
deduction by the employer of
l the market value of any qualifying equity shares granted to an employee as contemplated in s 8B
(on the date that the shares are granted to the employee)
l less any consideration paid by that employee for the shares
l limited to a maximum deduction of R10 000 per year per employee.
285
*
Remember
l Section 8B stipulates that the maximum value of shares issued to an employee in any five-
year period may not exceed R50 000. The employer may only deduct R10 000 per year per
employee, and any excess may be carried forward to the following year (the R10 000 limit will
also apply in that year).
l Only the employer can claim a deduction under s 11(lA) even if the shares have been grant-
ed by an associated institution (Interpretation Note No 62 (issued 30 March 2011)).
Example 12.4. Deduction for shares issued by employers in terms of s 8B
During the current year of assessment Shares Ltd issued four equity shares to each of its 74
employees, in terms of a ‘broad-based employee share plan’ (as defined in s 8B(3)). The
employees each paid R1 per share (being the nominal value of the share).
(i) Calculate the amount that Shares Ltd can deduct if the market value of each issued share
was R2 000.
(ii) Calculate the amount that Shares Ltd can deduct if the market value of each issued share
was R4 000.
SOLUTION
Amounts deductible in terms of s 11(lA):
(i) Market value of R2 000 per share:
(R2 000 × 4) – (R1 × 4) = R7 996, because the market value of the shares,
reduced by the consideration paid by the employee, does not exceed R10 000
the full amount can be deducted.
R7 996 × 74 employees ............................................................................................. R591 704
(ii) Market value of R4 000 per share:
(R4 000 × 4) – (R1 × 4) = R15 996, because the market value of the shares,
reduced by the consideration paid by the employees, exceeds R10 000, only
R10 000 of the costs incurred per employee can be deducted in the current year
of assessment. The excess amount has to be carried forward to the next year of
assessment. R10 000 × 74 employees ...................................................................... R740 000
An amount of R443 704 (R5 996 × 74) has to be carried forward to the next year
of assessment.
12.2.5 Annuities to former employees or partners and their dependants (s 11(m))

Section 11(m) provides a deduction for annuities paid by a taxpayer during a year of assessment
l to a former employee of the taxpayer who has retired from his employment as a result of old age,
ill health or infirmity (a physical or mental weakness) (s 11(m)(i)), or
l to a former partner of the taxpayer
– who retired from the partnership as a result of old age, ill health or infirmity, and
– who was a partner for at least five years in the undertaking, and
– the amount paid is reasonable when compared to the services rendered by the person con-
cerned as a partner in the partnership prior to his retirement and to the profits made in the
partnership, and
– it does not represent a consideration payable to him for his interest in the partnership (such as
goodwill) (s 11(m)(ii)), or
l paid to a person who is dependent for his maintenance upon a former employee or partner. If the
former employee or partner is deceased, then the person must be someone who was dependent
upon the former employee or partner immediately prior to his death, for example the widow of a
former employee or partner (s 11(m)(iii)).
286
Example 12.5. Annuities to former employees or partners and their dependants

During the 2018 year of assessment an employer made the following special payments:
l to A, who retired as a result of old age, an annual pension of R28 500 payable for life
l to B, who inherited a large fortune and ceased work, an annuity of R6 000 payable for a term
of ten years
l to C, who retired as a result of ill health, a gratuity of R40 000
l to Mrs D, widow of deceased employee D, a pension of R30 000 a year for life
l to Mrs E, widow of deceased employee E, a lump sum gratuity of R100 000
l to Mrs H, mother of employee E, a pension of R50 500 a year, and to Mr I, an aged uncle of
E, a pension of R10 500 a year; both pensions are payable for life. Mrs H and Mr I depended
on E for their maintenance prior to his death.
What will be the deductible amounts in terms of s 11(m)?
SOLUTION
Amounts deductible in terms of s 11(m):
A. Annuity to former employee who retired as a result of old age, deductible in
full .......................................................................................................................... R28 500
B. Annuity to former employee who did not retire as a result of ill health, infirmity
or old age, not deductible ..................................................................................... nil
C. Lump sum payment to retired employee, not deductible under s 11(m)............... nil
D. Annuity to widow of deceased employee, deductible in full.................................. R30 000
E. Lump sum payment to widow of deceased employee, not deductible under
s 11(m)................................................................................................................... nil
H & I. Annuities to dependants of deceased employee, deductible in full ...................... R60 100
R118 600
12.2.6 Life insurance premiums (s 11(w))

Section 11(w) addresses the deduction of life insurance premiums paid by the employer
l on behalf of employees, or
l on life insurance policies taken out to protect themselves against the loss of profits that may arise
due to the loss of certain key personnel,
if the employer is the policyholder. This deduction allows the taxpayer to deduct the full amount of the
premiums paid during the year of assessment.
The tax deduction will be allowed in the following two circumstances:
(1) if the policy meets the following two requirements:
l it relates to the death, disablement (disability) or illness of an employee or director, and
l the amount of expenditure incurred by the taxpayer in respect of premiums payable under
the policy is deemed to be a taxable benefit granted to an employee or director of the tax-
payer under par 2(k) of the Seventh Schedule (where the employer has made any payment
to any insurer under an insurance policy directly or indirectly for the benefit of the employee
or his or her spouse, child, dependant or nominee – see chapter 8), or
(2) if the policy (so-called key-person policy plans) meets all of the following requirements:
l it insures the employer against any loss of an employee or director (a key person) by rea-
son of the death, disablement (disability) or illness of an employee or director
l it is a risk policy (this excludes any policy with an investment element, for example whole
life policies) with no cash or surrender value
l it is the property of the employer (he is the sole owner and beneficiary) at the time of the
payment of the premium, and
l in respect of any policy entered into
– on or after 1 March 2012, the policy agreement states that s 11(w) applies in respect of
premiums payable under that policy, or
– before 1 March 2012, it is stated in an addendum to the policy agreement by no later than
31 August 2012 that s 11(w) applies in respect of premiums payable under that policy.
287
Premiums paid on this type of insurance policy, arising solely out of and in the course of employment
of an employee or director, will not be deductible under this section (for example, travel insurance
and general work-related accident plans (Explanatory Memorandum on the Taxation Laws Amend-
ment Bill, 2012)). Premiums on these policies (referred to as employment-event policies) will be
deductible in terms of s 11(a).
l Section 23(r) (see chapter 6) prohibits a deduction of any premiums paid by

a natural person in terms of an insurance policy covering that natural person
against illness, injury, disability, unemployment or death. Thus, no deduction
will be available to the natural person on these policies, but there is the pos-
sibility of a deduction (under s 11(w)) by the employer of the natural person
covered by the policy, if the premiums on this type of policy were paid by the
Please note! employer.
l The receipt or accruals of the insurance proceeds will be included in the
gross income of the employer. If the proceeds are received by a person
other than the employer, the special inclusion provisions under par (m) of the
gross income definition will apply (see chapter 4).
l The provisions of s 23H are applicable to s 11(w) premiums (see chapter 6).
Example 12.6. Tax implications of life insurance premiums

Speedco paid monthly premiums during the 2018 year of assessment (ending on 30 September)
on two insurance policies (Speedco is the policy holder of both policies), namely:
l R3 200 per month on a policy where Risk (an employee) is the beneficiary, which covers Risk
against an event arising solely out of and in the course of his employment with Speedco, and
l R2 300 per month on a risk policy (with no cash or surrender value) that insures Speedco
against the loss of Risk’s services by reason of death, disablement or illness (a so-called key-
man policy).
Indicate, supported with reference to legislation, the income tax implications for Speedco for the
2018 year of assessment of the monthly insurance premiums paid on the two insurance policies.
SOLUTION
The R3 200 monthly premium will not result in a fringe benefit in the hands of Risk as the policy is
work-related (par 2(k) of the Seventh Schedule – thus not a policy as referred to in s 11(w)(i)) and the
deduction of this type of policy is specifically excluded under s 11(w). Speedco will however be able
to claim the total deduction of R38 400 (R3 200 for 12 months) for the premiums paid in terms of
s 11(a).
The R2 300 paid monthly on a risk policy will fall into the provisions of s 11(w)(ii) (being a risk
policy with no cash or surrender value and Speedco being the beneficiary and policy holder) and
therefore the amount of R27 600 (R2 300 over 12 months) will be deductible in full in terms of
s 11(w).
12.2.7 Variable remuneration (s 7B)

Variable remuneration is defined in s 7B(1) and includes
l overtime pay, bonus or commission (as contemplated in the definition of ‘remuneration’ in par 1 of
the Fourth Schedule (see chapter 10))
l a travel allowance or advance paid in terms of s 8(1)(b)(ii) (see chapter 8), or
l leave pay (an amount which an employer is liable to pay to an employee due to any leave period
which the employee has not taken during the year).
If a taxpayer is determining his taxable income during a year of assessment, any amount to which an
employee becomes entitled from an employer in respect of variable remuneration, is deemed to have
l accrued to the employee, and
l constitute expenditure incurred by the employer,
on the date of payment of the amount by the employer to the employee (s 7B(2)).
288
The timing of the accrual and incurral of variable remuneration will therefore be on the payments
basis and will only be included in the income of the employee (and be taken into account for employ-
ees’ tax purposes) and be expenditure incurred by the employer on the date of actual payment.
‘Employee’ and ‘employer’ is defined in par 1 of the Fourth Schedule (refer to

Please note! chapter 10 for a detail discussion of these definitions).
Example 12.7. Tax implications of variable remuneration
Variance (Pty) Ltd (with a June year-end) has a company policy to pay performance bonuses to em-
ployees in divisions that increased their turnover from year to year by more than 10%. The calculation
of these performance bonuses are only finalised once the financial statements have been approved
by the auditors.
Performance bonuses for the company’s 2018 year of assessment was finalised on 15 August 2018
and paid to all applicable employees (with the August pay run) on 26 August 2018.
Indicate when the performance bonuses will be taxed in the hands of the employees and also
when Variance (Pty) Ltd will be able to claim the payment as a deduction from taxable income.
SOLUTION
Variance (Pty) Ltd can only deduct the performance bonuses for the 2018 year of assessment in their
tax calculation for the 2019 year of assessment, since it was only paid on 26 August 2018 (s 7B(2)).
Employees will be taxed on the performance bonuses during their year of assessment ending
28 February 2019, since it was paid during August 2018. Employees’ tax will be withheld from the
performance bonuses in August 2018, since this is the payment date of the bonuses (s 7B(2)).
12.2.8 Learnership agreements (s 12H)

Section 12H provides an additional deduction for employers (over and above other normal remunera-
tion deductions), from the employer’s income from his trade. This deduction is intended to encourage
employers to train employees in a regulated environment in order to encourage skills development
and job creation (Interpretation Note No 20 (Issue 7) (12 October 2017)). If a learner is a party to a
registered learnership agreement with an employer during the year of assessment, the provisions
listed below will apply.
When will s 12H be applicable?
Section 12H will apply if, during any year of assessment, a learner
l entered into a registered learnership agreement with an employer (s 12H(2) and (2A)), or
l was a party to a registered learnership agreement with an employer and the learner successfully
completed the learnership during the year (s 12H(3), (3A), (4) and (4A)).
The learnership agreement should always be entered into in the course of the employer’s trade, from
which income is derived.
l A registered learnership agreement is defined in s 12H(1) as an agreement

entered into before 1 April 2022 between a learner and an employer that is
registered in accordance with the Skills Development Act 1998 (Act No 97 of
1998) (thus registered with a sector education and training authority (SETA)).
An apprenticeship contract is no longer specifically mentioned in the definition
Please note! since a “learner” is defined in s 1 of the Skills Development Act as including
an apprentice and could thus still qualify for the s 12H allowances (Interpreta-
tion Note No 20 (issue 7)).
l A learner is defined in s 12H(1) as a learner defined in s 1 of the Skills
Development Act, 1998.
The provisions of s 12H will not apply if a learner who previously failed to complete a registered
learnership agreement registered for another learnership agreement with the same employer (or
associated institution as defined in s 12H(1)) with the same training and educational content.
(s 12H(6)).
289
What will the implications be if s 12H is applicable?

If an employer qualifies under s 12H, he may deduct an allowance (which can be an annual or a com-
pletion allowance), in addition to any deductible expenditure incurred in terms of s 11(a), notwith-
standing s 23B that prohibits double deductions (ss 12H(2), (2A), (3), (3A) (4) and (4A)).
Allowances for learnership agreements entered into before 1 October 2016

Before
1 October 2016
From
1 October 2016 for learnership agreements
entered into on or after that date but before
1 April 2022 (see below)
The amount of the allowance differs, depending on whether the learnership agreement is entered into
with
l a person with no disability, or
l a person with a disability (see the definition of disability in the Please note! block below).
The allowance (annual or completion) will be R30 000 if for a learner with no disability (s 12H(2) to
(4)), or R30 000 plus R20 000 (thus R50 000) if classified as a person with a disability when entering
into the learnership agreement (s 12H(5)). The following summary will utilise the R30 000 to illustrate
the application of the section:
When a registered l R30 000 allowance per full year of the learnership (s 12H(2)(a)). Take
learnership agreement is note that if the learnership agreement falls over the year- end, the
entered into and every year R30 000 allowance per full year will be apportioned over the two years
that a learner is party to a based on the number of months.
registered learnership l If the learnership agreement is for a period of less than 12 months, a
agreement (s 12H(2)): pro rata allowance of R30 000 is allowed, calculated based on the
An annual allowance Î ratio that the number of full months of the contract bears to 12 months
R30 000 (or R50 000 if (s 12H(2)(b)).
disabled) for every full
12-month period of the l If the learnership agreement is for a period of more than 12 months, a
learnership agreement R30 000 allowance will be allowed for every full period of 12 months of
the contract.
l Due to delayed registrations with the SETA, learnership agreements
registered on or after 1 January 2013 will be deemed registered
throughout the period of the learnership agreement (thus from the
date entered into between the employer and the learner), if registered
at the SETA within 12 months after the last day of the year of assess-
ment in which the learnership agreement was entered into
(s 12H(2)(c)).
When a registered learnership l If the period of the learnership agreement is less than 24 months, an
agreement is successfully allowance of R30 000 on successful completion (s 12H(3)).
completed (s 12H(3) and (4)): l If the learnership agreement is for a period of 24 months or longer,
A completion allowance Î R30 000 allowance on successful completion of the learnership for
R30 000 (or R50 000 if every consecutive period of 12 months of the learnership (thus the
disabled) number of full years) (s 12H(4)). If the learnership is shifted to a new
employer, the first employer will be eligible for a pro rata portion of the
annual allowance(s) (based on the portion of the contract period that
the learner was employed by him) and the second employer will be
able to deduct the remainder of the annual allowance(s) and the full
completion allowance.
l SARS requires proof of successful completion of the learnership be-
fore allowing the deduction for the completion allowance. The learner-
ship is considered to be completed when confirmation is provided by
the SETA that the learnership has been successfully completed.
290
Allowances for learnership agreements entered into on or after 1 October 2016

Before
1 October 2016 (see above)
From
1 October 2016 for learnership agreements
entered into on or after that date but before
1 April 2022.
The amount of the allowance differs, depending on whether the learnership agreement is entered into
with
l a person (a learner) in possession of a qualification on a NQF level 1 to 6 (under Chapter 2 of the
National Qualifications Framework Act), or
l a person (a learner) in possession of a qualification on a NQF level 7 to 10 (under Chapter 2 of
the National Qualifications Framework Act)
AND
whether the person
l has no disability, or
l has a disability.
A disability is defined in s 6B(1) as

a moderate to severe limitation of a person’s ability to function or perform daily
activities as a result of
l a physical
l sensory
l communication
l intellectual, or
l mental impairment
if the limitation
l has lasted or has a prognosis of lasting more than a year, and
l is diagnosed by a duly registered medical practitioner (in accordance with
criteria prescribed by the Commissioner).
The National Qualifications Framework (NQF) Act (Act 67 of 2008) sets out a ten-
Please note! level framework for education and training in South Africa. The ten levels repre-
sent the following:
l level 1 – General Certificate
l level 2 – Elementary Certificate
l level 3 – Intermediate Certificate
l level 4 – National Certificate (Grade 12)
l level 5 – Higher Certificate
l level 6 – Diploma or Advanced Certificate
l level 7 – Bachelor’s Degree or Advanced Diploma
l level 8 – Bachelor Honours Degree, Postgraduate Diploma or Bachelor’s
Degree
l level 9 – Master’s Degree or Master’s Degree (Professional)
l level 10 – Doctoral Degree or Doctoral Degree (Professional)
Section 12H has different allowances for levels 1 to 6 and 7 to 10.
291
The allowances (annual or completion) for the categories set out above can be summarised as fol-
lows (s 12H(2) to (5A)):
Type of learner Type of allowance Not disabled Disabled

A learner in possession of a An annual allowance R40 000 R60 000
qualification on a NQF level 1 to (R40 000 plus R20 000)
6 (under Chapter 2 of the
National Qualifications A completion allowance R40 000 R60 000
Framework Act) (R40 000 plus R20 000)
A learner in possession of a An annual allowance R20 000 R50 000
qualification on a NQF level 7 to (R20 000 plus R30 000)
10 (under Chapter 2 of the
National Qualifications A completion allowance R20 000 R50 000
Framework Act) (R20 000 plus R30 000)
The allowance will therefore be:

l R40 000 for a learner with no disability (s 12H(2), (3) and (4)), or R40 000 plus R20 000 (thus
R60 000) if classified as a person with a disability (as defined in s 6B(1)) when entering into the
learnership agreement (s 12H(5)) and the learner was in possession of a qualification on a NQF
level 1 to 6 when entering into the learnership agreement, or
l R20 000 for a learner with no disability (s 12H(2A), (3A) and (4A)), or R20 000 plus R30 000 (thus
R50 000) if classified as a person with a disability (as defined in s 6B(1)) when entering into the
learnership agreement (s 12H(5A)) and the learner was in possession of a qualification on a NQF
level 7 to 10 when entering into the learnership agreement.
The following summary will utilise a learner with no disability to illustrate the application of the section,
but the example below will highlight the application for disabled persons:
When a registered learnership l R40 000 allowance per full year of the learnership
agreement is entered into (with a (s 12H(2)(a)). Take note that if the learnership agreement falls
learner with no disability who is in over the year-end, the R40 000 allowance per full year will be
possession of a qualification on the apportioned over the two years based on the number of
NQF level 1 to 6) and every year months.
that a learner is a party to a l If the learnership agreement is for a period of less than
registered learnership agreement 12 months, a pro rata allowance of R40 000 is allowed, calcu-
(s 12H(2)): lated based on the ratio that the number of full months of the
An annual allowance Î R40 000 (or contract bears to 12 months (s 12H(2)(b)).
R60 000 if disabled) for every full
l If the learnership agreement is for a period of more than
12-month period of the learnership
12 months, a R40 000 allowance will be allowed for every full
agreement
period of 12 months of the contract.
When a registered learnership l R20 000 allowance per full year of the learnership
agreement is entered into (with a (s 12H(2A)(a)). Take note that if the learnership agreement falls
learner with no disability who is in over the year-end, the R20 000 allowance per full year will be
possession of a qualification on the apportioned over the two years based on the number of
NQF level 7 to 10) and every year months.
that a learner is a party to a l If the learnership agreement is for a period of less than
registered learnership agreement 12 months, a pro rata allowance of R20 000 is allowed, calcu-
(s 12H(2A)): lated based on the ratio that the number of full months of the
An annual allowance Î R20 000 (or contract bears to 12 months (s 12H(2A)(b)).
R50 000 if disabled) for every full l If the learnership agreement is for a period of more than
12-month period of the learnership 12 months, a R20 000 allowance will be allowed for every full
agreement period of 12 months of the contract.
General rules applicable to all lear- l Due to delayed registrations with the SETA, learnership agree-
nership agreements entered into ments registered on or after 1 January 2013 will be deemed
and for every year that a learner is a registered throughout the period of the learnership agreement
party to a registered agreement (thus from the date entered into between the employer and the
learner), if registered at the SETA within 12 months after the
last day of the year of assessment in which the learnership
agreement was entered into (s 12H(2)(c) and s 12H(2A)(c)).
continued
292
l If the learnership agreement is transferred to a new employer,

the first employer will be eligible for a pro rata portion of the
annual allowance(s) (based on the portion of the contract
period that the learner was employed by him) and the second
employer will be able to deduct the remainder of the annual
allowance(s) and the full completion allowance (Explanatory
Memorandum to the Taxation Laws Amendment Act, 2009).
l Only full calendar months in a particular year of assessment
would qualify for the annual allowance. (If a learnership agree-
ment begins on the ninth of a month, it would end on the eighth
of the next month.) For example, if an employer has a Decem-
ber year-end and an employee commences a nine-month
learnership on 10 February, the learnership would be com-
pleted on 9 November and there would be a full period of nine
months for purposes of the calculation of the annual allowance.
However, if the same nine-month learnership commenced on
15 October of Year 1, it would be completed on 14 July in
Year 2 and there would be a full two months in Year 1 and a full
six months in Year 2 for purposes of the annual allowance.
There would therefore be a full period of only eight months that
will qualify for the annual allowance over the two-year period.
(Example adapted from the Interpretation Note No 20 (Issue 7).)
A registered learnership agreement is successfully completed:
When a registered learnership agree- l If the period of the learnership agreement is less than 24 months,
ment is successfully completed (with an allowance of R40 000 on successful completion (s 12H(3)).
a learner with no disability and who is l If the learnership agreement is for a period of 24 months or
in possession of a qualification on the longer, R40 000 allowance on successful completion of the
NQF level 1 to 6) (s 12H(3) and (4)): learnership for every consecutive period of 12 months of the
A completion allowance Î R40 000 learnership (thus the number of full years) (s 12H(4)).
(or R60 000 if disabled)
When a registered learnership agree- l If the period of the learnership agreement is less than 24 months,
ment is successfully completed (with a an allowance of R20 000 on successful completion (s 12H(3A)).
learner with no disability who is in l If the learnership agreement is for a period of 24 months or
possession of a qualification on the longer, R20 000 allowance on successful completion of the
NQF level 7 to 10) (s 12H(3A) and learnership for every consecutive period of 12 months of the
(4A)): learnership (thus the number of full years) (s 12H(4A)).
A completion allowance Î R20 000
(or R50 000 if disabled)
General rules applicable to all lear- l If the learnership is transferred to a new employer, the second
nership agreements successfully employer will be able to deduct the full completion allowance.
completed l SARS requires adequate proof that the learnership agreement
is successfully completed before allowing the deduction for the
completion allowance. The learnership is considered to be
completed when confirmation is provided by the SETA that the
learnership has been successfully completed. For example, if it
is a two-year learnership agreement ending on 31 December
Year 1, but the SETA only confirms successful completion on
31 January Year 2, the company (if it has a December year-
end) can only claim the completion allowance on 31 January of
Year 2. If a confirmation is not obtained from the SETA, objec-
tive evidence should be collected by the employer to prove
completion. Thus, if the employer was in possession of ade-
quate documentary proof of successful completion from the
training provider on 31 December Year 1, the completion al-
lowance could have been claimed at the end of December
Year 1 (Interpretation Note No 20 (Issue 7)).
l If a learner obtains a higher qualification whilst a party to a learnership agree-

ment, resulting in the NQF level moving from NQF level 6 to 7 (thus affecting
the allowances), the employer will be able to adjust his allowances claimed.
Please note! The new allowance will be calculated on a pro rata basis (Interpretation Note
No 20 (Issue 7) – see Example 12.8 (e)).
l If the learnership agreement is terminated and not completed, no further
annual or completion allowance can be claimed by the employer.
293
Reporting
For every year that an employer was eligible for a deduction in terms of s 12H, the employer must
submit the information required by the SETA of the learnership agreement timeously and in the form
and manner and at the place indicated, to the SETA with which the learnership is registered
(s 12H(8)). The SETA then needs to report in the same manner to the Minister of Finance (s 12H(7)).
The reporting requirements are aimed at enabling the monitoring of the overall progress of the addi-
tional deduction for learnerships. The National Treasury will use this aggregate information to deter-
mine the viability of the s 12H deduction over the long term.
Example 12.8 (a). Learnership agreements
Learner Segone (in possession of a NQF level 3 qualification) enters into a 12-month registered
learnership agreement with his employer, Easy Employ (Pty) Ltd, on 1 January 2018.
Calculate the s 12H allowance(s) available to Easy Employ (Pty) Ltd if Segone successfully com-
pletes the learnership agreement. You can assume that Easy Employ (Pty) Ltd has a December
year-end.
SOLUTION
Section 12H(2)(a) annual allowance ........................................................................... (R40 000)
(R60 000 allowance if disabled (s 12H(5)))
Section 12H(3) completion allowance ......................................................................... (R40 000)
Example 12.8 (b). Learnership agreements

Assume the same information as in (a) above, but the period of the learnership agreement is only
8 months.
Calculate the s 12H allowance(s) available to Easy Employ (Pty) Ltd if learner Segone success-
fully completes the learnership agreement.
SOLUTION
Section 12H(2)(b) annual allowance (R40 000 × 8/12) ............................................... (R26 667)
(R60 000 × 8/12 = R40 000 allowance if disabled (s 12H(2)(b) and (5)))
Section 12H(3) completion allowance ......................................................................... (R40 000)
Example 12.8 (c). Learnership agreements

Assume the same information as in (a) above, but the learnership agreement is entered into on
1 July 2018 and is successfully completed on 30 June 2019.
Calculate the s 12H allowance(s) available to Easy Employ (Pty) Ltd.
SOLUTION
2018: Section 12H(2)(a) annual allowance (R40 000 × 6/12) ................................... (R20 000)
R60 000 × 6/12 = R30 000 allowance if disabled (s 12H(5)))
2019: Section 12H(2)(a) annual allowance (R40 000 × 6/12) ................................... (R20 000)
(R60 000 × 6/12 = R30 000 allowance if disabled (s 12H(5)))
Section 12H(3) completion allowance ............................................................. (R40 000)
Example 12.8 (d). Learnership agreements

Assume the same information as in (a) above, but the learnership agreement is entered into on
1 January 2018 and is successfully completed on 30 June 2019.
Calculate the s 12H allowance(s) available to Easy Employ (Pty) Ltd.
294
SOLUTION
2018: Section 12H(2)(a) annual allowance ............................................................... (R40 000)
2019: Section 12H(2)(b) annual allowance (R40 000 × 6/12) ................................... (R20 000)
Section 12H(3) completion allowance for every full 12-month period, thus .... (R40 000)
Example 12.8 (e). Learnership agreements
Learner Mapitsha (in possession of a NQF level 6 qualification) enters into a 12-month registered
learnership agreement with his employer, Easy Employ (Pty) Ltd, on 1 January 2018. On 1 July
2018, she obtained a NQF level 7 qualification.
Calculate the s 12H allowance(s) available to Easy Employ (Pty) Ltd if Mapitsha successfully
completes the learnership agreement on 31 December 2018. You can assume that Easy Employ
(Pty) Ltd has a December year-end.
SOLUTION
Section 12H(2)(a) annual allowance apportioned (R40 000 × 6/12) ........................... (R20 000)
Section 12H(2A)(a) annual allowance apportioned (R20 000 × 6/12) ......................... (R10 000)
Section 12H(4A) completion allowance (since level 7 at date of completion) ............. (R20 000)
(R50 000 allowance if disabled (s 12H(5A)))
Example 12.8 (f). Learnership agreements

Learner Shezi (in possession of a NQF level 8 qualification) enters into a 24-month registered
learnership agreement with his employer, Easy Employ (Pty) Ltd on 1 January 2018.
Calculate the s 12H allowance(s) available to Easy Employ (Pty) Ltd if Shezi successfully com-
pletes the learnership agreement on 31 December 2019. You can assume that Easy Employ
(Pty) Ltd has a December year-end.
SOLUTION
2018: Section 12H(2A)(a) annual allowance ............................................................. (R20 000)
2019: Section 12H(2A)(a) annual allowance ............................................................. (R20 000)
Section 12H(4A) completion allowance of R20 000 for every full 12-month
period thus R20 000 × 2 .................................................................................. (R40 000)
(R50 000 × 2 full 12-month periods = R100 000 if disabled (s 12H(5A)))
Example 12.8 (g). Learnership agreements

Assume the same information as in (f) above, but the learnership agreement is entered into on
1 January 2018 and is successfully completed on 30 June 2020. Assume further that learner
Shezi’s learnership agreement is taken over by Gentle (Pty) Ltd on 1 April 2019.
Calculate the s 12H allowance(s) available to both Easy Employ (Pty) Ltd and Gentle (Pty) Ltd in
connection with the learnership agreement entered into with Shezi. (You can assume both com-
panies have a December year-end.)
295
SOLUTION
Easy Employ (Pty) Ltd
2018: Section 12H(2A)(a) annual allowance ............................................................... (R20 000)
2019: Section 12H(2A)(b) annual allowance (R20 000 × 3/12) ................................... (R5 000)
(R50 000 × 3/12 = R12 500 allowance if disabled (s 12H(5A)))
No s 12H(4A) completion allowance as not yet successfully completed .......... –
Gentle (Pty) Ltd
2018: No s 12H allowance as not yet a party to learnership agreement
Section 12H(4A) completion allowance of R20 000 for every full 12-month
period of the learnership, thus 2 full years (2 × R20 000) ................................. (R40 000)
(R50 000 × 2 full years = R100 000 allowance if disabled (s 12H(5A)))
12.3 Legal expenses (s 11(c))

If legal expenses are not incurred in the production of income, it will not be deductible under s 11(a).
For circumstances like these, a special deduction is allowed under s 11(c) for qualifying legal ex-
penses that would otherwise not be deductible under s 11(a). A deduction will be allowed during the
year of assessment on:
legal expenses actually incurred on any claim, dispute or action at law occurring as a result of or due to the
ordinary operations of the taxpayer in the carrying on of his trade,
SUCH AS
fees for the services of legal practitioners, expenses incurred in procuring evidence or expert advice, court
fees, witness fees and expenses, taxing fees, the fees and expenses of sheriffs or messengers of court and
other expenses of litigation that are of an essentially similar nature to any of these fees or expenses,
BUT
no deduction will be allowed for legal expenses that are capital (it is not a requirement that the legal expenses
must be ‘in the production of income’),
AS LONG AS
the legal expenses were incurred to prevent a claim for compensation and that compensation or damages
are deductible under s 11(a) OR if the legal expenses are for a claim made by a taxpayer for the payment to
him of any amount and that amount will be ‘income’.
In practice, SARS accepts that disputes before rates courts, liquor licensing courts or valuation
courts are disputes or actions at law and will be deductible. Important is the requirement that there
must be a dispute or action at law, although the dispute need not be one that has reached the courts.
Example 12.9. Deduction of legal expenses relating to damages and compensation

A newspaper company incurred legal expenses to resist a claim for damages for libel (slander or
defamation). Would the legal expenses be deductible?
Yes, the legal expenses would be deductible under s 11(c). Legal expenses incurred by a news-
paper company to resist a claim for damages for libel would be deductible under s 11(c) be-
cause any damages paid would be deductible under s 11(a), the risk of libel actions being an
inevitable concomitant of the trade of a newspaper company.
296
Some legal expenses, although disallowed under s 11(a), are deductible under s 11(c), for example
legal expenses
l incurred in the protection of income
l to prevent a reduction of income
l to prevent an increase in deductible expenditure, or
l to avoid a loss or resist a claim for compensation.
Section 11(c) does not cover the payment of the damages or compensation itself. The deduction of
these payments will be allowed only under s 11(a), if the requirements of s 11(a) read with s 23(g)
(see chapter 6) are fulfilled.
Listed below are some practical examples taken from case law:
l An accountant incurred damages and legal expenses in connection with arbitration proceedings
that arose because, in order to earn income, he deliberately risked violating a restraint clause in
the agreement governing a partnership of which he had previously been a member. The court,
finding that the damages were allowable and that the legal expenses arose out of the ordinary
operations of the taxpayer as an accountant, permitted the deduction of the legal expenses un-
der s 11(c) (ITC 1310 (1979)).
l A company that sold its products through both agents and associated companies incurred legal
expenses in connection with the termination of an agency agreement. These costs were held to be
deductible as expenditure not of a capital nature, but were expenditure incurred on a dispute or ac-
tion at law arising in the course of the ordinary operations undertaken by the taxpayer in carrying on
its trade (ITC 1154 (1970)).
l A company that was a scrap-metal merchant erected a crushing machine on hired land zoned by
the local municipality for general residential purposes. The municipality then gave notice calling
for the removal of the machine, but the company took no action. The municipality consequently
instituted proceedings in the Supreme Court for an order directing the company to remove the
machine. In order to gain time and continue the profitable use of the machine for as long as pos-
sible, the company decided to use all legitimate means of resisting the granting of this order. At
the same time, it made every effort to find a suitable alternative site for the machine. The court,
having regard to the fact that the purpose and effect of the expenditure was to delay the granting
of an order compelling the removal of the machine for as long as possible, held (at 306):
that the legal expenses incurred did not create or enhance any asset, nor did they bring about any
advantage for the enduring benefit of trade. In fact, they were more closely related to the appellant’s
income-earning operations than to its income-earning structure.
The court accordingly concluded that the legal expenses incurred were not of a capital nature
and were deductible under s 11(c) (ITC 1241 (1975)).
l Legal expenses incurred by a farmer in the acquisition or protection of a right to use water on a
continuous basis were spent to protect a capital asset and are consequently not deductible in
terms of s 11(c) (ITC 1598 (1994)).
Interpretation Note No 80 (5 November 2014) discusses the income tax treat-

Please note! ment of stolen money. Reference is also made to the deductibility of the ex-
penditure incurred on legal and forensic services in terms of s 11(c).
12.4 Repairs: Introduction (s 11(d))

Section 11(d) allows as a deduction from income, expenditure actually incurred during the year of
assessment, on
l repair or beetle treatment of property occupied for trade purposes or in respect of which income
is receivable (rental property) (immovable property). The beetle treatment will include treatment
during an initial protective treatment or in the course of replacing infested woodwork (Interpreta-
tion Note No 74 (issued on 6 August 2013))), and
l repair of machinery, implements, utensils and other articles used for trade purposes (movable
property).
No deduction will, however, be allowed for expenditure incurred for repairs if the
Please note! expenditure is recoverable (s 23(c))(see chapter 6).
297
Expenditure incurred and deducted (under s 11(d)) to affect repairs, could, if subsequently recouped
(for example if the asset is sold), give rise to a recoupment under s 8(4)(a). The following are some
examples of the possible recoupment of expenditure incurred on repairs (provided by the courts in
C:SARS v Pinestone Properties CC (2002)):
l repairs on defective work on a building, which are recovered through a claim or damages against
the builder
l repairs effected on an insured asset and then the cost is reduced through a claim against the
insurer, and
l selling an income-producing property for a higher selling price based on an agreement that the
seller will effect specific repairs before the date of sale.
SARS will however have to prove, based on the facts, that there had been a recoupment.
The cost of repairs will therefore only be recoverable or could be recouped under s 8(4)(a) if there is
a causal link between the cost of the repairs and the amount received or accrued (Interpretation Note
No 74).
12.4.1 Repairs: Meaning

The Act does not contain a definition of the word ‘repairs’ used in s 11(d). Consequently, it should be
understood in its ordinary sense and according to its ordinary grammatical meaning. The meaning
given in the New Shorter Oxford English Dictionary is:
Restore (a structure, machine, etc.) to unimpaired condition by replacing or fixing worn or damaged parts;
mend.
Merriam Webster Dictionary gives the following meaning:
To restore by replacing a part or putting together what is torn or broken or to restore to a sound or healthy
state, etc.
The court held that, in the ordinary sense of the word, ‘repairs’ means replacement or renewal of some-
thing that has become defaced or worn out or worn down by use or possibly by wear and tear (ITC 491
(1941)).
Maintenance could fall under repairs, but will only be deductible under s 11(d) if
the maintenance is required to keep the asset in good working order and condi-
Please note!
tion, which implies that the asset has become worn out by use or wear and tear
(Interpretation Note No 74 and ITC 491 (1941)).
Although these tests are not exhaustive, but merely of assistance to the general inquiry, the Special
Court for Hearing Income Tax Appeals has in several cases accepted the following useful principles:
(1) Repair is restoration by renewal or replacement of subsidiary parts of the whole. Renewal as distin-
guished from repair is reconstruction of the entirety, meaning by the entirety not necessarily the whole
but substantially the whole subject-matter under discussion.
(2) In the case of repairs effected by renewal it is not necessary that the materials used should be identical
with the materials replaced (CIR v African Products Manufacturing Co Ltd 1944 TDP 248, 13 SATC 164).
(3) Repairs are to be distinguished from improvements. The test for this purpose is whether a new asset has
been created resulting in an increase in the income-earning capacity or whether the work undertaken mere-
ly represents the cost of restoring the asset to a state in which it will continue to earn income as before.
*
Remember
The words ‘restoration by renewal or replacement’ indicate that it is necessary for the original
structure to have become impaired and that the work done must be to restore it by repair. Conse-
quently, unless part of the original structure has deteriorated or is damaged or weakened, a renewal
or replacement cannot be regarded as a repair.
298
Example 12.10. Work that does not constitute repairs
If the owner of a rent-producing property, in order to improve the appearance of his asset, replaces
a shingle roof that is unimpaired with a new one that is differently coloured, it is submitted that the
work done does not constitute a repair. The position would be different if the shingle roof was so
dilapidated that the owner was compelled to replace it. A replacement in these circumstances would
constitute a repair. It has been held that as long as the work done is necessitated by decay and
deterioration, it does not matter that the taxpayer thought that the part was still serviceable or had
some other reason for replacing it (even if it was replaced by a product of better quality).
It is important to consider the deduction of repairs caused by some fortuitous act such as storm or
fire and not due to the wearing out, damage or deterioration of a property by use. In practice, SARS
permits the deduction of expenditure to repair storm damage to business premises or rent-producing
properties. (The same approach will probably be adopted for fire damage.) When, however, the
damage is so significant that the asset concerned has been partially destroyed, it may be considered
to be a reconstruction of the entirety. If it is, it will not be a repair but an improvement, and the expen-
diture will be of a capital nature.
The deductibility of expenses under s 11(d) has been the topic of many court cases over the years.
Important principles have been established in the following court cases:
Rhodesia Railways Ltd v Collector of Income Tax, Bechuanaland (1933 PC)

The distinction between repairs and renewals was clarified in this case. The company owned a rail-
way line running between Vryburg and Bulawayo, part of which passed through the Bechuanaland
Protectorate. Since the track generally had become worn and was in a dangerous state, despite the
incurring of ordinary current expenditure on maintenance, a large programme of renewal was adopt-
ed by the company. During the year in question, it expended a large amount in laying new sleepers,
rails and fastenings over part of the track. The result of the renewal was to bring the track back to its
normal condition, but the line, as renewed, was not capable of giving more service than the original
line. The Privy Council noted that the expenditure was incurred in consequence of the rails having
been worn out and represented the cost of restoring them to a state in which they could continue to
earn income. It did not result in the creation of any new asset. It was held that the expenditure consti-
tuted a repair and was properly deductible.
The fact that it is necessary, in order to effect a repair, to dismantle and re-erect
Please note! an asset completely cannot make a repair a renewal (ITC 1264 (1977) and
Rhodesia Railways Ltd v Collector of Income Tax, Bechuanaland (1933 PC)).
It is not always easy to determine whether a particular asset that has been renewed or reconstructed
forms a subsidiary part of a larger structure. If it is a subsidiary part of a larger structure, the work
done would constitute a repair. If it is not a subsidiary part of a larger structure, it will qualify as a
separate entity and as the entirety, and the work done would therefore not constitute repairs. There
may be difficulty in dealing with borderline cases, and, as has been emphasised in many decisions,
the question is one of degree.
Flemming v KBI (1994)

In this case the taxpayer drilled a new borehole, erected a windmill for the borehole and installed
piping to feed water from the borehole to a newly constructed dam, due to the fact that the existing
borehole did not pump adequate water for farming purposes. The taxpayer claimed a s 11(d) deduc-
tion, arguing that all these expenses were repairs of property occupied for the purpose of trade. He
argued further that the borehole and windmill were subordinate parts of the farm and that repairs of
property as used in the section also included the replacement of a subordinate portion of property.
It was held that since no evidence could be found that anything went wrong with the borehole itself
requiring its replacement, expenditure was not incurred on the repair of the borehole as a subordin-
ate and inseparable part of the farm. The expenditure was incurred to improve the water supply
which could therefore not be classified as repairs. A repair involves the renewing, renovating or
restoring of decaying or damaged parts. A deduction under s 11(d) will only be available if the origi-
nal structure was in need of repair (Interpretation Note No 74).
299
Reconstruction in lieu of repairs

It is submitted that if, in lieu of repairs, there is a reconstruction of the entire subject matter, it cannot
be said that any amount was actually incurred on repairs. Section 11(d) clearly provides that the de-
duction is available for ‘expenditure actually incurred on the repairs of property and sums expended
for the repair . . .’.
The position is not so clear when there is no reconstruction of the entirety, but a portion of the subject
matter has deteriorated and, instead of it being restored to its original condition, a repair is brought
about in the process of creating an improvement. If repairs are done as part of a larger reconstruction
project (an all-inclusive project), the cost of the repairs would not be deductible. It is submitted that if there
are two separate contracts, one for the reconstruction and one for the repair work, then the cost of the
repairs would be deductible under s 11(d) (ITC 238 (1932) and ITC 915 (1960)).
Summarised distinction between ‘repairs’ and ‘improvements’

Repairs Improvements
An asset or part of its original structure has de- Any construction on the asset in addition to its original
teriorated or was damaged and was restored to structure where the asset was improved from its origi-
its original condition (restoration). nal condition (for example, increased income-earning
capacity was achieved in the process).
l The structure or article should have been damaged or deteriorated and

needed replacement for it to be classified as a repair.
l Materials need not be identical to the original materials replaced, but should
only restore the asset to the original condition.
l Repairs done at the same time as improvements may qualify for deduction
under s 11(d) if it can be clearly and separately identified from the improve-
ments (the onus of proof will be on the taxpayer under s 102 of the Tax Ad-
Please note! ministration Act (see chapter 33)).
l If something new is added to an asset, it will usually be considered to be an
improvement (e.g. the underpinning of foundations to remedy cracks in a
building).
l Spare parts to be used in repairs will be deemed to be trading stock (defini-
tion of ‘trading stock’ in s 1 (see chapter 14) and a deduction will be de-
ferred until the spare parts are used and no longer included in closing stock
(s 22(8)).
(Interpretation Note No 74)
12.4.2 Repairs: Occupied for the purpose of trade or in respect of which income is
receivable
Section 11(d) does not exclude the deduction of expenditure on repairs that are of a capital nature
but requires that
l the repairs be effected to property
– ‘occupied for the purpose of trade, or
– in respect of which income is receivable’, or
l to machinery, implements, utensils and other articles ‘employed by the taxpayer for the purposes
of his trade’.
The reference to the word ‘receivable’ indicates that repairs will be deductible regardless of whether
income was actually received during the current year of assessment. It should just be capable of
generating income for that year of assessment (Interpretation Note No 74 and ITC 243 (1932)).
A number of court cases dealt with the question whether the property to which the repairs were
effected was used for trade purposes:
A taxpayer, who had personally occupied a house, decided to let it out to a third party for several
years. It was a term of the lease, included at the request of the lessee, that the taxpayer should effect
repairs up to a cost amounting to a substantial sum prior to the occupation of the house by the les-
see. The court took the view that these were deductible repairs ‘in respect of which income is receiv-
able’ (even though the repairs were done before the lessee occupied the property). As soon as the
lease was signed, income was receivable on the property from the date on which occupation was to
be given to the lessee (ITC 163 (1930)).
300
In a later case (ITC 243 (1932)), the court held that, because the word ‘receivable’ meant ‘capable of
being received’, it was not necessary that an agreement for the receipt of income should be in exist-
ence before the expenditure could be deducted. The expression ‘in respect of which income is
receivable’ merely means that the property must be in such a state or of such a kind that income is
‘capable of being received’ or it must be a ‘lettable proposition’ (ITC 561 (1944)) before the deduc-
tion of the repairs will be allowed.
When, however, initial repairs are effected because a bond-holder stipulated that they should be
effected before it would advance funds to finance the acquisition of the property, the repairs, in-
curred on the stipulation of the bond-holder, are regarded as capital in nature (ITC 162 (1930)).
In s 23(b) the legislature reaffirms the requirement of s 11(d) by not permitting any deduction for the
cost of repairs of
l any premises not occupied for the purposes of trade, or
l of any dwelling, house or domestic premises, except that part that is occupied for the purposes
of trade.
The part of the residence occupied for purposes of trade ‘shall not be deemed to have been occu-
pied for the purposes of trade’ unless it is
l specifically equipped for purposes of the taxpayer’s trade, and
l is regularly and exclusively used for those purposes.
The following expenses will not qualify as deductible repairs:

l Repairs to vacant premises hired by a taxpayer who wishes to prevent
occupation by a competitor would not be to property occupied for the pur-
poses of trade and thus would not be deductible under s 11(d) (Strong and
Co of Romsey Ltd v Woodifield (Surveyor of Taxes) (1906 AC)).
Please note! l Expenditure on repairs (necessary mainly due to the manner in which the
tenant treated the property) effected subsequent to reoccupation of the
premises by the owner. No deduction will be allowed (in terms of the
equivalent of s 23(g)), since the deduction of any moneys not wholly or
exclusively laid out or expended for purposes of trade will be prohibited.
The fact that the expenditure on repairs arose because of the use of the
premises when income was received will be irrelevant (ITC 643 (1947)).
The deduction requires that machinery, implements, utensils and other articles be employed by the
taxpayer for the purposes of his trade before expenditure on repairs effected to them may be deduct-
ed. It is submitted that when initial repairs are effected to a second-hand asset immediately after its
purchase, but prior to its use in the business, the deduction under s 11(d) will not be allowed. This is
because the asset was not yet ‘employed by the taxpayer for the purposes of his trade’.
By contrast, once the asset is used in the business of the taxpayer, all repairs are deductible. The
repairs will be deductible even if the bad state of repair is due wholly to the condition of the asset at
the time it was acquired.
* Remember
The provisions of s 23H (see chapter 6) could limit the deduction allowable for repairs paid in
advance.
12.5 Bad debt (s 11(i ))

Section 11(i) permits a deduction from a taxpayer’s income of the amount of any debt due to such
taxpayer. The deduction is allowed
l to the extent to which the debt has become bad during that year of assessment
l the amount of the debt must have been included in the taxpayer’s income in either the current or a
previous year of assessment, and
l the debt must be due to the taxpayer.
As a result, if a taxpayer sells his business, including his debt, during the year of assessment, he will
be unable to claim an allowance for bad debt (should that debt become bad), as the debt is not due
to that taxpayer anymore. Similarly, when a taxpayer compromises with a debtor during the year and
301
waives his right to claim any portion of the debt owing by him, the portion for which he has waived his
recovery right cannot rank as a bad debt. This is due to the fact that it does not belong to him at the
end of the year of assessment. In practice, however, the Commissioner permits a taxpayer to write off
any loss sustained in the event of a compromise as a bad debt.
If a bad debt is claimed as a deduction, the taxpayer must keep record of the following information:
l the name of the debtor
l the date the debt was incurred
l the amount written off
l his reasons for writing off the debt
l the circumstances in which the debt became due, for example, for goods supplied, services or
work performed, money lent or as a result of the purchase of the assets of a business, including
the debt due to it.
When considering this deduction, remember:
l The debt must have become bad during the year of assessment for it to be claimed in that year
(ITC 181 (1930)). Bad debt can therefore not be accumulated and written off in a later year.
If a debtor becomes insolvent in a particular year of assessment, the taxpayer

(seller) cannot claim a deduction under s 11(i) for that debt in a later year of
assessment.
Please note! If the seller has neglected to claim the deduction in the year in which the debtor
became insolvent (or an earlier year if the debt went bad before insolvency), his
only remedy is to seek a revision of the assessment or a refund of tax overpaid
for the year in which the debt became bad.
l Debt written off must have been included in the taxpayer’s income. A bad debt arising from the
sale of goods is deductible, since the amount of the debt would have been included in the sell-
er’s income when the debt initially arose.
* Remember
A bad debt arising out of money lent to an employee, for example, is not deductible in terms of
s 11(i), since the amount of the debt would never have been included in the lender’s income.
l The bad debt must be owing to the taxpayer on the last day of the year of assessment.
If an amount allowed as bad debt is subsequently recovered, it forms part of

gross income in the year of receipt, and previous assessments cannot be
Please note!
reopened. Section 8(4)(a) is also the authority for the inclusion of this amount
in the income of the taxpayer in the year in which it is recovered.
Purchase of a business
Debt taken over on the purchase of a business and subsequently found to be bad is not allowable,
since the amount of the debt would never have been included in the income of the buyer of the
business. The loss is clearly one of a capital nature. The same principle applies to an inherited busi-
ness. The heir is not entitled to deduct bad debt outstanding at the date of death of the deceased, as
the amount concerned was never included in the income of the heir.
The seller of a business, including debt due, may guarantee payment of the debt to the buyer in the
event of their becoming irrecoverable but
l any subsequent amount payable under the guarantee is a capital loss
l and this amount may also not be claimed as a deduction for bad debt, since the debt no longer
belongs to the seller.
This problem can be overcome. The agreement should provide that if the seller is compelled to make
any payment to the buyer under his guarantee for irrecoverable debt, he is entitled to re-cession of
that debt. If it is re-ceded to him, it is submitted that the bad debt is deductible, since the debt now
belongs to him, was previously included in his income and therefore comply with the requirements of
s 11(i). This was confirmed by the courts in SIR v Kempton Furnishers (Pty) Ltd (1974 A).
302
Moneylenders
Section 11(i) does not prevent a finance company or a moneylender from writing off moneys lent that
prove to be bad. Such losses are, however, deductible in terms of s 11(a) as losses incurred in the
production of income and not of a capital nature. This will also be the case if it is the custom of a
business or profession to make advances to customers or clients as an integral part of the business
carried on for the purpose of securing or retaining business.
Previous business
Section 11(i) does not require the continued existence of the taxpayer’s business out of which the
debt arose for the deduction to be available. A taxpayer can deduct bad debt incurred in a previous
business from his income from trade in a particular year. This will be allowed if all the other require-
ments of s 11(i) are satisfied. In practice, SARS also permits a taxpayer to deduct the cost of collect-
ing such debt.
Timing of bad debt deduction

The question of whether a debt is bad or not must be decided at the time when the bad debt is
claimed and according to the then existing circumstances of the debtor. Subsequent events cannot
influence the determination made for that year of assessment. In practice, the taxpayer is permitted
to make his determination at the time when his financial statements are prepared and is not obliged
to do so on the last day of his year of assessment. No deduction will be allowed for bad debts if the
debt is recoverable from some other person under a guarantee or suretyship agreement (s 23(c)).
Value-Added Tax
If a debt was included in debtors of a VAT vendor, the debtor amount will include VAT. Since the VAT
portion will never be a bad debt (as it can be claimed back from SARS – see chapter 31), VAT should
be excluded when calculating a bad debt for the purposes of s 11(i).
Example 12.11. Bad debt (s 11( i))
Bad debt of R60 000 was written off as irrecoverable by Goodheart during their 2018 year of
assessment. The amount written off related to trading debtors and the following loan made to an
employee:
During the 2015 year of assessment Goodheart lent R50 000 interest-free to one of its employ-
ees, Spender (Spender was never a holder of shares in the company). Spender has since left the
employment of Goodheart and by year-end 30 September 2018, after the company has recov-
ered R35 000 of the outstanding loan amount from Spender, the balance was written off as irre-
coverable.
Calculate the s 11(i) deduction available to Goodheart in respect of these irrecoverable debts.
SOLUTION
Section 11(i) deduction (R60 000 – R15 000 (R50 000 (loan) – R35 000
(recovered)) ................................................................................................................. (R45 000)
Note: The loan to Spender will be capital in nature and since it was never included in the income
of Goodheart, s 11(i) will not be applicable to the amount written off. There will however be a
capital loss under the Eighth Schedule of R15 000 (R0 (proceeds) – R15 000 (base cost)).
12.6 Doubtful debt (s 11(j))

Section 11(j) authorises an annual allowance (based on criteria set out in a public notice issued by
the Commissioner) for
l any debt due to the taxpayer that is considered to be doubtful, and
l the deduction of that debt would have been allowed under another provision had it become bad
(therefore it must have previously been included in the taxpayer’s income).
303
*
Remember
l To qualify for a doubtful debt provision, the debt must also comply with the requirements for
a bad debt deduction if it becomes bad (the amount must previously have been included in
the taxpayer’s income), or a deduction under any other provision. A doubtful debt provision
relating to an employee debt would therefore not be allowed as a deduction.
l Section 11(j) provides for an allowance of the amount of debt owed to the taxpayer that is
considered to be doubtful (based on criteria set out in a public notice). Section 11(i) (see 12.5)
allows for the deduction of an amount owed to the taxpayer that has already become bad.
The question of whether a debt is doubtful must be decided at the time when the debt is returned as
doubtful and according to the then existing circumstances of the debtor. Any subsequent events
cannot influence the determination made for that year of assessment. In practice, the taxpayer is
permitted to make his determination at the time when his financial statements are prepared and he
need not necessarily do so on the last day of his year of assessment.
The amount of the allowance granted must be included in the taxpayer’s income in the following year
of assessment. Due to the adding back of the allowance claimed in the previous year, the difference
between the allowance of the previous year and the current year will determine the net effect on the
taxable income. Any increase in the allowance will be allowed as a deduction, while a decrease in
the allowance will increase the taxable income of a taxpayer.
The taxpayer is required to render a detailed list of all debt due to him that is considered to be doubt-
ful. Previously, the amount allowed was at the discretion of the Commissioner. It is assumed that the
allowance given will still be calculated by applying a rate (not exceeding 25%) to the debt consid-
ered to be doubtful. The amount allowed will adhere to the criteria set out in the public notice as
issued by the Commissioner. For example, if the total of considered doubtful debt meeting the criteria
set out in the public notice is R200 000 (excluding VAT) at year-end, an allowance of R50 000 (25%
of R200 000) will be allowed as a doubtful debt deduction under s 11(j).
In the past, SARS has allowed the use of a special formula to calculate the allowance when the com-
pilation of detailed lists of doubtful debts is impracticable (for example in large businesses). It is
assumed that the following formula will still apply in the latter case:
Y = M × N,
in which
Y = the deductible allowance for doubtful debts,
M = the average of the bad debt written off, less the bad debt recovered over a period of five
years of assessment (the current year and the immediately preceding four financial years),
expressed as a percentage of the annual average credit turnover (cash sales excluded) for
that period, and
N = outstanding debtors’ balances (including VAT) at the close of the current year of assessment
less the bad debt written off during that year.
Example 12.12. The application of the formula is illustrated below:
(1) Bad debt: Year 5 (current year) ........................................................................... R14 000

Year 4.................................................................................................. 13 000
Year 3.................................................................................................. 12 000
Year 2.................................................................................................. 11 000
Year 1.................................................................................................. 10 000
R60 000
(2) Bad debt recovered: Year 5 (current year)........................................................ R1 400
Year 4 .............................................................................. 1 300
Year 3 .............................................................................. 1 200
Year 2 .............................................................................. 1 100
Year 1 .............................................................................. 1 000
R6 000
(3) Annual average turnover in Years 1 to 5:
Credit ..................................................................................................................... R750 000
Cash ....................................................................................................................... 250 000
R1 000 000
continued
304
(4) Debtors as at end of current year: R300 000 (including VAT and before
write-off of bad debt).
Calculation of allowance for doubtful debt:
60 000 – 6 000 100
M = ×
5 750 000
= 1,44%
N = R300 000 – 14 000
= R286 000
Y = 1,44% of R286 000
= R4 118
The Commissioner will consider granting an allowance for doubtful debt on any basis that is applied
for, but if the special formula is applied for, SARS must be satisfied that the volume or size of the
taxpayer’s business renders the compilation of a detailed list of doubtful debt impracticable.
An application that is not made on the basis of the special formula must be accompanied by a list
with the following details:
l the name of the debtor
l the date the debt was incurred
l the amount of the debt
l the circumstances in which the debt became due (for example for goods supplied)
l the reasons for the debt being regarded as doubtful
l the total allowance claimed on the total amount of doubtful debt.
Each debt will be examined and the allowance will be granted for the debt that is considered to be
doubtful. The rate of the allowance will usually not exceed 25% of the doubtful debt as listed, but a
larger allowance may be granted on an independent inquiry into the circumstances of each debt.
In practice, when the cessation of business occurs owing to the death or insolvency of the taxpayer,
SARS permits an allowance for doubtful debt as at the date of death or insolvency. Since the taxable
entity ceases to exist on death or insolvency, it is submitted that such allowance cannot subsequently
be included in the income of any person (for example an heir or legatee who inherits the business or
the executor or trustee who carries on the business).
12.7 Repayment of employee benefits (s 11(nA) and 11(nB))

If an employee
l received any amount (including a voluntary award) in respect of services rendered or to be
rendered, or in respect of any employment (or the holding of any office), which was included in
his taxable income, and
l such an amount (or a portion thereof) is refunded by the employee, the repayment will be allowed
as a deduction against his income (s 11(nA)).
The amount received or accrued that is later refunded to the employer will be limited to an amount of
money and not an asset that is returned (Interpretation Note No. 88 (issued 19 February 2016)). An
example of this provision is maternity leave payments that are refunded, due to the employee not
returning to work as agreed after the maternity leave period, or a retention bonus refunded in a fol-
lowing year. The deduction that will be allowed will however be limited to the amount previously
included in taxable income and will only be allowed in the year of assessment when the refund is
actually made.
Interpretation Note No 88 provides some examples of the treatment of the

s 11(nA) deduction and also states that:
l satisfactory proof must be provided by a taxpayer when claiming the
s 11(nA) deduction to show that the amount was previously taxed, and sub-
sequently refunded. Such proof must be provided when SARS conducts a
Please note!
compliance verification or audit (as referred to in s 31, read with s 40 of the
Tax Administration Act (see chapter 33)), and
l no change should be made to the leviable amount for Skills Development
levies or to the remuneration for Unemployment Insurance purposes for any
amounts recovered from employees.
305
Example 12.13. Repayment of employee benefits (s 11(nA))
Mpho, an employee of Swimgo, received a sign-on bonus of R80 000 in 2017. Swimgo deducted
employees’ tax of R32 000 from the amount and Mpho received a payment of R48 000.
During January 2018, Mpho resigns from his employment at Swimgo. As a result of his resigna-
tion, he is required, in terms of his employment contract, to repay the full sign-on bonus and
R6 500 interest charged by Swimgo, before the end of February 2018.
What amount will Mpho be allowed to deduct in terms of s 11(nA) from his taxable income for the
2018 year of assessment?
SOLUTION
Mpho will be entitled to a deduction of the refunded amount of R80 000 under s 11(nA).
(Although Mpho only received a payment of R48 000 after tax, he will have to repay the full
amount of the sign-on bonus and can therefore also deduct the full R80 000 which was included
in his taxable income in 2017.)
The interest that was raised by Swimgo will not be deductible by Mpho under s 11(nA), since it
was not previously included in Mpho’s taxable income as is required by s 11(nA).
The same principle will also apply to a restraint of trade payment on which the employee was taxed in
terms of par (cA) of the gross income definition in s 1 (see chapter 4), which is refunded by the
employee (s 11(nB)).
(It might just be an oversight by the legislator that par (cB) of the gross income definition in s 1 (that
covers restraint of trade payments to natural persons) is not also covered by these provisions.)
Previously the initial payment to the employee was fully taxable, but the employee could not obtain a
tax deduction for amounts repaid, although no net enrichment arose, as it was denied due to the
limitations existing in s 23(m). Section 23(m) has, however, been amended to allow the deductions in
terms of s 11(nA) and s 11(nB) to employees who earn remuneration.
Please note! These amounts will also be deductible if incurred by a personal service provider
(s 23(k)) (see chapter 10).
12.8 Deductions in respect of the issue of Venture Capital Company shares (s 12J)
Section 12J contains a tax incentive to assist small and medium-sized businesses and junior mining
exploration companies in terms of equity finance. It provides for the possible deduction of the amount
invested in such enterprises through Venture Capital Companies (VCCs). VCCs bring together small
investors and concentrate investment in the small business sector.
12.8.1 Defining a Venture Capital Company and a qualifying company

A VCC is a company approved as such by the Commissioner (under s 12J(5)) and in respect of
which such approval has not been withdrawn (in terms of s 12J(6) or (6A)). The VCC acts as a finan-
cier to various independent small businesses (referred to as qualifying companies or investee com-
panies). The VCC is aimed at bringing together small investors (who will qualify for the s 12J(2)
deduction). By acquiring shares issued by the VCC, they will acquire a share in the small businesses
in which the VCC invests. The VCC therefore acts as a financier to the small businesses by using the
funds of small investors. Schematically the proposed structure can be illustrated as follows (the
arrows indicate the flow of funds/investment):
306
Qualifying Qualifying Qualifying

Company A Company B Company C
VCC
Investor A Investor B Investor C

(natural person (listed company (unlisted company
– a taxpayer) – a taxpayer) – a taxpayer)
Please note! The VCC is a fully taxable entity and no special tax rules apply.
The VCC must meet all of the following requirements on the date of approval:
The VCC
l must be a resident company
l has the sole objective to manage the investments in qualifying companies (this is to ensure that a
deductible investment in the VCC is not misdirected)
l must be a taxpayer in good standing, and
l is licenced in terms of s 7 of the Financial Advisory and Intermediary Services Act, 2002 (Act 37
of 2002) (s 12J(5)).
A qualifying company (or an investee company) is defined in s 12J(1) as

l a resident company
l that is not a controlled group company in relation to a group of companies
l that is a taxpayer in good standing
l that is an unlisted company (as defined in s 41) or a junior mining company
(defined in s 12J(1) as any company solely carrying on a trade of mining
exploration or production which is either an unlisted company or listed on
the alternative exchange division of the JSE)
l that does not carry on an impermissible trade, which includes:
– dealing or renting of immovable property, except trade as a hotel keeper
(including bed and breakfast establishments)
– financial service activities, such as banking, insurance, money-lending or
hire-purchase financing
Please note! – provision of professional services, such as legal, tax advisory, broking,
management consulting, auditing, accounting and other related activities
– operating casinos or other gambling-related activities, including any other
games of chance
– manufacturing, buying or selling liquor, tobacco products or arms or
ammunition, and
– conducting business mainly outside South Africa (definition of ‘impermissi-
ble trade’ in s 12J(1)), and
l does not earn in excess of 20% of gross income as investment income (as
defined in s 12E(4)(c) – see chapter 19 (it includes, for example, dividends,
foreign dividends (from 1 April 2012), royalties, rental from immovable prop-
erty, annuities and proceeds from investment or trading in financial instru-
ments) during any year (which effectively prevents VCCs from investing in
passive companies).
307
The Commissioner can withdraw a company’s VCC status in the following two circumstances:
l If a VCC fails to meet the requirements listed above (thus listed in s 12J(5)) during a year of
assessment, the Commissioner can, after appropriate notice, withdraw VCC approval. The approval
will be withdrawn from the beginning of that year unless corrective steps are taken by the company
within the period stated in the notice (s 12J(6)), or
l If, at the end of the year of assessment, after the expiry of 36 months from the first date of the
issue of the venture capital shares, the VCC
– has spent less than 80% of expenditure to acquire assets, to obtain qualifying shares in qualify-
ing companies, that, immediately after issue of the shares, held assets with a maximum book
value of R50 million (R500 million if investing in any junior mining company), or
– has spent more than 20% of the amounts received for the issue of its shares (thus more than
20% of the total subscription monies received) to acquire qualifying shares in any one qualify-
ing company
the Commissioner can, after appropriate notice, withdraw the VCC approval. The approval will be
withdrawn effective from the date of approval by the Commissioner of the company as a VCC,
unless corrective steps are taken by the company within the period of the notice (s 12J(6A)).
A qualifying share is defined in s 12J(1) as

an equity share held by a VCC which is issued to it by a qualifying company but
excluding
l a hybrid equity instrument as defined in s 8E(1), but without the exclusion of
Please note! shares which the company is obliged to redeem in whole or in part within a
three-year period from the date of issue thereof, or which may at the option of
the holder be redeemed in whole or in part within three years, or in
respect of which the holder has a right of disposal which may be exercised
within the three years, or
l a third-party backed share as defined in s 8EA(1) (see chapter 16).
A company may reapply for approval in the year of assessment that follows after the year of assess-
ment in which the VCC status was withdrawn, if the non-compliance has been rectified to the Com-
missioner’s satisfaction (s 12J(7)). The following decisions of the Commissioner are subject to
objection and appeal under Chapter 9 of the Tax Administration Act (see chapter 33):
l the decision to withdraw a company’s VCC status (under s 12J(6) and (6A)), and
l the decision on whether to accept a company’s reapplication for approval after the VCC status
was withdrawn (under s 12J(7)), (s 3(4)(b)).
If the Commissioner withdraws the VCC status an amount equal to 125% of the
expenditure incurred by investors to acquire VCC shares must be included in
Please note! the income of the VCC in the year the approval is withdrawn (this will almost
equalise the deduction of individuals (with an approximate tax rate of 41%)
previously claimed to the VCC with a 28% tax rate) (s 12J(8)).
12.8.2 Deduction available on investment in a Venture Capital Company

If a taxpayer actually incurred expenditure to acquire any venture capital share issued to that taxpay-
er by a venture capital company on or before 30 June 2021 (s 12J(11)), a deduction of the full
amount will be allowed from income (s 12J(2)).
A venture capital share is defined in s 12J(1) as any equity share held by a tax-
payer in a VCC which is issued to that taxpayer by a VCC, and does not include
any share which
l is a hybrid equity instrument as defined in s 8E(1), but without the exclusion
of shares which the company is obliged to redeem in whole or in part within
Please note! a three-year period from the date of issue thereof, or which may at the op-
tion of the holder be redeemed in whole or in part within three years, or in
respect of which the holder has a right of disposal which may be exercised
within the three years, or
l constitutes a third-party backed share as defined in s 8EA(1) (see chap-
ter 16).
308
The deduction will only be allowed if supported by a certificate (a VCC investor certificate) issued by
the VCC. The certificate must state the amounts invested and that the Commissioner has approved
the company as a VCC (s 12J(4)), but subject to the following (provided for in s 12J(3) and (3A)):
l where during any year of assessment
– the taxpayer funded the payment or financing of any of the expenditure incurred to acquire any
VCC shares with a loan or credit, and
– any portion of that loan or credit is still outstanding on the last day of the year of assessment,
the amount which will qualify for a deduction will be limited to the amount for which the taxpayer
is deemed to be at risk on the last day of the year of assessment.
A taxpayer will be deemed to be at risk to the extent that:
– the incurral of the expenditure to acquire any VCC shares, or
– the repayment of any loan or credit used by the taxpayer for the payment or financing of any
expenditure to acquire VCC shares (under s 12J(2))
would (having regard to any transaction, agreement, arrangement, understanding or scheme
entered into before or after such expenditure is incurred) result in an economic loss to the
taxpayer. The economic loss should be the result of no income received by or accrued to the
taxpayer in future years from the disposal of the VCC shares issued to the taxpayer as a result of
the incurral of the expenditure.
The taxpayer will not be deemed to be at risk to the extent that
– the loan or credit is not repayable within a period of five years, and
– it was granted to the taxpayer by the VCC in which the shares were acquired (s 12J(3)).
l if (before 1 January 2017), during any year of assessment,
– a taxpayer incurred expenditure to acquire any VCC share, and
– as a result of, or immediately after the acquisition of a VCC share in a VCC, that taxpayer is a
connected person (see chapter 13) in relation to that VCC
– no deduction will be allowed for the expenditure incurred to acquire any VCC share.
l if, effective from 1 January 2017, at the end of any year of assessment but at least 36 months
after the first time that the venture capital shares were issued,
– a taxpayer incurred expenditure to acquire any VCC share, and
– that taxpayer is a connected person (see chapter 13) in relation to that VCC,
• no deduction will be allowed for the expenditure incurred to acquire any VCC share,
• the Commissioner must, after due notice to the VCC, withdraw the VCC approval (under
s 24J(5)) effective from the date of the original approval; and
• the VCC must include 125% of the expenditure incurred by any person to buy shares issued
by the VCC in the income of the VCC in the year in which the approval of the VCC is with-
drawn.
The VCC can prevent the above from happening if the VCC takes corrective steps, acceptable to
the Commissioner, within the prescribed period in the notice issued to the VCC. By allowing
36 months after the issue of the VCC shares before performing the first connected persons’ test,
the VCC should have enough time to find additional investors, and as such, a more enabling envi-
ronment will be created for the VCC (Explanatory Memorandum on the Taxation Laws Amend-
ment Bill, 2016).
Example 12.14. Acquisition of issued shares in a VCC
Moses (Pty) Ltd (an approved VCC) issued shares at a cost of R50 000 to Johannah (which she
bought using her own funds) on 1 September 2017. Johannah held these shares for a year before
selling them on 1 September 2018 for R60 000. She immediately took the R60 000 and after adding
another R10 000 (once again from her own funds), bought newly issued shares in Buck (Pty) Ltd
(another approved VCC). Assume that the necessary VCC investor certificates were obtained.
Calculate the tax implications of the share transactions for Johannah for the 2018 and 2019 years
of assessment.
309
SOLUTION
Shares in Moses (Pty) Ltd deductible (s 12J(2)), thus full investment deductible .......... (R50 000)
Shares sold in Moses (Pty) Ltd – full amount previously deducted under s 12J will be
recouped under s 8(4)(a), thus R50 000. ....................................................................... R50 000
The rest of the selling price obtained of R10 000 will be either treated as a capital
gain under the Eighth Schedule, or as income (if Johannah is a sharedealer or held
the shares for speculative purposes).
Shares in Buck (Pty) Ltd – deductible (s 12J(2)) ............................................................ (R70 000)
The portion of the cost of VCC shares that a taxpayer could deduct from his
income under the provisions of s 12J(2), will not qualify on disposal of the share
for the provisions of s 9C. It can therefore not be deemed to be capital in nature
Please note! when it is disposed of after a three-year holding period (s 9C(2A)). Thus, it will
be recouped and be taxable under s 8(4)(a) upon disposal. If, however, a VCC
share (and for years of assessment commencing from 1 January 2018, if there
was a return of capital) has been held by the taxpayer for longer than five years,
no amount shall be recovered or recouped notwithstanding the provisions in
s 8(4)(a) (s 12J(9)).
12.9 Donations to public benefit organisations and other qualifying beneficiaries

(s 18A)
The s 18A deduction has been discussed in detail in chapter 7. The detail provisions of the section
will therefore not be repeated here. Only a brief overview of s 18A and its application to companies,
followed by a discussion of the qualifying deductions available to a portfolio of a collective investment
scheme, are provided here.
Overview of s 18A
Section 18A(1) permits the deduction of
l bona fide donations to qualifying beneficiaries (see chapter 7)
l in cash or property in kind (see chapter 7)
l made by a taxpayer, and
l actually paid or transferred during the year of assessment.
A donation is made, not when the subject matter is delivered to the donee, but when the legal formal-
ities for a valid donation have been completed. The deduction of all qualifying donations made by the
taxpayer during the year of assessment is limited to 10% of the taxable income of the taxpayer as
calculated before allowing any deduction under s 18A.
*
Remember
This deduction is a deduction from ‘taxable income’. Consequently a taxpayer with no taxable in-
come or an assessed loss will not be allowed to claim the s 18A deduction.
Any amount of a donation not allowed in the current year of assessment (due to the donation exceed-
ing the limits for deduction) can be rolled over and will be allowed as a deductible donation in the
following year (subject to the limits). The excess can be carried forward from year to year until it is
fully deductible (proviso to s 18A(1)).
Example 12.15. Deductible donations
Lesego (Pty) Ltd donated R250 000 to an approved public benefit organisation (PBO) during the
2018 year of assessment and made no donations during the 2019 year of assessment. Lesego
(Pty) Ltd had taxable income of R1 850 000 for the 2018 year of assessment and R2 950 000 for
the 2019 year of assessment before any s 18A deduction was taken into account.
Calculate the s 18A deduction available to Lesego (Pty) Ltd for the 2018 and 2019 years of as-
sessment. You can assume that the company was in possession of the relevant s 18A certificate.
310
SOLUTION
Donation of R250 000, but maximum s 18A deduction limited to 10% × R1 850 000
= R185 000 (excess deductible donation of R65 000 carried forward to the 2019
year of assessment (proviso to s 18A(1))) ...................................................................... (R185 000)
Total deductible donation of R65 000 (excess deductible donation carried forward
from 2018). The maximum deduction will be limited to 10% of taxable income of
R2 950 000 = R295 000, but limited to total deductible donations of R65 000. ............. (R65 000)
The s 18A deduction available to a portfolio of a collective investment scheme is calculated using a
special formula. All other taxpayers will continue to calculate the s 18A deduction by using the
10% limitation discussed above.
Deduction for all qualifying donations made by a portfolio of a collective investment scheme
A collective investment scheme is treated as an investment vehicle for portfolio investors and, as
such, is treated as a flow-through entity in relation to revenue amounts (such as interest and divi-
dends for income tax purposes). The 10% deduction would therefore not really benefit a portfolio of a
collective investment scheme, due to the limited amounts of taxable income. It requires special
provisions for the deduction of donations since the only taxable income that a portfolio of a collective
investment scheme usually retains is management fees.
The deduction of all qualifying donations made by a portfolio of a collective investment scheme (see
chapter 5) is limited to
A = B × 0,005
Where
l A is the amount to which the deduction of qualifying donations will be limited
l B represents the average value of the aggregate of all of the participatory interests held by invest-
ors in the portfolio for the year of assessment, calculated by using the aggregate value of all the
participatory interests in the portfolio at the end of each day during that year (s 18A(1)(A)).
This means that the deductible donations will be limited to
l 0,5% of the weighted average annual value of net collective investment scheme assets
l during the year of assessment in which the donation is made.
12.10 Allowance for outstanding debt: Credit agreements and debtors’ allowance
(s 24)
Section 24 contains special provisions governing the taxation of income derived under qualifying sus-
pensive sale or credit agreements. The type of agreement that qualifies is one that has the effect that
l ownership of movable property will pass from the taxpayer to another person, or
l transfer of immovable property will be passed from the taxpayer to the other person
only upon or after the receipt by the taxpayer of the whole or a certain portion of the amount payable
to him under the agreement.
The provisions of s 24 also apply to qualifying suspensive sales of immovable

property. A taxpayer who disposes of immovable property, such as a township,
under suspensive sales must therefore include the proceeds in income in terms
of s 24. If this sale of trading stock meets the requirements of s 24, the taxpayer
Please note! will be entitled to claim the allowances provided by that section. The allowance
made must be included in the taxpayer’s income in the following year of as-
sessment (s 24(2)). For a detailed discussion of the tax implications of township
developments, see the 2017 edition of Silke.
311
Section 24 applies to an agreement that has the effect that ownership will pass from one person to
another upon or after the receipt by the taxpayer of the whole or a certain portion of the amount pay-
able under the agreement. Therefore, it applies when a taxpayer sells his goods on the basis that
ownership will pass only after the payment of a deposit, no matter how small. If this section is applic-
able, it implies that
l the whole amount payable under the agreement is deemed to have accrued to the taxpayer,
even if it is payable in instalments over a number of years, and
l the taxpayer is entitled to claim an allowance (also referred to as the s 24 allowance or the debt-
ors’ allowance). The allowance can only be claimed if less than 75% of the amount payable under
the agreement is payable within 12 months of the date of the agreement.
The purpose of the section is to prevent the undue deferral of income earned under credit agree-
ments. At the same time, it matches (on a limited basis) the recognition of the income with the receipt
of cash.
If a taxpayer enters into a qualifying suspensive sale or credit agreement, the tax implications will be
as follows:
l The total amount payable under the agreement, excluding finance charges and VAT, is deemed
to have accrued to the taxpayer on the day on which the agreement was entered into.
– The finance charges element must be dealt with under the provisions of s 24J (see chap-
ter 16). This means that the finance charges are taxed in the hands of the taxpayer as if they
accrue on a yield-to-maturity basis over the period of the credit agreement (s 24(1)).
– The VAT is excluded since it is not part of the selling price of goods which is subject to tax in
the hands of the taxpayer.
l The s 24 debtors’ allowance can be claimed. The allowance must relate to amounts that are
deemed to have accrued under qualifying agreements, but have not been received at the close
of the taxpayer’s accounting period. Taking into account any allowance for doubtful debts made
under s 11( j) (see 12.6), a further allowance can be made if it seems reasonable under the spe-
cial circumstances of the taxpayer’s trade as set out in a public notice issued by the Commis-
sioner.
*
Remember
An agreement will only qualify for the allowance if at least 25% of the amount payable under it
becomes due and payable at least 12 months after the date of the agreement.
The allowance is available only in certain circumstances and is subject to objection and appeal
under Chapter 9 of the Tax Administration Act (s 3(4)(b)). The s 24 allowance is not available for
l leases under which the lessee has an option to purchase the leased item
l sales on extended credit in the absence of a condition suspending the passing of ownership, and
l sales subject to a specific (resolutive) condition (for example the sale will be cancelled if the
purchase price is not paid by a certain date) (Interpretation Note No 48 (Issue 2) (19 December
2014)).
The s 24 allowance is calculated as a percentage of the amount owing to the taxpayer under qualifying
credit agreements at the end of the year of assessment.
l The amount owing (the adjusted qualifying outstanding debtors) is determined after the deduc-
tion from qualifying outstanding debt of
– the allowance for doubtful debt under s 11(j), and
– the deduction for bad debt under s 11(i).
l The percentage used is the gross-profit percentage on eligible credit agreements.
Finance charges and VAT are excluded from the determination of the gross-profit percentage
(and from the qualifying outstanding debts). The gross-profit element is therefore the gross-profit
percentage multiplied by the adjusted qualifying outstanding debt, excluding finance charges
and VAT. The gross-profit percentage in a particular year of assessment is:
Gross profit (excluding finance charges and VAT)
× 100
Sales (excluding finance charges and VAT)
312
The s 24 allowance is calculated as follows:

Section 24 allowance = Gross profit % × Adjusted qualifying outstanding debt
Gross profit
(excluding finance
charges and VAT) Qualifying outstanding debtors less
× 100 allowance for doubtful debt ( s 11(j))
Sales less bad debt (s 11(i))
(excluding finance
charges and VAT)
It is important to remember that the allowance made must be added back to (or included in) the
taxpayer’s income in the following year of assessment (s 24(2)).
Please note! The s 24 allowance granted in any year can be used to create an assessed loss
or to increase an assessed loss (Interpretation Note No 48 (Issue 2)).
Example 12.16. Suspensive sales

H Ltd sold a machine, held as trading stock, under a suspensive sale agreement on 1 July 2017.
The agreement provided for three repayments of R149 788 each, the first to be made on the last
day of June 2018 and the remaining two to be made on the last days of June 2019 and
June 2020 respectively. The cash price of the machine sold was R300 000, plus VAT of R42 000.
The cost of the machine to H Ltd was R200 000, excluding VAT. The interest rate charged is 15%
per year. H Ltd has a year of assessment which ends on the last day of June.
The amounts due in terms of the agreement can be analysed as follows:
Finance
Capital VAT charges Total
R R R R
1 July 2017......................................................... 300 000 42 000 – 342 000
30 June 2018 interest......................................... – – 51 300 51 300
30 June 2018 repayment ................................... (86 393) (12 095) (51 300) (149 788)
213 607 29 905 – 243 512
30 June 2019 interest......................................... – – 36 527 36 527
30 June 2019 repayment ................................... (99 352) (13 909) (36 527) (149 788)
114 255 15 996 – 130 251
30 June 2020 interest......................................... – – 19 537 19 537
30 June 2020 repayment ................................... (114 255) (15 996) (19 537) (149 788)
– – – –
Calculate the taxable income of H Ltd for the three years of assessment ended 30 June 2018,
2019 and 2020.
SOLUTION
Year of assessment ended 30 June 2018
Gross-profit percentage:
(R300 000 – 200 000) ÷ R300 000 × 100 = 33,33%
Outstanding debt, excluding VAT and finance charges = R213 607
Section 24 debtor’s allowance: 33,33% × R213 607 = R71 202
Taxable income calculation:
Capital portion due in terms of contract (s 24) ........................................................... R300 000
Interest accrued (s 24J) .............................................................................................. 51 300
R351 300
continued
313
Less: Cost of machine sold (s 11(a)) ....................................................... R200 000

Section 24 debtor’s allowance (see above – deductible under
s 11(x)) .......................................................................................... 71 202
(271 202)
Taxable income ............................................................................................. R80 098
Reconciliation of taxable income:

Gross profit portion of repayment received: 33,33% of R86 393 ................................ R28 798
Interest accrued .......................................................................................................... 51 300
R80 098

Outstanding debt, excluding VAT and finance charges = R114 255
Section 24 debtor’s allowance: 33,33% × R114 255 = R38 085
Interest accrued (s 24J) .............................................................................................. R36 527
Add back: Previous year’s s 24 debtor’s allowance ................................................ 71 202
107 729
Less: Section 24 debtor’s allowance (see above) ..................................................... (38 085)
Taxable income ............................................................................................. R69 644

Gross profit portion of repayment received: 33,33% of R99 352 ................................ R33 117
R69 644

Interest accrued (s 24J) .............................................................................................. R19 537
Add back: Previous year’s s 24 debtor’s allowance ................................................ 38 085
57 622
Less: Section 24 debtor’s allowance (debit balance = 0) ......................................... –
Taxable income ............................................................................................. R57 622

Gross profit portion of repayment received: 33,33% of R114 255 .............................. R38 085
R57 622
The Commissioner will allow four methods for the calculation of the debtors’ allow-
ance, namely:
l individual debtor-by-debtor basis (see example above)
Please note! l aged-debtors’ basis
l moving-weighted-average method, and
l use of the current year’s gross profit %
all of which is explained in Interpretation Note No 48 (Issue 2).
12.11 Future expenditure on contracts (s 24C)

Section 24C provides a deduction for certain future expenditure that will be incurred by a taxpayer in
the performance of his obligations under a contract from which he has derived income. Sometimes
taxpayers receive an advance payment before the commencement of the work under a contract.
Such an advance payment enables them to finance the acquisition of materials, equipment (assets)
and other expenditure relating to the contract. The advance payment received is included in ‘gross
income’ in terms of s 1 (amount received or accrued). This will occur when taxpayers engaged in, for
314
example, the construction industry or manufacturing (but can also include industries such as the
motor industry, financial services industry, publishing and share block schemes (Interpretation Note
No 78 (issued 29 July 2014))).
Section 24C grants these taxpayers and others in similar circumstances an allowance for their future
expenditure against the advance payment received. The taxpayer’s calculation should be substanti-
ated by supporting evidence.
A deduction is allowed in the determination of the taxpayer’s taxable income for a year of assessment
if
l his income in that year of assessment includes or consists of an amount received by or accrued
to him in terms of a contract, and
l the amount will be used in whole or in part to finance or pay future expenditure (excluding any
losses) that will be incurred by him in the performance of his obligations under the same contract
in a following year of assessment.
The allowance is calculated as follows:
Contract cost Income received/ Actual expenditure
Section 24C allowance = × less
accrued in advance incurred in year
Contract price (income)
The allowance may not exceed the amount received or accrued.

Cost as a percentage of contract price is calculated by taking into account the amount of the future
expenditure that relates to the contract (s 24C(2)).
‘Future expenditure’ excludes any losses and is
l expenditure that will be allowed as a deduction from income in a subsequent year of assessment
(s 11(a) or other expenditure, but not an allowance on a capital asset previously acquired (Inter-
pretation Note No 78)), and
l any asset on which a capital allowance will be allowed under the provisions of the Act.
*
Remember
Last year’s s 24C allowance must be added back before the taxpayer claims the current year’s
s 24C allowance (s 24C(3)). Effectively, only the change is allowed in the current year. Note
however that the reversal of the s 24C allowance in the subsequent year will be income received
under the contract and a further s 24C allowance may therefore be allowed against it in that year
(Interpretation Note No 78).
It is important for the taxpayer to show that he will have an obligation to incur the future expenditure
and also, as far as it is practical, to establish the amount of the obligation. There must be a clear
measure of certainty as to whether the expenditure is quantified or quantifiable. The onus is on the
taxpayer to satisfy the Commissioner that the contracts relied upon as the basis for the allowance will
result in an unconditional contractual (legal) obligation. The taxpayer must therefore have a legal obli-
gation to use a portion of the proceeds received or accrued to fulfil (pay) his obligations (expenses)
under the contract. The Commissioner will not be satisfied that future expenditure will be incurred
when there is only a contingent liability (ITC 1601 (1995)). In other words, the purpose of s 24C is not
to provide a deductible reserve fund for possible comebacks, unforeseen contingencies or latent
defects, since this would be in contradiction with the provisions of s 23(e) of the Act.
The taxpayer should do the analysis for purposes of s 24C on a contract-by-contract basis, unless
the contracts are similar and have the same obligations to perform under those contracts. In such a
situation the contracts may be grouped together, for example a transport business selling bus or air
tickets in advance (Interpretation Note No 78).
Interpretation Note No 78 includes a detailed explanation of the Commissioner’s

Please note! viewpoint on the application of s 24C to ceded contracts, warranty claims and
maintenance contracts.
315
Example 12.17. Section 24C allowance
Built-it Ltd, a builder, entered into a contract on 20 February 2018 for a contract price of
R1 000 000. It estimated that it would incur deductible costs of R800 000 in carrying out its obli-
gations under the contract. The contract determines that a deposit of R400 000 is receivable on
25 February 2018. It commenced work on the contract on 3 March 2018 and completed the work
in December 2018. In terms of the contract, the balance of the contract price only becomes pay-
able by the client once the work has been completed. Built-It Ltd received the balance of
R600 000 on 1 December 2018 and incurred the anticipated expenditure of R800 000. Its year of
assessment ends on the last day of February.
Calculate the taxable income of Built-it Ltd for the years of assessment ending on 28 February 2018
and 28 February 2019.
SOLUTION
Gross profit calculation:
Contract price .............................................................................................................. R1 000 000
Less: Estimated costs............................................................................................... (800 000)
Gross profit ............................................................................................................... R200 000
Cost as percentage of price (800 000/1 000 000 × 100) ............................................. 80%
Taxable income for year ended 28 February 2018
Gross income (not R1 000 000 as R600 000 is not unconditional at this stage as
the work has not yet been completed (Mooi v SIR)) .................................................... R400 000
Less: Section 24C allowance for the estimated portion of the R400 000 to be
incurred in the next year (80% of R400 000) .................................................... (320 000)
Taxable income .............................................................................................. R80 000
Taxable income for year ended 28 February 2019
Gross income ............................................................................................................... R600 000
Add: Section 24C allowance for previous year added back ..................................... 320 000
R920 000
Less: Expenditure actually incurred ........................................................................... (800 000)
Taxable income .............................................................................................. R120 000
The total taxable income in respect of the contract over the two years therefore
amounted to R200 000 (R80 000 plus R120 000).
If the corporate rules in ss 41 to 47 (see chapter 20) apply to a transaction, the

Please note! reversal of the s 24C allowance claimed in the previous year may take place in
another taxpayer’s hands (Interpretation Note No 78).
12.12 Assessed losses (s 20)

Section 20 of the Act contains the provisions relating to assessed losses and balance of assessed
losses. An ‘assessed loss’ is defined for the purposes of s 20 as
l an amount
l by which the deductions allowed under s 11
l exceeds the income from which they are deducted (s 20(2)).
A taxpayer will have an assessed loss when his allowable deductions are more than his income,
leaving him with a negative taxable income.
A ‘balance of assessed loss’ has not been defined, but means the excess of
l any assessed losses incurred in the carrying on of a trade
l over the taxable income derived from the carrying on of a trade plus any other taxable income.
316
Example 12.18. Balance of assessed loss
In 2017 Mr Makuyana has an assessed loss from a trade of R550 000, in 2018 a taxable income
of R380 000 and in 2019 an assessed loss of R70 000.
Calculate the balance of assessed loss for each year of assessment.
SOLUTION
In 2017, the balance of assessed loss is R550 000, and in 2018, R170 000 (R550 000 less
R380 000).
In 2019, the balance of assessed loss is R240 000 (R170 000 + R70 000).
For the purposes of determining the taxable income of a person, the following amounts will be al-
lowed to be set off against the income derived by him from carrying on any trade:
l a balance of assessed loss
– incurred by him in any previous year
– that has been carried forward from the preceding year of assessment (s 20(1)(a))
l an assessed loss
– incurred by him during the same year of assessment
– in carrying on any other trade, either alone or in partnership with others, otherwise than as a
member of a company whose capital is divided into shares (s 20(1)(b)).
12.12.1 Assessed losses: Balance set off by taxpayers other than companies
A balance of assessed loss incurred by a person may be set off against income derived by him from
the carrying on of any trade in the determination of the taxable income derived by him from that trade
(s 20(1)(a)).
There is one exception where a balance of assessed loss would not be allowed
to be set off. No person whose estate has been voluntarily or compulsorily
Please note! sequestrated may, unless the order of sequestration has been set aside, be
entitled to carry forward any assessed loss incurred prior to the date of seques-
tration (proviso to s 20(1)(a)).
A retirement fund lump sum benefit, retirement fund lump sum withdrawal benefit or a severance
benefit that was included in a person’s taxable income, may not be set off against his assessed loss
(proviso (c) to s 20(1)).
When a person, either alone or in a partnership with others, incurs an assessed loss in one trade, he
may set off that loss against any income from another trade derived during the same year of assess-
ment (s 20(1)(b)).
In the current year of assessment, Joseph Shabalala has derived a taxable income of R650 000
from his employment as an engineer. Included in the R650 000 was a severance benefit of
R350 000. He is also a 20% partner in a furniture business that has an assessed loss of
R1 400 000 for the same year.
What is Joseph Shabalala’s taxable income for the current year of assessment?
SOLUTION
Joseph Shabalala is entitled to set off his 20% share of the partnership loss, namely R280 000
(R1 400 000 × 20%), against the taxable income (BUT excluding the severance benefit) from his
employment as an engineer. Thus R650 000 – R350 000 = R300 000 of taxable income against
which his portion of the partnership assessed loss of R280 000 can be set off. His final taxable
income is therefore R370 000 (R20 000 (i.e. R300 000 – R280 000) + R350 000 (severance bene-
fit)).
317
A holder of shares in a company may not claim an assessed loss of the company as a deduction in
the determination of the holder’s own taxable income (s 20(1)(b)).
Since a close corporation is a ‘company’ as defined in s 1, a member of a close

Please note! corporation may also not claim an assessed loss incurred by the close corpora-
tion as a deduction in the determination of his taxable income.
Apart from these universal rules, two special concessions are available only to a person other than a
company:
l He may enjoy the benefit of a balance of assessed loss in relation to non-trade taxable income
(s 20(2A)(a)). A taxpayer, other than a company, can thus use a balance of assessed loss to re-
duce non-trade taxable income.
In certain circumstances, s 20A prohibits a natural person from setting off an

assessed loss incurred by him in a trade against the income derived by him
during the same year of assessment from a non-trading activity (s 20A(1)).
Please note! The prohibition will apply to a person whose taxable income exceeds the
amount at which the maximum marginal rate of tax for individuals becomes
payable for the relevant year of assessment. However, the prohibition will only
apply if one of a few other conditions is also met. Please see chapter 7 for a
detailed discussion of s 20A.
l He may carry forward a balance of assessed loss even through a year without income.
In practice, a person whose non-trade expenditure in a particular year of assessment exceeds
his non-trade income for that year is entitled to establish a ‘non-trade’ assessed loss. Subject to
s 20(1), he will not be prevented from carrying forward any balance of assessed loss merely
because he has not derived any income during a particular year of assessment (s 20(2A)(b)).
Consequently, even though he derives no income in Year 2, he may still carry forward the bal-
ance of the assessed loss established in Year 1 to Year 3. He need not carry on a trade in a par-
ticular year in order to carry forward to that year any balance of assessed loss from the previous
year. The concession therefore overrides the decision in SA Bazaars (Pty) Ltd v CIR (1952 AD),
which, however, still applies to companies (see 12.12.2).
12.12.2 Assessed losses: Balance set off by companies

In the SA Bazaars case, it was held that s 20(1)(a) prevents a person who does not carry on a trade
in Year 2 from carrying forward to Year 2 a balance of assessed loss established in Year 1.
While this decision has been overturned in relation to persons other than companies by s 20(2A) (see
12.12.1), it remains valid for companies. Therefore, a company that fails to carry on a trade for an
entire year of assessment cannot carry forward a balance of assessed loss established in the pre-
ceding year to that year of assessment. The result is that the company loses that balance of as-
sessed loss, even if it subsequently recommences its trade.
In Robin Consolidated Industries Ltd v CIR (1997 A, 59 SATC 199), two issues had to be considered
by the court. The first issue was whether the taxpayer had ‘carried on a trade’ during a particular year
of assessment.
The taxpayer was a manufacturer, wholesaler and retailer of stationery and associated products,
operating throughout the country via subsidiary companies. The taxpayer became insolvent and was
placed in provisional liquidation by 1986. On 3 October 1986, the liquidators sold the taxpayer’s
business ‘lock, stock and barrel’, except for the exclusion of certain assets. Goods and stock in bond
were excluded from the sale. Whilst in liquidation, two sale transactions, i.e. the sale of goods in bond
and stock in bond respectively, were undertaken by the liquidators.
The court held that while it may have been in the normal course of trading for a liquidator to sell off
assets in bulk, trading and realisation are distinct and opposing concepts. It was held that the dis-
posal of the stock in bond was designed to allow others to trade in that stock and release the tax-
payer from risks entailed in doing so itself. Accordingly, it was held that the two transactions did not
constitute the carrying on of a trade.
318
The second issue before the court was whether the taxpayer would be entitled to carry forward its
assessed loss to later years even though it neither traded nor earned any income from trade in the
particular year of assessment.
The court held that s 20(1) implies that, if there is no income or loss from trading in a specific year,
the assessed loss disappears. It was held that the rule in SA Bazaars (Pty) Ltd v CIR (1952 A,
18 SATC 240) should not be deviated from, i.e. that the set-off of an assessed loss is admissible only
l against income derived from trade, and
l where the balance of assessed loss has been carried forward from the previous year,
are correct.
The taxpayer’s appeal accordingly failed.
In Year 1, Abigail Ltd had an assessed loss of R200 000 and did not carry on trade in Year 2, but
recommenced trading in Year 3, when it derived a taxable income of R400 000.
Calculate the assessed loss or taxable income for each year.
SOLUTION
Year 1: Assessed loss R200 000.
Year 2: Nil assessment, that is, no taxable income or assessed loss (the assessed loss of
R200 000 established in Year 1 cannot be carried forward because no trade was
carried on in Year 2).
Year 3: Taxable income R400 000.
It is not essential that a company must have carried on a trade during the whole of the year; any
period of trading during the year will suffice. In Interpretation Note No 33 (Issue 5) (issued on 5 May
2017) SARS expresses the view that, in order for a company to set-off an assessed loss, the com-
pany must carry on a trade and income must have accrued to the company. Both these requirements
must be satisfied before an assessed loss may be carried forward.
SARS will, however, accept that these requirements are met if the company can prove that a trade
has been carried on during the current year of assessment, even if no income accrued. This will only
apply in cases where it is clear that trade has been carried on and the fact that no income was
earned must be incidental or as a result of the nature of the trade carried on by the company. The
company will, however, have to discharge the onus that it did trade in the year of assessment if no
income was derived from the trade.
Unless a company is doing business as a moneylender, the receipt of interest

on money lent would not ordinarily be regarded as income derived from the
carrying on of a trade. Therefore, if a company has a balance of assessed loss
carried forward from a previous year and during the current year of assessment
its income is derived solely from interest on a loan, the balance of assessed
Please note!
loss may not be set off against the interest, since the company cannot be
regarded as carrying on the trade of a moneylender. A company could, how-
ever, derive interest from investments on such a scale that its operations do
constitute a trade, in which event an assessed loss brought forward may be set
off against its interest income.
In the special circumstances set out in s 103(2), a company may be prevented from setting off an
assessed loss against other income derived by it (see chapter 32).
Whatever the correct legal position may be, SARS permits an assessed loss from trade to be set off
against non-trade income; otherwise an anomalous position might arise. For example, a company
that has a taxable income from interest of R200 000 and an assessed loss from trade of R200 000 in
the same year of assessment would be liable to tax on the interest (the assessed loss being carried
forward to the next year), although in truth its net income is nil.
319
Example 12.21. Assessed loss carried forward
Below are the income and expenditure accounts of Mloto (Pty) Ltd, which derives income from
letting property.
Income 2018 2019 2020
Rent receivable ............................................................. R150 000 R240 000 R480 000
Expenditure
Rates and taxes ............................................................ R30 000 R30 000 R35 000
Repairs and maintenance ............................................. 22 500 75 000 28 000
Insurance ...................................................................... 7 500 7 500 7 500
Commission on rent collected ...................................... 14 400 18 000 36 000
Alterations to property................................................... 160 000 115 000 130 000
Interest on bond ............................................................ 120 000 120 000 120 000
Audit fees ...................................................................... 9 000 9 000 9 000
Water charges .............................................................. 4 500 5 100 5 400
R367 900 R379 600 R370 900
Net surplus/(loss) .......................................................... (R217 900) (R139 600) R109 100
What is the taxable income or assessed loss of Mloto (Pty) Ltd for each year of assessment?
SOLUTION
2018 Year of assessment
Net loss according to account .................................................................................. R217 900
Less: Alterations to property (capital) (see note 1) ................................................... (160 000)
Assessed loss (s 20(2)) ............................................................................................ R57 900
Balance of assessed loss to 2019 (s 20(1)(a)).......................................................... R57 900
Net loss according to account .................................................................................. R139 600
Less: Alterations to property (capital) (see note 1) ................................................... (115 000)
Assessed loss (s 20(2)) ............................................................................................ R24 600
Add: Balance of assessed loss from 2018 (s 20(1)(a)) ............................................. 57 900
Balance of assessed loss to 2020 (s 20(1)(a)).......................................................... R82 500
Net surplus according to account ............................................................................. R109 100
Add: Alterations to property (capital) (see note 1) .................................................... 130 000
R239 100
Less: Balance of assessed loss from 2019 (s 20(1)(a)) ............................................ (82 500)
Taxable income......................................................................................................... R156 600
Note 1: The expenditure on alterations to property may be taken into account in the determination
of the base cost of the property for capital gains tax purposes.
Example 12.22. Assessed loss: More than one trade

The following information relates to Bernice (Pty) Ltd:
Year of assessment 2018 2019 2020
Income
Hardware business .............................................................. R400 000 R460 000 R480 000
Farming ................................................................................ 200 000 150 000 150 000
Grocery business ................................................................. 300 000 400 000 450 000
Admissible expenditure
Hardware business .............................................................. R350 000 R480 000 R400 000
Farming ................................................................................ 350 000 350 000 250 000
Grocery business ................................................................. 250 000 410 000 310 000
What is the taxable income or assessed loss of Bernice (Pty) Ltd for each year of assessment?
320
SOLUTION
Assessed loss from farming (s 20(2)) ......................................................................... R150 000
Less: Taxable income from the hardware business (s 20(1)(b)) ........... (R50 000)
Taxable income from the grocery business (s 20(1)(b)).............. (50 000)
(100 000)
Balance of assessed loss to 2019 (s 20(1)(a)) .............................................. R50 000
Assessed loss from farming (s 20(2)) ......................................................................... R200 000
Assessed loss from the hardware business (s 20(2)) ................................................. 20 000
Assessed loss from the grocery business (s 20(2)) .................................................... 10 000
R230 000
Add: Balance of assessed loss from 2018 (s 20(1)(a)) ........................................... 50 000
Balance of assessed loss to 2020 (s 20(1)(a)) ............................................... R280 000
Assessed loss from farming (s 20(2)) ..................................................... R100 000
Less: Taxable income from the hardware business (s 20(1)(b)) ........... (R80 000)
Taxable income from the grocery business (s 20(1)(b)).............. (140 000)
(220 000)
R120 000
Less: Balance of assessed loss from 2019 (s 20(1)(a)) .......................... (R280 000)
Balance of assessed loss to 2021 (s 20(1)(a)) ............................. R160 000
12.12.3 Assessed losses: From trade carried on outside South Africa

Proviso (b) to s 20(1) provides that
l foreign losses are fully ring-fenced, and
l taxpayers will only be allowed to use foreign losses to reduce foreign income
l and not to reduce any South African income (whether from trade or passive income (for example
rentals)).
Example 12.23. Special deductions

The following is the Statement of Profit or Loss and other Comprehensive Income of Mr Deduct’s
steel manufacturing business for the 2018 year of assessment:
Statement of Profit or Loss and other Comprehensive Income
Selling and administration expenses .. R1 124 000 Gross profit ................................ R2 873 000
Stock lost in fire .............................. 90 000 Interest on mortgage bonds ...... 16 000
Bad debt ........................................ 4 500
Provision for doubtful debt ............. 3 000
Rent................................................ 120 000
Foreign travelling expenses ........... 20 000
General expenses .......................... 329 500
Net surplus ..................................... 1 198 000
R2 889 000 R2 889 000
l Mr Deduct owns 25% of the capital of a private company which for the year has an assessed
loss of R4 000.
l Mr Deduct is aged under 65 years.
l In the previous year of assessment Mr Deduct had an assessed loss of R8 000.
continued
321
l General expenses include:

Repairs to private residence ....................................................................................... R25 000
Repairs to plant and machinery .................................................................................. 66 600
Stock taken for personal use ....................................................................................... 4 000
Income tax paid........................................................................................................... 211 400
Other deductible expenses ......................................................................................... 22 500
l A provision for doubtful debt of R2 000 will be allowed. No provision was allowed in the previous
tax year.
l Mr Deduct filed a claim on account of the stock lost in the fire and received R50 000 from his
insurance company. This amount was credited to a reserve account in his ledger. A stock-
taking immediately after the fire disclosed that goods costing R90 000 had been destroyed.
This amount was reflected in the books by a credit to ‘Purchases Account’ and a debit to ‘Fire
loss – Stock Account’.
l The foreign travelling expenses were incurred on a buying trip for the purchase of raw
materials and plant and machinery; 50% of this amount was spent in the purchase of raw
materials, and 50% in connection with the purchase of machinery.
Calculate Mr Deduct’s taxable income.
SOLUTION
Net surplus: Statement of Profit or Loss and other Comprehensive Income.................. 1 198 000
Add: Repairs to residence (note 3) .......................................................... R25 000
Foreign travelling expenses (in respect of plant and
machinery) (note 9) ......................................................................... 20 000
Stock for personal use (note 4) ....................................................... 4 000
Income tax paid (note 5) ................................................................. 211 400
Excess provision for doubtful debt (note 7)..................................... 1 000
Fire loss recoverable by insurance (note 8) .................................... 50 000
311 400
1 509 400
Less: Basic interest exemption (s 10(1)(i)) .............................................................. (16 000)
1 493 400
Less: Assessed loss from previous year (note 2) .................................................... (8 000)
Taxable income ................................................................................................ 1 485 400
Notes
(1) Mr Deduct cannot deduct any amount as a result of his being a holder of shares in a private
company having an assessed loss (s 20(1)(b)).
(2) The assessed loss of R8 000 incurred in the previous year of assessment must be carried
forward to the current year of assessment.
(3) The expenditure on repairs to the private residence is a private expense and not deductible
for income tax purposes (s 23(b)).
(4) Expenditure incurred for the maintenance of Mr Deduct is not allowed. Therefore, stock taken
for personal use is not deductible (s 23(a)). Section 22(8) applies and a recoupment at cost
price will be included.
(5) Income tax paid is prohibited as a deduction (s 23(d)).
(6) Bad debt is an allowable deduction, provided the debt was at some time included in the
taxpayer’s income, is due to the taxpayer and has during the year of assessment become
bad (s 11(i)).
(7) Section 11(j) allows for an allowance each year for debt that is considered to be doubtful
(adhering to the criteria set out in the public notice issued by the Commissioner). Here
R2 000 is allowed. The additional provision created, that is, R1 000, must be regarded as in-
come carried to reserve and, in terms of s 23(e), may not be deducted. Note that the R2 000
will be included in Mr Deduct’s income in the next year of assessment (s 11(j)).
(8) Loss of stock due to fire is ordinarily deductible but not when it is recoverable under an in-
surance contract. Therefore no deduction may be made for the R50 000 recovered (s 23(c)).
(9) Section 11(a) prohibits the deduction of expenditure or losses that are of a capital nature.
Hence the overseas travelling expenses of R20 000 expended in connection with the pur-
chase of machinery is not deductible under s 11(a).
322
13 Capital allowances and recoupments
Jolani Wilcocks

l identify when a person is a connected person for normal tax purposes, and apply
the connected person’s rules pertaining to depreciable assets and capital allow-
ances
l distinguish between the different types of assets and the capital allowance applic-
able to each
l calculate and discuss the tax consequences of leased assets
l calculate and discuss the capital allowances available on intellectual property and
research and development
l determine and calculate the recoupment or s 11(o) allowance when a capital asset
is disposed of, as well as the deferral available on a recoupment, if applicable.
Contents
Page
13.1 Overview .......................................................................................................................... 324
13.2 Core concepts ................................................................................................................. 326
13.2.1 Connected persons (s 1).................................................................................. 326
13.2.2 Machinery, plant, implement, utensil or article ................................................ 327
13.2.3 Process of manufacture ................................................................................... 328
13.2.4 Depreciable asset (s 1) .................................................................................... 329
13.2.5 Recoupments and the s 11(o) allowance ........................................................ 329
13.3 Allowances on movable assets ....................................................................................... 329
13.3.1 Wear-and-tear allowance (s 11(e))................................................................... 329
13.3.2 Movable assets used in farming or production of renewable energy
(s 12B) .............................................................................................................. 333
13.3.3 Movable assets used by manufacturers, for research and development or
by hotelkeepers, and ships, aircraft and assets used for the storage and
packing of agricultural products (s 12C) ......................................................... 335
13.3.4 Small business corporations (s 12E) ................................................................ 339
13.3.5 Rolling stock (s 12DA) ...................................................................................... 341
13.4 Allowances on immovable assets.................................................................................... 343
13.4.1 Buildings and improvements: Annual allowance (s 13) ................................... 343
13.4.2 Urban development zones (s 13quat).............................................................. 348
13.4.3 Residential units (s 13sex) ............................................................................... 350
13.4.4 Low-cost residential units on loan account (s 13sept)..................................... 353
13.4.5 Commercial buildings (s 13quin) ..................................................................... 354
13.4.6 Buildings in special economic zones (s 12S) .................................................. 356
13.4.7 Pipelines, transmission lines and railway lines (s 12D).................................... 357
13.4.8 Deductions in respect of improvements on property in respect of which
Government holds a right of use or occupation (s 12NA) ............................... 359
13.5 Hotels ............................................................................................................................... 360
13.5.1 Immovable assets of hotels: Annual allowance on buildings (s 13bis) ........... 360
13.5.2 Hotels: Movable assets (s 12C) ....................................................................... 363
13.6 Owners and charterers of aircraft or ships (s 33) ............................................................ 363
13.6.1 Movable assets: Aircraft and ships (ss 12C, 8(4)(a), 8(4)(e), 11(o), 12E
and 24P) ........................................................................................................... 364
13.6.2 Immovable assets: Airport and port assets (s 12F) ......................................... 364
323
Page
13.7 Leases .............................................................................................................................. 366
13.7.1 Lease premiums (s 11(f)) ................................................................................. 366
13.7.2 Leasehold improvements (s 11(g)) .................................................................. 369
13.7.3 Relief for the lessor (lessor’s special allowance) (s 11(h))............................... 373
13.7.4 Deductions in respect of improvements not owned by the taxpayer (s 12N) .... 375
13.7.5 Limitation of allowances for lessors of certain assets (s 23A) ......................... 377
13.7.6 Sale and leaseback arrangements (ss 23D and 23G)..................................... 379
13.8 Intellectual property and research and development ..................................................... 382
13.8.1 Legislation for expenditure incurred on or after 1 January 2014 but before
1 October 2022 (ss 11(gB), 11(gC), 11D, 12C, 13(1) and 23I) ..................... 383
13.9 Allowances on other types of expenses .......................................................................... 392
13.9.1 Government business licences (s 11(gD))....................................................... 392
13.9.2 Industrial policy project allowance (s 12I) ....................................................... 393
13.9.3 Energy efficiency savings deduction (s 12L) ................................................... 395
13.9.4 Additional deduction for roads and fences used in respect of the
production of renewable energy (s 12U) ......................................................... 396
13.9.5 Environmental expenditure (s 37B) .................................................................. 397
13.9.6 Environmental conservation and maintenance (s 37C) ................................... 398
13.9.7 Land conservation in respect of nature reserves and national parks
(s 37D) ............................................................................................................. 399
13.10 Recoupments ................................................................................................................... 400
13.10.1 Recoupments: General recoupment provision (ss 8(4)(a), 8(4)(b) and 24M) . 401
13.10.2 Recoupments: Donations, asset in specie distributions or disposal of
assets to connected persons (s 8(4)(k)) .......................................................... 405
13.10.3 Recoupments: Deferred recoupment of allowances (s 8(4)(e)–(eE)) .............. 406
13.10.4 Recoupments: Interest or related finance charges (s 8(4)(l)) .......................... 409
13.10.5 Recoupments: Industrial policy project allowance (s 8(4)(n)) ......................... 410
13.10.6 Recoupments: Acquisition of hired assets (s 8(5)) .......................................... 410
13.10.7 Recoupments: Concession or compromise regarding a debt (s 19) .............. 414
13.11 Alienation, loss or destruction allowance (s 11(o)).......................................................... 420
13.11.1 Limitation of losses from disposal of certain assets (s 20B) ............................ 423
13.12 Summary .......................................................................................................................... 424
13.12.1 Comparison between ss 11(e), 12C and 13 .................................................... 424
13.13 Comprehensive examples ............................................................................................... 426
13.1 Overview
As discussed in chapter 6, payments of a capital nature will not be deductible for normal tax pur-
poses in terms of the general deduction formula (s 11(a)). However, certain capital assets, if they fulfil
the requirements listed in the Act, will qualify for capital allowances (in this chapter referred to as
‘allowances’) and can be written off for normal tax purposes over different periods. Chapter 13 will
focus on these different allowances available (including those on leased assets, intellectual property,
and research and development). It will also cover the calculation of a recoupment or s 11(o) allow-
ance when a capital asset is disposed of.
After discussing certain core concepts, this chapter will focus on the following allowances and
recoupments available to taxpayers:
324
13.1 Chapter 13: Capital allowances and recoupments
Allowances and recoupments on capital assets
Movable assets: Immovable assets: Intellectual property Other types of

l Section 11(e): l Section 13: and research and expenses:
Wear-and-tear Buildings and development: l Section 11(gD):
allowance improvements l Section 11(gB): Government
(13.3.1) (13.4.1) Registration business
l Section 12B: l Section 13bis: expenses of licences (13.9.1)
Farming or Hotel buildings and intellectual l Section 12I:
production of improvements property (13.8.1) Industrial policy
renewable (13.5.1) l Section 11(gC): project allowance
energy l Section 13quat: Acquisition of (13.9.2)
(13.3.2) Urban development intellectual l Section 12L:
l Section 12C: zones (13.4.2) property (13.8.1) Energy efficiency
Manufacturing l Section 13sex: l Section 11D: savings deduc-
, research and Residential units Deductions for tion (13.9.3)
development, (13.4.3) scientific and l Section 12U:
hotels, ships, l Section 13sept: technological Additional
aircraft and Low-cost residen- research and deduction for
assets used tial units (13.4.4) development roads and fences
for storage l Section 13quin: (13.8.1) used in respect
and package Commercial of the production
of agricultural buildings (13.4.5) of renewable
products l Section 12S: energy (13.9.4)
(13.3.3) Buildings in special l Section 37B:
l Section 12E: economic zones Environmental
Small (13.4.6) expenditure
business l Section 12D: (13.9.5)
corporations Pipelines, l Section 37C:
(13.3.4) transmission lines Environmental
l Section 12DA: and conservation and
Rolling stock railway lines maintenance
(13.3.5) (13.4.7) (13.9.6)
l Section 12F: Airport l Section 37D:
and port assets Land conserva-
(13.6.2) tion in respect of
l Section 12NA: nature reserves
Deductions in or national parks
respect of im- (13.9.7)
provements on
property where
government holds a
right of use or Disposals of assets and other recoupments:
occupation (13.4.8) Disposals:
l Section 8(4)(a): General recoupments
(13.10.1)
l Section 8(4)(e), (eA)–(eE): Deferred
recoupments (13.10.3)
l Section 8(4)(k): Donations, dividends and
Leases: disposals to connected persons (13.10.2)
l Section 11(f): Lease premium (13.7.1) l Section 11(o): Alienation, loss or destruction
l Section 11(g): Leasehold improvements allowance (13.11)
(13.7.2)
Other recoupments:
l Section 11(h): Relief for lessor (lessor’s
l Section 8(4)(b): Actuarial surplus paid to
special allowance) (13.7.3)
employer from a pension fund (13.10.1)
l Section 12N: Deductions in respect of
l Section 8(4)(l): Interest or related
improvements not owned (13.7.4)
finances (13.10.4)
l Section 23A: Limitation of allowances
l Section 8(4)(n): Industrial policy project
granted to lessors of certain assets (13.7.5)
allowance (under s 12I) (13.10.5)
l Section 23D: Leasebacks and licenses
l Section 8(5): On acquisition of hired assets
(13.7.6)
(13.10.6)
l Section 23G: Leasebacks that involve
l Section 19: Concession or compromise
tax-exempt bodies (13.7.6)
regarding a debt (13.10.7)
325
13.2 Core concepts

There are certain core concepts and/or definitions of which a basic understanding is required before
allowances and recoupments could be discussed in detail. These are:
l connected persons (as defined in s 1)
l machinery, plant, implement, utensil or article (referred to, for example, in ss 11(e) and 12C)
l process of manufacture (referred to, for example, in ss 12C and 13)
l depreciable asset (as defined in s 1 – referred to, for example, in ss 11(o) and 8(4)(e))
l recoupments (contained mainly in ss 8(4) and 8(5) and the s 11(o) allowance).
13.2.1 Connected persons (s 1)

Many sections in the Act refer specifically to ‘connected persons’. It is important to understand this
concept since it can affect the normal tax treatment of a specific transaction. For example, if an asset
is sold to a ‘connected person’, no s 11(o) allowance will be allowed as a deduction (see 13.11). The
term ‘connected person’ is defined in s 1 as follows in relation to various other persons:
Connected persons in relation
Type of taxpayer Example
to the taxpayer
Natural person l any relative (within the third degree A father and his children will be
(par (a) of definition) of kinship (consanguinity) of the connected persons
natural person and including
adopted children/adoptive
parents)
l a trust (other than a portfolio of a Where a grandparent is the
collective investment scheme) of beneficiary of a trust, his
which the natural person or the grandchildren will be connected
relative is a beneficiary persons in relation to the trust
Trust (other than a l any beneficiary of the trust Where a grandmother is the
portfolio of a collective l any connected person in relation beneficiary of a trust, she will be a
investment scheme) to a beneficiary connected person in relation to the
(par (b) of definition) trust, and her relatives will also be
connected persons in relation to the
trust (even if they are not beneficiaries)
Connected person l any other person who is a Agnus and Josina, who are not
in relation to a trust connected person in relation to relatives, are both beneficiaries of the
(other than a portfolio the trust same trust. Agnus’ relatives will be
of a collective connected persons in relation to the
investment scheme) trust, and Josina’s relatives will be
(par (bA) of definition) connected persons in relation to
the trust. This rule causes Agnus’
relatives and Josina’s relatives to be
connected persons
Members of a l any other member The members of a partnership are
partnership or foreign l any connected person in relation connected persons, and they are
partnership to any member of the partnership connected persons in relation to the
(par (c) of definition) or foreign partnership other partners’ or members’
connected persons
Company, including a l any other company in the same Fellow subsidiaries of the same
portfolio of a collective group of companies (controlling holding company are connected
investment scheme and controlled group com- persons
(par (d)(i)–(vA) of panies), where a group of A company and a holder of shares
definition) companies consists of a con- (not a company) who is a ‘20%
trolling group company that holder’ are connected persons, and a
– directly holds more than 50% company and a group of connected
of the equity shares or voting persons who jointly constitute a ‘20%
rights in at least one controlled holder’ are connected persons
group company, and
continued
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Connected persons in relation

Type of taxpayer Example
to the taxpayer
– directly or indirectly holds If company Alfa holds at least 20% of
more than 50% of the equity the equity share capital of company
shares in or voting rights Colonial and no holder of shares holds
in each controlled group the majority voting rights in Colonial,
company Alfa is a connected person in relation
l any person (but excluding to Colonial. However, if Alfa and
companies) that individually or Albatross each holds 50% of the
jointly with that person’s equity share capital of Colonial, both
connected persons holds 20% Alfa and Albatross are connected
or more of a company’s equity persons in relation to Colonial
shares or voting rights (the equity If Notsung is a connected person of
shares or voting rights can be company Iglo and he or it also
held directly or indirectly) manages or controls company
l any company that holds 20% or Manganye, then Iglo and Manganye
more of a company’s equity are connected persons in relation to
shares or voting rights (but only if eah other. In addition, all the con-
no other holder of shares holds nected persons of Notsung will also
the majority of voting rights in the be connected persons in relation to
company) company Iglo.
l any other company, if the com-
pany is managed or controlled
by a connected person (or his
connected person)
l any other company that would be
part of the same group of
companies according to the
definition of ‘group of companies’
Close corporation l any member Kelly CC and Jordan CC will be
(par (d)(vi) of definition) l any relative of the member or trust connected persons if Jordan CC is a
(other than a portfolio of a connected person in relation to a
collective investment scheme) member of Kelly CC
that is a connected person in Morgan CC and Neville CC will be
relation to a member connected persons if Neville CC is a
l any other close corporation connected person in relation to a
which is a connected person to trust that is the connected person in
one of the members, or relative relation to Morgan CC
or connected trust
Interpretation Note No 67 (Issue 2) (issued on 14 February 2014) contains

Please note! detailed explanations and examples that explain the definition of ‘connected
person’.
13.2.2 Machinery, plant, implement, utensil or article
What does ‘machinery or plant’ mean?

Several of the provisions dealing with capital allowances use the term ‘machinery or plant’. However,
this term is not defined in the Act.
The Shorter Oxford English Dictionary defines ‘machinery’ as ‘machines, or their parts, taken collectively;
the mechanism or works of a machine or machines. . . [a] system or kind of machinery’, and ‘plant’ as
the ‘fixtures, implements, machinery, and apparatus used in carrying on any industrial process’.
The courts have found that a plant includes whatever device is used permanently by a businessman
to carry on his business, has a degree of durability and will not be classified as trading stock. An item
that is part of the manufacturing process (for example a railway line that connects a quarry with the
factory) will also be classified as plant.
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What does ‘machinery, plant, implement, utensil or article’ mean?

l Machinery, plant, implement, utensil or article
The words ‘machinery, plant, implement, utensil or article’ (used in various sections, including
ss 11(e), 11(o), 12C and 12E) have a wider meaning than the words ‘machinery or plant’. They
refer to tangible (touchable) assets and do not include intangible assets such as patent rights,
trade marks and goodwill. Animals that do not qualify as trading stock, for example racehorses or
circus animals, will also be regarded as ‘machinery, plant, implement, utensil or article’.
l Article
The meaning of the word ‘article’ in the expression ‘machinery, plant, implement, utensil and
article’ refers to items that can be detached, removed, stored and remounted easily and
inexpensively. Examples (from court cases) of items that will qualify as articles are carports that
are designed and intended to be removable and movable partitions used as the inner walls of a
building.
13.2.3 Process of manufacture

The s 12C and 12E(1) allowances are available for machinery or plant used directly in a process of
manufacture or in a process that in the Commissioner’s opinion is similar to a process of manufacture
(see 13.3.3 and 13.3.4). Section 13, in turn, makes an annual allowance available for buildings used
in a process of manufacture or in a process that in the Commissioner’s opinion is similar to a process
of manufacture.
What is a process of manufacture?
This term has been the subject of many court cases. In SIR v Safranmark (Pty) Ltd, 1982 (1) SA 113
(A) the important issues relating to a process of manufacture are summarised as:
(1) The term ‘process of manufacture’. . . means an action or series of actions directed towards the
production of an object or thing which is essentially different from the materials or components
which went into its making (this confirms the principles laid down in ITC 1006 (1962)).
(2) The requirement of ‘essential difference’ necessarily imports an element of degree; and there are
no fixed criteria – nor is there any precise universal test – whereby this can be determined. It is
never easy to determine whether or not a change in the materials or components wrought by the
process, be it as to the nature, form, shape or utility of the materials or components, has brought
about an essential difference. This must be decided on the individual facts of each case. In COT v
Processing Enterprises (Pvt) Ltd 1975 (2) SA 213 (RAD) it was stressed that there need not be a
change in the actual substance of the raw material before the process of dealing with it is
regarded as a manufacturing process. It is however important for skill to be applied in some way
to raw material to such an extent that its actual character is changed. Its physical substance may
remain the same, but the process of handling may none the less be regarded as a manufacturing
process if the raw material has been cleaned and broken up into its components.
(3) When deciding whether or not a particular activity falls within the ambit of a ‘process of manu-
facture’ the ordinary, natural meaning of that phrase in the English language must not be ignored.
Since no two activities are the same, each activity should be evaluated separately, based on the
facts.
What is a process similar to a process of manufacture?

The lists of processes that SARS accepts as ‘direct’ processes of manufacture, similar processes and
those processes excluded from being a process of manufacture are detailed in the Annexures to
Practice Note No 42:
l Annexure A: This annexure lists the processes regarded by SARS as processes similar to a
process of manufacture and includes, for example, curing of biltong, dry-cleaning, construction
of roads and buildings, photography, preparation of computer software and bulk processing of
meat.
l Annexure B: This annexure lists direct processes of manufacture and includes examples of
qualifying processes in addition to more conventional manufacturing operations, such as:
crushing of stone, baking of bread, blending and mixing of tea, printing, re-treading of tyres and
manufacture of bricks. The processes on this list do not require any specific approval before
being classified as a process of manufacture. However, Practice Note No 42 states that the list is
not exhaustive.
l Annexure C: This annexure lists processes regarded by SARS as neither processes of manufac-
ture nor similar processes, for example a garage keeper, dental surgery, processing of accounts data
and the delivery of final statements. However, Practice Note No 42 states that the list is not exhaustive.
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13.2–13.3 Chapter 13: Capital allowances and recoupments
What does the phrase ‘used directly in a process of manufacture’ mean?

The phrase ‘used . . . directly in a process of manufacture . . . or any other process . . . which is of a
similar nature’ is used in ss 12C and 12E. In SIR v Cape Lime Ltd (1967 A) it was agreed that
generally speaking once the process of manufacture has commenced or started, the movement of
material from one part of the plant to the next is an integral part of the process of manufacture. As a
result, any plant or machinery used to effect such movement during the manufacturing process, is
used ‘directly in a process of manufacture’.
13.2.4 Depreciable asset (s 1)

A ‘depreciable asset’ is
l an asset as defined in the Eighth Schedule, which includes:
– any property, movable or immovable, corporeal or incorporeal, excluding any currency, but
including any coin that is made mainly from gold or platinum, and
– any right or interest to or in the above-mentioned property
l that qualifies for a deduction or allowance that is wholly or partly based on its cost or value
l but excluding trading stock or any debt (s 1).
Remember
If a small, medium or micro-sized enterprise (SMME) uses an amount received from a small
business funding entity to fund (or to reimburse) expenditure incurred for the acquisition,
creation or improvement of an asset (including an allowance asset), the base cost of the asset
should be reduced by the amount of the funding received. The remaining amount should then
be used to base the calculation of the deductible allowances on (s 23O(3)–(5) – see chapter 19).
13.2.5 Recoupments and the s 11(o) allowance

When a taxpayer disposes of an asset on which allowances were granted for normal tax purposes,
there might be certain normal tax consequences:
The proceeds of Tax value of the Recoupment

the disposal EXCEED asset (see 13.10)
The proceeds of Tax value of the A possible s 11(o)

the disposal ARE LESS THAN asset allowance
(see 13.11)
Therefore, if:
l proceeds (limited to original cost price) – tax value = positive: add recoupment to income (s 1,
gross income, par (n) – see chapter 4)
l proceeds (limited to original cost price) – tax value = negative: claim s 11(o) allowance if circum-
stances qualify.
13.3 Allowances on movable assets
13.3.1 Wear-and-tear allowance s 11((e))

When will s 11(e) be applicable?
The s 11(e) allowance (commonly referred to as the wear-and-tear allowance) will be available to a
taxpayer if:
l the value of any machinery, plant, implements, utensils and articles
l owned by the taxpayer or acquired by him as purchaser in terms of an instalment sale agree-
ment, and
l used by him for the purpose of his trade (this will exclude assets held in reserve or as replace-
ment assets in the event of a breakdown (Interpretation Note No 47 (Issue 3) issued 2 November
2012))
l has been diminished by reason of wear and tear or depreciation during the year of assessment.
329
Section 11(e) does not apply to the following:

l farmers for development expenditure already allowed in full under the provisions of par 12 of the
First Schedule (specifically disallowed as set out in par 12(2) of the First Schedule (see chap-
ter 22))
l machinery, plant, implements, utensils and articles that qualify for deductions under ss 12B (mov-
able assets used in farming or production of renewable energy – see 13.3.2), 12C (see 13.3.3),
12DA (rolling stock – see 13.3.5), 12E(1) (see 13.3.4), 12U (additional deduction for roads and
fences used in respect of the production of renewable energy – see 13.9.4) or 37B (environ-
mental expenditure – see 13.9.5) (since the section only excludes s 12E(1) assets (manufacturing
assets of a small business corporation), taxpayers will still have the option to elect between
applying the provisions of s 11(e) or s 12E(1A) to the non-manufacturing assets of a small
business corporation)
l any machinery, plant, implement, utensil or article if the ownership is retained by the taxpayer as
a seller in terms of an instalment sale agreement (proviso (iA))
l buildings or other structures or works of a permanent nature (proviso (ii))
l any machinery, implement, utensil or article the cost of which has been allowed as a deduction
under s 24D (expenditure incurred on a National Key Point (proviso (iiiA)).
What will the implications be if s 11(e) is applicable?
General rule Allowance = Value Expected useful life × number of months used in year
Section 11(e) allows taxpayers a deduction against income for the amount by which the value of
qualifying assets used by him for the purpose of his trade has been diminished by reason of wear
and tear or depreciation during the year of assessment.
The wear-and-tear allowance should be calculated using the diminishing value of the asset (the
allowance should be calculated on the value remaining after deduction of previous years’
allowances). However, in terms of Binding General Ruling (Income Tax) No 7, a taxpayer may elect to
use the straight-line method (under this method the allowance is claimed in equal instalments over
the expected useful life of the asset) or the diminishing-value method for calculating the wear-and-
tear allowance. The taxpayer does not need to notify the Commissioner when changing the method
but should keep the necessary records supporting the write-off of all assets readily available.
A taxpayer using the diminishing-value method that wishes to adopt the straight-line method must
write off the income tax value of existing assets in equal instalments over the remaining estimated
useful life.
The following information and documents must be kept for any asset in respect
of which an allowance was claimed:
l The date of acquisition, date on which the asset was brought into use and if
disposed of, the date on which it was disposed of.
l The value of the asset.
l The write-off period of assets and any information or documentation used to
determine its write-off period.
Please note! l The income tax value of the asset at the end of the previous year of
assessment. Any assets written-off in full must be brought into account for
record purposes at a residual value of R1.
l If the asset is disposed of, the price realised on disposal or scrapping of the
asset and the income tax value at the end of the previous year of
assessment.
(Interpretation Note No 47 (Issue 3), p 17)
The allowance amount should be determined on the basis of the periods of use listed in a public
notice issued by the Commissioner. Write-off periods acceptable to SARS for assets that are written
off on the straight-line method are listed in Binding General Ruling (Income Tax) No 7 (reissued on
2 November 2012) (see Appendix E – this also includes leased assets), which is applicable to any
asset brought into use during a year of assessment commencing on or after 1 March 2009. For
example, personal computers are written off over three years, delivery vehicles over four years and
passenger cars are written off over five years. (It is submitted that the list in the Binding General
Ruling (Income Tax) No 7 will meet the requirements of a public notice as required.)
330
Taxpayers who believe that a shorter write-off period should be used are required to, on the
prescribed form and in the prescribed manner, obtain approval from their local SARS branch.
For an asset not mentioned in the list, a taxpayer must determine the period of write-off by its expected
life, taking into account the following factors:
l how long the taxpayer expects the asset to last
l how the taxpayer expects to use the asset
l whether the asset is likely to become obsolete
l whether the effective life of the asset is limited to the life of a particular project.
(Binding General Ruling (Income Tax) No 7, p.10)
Used (or second-hand) assets may be written off over their expected lifetimes, which may be
determined in the light of their condition.
Binding General Ruling (Income Tax) No 7 states that ‘small items’ may be written off in full in the year
of assessment in which they are acquired and brought into use. The Commissioner regards a small
item as an item acquired at a cost of less than R7 000 that ‘normally functions in its own right and is not
part of a set’. An example of a set would be a table and six chairs forming part of a set. If the set costs
R7 000 or more, it fails to qualify, as do its component parts. The small item write-off does, however, not
apply to assets acquired by a lessor for the purposes of letting. Lessors that let small items must
depreciate these assets over their useful life (examples of small items let are DVDs and gas cylinders).
Value of an asset for s 11(e) purposes is

l the direct cost of the asset
l as if acquired under a cash transaction concluded at arm’s length on the
date on which the purchase transaction was concluded (market value)
(s 11(e)(vii)),
including
– the direct cost of installation or erection of the asset
(also shipping and delivery charges) (see note 1)
Please note!
– cost of foundation/supporting structure (see note 2)
– moving cost (see note 3)
but excluding
interest and finance charges (but s 24J is available) (see note 4).
(In the case of a disposal, the taxpayer can elect that par 65 or 66 of the Eighth
Schedule should apply in order for s 8(4)(e) to provide for a delayed taxation of
the recoupment (see 13.10.3).)
Note 1: Foreign travelling expenses incurred by the taxpayer in order to buy the asset cannot be
included in the installation and erection costs and would thus not be added to the value of
the asset.
Note 2: If an asset in the form of any machinery, implement, utensil or article qualifies for the wear-
and-tear allowance and is also mounted on or fixed to any concrete or other foundation or
supporting structure, and:
l that structure is designed for the asset and is constructed in such a manner that it could
be regarded as being integrated with the asset, and
l its useful life will be limited to the useful life of the asset mounted on it,
the foundation or supporting structure will not be deemed to be a structure or work of a
permanent nature, but will be deemed to be part of the asset that is mounted on or affixed to
it (s 11(e)(iiA)). For example, if an industrial washing machine is mounted in concrete to
prevent the machine from excessive vibration and movement, the concrete will be deemed
to be part of the washing machine for the purposes of the s 11(e) allowance.
Note 3: Any expenditure incurred in moving an asset (on which a s 11(e) allowance can be claimed)
from one location to another shall be included in the value of that asset if:
l used for purposes of trade, and
l if not deductible under s 11(a) (thus preventing a double deduction) (s 11(e)(v)).
These expenses can then also be claimed over the remaining write-off period of the asset.
Note 4: The following should be considered when determining the value of an asset qualifying for
the s 11(e) allowance:
l If a taxpayer acquires an asset without paying for it (e.g. if a vehicle is acquired by
donation, inheritance or as a distribution in specie), the taxpayer will have to base the
allowance on the market value of the asset.
331
l The allowance under s 11(e) is calculated based on the value of the asset, in contrast to,
for example the s 12C allowance (see 13.3.3) that is claimed on the cost of the asset.
The implication of this is that the s 11(e) allowance can be claimed on an asset obtained
for no consideration, but s 12C can only be claimed on assets that were obtained at an
actual consideration, since there should be a cost before s 12C can be claimed. Under
s 11(e) the taxpayer can claim the allowance on the value of the asset (regardless of
whether or not any amount was paid for the asset).
l When an asset qualifying for the wear-and-tear allowance is acquired in a foreign
currency, the price should be converted to Rand by applying the provisions of s 25D. It
is the practice of SARS to convert the cost price of the asset to Rand for the purposes of
the wear-and-tear allowance on the date on which the transaction for its acquisition was
incurred. When the delivery of the asset takes place over an extended period or a long
time after the order for the machinery or plant was placed, it is prepared to permit the
conversion to take place on the date of delivery. All subsequent foreign exchange gains
and losses are then dealt with in terms of s 24I (see chapter 15) and par 43 of the Eighth
Schedule (see chapter 17).
l A manufacturer who constructs plant and machinery for the purposes of his business
may not claim the wear-and-tear allowance on the value of his own skill and labour.
Remember
The s 11(e) allowance (some additional notes to clarify the application):
l The allowance is only available for ordinary wear and tear. When damage to an article is
caused through an accident or a removal or through some external or violent means, the
damage cannot be said to be ordinary wear and tear as envisaged by the allowance.
Depreciation arising from other causes (for example a change in fashion or the obso-
lescence of the asset) is not deductible.
l The allowance can be claimed up to the date of sale of an asset or up to the time the asset is
scrapped and no longer used for the purposes of trade. (If the asset is sold for more than its
tax value, the amount exceeding the tax value will be included in income to the extent to
which it represents a recoupment of any wear-and-tear allowances previously made (in terms
of s 8(4)(a)). On the other hand, if a taxpayer disposes of an asset on which allowances were
previously claimed, there might be the possibility of claiming a s 11(o) allowance, if the
proceeds (limited to original cost price) less the tax value is a negative amount.
l The allowance may be granted only for wear and tear relating to the current year of assess-
ment.
l The requirement merely states that an asset be used by the taxpayer for the purposes of his
trade and not that he be obliged to use it (for example by the terms of his employment).
l The allowance is only granted on qualifying assets belonging to the taxpayer. Therefore, a
taxpayer is not entitled to the allowance on machinery and plant that he has hired or that is
subject to a usufruct in his favour.
l If fixed assets are used partly for trading purposes and partly for private purposes, a wear-
and-tear allowance based on the proportion of use for trading purposes will be allowed.
l The s 11(e) allowance will be apportioned if the asset was not used for purposes of trade for
the full year (for example asset acquired or disposed of in the year or a natural person using
the asset in his trade dies or becomes insolvent).
l A special ‘deemed allowance’ rule provides that:
– when an asset was previously brought into use by the taxpayer in a trade carried on by
him
– in the production of income that was excluded from income (for example under the
turnover tax regime)
– the period of use of the asset in the previous year or years of assessment shall be taken
into account in determining the amount by which the value of the asset has been
diminished (s 11(e)(ix)).
The deemed allowance will not be recouped if the asset is consequently disposed of
(s 8(4A)).
l The allowance granted to a lessor must be based on the cost of the asset less any residual
value (as specified in the lease agreement). Section 23A may also set a limit on the amount
of certain allowances, including the wear-and-tear allowance that may be claimed in any
year of assessment by a lessor letting ‘affected assets’ as defined (see 13.7.5).
l Section 23D imposes a restriction on the deduction or allowance available under s 11(e) on
machinery, plant, implements, utensils or articles let or licensed to a person (or his
connected person) who held the asset during the two years before the start of the lease or
licence (see 13.7.6).
332
See 13.12 for a comparison between the provisions of ss 11(e), 12C (movable assets used by manu-
facturers, for research and development or by hotelkeepers, and ships, aircraft and assets used for
the storage and packing of agricultural products) and 13 (allowance on buildings and improve-
ments).
Example 13.1. Wear-and-tear allowance

Moatshe (Pty) Ltd acquired a motorcycle at a cost of R40 000 (excluding VAT) on 1 March 2018
and immediately brought it into use in its business, for the purpose of making deliveries. It used
the motorcycle for the rest of its year of assessment ending 31 August 2018 and throughout its
year of assessment ending 31 August 2019.
Calculate the wear-and-tear allowance to be claimed in the 2018 and 2019 years of assessment.
The taxpayer elects the straight-line method. Binding General Ruling (Income Tax) No 7 and
Interpretation Note No 47 (which is in line with the Commissioner’s public notice) allow a four-
year write-off period on a motorcycle.
SOLUTION
31 August 2018
Wear and tear (R40 000/4 × 6/12 (s 11(e)) .................................................................. (R5 000)
31 August 2019
Wear and tear (R40 000/4) .......................................................................................... (R10 000)
Remember
The s 11(e) allowance
l can be claimed only on assets that do not qualify for other allowances
l can never be claimed on buildings
l has to be apportioned for the period it was used in the taxpayer’s trade. As the Act does not
prescribe the method of apportionment, either the number of days or the number of months
used in the taxpayer’s trade during the year of assessment could be applied.
13.3.2 Movable assets used in farming or production of renewable energy (s 12B)

The provisions of s 12B can be summarised as follows:
Assets that will Machinery, implements, utensils or articles
qualify for the l owned by the taxpayer or acquired by him as purchaser under an instalment
allowance: sale agreement, and
l used by him in the carrying on of his farming operations (but not livestock),
but excluding
– any motor vehicle whose sole or primary function is the conveyance of persons
– caravans
– aircraft (other than an aircraft used solely or mainly for the purpose of crop-
spraying), or
– office furniture or equipment (s 12B(1)(f))
l used in the taxpayer’s trade for the production of bio-fuels (s 12B(1)(g)), or
l used in the taxpayer’s trade to generate electricity from
– wind power
– solar energy (sunlight) (see note 1)
– hydropower (gravitational water forces) to produce electricity of not more
than 30 megawatts, and
– biomass comprising organic wastes, landfill gas or plant material (s 12B(1)(h)),
or
l improvements (not repairs) to any of the above assets (s 12B(1)(i)(a))
(If a lessee undertakes obligatory improvements on leased property in terms of
a Public Private Partnership,
– owned by the government in the national, provincial or local sphere or
certain government-owned exempt entities,
– or for obligations incurred on or after 1 January 2013, the Independent
Power Producer Procurement Programme administered by the Department
of Energy,
continued
333
s 12N (deduction for improvements not owned by the taxpayer – see 13.7.4)
will be applicable. It allows for the depreciation allowance on the improvements
to be calculated as if the lessee owned the property, if the lessee uses the
property for earning income. The expenditure incurred by the lessee to
complete the improvements shall be deemed to be the cost to the lessee of the
movable asset used for farming or the production of renewable energy.), and
l foundations or supporting structures that are deemed to be part (see note 2) of
the above assets (s 12B(1)(i)(b)).
Capital allowance The year of assessment during which a qualifying asset, or any improvements
available from: thereto, is brought into use for the first time by a taxpayer (new or used assets).
Allowance (general) = Cost × 50%/30%/20% per year

General rule and
Allowance (machinery to generate electricity from photovoltaic solar energy
not exceeding one megawatt) = Cost × 100%
Calculation of the A 100% allowance will be allowed for machinery used in the taxpayer’s trade to
capital allowance: generate electricity from photovoltaic solar energy not exceeding one megawatt
(see note 1) (s 12B(2)(b)).
The deduction for all other qualifying assets will be calculated on the cost as
follows:
l 50% in the first year
l 30% in the second year, and
l 20% in the third year (s 12B(2)(a)).
The full allowance can be claimed, even if an asset is used for only part of the year
of assessment (s 12B(2)).
Note 1: For years of assessment commencing on or after 1 January 2016, the generation of electricity
from solar energy will only be allowed for the following three categories:
l photovoltaic solar energy (solar PV) of more than one megawatt,
l photovoltaic solar energy (solar PV) not exceeding one megawatt, or
l concentrated solar energy (solar CSP).
The useful life of the foundation or supporting structure will be limited to the useful life of the
asset or improvement (proviso to s 12B(1)). For years of assessment commencing on or
after 1 April 2016, a deduction will be allowed for expenditure actually incurred for roads
and fences (including foundations or supporting structures designed for such fences (under
s 12U – see 13.9.4) constructed for purposes of trade of a person generating electricity.
Note 2: The foundations or supporting structures is deemed to be part of the asset if:
l the asset is mounted or fixed to any concrete or other supporting structure or foun-
dation, and
l the supporting structure or foundation is designed for the asset in such a way that it is
an integral part of the asset, and
l the foundation or supporting structure is brought into use on or after 1 January 2013.
The useful life of the foundation or supporting structure will be limited to the useful life of the
asset or improvement (proviso to s 12B(1)).
The allowance is available only if the asset is brought into use for the first time by
Please note! the taxpayer. This requirement does not limit the deduction to new or unused
assets, but prevents a taxpayer from claiming the s 12B allowance twice on the
same asset.
Example 13.2. Movable assets used in production of renewable energy

On 30 June 2018, Solastic (Pty) Ltd completed the installation of solar panels at a total cost of
R350 000, and immediately brought it into use. The solar panels will generate electricity from
photovoltaic solar energy not exceeding one megawatt.
Calculate the allowances on the solar panels for the year of assessment ending 30 September
2018.
334
SOLUTION
2018: R350 000 × 100% (s 12B(2)(b)) ........................................................................ (350 000)
Remember
The s 12B allowance
l cannot be claimed on buildings
l is claimed when the asset is brought into use for the first time by the taxpayer
l can be claimed in full (thus no apportionment) in a year of assessment, even if the asset was
used for only a few days in the production of income.
Section 12B is discussed in more detail (with additional examples) in chapter 22.
13.3.3 Movable assets used by manufacturers, for research and development or by

hotelkeepers, and ships, aircraft and assets used for the storage and packing
of agricultural products (s 12C)
When will s 12C be applicable?
Section 12C provides an allowance on the following assets, owned by the taxpayer or acquired by
him in terms of an instalment sale agreement and brought into use for the first time:
Industrial machinery or Machinery or plant
plant l of the taxpayer or the lessor, where the asset is let
(after 15 December 1989) l that is used for the purposes of the taxpayer’s or lessee’s trade (but not
mining and farming)
l directly in a process of manufacture or similar process (see 13.2.3)
l carried on by the taxpayer or lessee (s 12C(1)(a) and (b)).
If, however, the taxpayer is a small business corporation as defined in
s 12E(4), the machinery or plant may qualify for the 100% allowance under
s 12E(1) (see 13.3.4) and not s 12C (s 12C(1)(a), (b) and (c)).
Industrial machinery or Machinery or plant
plant used under a supply l of the taxpayer
agreement in the l made available in terms of a contract to another person (the components
Automotive industry supplier) for no consideration
(years of assessment l that is brought into use by the supplier for the first time
ending on or after
1 January 2016) l for purposes of the supplier’s trade (but not mining and farming)
l and is used by the supplier solely for the benefit of the taxpayer for the
purposes of the performance of his obligations under that contract
l in a process of manufacture (see 13.2.3)
l under the Automotive Production and Development Programme or
Automotive Incentive Scheme administered by the Department of Trade
and Industry (referred to in the 11th Schedule to the Act) (s 12C(1)(bA)).
If, however, the taxpayer is a small business corporation as defined in
s 12E(4), the machinery or plant may qualify for the 100% allowance under
s 12E(1) (see 13.3.4) and not s 12C (s 12C(1)(bA)).
Agricultural Machinery or plant
co-operatives l of an agricultural co-operative, and
(after 15 December 1989) l used by it directly for storing or packing pastoral, agricultural or other
farm products of its members, or
l for subjecting such products to a ‘primary process’ as defined in s 27(9)
(s 12C(1)(c)).
Hotelkeepers Machinery, implement, utensil or article
(after 15 December 1989) l of the taxpayer or the lessee (where the asset is let)
l used for the purposes of the taxpayer or lessee’s trade as hotelkeeper
(see 13.5), and
l that is used by the taxpayer or lessee in a hotel
l excluding any vehicle or equipment for offices or managers’ or servants’
rooms (s 12C(1)(d) and (e)).
continued
335
Aircraft An aircraft
(on or after 1 April 1995) l of the taxpayer
l that is used for the purposes of his or her trade
l excluding an aircraft in respect of which an allowance has been granted to
the taxpayer under s 12B (see 13.3.2 and chapter 22) (s 12C(1)(f)).
Ships A ship
(on or after 1 April 1995) l of the taxpayer
l that is used for the purposes of his or her trade
l excluding a South African ship contemplated in s 12Q(1) (s 12C(1)(g)).
Machinery or plant used New or unused machinery or plant
for research and l of the taxpayer
development purposes l that is first brought into use
(on or after 1 October
l for purposes of research and development as defined in s 11D (see 13.8.1)
2012 but before
(s 12C(1)(gA))
1 October 2022)
Improvements Improvements (other than repairs) to any of the above assets, except to an air-
craft (s 12C(1)(f)) and a ship (s 12C(1)(g)) (s 12C(1)(h)).
Section 12C is not available for an asset that is let, unless:

l the asset is let under an ‘operating lease’ as defined in s 23A(1) (see
Please note! 13.7.5), or
l the asset is let under any other lease and the lessee under the lease derives
income (as defined in s 1) in the carrying on of his trade (s 12C(3)(a)).
Remember
If a taxpayer qualifies as a small business corporation, allowances on manufacturing plant and
machinery can be claimed under the provisions of s 12E(1).
What will the implications be if s 12C is applicable?
Allowance (new and unused manufacturing assets) = Cost ×

General rule 40%/20%/20%/20%
and
Allowance (all other assets) = Cost × 20% per year
The s 12C allowance will normally be:
20% of the cost of the asset or improvement to the taxpayer in

each year for five years
EXCEPT IF
it is new or unused machinery or plant or improvement
l acquired by the taxpayer under an agreement formally and finally signed by every party to it on
or after 1 March 2002, and
– brought into use for the first time by the taxpayer for the purposes of his trade (other than
mining, farming, banking, financial services, insurance or rental business), and
– used directly in a process of manufacture or similar process,
where it will be:
40% of the cost in the year brought into use, and then
20% in each of the three subsequent years of assessment.
336
l acquired by the taxpayer under an agreement formally and finally signed by every party to it on
or after 1 January 2012, and
– brought into use on or after that date by the taxpayer for the purpose of research and develop-
ment as defined in s 11D (see 13.8.1 – the allowance will be available on plant and machinery
used for research and development purposes where the expenditure to acquire the assets was
incurred on or after 1 October 2012 but before 1 October 2022), where it will be:
50% of the cost in the year first brought into use, and then
30% in the second year and 20% in the third year of assessment.
Special allowance:
For the period 1 July 1996 until 30 September 1999 a
331/3% per year (over a three-year period) allowance
could be claimed on the cost of new or unused machinery or plant used directly in a process of
manufacture or similar process acquired between these dates and brought into use before
31 March 2000.
If a lessee undertakes obligatory improvements to a leased asset in terms of a Public Private Part-
nership,
l owned by the government in the national, provincial or local sphere or certain government-owned
exempt entities
l or for obligations incurred on or after 1 January 2013, the Independent Power Producer Procure-
ment Programme administered by the Department of Energy,
s 12N (deduction for improvements not owned by the taxpayer – see 13.7.4) will be applicable. It
allows for the depreciation allowance on the improvements to be calculated as if the lessee owned
the asset (plant and machinery), if the lessee uses the asset to earn income. The expenditure
incurred by the lessee to complete the improvements shall be deemed to be the cost for purposes of
the allowance (s 12N(1)).
Remember
l The accelerated allowance (40:20:20:20) is not available where the asset is let.
l The accelerated allowance applies only to new or unused machinery or plant (and is
therefore not available to an aircraft and a ship).
l The 20% rate applies to both new and used assets (including aircrafts and ships).
l The s 12C allowance is not apportioned, but can be claimed in full, if the asset was used for
any period of time in the required manner during a particular year of assessment.
l The total deductions allowed under ss 12C and 11(o) (the alienation, loss or destruction
allowance) can never exceed 100% of the cost (s 12C(5)).
l The s 12C allowance is only available if the asset is brought into use for the first time by
the taxpayer (or his lessee, where applicable). This requirement prevents a taxpayer from
claiming the s 12C allowance twice on the same asset.
If a taxpayer brings the same asset into use in a process of manufacture for the second time,
the taxpayer may not claim s 12C again, but may apply the s 11(e) wear-and-tear allowance
(see 13.3.1).
l Any improvement to a s 12C asset is treated as a ‘new asset’ in that it is written off from the
time that the improvements are first brought into use.
The cost of an asset for the purposes of s 12C is

the lesser of
l the actual cost to the taxpayer to acquire that asset, or
l the direct cost under a cash transaction concluded at arm’s length on the date
on which the purchase transaction was concluded (market value),
Please note! including
– the direct cost of installation or erection of the asset
(also shipping and delivery charges)
– cost of foundation/supporting structure (note 1)
– moving cost (note 2)
but excluding
interest and finance charges (note 3).
337
Note 1: When any machinery, plant, implement, utensil, article or improvement qualifying for the
s 12C allowance is mounted on or fixed to any concrete or other foundation or supporting
structure, and:
l the foundation or supporting structure is designed for the asset and is constructed in
such a manner that it could be regarded as being integrated with the machinery, plant,
implement, utensil, article or improvement, and
l its useful life will be limited to the useful life of the asset mounted on it,
the foundation or supporting structure will be deemed to be part of the asset that is mounted
on or affixed to it (proviso to s 12C(1)).
Note 2: Any expenditure (not deductible under s 11(a)) incurred by a taxpayer to move an asset
from one location to another is deductible in equal instalments over the remaining write-off
period (under s 12C) of the asset. If the asset has been written off in full by the time that it is
moved, the moving cost is deductible in full in the year in which it is incurred (s 12C(6)).
Note 3: Interest need to be dealt with under s 24J(2) (see chapter 16).
A special ‘deemed allowance’ rule provides:

l when an asset was previously brought into use by the taxpayer in a trade
carried on by him
l in the production of income that was excluded from income (for example
under the turnover tax regime)
l any deduction that could have been allowed under s 12C during the
previous year in which the asset was brought into use and any following
Please note! year is deemed to have been allowed during those years of assessment, as
if the receipts and accruals were included in the taxpayer’s income
(s 12C(4A)).
Therefore, the tax value of the asset is reduced by the deemed allowance,
although no actual deduction will be granted under this section (s 12C) in
respect of the period of use of the asset (which was excluded from income) in
the previous years. The deemed allowance will not be recouped if the asset is
consequently disposed of (s 8(4A)).
Remember
Section 12C(3)(c) prohibits the s 12C allowance on an asset that has been disposed of by the
taxpayer during any previous year of assessment.
See 13.12 for a comparison of the provisions of ss 11(e) (wear-and-tear allowance), 12C and 13
(allowance on buildings and improvements).
Example 13.3. Section 12C 20% and 40% allowances, moving and installation cost
Kanyetu CC acquired Machine A (a second-hand machine) for R1 500 000 and brought it into
use in its manufacturing process on 10 January 2013.
Kanyetu CC acquired a new manufacturing Machine B for R3 000 000 and brought it into use in
its manufacturing process on 15 December 2015. Kanyetu CC spent an additional R50 000 on
installation expenditure for Machine B.
Kanyetu CC decided to move to another site and both machines were moved on 15 July 2016 at
a cost of R10 000 for Machine A and R60 000 for Machine B (both amounts not claimable under
s 11(a)).
Calculate the allowances that Kanyetu CC may claim under s 12C in its years of assessment
ending at the end of June 2016, 2017, 2018 and 2019 (ignore VAT).
338
SOLUTION
Year ended 30 June 2016
Machine A:
Section 12C allowance (20% of R1 500 000 – 20% as a second-hand machine) .... (R300 000)
Machine B:
Section 12C allowance (40% of (R3 000 000 + R50 000 (installation cost
included)) (new and unused) – the allowance is granted in full even though the
machine was used for only part of the year) ............................................................. (R1 220 000)
Machine A:
Section 12C allowance (20% of R1 500 000, plus R10 000 (moving cost – as
Machine A is written off in full in the 2017 year, the full amount will be claimed)) .... (R310 000)
Machine B:
Section 12C allowance (R610 000 (20% of R3 050 000) plus R20 000
(ϛ of R60 000 – the moving cost is deductible in equal instalments over the
remaining years over which the s 12C allowance is to be claimed, thus
three years)) .............................................................................................................. (R630 000)
Year ended 30 June 2018, 2019
Machine B:
Section 12C allowance (R610 000 (20% of R3 050 000) plus R20 000
(ϛ of R60 000) ........................................................................................................... (R630 000)
Remember
The s 12C allowance for a year of assessment can be claimed in full (thus no apportionment),
even if the asset was used for only a few days in the taxpayer’s trade.
13.3.4 Small business corporations (s 12E)

Section 12E allows certain deductions on movable assets for small business corporations. The
requirements for a taxpayer to be classified as a small business corporation are discussed in detail in
chapter 19.
Allowance (manufacturing assets) = Cost × 100%

General rule and
Allowance (non-manufacturing assets) = Cost × {s 11(e) write-off period
% (see 13.3.1) OR 50%/30%/20% per year}
339
The three types of deductions that are provided for in s 12E can be summarised schematically as
follows:
Allowances available
in terms of s 12E
Manufacturing assets: Non-manufacturing assets: Moving expenses:

Applicable to Applicable to Any expenditure incurred by
l plant and machinery l Any machinery, plant, im- the taxpayer in moving a
l owned or acquired (under plement, utensil, article, qualifying s 12E asset from
an instalment sale agree- aircraft or ship one location to another, which
ment) by the taxpayer, l that does not qualify for is not deductible under
and s 12E(1) (thus not manu- s 11(a), will be allowed
l used directly in a process facturing assets), and l in equal instalments over
of manufacture or similar l is acquired (under an the remaining years of
process agreement formally and that capital deduction (in
terms of s 12E(1), or
l for the first time on or after finally signed) on or after
12E(1A)) will be allowed
1 April 2001 1 April 2005, and
on the asset, or
l by a small business cor- l would also qualify for
deduction under s 11(e). l in any other case, in full in
poration for the purposes the year incurred.
of the taxpayer’s trade The allowance is at the
(other than mining and election of the small business (s 12E(3)).
farming). corporation (note 1), either
A 100% allowance of cost is l the wear-and-tear
permitted in the year that the allowance in terms of
asset is brought into use, s 11(e) (see 13.3.1) (s
even if the asset is not used 12E(1A)(a), or
for the full year (s 12E(1)). l 50% of the cost of the
asset in the year during
which that asset was
bought into use for the
first time,
30% of the cost in the
second year and
20% of the cost in the
third year (note 2 and 3)
(s 12E(1A)(b)).
Notes:
1. The taxpayer would elect to use s 11(e) if it results in a more favourable allowance than under s 12E(1A)(b).
2. The s 12E allowance is not apportioned if the asset is used for less than 12 months during a year of
assessment (s 12E(1A)).
3. It is important to realise that in order for an asset to qualify for the allowance available for non-manufacturing
assets under s 12E(1A), the asset should meet and is subject to the requirements of s 11(e).
Remember
The above allowances will only be available if the taxpayer
l qualifies as a small business corporation for purposes of s 12E(4)(a) (see chapter 19)
l is the owner or purchaser (under an instalment sale agreement), but not the lessor of the
asset, and
l is available for new, as well as second-hand moveable assets.
340
The cost of an asset for s 12E is

the lesser of
including
Please note! the direct cost of installation or erection of the asset
(also shipping and delivery charges)
but excluding
interest and finance charges (s 12E(2)).
In the case of a disposal, the taxpayer can elect that par 65 or 66 of the Eighth
Example 13.4. Assets and moving expenses of small business corporations

Naidoo CC, a small business corporation as defined, commenced trading on 1 September 2016.
Its year of assessment ends on the last day of February each year. Naidoo CC acquired non-
manufacturing machinery on 15 September 2016 for R1 000 000, which was immediately brought
into use for trade purposes. A new plant costing R1 250 000 was purchased on 1 December
2016 and Naidoo CC immediately brought the plant into use in its manufacturing operations. On
29 May 2017, Naidoo CC moved to bigger premises and incurred moving costs amounting to
R50 000 in respect of the manufacturing machinery and R30 000 in respect of the non-manu-
facturing machinery.
Calculate the allowances that Naidoo CC can claim during the 2017, 2018 and 2019 years of assess-
ment.
SOLUTION
28 February 2017 R
Allowance in respect of non-manufacturing machinery (Year 1 = 50%) (s 12E(1A)) .. (500 000)
Cost of manufacturing plant (100% deduction allowed in the first year) (s 12E(1)) ..... (1 250 000)
28 February 2018
Allowance in respect of non-manufacturing machinery acquired during 2017
(Year 2 = 30%) (s 12E(1A)) .......................................................................................... (300 000)
Deduction for moving costs:
Manufacturing machinery (deduct in full as asset written-off in full) (s 12E(3)(b)) ....... (50 000)
Non-manufacturing machinery (two years remaining that capital deductions will be
allowed) (R30 000/2) (s 12E(3)(a)) ............................................................................... (15 000)
28 February 2019
Allowance in respect of non-manufacturing machinery acquired during 2017
(Year 3 = 20%) (s 12E(1A)) .......................................................................................... (200 000)
Deduction for remaining moving costs incurred during 2018 on non-manufacturing
machinery (remaining moving costs written off in full as final allowance is claimed
on asset in 2019) (R30 000 – R15 000 (2018)) (s 12E(3)(a))........................................ (15 000)
Interpretation Note No 9 (Issue 6) (issued on 26 July 2016) contains detailed

Please note! explanations and examples that further clarify the taxation of small business
corporations.
13.3.5 Rolling stock (s 12DA)

When will s 12DA be applicable?
In support of government’s objective to reduce the cost of doing business in South Africa, investment
in the rail transportation industry had to be encouraged. This objective led to the introduction of the
rolling stock allowance (s 12DA) and the allowance on railway lines (s 12D – see 13.4.7), which is
aimed at the infrastructural development of rail transportation.
The s 12DA allowance is applicable to any rolling stock (for example trains and carriages) brought
into use on or after 1 January 2008.
341
Section 12DA is applicable to

l any acquisition or improvements of any rolling stock
l owned by the taxpayer, or acquired by him in terms of an instalment sale agreement
l that is wholly or mainly used by the taxpayer for the transportation of persons, goods or things
l in the production of his income (s 12DA(1)).
*
Remember
The allowance will not be available to a lessor of rolling stock, as the section requires that the
taxpayer himself should use the rolling stock to transport passengers, goods or things.
What will the implications be if s 12DA is applicable?
General rule Allowance = Cost × 20% per year
An allowance of 20% per year (thus a five-year straight-line write-off period) on the cost of the rolling
stock will be allowed as a deduction from the income of the taxpayer (s 12DA(2)). The full allowance
will be available for a year of assessment, even though the rolling stock was brought into use for only
a part of the year of assessment. The total deduction allowed or deemed to be allowed under this
section and any other provisions of the Act can never exceed 100% of the cost (s 12DA(6)).
The cost of rolling stock for s 12DA is

the lesser of
l the actual cost, incurred by the taxpayer, or
l the direct cost under a cash transaction concluded at arm’s length on the
date on which the transaction for the acquisition or improvements were
Please note! concluded (market value),
including
the direct cost of acquisition or improvement of the rolling stock
(In the case of a disposal, the taxpayer can elect that par 65 or 66 of the Eighth

l when any rolling stock was, in a previous year of assessment, brought into use for the first time by
the taxpayer in any trade carried on by him
l in the production of income but that was excluded from income (exempt income or for example
part of the turnover tax (see chapter 23))
l any deduction that could have been allowed under this section during the previous year in which
the asset was brought into use and any subsequent year is deemed to have been allowed during
those years, as if the receipts and accruals were included in the taxpayer’s income (s 12DA(4)).
Therefore, the tax value of the rolling stock is reduced by the deemed allowance, although no actual
deduction will be granted under this section (s 12DA) regarding the period of use of the asset (which
was excluded from income) in the previous years. The deemed allowance will not be recouped if the
asset is consequently disposed of (s 8(4A)).
No deduction shall be allowed on rolling stock in the year after it has been disposed of (thus the year
after the taxpayer ceased to be the owner) (s 12DA(5)).
Example 13.5. Allowance on rolling stock

On 15 March 2018, Roll-a-Long Ltd acquired a train and immediately brought it into use for the
transport of passengers. The train was purchased for a total cost of R600 000.
Calculate the allowances for Roll-a-Long Ltd on the train for the years of assessment ending on
30 June 2018 and 30 June 2019.
342
SOLUTION
2018: R600 000 × 20% (s 12DA(2)) (the full allowance allowed, although only
used for a part of the year of assessment) .................................................................. (R120 000)
2019: R600 000 × 20% (s 12DA(2)) ............................................................................ (R120 000)
13.4 Allowances on immovable assets

Legislation relating to allowances on immovable assets was amended, effective from 21 October
2008, to ensure a simple and comprehensive regime for easier compliance and enforcement. The
main objective of these amendments was a unified structure for capital allowances on buildings,
which comprises the bulk of what will be covered in this section.
13.4.1 Buildings and improvements: Annual allowance (s 13)

When will s 13 be applicable?
Section 13 allows a taxpayer to deduct an annual allowance on the cost of a building that was
l erected by the taxpayer, or
l purchased by the taxpayer from another person who was entitled to the s 13(1) annual allowance,
or
l purchased by the taxpayer from another person, where the building was never used before
and is
l wholly or mainly used by the taxpayer (or tenant or subtenant if the building was let)
l for trade purposes (other than mining or farming) for a process of manufacture, research and
development (as defined in s 11D (see 13.8.1)) or similar process (see 13.2.3).
Buildings in which research and development are carried on, on or after

Please note! 1 October 2012, but before 1 October 2022, will also qualify for the s 13
allowance (s 13(1)).
Important terminology for the purposes of s 13:

Date of erection:
The date of the commencement of erection of a building is important in the determination of the rate
of the annual allowance. The erection of a building commences on the date when the laying of its
foundations commences. (Excavation is performed in preparation of, preparatory but not part of, the
process of erection.)
‘Wholly or mainly’ used:
The buildings should be ‘wholly or mainly’ (more than 50%) used for a qualifying purpose. In practice,
SARS requires more than 50% of a building, measured either by floor space or by volume, to be used
for qualifying purposes. The allowance is also granted on the cost of erection of subsidiary buildings,
provided that they are erected on the same site and at the same time as the taxpayer’s qualifying
industrial buildings. An example would be buildings comprising offices, changing rooms and
cafeterias for employees. The ‘same site’ is not taken to mean merely the same subdivision of land
but will include any land next to the land on which the industrial buildings are erected. SARS will not
extend the allowance to improvements to the subsidiary buildings, since they will not be effected for
the purpose of increasing or improving the industrial capacity of these buildings. A building that is
used wholly or mainly for a qualifying purpose but includes, for example, offices, would qualify for the
allowance, but future improvements to these offices will not qualify for the reason already given.
What will the implications be if s 13 is applicable?
A taxpayer can deduct an annual allowance on the cost of a qualifying building (s 13(1)(b)). The rate
of the allowance varies, depending on when the erection of the building or qualifying improvements
commenced.
343
Erection of the building or qualifying improvements commenced – Rate of allowance

From 15 March 1969 but before 1 July 1985 2%
Between 1 July 1985 and 31 December 1988 2% (17,5% initial allowance)
Between 1 January 1989 and 30 June 1996 5%
Between 1 July 1996 and 30 September 1999 (provided that the buildings
or improvements were brought into use by 31 March 2000) 10% (provision deleted)
From 1 October 1999 onwards 5%
In each instance, the allowance is based on (and in total may not exceed):
The cost to the taxpayer of the qualifying buildings or

improvements, excluding repairs
LESS
Any recovery or recoupment of allowances of a replaced asset (s 13(3))
LESS
The initial allowance (which was 17,5% of the cost of qualifying buildings and improvements, the
erection of which commenced between 1 July 1985 and 31 December 1988, if completed and
brought into use by 31 December 1989) that was available (under the now-repealed s 13(7)).
A person who acquires buildings by purchase from a person who was entitled
to the allowance will also qualify for the allowance, provided that he or his
tenant or subtenant continues to use the building for the prescribed purposes
Please note!
(s 13(1)(d)). If the previous owner was not entitled to the allowance, the pur-
chaser will also not be able to claim the allowance, although the building may
be used for a qualifying purpose by the new owner.
Example 13.6. Initial and annual allowance

Nomatema (Pty) Ltd erected a factory building at a total cost of R1 800 000. The erection of the
building commenced on 1 March 1988, and it was brought into use on 1 October 1988.
Calculate the allowances on the building for the year ended 28 February 2018.
SOLUTION
Cost of building ....................................................................................................... R1 800 000
Less: Initial allowance (17,5% of R1 800 000) ........................................................ (315 000)
R1 485 000
The annual allowance each year must be based on the cost less the initial allowance; that is,
R1 485 000. Therefore the annual allowance in the year ended 28 February 2018 will be an
amount of R29 700 (2% of R1 485 000).
This allowance is calculated on the cost to the taxpayer of a building or improvements. Take note of
the following in calculating the cost:
l If a taxpayer acquires a building without giving any consideration (for example by donation or
inheritance), he is not entitled to the allowance, since he incurred no cost.
l The portion of interest and other expenditure relating to any part of a building that has been
brought into use or is available for letting is deductible under s 24J(2) (see chapter 16).
l In practice, SARS considers that the cost of a building for purposes of s 13 excludes
– the cost of clearing and levelling the site preparatory to construction
– the cost of excavations, and
– the cost of external paving and fencing.
l Only the cost of a building qualifies for the allowance; a lump sum consideration paid for both a
building and the land on which it stands, will have to be apportioned.
l Improvements to any building will qualify for the allowance (s 13(1)(f )). ‘Improvements’ is defined
and means
– any extension
– addition, or
344
– improvements, other than repairs

– to a building that is or are effected for the purpose of increasing or improving the industrial
capacity of the building (s 13(9)).
The annual allowance is granted on the cost of improvements to any building if
– the building was wholly or mainly used by the taxpayer in the course of his trade (other than
mining or farming) for any process of manufacture or similar process (see 13.2.3), or
– the building was let by the taxpayer and used as described by the tenant or subtenant
(s 13(1)(f )).
The annual allowance applicable when the erection of the improvements commenced will be
used to calculate the s 13 allowance on the improvements. It is therefore possible that the
allowance claimed on the building may differ from the allowance claimed on the improvements.
A special ‘deemed-allowance’ rule provides:

l when the buildings or improvements were previously brought into use by the
taxpayer in a trade carried on by him
l in the production of income that was excluded from income (for example
under the old source-based system of taxation)
l any deduction that could have been allowed under s 13(1) during the
Please note! previous year in which the asset was brought into use and any following
year is deemed to have been allowed during those years, as if the receipts
and accruals were included in the taxpayer’s income (s 13(1A)).
Therefore the tax value of asset is reduced by the deemed allowance, although
no actual deduction will be granted under this section (s 13(1)) regarding the
period of use of the asset (which was excluded from income) in the previous
years. The deemed allowance will not be recouped if the asset is consequently
disposed of (s 8(4A)).
Remember
l The allowance is calculated with reference to the year when the erection of the building or
improvements commenced, not the date of purchase.
l The allowance is only claimed from the year of assessment that the building is brought into
use.
l The allowance can be claimed only on buildings used wholly or mainly for manufacturing
and, from 1 October 2012 but before 1 October 2022, also for buildings used wholly or
mainly for research and development. If the building was used for administration only, no
allowance can be claimed.
l The allowance is not apportioned if the building is not used for the full year of assessment.
Example 13.7. Buildings and improvements: Annual allowance

Only the annual allowance will be considered in this example:
Facts Allowance to be granted
Scenario 1: Scenario 1:
Building erected by Allen at a cost of Allen enjoys an allowance of R4 000 a year
R200 000 on land costing R120 000 and (2% of R200 000). Since the building was
completed on 1 February 1974. erected after 14 March 1961, Allen, who
Building let to Barry from that date and used erected the building, may claim the allowance,
by Barry in a process similar to a process of provided the building is used mainly in a
manufacture. process of manufacture or a similar process,
Allen’s year of assessment ends on the last either by himself or his lessee. The allowance
day of February. is granted in full, even though the building is
used for only one month during the year of
assessment. The rate of the allowance is 2%
because the erection of the building com-
menced before 1 January 1989.
No allowance available on the land.
Improvements effected to above building Allen enjoys an allowance of R500 a year
during January 1976 by Allen at a cost of (2% of R25 000). The rate of the allowance is
R25 000. 2% because the erection of the improvements
to the building commenced before 1 January
1989.
continued
345
Facts Allowance to be granted

Above building together with the land on Chris enjoys an allowance of R5 000 a year
which it stands is purchased from Allen by (2% of R250 000). A purchaser is entitled to
Chris on 1 May 1996 at a total cost of the allowance if the seller was entitled to the
R350 000, of which R100 000 was stipulated allowance. The allowance is calculated on
as being for the land and R250 000 as being cost for the purchaser.
for the building. The building is then mainly The rate of the allowance is 2% because the
used by Chris in a process of manufacture. erection of the building commenced before
1 January 1989.
Allen will be liable for tax on so much of the
R250 000 as represents a recoupment of
annual allowances that he has claimed, that is,
2% of R200 000 for 24 tax years (R96 000) plus
2% of R25 000 for 22 tax years (R11 000); that
is, R107 000.
The balance of the profit on the sale; that is,
R5 000 (R25 000 capital gain on building and
improvements (R250 000 – R225 000) less
capital loss of R20 000 (R100 000 – R120 000)
on the land), will be of a capital nature and not
taxable since it was before capital gains tax
was introduced, thus before 1 October 2001.
Chris effected improvements to above No allowance. The improvements must be
building during September 2006 at a cost of effected for the purpose of increasing or
R400 000. The improvements were effected improving the industrial capacity of the building.
in order to improve the facilities for staff, by
the provision of restrooms and a canteen.
Donovan commenced the erection of a Donovan enjoys an allowance of R40 000 a
building on 1 February 1996. The building year (5% of R800 000). The allowance would
was completed at a cost of R800 000 and be available to Donovan if the building were
brought into use by Donovan on 15 June used mainly in a process of manufacture or a
1996 to house a process of manufacture. similar process, either by Donovan or his
lessee.
The rate of the allowance is 5% because the
erection of the building commenced on or
after 1 January 1989.
Donovan effected improvements to the above Donovan enjoys an allowance of R30 000 a
building during August 1996 at a cost of year (5% of R600 000) on the cost of the im-
R600 000. The improvements were effected provements, since they were effected for the
in order to increase the industrial capacity of purpose of increasing or improving industrial
the building. The improvements were brought capacity.
into use during April 2000.
Enslin commenced the erection of a building Enslin enjoyed an allowance of R200 000
during October 1998. The building was com- a year (10% of R2 000 000). The rate of the
pleted at a cost of R2 000 000 and brought allowance is 10% because the erection of the
into use in a process of manufacture on building commenced between 1 July 1996
15 September 1999. and 30 September 1999 and the building was
brought into use on or before 31 March 2000.
The building is already fully written off.
Note
All buildings of which the erection commenced after 30 September 1999 and brought into use
after 31 March 2000 will revert back to the allowance of 5%.
See 13.12 for a comparison of the provisions of ss 11(e) (wear-and-tear allowance), 12C (movable
assets used by manufacturers, for research and development or by hotelkeepers, and ships, aircraft
and assets used for the storage and packing of agricultural products) and 13.
Recoupments
The annual allowance on buildings and improvements is subject to recoupment in terms of s 8(4)(a),
except if that taxpayer has elected (under s 13(3)) to prevent the recoupment from being included in
his income in the year in which it arises.
346
The recoupment will then not be taxed but will be set off against the cost of another building,
provided that the taxpayer
l purchases or erects the further building within 12 months (or any longer period that the Commis-
sioner may allow) from the date on which the event giving rise to the recoupment occurred, and
l the further building purchased or erected qualifies for the annual allowance under s 13(1).
Please note! Should the untaxed recoupment exceed the cost of the further building, the
excess would be taxed as a recoupment under s 8(4)(a).
Leased assets
Lessees or sub-lessees are also entitled to this allowance. No allowance may be claimed on the
portion of the cost of a building or improvements on which any allowance for leasehold improvements
(under s 11(g) – see 13.7.2) was previously claimed (proviso (a) to s 13(1)). If, for example, a taxpayer
spends R1 500 000 on a building and R1 000 000 is deductible under s 11(g), he may only claim the
annual allowance on the R500 000 not qualifying for the leasehold improvements allowance (under
s 11(g)). It is submitted that the taxpayer can decide which allowance of either s 11(g) or s 13(1) will
provide the most beneficial deduction, since neither of the sections prescribe a specific sequence in
which the deductions should be used.
A lessee or sub-lessee is also liable for tax if he enjoys a recoupment of the annual allowances, and
is also entitled to elect that the recoupment be set off against the cost of a further building (under
s 13(3)).
If a lessee undertakes obligatory improvements on leased property in terms of a Public Private Part-
nership,
exempt entities
the property, if the lessee uses the property for earning income. The expenditure incurred by the
lessee to complete the improvements shall be deemed to be the cost for purposes of the allowance
(proviso (d) to s 13(1)).
Section 23D imposes a restriction on the deduction or allowance available on a building, or improve-
ments contemplated in s 13, let to the person from whom the building or improvements were
acquired (for details see 13.7.6).
Example 13.8. Buildings and improvements: Deductions by lessee

As a result of an insurance claim following the destruction of his hired premises by fire, lessee
Tshlaene has enjoyed a recoupment of past allowances claimed on the cost of the destroyed
building amounting to R500 000. Because he erects a further qualifying building, this
recoupment is available for set-off against the cost of the further building instead of being taxed
immediately.
The cost of the further building, which qualifies for the annual allowance, amounts to R1 600 000.
Calculate the portion of the cost of the further building subject to the annual allowance if the
portion of the cost of that building deductible under s 11(g) (obligation to effect improvements) is
R750 000. Tshlaene will elect any option available to him to minimise his tax liability.
SOLUTION
Cost of erection of the further building..................................................................... R1 600 000
Portion of the cost subject to the annual allowance:
The untaxed recoupment will therefore be:
Cost of further building............................................................................................. R1 600 000
Less: Portion of cost deductible under s 11(g) ........................................................ (750 000)
R850 000
Recoupment arising from previous building (s 13(3)) – untaxed recoupment ......... (500 000)
Cost on which annual allowance is based ............................................................... R350 000
Annual allowance (5% of R350 000) ........................................................................ R17 500
continued
347
Note
Had the recoupment amounted to R900 000, the untaxed recoupment would have been R850 000
(the amount of the untaxed recoupment must be calculated on the basis of the full cost of the
building (R1 600 000) less the portion of that cost that is deductible under s 11(g) (R750 000)).
The balance of R50 000 remaining would have been taxable under s 8(4)(a). No annual allow-
ance would therefore be deductible, since the recoupment on the previous building exceeded
the cost (after s 11(g) deductions) of the further building.
Also remember the following:
Section 13(2) ensures that the aggregate of the annual allowances may not exceed:
Less: Untaxed recoupment ...................................................................................... (500 000)
R1 100 000
Less: Portion of cost deductible under s 11(g) ........................................................ (750 000)
R350 000
In terms of s 11(g)(iv), the aggregate of the allowances under s 11(g) may not exceed:
Less: Untaxed recoupment ...................................................................................... (500 000)
R1 100 000
Less: Annual allowances.......................................................................................... (350 000)
R750 000
The aggregate of the leasehold improvements allowances claimable in terms of s 11(g) of
R750 000 is therefore not affected by this limitation.
If the lease contract in terms whereof the improvements must be effected was for a longer period
than 20 years, Tshlaene should have elected to write off the R750 000 in terms of s 13(1) (over
20 years at 5% per year) instead of in terms of s 11(g) over the longer period.
13.4.2 Urban development zones (s 13quat)

When will s 13quat be applicable?
The section is available to owners or lessors who bring derelict or obsolete properties in demarcated
areas (as published by the Minister of Finance in the Government Gazette) in certain municipalities
back onto the market.
If a taxpayer incurred expenditure
l on the erection or improvement (which covers either the entire building or at least 1 000 m² of the
building) of buildings (both residential and commercial)
l owned (also if a lessor (leased buildings) or if acquired from a developer) by the taxpayer
l within specified urban development zones (as set out in s 13quat(6)(a)-(e)), and
l used solely for his trade (s 13quat(2)(a)–(c)).
If the taxpayer purchased the building from a developer, he will only qualify for the urban develop-
ment zone building allowance (s 13quat) if
l the contract for the sale was concluded on or after 8 November 2005
l the developer did not claim the allowance under s 13quat, and
l if it is an improvement, the developer should incur expenditure in respect of those improvements
that is equal to at least 20% of the purchase price of the taxpayer in respect of the building or
part thereof (s 13quat(2)(d)).
The allowance will no longer be available if a building
l ceases to be used solely for the purposes of trade
l was disposed of in the previous year of assessment, or
l was brought into use after 31 March 2020 (s 13quat(5)).
The erection or improvements should commence on or after the date of publication of a notice in the
Gazette declaring the area as an urban development zone to qualify for this allowance.
348
What will the implications be if s 13quat is applicable?
Allowance (construction) = Cost × 20% year 1 (and 8% for next 10 years)

General rule and
Allowance (improvements) = Cost × 20% per year
This section provides an accelerated depreciation allowance on the cost of the buildings. The allow-
ance depends on whether the building was
l erected or extended (construction), or
l improved (refurbishment).
The cost on which the allowance is calculated depends on whether the allowance is claimed by
l the developer, or
l by a taxpayer buying directly from the developer.
In general, the allowance is the following:
l Where a new building is erected, or an existing building is extended (construction), the allowance is
calculated as
– 20% of the cost of the erection or extension in the year in which the building is brought into use,
and
– 8% in each of the following 10 years (s 13quat(3)(a)).
l Where an existing building, or part of that building, is improved (refurbishment) without changing
its structural or exterior framework, the allowance is
– 20% of the cost of the improvement in the year in which it is brought into use, and
– 20% in each of the following four years (s 13quat(3)(b)).
If the building is a ‘low-cost residential unit’ as defined in s 1 (see below), this allowance will be
available for the building, part thereof or improvement thereto, brought into use on or after 21 Octo-
ber 2008 and will be allowed as follows:
l Where a new building is erected, or an existing building is extended, the allowance is
– 25% of the cost of the construction in the year brought into use, and
– 13% in the following five years and 10% in the last year (Year 7) (s 13quat(3A)(a)).
l Where an existing building, or part of that building, is improved, the allowance is
– 25% of the cost of the improvement in the year brought into use, and
– 25% in each of the succeeding three years (s 13quat(3A)(b)).
The cost of an asset for s 13quat is

the cost actually incurred for erecting, adding to or improving a building
including
l the cost of demolishing existing buildings
l excavating land, and
l cost of structures providing certain services (water, power, parking, drainage,
security, waste disposal and access to the building)
but excluding
interest and finance charges (s 13quat(1)).
‘Low-cost residential unit’ is defined in s 1 as:
l a stand-alone unit (a building qualifying as a residential unit located in South
Please note! Africa)
– with a cost of R300 000 or less (excluding the cost of land and bulk infra-
structure), and
– on which the owner does not charge a monthly rental of more than 1% of
that cost (plus the proportionate cost of the land and bulk infrastructure)
(see note), or
l an apartment (qualifying as a residential unit in a building located in South
Africa)
– with a cost of R350 000 or less, and
that cost (see note).
349
This same allowance will be available if a building or a part of a building in an urban development
zone was purchased from the developer, but the cost will be limited as follows:
l 55% of the purchase price if the building or part of the building purchased was erected or
extended by the developer (construction), and
l 30% of the purchase price if the building or part of the building purchased was improved by the
developer (s 13quat(3B)).
‘Developer’ is defined in s 13quat(1) as a person who

l erects, extends, adds to or improve a building or part of a building with the
purpose of disposing of the building or part thereof immediately after com-
pletion, and
l disposes of the building or part of a building within three years after com-
Please note! pletion.
The developer is allowed a three-year period in which to sell the building. This
extension period is granted to allow for the situation where the developer is
unable to sell the property immediately after completion and is ‘forced’ to let the
property due to cash-flow problems. Under these circumstances, the developer
will still be able to qualify for the s 13quat allowance. (A matching relief is
granted to VAT vendors in s 18B – see chapter 31.)
If a lessee undertakes obligatory improvements on leased property in terms of a Public Private

Partnership,
exempt entities,
(s 13quat(2A)).
Example 13.9. Building in an urban development zone
On 30 June 2017, Zone (Pty) Ltd completed the erection of a new building in an urban develop-
ment zone at a total cost of R3 500 000, and immediately brought it into use.
Calculate the allowances for Zone (Pty) Ltd on the building for the years of assessment ending on
28 February 2018 and 28 February 2019.
SOLUTION
2018: R3 500 000 × 20% (s 13quat(3)(a)) .................................................................. (700 000)
2019: R3 500 000 × 8% (s 13quat(3)(a)) .................................................................... (280 000)
13.4.3 Residential units (s 13sex)

When will s 13sex be applicable?
Section 13sex allows a taxpayer to claim an allowance (if not otherwise provided for in the Act) on
l residential units (as defined in s 1), and
l improvements to these residential units (s 13sex(5)),
if the residential unit or improvements to it were acquired, or the erection commenced on or after
21 October 2008.
The section is applicable if a taxpayer
l owns a new and unused residential unit
l that unit or improvements are exclusively used by him for the purposes of a trade carried on by
him (it is submitted that for purposes of trade will also include the letting to an employee)
l it is situated in South Africa, and
350
l the taxpayer owns at least five residential units in South Africa (all of which are used for purposes
of a trade carried on by him)
l but excluding the provision of new and unused low-cost residential units for occupation by mining
employees (allowances for these expenses will be available under s 36) (s 13sex(1)).
‘Residential unit’ is defined in s 1 as:

l a building or self-contained apartment
l mainly used for residential accommodation,
but excludes
a building or apartment used by a hotel keeper in his trade.
l a stand-alone unit (a building qualifying as a residential unit located in
South Africa)
– with a cost of R300 000 or less (excluding the cost of land and bulk
Please note! infrastructure), and
that cost (plus the proportionate cost of the land and bulk infrastructure)
(see note), or
Africa)
that cost (see note).
(Note: the cost on which the 1% rental limitation is calculated should be
increased by 10% annually.)
*
Remember
l A building purchased that was previously used will not qualify for this allowance.
l A lessee that erected a residential building on the premises of the lessor, will not qualify for
this allowance on the amount he spent in excess of the contract amount (which is allowed
under s 11(g)), since this allowance is only available to the owner of the asset, unless the
provisions of s 12N (see 13.7.4) are applicable.
l If a taxpayer owns six residential units and sells two of them, the s 13sex allowance will be
granted in the year of the sale. It will not be granted in the following year of assessment
regarding the two units sold (s 13sex(5)) nor the four units still owned, since the section
requires a taxpayer to own at least five residential units.
What will the implications be if s 13sex is applicable?
An allowance of
l 5% per year on the cost of any new and unused residential unit (or improvements) will be allowed
as a deduction from the income of the taxpayer (s 13sex(1))
AND
l an additional 5% of the cost if it is a low-cost residential unit as defined in s 1 (s 13sex(2)).
Remember
A low-cost residential unit (or improvements thereto) will therefore qualify for a total allowance of
10% over a 10-year period, if it meets all the requirements (of s 13sex(1)).
The full allowance will be deductible, even though the residential unit is brought into use for only a
portion of the year of assessment. The total deductions allowed under this and any other sections of
the Act can never exceed 100% of the cost (s 13sex(7)).
351
The cost of a residential unit or improvements for s 13sex is

the lesser of
l the actual cost, incurred by the taxpayer, of the asset, or
date on which the transaction for the acquisition, erection or improvements
were concluded (market value),
including
Please note! the direct cost of acquisition, improvement or erection of the residential unit
(s 13sex(3))
UNLESS
a part of a building was acquired, without the taxpayer erecting or constructing
it, then cost will be:
l 55% of the acquisition price if a part is acquired, and
l 30% of the acquisition price if an improvement part is acquired
(s 13sex(8)).
nership,
exempt entities,
(proviso to s 13sex(1)).
However, this allowance will not be available if the cost of the building or improvements, or any part
thereof qualified or will qualify for a deduction under any other section (s 13sex(6)).
l when any residential unit or improvements were, in a previous year of assessment, brought into
use for the first time by the taxpayer in any trade carried on by him
l in the production of income but that was excluded from income (exempt income or, for example,
part of the turnover tax regime (see chapter 23))
the asset was brought into use and any following year, is deemed to have been allowed during
those years, as if the receipts and accruals were included in the taxpayer’s income (s 13sex(4)).
Therefore, the tax value of the building or improvements is reduced by the deemed allowance,
although no actual deduction will be granted under this section for the period of use of the asset
(which was excluded from income) in the previous years. The deemed allowance will not be
recouped if the asset is consequently disposed of (s 8(4A)).
No deduction will be allowed on a building in the year after it has been disposed of (s 13sex(5)).
Example 13.10. Allowance on residential units
On 15 January 2018, TDK (Pty) Ltd bought six brand new flats in a residential building directly
from the developer at a total cost of R650 000 each. All of these residential units were rented out,
effective from 1 February 2018.
Calculate the allowances for TDK (Pty) Ltd on the flats for the year of assessment ending on
31 October 2018.
SOLUTION
2018: Section 13sex applicable (more than five units owned and used in trade in
South Africa) (R650 000 x 6 units) × 55% (as a part is required from a developer
(s 13sex(8))) = cost of R2 145 000 × 5% (s 13sex(1)) (the full allowance allowed,
although only used for a part of the year) .................................................................... (R107 250)
352
13.4.4 Low-cost residential units on loan account (s 13sept)

When will s 13sept be applicable?
Employers are moving away from leasing low-cost employer-owned residential units towards the
selling of residential units to employees. Employers will now be allowed tax relief under s 13sept for
the sale of employer-provided low-cost residential units (as defined in s 1) to employees (or
employees of associated institutions (as defined in the Seventh Schedule)) via an interest-free loan.
The deduction seeks to provide relief to the employer for the provision of an interest-free loan to the
employee and is applicable to any disposal on or after 21 October 2008 (s 13sept(1)).
The section will only allow a deduction for a disposal if
l the disposal is not subject to any condition, except for the condition that the employee is required
to
– on termination of employment, or
– in the case of consistent failure for a period of three months to pay an amount owing in respect
of the low-cost residential unit
dispose of the unit to the employer for an amount equal to the actual cost (excluding finance or
borrowing cost) to the employee of the unit and the land on which it is built,
l the disposal is financed by an interest-free loan to the employee, and
l the selling price is equal to or less than the actual cost (excluding finance or borrowing cost
incurred by the employer) of the unit and the land for the employer (s 13sept(3)),

l a stand-alone unit (a building qualifying as a residential unit located in
South Africa)
– with a cost of R300 000 or less (excluding the cost of land and bulk infra-
structure), and
– the owner does not charge a monthly rental of more than 1% of that cost
(plus the proportionate cost of the land and bulk infrastructure) (see
Please note! note), or
Africa)
– the owner does not charge a monthly rental of more than 1% of that cost
(see note).
(Note: the cost on which the 1% rental limitation is calculated should be
increased by 10% annually.)
Remember
There will be capital gains consequences for the employer on the sale of the low-cost residential
unit to the employee, as well as a possibility of a fringe benefit being included as part of the
remuneration of the employee as a result of the disposal that is financed by an interest-free loan.
What will the implications be if s 13sept is applicable?
General rule Deduction = 10% of the outstanding loan amount at year-end
A deduction of 10% on the outstanding loan account amount at year-end will be available. This
deduction is available for a maximum of 10 years (the 10% deduction matches the capital allowance
available for low-cost residential units owned and rented out (under s 13sex – see 13.4.3)).
Recoupment
This section contains its own internal recoupment provision, which applies if any outstanding amount
on the loan account of the employee, is paid back to the employer. This deemed recoupment will be
the lesser of
l the amount repaid on the loan by the employee, or
l the amount claimed in the current or any previous year (under s 13sept) that was not yet
recouped or recovered in a previous year (s 13sept(4)).
353
Example 13.11. Allowance on low-cost residential units
On 31 October 2017, Khumbelo Ltd commenced with the erection of a low-cost residential unit
for purposes of selling it to an employee. Khumbelo Ltd incurred a total cost of R150 000 for the
erection of the unit. On 1 December 2017 this unit was sold to one of their employees for
R125 000. The employee is required to pay R25 000 in cash up front and the remaining
R100 000 is incurred via an interest-free loan account from Khumbelo Ltd. The employee repaid
R15 000 in 2018, R12 500 in 2019 and made no repayment in 2020.
Calculate the allowances or recoupments for Khumbelo Ltd on the residential unit for the years of
assessment ending on 31 December 2017 to 2020.
SOLUTION
2017: R100 000 × 10% (s 13sept(2)) (the full allowance allowed, although only
used for a part of the year) .............................................................................. (R10 000)
2018: Allowance on the outstanding loan balance: R100 000 – R15 000 =
R85 000 × 10% (s 13sept(2)) .......................................................................... (R8 500)
Recoupment of R15 000 repayment – since allowances claimed to date
equals R18 500, full repayment recouped (s 13sept(4)) .................................. R15 000
2019: Allowance on the outstanding loan balance:
R85 000 – R12 500 = R72 500 × 10% (s 13sept(2)) ........................................ (R7 250)
Recoupment: Allowances claimed and not yet recouped = R3 500 (allow-
ances of R10 000 (2017) and R8 500 (2018) of which only R15 000 has
already been recouped) + R7 250 = R10 750 – thus the recoupment is the
lesser of: the repayment of R12 500 or the previous allowances not yet
recouped, namely R10 750 (The difference: R12 500 – R10 750 = R1 750
will be carried forward for possible recoupment in 2020) (s 13sept(4)) .......... R10 750
2020: Allowance on the outstanding loan balance: R72 500 × 10% (s 13sept(2)).... (R7 250)
Recoupment: Allowances claimed and not yet recouped of R1 750 (from
2019) carried forward for recoupment in 2020 (limited to the lesser of
repayment made and not yet recouped (R1 750) or amounts previously
claimed as allowances (R7 250)) .................................................................... R1 750
13.4.5 Commercial buildings (s 13quin)

When will s 13quin be applicable?
Section 13quin allows a taxpayer to claim an allowance on commercial buildings and improvements
to these buildings, which is not otherwise provided for in the Act (s 13quin(5)). This allowance is
applicable to any building or improvements that were contracted for, and the construction, erection
or installation commenced, on or after 1 April 2007.
Section 13quin is applicable if a taxpayer
l owns a new and unused building, and
l that building or improvements are wholly or mainly used by the taxpayer during the year of
assessment for producing income
l in the course of his trade
l but excluding the provision of residential accommodation (allowances for these expenses will be
available under ss 13sex or 13sept) (s 13quin(1)).
Remember
l A building purchased from a seller who previously used the building, will not qualify for this
allowance.
l A lessee who erected a commercial building on the premises of the lessor, will not qualify for
a deduction on the amount he spent in excess of the contract amount (which is allowed
under s 11(g)), since this allowance is only available to the owner of the asset.
What will the implications be if s 13quin is applicable?
354
An allowance of 5% per year on the cost of the building (or improvements) will be allowed as a
deduction from the income of the taxpayer (s 13quin(1)). The full allowance will be deductible, even
though the building is brought into use for only a portion of the year of assessment. All deductions
allowed in terms of the Act can never exceed 100% of the cost (s 13quin(6)).
The cost of a building or improvement for s 13quin is

the lesser of
date on which the transaction for the acquisition, erection or improvement
was concluded (market value)
Please note!
(s 13quin(2))
UNLESS
a part of a building was acquired on or after 21 October 2008, without the tax-
payer erecting or constructing it, then cost will be:
l 55% of the acquisition price if a part is acquired, and
l 30% of the acquisition price if an improvement part is acquired
(s 13quin(7)).
nership,
exempt entities,
(s 13quin(1A)).
However, this allowance will not be available if the cost of the building or improvements, or any part
thereof, qualified or will qualify for a deduction under any other section (s 13quin(5)).
l when any building or improvements were, in a previous year of assessment, brought into use for
the first time by the taxpayer in any trade carried on by him
l in the production of income but that was excluded from income (exempt income or, for example,
part of the turnover tax regime (see chapter 23))
the asset was brought into use and any following year is deemed to have been allowed during
those years, as if the receipts and accruals were included in the taxpayer’s income (s 13quin(3)).
Therefore, the tax value of the building or improvements is reduced by the deemed allowance,
although no actual deduction will be granted under this section regarding the period of use of the
asset (which was excluded from income) in the previous years. The deemed allowance will not be
recouped if the asset is consequently disposed of (s 8(4A)).
No deduction will be allowed on a building in the year after it has been disposed of (s 13quin(4)).
Example 13.12. Allowance on commercial buildings
On 15 April 2018, Commercial (Pty) Ltd commenced with the erection of a new office block at a
total cost of R8 500 000. The erection was completed and the offices brought into use for pur-
poses of Commercial (Pty) Ltd’s trade (in the production of income) on 30 September 2018.
Calculate the allowances for Commercial (Pty) Ltd on the office block for the years of assessment
ending on 31 October 2018 and 31 October 2019.
355
SOLUTION
2018: R8 500 000 × 5% (s 13quin(1)) (the full allowance allowed, although only
2019: R8 500 000 × 5% (s 13quin(1)) ......................................................................... (R425 000)
13.4.6 Buildings in special economic zones (s 12S)

When will s 12S be applicable?
Special economic zones (introduced in s 12R – see chapter 19 for details on the provisions applic-
able to special economic zones) were introduced to broaden the industrial development zones
incentive.
Section 12S applies to years of assessment commencing on or after 9 February 2016 (the date that
the Special Economic Zones Act 16 of 2014 came into operation), but before 1 January 2024
(s 12S(10)). The section is applicable if a taxpayer
l is a qualifying company for purposes of a special economic zone (as defined in s 12R(1)) but
without taking into account any of the exclusions from qualifying companies (as listed under
s 12R(4)). (A qualifying company for purposes of s 12R will be a company incorporated or that is
effectively managed within South Africa. The company generates at least 90% of its income from
the carrying on of a trade from activities attributable to a fixed place of business within one or
more special economic zone(s) approved by the Minister of Finance (in consultation with the
Minister of Trade and Industry) by notice in the Gazette) (s 12S(1)))
l owns a new and unused building, and
l that building or improvements are wholly or mainly used by the taxpayer during the year of
assessment for producing income in an approved special economic zone (means a special
economic zone defined in the Special Economic Zones Act (Act 16 of 2014) that is approved for
the purposes of s 12R by the Minister of Finance)
l in the course of the taxpayer’s trade
l but excluding the provision of residential accommodation (allowances for these expenses will be
available under ss 13sex or 13sept) (s 12S(2)).
Remember
l A building purchased from a seller who previously used the building, will not qualify for this
allowance.
l A lessee who erected a building on the premises of the lessor, will not qualify for a
deduction under s 12S on the amount he spent in excess of the contract amount (which is
allowed under s 11(g)), since s 12S is only available to the owner of the asset.
What will the implications be if s 12S is applicable?
An allowance of 10% per year on the cost of the building (or improvements) will be allowed as a
deduction from the income of the taxpayer (s 12S(1)). The full allowance will be deductible, even
though the building is brought into use for only a portion of the year of assessment. No deduction will
be available under any other section for the cost of a building or improvements, if it has qualified or
will qualify either as a deduction of expenditure or as an allowance under this section (s 12S(6)).
All deductions allowed in terms of the Act can never exceed 100% of the cost (s 12S(7)).
The cost of a building or improvement for s 12S is

the lesser of
Please note! l the actual cost, incurred by the taxpayer, of the building, or
were concluded (market value) (s 12S(4))
356
nership,
exempt entities
ment Programme administered by the Department of Energy
(s 12S(3)).
No deduction will be allowed on a building in the year after it has been disposed of (s 12S(5)).
Example 13.13. Allowance on commercial buildings in special economic zones
On 15 July 2018, Zones (Pty) Ltd, a qualifying company as defined in s 12R(1), commenced with
the erection of a new office block at a total cost of R8 500 000 in an approved special economic
zone. The erection was completed and the offices brought into use for purposes of Zone (Pty)
Ltd’s trade (in the production of income in the special economic zone) on 30 September 2018.
Calculate the allowances for Zones (Pty) Ltd on the office block for the years of assessment
ending on 31 July 2019 and 31 July 2020.
SOLUTION
2019: R8 500 000 × 10% (s 12S(2)) (the full allowance allowed, although only
used for a part of the year of assessment) ................................................................. (R850 000)
2020: R8 500 000 × 10% (s 12S(2))............................................................................ (R850 000)
Remember
The s 12S allowance is only claimed from the year of assessment that the building is brought into
use, and not from the year of assessment that erection commences.
If a qualifying company is guilty of

l fraud, or
l misrepresentation, or
l non-disclosure of material facts
with regard to any type of tax, duty or levy administered by SARS, SARS may (notwithstanding ss 99
and 100 of the Tax Administration Act – see chapter 33) disallow all deductions provided for in this
section and can, as a result, raise an additional assessment (s 12S(8) and (9)).
13.4.7 Pipelines, transmission lines and railway lines (s 12D)

When will s 12D be applicable?
Section 12D will be applicable if a taxpayer actually incurred expenditure in respect of the acquisition
or improvement of certain pipelines, transmission lines and railway lines (‘affected assets’). (Only
improvements to assets brought into use on or after 1 January 2008 will qualify for a deduction under
s 12D.)
The affected asset must be
l new and unused (except for a line or cable used for the transmission of electricity that, from
1 April 2015, will still qualify even if it is second-hand – all other requirements should however still
be met)
l owned by the taxpayer
l brought into use by him for the first time, and
l used by him directly for the purposes as listed in the definition of ‘affected asset’ (in s 12D(1) –
see Please note below) (s 12D(2)).
357
‘Affected assets’ are defined in s 12D(1) as any:

l pipeline used for the transportation of natural oil
l pipeline used for the transportation of water used by power stations in the
process of generating electricity
l line or cable used for the transmission of electricity
l line or cable used for the transmission of electronic communications (for
example telephone lines), and
Please note!
l railway line used for the transportation of persons, goods or things
and will include
l earthworks or supporting structures and equipment forming part of these
assets (for example communication cables used for the transmission of
electronic communication relating to pipeline), and
l any improvements to these assets.
What will the implications be if s 12D is applicable?
Allowance (pipeline for natural oil) = Cost × 10% per year

Allowance (line/cable for electronic communication) = Cost × 6,67% per
General rule year
and
Allowance (all other affected assets) = Cost × 5% per year
An allowance can be deducted in respect of the cost actually incurred of:

l 10% per year for pipelines used for the transportation of natural oil
l 5% per year for all other affected assets, and
l from 1 April 2015, 6,67% per year (and no longer only a 5% allowance) for line or cable used for
the transmission of electronic communications (s 12D(3)(c)).
The deduction is allowed to the extent that the affected asset is used in the production of the tax-
payer’s income.
The cost of an asset for s 12D is

the lesser of
date on which the purchase transaction or improvements were concluded
(market value),
Please note! including
the direct cost of installation or erection of the asset
but excluding
interest and finance charges
(s 12D(4)).
nership,
exempt entities
(s 12D(2A)).
358
Following the introduction of the turnover tax (see chapter 23), a special ‘deemed allowance’ rule
provides:
l when an asset was previously brought into use by the taxpayer in a trade carried on by him
l in the production of income that was excluded from income (for example under the turnover tax
regime)
l any deduction that could have been allowed under s 12D during the previous year in which the
asset was brought into use and any following year is deemed to have been allowed during those
years of assessment, as if the receipts and accruals were included in the taxpayer’s income
(s 12D(3A)).
Therefore, the tax value of the asset is reduced by the deemed allowance, although no actual deduc-
tion will be granted under this section regarding the period of use of the asset (which was excluded
from income) in the previous years. The deemed allowance will not be recouped if the asset is
13.4.8 Deductions in respect of improvements on property in respect of which Government

holds a right of use or occupation (s 12NA)
Section 12NA was introduced to allow for the deduction by taxpayers of the cost of improvements
undertaken
l on land or to buildings owned by government entities
l where the taxpayer does not have a right of use or occupation and thus the taxpayer is not
meeting the requirements of s 12N (see 13.7.4).
This would happen where the government enters into a contract with a private party for the financing,
designing and constructing, as well as maintaining of a government building. The taxpayer will there-
fore service the building but will not occupy it (Explanatory Memorandum on the Taxation Laws
Amendment Act, 2014).
When will s 12NA be applicable?
The section is applicable if a taxpayer
l is obliged to effect an improvement on land or building in terms of
– a Public Private Partnership
– if the right of use or occupation of the land or building is held by the government of the
Republic in the national, provincial or local sphere (s 12NA(1)).
The provisions do not apply if the taxpayer carrying out the improvements carries on any banking,
financial services or insurance business (s 12NA(4)).
What will the implications be if s 12NA is applicable?
Allowance = Actual cost of improvements divided by

lesser of
General rule
*25 years OR
*the number of years that income is derived from the Public Private
Partnership
If this section is applicable, the taxpayer will qualify for a deduction of

l the expenditure (not previously deducted under s 12NA) actually incurred to effect the improve-
ments
l divided by the lesser of the number of years for which the taxpayer will derive income from the
Public Private Partnership agreement (including the year in which the improvement is effected),
or 25 years (s 12NA(2)).
If an exempt receipt or accrual (under the now repealed s 10(1)(zl) that was only
effective until 31 December 2015) was received from Government and it was
Please note! used to effect the improvements or to fund the improvements, the allowance
needs to be reduced by the tax exempt contribution (this is to prevent a further
tax deduction of a tax exempt award) (s 12NA(3)).
359
Example 13.14. Deduction for improvements on property in respect of which Government

holds a right of use or occupation
On 1 July 2017, Masango (Pty) Ltd and the municipality entered into a 20-year agreement where-
by Masango (Pty) Ltd will be responsible for the financing, design, constructing, operating and
maintenance of a new building that will house the Electricity Department. Masango (Pty) Ltd
received a R2 million capital contribution on 15 July 2017 from the municipality (which is exempt
from tax in the hands of Masango (Pty) Ltd under s 10(1)(zl)).
Masango (Pty) Ltd immediately (during 2017) commenced with the erection of the new building
at a total cost of R8 500 000. The erection was completed on 30 April 2019.
Calculate the s 12NA deduction available to Masango (Pty) Ltd for the year of assessment
ending on 30 June 2019.
SOLUTION
In terms of the provisions of s 12NA(2), Masango (Pty) Ltd will qualify for an allowance of:
(R8 500 000 – R2 000 000) / 20 years (lesser of 25 or 20 years)................................. (R325 000)
13.5 Hotels
Hotelkeepers and lessors whose lessees are hotelkeepers are currently entitled to the following
special allowances for their qualifying buildings and improvements and equipment:
l the annual allowance for hotel buildings and improvements (s 13bis(1); see below)
l the 20% straight-line depreciation allowance for hotel equipment brought into use after
15 December 1989 (s 12C; see 13.3.3)
l the alienation, loss or destruction allowance for hotel equipment (see 13.11).
These allowances are subject to tax in terms of s 8(4)(a) if recovered or recouped (see 13.10).
13.5.1 Immovable assets of hotels: Annual allowance on buildings (s 13bis)

When will s 13bis be applicable?
Section 13bis(1) is applicable to
l a building and any improvements (other than repairs) that are
l exclusively or mainly used by the taxpayer during the year of assessment for the purpose of
carrying on in it his trade as a hotel keeper, or
l let by the taxpayer and exclusively or mainly used by the lessee for the purpose of carrying on in
it the lessee’s trade as a hotel keeper.
What will the implications be if s 13bis is applicable?
Allowance = Cost × 5% per year

General rule and
Allowance (improvements not extending the exterior framework) =
Cost × 20% per year
Section 13bis(1) provides an annual allowance, the rate of which varies, depending on when the
erection of the building or qualifying improvements commenced. The different rates that are applied
to cost, can be summarised as follows:
Erection of the building or qualifying improvements commenced: Rate of allowance

before 4 June 1988 2%
from 4 June 1988 onwards 5%
from 17 March 1993, but
only in respect of improvements that do not extend the existing exterior framework 20%
360
The cost of an asset for s 13bis is

l the cost of the building or improvements
Please note! less
l the amount of any recovery or recoupment (under s 13bis(6)) that is set off
against the cost (s 13bis(1) and second proviso to s 13bis(1) (see below)).
In calculating this allowance, the following are important:

l The annual allowance can be claimed in full even though the building is used for only a portion of
the year of assessment.
l The allowance is available only on the cost of a building, and is not granted on the cost of the
land on which the building is erected.
l The allowance may be claimed only for buildings erected by the taxpayer and not for buildings
purchased by him. However, the allowance is available for improvements to purchased or
‘second-hand’ buildings registered as hotels under the Hotels Act.
l The total amount of all allowances claimed under the Act, in respect of the building (or improve-
ments) shall be limited to the cost (s 13bis(5)).
l If any part of the cost of a building, or any improvements, has previously been taken into account
as part of a leasehold improvement allowance (under s 11(g) – see 13.7.2), that part of the cost
will not qualify for the s 13bis allowance (first proviso to s 13bis(1)).
l If a lessee undertakes obligatory improvements on leased property in terms of a Public Private
Partnership,
– owned by the government in the national, provincial or local sphere or certain government-
owned exempt entities,
– or for obligations incurred on or after 1 January 2013, the Independent Power Producer
Procurement Programme administered by the Department of Energy,
allows for the depreciation allowance on the improvements to be calculated as if the lessee
owned the property, if the lessee uses the property for earning income. The expenditure incurred
by the lessee to complete the improvements shall be deemed to be the cost for purposes of the
allowance (s 13bis(1A)).
Recoupment
Although the annual allowance on buildings and improvements is subject to the recoupment in terms
of s 8(4)(a), the taxpayer can elect to defer the recoupment, as follows (s 13bis(6)(a)):
l A taxpayer can defer or even prevent a recovery or recoupment of the annual allowance from
being included in his income and instead choose (make an election) to have it set off against the
cost of a further building (hereinafter referred to as the ‘replacement’ building), if:
– the replacement building was erected by the taxpayer (thus not applicable if the replacement
building was purchased)
– the replacement building must be erected within 12 months (or any longer period that the
Commissioner may allow) from the date on which the event giving rise to the recovery or
recoupment occurred
– the replacement building erected should also qualify for the allowance under s 13bis(1).
l So much of the recovery or recoupment as is set off against the cost of a qualifying replacement
building will then, despite s 8(4)(a), not be included in his income for that year of assessment.
The recoupment will be set off against the cost of the qualifying replacement building. The cost of
the qualifying replacement building, for the purposes of s 13bis will be calculated as follows:
361
Original cost of a qualifying replacement building
LESS
Portion of the cost for which an allowance has been granted under
s 11(g)
(leasehold improvements) – if applicable
LESS
Set-off of recoupment on previous building under s 13bis(6)(a)
Cost of replacement building for purposes of s 13bis
Please note! If the untaxed recoupment exceeds the cost of the replacement building, the
excess would be taxed as a recoupment under s 8(4)(a).
l The taxpayer’s election to defer may be made for a building or portion of a building or to improve-
ments or a portion of the improvements.
Example 13.15. Hotels: Buildings and improvements
Facts Allowances to be granted

l Leisure Ltd, whose financial year ends Leisure Ltd enjoys an annual allowance of
on 31 March, commenced the erection R750 000 (5% of R15 000 000) in its financial year
of a hotel building on 15 April 2015. It ended 31 March 2016 (the year in which the build-
completed the building at a total cost of ing was brought into use) and each subsequent
R15 000 000 on 1 February 2016 and year while it continues to use the building as a hotel
immediately brought it into use in its (s 13bis). The aggregate of the annual allowances
trade of hotel keeper. may ultimately not exceed the cost of R15 000 000.
l Leisure Ltd spends R2 500 000 on Leisure Ltd enjoys an annual allowance of
improvements (that extended the R750 000 on the original cost of the hotel and
existing exterior) to the above hotel in R125 000 (5% of R2 500 000) on the cost of the
its financial year ending 31 March improvements. It may claim the annual allowances
2017. It lets the hotel to another hotelier on the building and the improvements even though
for the last few months of the year the building is let. (Leisure Ltd will not qualify for
(2017). the 20% allowance on improvements, as the
improvements extended the existing exterior of
the hotel.)
l Leisure Ltd sells the hotel building for Recoupment:
R20 000 000 on 1 April 2017. It An amount of R1 625 000 (R750 000 (2016) +
immediately started the erection of a (R750 000 + R125 000 (2017) (recoupment of
new hotel on 1 April 2017. The new previous allowances)) would be a recoupment on
hotel (built for a total cost of sale of the hotel under s 8(4)(a).
R25 000 000) was brought into use in (The recoupment can also be calculated as
its trade as hotel keeper on 1 March follows:
2018. Leisure Ltd would make any
election to limit their tax liability. Selling price of R20 million, but limited to cost of
R17,5 million (R15 million + improvements of
R2,5 million) less tax value of R15 875 000
(R17,5 million – R750 000 (2016) – (R750 000 +
R125 000 (2017)) = R1 625 000.)
continued
362
Facts Allowances to be granted
Capital gain:
The balance of the profit on the sale; that is,
R2 500 000 (excess above cost price) will be of a
capital nature and subject to capital gains tax
(see chapter 17).
Since the hotel was replaced by a qualifying
replacement hotel, the recoupment on the old
hotel will not be included in taxable income for
2017, but can be set off against the cost price of
the new hotel (s 13bis(6)(a)).
Cost price for the replacement hotel under
s 13bis:
R25 million – R1 625 000 (recoupment on
previous hotel) = R23 375 000.
Annual allowance under s 13bis on replacement
hotel for 2018:
5% × R23 375 000 = R1 168 750
(Leisure Ltd would have elected to set off the
recoupment against the cost price of the replace-
ment hotel under s 13bis(6)(a) to minimise their
tax liability.)
Boulders Ltd erects a hotel building costing Boulders Ltd enjoys a leasehold improvements
R4 000 000 on hired land in pursuance of an allowance (s 11(g) – see 13.7.2) of R200 000
obligation imposed by the lease of the land (1/15 of R3 000 000) in the year ended 30 June
to erect a hotel to a value of R3 000 000. The 2018 and each of the subsequent 14 years of the
erection of the building commenced on lease. It enjoys an annual allowance of R50 000
1 August 2016 and it was completed and (5% of R1 000 000) a year under s 13bis for the
brought into use on 1 July 2017. The com- expenditure it incurred in excess of the amount
pany’s financial year ends on 30 June. The that it was obliged to spend in terms of the lease
lease had 15 years to run from 1 July 2017. (R4 000 000 – R3 000 000).
13.5.2 Hotels: Movable assets (s 12C)

Machinery, implements, utensils or articles owned or purchased (under an instalment sale agree-
ment) and brought into use after 15 December 1989 for the first time by
l the taxpayer, or
l the lessee, where the asset is let
for the purposes of his trade as hotelkeeper and used by the taxpayer or lessee in a hotel, will qualify
for the s 12C 20% straight-line depreciation allowance (see 13.3.3).
Specifically excluded from the provisions of s 12C are
l any vehicle, or
l equipment for offices or managers’ or servants’ rooms (s 12C(1)(d) and (e)).
These assets that are excluded could, however, qualify for a deduction under the wear-and-tear
allowance in s 11(e) (see 13.3.1)
The general recoupment (s 8(4)(a) – see 13.10) and the alienation, loss or destruction allowance
under s 11(o) (see 13.11) is also available on hotel equipment, if all requirements are met.
13.6 Owners and charterers of aircraft or ships (s 33)

The method of taxation of owners and charterers of aircraft or ships depends upon whether they are
resident in South Africa.
South African residents are assessed on their worldwide taxable income in accordance with the
ordinary provisions of the Act, while non-resident owners and charterers of aircraft or ships are
assessed in accordance with the provisions of s 33 of the Act (which is not covered in Silke).
363
13.6.1 Movable assets: Aircraft and ships (ss 12C, 8(4)(a), 8(4)(e), 11(o), 12E and 24P)
The following allowances may be applicable to aircraft and ships:
l Aircraft and ship owners are entitled to deduct the s 12C 20% straight-line allowance for aircraft
and ships brought into use for the first time by them (see 13.3.3). If, however, the taxpayer is a
small business corporation (as defined in s 12E(4)), the aircraft or ship may qualify for the
50%:30%:20% allowance over a three-year period (under s 12E(1A) - see 13.3.4).
l Section 24P allows for an allowance for future expenditure (notwithstanding the provisions of
s 23(e)) on repairs to any ship of a resident used for purposes of trade in the carrying on of a
business as owner or charterer of any ships. The taxpayer should be likely to incur the
expenditure within five years of the year in which the allowance is claimed (s 24P(1)).
In determining the amount of the allowance for future repairs, the taxpayer should consider the
estimated cost and the date on which the cost for the repairs is likely to be incurred (s 24P(2)).
The allowance claimed in a specific year of assessment must be included in (added back to) the
income of the taxpayer in the following year of assessment (s 24P(3)).
l Section 23A, which in certain circumstances may limit the s 12C allowance available to lessors of
aircraft or ships, should also be considered (see 13.7.5). The taxpayer affected by this limitation
is one who lets ‘affected assets’ as defined. The limitation ensures that the sum of the allowances
allowed in any year on the affected assets let, do not exceed the taxable income (determined
before the deduction of the restricted allowances) derived by the lessor during that year from
‘rental income’ as defined. The limitation applies notwithstanding the provisions of the allowances
it restricts.
l The taxpayers are liable for tax on recoupments arising on the sale of an aircraft or a ship
(s 8(4)(a)). In certain circumstances the recoupment can be delayed for an aircraft or ship
disposed of, if the taxpayer elected that the provisions of par 65 or 66 of the Eighth Schedule
(see chapter 17) should apply. This election will provide a delayed taxation of the recoupment of
the allowance (under s 8(4)(e) – see 13.10).
l The provisions of s 11(o) will apply on the alienation, loss or destruction of an aircraft or a ship
(see 13.11).
l Interpretation Note No 73 (Issue 2) (issued on 14 December 2015) relates to

the tax implications of rental income from tank containers and could be
applicable to local and international shipping companies.
l Section 12Q (exemption of income in respect of ships used in international
Please note! shipping (see chapters 5, 21 and 17)) provides tax relief for shipping com-
panies. It provides relief for qualifying domestic shipping companies
including exemption from normal tax (see chapter 5), capital gains tax (see
chapter 17), dividends tax (see chapter 19) and also from withholding tax
on interest paid to any foreign person (effective for interest received or
accrued on or after 1 March 2015 – see chapter 21).
Remember
If a taxpayer qualifies as a small business corporation, allowances on aircraft and ships can be
claimed under the provisions of s 12E(1A).
13.6.2 Immovable assets: Airport and port assets (s 12F)

When will s 12F be applicable?
The section is applicable to
l airport assets, which include
– any aircraft hangar, apron, runway or taxiway and any earthworks or supporting structures that
form part of the aircraft hangar, apron, runway or taxiway and any improvements to such air-
craft, hangar, apron, runway or taxiway
– on any designated airport, which is an airport approved by the Minister of Finance in consul-
tation with the Minister of Transport, and
364
l port assets, which include

– any port terminal, breakwater, sand trap, berth, quay wall, bollard, graving dock, slipway,
single point mooring, dolos, fairway, surfacing, wharf, seawall, channel, basin, sand bypass,
road, bridge, jetty or off-dock container depot and any improvements thereto, and
– includes any earthworks or supporting structures forming part of such asset.
The airport or port assets should be
l new and unused
l brought into use for the first time by the taxpayer, and
l used directly by the taxpayer exclusively for the purposes of carrying on his business as an
airport, terminal or transport operator or port authority (s 12F(1) and (2)).
What will the implications be if s 12F is applicable?
An allowance equal to 5% each year on the cost of acquisition (including constructing, erecting or
installing) of the asset will be deductible to the extent that the asset is used in the production of the
taxpayer’s income. The allowance can be claimed in full (no apportionment), even if the asset was
only used in the taxpayer’s trade for a few days (s 12F(3)). All deductions allowed in terms of the Act
can never exceed 100% of the cost (s 12F(6)).
l when an asset was previously brought into use for the first time by the taxpayer in any trade
carried on by him
l in the production of income but that was excluded from income (exempt income or the taxpayer
was taxed in terms of the turnover tax regime (the Sixth Schedule) – see chapter 23)
l any deduction that could have been allowed under s 12F during the previous year in which the
asset was brought into use and any following year, is deemed to have been allowed during those
years, as if the receipts and accruals were included in the taxpayer’s income (s 12F(3A)).
Therefore, the tax value of the asset is reduced by the deemed allowance, and although no further
deduction will be granted under this section in respect of the period of use of the asset (which was
excluded from income) in the previous years. The deemed allowance will not be recouped if the
asset is consequently disposed of (s 8(4A)).
The cost of an asset for s 12F is

the lesser of
including
the direct cost of installation or erection of the asset.
Please note!
(Where the asset was acquired to replace an asset that was damaged or
destroyed, the deduction is determined on the cost after deducting any amount
that has been recovered or recouped in respect of the damaged or destroyed
asset and excluded from the taxpayer’s income in terms of s 8(4)(e) (s 12F(4)).)
The taxpayer can elect that par 65 or 66 of the Eighth Schedule should apply in
order for s 8(4)(e) to provide for a delayed taxation of the recoupment (see
13.10.3).)
nership
exempt entities
(s 12F(2A)).
365
13.7 Leases
13.7.1 Lease premiums (s 11(f))

When will s 11(f) be applicable?
If a premium, or consideration in the nature of a premium,
l was paid by a taxpayer
l for any of the following items:
(1) the right of use or occupation of land or buildings
(2) the right of use of plant or machinery
(3) the right of use of a motion picture film or any sound recording or advertising matter
connected with the film
(4) the right of use of
– a ‘patent’ as defined in the Patents Act 57 of 1978
– a ‘design’ as defined in the Designs Act 195 of 1993
– a ‘trade mark’ as defined in the Trade Marks Act 194 of 1993
– a ‘copyright’ as defined in the Copyright Act 98 of 1978, or
– any other property that is of a similar nature
(5) the providing of or the undertaking to provide any knowledge directly or indirectly connected
with the use of the items listed in (3) and (4) above, or
(6) the right of use of any pipeline, transmission line or cable or railway line (as meant in the
definition of an ‘affected asset’ in s 12D (see 13.4.7)), and
l it is used for the production of income or from which income is derived
l the provisions of s 11(f ) will apply.
The allowance is available only when a premium is paid for the right of use or occupation of an asset.
Amounts paid for the complete acquisition of an asset do not fall within the ambit of the allowance.
‘Premium or consideration in the nature of a premium’ for purposes of s 11(f )

means:
Please note! A consideration in the nature of rent passing from a lessee to a lessor over
and above or in lieu of the rental payments.
(CIR v Butcher Bros (Pty) Ltd (1945 AD))
Remember
The person receiving the premium is obliged to include in his gross income the full premium in
the year of its receipt or accrual (par (g) of the definition of the term ‘gross income’ in s 1 – see
chapter 4).
The lease premium allowance will also be available to a sub-lessee, since under a sublease a
premium is additional rent passing from the sub-lessee to the sub-lessor.
The following will not be classified as lease premiums for purposes of s 11(f ):
l A premium or consideration that will not qualify as ‘income’ for the recipient. For example, if the
lessor is a tax exempt person or body in terms of s 10 (for example a pension fund), a premium
paid to it cannot be deducted by the taxpayer under the s 11(f ) allowance. There is one
exception, namely the right of use of a line or cable (refer item (6) above)
– used for the transmission of electronic communications, and
– of which substantially the whole is located outside the territorial waters of South Africa, thus
international submarine (underwater) telecommunication cables, where
– the terms of the right of use is 15 years or more (s 11(f )(dd)).
l When a lease contract is transferred from one lessee to another, any amount paid will not qualify
for this allowance. This is since the payment did not pass from the lessee to the lessor by way of
additional rent, but between the previous lessee (cessionary) and the new lessee. It is
366
expenditure of a capital nature for the substitute lessee and will be a capital gain in the hands of
the previous lessee.
l If a lessor pays an amount to a lessee to vacate business premises before the end of the lease, it
will not qualify for this allowance.
l An amount paid by a lessee to a lessor for the cancellation of a lease is not a premium or like
consideration, since it is not paid for the right of use or occupation of the property. The question
of whether such a payment will be deductible will depend upon whether it complies with the
requirements of ss 11(a) and 23(g) (see chapter 6).
What will the implications be if s 11(f) is applicable?
Total lease premium or like consideration

DIVIDED BY
General rule Number of years (maximum of 25 years, including renewals) of use
MULTIPLIED BY
Period (either days or months) in the year of assessment used in the
production of income
An allowance, calculated under s 11(f ), will be available to the taxpayer. The allowance (except for
the provision of any knowledge (item 5 above)) is calculated as follows (s 11(f )(aa)):
Total lease premium or like

consideration
DIVIDED BY
Number of years for which the taxpayer is entitled to the use or

occupation of the property.
(Limited to a maximum of 25 years)
The allowance for a lease premium paid on the provision of or the undertaking to provide any know-
ledge (item 5 above) is calculated as follows (s 11(f )(cc)):
Total lease premium or like

consideration
DIVIDED BY
Number of years for which the taxpayer is entitled to the right

of use (also taking into account any other relevant
circumstances) of the property.
(Limited to a maximum of 25 years)
In calculating the s 11(f ) allowance the following should be remembered:

l The allowance will be apportioned taking into account the period during the
year of assessment it was used for the production of income or from which
income is generated (as required by s 11(f )(i) – (iii) and (v)).
l Should the taxpayer be entitled to
– the use or occupation for an indefinite period, or
– if the taxpayer or the person by whom the right was granted, holds a
right or option to extend or renew the original period of the use or
occupation,
Please note! the taxpayer will be deemed to be entitled to use or occupy for the period
that represents the probable duration of that use or occupation, but limited
to 25 years (s 11(f )(aa), (bb) and (cc)). Renewal periods will be taken into
account.
l If a taxpayer cedes or surrenders his rights under the agreement
– a full year’s allowance will in practice be granted in the year of the
cession or surrender, and
– the balance of the premium not yet deducted will fall away (be forfeited).
This will also be the case in the event of a premature termination of an agree-
ment.
367
Recoupment
On the disposal of his right of use or occupation, the lessee will have to include in his income that
portion of the selling price that represents a recoupment or recovery of allowances previously
granted under this section (s 8(4)(a)).
Remember
l The allowance will be apportioned taking into account the number of months it was used or
occupied (as provided for in s 11(f)).
l The premium should be in respect of items used for the production of income or from which
income is derived.
l In the event of the early termination of an agreement, the balance of the amount of the
premium not yet deducted will fall away (but there is the possibility of a capital loss in the
taxpayer’s hands).
l The duration of use or occupation of the item on which the lease premium was paid is limited
to a maximum of 25 years.
l In calculating the duration of the lease, renewal periods are taken into account.
Example 13.16. Lease premiums
Calculate the lease premium allowance deductible in the following instances in terms of s 11(f)
(assume that all years of assessment end on the last day of February):
A For a lease over premises entered into on 1 September 2017, Walter paid the lessor a
premium of R150 000. He is entitled to occupation for 15 years. The annual rental is
R120 000.
SOLUTION
Allowances to Walter
28 February 2018
6
R5 000, that is, (R150 000 ÷ 15) ×
12
Walter’s allowance has been reduced since the property was occupied for only 6 months of the tax
year.
2019 to 2031 years of assessment
R10 000 each year (R150 000 ÷ 15).
R5 000 (balance not yet deducted).
Notes
(1) The lessor is liable for tax on the full amount of the premium of R150 000 in 2018 tax year
(par (g) of the definition of the term ‘gross income’ in s 1).
(2) If Walter ceased business in the middle of the 2022 tax year and surrendered his interest in
the lease, the allowance for the 2022 tax year would be R10 000, even though the property
was occupied for only six months of the tax year. The balance of the premium not yet
deducted (i.e. R150 000 – R45 000 = R105 000) falls away. (This is the practice. It could,
however be recognised as a capital loss.)
Example 13.16. Lease premiums – continued
B For the use of a trade mark with effect from 1 June 2017, Faheem paid Seluh a royalty of
10% of the net profit earned plus a lump sum payment of R1 500 000. The lease is for
30 years.
368
SOLUTION
Allowances to Faheem
28 February 2018
9
R45 000, that is, (R1 500 000 ÷ 25) ×
12
Reduced since use of patent is from 1 June.
R60 000 each year (R1 500 000 ÷ 25).
R15 000 (balance not yet deducted (R1 500 000 ÷ 25 × 3/12)).
Nil
Note
When the period of the lease exceeds 25 years, the premium is amortised over 25 years.
Example 13.16. Lease premiums – continued

C Modise is the lessee under a ten-year lease of property entered into on 1 March 2015. For
the cession and assignment of all his rights under the lease on the last day of the 2018 tax
year, Modise received from Nell an amount of R70 000. Modise originally paid Nell (the
landlord) R30 000 as a premium for the granting of the lease.
SOLUTION
Allowances to Modise
2016 tax year: R3 000 (R30 000 ÷ 10).
2017 tax year: R3 000 (R30 000 ÷ 10).
2018 tax year: R3 000 (R30 000 ÷ 10).
Allowances to Nell: Nil
Notes
(1) The balance of the premium not yet deducted by Modise, i.e. R21 000 (R30 000 less R9 000),
falls away (but could be recognised as a capital loss) since the property is no longer used or
occupied for the purpose of trade.
(2) Modise is not liable for normal tax on the R70 000 received on the cession of the lease,
except to the extent to which it represents a recoupment of allowances made in terms of
s 11(f ) (see note 3 below). Capital gains tax will, however, apply to the capital gain of
R40 000 (Proceeds of R61 000: R70 000 (selling price) – R9 000 (recoupment), less base
cost of R21 000: R30 000 (original cost) – R9 000 (s 11(f) deduction).
(3) Since Modise paid R30 000 for the lease but sold it for R70 000, a taxable recoupment
arises in terms of s 8(4)(a) of allowances granted under s 11(f ). Therefore R9 000 (three
years’ allowances) must be included in Modise’s income in the 2018 tax year.
(4) Nell is not entitled to any allowance for the R70 000 paid for the lease, since it is expen-
diture of a capital nature and not a premium (in terms of s 11(f) - Turnbull v CIR
(1953 A)).
(5) If instead of ceding his lease to Nell, Modise had subleased the premises on the same
terms and conditions enjoyed by him but in return for a premium of R70 000, Nell would be
entitled to the following allowance each year:
2019 to 2025 years of assessment: R10 000, that is: R70 000 ÷ 7.
Modise would be liable for tax on the full amount of R70 000 in the 2018 tax year, but the
Commissioner is likely to grant him an allowance of R21 000 in terms of s 11(h) for the non-
deducted portion of the premium originally paid by him for the lease.
13.7.2 Leasehold improvements (s 11(g))

When will s 11(g) be applicable?
Section 11(g) makes an allowance available for:
l expenditure actually incurred by a taxpayer
l enforced by a leasehold agreement
l to undertake improvements on land or to buildings
l used or occupied for the production of income or income must be derived from it.
369
The allowance is only available when the lessee is forced (obliged) to effect
improvements in terms of the contract of lease.
The terms of a lease may be such that there is an implied obligation to effect
Please note! improvements. It is also not essential, it is submitted, that the exact nature or
amount of the improvements be decided upon by the parties. When no amount
is stipulated as the value of the improvements, their fair and reasonable value
must be determined.
Remember
The lessor is required to include in his gross income the value of the improvements allowable
as a deduction to the lessee in the year of assessment in which the right to have the
improvements effected accrues to him (par (h) of the definition of the term ‘gross income’ in s 1 –
see chapter 4).
The provisions of the leasehold improvements allowance do not apply if:

l the value of the improvements or the amount to be expended
l does not constitute income of the lessor.
What will the implications be if s 11(g) is applicable?
The stipulated value of the improvements

DIVIDED BY
Number of years of use (calculated from the date when improvements are
General rule completed (including renewal periods)) but limited to 25 years
MULTIPLIED BY
Period (either days or months) in the year of assessment used in the
production of income
If s 11(g) is applicable, an allowance may be claimed on the leasehold improvements. The allowance
is calculated as:
The stipulated value
(or the fair and reasonable value if no value is stipulated)
DIVIDED BY
Number of years that the taxpayer is entitled to the use or occupation of

the property.
(Calculated from the date on which the improvements are completed, but
limited to a maximum of 25 years (s 11(g)(ii)).)
In other words, the expenditure actually incurred is not allowed in full in the year of assessment in
which it is incurred. It is allowed in annual instalments over the number of years from the completion
of the improvements until the end of the lease, with a maximum of 25 years. Therefore, if the lessee is
entitled to the use or occupation of the premises for more than 25 years, the expenditure must be
written off in only 25 annual instalments.
In calculating the s 11(g) allowance the following should be remembered:

l As a result of the requirement that the number of years be calculated from
the date on which the improvements are completed, the first allowance
available to a taxpayer will be granted only in the year of assessment in
which the improvements are completed and brought into use.
l The allowance is proportionately reduced in the year the improvements are
Please note! completed if the property is used for less than a full year.
l SARS does not require the allowance to be reduced proportionately if the
property does not produce income for the full year because of the early
termination of the lease. The full annual allowance can still be claimed in the
year of termination (for example, if he surrenders or cedes his rights under the
lease or if he vacates the premises upon the cancellation of the lease).
continued
370
l If the leasehold agreement is terminated before the expiry date, the portion of
the leasehold improvements allowance that has not been claimed yet will be
allowed in the year of assessment when the termination occurred (s 11(g)(vii).
l If the lessee is entitled to the use or occupation for an indefinite period, or the
Please note! lessee or lessor could renew or extend the original lease period, the lessee is
deemed to be entitled to the use or occupation for a period that represents
the probable duration of his use or occupation (s 11(g)(iii)). This period may
not exceed 25 years. (It is submitted that renewal periods (an option to extend
the lease) will be taken into account to determine the period of the lease.)
The aggregate of the allowances granted may not be more than

l the amount stipulated in the lease agreement as the value of the improvements or as the amount
to be spent on the improvements, or
l if the lease agreement does not stipulate an amount, the fair and reasonable value of the
improvements (s 11(g)(i)). In practice, the fair and reasonable cost to the lessee of the improve-
ments is taken as the value to be used.
The following situations can therefore occur:
The lessee spends > the amount in the contract Î

allowance limited to stipulated amount in contract.
For example, if the lease stipulates that improvements to the value of R1 200 000 must be effected
and the lessee spends R1 500 000, the annual allowances must be calculated on R1 200 000; that is,
the amount stipulated in the lease. The lessee is a volunteer in respect of the R300 000 (1 500 000 –
R1 200 000) on which the taxpayer may claim any other allowance on buildings (for example s 13,
but not s 13quin, since only the owner can claim the s 13quin allowance – see 13.4.5), if the asset
qualifies.
The lessee spends = the amount in the contract Î

allowance limited to stipulated amount in contract.
and the lessee spends R1 200 000, the annual allowances must be calculated on R1 200 000.
The lessee spends < the amount in the contract Î

allowance limited to actual amount incurred for improvements.
and the lessee spends R1 100 000, the annual allowances must be calculated on R1 100 000.
When a lessee is forced to undertake improvements in terms of a lease:
l a variation of the original agreement of lease at a later date
l with the effect of increasing the value of the improvements to be done
l would entitle him to claim the leasehold improvements allowance on the increased sum
l provided that the improvements are still in the course of construction at the date of the variation.
(A variation of the original agreement concluded after the improvements have been effected, would
not enable the lessee to base the allowances on the increased sum.)
Provision is made for the situation in which the lessee is or has been entitled to
both
l the leasehold improvements allowance, and
Please note! l the annual allowance for buildings used in a process of manufacture or
similar process on the cost of the buildings or improvements (s 13(1)) or the
annual allowance made available on the cost of the storage buildings and
improvements of an agricultural co-operative (s 27(2)(b)).
continued
371
In such an event, the aggregate of the leasehold improvements allowance must

be limited to:
l the cost to the taxpayer of the building or improvements
Less
l any untaxed recoupments set off against that cost (under ss 13(3) or 27(4))
Please note! Less
l total allowances allowed under ss 13(1) or 27(2)(b).
(Section 11(g)(iv).)
The purpose of this provision is to deny the taxpayer deductions by way of
annual allowances and the leasehold improvements allowance in excess of the
cost of a building or improvements as reduced by any untaxed recoupment.
It is submitted that the taxpayer can decide which allowance of either the leasehold improvements
(s 11(g)) or s 13(1) (see 13.4.1) will provide the most beneficial deduction, since neither section pre-
scribes a specific sequence in which the deductions should be used.
Recoupment
On the disposal of his right under a lease, the lessee will have to include in his income that portion of
the selling price that represents a recoupment or recovery of allowances previously granted under
this section (s 8(4)(a)).
If, on the termination of the lease, the lessee receives compensation from the lessor for improvements
done during the lease, such payment will be included in his income to the extent to which it repre-
sents a recoupment of previously enjoyed allowances.
Remember
l The allowance is proportionately reduced (either by way of days or months) in the year the
improvements are completed if the property is used for less than a full year of assessment.
l The leasehold improvements should be in respect of assets used for the production of
income or from which income is derived.
l In the event of the premature termination of an agreement, the balance of the improvement
not yet deducted will be allowed in full as a deduction in the year of termination.
l The allowance is calculated over the number of years left after the completion of the
improvements for which the lessee is entitled to the use or occupation of the land or
buildings in terms of the lease, with a maximum of 25 years.
l In calculating the duration of the lease, renewal periods are taken into account if it is part of
the probable duration of the use or occupancy.
Example 13.17. Leasehold improvements

In terms of a leasehold agreement of land, Builder, the lessee, has to erect a factory (for sole use
in its manufacturing operations) to a value of R3 000 000 within a period of 18 months from the
date of commencement of the lease, which was 1 January 2017. The lease is for a period of
20 years. On the expiry of the lease, the factory will revert to the landlord without compensation
to Builder. At the end of the first year of assessment (30 June 2017) the factory had not been
completed, but R1 250 000 had actually been spent on its erection. The building was completed
on 31 March 2018, at a total cost of R3 500 000, and the factory was immediately let to tenants
(that also carries on a qualifying manufacturing trade).
Calculate the allowances to be granted to Builder in terms of s 11(g), as well as any other
allowances for which the factory may qualify.
372
SOLUTION
Leasehold improvements allowance:
No allowance, since the factory was not completed during the year of assessment.
Factory completed on 31 March 2018.
Lease expires 18¾ years after completion.
Therefore the value of the improvements stipulated in the lease is to be amortised over a period
of 18¾ years, but must be reduced since the buildings were brought into use only on 31 March
2018.
R3 000 000 3
Annual allowance × = R40 000
183/4 12
The next 18 years of assessment
R3 000 000
An allowance of R160 000 for each of the 18 years ( 183/4 )
R3 000 000 6
Annual allowance × = R80 000
3
18 /4 12
Section 13 allowance (see 13.4.1) on the excess cost not qualifying for the s 11(g) allowance:
No allowance, since the factory was not yet brought into use in a process of manufacture.
Section 13 annual allowance: 5% of R500 000 (the excess cost not qualifying for the
s 11(g) allowance) .......................................................................................................... R25 000
If the lease contract in terms whereof the improvements must be effected was for a
longer period than 20 years, Builder should have elected to write off the R3 000 000
in terms of s 13(1) (over 20 years at 5% per year) instead of in terms of s 11(g) over
the longer period.
13.7.3 Relief for lessor (lessor’s special allowance) (s 11(h))

When will s 11(h) be applicable?
Section 11(h) provides a taxpayer in certain circumstances with an allowance referred to here for
convenience as the ‘lessor’s special allowance’. The allowance is made for amounts included in the
taxpayer’s ‘gross income’ under the following paragraphs:
l Paragraph (g) (lease premiums)
A lessor who derives a premium for granting a lease will have the full premium included in his
‘gross income’ (under par (g) of the definition of that term) in the year of its receipt or accrual.
OR
l Paragraph (h) (leasehold improvements)
When a lessee is forced to effect improvements in terms of a lease the lessor will effectively
include in his ‘gross income’ (under par (h) of the definition of that term) the value of the improve-
ments allowable as a deduction to the lessee in the year in which the right to have the improve-
ments effected accrues to him. He is not entitled to spread that value over the period of the lease
but must include the full amount in that year, although the lessor will only receive a benefit, at the
expiry of the lease.
In the following circumstances the lessor’s special allowance may not be made to the taxpayer:
l if either the lessor or the lessee is a company and the other party has an interest in more than
50% of any class of shares issued by that company, whether directly as a holder of shares in that
company or indirectly as a holder of shares in any other company (s 11(h)(i)), or
l if both the lessor and the lessee are companies and any third person has an interest in more than
50% of any class of shares issued by each of these companies, whether directly or indirectly
(s 11(h)(ii)).
373
This exclusion avoids abuse of the allowance when the lessor and lessee are not independent
persons (for example when one is a company and the other is its holder of shares or both are
companies controlled by the same holder of shares).
What will the implications be if s 11(h) is applicable?
The amount included in gross income (under par (g) or (h) of the
gross income definition)
General rule
LESS
Present value of the amount included in the lessor’s gross income
The ‘lessor’s special allowance’ will be granted as a deduction to the taxpayer. The allowance will be
whatever amount the Commissioner, having regard to any special circumstances, might consider to
be reasonable.
The Commissioner, in fixing the amount of the allowance, must have regard to the number of years
taken into account in the determination of the allowance granted to any other person (the lessee)
under the leasehold improvements allowance made available by s 11(g). This is the number of years,
calculated from the date on which the leasehold improvements are completed, but not more than
25 years, for which the lessee is entitled to use or occupation. In this way, the lessor and lessee are
prevented from arranging the lease in such a way that it has a brief compulsory duration, in order to
maximise the deductions enjoyed by the lessee under the leasehold improvements allowance, and a
lengthy optional extension, in order to maximise the deduction enjoyed by the lessor under the
special lessor’s allowance.
The practice of SARS is to determine the lessor’s special allowance as follows:
(1) Establish the amount that has been included in the lessor’s gross income as the value of the
improvements under par (h) of the definition of the term ‘gross income’ in s 1.
(2) Discount that amount to its present value at 6% over the same period taken into account in the
determination of the leasehold improvements allowance granted to the lessee. This period would
include renewal periods available at the option of the lessee (see 13.7.2).
(3) Set the lessor’s special allowance at an amount sufficient to reduce the amount referred to in
item 1 above to the discounted amount referred to in item 2.
The allowance will therefore be:
The amount included in gross income

(under par (g) or (h) of the gross income definition)
LESS
Present value of the amount

included in the lessor’s gross income
EQUALS
Special lessor’s allowance (s 11(h))
Example 13.18. Lessor’s special allowance

Lessor Ltd lets premises to Mr Lessee for a period of five years, with an option to renew the lease for
a further three years. The lease forces Mr Lessee to effect improvements to the leased premises to
the value of R1 800 000. The Commissioner regards the duration of the lease to be eight years.
Show the effect of the improvements on Lessor Ltd’s taxable income in the year of assessment in
which the lease is signed.
374
SOLUTION
Value of improvements included in gross income in terms of par (h) of the
definition of ‘gross income’ ............................................................................................ R1 800 000
Less: Deduction under s 11(h) [Present value of R1 800 000 is R1 129 342,
therefore the allowance is (R1 800 000 – R1 129 342)] ........................................ (670 658)
Taxable income in respect of improvements ............................................................ R1 129 342
Note
The deduction allowed under s 11(h) is calculated to discount the amount required to be expended
by the lessee on the improvements to its present worth at 6% over the period of the lease.
(FV = R1 800 000; n = 8; i = 6%; Comp PV = R1 129 342)
l The s 11(h) allowance is only claimed by the lessor in the year of assess-
ment in which the right to occupy or the right to effect improvements is
granted to the lessee and a corresponding inclusion is made in the gross
income of the lessor under special inclusion paragraphs (g) and (h) respect-
Please note! ively (see chapter 4).
l Although the lessee deducts the whole of the value of improvements over
the period of the lease, when a lease is of substantial duration the lessor
may (as a result of the special lessor’s allowance) have to include in his
gross income only a small portion of that value.
13.7.4 Deductions in respect of improvements not owned by the taxpayer (s 12N)

Section 12N was introduced to allow for the deduction by the lessee of the cost of improvements
undertaken on leased land or to buildings owned by government or semi-government entities. These
improvements would not qualify for a deduction in terms of s 11(g) (see 13.7.2), since the improve-
ments are not income in the hands of the tax exempt recipients.
When will s 12N be applicable?
Section 12N is applicable if a taxpayer (the lessee)
l holds a right of use or occupation of land or a building, and
l will (whether contractually or voluntarily) undertake (effect) an improvement on the land or to the
building in terms of
– a Public Private Partnership, or
– a leasehold agreement, if the land or building is owned by
• the government of the Republic in the national, provincial or local sphere, or
• by any entity exempt from tax under s 10(1)(cA) or (t) (see chapter 5 – for example Black
tribal authorities, certain water service providers, the Council for Scientific and Industrial
Research (CSIR) and the South African Roads Agency Limited), or
• the Independent Power Producer Procurement Programme administered by the Department
of Energy
l incurs expenditure to do these improvements, and
l uses or occupies the land or buildings for the production of income or income must be derived
from it (s 12N(1)).
The provisions of this section do not apply if the lessee
l carries on banking, financial services or an insurance business, or
l enters into an agreement to sub-lease the land or building to another person, unless
– the land or building is occupied by the other person (sub-lessee) and it is a company that is a
member of the same group of companies as the lessee
– the lessee (the taxpayer) carries
• the cost of maintaining the land or building, and
• the responsibility for repairs as a result of normal wear and tear, and
– the potential risk of destruction or repair is borne by the lessee (s 12N(3)).
375
What will the implications be if s 12N is applicable?
The lessee is deemed to be the owner of the improvements made to the

General rule property of the lessor. He can claim the applicable allowances although
the property is not legally owned by him.
If this section (s 12N) is applicable, the lessee will be deemed to be the owner of the improvements
for purposes of
l the allowances on intellectual property, and research and development (s 11D – see 13.8.1)
l the allowance on movable assets used in farming or production of renewable energy (s 12B – see
13.3.2)
l the s 12C allowance (see 13.3.3)
l the allowance on railway lines (s 12D – see 13.4.7)
l the allowance on airport and port assets (s 12F – see 13.6.2)
l the industrial policy project allowance (s 12I – see 13.9.2)
l the allowance for buildings in special economic zones (s 12S – see 13.4.6)
l the manufacturing building allowance (s 13 – see 13.4.1)
l the allowance on hotels (s 13bis – see 13.5.1)
l the s 13ter allowance (replaced – see 2013 edition of Silke)
l the allowance for buildings in urban development zones (s 13quat – see 13.4.2)
l the commercial building allowance (s 13quin – see 13.4.5)
l the residential unit allowance (s 13sex – see 13.4.3), or
l s 36 (mining assets))
and will therefore qualify for the same allowance as other owner taxpayers, on the amount of the
improvements completed.
The lessee will also be deemed to be the owner of the improvements for purposes of the Eighth
Schedule (see chapter 17) and will therefore be liable for capital gains tax on the improvements
(s 12N(1)).
When the right of use or occupation terminates, the taxpayer is deemed to have disposed of the
improvements to the owner on the later of
l the date that the lease terminates, or
l the date that the use or occupation ends (s 12N(2)(a)).
If the lease terminates and the lessee continues to use or occupy the land or building, or extends the
period of the lease, the deemed disposal will be postponed until the end of the extension period
(s 12N(2)(b)).
Example 13.19. Deduction for improvements not owned by the taxpayer

On 15 April 2018, Twintopia (Pty) Ltd and the Municipality entered into an agreement whereby
the Municipality leased a piece of land to Twintopia (Pty) Ltd and Twintopia (Pty) Ltd undertook
to erect a new office block for use in its business on the piece of land. Twintopia (Pty) Ltd
immediately commenced with the erection of a new office block at a total cost of R6 500 000. The
erection was completed and the offices brought into use for purposes of Twintopia (Pty) Ltd’s
trade (in the production of income) on 30 September 2018.
Calculate the allowances (if any) on the office block for Twintopia (Pty) Ltd for the years of
assessment ending on 31 October 2018 and 31 October 2019.
376
SOLUTION
In terms of the provisions of s 12N, Twintopia (Pty) Ltd is deemed to be the owner of the office
block and will qualify for the accelerated s 13quin allowance on the cost of the improvements
(s 12N(1)).
2018: R6 500 000 × 5% (s 13quin(1)) (the full allowance allowed, although only
2019: R6 500 000 × 5% (s 13quin(1)) ......................................................................... (R325 000)
Note
A deemed disposal event will arise for Twintopia (Pty) Ltd on the later of the date that the right of
use or occupation terminates, or use or occupation ends (s 12N(2)(a)). Rights or options to
renew the lease period need to be included when the lease period is determined (s 12N(2)(b)).
13.7.5 Limitation of allowances for lessors of certain assets (s 23A)

When will s 23A be applicable?
Section 23A will be applicable if a taxpayer lets ‘affected assets’ as defined (s 23A(2)).
‘Affected assets’ include any asset that has been let under a lease agreement
(signed on or after 19 November 1988) on which the lessor is or was entitled to
(see note 1) an allowance under ss 11(e), 12B, 12C, 12DA (allowance for rolling
stock) or 37B(2)(a) (allowance on environmental treatment and recycling
assets), no matter whether in the current or a previous year of assessment.
Please note! But exclude:
l assets let by the lessor under an ‘operating lease’ as defined (see below),
and
l assets that, during the year of assessment, were mainly (more than 50%)
used in a non-letting trade (see note 2).
(Section 23A(1).)
Note 1: The phrase ‘entitled to’ is defined in the Business Dictionary as:
Having rights and privileges to something either by legal mandates or by policies set in
place.
Take note that an asset will remain an affected asset even if no allowance was claimed but
the lessor was entitled to the allowance (Interpretation Note No 53 (Issue 2)).
Note 2: To determine whether an asset was mainly used (more than 50%) in a non-letting trade,
Interpretation Note No 53 (Issue 2) (issued on 9 October 2015) provides that the taxpayer
needs to determine the period for which the asset was made available for letting, whether it
was actually let or not.
An ‘operating lease’ is defined as

l a lease of movable property
l concluded by a lessor in the ordinary course of a business of letting such
property.
Letting in the banking, financial services or insurance business is, however,
excluded (with the consequence that the banking, financial services or
insurance business cannot enter into operating leases in order to escape the
application of the limitation).
Please note! In addition, the movable property let must satisfy all of these requirements:
l It must be possible for members of the general public to hire it directly from
the lessor for a period of less than one month.
l The cost of maintaining it and of carrying out the repairs to it required in
consequence of normal wear-and-tear must be borne by the lessor.
l Subject to any claim that the lessor might have against the lessee owing to
the lessee’s failure to take proper care of it, the risk of its destruction or loss
or any other disadvantage must not be the responsibility of the lessee.
(Section 23A(1).)
377
What will the implications be if s 23A is applicable?
The sum of the capital allowances on all affected assets

General rule CANNOT EXCEED
The sum of the net rental income (i.e. taxable income) on all the affected
assets.
Section 23A limits certain allowances available to lessors of affected manufacturing machinery or
plant, aircraft or ships. The limitation is applied as follows (s 23A(2)):
The sum of the deductions allowable to a lessor in a year of assessment under

l s 11(e) (the wear-and-tear allowance)
l s 11(o) (the alienation, loss or destruction allowance)
l s 12B (allowance on movable assets used in farming or production of renewable energy)
l s 12C (20% or 40% allowance (manufacturing assets))
l s 12DA (allowance on rolling stock), and
l s 37B(2)(a) (40/20/20/20% allowance on new and unused environmental treatment and recycling assets)
(referred to as the restricted allowances) on the affected assets let by him.
CANNOT EXCEED
Taxable income (determined before the deduction of the restricted allowances)
derived by him during that year from ‘rental income’ as defined (thus net rental
income).
Interpretation Note No 53 (Issue 2) explains that the limitation is applied on an aggregate basis and
not on an asset-by-asset basis. The sum of the specified capital allowances on all affected assets is
therefore limited to the sum of the net rental income derived from all such assets. This limitation
applies notwithstanding the provisions of the allowances (listed above) that it restricts.
‘Rental income’ is defined for the purposes of s 23A as income derived by way of
rent from the letting of any affected asset in respect of which an allowance has
been granted to the lessor, either in the current or any previous year of assess-
ment, and includes any amount
l recouped under s 8(4) in respect of an affected asset, and
Please note! l derived from the disposal of any affected assets (including capital gains
realised (s 23A(1)).
(The inclusion of the recoupment on the date of sale and of the income from the
disposal ensures that ring-fenced losses are fully permitted against the trade
associated with the leased asset.)
It is important to note that rental income from any movable property and not just
the assets giving rise to the restricted allowances sets the cap on the limitation.
Lease premiums received from the letting of assets will be included in rental
income, whilst a foreign exchange gain will not be included (a foreign exchange
loss will however be allowed – Interpretation Note No 53 (Issue 2)).
Please note!
A qualifying foundation and supporting structure will be treated in the same way
as the machinery, implement, utensil or article mounted on or affixed to it;
therefore, the allowances available on the foundation or structure will also be
restricted by the limitation.)
When a taxpayer is entitled to a deduction that relates to both rental income and other income, he
can apportion the deduction when calculating the taxable income he derived, from rental income
(s 23A(3)). The Commissioner will accept any fair and reasonable apportionment based on the facts
of the case.
Any disallowed deduction can be carried forward to the following year of assessment. It will be
deemed to be part of the allowable deductions for the following year and the s 23A limitation will
again be applied in that year (s 23A(4)). The implication of this limitation is that a rental loss as a
result of capital allowances will be ring-fenced and cannot be used against the taxpayer’s other
income. If the taxpayer has a balance of an assessed loss from the previous year, the taxpayer must
378
first deduct the capital allowances from the net rental income (in terms of s 23A(4)), after which the
balance of the assessed loss must be set off (Interpretation Note No 53 (Issue 2)).
If an affected asset is sold, the taxpayer should make the assumption, when determining the
recoupment on the sale of the asset, that all capital allowances on the affected asset have been
allowed. If this results in an assessed loss, the excess must be carried forward to the following year
(under s 23A(4)) (Interpretation Note No 53 (Issue 2)).
Remember
l The deduction of the allowance is limited to the taxable income derived from rentals (net
rentals), therefore gross income from rentals less applicable expenses.
l Assets let under operating leases and assets used mainly in non-letting trades are
unaffected by the limitation of lessors’ allowances under s 23A.
l The provisions of both ss 23A and 23D (see 13.7.6) can apply to the same leased asset.
Example 13.20. Limitation of lessors’ allowances under s 23A

Clown Ltd lets a machine to Circus (Pty) Ltd for a rental of R240 000 a year. The machine quali-
fies for a s 12C allowance of R180 000 in the year of assessment ending 28 February 2018.
Clown Ltd derives no other rental income, but has spent R90 000 on tax-deductible expenses
relating to the generating of the rental income.
Calculate the taxable income derived by Clown Ltd during the 2018 year of assessment from this
transaction.
SOLUTION
Rental received .............................................................................................................. R240 000
Less: Related tax deductible expenses......................................................................... (90 000)
Taxable income from rentals before restricted allowance ............................................. 150 000
Less: Section 12C allowance (R180 000 but limited to the taxable income from
rentals) ................................................................................................................. (150 000)
Taxable income from lease ............................................................................................ nil
The balance of the allowance (R30 000) is carried forward to the 2019 year of assessment.
13.7.6 Sale and leaseback arrangements (ss 23D and 23G)

A ‘sale and leaseback’ arrangement is any arrangement whereby
l a person (the seller) disposes of an asset (directly or indirectly) to another person (the pur-
chaser), and
l the seller or any connected person in relation to him hires (directly or indirectly) the asset (back)
from the purchaser (s 23G(1)).
Both sections 23D and 23G (discussed below) make reference to transactions referred to as a ‘lease-
back’ or a ‘sale and leaseback.’
Section 23D
Section 23D will apply in the following circumstances:
A depreciable asset (see 13.2.4) has been let or

licensed by the taxpayer to a lessee or licensee.
AND
It was held, within a period of two years preceding the commencement of the lease or licence, by:
l the lessee or licensee, or by a person who is a connected person in relation to the lessee or licensee, or
l a sub-lessee or sub-licensee in relation to the asset (that is, a person to whom the right of use of the
asset has been granted by a lessee or licensee or by any person to whom the right of use of the asset
has previously been granted) or from a person who is a connected person in relation to the sub-lessee
or sub-licensee (hereafter referred to as ‘the other party’ – s 23D(2)).
379
Amount on which allowances or deductions can be claimed is:

LESSER OF
Purchase price (lessor or licenser)
General rule OR
Original cost (for lessee or licensee)
Less: allowances claimed (lessee or licensee)
Plus: Recoupment and taxable capital gain on disposal to lessor or
licenser
Section 23D will restrict the amount of the purchase price used to calculate deductions or allowances
if a taxpayer lets a depreciable asset, or licenses a depreciable asset to a person (or his connected
person) who held the asset within two years before the start of the lease or licence.
Any deduction or allowance claimed by the lessor or licenser on the depreciable asset must be
calculated on the purchase price of the asset for the taxpayer, but not exceeding the sum of:
Cost of the asset to the other party (lessee or licensee)

Less
l all deductions previously allowed to the other party on that asset, and
l all deemed allowances allowed to the other party under ss 11(e), 12B, 12C or any of the following
allowances, namely the allowance on railway lines (s 12D), the allowance for rolling stock (s 12DA),
allowance on airport and port assets (s 12F), the manufacturing building allowance (s 13), the allow-
ance on hotels (s 13bis), the s 13ter allowance (replaced – see 2013 edition of Silke), the commercial
building allowance (s 13quin), or the allowance on environmental assets (s 37B). (The ‘deemed allow-
ance’ rule provides that when an asset was previously brought into use for the first time in the
production of income, but was excluded from income (exempt income), any deduction that could have
been allowed under the specific section in any year is deemed to have been allowed. Therefore, the tax
value of the asset is reduced by the deemed allowance, although no actual deduction will be granted
under this section in respect of the period of use of the asset (which was excluded from income) in the
previous years. The deemed allowance will not be recouped if the asset is consequently disposed of
(s 8(4A)).).
ADD
Any recoupment (under s 8(4)) on the sale of the asset by the other party
ADD
The capital gain that realised in the hands of the seller, multiplied by the applicable capital gains tax
inclusion rate (either 40% or 80%) (note: the inclusion rate will be determined by the person status of the
seller) (s 23D(2A)).
Remember
l The provisions of both ss 23A (see 13.7.5) and 23D can apply to the same leased asset.
l These limitation provisions could be triggered even if the asset was not bought directly from
the lessee or licensee or sub-lessee or sub-licensee (or their connected person) as a result
of the two-year time period for previous ownership.
Example 13.21. Sale and leaseback (s 23D)
Zibi Ltd sold a machine (that qualified for a s 11(e) allowance) to Fimble Ltd for R2 500 000 and
then leased it back from Fimble Ltd on 1 March 2017. The machine would qualify for a 20%
wear-and-tear allowance. Zibi Ltd originally purchased the machine for R2 000 000. Zibi Ltd had
previously claimed allowances of R800 000 on the machine and made a recoupment of
R800 000 on the sale to Fimble Ltd. Zibi Ltd also realised a capital gain of R500 000 on the sale.
Calculate the allowances available to Fimble Ltd from this transaction for the year of assessment
ending on 28 February 2018.
380
SOLUTION
Machine purchased by Fimble Ltd for R2 500 000, but allowance calculated on an
amount that may not exceed the lesser of (s 23D(2A)):
l Purchase price for lessee (Zibi Ltd) R2 000 000 less allowances of R800 000
plus the recoupment of R800 000 and plus R400 000 (the capital gain of
R500 000 × 80%) = R2 400 000, or
l Purchase price for Fimble Ltd of R2 500 000,
Thus allowance: R2 400 000 × 20% ........................................................................... (R480 000)
Section 23G (Tax-exempt bodies)

When will s 23G be applicable?
Section 23G addresses sale and leaseback arrangements in respect of an asset where either the les-
sor or the lessee is a tax-exempt body. For purposes of this section, an ‘asset’ is defined as any
asset, whether movable or immovable, corporeal or incorporeal.
What will the implications be if s 23G is applicable?
Lessee or sub-lessee Î Tax-exempt Lessor or sub-lessor ÎTax-exempt
Tax implications for the lessor (or sub-lessor): Tax implications for the lessee (or sub-lessee):
l Amounts received by or accrued to the lessor l Deductions in relation to the sale and leaseback
(the lease income) will be limited to an amount will be limited to an amount that constitutes
that constitutes ‘interest’ as contemplated in interest as contemplated in s 24J (s 23G(3)).
s 24J (s 23G(2)(a)). (This provision is made subject to the provi-
(This provision does not apply to a person who sions of the allowance for lease premiums
is both a lessor and a lessee in relation to the (s 11(f )).)
same sale and leaseback arrangement during a Note: Take note that no lease premium allowance is
year of assessment, with the result that during available for the lessee (if the lease premium does
such a year there will be no accrual of interest not constitute income in the hands of the lessor
(s 23G(4)).) (s 11(f)(dd)). It is considered that deductions for the
l The lessor will not be entitled to any of the lease premium will in circumstances qualifying for
following capital allowances on the assets that s 23G not be limited to interest calculated under
are the subject of the sale and leaseback s 24J, but will be zero, as no deduction for the
arrangement: lease premium will be available if the lessor is tax-
– s 11(e) (the wear-and-tear allowance) exempt.
– s 11(f) (the allowance for lease premiums)
– ss 11(gA) or 11(gC) (allowances for patents
and similar rights)
– s 12B (allowance for movable assets used in
farming or production of renewable energy)
– s 12C (the 20% or 40% allowance)
– s 12DA (the allowance for rolling stock)
– s 13 (the annual allowance on ‘industrial’
buildings and improvements to these build-
ings), or
– s 13quin (allowance on commercial buildings)
(Section 23G(2)(b).)
For purposes of a sale and leaseback arrangement, the interest (determined

under s 24J) for these purposes is the absolute value of the difference between
all amounts receivable and payable throughout the full term of the arrangement.
Please note!
The manner in which the interest amount is calculated, be it using a fixed rate or
a variable rate of interest, or if it is payable or receivable as a lump sum or in
unequal instalments, will not affect this calculation.
381
Example 13.22. Sale and leaseback: Lessee is tax-exempt (s 23G)
The Zero Municipality sold a machine to Lesu Ltd for R1 500 000 and then leased it back from
the company for an annual rental of R220 000. The machine would usually qualify for a 20%
wear-and-tear allowance. Assume that the equivalent interest under s 24J amounts to R200 000
for the year of assessment in which the arrangement commenced.
Calculate the income of Lesu Ltd from this transaction in that year.
SOLUTION
Income: Rental received (R220 000, but income limited to equivalent interest) ............ R200 000
Note
The company will not be entitled to a wear-and-tear allowance on the machine.
Example 13.23. Sale and leaseback: Lessor is tax-exempt (s 23G)

Lesu Ltd sold a machine to the Zero Municipality for R1 500 000 and then leased it back from the
municipality for an annual rental of R220 000. The machine would usually qualify for a 20% wear-
and-tear allowance. Assume that the equivalent interest under s 24J amounts to R200 000 in the
year of assessment in which the arrangement commenced.
Calculate the deductions to which Lesu Ltd would be entitled from this transaction in that year.
SOLUTION
Rental paid (R220 000, but deductions limited to equivalent interest) ........................ (R200 000)
13.8 Intellectual property and research and development

The following table summarises the deductions available for intellectual property and research and
development:
Qualifying expenses: Expenditure Expenditure Expenditure
incurred on or after incurred on or after incurred on or after
(Legislation applicable to 2 November 2006, 1 October 2012 1 January 2014
expenditure incurred but before but before but before
before 2 November 2006 1 October 2012 1 January 2014 1 October 2022
has been repealed – see (see 2013 edition of (see 2014 edition of (see 13.8.1)
2010 edition of Silke) Silke) Silke)
Expenses to acquire Section 11(gC) Section 11(gC) Section 11(gC)
intellectual property (note 1) (note 1) (note 1)
Intellectual property Section 11D Section 11D, 12C and Section 11D, 12C and
developed, created or (note 1) 13(1) 13(1)
devised (producing) (see 2013 edition of (note 1) (note 1)
Silke) (see 2014 edition of (see 13.8.1)
Silke)
Discovery of information Section 11D Section 11D, 12C and Section 11D, 12C and
(note 1) 13(1) 13(1)
(note 1) (note 1)
Registration or renewal of Section 11(gB) Section 11(gB) Section 11(gB)
registration
Note 1: No deduction is allowed under this section if it is in respect of or relates to a trade mark.
Section 23I, which is effective for any expenditure incurred on or after 1 January 2009, was intro-
duced to prevent ‘tax leakages’ stemming from tax planning schemes involving intellectual property.
This anti-avoidance measure will be discussed as part of 13.8.1.
382
13.8.1 Legislation for expenditure incurred on or after 1 January 2014 but before
1 October 2022 (ss 11(gB), 11(gC), 11D, 12C, 13(1) and 23I)
Sections relating to intellectual property and research and development for this period can be sum-
marised as follows:
Expenses to acquire intellectual property S 11(gC)
Intellectual property developed, created or devised (producing)

Ss 11D, 12C
Discovery of scientific or technological information and 13(1)
Registration or renewal of registration S 11(gB)
A discussion of each of these sections follows below:

Section 11(gB): Registration or renewal of registration of intellectual property effective for expenditure
incurred on or after 2 November 2006
The section will be If a taxpayer actually incurred expenditure during the year of assessment in
applicable: obtaining the
(WHEN is it applicable?) l grant, restoration or extension of the term of any patent under the Patents
Act 57 of 1978, or
l registration or extension of registration of a design under the Designs Act
195 of 1993, or
l registration or renewal of registration of a trade mark under the Trade
Marks Act 194 of 1993
(or under similar laws of any other country)
if that intellectual property is used by the taxpayer in the production of his
income.
(The section specifically excludes expenditure that has qualified either in
whole or in part for deduction or allowance under any of the other provisions
of s 11 (to prevent a double deduction).)
General rule Deduction = Expenditure to extent or renew registration × 100%
The implications if the A deduction for the full expenditure in obtaining the extension or renewal of
section is applicable: registration will be allowed.
(WHAT can be claimed?):
Remember
The only expenditure allowed for a trade mark on or after 2 November 2006 is registration and
renewal of registration expenses (under s 11(gB)).
Section 11(gC): Acquisition of intellectual property
The section will be If a taxpayer actually incurred expenditure for years of assessment com-
applicable: mencing from 1 January 2004, to acquire (but not to devise, develop or
(WHEN is it applicable?) create)
l an invention or patent
l a design
l a copyright
l other similar property (but not a trade mark), or
l knowledge essential to the use of any of these assets or the right to have
such knowledge provided
that is used in the production of the taxpayer’s income.
continued
383
Allowance ( R5 000) = Cost × 100%

and
General rule
Allowance (> R5 000) = Cost × 5% (patent, invention or copyright) or 10%
(design) per year
The implications if the The taxpayer can deduct the following allowance from income, commencing
section is applicable: during the year of assessment that such asset is brought into use for the first
(WHAT can be claimed?) time by the taxpayer:
l If the expenditure incurred is R5 000 or less
Î deduct the full amount in the year of assessment brought into use
l If the expenditure is more than R5 000, the annual allowance on cost
incurred will be limited to
Î 5% per year of assessment for a patent, invention or copyright (not
trade marks)
OR
Î 10% per year of assessment for a design.
(No apportionment if for less than a full year of assessment)
(Proviso (aa).)
Example 13.24. Patent rights acquired

Mickey Ltd acquired a patent on 1 April 2018 at a cost of R550 000 and immediately brought it
into use in its income-producing operations. The probable duration of use of the patent was esti-
mated to be ten years. Calculate the allowance that Mickey Ltd may deducted under s 11(gC) for
the year of assessment ending on 31 December 2018.
SOLUTION
Cost of acquisition of the patent .................................................................................. R550 000
Deduction under s 11(gC) (5% of R550 000) .............................................................. (R27 500)
Even though the patent was held for less than a full year of assessment, the full 5% can be
claimed.
Sections 11D, 12C and 13(1): Deductions in respect of scientific or technological research and
development undertaken on or after 1 January 2014, but before 1 October 2022
The section will be If a taxpayer, that is a company, actually incurred expenditure

applicable: l on or after 1 January 2014, but before 1 October 2022
(WHEN is it applicable?) l directly and exclusively for the carrying on of research and development
(as defined in s 11D(1)) in South Africa (see note 1 and 3)
l if (test)
– it is incurred by the taxpayer in the production of income,
– it is incurred in the carrying on of any trade
– the research and development is approved by the Minister of Science
and Technology (under s 11D(9) – see note 2), and
– that expenditure is incurred on or after the date that the application for
approval of that research and development is received by the Depart-
ment of Science and Technology (s 11D(2)(a)).
No deduction will be allowed for expenditure incurred in respect of
– immovable property, machinery, plant, implements, utensils or articles
(deduction for allowances on these assets will however be allowed
under s 12C and s 13(1)) excluding any prototype or pilot plant
created exclusively for the purpose of the process of research and
development, and that asset is not intended to be used or is not used
for production purposes after the completion of that research and
continued
384
development (a deduction will be allowed for these assets under

s 11D(2)), and
– financing, administration, compliance and similar costs (s 11D(2)(b)).
Research and development is defined (in s 11D(1)) as
l systematic investigative or systematic experimental activities of which the
results are uncertain for the purposes of
– the discovery (being something that is already in existence and is
brought to the discoverer’s awareness) of non-obvious (therefore
inventive) scientific or technological knowledge (s 11D(1)(a)),
– the creation or development of any
• invention (as defined in s 2 of the Patents Act, 1978 (57 of 1978))
(the invention should be new, involve an inventive step and be
capable of being used or applied in trade or industry or agriculture)
• functional design (as defined in s 1 of the Designs Act, 1993 (Act
195 of 1993)) that is capable of qualifying for registration under s 14
of that Act and that is innovative in respect of the functional char-
acteristics or its intended uses (thus the design should be functional
to qualify and not only aesthetic)
• computer program (as defined in s 1 of the Copyright Act, 1978 (98
of 1978)) which is of an innovative nature (a computer program for
sale for use under license should qualify if not for internal business
processes), or
• research knowledge (defined in the Oxford English Dictionary as
‘facts, information, and skills acquired by a person through experi-
ence or education: the theoretical or practical understanding of a
subject; what is known in a particular field or in total; facts and infor-
mation; or awareness or familiarity gained by experience of a fact or
situation’) essential to the use of an invention, functional design or
computer program but not the creating or development of operating
manuals or instruction manuals or documents of a similar nature
intended for use after the completion of the research and develop-
ment (s 11D(1)(b)),
– making a significant and innovative improvement to any of the above for
purposes of
• new or improved function
• improvement of performance
• improvement of reliability, or
• improvement of quality
of that invention, functional design, computer program or
knowledge (s 11D(1)(c)),
– the creation or development of a multisource pharmaceutical product,
conforming to the requirements prescribed by regulations made by the
Minister after consultation with the Minister for Science and Technology
(s 11D(1)(d)), or
– conducting a clinical trial, conforming to such requirements as must be
prescribed by regulations made by the Minister after consultation with
the Minister for Science and Technology (s 11D(1)(e)).
l but section 11D specifically excludes expenditure for
– routine testing, analysis, collection of information or quality control in
the normal course of business (thus unrelated to a significant research
and development project)
– development to enhance internal business processes (for example
typical computer software), unless the development in respect of the
internal business processes is conducted for possible sale or license
to external customers who are not connected persons to the company
– market research, market testing or sales promotion
– social science research, including the arts and humanities (for
example languages, history, philosophy, religion, visual and perform-
ing arts and economics)
continued
385
– oil and gas or mineral exploration or prospecting, except research

and development carried on to develop technology used for that
exploration or prospecting
– create or develop financial instruments or financial products (for
example development of financial derivatives)
– trade mark or goodwill creation or enhancement, and
– any expenditure incurred or allowances granted for the acquisition of
pre-existing inventions, designs or computer programs already
deductible (under s 11(gB) or 11(gC))
(proviso to the definition of research and development in s 11D(1)).
Deduction (operational expenses) = Qualifying research and development

expenditure × 150%
and
Allowance (capital expenditure) = Cost × 150%
except
General rule
Allowance (new and unused research and development plant or
machinery) = Cost × 50/30/20% per year (s 12C)
and
Allowance (buildings used for research and development) = Cost × 5%
per year (s 13(1))
The implications if the The following deductions will be available from income derived from the
section is applicable: taxpayer’s trade:
(WHAT can be claimed?) l Operational (non-capital) expenditure
– 150% deduction
Î Research and development expenditure incurred, may be deducted in
the following two situations:
Situation 1 – Taxpayers perform approved research and development:
A taxpayer may qualify for the deduction of 150% of the research and
development expenditure incurred directly and solely for the carrying on
of research and development (s 11D(2)).
Situation 2 – Funded research:
A taxpayer that funded the expenditure of another person carrying on
research and development on behalf of the taxpayer, may deduct an
amount of 150% of such expenditure incurred, if
• the research and development is approved by the Minister of Science
and Technology (under s 11D(9) – see note 2)
• that expenditure is incurred in respect of research and development
carried on by that taxpayer (see note 3),
• to the extent that the other person carrying on the research and
development is:
* an institution, board or body that is exempt from normal tax under
s 10(1)(cA) (see chapter 5), or
* the Council for Scientific and Industrial Research, or
* a company forming part of the same group of companies as
defined in s 41 (see chapter 20), if the company that carries on the
research and development does not claim a deduction under s
11D(2) (situation 1 discussed above) (see note 4), and
• that expenditure is incurred on or after the date of receipt of the
application by the Department of Science and Technology for
approval of that research and development (s 11D(4)).
continued
386
Note: If any funding from government or semi-governmental agencies

is received by or accrues to a taxpayer, the funding received must be
deducted from the actual research and development expenditure
incurred, before the 150% deduction is calculated (s 11D(7)). The
purpose of this is to enhance private funding through the 150%
deduction (Explanatory Memorandum on the Taxation Laws Amend-
ment Bill, 2013).
The implications if the l Capital expenditure

section is applicable: Capital expenditure, excluding immovable property, machinery, plant,
(WHAT can be claimed?) implements, utensils or articles (therefore allowance assets), can also
(continued) qualify for a 150% deduction (s 11D(2)(b)(i)) (or possibly the deduction
under s 11D(4) for funded research). An example of a qualifying expense
is expenditure for any prototype or pilot plant created exclusively for
research and that asset will not be used after the research has been com-
pleted.
Capital expenditure relating to allowance assets will however qualify for
the following deductions:
– a deduction will be allowed on the cost of new and unused research
and development machinery or plant, at a write-off of 50:30:20 (no
apportionment for part of a year) under s 12C (see 13.3.3), and
– a deduction will be allowed on the cost of a building owned by the
taxpayer and used for research and development, at a write-off of 5%
over a 20-year period (no apportionment for part of a year) under
s 13(1) (see 13.4.1).
Take note that pre-trade research expenditure (both capital and operational)
will qualify for possible deduction under s 11A (refer chapter 6).
Note 1: Foreign registered intellectual property can still fall under s 11D, since no requirement exists
that the intellectual property must be registered in South Africa.
Note 2: Research and development carried on or funded by taxpayers claiming the 150% deduction
(s 11D(2) or (4)) must be approved by the Minister of Science and Technology, taking into
account
l whether the taxpayer has proved to the committee that the research and development in
respect of which approval is being sought complies with the criteria as set out in the
definition of ‘research and development’ (in s 11D(1) – see above), and
l such other criteria as the Minister of Finance, in consultation with the Minister of Science
and Technology may prescribe by regulation (s 11D(9)).
If any research and development is approved by the Minster and
l any material fact changes that would have resulted in that project not being approved
initially,
l the taxpayer carrying on that research and development fails to submit a report to the
committee (This is an annual report, submitted within 12 months after the end of the year
of assessment from the year after which approval was granted. It should be in the form
and manner prescribed by the Minister of Science and Technology and should contain
the progress of the research and development and the extent to which that research
requires specialised skills (s 11D(13)), or
l the taxpayer carrying on that research and development is guilty of fraud, or misrepre-
sentation or non-disclosure of material facts which would have resulted in the approval
(under s 11D(9)) not being granted
the Minister of Science and Technology may, after taking into account the recommendations
of the committee, withdraw the approval granted in respect of that project effective from a
specified date (s 11D(10)).
The Minister of Science and Technology must provide the decision to grant or deny (under
s 11D(9)) or to withdraw (under s 11D(10)) approval, in writing and also inform the Commis-
sioner of these decisions. If an approval was granted, the Commissioner should be informed
of the amount on which the 150% deduction should be calculated and if an approval was
withdrawn the date on which the withdrawal takes effect (s 11D(16)). If approval was
387
withdrawn, the Commissioner may raise an additional assessment for any year of assess-
ment where a deduction in respect of research and development was allowed (s 11D(19)).
A committee must be appointed to approve the research and development (see s 11D(9))
and must consist of:
l three employees of the Department of Science and Technology appointed by the
Minister of Science and Technology,
l one employee of National Treasury, appointed by the Minister of Finance, and
l three persons from SARS, appointed by the Minister of Finance.
If any person appointed cannot perform any function as a member of the committee, the two
Ministers may appoint an alternative person (from the same institution) to the committee to
perform the functions (s 11D(11)).
This committee must perform its functions impartially and without fear, favour or prejudice. It
may appoint its own chairperson and determine the procedures for meetings. It should
evaluate any application and make recommendations to the Minister of Science and Tech-
nology for purposes of the approval of research and development and investigate research
and development approved, if necessary. Further, it should monitor all research and devel-
opment approved to determine whether the objectives of s 11D are achieved and to advise
the Minister of Finance and the Minister of Science and Technology on any future proposed
amendment or adjustment to s 11D. The committee may obtain the assistance of advisors.
Lastly, the committee may require any taxpayer applying for approval to furnish any
information or documents necessary to perform its functions (s 11D(12)).
The Minister of Science and Technology must annually submit a report to Parliament
advising them of the direct benefits of the research and development and the aggregate
expenditure in respect of such activities (s 11D(17)). Notwithstanding the preservation of
secrecy under Chapter 6 of the Tax Administration Act (see chapter 33), the Commissioner
may disclose to the Minister of Science and Technology information required for purposes of
submitting the above report to parliament and if that information is material in respect of the
granting or the withdrawal of the approval (s 11D(14)). The employees of the Department of
Science and Technology, members of the committee and any advisors appointed must
preserve secrecy with regards to any information obtained whilst performing their functions
(s 11D(18)).
Due to the delay in the processing of approvals, a taxpayer may apply to the Commissioner
to allow the deductions under this section (although final approval has not yet been
granted), if:
l that expenditure is incurred on or after the date of receipt of the application by the
Department of Science and Technology for approval
l that expenditure was only disallowed as a deduction due to the approval not yet being
granted, and
l the research and development is approved by the Minister of Science and Technology
in a following year.
The Commissioner may reopen a previous assessment, where expenditure would have been
allowed if the approval had been granted. In these circumstances the authority to revise an
assessment will not prescribe within three years after assessment (s 11D(20)).
Note 3: For purposes of the 150% deduction, it will be deemed that research and development are
carried on if that person may determine or alter the methodology of the research. Certain
additional categories of development designated by the Minister, by notice in the Gazette,
will also be deemed to constitute the carrying on of research and development (s 11D(6)).
Note 4: If a company funds research on his behalf by another group company, it will only qualify for
a 150% deduction on the actual expenditure incurred by the funded company. No deduc-
tion will be allowed on the profit charged between group companies (s 11D(5)).
388
Example 13.25. Section 11D allowances and recoupments

During May 2017, the management of Baby Boom Ltd decided to develop a new type of baby
bottle. A patent would ultimately be registered in terms of the Patents Act. The research and
development has been approved by the Minister of Science and Technology under s 11D(9).
The following expenses relating to this research were incurred during the 2018 year of assess-
ment ending April:
l A new laboratory at a cost of R1 500 000 was brought into use on 15 May 2017 for the pur-
poses of this research.
l A new machine at a cost of R850 000 was brought into use on 15 May 2017 for the purposes
of this research.
l Computers purchased for R75 000 and used exclusively for the research, were brought into
use on 1 June 2017. Binding General Ruling (Income Tax) No 7 and Interpretation Note
No 47 (which is in line with the public notice issued by the Commissioner) allows for a three-
year write-off period on these computers.
l Research consumables for this project were purchased on 25 May 2017 for an amount of
R250 000.
l Salaries of R1 500 000 were paid to research assistants. A taxable government grant of
R500 000 was received on 15 May 2017 to help fund this research project. The full amount of
the grant was used to pay these salaries.
Calculate the allowances available to Baby Boom Ltd for the year of assessment ending on 30
April 2018 (ignore VAT).
SOLUTION
Year ended 30 April 2018
Laboratory:
Section 13(1) allowance (5% of R1 500 000)) ........................................................... (R75 000)
Machine:
Section 12C allowance (50% of R850 000)) ............................................................. (R425 000)
Computer:
Section 11(e) allowance (R75 000 / 3 × 11/12) ......................................................... (R22 917)
Research consumables:
Section 11D(2) 150% deduction applicable (R250 000 × 150%) ............................. (R375 000)
Government grant:
Taxable (given) ......................................................................................................... R500 000
Salaries:
Section 11D(2) 150% deduction applicable ((R1 500 000 – R500 000) × 150%)..... (R1 500 000)
Section 23I: Prohibition of deductions in respect of certain intellectual property

This anti-avoidance section was introduced to prevent that intellectual property, subsidised by
government (via tax allowances), is used as a tool to erode the South African tax base. The goal of
s 23I is therefore to prevent avoidance of tax, without undermining foreign investment in South African
research and development.
The section will be applicable: If a taxpayer actually incurred expenditure

(WHEN is it applicable?) l on or after 1 January 2009
l for the use or right of use or permission to use any tainted intellec-
tual property (see note 1), or
l if the incurral, or the amount of the expenditure incurred is deter-
mined directly or indirectly with reference to expenditure incurred for
the use or right of use or permission to use any tainted intellectual
property (see note 1)
AND
l the amount of expenditure is not income received by or accrued to
any other person,
OR
l is not included in the income of any resident under the provisions of
s 9D (a percentage of net income – see chapter 21) (s 23I(2)).
continued
389
If a controlled foreign company’s (CFC) total taxes paid in any foreign

country (in respect of the tax year in the foreign country) are in aggre-
gate at least 75% of the local taxes that would have been payable on
any taxable income had the CFC been a resident for that foreign tax year
(the net income of the CFC for inclusion will be deemed to be Rnil under
s 9D (see chapter 21) due to the application of the high-tax exemption),
the provisions of this section will not be applicable (s 23I(4)). The aggre-
gate foreign tax must be calculated (for years of assessment com-
mencing from 1 January 2018)
l taking into account any applicable double tax agreement and any
credit, rebate or other right of recovery of tax of any foreign country,
and
l disregarding any loss of a year, other than the foreign tax year, or
from a company other than the CFC.
No deduction for the use or right of use or permission to use tainted

intellectual property,
General rule or
for any expenditure incurred that was calculated on the expenditure
paid for the above to the extent that it is not income in the hands of the
recipient.
The implications if the section No deduction shall be allowed for

is applicable: l the use or the right of use of or permission to use any tainted
(WHAT can be claimed?) intellectual property (see note 2), or
l for any expenditure incurred that is calculated on the expenditure
paid for the use or right of use of or permission to use any tainted
intellectual property (see note 3),
to the extent that the amount is not income in the hands of the other
party or is not included in the income of any resident under the provi-
sions relating to Controlled Foreign Companies (s 9D – see chapter 21)
(s 23I(2)).
l Expenditure incurred to acquire intellectual property, allowed as a
deduction under s 11(gC) (see 13.8.1)
AND
l expenditure allowed as a deduction in respect of trading stock
(s 22 – see chapter 14)
will be excluded from the provisions of s 23I and will be deductible
(unless s 31 is applicable – see chapter 21).
Note 1: Tainted intellectual property is defined as

l intellectual property, which includes
– a patent, design, trade mark or copyright, protected by South African law
– any of the above protected by foreign law
– property or rights similar to the above, and
– knowledge connected to the use of any of the intellectual property mentioned (defini-
tion of ‘intellectual property’ in s 23I(1))
l which was the property of the end user or of a taxable person that is or was a connected
person in relation to the end user, or
l if the intellectual property is the property of a taxable person, or
l if a material part of the intellectual property was used by a taxable person in carrying on
a business while that property was the property of a taxable person and the end user of
that property acquired that business or a material part thereof as a going concern.
The following is a practical example of this provision: South African company A sells
intellectual property to Foreign Company and the rest of the business (in which the
intellectual property was used) to South African company B as a going concern.
390
Foreign Company subsequently licenses the intellectual property (which it acquired from
South African company A) to South African company B, for which South African com-
pany B pays royalties to Foreign Company.
Section 23I will classify the intellectual property as tainted. South African company B will
be denied a deduction of the royalties paid (note that any person acquiring the business
from South African company B, as a going concern, will also fall into the ambit of s 23I
(example adapted from the Explanatory Memorandum to the Revenue Laws Amendment
Act, 2008)), or
l if the intellectual property, or any material part thereof, was exclusively or mainly
discovered, devised, developed, created or produced by
– the end user of that property, or
– by a taxable person that was a connected person to the end user, if that end user and
that connected person holds at least 20% of the participation rights, as defined in
s 9D, in a person that received an amount or to whom an amount accrues:
– for the grant of use, right of use or permission to use that property, or
– where the receipt, accrual or amount is determined directly or indirectly with refer-
ence to expenditure incurred for the use, or right of use of or permission to use
that property (s 23I(1)).
Taxable person for purposes of s 23I, means any person other than:
l a non-resident
l the government of the Republic in the national, provincial or local sphere (exempt enti-
ties under s 10(1)(a))
l specified research and related entities (exempt under s 10(1)(cA))
l approved public benefit organisations (defined in s 30)
l approved recreational clubs (defined in s 30A)
l closure rehabilitation company or trust (under s 37A)
l any benefit, pension, pension preservation, provident, provident preservation or retire-
ment annuity fund, or a beneficiary fund defined in s 1 of the Pension Funds Act, 1956
(Act 24 of 1956), exempt under s 10(1)(d)(i) and (ii), or
l any exempt entity listed in s 10(1)(t) (for example the CSIR and any water service pro-
vider),
An end user is a taxable person or a person with a permanent establishment in South Africa,
who uses intellectual property or any corresponding invention during a year of assessment
to derive income from it (but not by the receipt of royalties from the grant of use of intellec-
tual property) (s 23I(1)).
Connected person is a ‘connected person’ as defined in s 1 (see 13.2.1). The only
difference is that a company that is a holder of shares will be treated as connected to the
company if it holds 20% or more of the shares. This will be the situation even if another holder
of shares holds the majority interest (s 23I(1), read with s 31(4)).
Note 2: A licensee will be denied deductions for royalty expenditure incurred for the use of tainted
intellectual property to the extent that the royalty receipts are not income of the licensor (if,
for example, the licensor has tax exemption or treats the income as not from a South African
source or deemed source) (s 23I(2)(a)).
If the payment of royalties for the use of tainted intellectual property triggers a withholding
tax (s 49A–H – see chapter 21), the licensee can deduct an amount equal to half of the
royalty expenditure. This deduction will be allowed if, as a result of any double tax
agreement, the tax payable on the royalty is at a rate of 15% (s 23I(3)).
Note 3: Section 23I(2)(b) prevents taxpayers from eluding this provision by introducing a third party
that converts royalty income into a financial instrument (for example a promissory note).
These payments are then distributed to entities with a lower effective tax rate.
391
Example 13.26. Section 23I prohibition of expenditure relating to intellectual property

During 2016, Intelligent Ltd (with a December year-end) developed a patent and deducted all
the related expenditure under s 11D. On 30 September 2017, the patent was assigned to Out-
side (a foreign company (not a CFC as defined in s 9D) in which Intelligent Ltd holds a 30%
share). Outside filed a patent application in South Africa and then licensed the South African
patent to Intelligent Ltd from 1 January 2018, for an annual licence fee of R900 000.
Calculate the tax deductibility of the royalty payment made by Intelligent Ltd for the 2018 year of
assessment, if s 49B withholding tax of R135 000 was withheld from the payment made to Outside.
SOLUTION
Year ended 31 December 2018
Section 23I prohibits the deduction of the royalty payment. It is paid in respect of
tainted intellectual property (it was originally developed by Intelligent Ltd and is
now licensed back from a CFC in which Intelligent Ltd holds more than 20% of
the participation rights (par (d) of the definition of ‘tainted intellectual property’ in
s 23I(1)) (s 23I(2)). But since withholding tax was withheld from the royalty
payment made to Outside, Intelligent Ltd will be allowed to deduct an amount of
R900 000 × ½ (s 23I(3)) ............................................................................................ (R450 000)
13.9 Allowances on other types of expenses
13.9.1 Government business licences (s 11(gD))
When will s 11(gD) be applicable?

Businesses often require a government licence in order to conduct certain specific business activities
(for example telecommunications). The licence fee is of a capital nature and a special allowance is
necessary in order to enable taxpayers to deduct these expenses. Section 11(gD) allows for a
deduction
l of any expenditure incurred to acquire a licence
l from the government of the Republic in the national, provincial or local sphere or by a regulatory
entity governed by the Public Finance Management Act 1 of 1999 (PFMA entities)
l if the licence is a prerequisite for the carrying on of that trade.
Trade for this section includes:
l the provision of telecommunication services
l the exploration, production or distribution of petroleum, or
l the provision of gambling facilities.
What will the implications be if s 11(gD) is applicable?
General rule Allowance = Cost / lesser of number of years that license is valid OR
30 years
The taxpayer can deduct any expenditure incurred to acquire the licence over the lesser of
l the remaining number of years that the taxpayer is entitled to the licence, or
l 30 years.
Example 13.27. Licence acquired

Chobe Ltd is, in terms of an agreement signed on 1 March 2018, contractually required to pay
R100 000 000 to the national government for the acquisition of a licence to operate a new cellular
network. The licence covers a period of 10 years. R50 000 000 is payable on 1 March 2018 and
R50 000 000 on 1 March 2019.
Calculate the allowances that may be deducted by Chobe Ltd under s 11(gD) for years of
assessment ending on the last day of February.
392
SOLUTION
Cost of acquisition of licence .................................................................................... R100 000 000
Deduction under s 11(gD):
From 2019–2028: R100 000 000/10 years) ............................................................... (R10 000 000)
Note
The full amount of R100 000 000 was incurred on 1 March 2018 and thus the full amount will
qualify for a deduction, although R50 000 000 of this amount was only paid on 1 March 2019.
13.9.2 Industrial policy project allowance (s 12I)

When will s 12I be applicable?
Section 12I provides an incentive to assist the transformation of current production processes and
methods to attain cost reductions and greater efficiency in the use of resources. It supports the
investment in manufacturing assets and the provision of training to personnel to improve labour
productivity. This section is available for the manufacturing sector in respect of new projects (green-
field projects), but also expansions or upgrades of existing projects (brownfield projects).
For a project to qualify it must be solely or mainly for the manufacturing of products, articles or other
things as classified under ‘Section C: Manufacturing’ in version 7 of the Standard Industrial
Classification Code issued by Statistics South Africa. (Projects for the manufacturing of wine, malt
liquors, malt and tobacco products, weapons and ammunition and certain bio-fuels, as well as the
distilling, rectifying and blending of spirits are specifically disqualified.) (Definition of ‘industrial
project’ in s 12I(1)). Every project must satisfy, amongst other requirements, a minimum asset
holding. The minimum asset holding for
l greenfield projects should exceed R50 million (based on the cost of new and unused manufac-
turing assets), and
l in the case of brownfield projects, the cost of existing manufacturing assets should exceed the
higher of: 25% of the cost of pre-existing assets (limited to R50 million) or R30 million (s 12I(7)).
According to the legislator, these thresholds ensure that projects receiving this incentive will bring
substantial benefit to the economy. Note, however, that the total amount of the allowable deductions
in terms of this incentive is R20 billion and therefore no approval will be granted if the potential addi-
tional investment and training allowances in respect of all industrial projects, will in aggregate exceed
R20 billion (s 12I(9)).
Projects will have either
l a preferred (if the project achieves at least eight out of the 10 potential points in terms of the
criteria, which points are allocated based on the point system as set out in ‘Regulations made
under section 12I of the Income Tax Act, 1962 (Act No 58 of 1962)’ issued on 23 July 2010 in the
Government Gazette No 33385), or
l a qualifying status, based on the meeting of qualifying criteria (see s 12I(8) and 12I(10)).
Applications for this additional incentive allowance will only be considered if it was received no later
than 31 March 2020 (s 12I(7)(d)).
The incentive will be available for
l manufacturing assets (capital incentive), which include:
– manufacturing buildings, plant and machinery (including any improvements)
– acquired and contracted for on or after the date of approval
– brought into use for the first time by the applicable company within four years from the date of
project approval
– which is used in South Africa for the carrying on of an industrial project, and
– qualify for the ss 12C(1)(a) (manufacturing plant and machinery), 13 (buildings) or 13quat
(immovable property in urban development zones) allowances (s 12I(1) and (2))
l training provided by the employer to employees (training allowance), including
– wholly external training (all costs charged by the external party qualify as cost of training)
– internal training (cost of employees employed exclusively to provide training and the cost of
training materials qualify as cost of training), and
– training provided by connected persons (cost of employees employed exclusively to provide
training and the cost of training materials qualify as cost of training) (definition of ‘cost of
training’ in s 12I(1)).
393
What will the implications be if s 12I is applicable?
Additional industrial allowance:

Preferred projects = Cost × 55% (100% if in special economic zone)
General rule Qualifying projects = Cost × 35% (75% if in special economic zone)
Additional training allowance:
Allowance = Actual training expense (limited to R36 000 per employee)
Two types of allowances (in addition to any other allowances granted under the Income Tax Act) will
be available on qualifying industrial projects, namely: an additional investment allowance; and an
additional training allowance.
The additional investment allowance will be granted, determined at one of the following rates:
l Where the industrial policy project is approved with preferred status:
– 55% of the cost of the new and unused manufacturing asset, or
– 100% of the cost of any new and unused manufacturing asset located within a special eco-
nomic zone
in the year that the asset is brought into use, limited to a total deduction of
– R900 million per project for greenfield projects, and
– R550 million per project for brownfield projects
over the life span of the project.
l Where the industrial policy project is approved with qualifying status:
– 35% of the cost of the new and unused manufacturing asset, or
– 75% of the cost of any new and unused manufacturing asset located within a special economic
zone
in the year that the asset is brought into use, limited to a total deduction of
– R550 million per project for greenfield projects, and
– R350 million per project for brownfield projects
over the life span of the project (s 12I(2) and 12I(3)).
The cost of a manufacturing asset for s 12I is

the lesser of
Please note! l the direct cost under a cash transaction concluded at arm’s length on the
date on which the transaction for the acquisition was concluded (market
value),
including
the direct cost of acquisition (s 12I(24)).
nership
exempt entities
(s 12I(1A)).
If a taxpayer completes an improvement on any land not owned by him and the improvement con-
sists of machinery or plant that qualifies for a s 12C allowance (manufacturing assets – see 13.3.3),
the taxpayer shall be deemed to be the owner of the improvement (s 12I(1B)).
394
The additional training allowance will allow a deduction of training costs which may not exceed
R36 000 per employee and must be incurred from the date of approval until the end of the com-
pliance period, limited to
l R30 million if the industrial policy project is approved with preferred status, or
l R20 million if the industrial policy project is approved with qualifying status (s 12I(4) and 12I(5)).
The compliance period begins at the beginning of the year of assessment following the year of
assessment in which the assets are first brought into use and ends at the end of the year of
assessment three years after the year of assessment in which the assets were first brought into use
(definition of compliance period in s 12I(1)). The compliance period will therefore run for a full three-
year period.
If, at the end of the compliance period, a project approved with preferred status,
did not comply with all the requirements, the Minister of Trade and Industry may
substitute that approval, effective from a specified date, with an approval of the
industrial project with a qualifying status instead (s 12I(12A)). As a result of the
Please note! change in the approval status, the Commissioner may (in the year when the
status changes) make an adjustment for the excessive allowances claimed
under s 12I and raise an additional assessment, if applicable (ss 12I(13)(d) and
12I(14)(b)).
Remember
If project assets are disposed of, there is the possibility of a recoupment under s 8(4)(n)
(see 13.10.5).
Interpretation Note No 86 (issued on 8 December 2015) contains detailed

Please note! explanations and examples that explain the additional investment and training
allowance for industrial policy projects.
13.9.3 Energy efficiency savings deduction (s 12L)

When will s 12L be applicable?
This section was introduced to give taxpayers a tax benefit or notional allowance for energy efficiency
savings. This notional allowance seeks to stimulate investment in the conversion by taxpayers of old
technologies to new ones (often at a great cost) to address the challenges of climate change and
improved energy usage.
Section 12L allows a taxpayer to claim a deduction for all the forms of energy efficiency savings
resulting from activities in the production of income. The taxpayer needs to be in possession of a
certificate before being able to claim a deduction under s 12L during any year of assessment.
The certificate must be issued by an institution, board or body prescribed by the

regulations, reflecting the following:
l a pre-determined energy use baseline (at the beginning of the year of
assessment)
l a reporting period energy use (at the end of the year of assessment)
l the annual energy efficiency savings expressed in kilowatt hours or kilowatt
hours equivalent for the year of assessment, and
l any other information that may be required by the regulations (s 12L(3)).
The Minister of Finance, in consultation with the Minister of Energy and the Min-
Please note!
ister of Trade and Industry, must make regulations prescribing:
l the institution, board or body that may issue the certificate indicating the
energy efficiency savings,
l the powers and responsibilities of the institution, board or body,
l the information that the certificate must contain,
l since a deduction may not be claimed if the person claiming the deduction
receives any concurrent benefit in respect of energy efficiency savings
(s 12L(4)), clarity regarding what is meant under concurrent benefits, and
l any limitation of energy sources in respect of which the deduction may be
claimed (s 12L(5)).
395
What will the implications be if s 12L is applicable?
General rule Deduction = 95c × number of kilowatt hours of energy efficiency savings
A deduction of the energy efficiency savings by a person calculated as

l 95 cents (per kilowatt hour or kilowatt hour equivalent) × the energy efficiency savings expressed
in kilowatt hours or kilowatt hours equivalent
l will be allowed as a deduction from the taxable income of any person
l in any year of assessment ending before 1 January 2020
l from the carrying on of any trade (s 12L(1) and (2)).
Interpretation Note No 95 (issued on 24 February 2017) provides guidance and

Please note! examples that explain the energy efficiency savings deduction (under s 12L
read with the regulations).
13.9.4 Additional deduction for roads and fences used in respect of the production of
renewable energy (s 12U)
When will s 12U be applicable?
This section was introduced to assist taxpayers with an additional deduction for the cost actually
incurred regarding some of the supporting capital infrastructure (roads and fences) in large-scale
renewable energy projects. Section 12U (effective for years of assessment commencing from 1 April
2016) will be applicable if
l a person incurred any amount
l for purposes of his trade of the generation of electricity which exceeds 5 megawatts from
– wind power,
– solar (sunlight) energy,
– hydropower (gravitational water forces) to produce electricity of not more than 30 megawatts,
or
– biomass comprising organic wastes, landfill gas or plant material
l in respect of:
– the construction of, or improvements (other than repairs) to
• any road, or
• the erecting of any fence, including a foundation or supporting structure designed for such
a fence (s 12U(1)).
The foundation or supporting structure for a fence should be an integral part of

Please note! the foundation or fence for its useful life to be regarded the same as that of the
fence it supports (s 12U(2)).
What will the implications be if s 12U is applicable?
General rule Deduction = Cost of qualifying roads or fences × 100%
The full amount (although capital in nature) actually incurred during the year regarding the construc-
tion or improvement of a qualifying road or fence (or supporting structure of such fence), in respect of
a large-scale renewable energy project, will be allowed as a deduction (s 12U(1)).
If a qualifying expense (not previously deducted) was incurred before the commencement (or in
preparation) of a project, it will be allowed as a deduction, as soon as the project commences
(s 12U(3)).
396
13.9.5 Environmental expenditure (s 37B)

When will s 37B be applicable?
Section 37B seeks to provide deductions for general capital environmental expenditure and post-
trade environmental expenses (for example decommissioning and restoration). These expenses are a
legal precondition for operations in many instances.
Section 37B will be applicable if a taxpayer uses either
l environmental treatment and recycling assets (air, water and solid waste treatment and recycling
plant or pollution control and monitoring equipment) and any improvements to the plant and
equipment, or
l environmental waste disposal assets (air, water and solid waste disposal site, dam, dump, reser-
voir, or other structure of a similar nature, or any improvements thereto) of a permanent nature
l owned by the taxpayer, or acquired by him in terms of an instalment sale agreement
l in the course of his trade, in a supplementary process to a manufacturing or similar process
l which is required by law for purposes of complying with measures that protect the environment
(s 37B(1) and (2)).
It will also provide relief to a taxpayer who incurred any expenditure or a loss in respect of decom-
missioning, remediation or restoration arising from a trade previously carried on by the taxpayer
(s 37B(6)).
What will the implications be if s 37B is applicable?
Allowance (environmental treatment and recycling assets) =

General rule Cost × 40%/20%/20%/20% per year
and
Allowance (environmental waste disposal assets) = Cost × 5% per year
Two different allowances are available for the two types of environmental capital assets:
l new and unused environmental treatment and recycling assets:
– an allowance of 40% on the cost of the asset in the year that the asset is first brought into use
and 20% in each of the following three years of assessment
l new and unused environmental waste disposal assets:
– an allowance of 5% per year on the cost of the asset will be allowed as a deduction from the
income of the taxpayer from the year of assessment that the asset is first brought into use
(s 37B(2)).
The full allowance will be deductible, even if the asset was not used for the full year. The total deduc-
tion allowed under s 37B can never exceed 100% of the cost (s 37B(9)).
The cost of an asset for s 37B is

the lesser of
Please note! l the direct cost under a cash transaction concluded at arm’s length on the
was concluded (market value),
including
the direct cost of acquisition (s 37B(3)).
No deduction will be available for an environmental treatment and recycling asset or an environ-
mental waste disposal asset under ss 11, 12C and 13 (s 37B(8)).
A special ‘deemed allowance’ rule provides
l when any asset was, in a previous year of assessment, brought into use for the first time by the
taxpayer in any trade carried on by him
l in the production of income but that was excluded from income (exempt income or the taxpayer
taxed in terms of the turnover tax regime (see chapter 23)),
397
the asset was brought into use and any following year is deemed to have been allowed during
those years, as if the receipts and accruals were included in the taxpayer’s income (s 37B(4)).
Therefore, the tax value of the asset is reduced by the deemed allowance although no actual deduc-
tion will be granted under this section regarding the period of use of the asset (which was excluded
from income) in the previous years. The deemed allowance will not be recouped if the asset is
No deduction will be allowed on an asset in the year after it has been disposed of (s 37B(5)).
Remember
If an environmental treatment and recycling asset or an environmental waste disposal asset is
sold at a price above its tax value, the amount exceeding the tax value will be included in income
in terms of s 8(4)(a) to the extent that it represents a recoupment of any capital allowances
previously made.
A further deduction is available of the full amount of any expenditure or loss in respect of decom-
missioning, remediation or restoration arising from a trade previously carried on by the taxpayer, to
the extent that
l it is incurred for purposes of complying with any law of South Africa that provides for environ-
mental protection upon cessation of trade
l if the taxpayer was still carrying on that trade, these expenses would have been allowed as a
deduction under s 11, and
l it is not otherwise allowed as a deduction (s 37B(6)).
Any assessed loss created as a result of the deduction of these environmental expenses (under
s 20(2)) on cessation of trade, can still be set off against income, although the taxpayer is not
carrying on a trade during the year (s 37B(7)).
13.9.6 Environmental conservation and maintenance (s 37C)

Government has created a regime for entering into bilateral agreements with private landowners to
conserve and maintain particular areas of land for the public good. Section 37C recognises that
landowners incur nature conservation maintenance expenses for the public good and for loss of a
right to the use of land. It will be applicable if a taxpayer has
l actually incurred expenditure
l to conserve or maintain land, and
l the conservation or maintenance is carried out in terms of a biodiversity management agreement
that has a duration of five or more years entered into by the taxpayer in terms of s 44 of the
National Environmental Management: Biodiversity Management Act, 2004 (Act 10 of 2004), and
l the taxpayer must use the land or other land in the immediate proximity for the production of
income and for the purposes of a trade (Biodiversity Management Agreements – s 37C(1))
OR
l he has actually incurred expenditure
l to conserve or maintain land owned by him, and
l the conservation or maintenance is carried out in terms of a declaration that has a duration of at
least 30 years under ss 20, 23 and 28 of the National Environmental Management: Protected
Areas Act, 2003 (Act 57 of 2003) (Protected Area Agreements – s 37C(3)).
What will the implications be if s 37C is applicable?
Deduction (biodiversity agreement) =

100% × environmental maintenance rehabilitation and management
expenses (limited to income from the land Î excess carried forward)
General rule and
Deduction (protected area agreements) =
Land conservation and maintenance expenses × 10% of taxable income
(Deemed s 18A deduction – excess carried forward to next year)
398
Section 37C creates a deduction for environmental maintenance rehabilitation and management
expenses. It furthermore allows for the deduction of the loss of land use rights associated with formal
conservation agreements in limited circumstances.
The following deductions will be allowed:
1. Biodiversity agreements
Non-capital land conservation and maintenance expenditure will be treated as being incurred in
the production of income and for purposes of trade and thus deductible under s 11(a).
The deduction will be limited to income derived by the taxpayer from the land (or land in the
immediate proximity), with excess expenditure being carried forward to the following year (being
deemed to again be a potential deduction in the following year) (s 37C(1) and (2)).
2. Protected area agreements
Land conservation and maintenance expenses are treated as a deemed s 18A deductible
donation (see chapter 7). Binding General Ruling No 24 (issued 15 February 2016) clarifies that
this deduction will be allowed notwithstanding the fact that a s 18A receipt has not been issued.
Recoupment:
Taxpayers contravening their biodiversity management and protected areas
Please note! agreements are subject to a recoupment (deductions 1. and 2. above) equal to
the deductions previously allowed under s 37C, but limited to deductions
allowed within five years before the contravention (s 37C(4)).
13.9.7 Land conservation in respect of nature reserves and national parks (s 37D)

If a taxpayer is the owner of declared land in a year of assessment commencing on or after
1 March 2015 the taxpayer will qualify for allowances and deductions under s 37D.
Declared land means
l land that is declared a national park or nature reserve in terms of an agreement under ss 20 or 23
of the National Environmental Management: Protected Areas Act, 2003 (Act 57 of 2003), and
l the declaration is endorsed on the title deed of the land, and
l it has a duration of at least 99 years (land declared a national park or nature reserve – s 37D(1)).
Allowance = Actual expenditure* × 4% per year

General rule *Actual expenditure will be used, unless it is < the market value or
municipal value, then:
Actual expenditure (A) = B + (C × D)
Section 37D creates an allowance for the acquisition cost and improvements effected to declared
land.
An allowance of 4% per year (thus over 25 years – no apportionment) will be allowed from the year in
which the land becomes declared land and in every subsequent year that it qualifies as declared
land. The 4% annual allowance will be based on actual expenditure, which is:
l the total of
– the acquisition cost of the declared land plus
– the cost of any improvements effected to the declared land
– but excluding any borrowing or finance costs, unless
l the actual expenditure is < the market value or municipal value of the declared land
– then the allowance will be based on an amount determined in accordance with the following
formula:
A = B + (C × D)
• A = the amount on which the annual allowance of 4% will be based on
• B = the total cost of acquisition and any improvements effected to the declared land
399
• C = the amount of the capital gain (if any), had the declared land been disposed of for the
lesser of market value or the municipal value of the declared land on the date of the
agreement, and
• D = 60% for a natural person or special trust, or
20% in any other case (s 37D(2)).
The total amount of the allowances claimed under s 37D is limited to the actual expenditure or the
formula (if the formula was used to calculate the allowance) (s 37D(4)).
If the taxpayer retains a partial right of use in the land, he will qualify for only a partial deduction, cal-
culated as follows (s 37D(3)):
Deductible amount MV of land declared

×
(determined under s 37D(2)) MV of land declared + MV of land rights retained
Capital gains tax implications:

The 99-year declaration of land as a national park or nature reserve will qualify as
a deemed disposal under par 11(2) of the Eighth Schedule, but since the capital
gain is already taken into account when calculating the s 37D allowance, this
would result in double capital gains implications for the taxpayer. To alleviate this
problem, par 38 of the Eighth Schedule has been amended to specifically exclude
such land from the date on which that land becomes declared land as defined in
s 37D(1). As a result, the declaration will not be deemed to be a disposal at market
Please note!
value for capital gains purposes (par 38(2)(f) of the Eighth Schedule – see chap-
ter 17).
Recoupment:
Taxpayers contravening their 99-year declaration of land as a national park or
nature reserve are subject to a recoupment equal to the deductions previously
allowed under s 37D, in the five years of assessment preceding the termination.
This amount must be included in the income of the taxpayer in the year of
assessment in which the agreement is terminated (s 37D(5)).
Example 13.28. Land declared a national park
Mr Strange enters into an agreement during March 2018 to declare land he owns as a national
park. The cost of the land declared as a national park was R10 000 000. The total market value of
the land is R25 000 000 while the market value of the declared land equals R13 million.
Calculate the allowance that Mr Strange may claim annually under s 37D.
SOLUTION
The allowance will be 4% per annum (s 37D(2)).
Since the acquisition cost of the declared land (R10 million) is the market value
(R13 million), the formula will be used to determine the amount on which the
allowance should be based:
A = B + (C × D)
B = R10 million (acquisition cost)
C = R13 million – R10 million = R3 million capital gain
D = 60% inclusion rate for capital gain since a natural person
A = R10 000 000 + R1 800 000 (R3 000 000 × 60%)
A = R11 800 000
Section 37D allowance = R11 800 000 × 4% (s 37D(2)). ............................................ (R472 000)
13.10 Recoupments
As indicated in 13.2, where the core concepts were discussed, if a taxpayer disposes of an asset on
which allowances were granted for normal tax purposes, there might be certain normal tax conse-
quences:
400
EXCEEDS
The proceeds of Tax value of the Recoupment
the disposal asset (see 13.10)
IS LESS THAN
Therefore, if:
The proceeds of Tax value of the A possible s 11(o)
the disposal asset allowance
(see 13.11)
l proceeds (limited to original cost price) – tax value = positive (+): add recoupment to income
l proceeds (limited to original cost price) – tax value = negative (–): claim s 11(o) allowance if cir-
cumstances qualify.
The general recoupment provisions are mainly found in s 8(4) and (5). This part of the chapter will
focus on these recoupments, which can be categorised as follows:
Recoupments arising as a result of a disposal of an asset

l Section 8(4)(a): General recoupment provision (13.10.1)
l Section 8(4)(k): Donations, dividends or disposal to connected persons (13.10.2)
l Section 8(4)(e), (eA)–(eE): Deferred recoupments (13.10.3)
Recoupments resulting from other circumstances

l Section 8(4)(b): Actuarial surplus paid to employer from a pension fund (13.10.1)
l Section 8(4)(l): Interest or related finances (13.10.4)
l Section 8(4)(n): Additional industrial policy project allowance (under s 12I) (13.10.5)
l Section 8(5): On acquisition of hired assets (13.10.6)
l Section 19: Concession or compromise regarding a debt (13.10.7)
A discussion on each of these recoupments will follow.
There are specific sections, for example s 13sept (low-cost residential units on
Please note! loan account – see 13.4.4), which contain their own recoupment provisions.
13.10.1 Recoupments: General recoupment provision (ss 8(4)(a), 8(4)(b) and 24M)
When will s 8(4)(a) be applicable?
Section 8(4)(a) will be applicable if a taxpayer recovered or recouped certain amounts allowed as
deductions in the current or any previous year of assessment. The deductions included in the ambit of
s 8(4)(a) are:
l ss 11 to 20 (with certain exclusions)
l s 24D (security expenditure)
l s 24F (film allowance)
l s 24G (toll roads)
l s 24I (foreign exchange gains or losses)
l s 24J (interest)
l s 27(2)(b) (agricultural co-operatives), and
l s 37B(2) (environmental expenditure).
The scope of s 8(4)(a) is further extended by s 8(4)(k) to include certain donations, asset in specie
distributions and the disposal of assets to connected persons (see 13.10.2).
Since s 8(4)(a) applies only to recoupments of certain amounts, recoupments of amounts deducted
under other provisions of the Act would not be taxable under s 8(4)(a). For example, there can be no
recoupment under s 8(4)(a) of the farming development expenditure allowed as a deduction in terms
of the First Schedule to the Act, although the Schedule itself contains a limited recoupment provision.
401
Section 8(4)(a) specifically excludes the following recoupments from its application:
l recoupment of pension fund, provident fund or retirement annuity fund contributions made by an
employee, even though he was entitled to deduct these contributions from his income in terms of
s 11F. Previously some of these deductions were allowed under s 11(k) (for pension fund contri-
butions) and under s 11(n) (for retirement annuity fund contributions), the recoupment of any
deductions under these two sections are also excluded from s 8(4)(a)
l recoupment of the capital expenditure in connection with mining operations deducted in terms of
s 15(a)
l proceeds from the disposal of assets originally manufactured, produced, constructed or
assembled by the taxpayer for the purposes of manufacture, sale or exchange, to the extent that
these proceeds are included in his gross income in terms of par (jA) of the definition of ‘gross
income’ in s 1
l any debt reduction amount applied to reduce the cost or expenditure incurred by the taxpayer in
terms of s 19 (note however that s 19 specifically allows for certain portions of a debt reduction
amount to be recouped under s 8(4)(a))
l any amount previously taken into account as an amount deemed to be recovered or recouped in
terms of ss 19(4) to (6) (this is to prevent a double recoupment because s 19 already gives rise to
a recoupment for certain debt reductions (see 13.10.7 for a detailed discussion on s 19)).
Certain other provisions of the Act specifically prohibit the application of s 8(4)(a):
l Section 13bis(6) permits the taxpayer to choose not to be subjected to tax on a recoupment of
the annual and grading (no longer applicable) allowances on a hotel building provided by
s 13bis(1) and (2) but to set the recoupment off against the cost of a replacement building.
l The deduction for qualifying security expenditure provided by s 24D, including s 24D(3), a limited
suspension of the operation of s 8(4)(a).
l Paragraph 12(1B)(b) of the First Schedule to the Act provides for the exclusion of certain wear-
and-tear allowances enjoyed by farmers from the application of s 8(4)(a).
What will the implications be if s 8(4)(a) is applicable?
Recoupment (amount included in income) =

General rule Amounts previously allowed as deduction or an allowance and then
recovered (if an allowance asset:
Recoupment = Proceeds (limited to cost) – Tax value)
Qualifying amounts (amounts previously allowed as a deduction or an allowance) will be included in

income if they have been recovered or recouped during the current year of assessment. Therefore,
on the disposal of an asset, the recoupment under s 8(4)(a) will always be limited to the original cost
(on which allowances were calculated). If an amount is recovered under s 8(4), it should be included
in gross income and is deemed to be from a source within South Africa (even if from outside of South
Africa) (par (n) of the definition of ‘gross income’ in s 1 – see chapter 4).
Take note of the following special circumstances:
l An asset that was originally acquired for no consideration (for example, by way of a donation or
inheritance)
If the taxpayer has claimed wear and tear on the asset, the proceeds derived on disposal will
represent a recoupment.
l An asset originally used elsewhere and subsequently used for trade purposes
In the case of an asset originally used elsewhere, for example, for private or domestic purposes,
but subsequently used for trade purposes, on its ultimate disposal any recoupment or recovery of
wear-and-tear allowances must be calculated with reference to its original cost and not to its
value at the date when it was introduced into the business.
For example, an asset costing R10 000 was introduced into the business at a time when its value
was R4 000. After SARS had allowed R1 500 wear and tear on this asset, it was sold for R6 500.
There will be no recoupment in terms of s 8(4)(a), since the taxpayer incurred a loss of R2 000 on
the disposal of the asset (tax value of R8 500 less proceeds of R6 500), while only R1 500 was
allowed by way of wear and tear.
l An asset used partly for purposes of trade and partly for private purposes
402
When an asset is used partly for purposes of trade and partly for private purposes and then
disposed of, SARS (in practice) will apply a reasonable basis of apportionment to the proceeds,
based on the extent to which the asset was used for trade and non-trade purposes respectively.
This approach is also applied to the wear-and-tear and s 11(o) allowances.
l It is important to remember that the recoupment is taxable in one sum in the

year in which it occurs.
l A recoupment of allowances can also result from a receipt of money
derived from an insurance company representing compensation received
upon the destruction of the asset by fire or some other hazard.
l In a ‘lock-stock-and-barrel’ sale of a business with depreciated assets in cir-
cumstances in which the purchase price is not allocated to any particular
asset, the Commissioner is at liberty to place a reasonable value on the
Please note!
various assets sold in order to determine any recoupment of allowances for
wear-and-tear. The same will apply if a number of assets are sold for a lump
sum. For example, it may be necessary to apportion a lump sum considera-
tion derived for a developed industrial property held as a capital asset
between the land, on the cost of which no deductions would have been
claimed, and the buildings, on the cost of which the industrial building allow-
ances would have been claimed.
l If the taxpayer disposes of an asset for consideration which cannot be
quantified in terms of s 24M, the amount of the recoupment should be taken
into account in the years of assessment when the consideration becomes
quantifiable (s 24M(3)).
Example 13.29. Recoupments: Cessation of trading

Short Lived (Pty) Ltd ceased manufacturing operations on 30 June and sold or ceded the
following assets to Better Equipped Ltd:
Amount realised Book value
Land and factory buildings (note 1 of solution) .................... R6 000 000 R4 000 000
Trade marks (acquired at no cost) (note 2 of solution) ......... 1 000 000 nil
Machinery and plant ............................................................. 2 500 000 900 000
Motor vehicles ....................................................................... 200 000 150 000
Office furniture and fittings (note 4 of solution) ..................... 250 000 300 000
Trading stock ........................................................................ 3 000 000 2 500 000
(cost)
Debts due (all recoverable) (note 5 of solution) .................... 1 500 000 1 700 000
(face value)
Leasehold land and buildings .............................................. 2 500 000 1 800 000
Short Lived (Pty) Ltd rendered accounts from 1 January to 30 June covering the six months’
trading to the date of cessation of business. These accounts showed a taxable profit of R1 000 000
before the following transactions were taken into account. Further information about assets are as
follows:
Land and factory buildings
The original cost was R5 000 000. Over the years the company wrote off R1 000 000 depre-
ciation in its books but no allowance for wear and tear in terms of the proviso to s 11(e) was
permitted. The buildings did not qualify for the annual allowance in terms of s 13.
Machinery and plant, motor vehicles, office furniture and fittings
The income tax values are the same as the book values. The following allowances have been
permitted so far:
Section 12C allowance on manufacturing assets ........................................................ R1 100 000
Wear-and-tear allowances: Motor vehicles .................................................................. R170 000
Wear-and-tear allowances: Office furniture and fittings ............................................... R100 000
Leasehold land and buildings
The book value of R1 800 000 represents a cash premium of R500 000 paid for the right of use,
plus R1 300 000 expended on buildings that Short Lived (Pty) Ltd was forced to erect on the
hired land. So far, R100 000 in terms of s 11(f) for the premium, and R250 000 in terms of s 11(g),
for the improvements, have been allowed.
Calculate the taxable income of the company on the assumption that it received no other income
for the remaining six months of the year of assessment. (Capital gains tax can be ignored in the
calculation of taxable income, but will be mentioned for the sake of completeness.)
403
SOLUTION
Taxable profit (in accounts) ........................................................................................ R1 000 000
Add: Recoupment of s 12C allowance on machinery and plant:
Proceeds of sale ..................................................................... R2 500 000
Less: Income tax value ........................................................ (900 000)
Profit ........................................................................................ R1 600 000
Recoupment limited to allowances claimed (note 6) ....................................... 1 100 000
(Or recoupment = R2 000 000 – R900 000 = R1 100 000)
Balance of profit, R500 000, of a capital nature.
Add: Recoupment of wear-and-tear allowances on motor vehicles
Proceeds of sale ..................................................................... R200 000
Less: Income tax value ........................................................ (150 000)
Recoupment (note 6) .............................................................. R50 000
Recoupment (no need to limit to allowances as less than allowances 50 000
claimed) ...........................................................................................................
Add: Difference between realised value of trading stock and its cost (R3 000 000
(gross income) less R2 500 000 (s 22)) (note 3) .............................................. 500 000
Add: Recoupment of allowances made on leasehold land and buildings
Proceeds of cession of rights.................................................. R2 500 000
Less: Income tax value (R1 800 000 less R350 000) ........... (1 450 000)
Profit ........................................................................................ R1 050 000
Recoupment limited to total allowances granted (note 6) ................................ 350 000
(Or recoupment = R1 800 000 – R1 450 000 = R350 000)
Balance of profit, R700 000, of a capital nature
Taxable income................................................................................................ R3 000 000
Notes
(1) The profit on the sale of land and factory buildings of R2 000 000 is a capital profit, and
since no wear-and-tear allowances or annual allowance have been granted on this asset,
there is no taxable recoupment in terms of s 8(4)(a).
(2) The amount realised for the trade marks is a receipt of a capital nature.
(3) A profit on the sale of trading stock is taxable, despite the closing down of the business.
(4) The loss of R50 000 (R250 000 – R300 000) on the sale of office furniture and fittings has not
been allowed in the example, being a loss of a capital nature. The allowance under s 11(o),
does not apply when the asset is disposed of on the total abandonment of trading operations,
since they are no longer carrying on a trade (requirement in first part of s 11 not met).
(5) The loss on the sale of the debts due is not allowed, since it is not a loss incurred in the
production of income. (If the company did not cease trading and did not sell the debts to
the purchaser but retained them, any bad debts incurred in later years would be allowed as
a deduction from trade income in those years.)
(6) The profits derived from the sale of the plant and machinery, motor vehicles and the lease
are of a capital nature. Remember, however, the recoupment of allowances previously made.
Example 13.30. Recoupments: Proceeds received in instalments
A taxpayer sold office furniture for R100 000 on 31 January 2016, the proceeds being due and
payable as follows:
Year ending 29 February 2016: 31 January 2016 .......................................................... R25 000
Year ending 28 February 2017: 31 July 2016 ................................................................ 25 000
31 January 2017 .......................................................... 25 000
Year ending 28 February 2018: 31 July 2017 ................................................................ 25 000
Up to the date of sale, wear-and-tear allowances amounts totalling R35 000 were permitted, the
furniture having cost R80 000 a number of years ago.
Calculate the recoupments arising in each of the relevant years of assessment.
404
SOLUTION
Since the income tax value is R45 000 (R80 000 less R35 000), a total profit of R55 000
(R100 000 – R45 000) has been made, but this may be taxed as a recovery or recoupment within
the terms of s 8(4)(a) only to the extent of R35 000 (the allowances previously granted). The
recoupment of R35 000 will be taxable as follows:
Year ending 29 February 2016
There is no recoupment, since the seller has only received R25 000, while the written-down
income tax value is R45 000 (therefore, until another R20 000 has been received to equal the tax
value (R25 000 (2016) plus R20 000 = R45 000 (tax value), no recoupment will be recorded).
The seller has received R50 000 during 2017 and may use this to calculate the recoupment. Of
this amount R20 000 must be appropriated to the balance of the income tax value (R25 000
(2016) plus R20 000 (2017), thus R30 000 has so far been received in excess of the tax value).
R30 000 ((R25 000 (2016) plus R50 000 (2017)) less R45 000 (tax value)) constitutes a recoup-
ment under s 8(4)(a).
The seller has received an additional R25 000. Although the full amount of the income tax value
has been recovered, only R5 000 constitutes a recoupment, since the total recoupment to be
taxed must be limited to the allowances actually granted; namely, R35 000 (R30 000 having been
taxed as a recoupment in the previous year).
(This can also be calculated as follows: received in total R100 000, but limited to original cost
price of R80 000 less tax value of R45 000 = R35 000 recoupment in total (R30 000 already
included in 2017, thus R5 000 included in 2018.)
The balance of R20 000 is a capital gain and may be subject to income tax under the Eighth
Schedule (calculated as follows: (R100 000 – R35 000 (total recoupment under s 8(4)(a)) less
(R80 000 – R35 000 (total amount of wear and tear) = R20 000 capital gain).
If an actuarial surplus is paid to an employer (in terms of s 15E(1)(f) or (g) of the

Pensions Fund Act) the amount recovered or recouped will be taxable in terms
of s 8(4)(a). Note however that any previous non-deductible expenditure (in
Please note! terms of s 11(l) – refer chapter 12) paid by the employer to the Pension Fund in
respect of that surplus (s 8(4)(b)) will be excluded from the taxable portion. The
non-deductible portion will be tax-free (it will not be recouped under s 8(4)(a))
by the employer.
13.10.2 Recoupments: Donations, asset in specie distributions or the disposal of assets to

connected persons (s 8(4)(k))
When will s 8(4)(k) be applicable?

Section 8(4)(k) comes into operation when
l a person donates an asset
l a company transfers an asset in any manner to a holder of a share in that company (i.e. an asset
in specie distribution as a dividend), or
l a person disposes of an asset to a connected person,
but it is only applicable to assets on which wear and tear was claimed (under any of the provisions
referred to in s 8(4)(a) - see 13.10.1).
A donation encompassed by this provision will be a donation in the ordinary

sense of the word in the common law and is not restricted to a ‘donation’ as
Please note! defined in s 55(1) for the purposes of donations tax. However, the term
‘dividend’ is used in its sense as defined in s 1.
What will the implications be if s 8(4)(k) is applicable?
Proceeds on disposal = Market value* on date of donation, distribution or

disposal
General rule
*Note that the market value will still be limited to the cost when calculating
the recoupment.
405
Section 8(4)(k) deems the asset disposed of to be disposed at market value as at the date of the
donation, distribution or disposal. Therefore, if an asset is
l donated
l distributed as a dividend in specie, or
l disposed of to a connected person
s 8(4)(k) will deem the amount recovered to be the market value.
Remember
Section 8(4)(k) only deems the asset to be sold at market value (thus proceeds equals market
value); it does not regulate the recoupment or the amount of the recoupment, as this is regulated
by s 8(4)(a). It therefore follows that the amount actually subjected to tax is limited to the extent of
the deductions or allowances previously granted.
Example 13.31. Recoupments: Disposal of an asset to a connected person

On 1 October 2018, Fast Feathers Ltd (with an October year-end) sold a manufacturing machine
to Slow Feathers (Pty) Ltd (its 100% subsidiary) at R1 500 000 (when market value was
R1 800 000). Fast Feathers Ltd originally acquired the new machine for R3 000 000 on
1 March 2017.
Calculate all the tax implications of the disposal of the machine for Fast Feathers Ltd for the 2018
year of assessment.
SOLUTION
Year ending 31 October 2018
Selling price is R1 500 000, but since it was sold to a connected person, it is deemed to have
been sold at market value at date of sale, being R1 800 000 (1 October 2018) (s 8(4)(k)).
Recoupment in respect of sold machinery under s 8(4)(a):
R1 800 000 (value (proceeds) in terms of s 8(4)(k))
Less:
Tax value of R1 200 000
(R3 000 000 – R1 200 000 (R3 000 000 × 40% (s 12C – 2017)) – R600 000
(R3 000 000 × 20% (s 12C – 2018 (allowance))
= R600 000
Allowance (s 12C) .......................................................................................................... (R600 000)
Recoupment .................................................................................................................. 600 000
Note
l If the market value on 1 October 2018 was R3 200 000, the recoupment would have been
limited to R3 000 000 (the amount on which allowances were claimed).
l As the machine was acquired from a connected person, Slow Feathers (Pty) Ltd can only
claim the s 12C allowance of 20% (as it is a second-hand machine) on the purchase price of
R1 500 000.
13.10.3 Recoupments: Deferred recoupment of allowances (s 8(4)(e)–(eE))

When will s 8(4)(e) be applicable?
Section 8(4)(e) will be applicable if a taxpayer
l has replaced one asset with another asset (the replacement asset), and
l has elected that paragraph 65 (that deals with involuntary disposal) or paragraph 66 (that deals
with reinvestment in replacement assets (all of which are depreciable)) of the Eighth Schedule
(see chapter 17) applies in respect of that disposal.
The most important requirement (other than the fact that the full proceeds should be reinvested in the
replacement asset(s)) that needs to be met before either of paragraphs 65 or 66 can be elected is
that
proceeds = base cost
OR
proceeds > base cost
on disposal of the asset.
406
No capital gain is realised if

proceeds = base cost.
Although NO capital gain is realised (thus proceeds = base cost), the provisions
of s 8(4)(e) may still be applicable, since par 65 and 66 of the Eighth Schedule
Please note!
can be elected if proceeds are either
l EQUAL to (thus no capital gain is realised), or
l exceeds (a capital gain is realised)
base cost.
What will the implications be if s 8(4)(e) is applicable?
Deferred recoupment included in income:

General rule Depreciable asset Î over the same period as the allowance claimed on
the replacement asset
Non-depreciable asset Î when the replacement asset is disposed of
Amounts recovered or recouped by the taxpayer upon the disposal of an asset will not be included in
his income, but will be deferred (under s 8(4)(eA)–(eE)).
Remember
The deferral in terms of s 8(4)(e) takes preference over the provisions of s 8(4)(a), which would
have deemed the full recoupment to be included in income in the year of assessment of the
disposal of the asset.
The deferral will be treated as follows:

l The treatment of the deferral of the recoupment will depend mainly on the type of replacement
asset that is acquired:
– If the replacement asset is a ‘depreciable asset’ (see 13.2.4):
The recoupment on the original asset is spread and included in income over the same period
as the deduction or allowance is claimed on the replacement asset. This is calculated by
apportioning the recoupment allocated to the replacement asset in the same ratio as the
amount of the deduction or allowance in that year bears to the total amount of the deductions
or allowances claimable for the replacement asset for all years of assessment (s 8(4)(eB)).
– If the replacement asset is not a depreciable asset:
The recoupment is deferred until the replacement asset is disposed of and the full recoupment
is then included in income. This will only be applicable if the taxpayer has elected to apply the
provision of paragraph 65 of the Eighth Schedule (involuntary disposals).
Example 13.32. Recoupments: Deferred recoupment of allowances

During the 2018 year of assessment, Diverse Ltd’s plant and machinery was destroyed in a fire.
The plant and machinery qualified for the accelerated s 12C allowance. The company was
insured, and received an insurance payment of R1 800 000 in the same year of assessment. The
amount was immediately used to fund the acquisition of a new, similar plant and machinery for
R2 000 000. The recoupment of allowances (under s 8(4)(a)) on the destroyed plant amounted to
R700 000. Diverse Ltd’s year of assessment ends on the last day of February.
Calculate the allowances and recoupments with regard to the above if Diverse Ltd elected the
application of par 65 of the Eighth Schedule (ignore capital gains tax implications and VAT).
407
SOLUTION
Section 12C allowance on new plant and machinery (40% × R2 000 000) ................. (R800 000)
Recoupment in respect of destroyed plant and machinery – deferred in accordance
to allowance on new asset
R700 000 × R800 000/R2 000 000 (or R700 000 × 40%) ............................................ 280 000
Years ending 28/29 February 2019, 2020 and 2021
Section 12C allowance on new plant and machinery purchased in 2018
(20% × R2 000 000) (400 000)
Recoupment in respect of destroyed plant and machinery – deferred in accordance
to allowance on new asset
R700 000 × R400 000/R2 000 000 (or 20% × R700 000) ............................................ 40 000
l An asset may be replaced with multiple assets. If this occurs, the amount recovered or recouped
on the disposal of the original asset (calculated in terms of s 8(4)(a)) must be apportioned
between the replacement assets. The recoupment will be allocated to the replacement assets in
proportion to their respective purchase prices (costs) (s 8(4)(eA)).
Example 13.33. Recoupments: Deferred recoupment: more than one replacement asset
During the 2018 year of assessment, Brando Ltd’s Manufacturing machine A was destroyed by a
fire. Manufacturing machine A qualified for the accelerated s 12C allowance. The company was
insured at replacement value and when the insurance payment (of R3 750 000) was received, a
s 8(4)(a) recoupment of R250 000 was made.
Brando Ltd used the insurance amount received to immediately replace Manufacturing machine
A with a similar, but smaller, new Machine B at a cost of R1 750 000. The rest of the insurance
payment of R2 000 000 was used to acquire a much-needed new office block.
The company elected that the provisions of par 65 of the Eighth Schedule be applicable to the sale.
Since s 8(4)(e) will apply and the recoupment will be deferred, calculate the allocation of the
recoupment on Machine A to the replacement assets. (Ignore capital gains tax implications.)
SOLUTION
Recoupment amounted to R250 000:
Recoupment allocated to Machine B:
R250 000 × R1 750 000/R3 750 000 = ....................................................................... R116 667
(This part of the recoupment will be deferred in accordance to the allowance on
Machine B, thus 40:20:20:20 over the next four years.)
Recoupment allocated to office building:
R250 000 × R2 000 000/R3 750 000 = ....................................................................... R133 333
(This part of the recoupment will be deferred in accordance to the allowance on the
office block (s 13quin) at 5% over the next 20 years.)
l At the time of disposal of the replacement asset, any deferred recoupment not yet included in the
taxpayer’s income (in terms of s 8(4)(eB) or (eD)), is deemed to be an amount recovered or
recouped by the taxpayer. The full balance of the recoupment not yet recognised will be included in
income at the time of disposal (s 8(4)(eC)).
l Where a taxpayer ceases to use a replacement asset without disposing of it, any deferred
recoupment not yet included in income (under s 8(4)(eB) or (eC)) will be deemed to be recovered
or recouped in full. It will be included in the taxpayer’s income at the time of ceasing to use the
replacement asset (s 8(4)(eD)).
Example 13.34. Recoupments: Deferred recoupment of allowance: disposal of

replacement asset
On 1 December 2016, Selby CC sold a delivery vehicle (that qualified for a s 11(e) allowance)
and a s 8(4)(a) recoupment of R15 000 was made on the sale. The full selling price was used to
purchase a new delivery vehicle for R150 000.
The company elected that the provisions of par 66 of the Eighth Schedule should apply to the
sale and accounted for R1 875 of the recoupment in 2017 (under s 8(4)(e)).
continued
408
On 31 May 2018, the last day of their year of assessment, Selby CC decided to sell the replace-
ment delivery vehicle.
(Binding General Ruling (Income Tax) No 7 and Interpretation Note No 47 (which is in line with
the public notice issued by the Commissioner) allows for a four-year write-off on delivery
vehicles.)
Calculate the amount that Selby CC needs to recoup under s 8(4)(e) during the 2018 year of
assessment.
SOLUTION
Year ending 31 May 2018
Section 8(4)(eC) provides that the remaining amount of the recoupment not yet
included in taxable income be accounted for on the sale of the replacement asset,
thus
Recoupment (s 8(4)(e)) (R15 000 – R1 875 (2017)) ....................................................... R13 125
Note
The solution would have been the same if the CC ceased to use the replacement
asset (s 8(4)(eD)).
l If a taxpayer fails to conclude a contract or to bring a replacement asset into use within the
prescribed period (contract for acquisition concluded within 12 months and replacement asset
brought into use within three years after disposal – par 65 or 66 of the Eighth Schedule (chapter
17)), the deferred recoupment provision falls away.
The taxpayer is then required to include in his income on the date the prescribed period ends
– the recoupment, and
– interest at the prescribed rate on the amount of the recoupment from the date of disposal until
the end of the prescribed period (s 8(4)(eE)).
The interest is deemed to be an amount recovered or recouped for the purposes

Please note! of s 8(4)(a) (i.e. it is included in income as a recoupment).
13.10.4 Recoupments: Interest or related finance charges (s 8(4)(l))

When will s 8(4)(l) be applicable?
Section 8(4)(l) will come into operation where a financial arrangement or instrument (treated in terms
of s 24J) is transferred by one person (the transferor) to another person (the transferee) and any
interest or related finance charges that the transferor was legally liable to pay were also transferred to
the transferee.
A specific recoupment provision is required since s 24J, that provides for the taxation of the returns
generated by financial instruments, specifically requires that the accrual basis be used in order to
spread interest, including a discount or premium, on a daily basis (see chapter 16).
It is therefore possible for
the transferor to have claimed (and been allowed) a deduction in terms of s 24J
but,
by transferring the underlying financial arrangement to the transferee, the obligation to pay the
interest or related finance charges is transferred to the transferee.
To prevent the transferor from claiming a deduction without effectively paying the interest or related
finance charges, the provisions of s 8(4)(l) will be applicable in such circumstances (read with
s 24J(4A)(b)).
409
What will the implications be if s 8(4)(l) is applicable?
Amount of taxable recoupment (under s 8(4)(a)) for transferor =

General rule Interest deducted and not yet paid less amount paid on transfer of the
obligation
The transferor will be deemed to have recovered or recouped an amount equal to the amount of the
obligation transferred. The recoupment must be included in income in the year that the financial
arrangement is transferred.
The following is deemed to be recovered or recouped by the transferor and taxable under s 8(4)(a):
l the amount of any obligation in respect of interest or related finance charges which a person has
been allowed as a deduction for income tax purposes but which has not been actually paid
less
l the amount actually paid in respect of the transfer of the obligation to another person.
13.10.5 Recoupments: Industrial policy project allowance (s 8(4)(n))

When will s 8(4)(n) be applicable?
Section 8(4)(n) provides for the recoupment of the additional industrial investment allowance claimed
(under ss 12G (now repealed) or 12I (see 13.9.2)). It arises where a taxpayer disposes of an
industrial asset before completion of the write-off period of that asset for the purposes of ss 11(e),
12C or 13.
What will the implications be if s 8(4)(n) is applicable?
Amount of taxable recoupment (under s 8(4)(n)) =

General rule All allowances previously claimed (under s 12I) and recovered on disposal
All allowances previously claimed (under ss 12G (now repealed) or 12I (see 13.9.2)) and recovered
on disposal, will be included in the taxpayer’s income.
Remember
This recoupment applies in addition to any recoupment under s 8(4)(a) (see 13.10.1).
13.10.6 Recoupments: Acquisition of hired assets (s 8(5))
When will s 8(5) be applicable?

Section 8(5)(a) comes into operation when:
l an amount has been paid (for example rent or a lease premium) by a person for the right of use
or occupation of any movable or immovable property
l that amount has been allowed as a deduction in the determination of that person’s taxable
income, and
l that amount or its equivalent is upon the subsequent acquisition of the property by that or any
other person applied in reduction or towards settlement of the purchase price of the property.
This section will not be applicable if an employee acquired a hired asset from his employer for no
consideration, or for a consideration less than the determined value, and has, as a result, been taxed
on the acquisition as a fringe benefit (under par (i) of the definition of ‘gross income’ in s 1). The pur-
pose of this exclusion is to prevent the acquisition of the same asset from generating both a taxable
recoupment and a taxable fringe benefit.
410
What will the implications be if s 8(5) is applicable?
Termination of lease (recoupment for former lessee):

1. Asset acquired
• Rental applied to reduce purchase price
Î recoupment = rentals used to reduce purchase price (s 8(5)(a))
General rule • Acquired for consideration less than fair market value or for no
consideration
Î recoupment = market value – consideration paid (if any) (s 8(5)(b))
2. Continue use of asset (but not acquired)
• No rental or nominal rental (< 10% of fair market value per year) paid
Î recoupment = fair market value (s 8(5)(bA))
The amount applied in reduction or towards settlement of the purchase price of the property must
then be included in the income of the person who acquires the property for the year of assessment
during which he
l exercised his option to acquire it, or
l concluded the agreement to acquire it (s 8(5)(a)).
For example, if Lindani (the lessor) agrees to sell the hired property to Rall (the lessee) at an agreed
price less whatever amount has previously been paid by way of rent by Rall (say R3 000), Rall is
liable for tax on the amount of the rent previously allowed as a deduction to him, namely R3 000.
SARS will also apply this provision when a lessee undertakes improvements at a certain cost, being
given an option to purchase the premises during the lease at a price that is reduced by the cost to
the lessee of the improvements undertaken. To the extent to which the cost of the improvements has
been allowed as a deduction to the lessee in terms of s 11(g), it must be included in his income in the
year of assessment during which he exercised the option to purchase.
If rental property is acquired by the lessee (or some other person), for a consideration that is less
than the fair market value, the following must be deemed to have been applied in reduction or
towards settlement of the purchase price of the property and will be taxable:
Fair market value

of the property LESS Purchase price (if any)
(as defined in s 1 of the Tax Administration Act)
limited to the amount previously paid for the right of use or occupation of the property (for example
rentals and a lease premium) (s 8(5)(b)).
Example 13.35. Recoupment on acquisition of hired asset
Sisa (the lessor) gives Leroy (the lessee) an option to acquire property at any time during the
lease at a price of R1 000 000. Leroy exercises the option at a time when the fair market value is
R1 500 000. Leroy will be subject to tax in the year in which he exercises the option on the
difference between R1 500 000 and R1 000 000 (i.e. on R500 000), but limited to a maximum of
the aggregate amount he has paid for the right of use or occupation and allowed to him as a
deduction in previous years. For example, if R300 000 has been allowed to him by way of
deductions, only R300 000 is taxable. If R800 000 has been allowed to him, R500 000 is taxable.
If Leroy has ceded all his rights under the lease to Eben, who exercises the option, it is Eben
who may be subject to tax on the recoupment in terms of s 8(5)(a), even though Eben enjoyed
no deductions from his taxable income in respect of prior rentals paid. (Capital gains tax was
ignored in this discussion.)
A lessee is deemed to have acquired the property for no consideration (under s 8(5)(b)) if, after the
termination of a lease, he is allowed to use the property with the express or implied agreement of the
former lessor (or owner) of the property
l without the payment of any rental or other consideration, or
l subject to the payment of a consideration that is nominal in relation to the fair market value of the
property (s 8(5)(bA)).
411
This is only applicable to a lease of

l property consisting of corporeal movable goods, or
l of machinery or plant on which the former lessor was entitled to claim any allowance (including
immovable machinery or plant (perhaps due to fixture to the building in which it is housed) if it
previously qualified for any allowance).
If the property was owned by the former lessor, its fair market value (the amount to be included in
taxable income, which is always limited to the amounts paid for the right of use or occupation of the
property) will be deemed to be
The cost to the former lessor of Depreciation allowance at the rate of 20% per year on
the property LESS the reducing-balance method (s 8(5)(bB)(i)).
A consideration payable for the property is deemed to be nominal in relation to the fair market value
if,
l in relation to the period for which it is payable
l it is less than 10% per year of the fair market value (s 8(5)(bB)(iii)).
For example, if after the termination of the lease the former lessee is permitted to continue to use
property that has a fair market value of R20 000 for a consideration of less than R2 000 per year (thus
10% of the fair market value), the consideration will be nominal. The former lessee will be deemed to
have acquired the property for no consideration. He will be liable for tax on a recoupment of R20 000
(fair market value, but limited to the amounts previously paid for the right of use of the property that
have been deducted, if less than R20 000). He will be able to claim a deduction of the current rentals
under s 11(a).
If, after three months from the date of the termination of the lease, the former lessor (or owner) has not
instituted legal proceedings against the lessee to return the property, he will be deemed to have
agreed to the former lessee’s use, enjoyment or dealing with the property (for s 8(5)(bA))
(s 8(5)(bB)(ii)).
In certain circumstances a lease is deemed to have terminated:
A lease will be deemed to have terminated (which would result in a recoupment) when the former
lessee is required to pay a consideration, after the termination, in respect of his right to use, enjoy or
deal with the property but
l ceases to pay that consideration, or
l if he pays a consideration for the right that is nominal (see above) in relation to the fair market
value of the property.
The lease is deemed to have been terminated on the date from which the former lessee is no longer
required to pay the consideration, or from which the consideration payable by the lessee becomes
nominal (s 8(5)(bB)(iv)).
Example 13.36. Recoupment on acquisition of hired assets

(1) Mr Holmes hired computer equipment for his business from Picoult Ltd for three years at an
annual rental of R30 000, which was fully deductible. At the end of the lease he exercised his
option to acquire the equipment for R100 000 less half of the rentals of R90 000 paid to date
(that is, for R100 000 less R45 000, or a net price of R55 000).
What amount must be included in Mr Holmes’ income on the exercise of the option?
SOLUTION
Total amount paid as rentals for hire of equipment and allowed as deductions.......... R90 000
Amount to be included in Mr Holmes’ income in terms of s 8(5)(a) – amount of
rentals previously deducted applied in reduction of the purchase price of the asset . R45 000
412
13.10 Chapter13: Capital allowances and recoupments
Example 13.36. Recoupment on acquisition of hired assets – continued

(2) Goddard (Pty) Ltd hired computer equipment for its business from Todd Ltd for three years
at an annual rental of R30 000, which was fully deductible. In terms of the lease, Mr Cussler,
the sole holder of shares of Goddard (Pty) Ltd, was entitled to acquire the equipment at the
end of the lease for R100 000 less the rentals paid to date (that is, for R100 000 less
R90 000 or a net price of R10 000).
What amount should Mr Cussler include in his income when he acquires the equipment?
SOLUTION
Amount paid as rentals for hire of equipment and allowed as deductions to
Goddard (Pty) Ltd ........................................................................................................ R90 000
Amount to be included in Mr Cussler’s income in terms of s 8(5)(a) – amount of
rentals previously deducted by Goddard (Pty) Ltd applied in reduction of the
purchase price of the asset by Mr Cussler .................................................................. R90 000
Note
The amount in question must be included in the income of the person who acquires the equipment,
even if that person was not the one who was allowed the deduction of rentals in the first instance.

(3) Mr Pitt hired imported computer equipment for his business from Clive Ltd for three years at
an annual rental of R30 000, which was fully deductible. He was given the option to acquire
the equipment at a price of R10 000 at the end of the lease. He exercised this option at the
end of the lease when the fair market value of the equipment had increased to R160 000 due
to currency fluctuations.
What amount must be included in Mr Pitt’s income on the exercise of the option?
SOLUTION
Amount paid as rentals for hire of equipment and allowed as deductions .................. R90 000
Value of equipment at the time of the exercise of the option ....................................... R160 000
Less: Amount payable by Mr Pitt for the acquisition of the equipment ...................... (10 000)
Excess ......................................................................................................... R150 000
This excess must be included in Mr Pitt’s income in terms of s 8(5)(b) read with
s 8(5)(a), but the amount to be included is limited to the amount of rentals
previously deducted; that is, ........................................................................................ R90 000

(4) Mr Koontz hired imported computer equipment for his business from Dean Ltd for three years
at an annual rental of R180 000, which was fully deductible. The equipment had cost Dean
Ltd R400 000. Mr Koontz was permitted to continue to use the equipment at the end of the
three-year period for a rental of R10 000 a year.
What amount must be included in Mr Koontz’s income on the termination of the initial lease?
SOLUTION
Determination of fair market value of equipment
Cost of equipment to Dean Ltd.................................................................................... R400 000
Less: Depreciation at 20% a year on reducing balance method
(in terms of s 8(5)(bB)(i):
Year 1 (20% of R400 000) ................................................................................. (80 000)
R320 000
Year 2 (20% of R320 000) ................................................................................. (64 000)
R256 000
Year 3 (20% of R256 000) ................................................................................. (51 200)
Deemed fair market value of equipment at the end of the initial lease period ............ R204 800
continued
413
Since the annual rental, R10 000, is less than 10% of the fair market value as determined above,
that is, R20 480, it is in terms of s 8(5)(bB)(iii) deemed to be nominal and Mr Koontz is under
s 8(5)(bA) deemed to have acquired the equipment for no consideration for the purposes of
s 8(5)(b). He must therefore include in his income in terms of s 8(5)(b) read with s 8(5)(a) the
lesser of the following two amounts:
Fair market value as determined ................................................................................. R204 800
Rentals previously deducted (R180 000 × 3) .............................................................. 540 000
Therefore R204 800 must be included in Mr Koontz’s income. If the rental payable after the
termination of the initial lease had exceeded the nominal amount of R20 480 a year, then there
would have been no deemed recoupment under s 8(5).
13.10.7 Recoupments: Concession or compromise regarding a debt (s 19)

Government wanted to introduce a uniform system for the taxation treatment of debt reduction or
relief that would assist in local economic recovery. The uniform system that was introduced
addressed debt relief (thus debt reductions (including cancellations) for less than the full consider-
ation) resulting from a debtor’s inability to pay. The system covers both the rules relating to ordinary
revenue (s 19) and the rules relating to capital gains (par 12A of the Eighth Schedule – see
chapter 17) (Explanatory Memorandum on the Taxation Laws Amendment Bill, 2012).
When will s 19 be applicable?
Reduction of debt for years of assessment commencing before 1 January 2018

Before
Years of assessment
commencing before
1 January 2018 for debt
reductions before that date
From
Years of assessment commencing on
or after 1 January 2018 for debt benefits
due to concessions or compromises on
or after that date
If a debt that was initially used to finance deductible expenditure or allowance assets (for example
assets on which a s 11(e) allowance could be claimed) is reduced, and the reduction of the debt is
not a bequest, a donation or a fringe benefit, the ‘ordinary’ debt relief system under s 19 will be
applicable.
Section 19 applies when
l a debt that is owed by a person
l is reduced by any amount, and
l the amount of the debt was used, either directly or indirectly, to fund any expenditure for which a
deduction or allowance was granted in terms of the Act, and
l the amount of the reduction of the debt (reduction amount) exceeds the amount given by the
taxpayer as payment (or consideration) for the reduction (s 19(2)).
Debt for the purposes of s 19 will not include a tax debt as defined in s 1 of the
Tax Administration Act (see chapter 33)) (s 19(1)). Debt can be defined as any
amount owing to or by a person (Explanatory Memorandum on the Taxation
Laws Amendment Bill, 2012) and includes, for example an advance, debenture,
Please note! bank deposit or a loan that needs to be repaid (Interpretation Note No 91
(issued on 21 October 2016)).
Reduction amount in relation to a debt owed by a person means any amount by
which the debt is reduced less any amount applied (paid) by the person as con-
sideration for the reduction of the debt (defined in s 19(1)).
This section will however not apply to any debt owed by a person
l who is an heir or legatee of a deceased estate, to the extent that
– the debt is owed to the deceased estate
– the debt is reduced by the deceased estate, and
414
13.10 Chapter13: Capital allowances and recoupments
– the amount of the reduction forms part of the property of the estate for the purposes of the
Estate Duty Act, 1955 (Act 45 of 1955) (see chapter 27)
(This is excluded since the reduction will constitute a bequest and estate duty will potentially
apply.)
l to the extent that the debt is reduced by way of
– a donation (as defined in s 55(1)), or
– a deemed donation in terms of s 58 (see chapter 26)
(this reduction of debt is excluded since it will qualify as a donation for donations tax and as such
will already be taxed, Therefore, the reduction of debt must occur due to commercial reasons
(that is the inability to pay on the side of the person owing the debt) and should not constitute a
donation or a deemed donation), or
l to his employer, to the extent that it will be a taxable fringe benefit under par 2(h) of the Seventh
Schedule (employee debt is discharged by the employer – see chapter 8) (s 19(8)).
Remember
Section 19 does not apply to a debt reduction that is a bequest, a donation, a deemed donation
or a taxable employer-employee fringe benefit.
Debt benefits due to concessions or compromises in respect of a debt for years of assessments com-
mencing on or after 1 January 2018
Before
Years of assessment
commencing before
reductions before that date
From
Years of assessment commencing on
or after 1 January 2018 for debt benefits
due to concessions or compromises on
or after that date
If a debt benefit arises due to a concession or compromise regarding a debt that was initially used to
finance deductible expenditure or allowance assets (for example assets on which a s 11(e) allow-
ance could be claimed) and the reduction of the debt is not a bequest, a donation, a fringe benefit or
specific debt between group companies, the ‘ordinary’ debt relief system under s 19 will be applic-
able.
Section 19 applies when
l a debt benefit in respect of debt that is owed by a person
l arises due to or because of a concession or compromise regarding that debt, and
l the amount of the debt was used, either directly or indirectly, to fund any expenditure for which a
deduction or allowance was granted in terms of the Act (s 19(2)).
Debt for the purposes of s 19 includes any amount that is owed by a person but
will not include a tax debt as defined in s 1 of the Tax Administration Act (see
chapter 33) or interest (s 19(1)). It can include, for example, an advance, deben-
ture or a loan that needs to be repaid (Interpretation Note No 91 (issued on
21 October 2016)).
Concession or compromise is any arrangement in terms of which
l any
Please note!
– term or condition regarding the debt has been changed or waived, or
– obligation is replaced, whether by novation (replacing one contract with
another) or otherwise, for the obligation in terms of which that debt is
owed, or
l a debt owed by a company is settled (paid), directly or indirectly
– by conversion or exchange for shares in that company, or
– by applying the proceeds of shares issued by that company (s 19(1)).
continued
415
Debt benefit in respect of a debt owed by a person means any amount by which
the face value of the debt (before entering into a concession or compromise),
exceeds
l for an arrangement where the terms or conditions regarding the debt have
been amended or the obligation has been replaced Î the market value of
the debt, or
l where shares in the company are acquired in exchange for or as payment of
debt and the person subscribing or acquiring the shares has not previously
Please note!
been a shareholder of the company Î market value of those shares, or
l where shares in the company are acquired in exchange or as payment of
debt and the person subscribing or acquiring the shares has previously
been a shareholder of the company Î market value of shares held in the
company after the concession or compromise less the market value of
shares held in the company before the concession or compromise
less
any increase in the market value of shares held in another company in the same
group of companies (as defined in s 41 – see chapter 20) due to the concession
or compromise entered into (defined in s 19(1)).
This section will, however, not apply to any debt benefit regarding debt owed by a person
l who is an heir or legatee of a deceased estate, to the extent that
– the debt is owed to the deceased estate
– the debt is reduced by the deceased estate, and
– the amount of the reduction forms part of the property of the estate for the purposes of the
Estate Duty Act, 1955 (Act 45 of 1955) (see chapter 27)
(This is excluded since the reduction will constitute a bequest and estate duty will potentially
apply.)
l to the extent that the debt is reduced by way of
– a donation (as defined in s 55(1)), or
– a deemed donation in terms of s 58 (see chapter 26)
(This is excluded since it will qualify as a donation for donations tax purposes and as such will
already be taxed. Therefore, the debt benefit must arise due to commercial reasons (that is the
inability to pay on the side of the person owing the debt) and should not constitute a donation or
a deemed donation.)
l to his employer, to the extent that it will be a taxable fringe benefit under par 2(h) of the Seventh
Schedule (employee debt is discharged by the employer – see chapter 8)
l to another company in the same group and the company (referred to as the dormant company)
owing the debt has not carried on a trade in the current or previous year of assessment (this
mirrors the exclusion for the waiver of debt regarding capital or allowance assets for group
companies (contained in par 12A(6)(d) of the Eighth Schedule – see chapter 17)).
This exclusion will not apply to debt
– that arose directly or indirectly to fund expenditure for an asset that was later disposed of
under the corporate roll-over relief provisions (as part of an asset-for-share, amalgamation,
intragroup transaction or a liquidation distribution under ss 42, 44, 45 or 47 respectively – see
chapter 20), or
– incurred by the dormant company to settle, take over, refinance or renew, directly or
indirectly, any debt of another company that forms part of the same group, or a CFC of the
dormant company that forms part of the same group of companies, or
l to another company in the same group and reduces or settles the debt, directly or indirectly, with
shares issued in the company owing the debt (the debtor).
This exclusion will not apply to debt
– incurred when the debtor was not part of the same group of companies, or
– that is settled or reduced by the issuing of shares in the debtor at a time when the debtor was
not part of the same group of companies (s 19(8)).
416
Remember
Section 19 does not apply to a debt benefit that is a bequest, a donation, a deemed donation or
a taxable employer-employee fringe benefit. It will also not apply to certain debt benefits arising
due to debt owing between companies in the same group.
What will the implications be if s 19 is applicable?

Although the scope of s 19 has been extended and some specific exclusions (debt between group
companies where one party is dormant and certain share issues in exchange for debt) have
been added (effective for years of assessment commencing on or after 1 January 2018), the tax
implications of the section were not affected. The discussion below will therefore apply to both a
reduction amount (for years of assessment commencing before 1 January 2018) as well as a debt
benefit arising from a debt owed (for years of assessment commencing on or after 1 January 2018).
To simplify the discussion below, only the term ‘debt benefit’ will be used (since this will also include a
reduction amount).
Tax deductible expenses Î Debt benefit recouped (ss 19(5)

and 8(4)(a))
OR
Trading stock Î Debt benefit applied to reduce cost of trading stock
(s 19(3)) and any excess of debt benefit recouped
Please note! (ss 19(4) and 8(4)(a))
OR
Allowance assets Î Debt benefit applied to reduce base cost of
allowance asset (par 12A) and any excess of debt benefit recouped
(ss 19(6) and 8(4)(a))
(Also see schematic summary of general rule at end of 13.10.7)
Debt benefit used to fund other expenditure

If a debt benefit regarding a debt owed by a person arises and
l the amount of the debt was used to fund expenditure other than expenditure incurred for
– trading stock (held and not disposed of at the time of the debt reduction), or
– an allowance asset,
the debt benefit must, to the extent that an allowance or deduction was allowed under this Act, be
deemed to be a recoupment in income (under s 8(4)(a)) in the year that the debt benefit arises
(s 19(5)).
Example 13.37. Debt benefit regarding a debt used to fund other expenditure
On 1 March 2018, Norush (Pty) Ltd owes a debt of R500 000. Norush (Pty) Ltd has used the debt
to fund ordinary operating expenses (for example salaries), all of which are tax deductible under
s 11(a). Norush (Pty) Ltd’s creditors discharges the R500 000 of debt, due to Norush (Pty) (Ltd)’s
inability to pay.
Calculate the tax implications for Norush (Pty) Ltd of the debt compromise for the year of
assessment ending on 31 December 2018.
SOLUTION
Year ending 31 December 2018
The debt benefit of R500 000 is not in respect of trading stock or allowance assets
and will therefore be treated as a recoupment of the deductions previously allowed
under s 11(a) and will have to be included in income, but limited to the previous
deductions allowed (s 19(5)).
Tax deductible expenditure (s 11(a))........................................................................... (R500 000)
Recoupment – debt benefit (s 19(5) read with s 8(4)(a)) ............................................. R500 000
417
Debt benefit used to fund trading stock

If a debt benefit arises on a debt owed by a person and
l the amount of the debt was used to fund expenditure in respect of trading stock
l that is held and not disposed of by the taxpayer at the time the debt benefit arises,
the debt benefit amount must be applied to reduce the deduction previously claimed for the trading
stock as either opening stock (s 22(2)), closing stock (s 22(1)) or the purchase price (s 11(a))
(s 19(3)).
The cost price reduction will therefore only apply to the extent that the borrowed funds were used in
respect of trading stock still held and only to the extent that the trading stock has a remaining cost
price. The debt could therefore have been used to fund any expenditure in respect of trading stock
(for example, expenditure to fund improvement in production) and not only the acquisition cost of the
trading stock.
The amount by which the debt benefit amount exceeds the cost price of the applicable trading stock,
will be deemed to be a recoupment for purposes of s 8(4)(a) in the year that the debt benefit arises
(s 19(4)).
Example 13.38. Debt benefit regarding a debt used to fund trading stock
On 1 June 2018, Nocash (Pty) Ltd owes a debt of R500 000. Nocash (Pty) Ltd has trading stock
of R430 000, on that date, purchased during the year. Nocash (Pty) Ltd’s creditors discharge the
R500 000 of debt due to Nocash (Pty) (Ltd)’s inability to pay. Of the debt owing, R430 000 stems
from trading stock held and the other R70 000 relates to trading stock previously held.
Calculate the tax implications for Nocash (Pty) Ltd of the debt compromise for the year of
assessment ending on 31 December 2018.
SOLUTION
Year ending 30 April 2018
The amount of the debt benefit regarding the debt owing of R500 000 will first be
applied to reduce the cost price of the trading stock still held at the time of the
discharge of the debt. The deduction for the trading stock purchased under s 11(a) will
be reduced to Rnil. Therefore, R430 000 of the debt benefit is applied against the
purchase price of the stock still on hand at date of the discharge of the debt. The
trading stock of which the cost price was reduced to Rnil, will accordingly not have any
value for tax purposes if still on hand at year-end. Note that no reduction is made
against the R70 000 of trading stock already sold, since it is no longer part of trading
stock at the time of the discharge of the debt, as required under s 19(3).
Purchase of trading stock (s 11(a)) ............................................................................. (R430 000)
Debt benefit under s 19(3) ........................................................................................... R430 000
The remaining R70 000 of the debt benefit will be a deemed recoupment in income
under s 8(4)(a) (s 19(4)).
Recoupment (s 8(4)(a))................................................................................................ R70 000
Debt benefit used to fund allowance assets

If a debt owed by a person is reduced and the amount of the debt was used to fund expenditure in
respect of an allowance asset the debt benefit must, to the extent that it exceeds
l the deductions or allowances that were claimed and granted in terms of the Act in respect of the
expenditure, plus
l the amount used in terms of par 12A of the Eighth Schedule (see chapter 17) to reduce the base
cost of the allowance asset to zero (base cost reduction)
be deemed to be a recoupment in income (under s 8(4)(a)) in the year that the debt benefit arises
(s 19(6)).
The debt could have been used to fund any expenditure in respect of the allowance asset and not
only the acquisition cost of the allowance asset.
Allowance asset means a capital asset in respect of which a deduction or allow-

ance is allowable in terms of the Act for purposes other than the determination of
Please note! any capital gain or loss (therefore assets on which allowances can be claimed
(defined in s 19(1)).
418
Remember
If a debt benefit relates to a debt to fund an allowance asset, first apply the debt benefit to
reduce the base cost of the asset to Rnil (in terms of par 12A of the Eighth Schedule (see chap-
ter 17)), then recoup the remainder of the debt benefit under s 8(4)(a).
If a debt benefit arises, the total amount of allowances and deductions allowable to the taxpayer may,
in future, not exceed an amount equal to the total expenditure incurred regarding an allowance asset
(the cost), reduced by the sum of
l the debt benefit, and
l the total of all deductions and allowances previously claimed (s 19(7)).
Example 13.39. Debt benefit regarding a debt used to fund an allowance asset
On 1 June 2018, Nofuss (Pty) Ltd borrows R1 500 000 to acquire a new plant. Nofuss (Pty) Ltd
purchased the plant for a total cost of R1 450 000 and used the remaining R50 000 of debt to
fund tax-deductible administrative expenses. Nofuss (Pty) Ltd has claimed allowances of
R725 000 on the asset, at the stage when Nofuss (Pty) Ltd’s creditors discharge the R1 500 000
of debt, due to Nofuss (Pty) (Ltd)’s inability to pay.
Calculate the tax implications for Nofuss (Pty) (Ltd) of the debt benefit arising due to the debt
discharge for the year of assessment ending on 31 December 2018.
SOLUTION
Year ending 31 December 2018
The amount of the debt benefit of R1 500 000 was used to fund tax-deductible
expenses of R50 000 and the plant of R1 450 000. The amount of the debt benefit
of R50 000 is not in respect of trading stock or allowance assets and will therefore
be treated as a recoupment of the deductions previously allowed under s 11(a)
and will have to be included in income, but limited to the previous deductions
allowed (s 19(5)).
Recoupment under s 19(5) read with s 8(4)(a) ............................................................ R50 000
The remaining amount of the discharge of the debt (debt benefit) of R1 450 000
will first be applied against the base cost of the asset (in terms of par 12A of the
Eighth Schedule) which will be reduced to Rnil; the base cost being R1 450 000
less the allowances claimed of R725 000, thus a base cost reduction of R725 000.
The remaining debt benefit of R725 000 (R1 450 000 – R725 000 (debt benefit
applied against base cost of asset) will be recouped in income (s 19(6)).
Recoupment under s 19(6) read with s 8(4)(a) ............................................................ R725 000
Note
The claiming of any further allowances on the plant will be prohibited under
s 19(7)). It is submitted that if the plant is later disposed of for an amount of
R1 200 000, the full amount will be a taxable capital gain, since the base cost was
reduced to Rnil when the discharge of the debt took effect.
The interaction between s 19 and par 12A of the Eighth Schedule (see chapter 17), as well as the
steps to be followed in the application of the debt benefit when there is a concession or compromise
regarding a debt, can be illustrated as follows:
419
Section 19 Paragraph 12A
Tax deductible Trading stock: Allowance assets: Capital assets (not

expenses: 1. Debt benefit 1. Debt benefit allowance assets):
1. Debt benefit applied to reduce applied to reduce 1. Debt benefit
recouped under cost of trading base cost of applied to reduce
s 19(5) and stock (s 19(3)) allowance asset base cost
s 8(4)(a) 2. Excess of debt (par 12A) (par 12A)
benefit recouped 2. Excess of debt 2. Excess debt
under s 19(4) and benefit recouped benefit applied to
s 8(4)(a) under s 19(6) and reduce assessed
s 8(4)(a) capital loss
(par 12A)
3. Any excess of the
debt benefit left will
have no tax effect.
Interpretation Note No 91 (issued on 21 October 2016) contains detailed explan-

Please note! ations and more than 40 examples that further clarify the tax implications on the
reduction of a debt, including the interaction between s 19 and par 12A of the
Eighth Schedule (see chapter 17).
13.11 Alienation, loss or destruction allowance (s 11(o))

When a taxpayer disposes of an asset on which allowances were previously granted for tax pur-
poses, there might be the possibility of claiming a s 11(o) allowance, if:
Proceeds (limited to original cost price) – Tax value = a negative amount.
When will s 11(o) be applicable?

This allowance will be available
l at the election of the taxpayer
l for qualifying depreciable assets
l used by him for the purposes of his trade
l that have been alienated, lost or destroyed
l during the year of assessment.
To alienate an asset means that ownership is transferred. The withdrawal of an asset from production
will not qualify as alienation since the taxpayer retains ownership. A depreciable asset that is donated
for purposes of trade will be an ‘alienated’ asset and will qualify for the allowance. If not donated for
trade, the allowance will be disallowed (s 23(g) – see chapter 6).
The meaning of the word ‘loss’ was considered in Joffe & Company (Pty) Ltd v CIR. It was stated that
the word signifies a deprivation suffered by the loser, usually involuntarily. In contrast, expenditure
usually refers to a voluntary payment of money. The New Shorter Oxford English Dictionary defines
the word ‘loss’ as ‘perdition, ruin, destruction, the state of fact being destroyed or ruined’. It will also
refer to the theft of an asset (although no proceeds are received, the s 11(o) allowance can be
claimed on the theft of an uninsured asset).
‘Destruction’ is defined in the New Shorter Oxford English Dictionary as
‘1. the action of destroying, demolition, devastation, slaughter,
2. the fact or condition of being destroyed: ruin.
3. a means of destroying; a cause of ruin.’
(Interpretation Note No 60 (dated 10 January 2011))
420
Qualifying depreciable assets for the purposes of s 11(o):

l A ‘depreciable asset’ is discussed in 13.2.4.
l Qualifying depreciable assets are (s 11(o)(i)):
– machinery, plant, implements, utensils and articles that qualified for the
wear-and-tear allowance under s 11(e)
– machinery, implements, utensils and articles that qualified for the allowance
under s 12B (farming and generation of renewable energy)
– machinery, plant, implements, utensils, articles, aircraft or ships that quali-
Please note! fied for the s 12C allowance
– rolling stock that qualified for the allowance under s 12DA
– plant and machinery of small business corporations that qualified for the
allowance under s 12E, and
– an environmental treatment and recycling asset that qualified for the allow-
ance under s 37B(2)(a)
provided that the expected useful life of the asset for tax purposes (deter-
mined from the date of original acquisition) did not exceed 10 years.
The s 11(o) allowance will not be available if the amount received or accrued on the alienation, loss
or destruction, was received from a connected person to the taxpayer (second proviso to s 11(o)).
Remember
l The s 11(o) allowance is only available on election of the taxpayer, if not elected, it will result
in a capital loss (under the Eighth Schedule).
l It is only applicable to qualifying depreciable assets with an expected useful life for normal
tax purposes that does not exceed ten years as determined from the date of original acquisi-
tion (and not the date brought into use). (A new manufacturing machine qualifying for the
s 12C allowance, will have an expected useful life of four years for tax purposes
(40:20:20:20) although it may in reality have an expected useful life of 12 years (Interpre-
tation Note No 60).)
l The s 11(o) allowance applies only to assets that are alienated, lost or destroyed, and is not
available if assets are taken out of production (i.e. mothballed).
l The allowance is not available if
– the asset has never been used
– the disposal did not take place in the year of assessment in which a claim for the allow-
ance was made, or
– if the asset was sold to a connected person in relation to the taxpayer.
What will the implications be if s 11(o) is applicable?
Allowance = Cost – (proceeds plus allowances claimed)

General rule OR
Allowance = Tax value less proceeds
If s 11(o) is elected, a deduction from the income of a taxpayer will be allowed, it will be calculated as
follows and will be allowed (thus a revenue loss can be claimed) if the answer to the calculation is
positive:
The cost of the asset (see below)
EXCEEDS
The SUM of:

l the amount received or accrued from the alienation, loss or destruction (proceeds)
AND
l the allowances or deductions allowed or deemed to have been allowed in respect
of the asset in the current and any previous years of assessment.
421
The reference to the deduction of a ‘deemed allowance’ implies that if a taxpayer used an asset and
for some reason he could not claim an allowance (for example it was not used in his trade), the cost
is reduced by the deemed allowance, although no actual deduction for the allowance could be
claimed.
The cost of an asset for calculation of the s 11(o) allowance is
l for any machinery, implement, utensil or article, deemed to be
– the actual cost to the taxpayer to acquire that asset
Please note! (deemed to be the direct cost of the acquisition of the asset, including
the direct cost of its installation or erection, if acquired in an arm’s-length
transaction (proviso (bb) to s 11(o))
– plus moving cost (see 13.10.3).
The calculation of the allowance upon the alienation, loss or destruction of an asset may be illustrated
as follows:
Example 13.40. Basic calculation of a s 11(o) deduction

Loser Ltd originally purchased Machine A for business purposes for R800 000 as a replacement
for Machine B during 2013 (on which a recoupment of R200 000 was realised and which was
deferred under s 8(4)(e)). During the useful life of the machine, R20 000 was spent to move the
machine to another location. Section 11(e) allowances of R600 000 were claimed on the machine
until date of disposal. The machine was disposed of for R100 000.
Calculate the s 11(o) allowance available to Loser Ltd on Machine A.
SOLUTION
(i) Original cost of machine.................................................................................... R800 000
(ii) Add:
Expenditure incurred on moving the machine from one location to another ....... 20 000
Deemed cost ..................................................................................................... R820 000
Less:
(a) Allowances deducted in the current and previous years of
assessment ................................................................................ R600 000
(b) The amount received or accrued from the alienation, loss or
destruction of the asset .............................................................. 100 000
(700 000)
Section 11(o) allowance ............................................................. R120 000
Note
If the items (a) and (b) in the example exceed the sum of items (i) to (ii), it follows that a profit has
been made on the sale or disposal of the asset. To the extent to which this profit represents a
recoupment of allowances previously made, it is included in the taxpayer’s income as a taxable
recoupment in terms of s 8(4)(a), unless the recoupment is deferred in terms of s 8(4)(e) (see 13.10).
l A portion of the s 11(o) allowance must be disregarded if an asset was

previously used for private purposes. The adjustment can be made by
determining the market value of the asset at the time it is introduced into
the business and using this value as cost (Interpretation Note No 60).
l When calculating the capital gain or loss on an asset under the Eighth
Schedule, the s 11(o) allowance will be deducted from the base cost
(par 20(3)(a) of the Eighth Schedule – see chapter 17).
l If an asset, used partly for trading purposes and partly for private pur-
Please note! poses, is disposed of, the full s 11(o) allowance must be granted. The
section does not require that an asset must be used exclusively or mainly
for the purposes of trade. In practice, however, the full allowances for wear
and tear or, presumably, the s 12B or 12C allowances, and the full s 11(o)
allowance, are determined, and the estimated percentage applicable to the
private use of the asset is disallowed (under s 23(g)) (see example below).
l Sections 23A (the section limits the s 11(o) allowance to rental income
derived from ‘affected’ assets) and 23D (limitations relating to sale and
leaseback assets) will, if all the provisions apply, impose restrictions for the
lessor on the allowance available under s 11(o) (see 13.7.5 and 13.7.6).
422
Example 13.41. Section 11(o) allowance: Asset used partly for trade and partly for
private purposes
An asset costing R10 000 is used 50% for trading purposes and 50% for private (non-trading)
purposes. The total wear and tear is determined as follows:
2017 ................................................................................................................................ R2 000
2018 ................................................................................................................................ R1 600
End of year 2019 ............................................................................................................. R1 280
The asset is then disposed of for R3 000.
Calculate the s 11(o) allowance that will be allowed.
SOLUTION
The following is a method that may possibly be employed to calculate the allowances:
Wear and tear (s 11(e)):
2017 ...................................................................................................... R1 000 (50% of R2 000)
2018 ...................................................................................................... R800 (50% of R1 600)
2019 ...................................................................................................... R640 (50% of R1 280)
The total s 11(o) allowance would be R2 120 (R10 000 – (R4 880 (R2 000 + R1 600 + R1 280) +
R3 000 (selling price))) if the asset were used exclusively for trading purposes, but since the
asset is used 50% for private purposes, only 50% of R2 120 that is, R1 060, will be allowed as a
deduction.
An asset acquired for no consideration will not qualify for s 11(o) since the asset does not have a cost
(Interpretation Note No 60).
13.11.1 Limitation of losses from disposal of certain assets (s 20B)

A s 11(o) allowance will be disregarded (not be allowed) if the full consideration for a disposal does
not accrue to a person in the current year of assessment (s 20B(1)). This could happen, for example,
where an asset is disposed of for an unquantified consideration (under s 24M – see 13.10). In some
instances, this disposal can trigger an initial loss for the transferor (although the total proceeds (when
received) will not result in a loss), as a part or the whole of the consideration will only become
quantifiable during a following year(s). These initial losses will then be deferred (s 20B(1)) until further
consideration is received in a following year.
The disregarded s 11(o) allowance will be deductible in a following year, to the extent that any
consideration received from that disposal is included in the taxpayer’s income in that following year
(s 20B(2)).
Any remaining s 11(o) allowance will be deductible in full if the taxpayer can prove that no further
consideration will accrue to him in respect of that disposal (s 20B(3)).
Example 13.42. Limitation of s 11(o) allowance

During the 2018 year of assessment, Helper Ltd (with a March year-end) sold a manufacturing
machine to Support (Pty) Ltd. The machine originally had a cost price of R500 000 and tax
allowances of R400 000 have been deducted for normal tax purposes on this machine. The terms
of the sale were a cash amount of R50 000 on date of sale and then 10% of the value of products
produced by the machine for the subsequent two years. Assume that the amounts eventually
received were R20 000 (2019) and R25 000 (2020).
Calculate the implications of the above transaction for Helper Ltd for the 2018, 2019 and 2020
years of assessment.
423
SOLUTION
Year ending 31 March 2018
Section 11(o) allowance (R500 000 – (R400 00 + R50 000) = R50 000, but the
allowance is disregarded under s 20B(1) as the full consideration has not yet
accrued to Helper Ltd. .................................................................................................. –
Proceeds on sale realised are R20 000 for 2019, but this will not be included in
income. It will be set off against the disregarded s 11(o) allowance carried forward
from 2018 (s 20B(2)):
R50 000 (s 11(o) – 2018) – R20 000 (proceeds – 2019)
= R30 000 (balance of s 11(o) allowance to be carried forward to 2020). ................... –
Proceeds on sale realised are R25 000 for 2020, but this will not be included in
income. It will be set off against the balance of the disregarded s 11(o) allowance
carried forward from 2019 (s 20B(2)):
R30 000 (balance of s 11(o) allowance – 2019) – R25 000 (proceeds – 2020)
= R5 000 (balance of s 11(o) allowance).
This allowance will be allowed as a deduction from income in 2020, as the full con-
sideration has accrued to Helper Ltd during 2020 (s 20B(3)). ..................................... (5 000)
13.12 Summary
13.12.1 Comparison between ss 11(e), 12C and 13

The allowances that are claimed most often in the manufacturing environment are:
l s 11(e) – wear-and-tear allowance (see 13.3.1)
l s 12C – movable assets used by manufacturers, for research and development or by hotel-
keepers, and ships, aircraft and assets used for the storage and packing of agricultural products
(see 13.3.3)
l s 13 – allowance on buildings and improvements (see 13.4.1).
Each of the above allowances has certain criteria that have to be met before it can be used.
The following table can be used for quick reference purposes:
Section 11(e) Section 12C Section 13

Type of l machinery, l machinery or plant l buildings (and certain
asset l plant, owned by the taxpayer improvements)
and used directly by the l used wholly/ mainly for a
l implements,
taxpayer or lessee in a process of manu-
l utensils and articles process of manufacture facturing or research and
used by the taxpayer in his (or similar process) and development (or a
trade (not buildings, only used for trade purposes process which is similar
movable assets) or improvements thereto in nature) in the course of
his trade
l machinery or plant
owned by the taxpayer
and used under a
supply agreement by a
components supplier in
the Automotive industry
(where grants under the
11th Schedule are
received) in a process
of manufacture and
used for trade purposes
or improvements thereto
continued
424
Section 11(e) Section 12C Section 13

l new or unused
machinery or plant
owned by the taxpayer
and used directly by the
tax-payer for purposes
of research and
development or
improvements thereto
l ships or aircraft
Allowance l owner of asset or l owner of asset or l owner
claimed purchaser (under a purchaser (under a l lessor
by suspensive sale agree- suspensive sale l lessee
ment) agreement)
l lessor if leased under a l lessor if leased under a
financial lease and used financial lease and
for trade purposes used directly in
manufacturing process
Value of Includes: The LESSER of: Includes:
asset value at time of acquisition l the actual cost to the ‘cost’ = cost for taxpayer
(excluding input VAT if it can taxpayer, and (excluding input VAT if it
be claimed) l the cash cost in an can be claimed)
Plus: installation/erection arm’s-length transaction Less: initial allowance (if
costs (excluding input VAT if it applicable)
Plus: cost of foundation/sup- can be claimed) Less: s 13(3) recoupment (if
porting structure Plus: installation/erection chosen by taxpayer)
Plus: moving cost costs Less: s 11(g) allowance
Excludes: Plus: cost of claimed
finance charges, value of skill foundation/supporting
and labour where the tax- structure
payer constructed the asset Plus: moving cost
Excludes:
finance charges
Write-off Write-off periods according Starts when first BROUGHT Various allowance
period to the list issued by the INTO USE depending on when
Commissioner in a public New or unused on or after erection started
notice (Binding General 1/03/2002: After 30 September 1999:
Ruling No 7 and 40%/20%/20%/20% 5%
Interpretation Note No 47) Ships/Aircraft/Second-hand:
differ for each type of asset 20% for five years
(small items < R7 000 write
off in full to R1)
Apportion- If only used for a part of the Do NOT apportion Do NOT apportion
ment year, apportion for the
period of the year that the
asset was used
Recoup- Recoupment of allowances previously Recoupment of allowances previously
ment / granted if sold for more than the tax value granted if sold for more than the tax value
s 11(o) Deductible s 11(o) allowance if sold for less NO s 11(o) allowance available if sold for
allowance than the tax value (but disallowed if to a less than the tax value
connected person)
425
13.13 Comprehensive examples

Example 13.43. Capital allowances
Matlapu Ltd (a manufacturer approved by the Commissioner) with a February year-end acquired
and brought the following assets into use:
Motor car on 1 October 2013 costing ............................................................................ R240 000
Machine A (second-hand) on 1 November 2012 costing .............................................. 960 000
Machine B (new and unused) on 1 February 2014 costing ........................................... 900 000
The company also erected a new factory, which was commenced on 1 March 2013 and
completed and brought into use on 31 January 2014, at a cost of R10 000 000 (excluding the
land, which cost R1 500 000).
Additional information:
(1) Machine A was destroyed by fire on 31 August 2014. R1 000 000 was received from the
insurance company.
(2) Machine B was sold on 31 October 2014. The proceeds from the sale amounted to R80 000.
(3) Machine C was acquired on 1 December 2014 to replace Machine A at a cost of R1 392 000.
(4) The motor car was destroyed on 31 January 2018 and realised R10 000.
(5) Machine C was sold on 31 August 2017, the proceeds from the sale amounting to
R1 250 000.
(6) The factory premises were sold on 30 November 2021 for R11 500 000 (including R2 000 000
received for the sale of the land). Hired premises were occupied from that date.
Calculate the various allowances to which Matlapu Ltd is entitled on the various assets acquired
for the different years of assessment up to and including the year ending on 28 February 2022,
including any s 11(o) allowance or taxable recoupment (Ignore VAT). Assume that the motor car
qualifies for a five year write off period in terms of Interpretation Note No 47. The plant qualifies
for the s 12C allowance and the premises qualify for a 5% annual allowance.
SOLUTION
MOTOR CAR
Original cost (1 October 2013) ................................................................................... R240 000
Less: 20% wear and tear 2014 tax year (5 months) .................................................. (20 000)
R220 000
Less: 20% wear and tear (2015 tax year) (on R240 000) ...................... R48 000
20% wear and tear (2016 tax year) (on R240 000) ...................... 48 000
20% wear and tear (2017 tax year) (on R240 000) ...................... 48 000
20% wear and tear (2018 tax year) (11 months) (on R240 000) .. 44 000
(188 000)
Income tax value 31 January 2018 ............................................................................. R32 000
Since the motor car was destroyed in the 2018 tax year, a s 11(o) allowance of R22 000 must be
granted, namely:
Original cost ................................................................................................................... R240 000
Less: Total amount of the wear-and-tear allowances previously granted R208 000
Proceeds of sale .............................................................................. 10 000
(218 000)
Alienation, loss or destruction allowance (s 11(o)) ........................................................ R22 000
Had the motor car been sold for R100 000, there would have been no alienation, loss or destruc-
tion allowance in terms of s 11(o) but there would have been a taxable recoupment of wear-and-
tear allowances previously granted in terms of s 8(4)(a) amounting to R68 000; that is:
Proceeds of sale 31 January 2018 ................................................................................ R100 000
Less: Income tax value at 31 January 2018................................................................... (32 000)
Taxable recoupment ...................................................................................................... R68 000
continued
426
The whole profit of R68 000 constitutes a taxable recoupment, since the wear-and-tear allow-
ances previously granted amount to R208 000. If the motor car had been sold for R250 000, the
recoupment would have been calculated as follows:
Proceeds........................................................................................................................ R250 000
Less: Income tax value .................................................................................................. (32 000)
Profit on sale .................................................................................................................. R218 000
The recoupment may not exceed R208 000, i.e. the amount of the wear-and-tear allowances
previously granted. The balance of the profit, R10 000, is a profit of a capital nature and will be
subject to income tax under the provisions of the Eighth Schedule as a capital gain.
Notes
(1) In the 2014 and 2018 years of assessment, the wear-and-tear allowance is proportionately
reduced, since the asset was used for only a portion of the year of assessment.
(2) In terms of s 11(e) a taxpayer is entitled to the wear-and-tear allowance up to the date of
sale of an asset. From a practical point of view, it is not always necessary to make the
allowance from the beginning of the year of assessment to the date it is destroyed, since to
do so will not result in any advantage to the taxpayer. If the calculation is made as in the
example above, resulting in an additional allowance, this will be offset by either a corres-
ponding reduction in the s 11(o) allowance or a corresponding increase in the taxable
recoupment. The wear-and-tear allowance should be claimed to the date of sale if a recoup-
ment arises that is not taxed in the year of sale by virtue of the provisions of s 8(4)(e).
MACHINE A
Original cost (1 November 2012) ................................................................................... R960 000
Less: Section 12C allowance (2013 tax year) (20% of R960 000) .......... R192 000
Section 12C allowance (2014 tax year) (20% of R960 000) .......... 192 000
(576 000)
Income tax value 31 August 2014 ................................................................................. R384 000
The s 12C 20% straight-line allowance is granted in full in the 2013, 2014 and 2015 years of
assessment, even though the machine was used for only part of the year in 2013 and 2015. Since
R1 000 000 was recovered from the insurance company, the s 12C allowances totalling R576 000
have been recouped, but if the taxpayer elects the provisions of par 65 or 66 of the Eighth
Schedule, s 8(4)(e) applies and the amount of R576 000 is not included in his income in the 2015
tax year. The recoupment is deferred and included in income in subsequent years in proportion
to the s 12C allowances applicable to Machine C, that is
2015 tax year (R576 000 × 40%) ................................................................................... R230 400
2016 tax year (R576 000 × 20%) ................................................................................... 115 200
2017 tax year (R576 000 × 20%) ................................................................................... 115 200
2018 tax year (R576 000 × 20%) ................................................................................... 115 200
The balance of R40 000 received from the insurance company is of a capital nature and is
subject to income tax under the Eighth Schedule as a capital gain.
MACHINE C
Original cost (1 December 2014) ................................................................................ R1 392 000
Less: Section 12C allowance (2015 tax year) (40% of R1 392 000) ....... R556 800
Section 12C allowance (2016 tax year) (20% of R1 392 000) ....... 278 400
Section 12C allowance (2017 tax year) (20% of R1 392 000) ....... 278 400
Section 12C allowance (2018 tax year) (20% of R1 392 000) ....... 278 400 (1 392 000)
Income tax value at 31 August 2017............................................................................ nil
Machine C was sold for R1 250 000; the taxable recoupment will therefore be:
Proceeds (limited to original cost) .............................................................................. 1 250 000
Less: Income tax value ................................................................................................ nil
1 250 000
MACHINE B
Original cost (1 February 2014) ..................................................................................... R900 000
Less: Section 12C allowance (2014 tax year) (40% of R900 000) .......... R360 000
(540 000)
Income tax value 31 October 2014 ................................................................................ R360 000
continued
427
The machine was sold for R80 000. The alienation, loss or destruction allowance under s 11(o) is
therefore calculated as follows:
Original cost ................................................................................................................... R900 000
Less: Depreciation allowed ..................................................................... R540 000
Add: Proceeds of sale ............................................................................ 80 000
(620 000)
Section 11(o) allowance................................................................................................. R280 000
The s 12C allowance is granted in full in the years of assessment in which the machine was
acquired and sold. Had the allowance not been granted in the year of sale, the result would have
been the same, since the s 11(o) allowance would then have been greater by the amount not
granted by way of the s 12C allowance.
If the machine had been sold for, say, R580 000, there would have been a taxable recoupment in
terms of s 8(4)(a), determined as follows:
Proceeds of sale ............................................................................................................ R580 000
Less: Income tax value .................................................................................................. (360 000)
Taxable recoupment ...................................................................................................... R220 000
FACTORY PREMISES
Original cost (first used 31 January 2014) ................................................................ R10 000 000
Less: 5% annual allowance (for each tax year 2014 to 2022) (nine years at
R50 000 a year) ........................................................................................................ (4 500 000)
Income tax value 30 November 2021 ....................................................................... R5 500 000
Less: Premises (excluding land) sold for .................................................................. (9 500 000)
Taxable recoupment (s 8(4)(a)) ................................................................................ R4 000 000
Notes
(1) The 5% annual allowance is a fixed allowance and is calculated on the original cost, not on
the diminishing balance of the cost.
(2) In the 2014 and 2022 years of assessment a full allowance is granted, even though the
premises were only used for one month and nine months respectively.
(3) The allowance is not given on the cost of the land.
(4) Since the taxpayer is not acquiring or erecting any new premises, the recoupment is tax-
able. Section 13(3) does not apply.
Example 13.44. Comprehensive example starting with profit before tax
Lekabe (Pty) Ltd is a company resident in South Africa. It designs and manufactures board
games for children and sells these board games to retailers nationwide. Its financial year ends
on the last day of December each year. Lekabe (Pty) Ltd has neither an assessed loss nor an
assessed capital loss to carry forward from its 2017 year of assessment.
The Statement of Profit or Loss and other Comprehensive Income of Lekabe (Pty) Ltd for the year
ended 31 December 2018 is set out below:
Notes R R
Sales 26 850 000
Less: Cost of sales (13 250 000)
Gross profit 13 600 000
Add: Sundry income
Profit on Machine A 432 500
14 032 500
Less: Expenditure 7 (5 493 250)
Bad debt 1 (25 000)
Increase in provision for doubtful debt 2 (95 000)
Rentals 3 (102 000)
Depreciation on computer 4 (50 000)
Depreciation on Machine A 5 (1 250 000)
Depreciation on factory building 6 (130 000)
Depreciation on Machine B 7 (22 500)
continued
428
Notes R R
Depreciation on other machinery and depreciable
assets – all fully written off for tax purposes (22 250)
Restraint of trade 8 (800 000)
Insurance premiums 9 (280 000)
Salaries 10 (2 500 000)
Provision for leave pay 11 (99 500)
Other tax-deductible administrative and marketing
expenses (117 000)
Profit before tax 8 539 250
Additional notes
(1) Bad debt written off of R25 000 consist of trade debtors.
(2) During the previous year of assessment Lekabe (Pty) Ltd claimed R50 000 as a doubtful
debt allowance. At 31 December 2018, the outstanding trade debtors of Lekabe (Pty) Ltd
amounted to R3 800 000 and the list of outstanding debt owed by trade debtors that is
considered to be doubtful and which adheres to the criteria set out in the public notice
issued by the Commissioner amounted to R295 000.
(3) Since 1 April 2015, Lekabe (Pty) Ltd leased a delivery truck (with a cost price of R780 000)
from Naidoo Ltd, a non-connected company, for R25 000 per month in terms of a three-year
lease agreement. The agreement stated that Lekabe (Pty) Ltd will be permitted to continue
using the delivery truck at the end of the three-year period for a rental of R3 000 per month.
Lekabe (Pty) Ltd is allowed to write off the delivery truck over two years in terms of Interpre-
tation Note No 47 constituting the remaining useful life from 1 April 2018), if applicable.
(4) On 18 November 2018 computer equipment was purchased for R255 000. Binding General
Ruling (Income Tax) No 7 and Interpretation Note No 47 allows for a three-year write-off
period on this computer equipment. The computer equipment was brought into use on
1 December 2018.
(5) Lekabe (Pty) Ltd ordered a manufacturing machine (Machine A) from a supplier in France for
̀250 000 on 1 September 2018 to use in the manufacturing process. Machine A was
shipped free on board (FOB) on 15 September 2018 and was delivered at Lekabe (Pty) Ltd’s
premises on 25 September 2018. The payment for the machine was made to the supplier on
15 September 2018. The import duties of R45 000 were paid on importation. The company
had to erect a supporting structure at a total cost of R27 500 to support the machine before it
was brought into use on 1 October 2018.
The following ruling exchange rates were applicable:
Date Spot rate ̀1 = R

1 September 2018 ̀1 = R17,75
15 September 2018 ̀1 = R17,70
25 September 2018 ̀1 = R17,68
1 October 2018 ̀1 = R17,60
31 December 2018 ̀1 = R16,70
(6) The current factory building was erected by Lekabe (Pty) Ltd at a cost of R6 500 000 and
brought into use on 1 June 2016.
(7) On 1 November 2018, a part of the factory was flooded during a heavy rainstorm and machine A
(see note 5 above) was irreparably damaged in the process. On 15 November 2018, an amount
of R3 568 000 was received from the insurance company. The production manager immediately
started looking for a replacement machine and purchased manufacturing machine B (second-
hand) for R2 550 000 on 1 December 2018. Machine B was immediately brought into use in the
manufacturing process.
(8) Lekabe (Pty) Ltd paid R800 000 to Ex Shezi, a former employee who left the employment of
Lekabe (Pty) Ltd, on 1 November 2018 as a restraint of trade on the condition that Ex Shezi
will not exercise a trade, profession or occupation in the manufacturing of board games for
the next five years.
continued
429
(9) Insurance premiums of R175 000 were incurred during the 2018 year of assessment. In
addition, Lekabe (Pty) Ltd paid insurance premiums of R105 000 covering the period
1 January 2019 to 31 August 2019 on 15 December 2018, since this early payment would
secure cheaper insurance.
(10) Salaries of R2 500 000 include directors’ salaries and fees. On 1 February 2018 Lekabe
(Pty) Ltd employed a learner, Shabangu, on a full-time basis at a wage of R800 per week.
(Shabangu was not previously employed by Lekabe (Pty) Ltd.) Lekabe (Pty) Ltd entered
into a 25-week, registered learnership agreement with Shabangu (who is in possession of
a qualification on the NQF level 5) in the course of its trade. The agreement commences
on 1 February 2018 and will be completed during August 2018. The learnership agree-
ment is registered with the relevant Sector Education and Training Authority (SETA).
Lekabe (Pty) Ltd has complied with all the requirements of the Skills Development Levies
Act. The wages paid to Shabangu and the levies paid to the relevant SETA are included in
the salaries amount.
(11) The leave pay provision was increased by R99 500 for the 2018 financial year. As at
31 December 2018 the balance on the leave pay provision amounted to R150 500. Actual
leave payments made, were all made on 28 February 2018 and have been expensed
directly to salaries.
Required
Calculate the normal tax liability of Lekabe (Pty) Ltd for its 2018 year of assessment. You can
ignore VAT. Your answer should start with the profit before tax of R8 539 250.
SUGGESTED SOLUTION
R R
Profit before tax 8 539 250
1 Bad debt (s 11(i)) Trade debtors written off will be deductible in
terms of s 11(i), no adjustment required .......... –
2 Doubtful debt Add back increase in accounting provision for
(s 11(j)) doubtful debt, not deductible .......................... 95 000
Add back: R50 000 (2017)............................... 50 000
and deduct R295 000 × 25% = (R73 750)
(2018)) ............................................................. (73 750)
3 Delivery vehicle Rental payments until 31 March 2018: 3 ×
(s 11(a) and 8(5)) R25 000 (R75 000) plus rental payments from
1 April until 31 December 2018: 9 × R3 000
(R27 000) = R102 000 – deductible under
s 11(a) – no adjustment. –
Determination of the fair market value of the
delivery truck:
Cost to Naidoo Ltd ........................................... 780 000
Less: 20% depreciation on the reducing
balance method per full year (s 8(5)(bB)(i))
2016: ................................................................ (156 000)
624 000
2017: ................................................................ (124 800)
499 200
2018: ................................................................ (99 840)
Deemed fair market value ................................ 399 360
But there will be a s 8(5) recoupment: since

the annual rental of R36 000 (R3 000 × 12),
payable from 1 April 2018 is less than 10% of
the fair market value determined above (10%
× R399 360 = R39 936). The rental is there-
fore deemed to be nominal and Lekabe (Pty)
Ltd is deemed to have acquired the delivery
truck for no consideration for purposes of
s 8(5)(b).
(No s 11(e) allowance will be allowed since
Lekabe (Pty) Ltd is not the owner of the
vehicle.)
continued
430
R R
4 Computer
equipment – s 11(e) Add back accounting depreciation ................. 50 000
R255 000/3 × 1/12 (s 11(e) allowance) ............ (7 083)
5 Machine A imported Add back accounting depreciation on
– s 24I and 12C Machine A ........................................................ 1 250 000
Purchase price (s 12C) – capital:
(̀250 000 × R17,70 (s 25D)) = R4 425 000
Plus: R45 000 (import duties)
plus: R27 500 (foundation)
Total cost = R4 497 500 × 40% (s 12C
allowance)........................................................ (1 799 000)
No foreign exchange differences in terms of
s 24I since paid on transaction date.
6 Factory – s 13(1) Add back accounting depreciation ................. 130 000
Section 13(1) allowance: R6 500 000 × 5% ..... (325 000)
7 Machine A Add back accounting profit ............................. (432 500)
destroyed – s 12C, Machine A:
8(4)(e) and Purchase price = ........................................... 4 497 500
par 65 of the Less:
Eighth Schedule Wear and tear (s 12C):
40% × R4 497 500 (2018 note 5) ..................... (1 799 000)
Tax value.......................................................... 2 698 500
Proceeds.......................................................... 3 568 000

Tax value.......................................................... (2 698 500)
Recoupment .................................................... 869 500
But can elect par 65 of the Eighth Schedule
as proceeds are equal to or greater than base
cost (refer below) and defer recoupment in
terms of s 8(4)(e). –
Capital gains tax implications:
Proceeds.......................................................... 2 698 500
(R3 568 000 – recoupment of R869 500) .........
Less: Base cost ............................................... (2 698 500)
(R4 497 500 – s 12C of R1 799 000) ................
– –
Add back accounting depreciation ................. 22 500
R2 550 000 × 20% (Machine B: s 12C) ........... (510 000)
Therefore:
Section 8(4)(e) on Machine A:
R869 500 × 20% (same % as machine B) ....... 173 900
Depreciation on Add back depreciation – fully written off for
other assets tax .................................................................... 22 250
8 Restraint of trade Add back restraint of trade payment, capital
to Ex Shezi in nature ........................................................... 800 000
(s 11(cA))
The lesser of:
R266 667 (R800 000 / 3 years) or R160000
(R800000 / 5years) will be deductible ........... (160 000)
9 Insurance premiums Insurance premiums for the 2018 year of
(s 11(a) and 23H) assessment, deductible under s 11(a) ............ –
Prepayment not deductible, s 23H, no benefit
received during 2018 year of assessment,
period of prepaid benefits is longer than six
months and the amount of the prepayment is
greater than R100000. Add back ................... 105 000
continued
431
R R
10 Salaries and Salaries deductible under section 11(a) – no
learnership adjustment ....................................................... –
(s 11(a) and 12H)
Learnership allowance, s 12H(2)(a)(ii)
l Commencement allowance : R40 000 ×
25 / 52 ........................................................ (19 231)
l Completion allowance = R40 000
(< 24 months) ............................................. (40 000)
11 Leave pay provision Add back increase in leave pay provision, not
(s 23(e)) deductible (s 23(e)) ......................................... 99 500
Other tax deductible Deductible for tax purposes – no adjustment .. –
expenses
TAXABLE INCOME 8 370 196
Tax payable At 28% ............................................................. 2 343 655
432
14 Trading stock
Jolani Wilcocks

l value trading stock for taxation purposes in the following circumstances:
– normal trade activities
– trading stock acquired for no consideration
– trading stock distributed as a dividend in specie
– trading stock donated or applied for own use
l deal correctly with opening stock and closing stock in an income tax calculation
l understand the anti-avoidance provisions relating to trading stock
l calculate the deductions with regard to trading stock in respect of
– share dealers, and
– contractors
l apply s 9C to the disposal of shares deemed to be of a capital nature.
Contents
Page
14.1 Overview and core concepts (s 22 and definition of ‘trading stock’ in s 1)................... 433
14.2 Closing stock (s 22(1)) ................................................................................................... 435
14.3 Opening stock (s 22(2)).................................................................................................. 436
14.4 Cost price of trading stock (s 22(3)) .............................................................................. 437
14.5 Trading stock acquired for no consideration (s 22(4)) .................................................. 438
14.6 Goods taken from stock or distributed as a dividend in specie (s 22(8)) ..................... 439
14.7 Anti-avoidance provisions (s 23F) .................................................................................. 441
14.8 Contractors’ work in progress (s 22(2A) and 22(3A)) .................................................... 443
14.9 Securities lending arrangements and collateral arrangements
(s 22(4A), (4B) and (9)) .................................................................................................. 444
14.10 Deemed capital receipts from the disposal of shares (s 9C) ....................................... 445
14.11 Share dealers (ss 22, 22B and 40C) .............................................................................. 448
14.1 Overview and core concepts (s 22 and definition of ‘trading stock’ in s 1)

Trading stock is an essential element of many businesses and as a result a basic understanding of
the tax treatment is important for many taxpayers. Cost of sales is calculated the same for tax pur-
poses and for accounting:
Cost of sales:
l Opening stock (s 22(2) – 14.3) ................................................................................ (Rxx)
l Purchases (s 11(a)) ................................................................................................. (zzz)
l Closing stock (s 22(1) – 14.2) .................................................................................. yy
Total deduction from taxable income (taxation) or turnover/sales (accounting) ........... (Rxz)
Expenses incurred to acquire trading stock will be allowed as a deduction under the general deduc-
tion formula (s 11(a) – provided that all of the requirements of that provision have been met). Sec-
tion 22 contains the tax treatment of trading stock on hand at the beginning and end of the year of
assessment. Livestock and produce are not covered under s 22, but are dealt with under the provi-
sion relating to farmers (see chapter 22).
433
The proceeds from the sale of trading stock will fall within the gross income definition and will there-
fore be included in taxable income.
Below is a schematic overview of the sections covered in this chapter:
Trading stock (section 22) Goods taken

from stock
and applied
Cost price for another
determined purpose Î
under Cost of sales: Tax treatment: recoupment
s 22(3) (14.4) under s 22(8)
l Opening stock (s 22(2) – 14.3) ......... (Rxx)
l Purchases (s 11(a)) .......................... (zzz) (14.6)
Trading stock l Closing stock (s 22(1) – 14.2) ........... yy
acquired at no Total deduction from taxable income ..... (Rxz) Reduction of
cost Î include
debt under
at market value
s 19 (see
(s 22(4)) (14.5)
chapter 13)
Special valuation
Holding period of at
rules for contractors’ Anti-avoidance least three continu-
work in progress provisions in s 23F ous years before
(s 22(2A) and (14.7) applied to disposal Î deemed
22(3A)) (14.8) schemes where capital of nature
taxpayers deduct (s 9C) (14.10)
purchases, but do
not include the stock
as closing stock
The following core concepts are covered in this chapter:

Trading stock (s 1)
l It includes
– anything produced, manufactured, constructed, assembled, purchased or in any other manner
acquired by a taxpayer to use in manufacturing, to be sold or exchanged by the taxpayer or on
the taxpayer’s behalf, or
– anything the proceeds from the disposal of which forms or will form part of the taxpayer’s gross
income, but not
• proceeds from the disposal of capital assets by a mine (par (j));
• proceeds from the disposal of a plantation (covered in par 14(1) of the First Schedule) by a
farmer (see chapter 22), or
• an amount received under a key-man policy (par (m)), or a recovery or recoupment under
s 8(4) (par (n), or
– any consumable stores and spare parts that the taxpayer acquired that will be used in the
course of his trade.
l It excludes
– a foreign currency option contract, or
– a forward exchange contract (defined in s 24I(1) – see chapter 15).
Closing stock (s 22(1) – see 14.2)
This is trading stock that is held and not sold at the end of the year of assessment.
Opening stock (s 22(2) – see 14.3)
This is the trading stock held and not sold at the end of the year of assessment, and carried forward
to the following year.
Market value
Market value is not defined in the Act. It is, however, deemed to be the price that a person would pay
when acquiring an asset in terms of a cash transaction concluded at arm’s length.
434
14.1–14.2 Chapter 14: Trading stock
It will be the best price at which an asset can be sold unconditionally for a cash consideration on the
valuation date, assuming
l a willing seller and buyer
l that, before the date of sale there had been a reasonable period for the proper marketing of the
interest and the sale to be concluded
l that no account is taken of any additional bid by a prospective purchaser with a special interest
l a sale either
– of the asset as a whole for use in its working place
– of the asset as a whole for removal from the premises of the seller at the expense of the pur-
chaser, or
– of individual items for removal from the premises of the seller at the expense of the purchaser,
and
l that both parties to the transaction had acted knowledgeably, prudently and without compulsion
(Interpretation Note No 65 (Issue 3)).
Market value will generally exclude VAT, unless the taxpayer is not a registered VAT vendor (and can
therefore not claim back the VAT) or if the deduction of input tax is denied in terms of s 16(3) of the
VAT Act (refer chapter 31) (Interpretation Note No 47 (Issue 3) (issued 2 November 2012)). The VAT
Act refers to the term ‘open market value’, which is deemed to be the consideration for a supply
(therefore the full selling price) and will include VAT.
14.2 Closing stock (s 22(1))

If trading stock is acquired or manufactured and then also sold in the same year, the taxpayer will
include the proceeds from the sale and deduct the cost of the trading stock in the same tax calcula-
tion. The income and related expenses are ‘matched’ within the same year. If the trading stock is not
sold in the same year it was acquired, the taxpayer will only deduct the cost for tax purposes without
including any amount in gross income. This will lead to a mismatch between the income and ex-
pense. To address this problem, any person carrying on a trade must take the value of trading stock
held and not disposed of by him at the end of the year of assessment (closing stock) and add it back
to taxable income (s 22(1)).
The value of the closing stock to be added to taxable income is the
l cost price to the taxpayer
less
l any amount by which the value of trading stock has reduced due to
– damage
– deterioration (wear and tear due to use)
– change in fashion
– decrease in market value, or
– any other reason listed in a public notice issued by the Commissioner.
If closing stock is valued at less than cost, SARS must be informed of this in the taxpayer’s tax return,
together with reasons and an explanation of how the lower value was calculated.
All financial instruments (including shares) should be valued at cost for tax purposes (the lower of
cost or market value-rule is not available to share dealers).
Section 23F contains special anti-avoidance provisions relating to closing stock. These are discussed
in 14.7.
Example 14.1. Trading stock acquired but not sold in the same year
Assume the taxpayer purchased trading stock of R110 000 for cash and has not sold that stock
at year-end. The effect on his taxable income for that year will be:
Deduction in terms of s 11(a) for trading stock purchased. ........................................ (R110 000)
Add: closing stock (s 22(1)) ........................................................................................ 110 000
Effect on taxable income ............................................................................................. Rnil
435
Remember
l The value of the closing stock is added to taxable income to ‘balance’ the tax calculation.
l All financial instruments must be included in closing stock at cost.
l If instruments, interest rate agreements or option contracts are held as

trading stock, the taxpayer may elect that the provisions of s 24J do not apply
and that the instrument be included in closing stock at market value (in terms
of s 22(1)(b) read with s 24J(9) (see chapter 16)).
l If a small, medium or micro-sized enterprise (SMME) uses funding received
from a small business funding entity to finance the acquisition, manufac-
Please note! turing or improvement of trading stock
– any deduction in terms of s 11(a) for the cost of the stock, or any amount
taken into account as closing stock (s 22(1)) or opening stock (s 22(2))
– should first be reduced with the amount of the funding received from the
small business funding entity that was applied to fund the trading stock,
before taking the remaining amount into account in the tax calculation
(s 23O(2) – see chapter 19).
14.3 Opening stock (s 22(2))

Any trading stock that was not sold in the previous year and was still held at the beginning of the
current year (opening stock) must be deducted from taxable income (s 22(2)). The deductible
amount will be calculated as follows:
l If the trading stock was held at the end of the previous year and included in the taxpayer’s clos-
ing stock, the value of the opening stock will be that same amount (Year 1 closing stock value
equals Year 2 opening stock value).
l If the trading stock was not part of the taxpayer’s closing stock at the end of the previous year of
assessment, the value of the opening stock will be the cost price of the trading stock for the tax-
payer. This will happen if, for example, a taxpayer originally acquired an asset for investment pur-
poses and subsequently changed its intention and treated the asset as trading stock. The value
of the asset that will be included as opening stock will be the original cost price. However, for
CGT purposes where a capital asset is deemed to have been disposed of and re-acquired at
market value, the value of the trading stock will be that deemed market value (see chapter 17).
Example 14.2. Trading stock not included in closing stock at the end of the previous year
A taxpayer, who is a motor vehicle dealer, acquired a Ferrari for marketing purposes for
R2 400 000 (thus initially acquired as a capital asset and not trading stock). Due to the number of
speeding fines he received, he decided to sell the Ferrari at his dealership. The Ferrari was still
on hand at the end of the tax year in which the decision was made. The effect on his taxable
income for that year will be (assuming that the market value of the vehicle is R2 500 000):
Deduction in terms of opening stock for trading stock not included in closing
stock at the end of the previous year. ...................................................................... (R2 500 000)
Add: closing stock (s 22(1)) .................................................................................... 2 500 000
Effect on taxable income .......................................................................................... Rnil
Remember
Closing stock is an addition to taxable income, whereas opening stock is a deduction.
The Ernst Bester Trust v CIR (70 SATC 151 (SCA)) court case (which dealt with mining of sand on a
farm) found that s 22 was not applicable to deposits of sand still in the ground. Sand not removed
could therefore not be seen as part of trading stock and as such could not be classified as opening
stock.
436
14.4 Chapter 14: Trading stock
14.4 Cost price of trading stock (s 22(3))

The acquisition cost of trading stock may be deducted in terms of s 11(a). It is therefore important to
know how this cost price should be determined.
The cost price of trading stock is
l the cost incurred by the taxpayer (in the current or any previous year of assessment), when
acquiring that trading stock
plus
l any further costs incurred by the taxpayer, in terms of IFRS (if the taxpayer is a company) in
getting the trading stock into its existing condition and location, but excluding any foreign ex-
change differences made on the stock purchased (for foreign exchange, see chapter 15)
plus
l an amount that has been included in his income as a recoupment (in terms of s 8(5) – see chap-
ter 13) since it was used to reduce or to settle the purchase price of the trading stock that was
previously hired by the taxpayer (s 22(3)(a)(i) and (iA)).
The ‘further costs’ that are referred to are the costs that should be included in the
valuation of the trading stock in terms of IFRS (IAS 2 (Inventories)). The Explana-
tory Memorandum on the Income Tax Bill 1993 suggests that the cost price of
trading stock includes ‘the purchase price, import duties, sales tax, transport,
handling costs and other directly attributable costs of acquisition (less dis-
Please note! counts, rebates and subsidies on purchases)’. For a manufacturer, the ‘further
costs’ to be taken into account include fixed and variable production overheads
such as indirect materials, direct and indirect labour, depreciation and mainte-
nance of factory buildings, machinery and plant and the cost of factory manage-
ment and administration. Selling expenses, general administrative overheads,
research and development costs and other costs that ‘do not normally relate to
getting the stock in its present condition or location’ are excluded.
Take note of the following special valuation rules that might be applicable:
l If a taxpayer changes his intention and a capital asset (that is subject to CGT) becomes trading
stock, the cost of the trading stock is deemed to be the market value of the capital asset on the
conversion date (par 12(2)(c) of the Eighth Schedule (see chapter 17) and s 22(3)(a)(ii)).
Example 14.3. Cost price of trading stock
A taxpayer has collected and restored furniture as a hobby for the last few years. After pur-
chasing a suitable item of furniture, many hours were spent restoring it in her workshop. The
completed items were then kept on display in her home. On 1 March she decided to go into
business as an antique furniture dealer. She selected six pieces of furniture from her home and
moved these into her shop, from where they were sold. One of these, a dining room table, she
had inherited from her late grandmother. The table was in perfect condition when she had re-
ceived it and she did not have to do any further work on it before it was sold.
The deduction in respect of the five purchased items of trading stock on hand on 1 March is the
sum of the purchase cost and the further costs which were incurred in restoring the furniture to a
saleable condition, including her materials and any overhead costs directly related to her work-
shop, such as rental and electricity. As these pieces of furniture are personal-use assets, they
are deemed to have been acquired at market value (par 12(2)(d) of the Eighth Schedule). The
table was acquired for no consideration (inherited) and will be included in terms of s 22(4) at the
market value (see 14.5).
l If a resident holds any shares directly in a Controlled Foreign Company (a CFC – see chap-
ter 21), the cost price includes
– an amount equal to the proportional amount of the net income (before capital gains are adjust-
ed by the inclusion rate of either 40% or 80%) of the CFC (or any other CFC in which that CFC
and the resident directly or indirectly have an interest) included in the taxpayer’s taxable in-
come under s 9D in any year
reduced by
– any foreign dividend, received from that CFC, which is exempt in terms of s 10B(2)(a) or (2)(c)
(s 10B covers the exemption of foreign dividends – see chapter 5).
(Note that these rules will also apply to the cost price of shares of a CFC held directly by another CFC.)
437
l If a reduction of debt occurs, the cost of trading stock might be reduced in certain circumstances
due to the provisions contained in s 19 (see chapter 13 for a detailed explanation and illustrative
examples of s 19).
l If an exempt government grant (under s 12P – see chapter 5) has been received to fund the
acquisition, creation or improvement of trading stock, or to reimburse the acquisition of trading
stock, the cost price of the trading stock will first be reduced by the amount of the grant. (Any ex-
cess left of the grant will be recouped under s 8(4)(a) (see chapter 13)).
l If a small, medium or micro-sized enterprise (SMME) uses funding received from a small business
funding entity to finance the acquisition, manufacturing or improvement of trading stock,
– any deduction in terms of s 11(a) for the cost of the stock, or any amount taken into account as
closing stock (s 22(1)) or opening stock (22(2))
– should first be reduced with the amount of the funding received from the small business
funding entity to the extent in which it was applied to fund the trading stock, before taking the
remaining amount into account in the tax calculation (s 23O(2) – see chapter 19).
14.5 Trading stock acquired for no consideration (s 22(4))

If a person acquires trading stock for
l no consideration, or
l for a consideration that is not measurable in terms of money
l but excluding an in-kind government grant (a government grant received by the taxpayer, not in
money but in the form of goods that will form part of the taxpayer’s trading stock)
the cost price of that trading stock will be deemed to be its current market value (see 14.1) on the
date acquired (s 22(4)). Trading stock received under an exempt government grant will therefore not
be recorded for tax purposes at a deemed cost of the current market value but will have a Rnil value.
This is to disallow the deduction of the cost (at market value) of trading stock that was, in fact, funded
by an exempt government grant.
This subsection does not specifically state that the market value will be deductible and there is no
provision in the Act, other than s 40CA (see below), that permits a deduction in respect of trading
stock acquired for no consideration. In practice, and confirmed in the Eveready (Pty) Ltd v CSARS
court case, SARS does allow the market value of the trading stock at the date of acquisition as a
deduction. The Eveready case dealt with the issue of whether the taxpayer company (appellant) had
acquired trading stock for no consideration, which would, as a result, entitle the taxpayer to claim a
deduction for income tax purposes of the market value of the trading stock on the date of acquisition
(under s 22(4)). The deduction of the trading stock acquired for no consideration was never in dis-
pute by SARS; it was the amount or value to be attributed to the deduction that was in dispute, i.e.
l whether the trading stock was acquired for no consideration, which would lead to a deduction of
the market value of the trading stock (under s 22(4)), or
l whether the trading stock was acquired for a consideration, which would lead to a (considerably
lesser) deduction of the cost price of the trading stock (under s 22(2)(b)).
In practice this will imply that any trading stock that was acquired for no consideration will be allowed
as a deduction at market value (as part of opening stock (s 22(2)(b)). If it is still on hand at the end of
the year of assessment, it will also be included in closing stock at the lesser of cost or market value
(except for financial instruments (for example shares) that will always be carried at cost).
Section 40CA applies to the acquisition of trading stock in exchange for shares or an amount of debt
(see chapter 20). Section 40CA deems an amount of expenditure equal to the market value of the
shares (or any amount of debt in exchange for which the trading stock was obtained) immediately
after the acquisition to be the value or cost price of the trading stock acquired. Market value of the
trading stock acquired (under s 22(4)) is therefore not used as cost price if trading stock is acquired
in exchange for shares issued by the company.
Trading stock can also be acquired, for no consideration, through an asset-for-share transaction
(under s 42 (corporate roll-over relief) – see chapter 20 for a detailed discussion of this section).
438
Example 14.4. Trading stock acquired for no consideration

Trading stock with a market value of R50 000 is acquired by way of inheritance. If the trading stock is
still on hand at the end of the year of assessment the effect on taxable income will be as follows:
Opening stock (s 22(2)(b) read with s 22(4)), deduction of trading stock not includ-
ed in closing stock at end of previous year. ................................................................... (50 000)
Closing stock (s 22(4), unless the market value is lower at the end of the year of
assessment, in which case a write-down may be made in terms of s 22(1)). ................ R50 000
Effect on taxable income .......................................................................................... Rnil
14.6 Goods taken from stock or distributed as a dividend in specie (s 22(8))

Trading stock is usually acquired to be sold for a profit. Should a taxpayer use the trading stock for
another purpose, this might result in a recoupment for tax purposes. This recoupment provision
(contained in s 22(8)) will not apply to livestock or produce used for farming purposes (see chap-
ter 22). This recoupment will be either at the cost price as determined in terms of s 22(1) (ss 22(8)(a)
and 22(8)(A)) or at market value at the date of the relevant event (ss 22(8)(b) or 22(8)(B)). The re-
coupment must be included in the taxpayer’s income for the year of assessment during which the
trading stock was applied, disposed of, distributed or ceased to be held as trading stock. Should the
taxpayer use or consume trading stock in the carrying on of trade, an amount equal to the recoup-
ment will be deemed to be expenditure incurred on the acquisition of such asset (proviso (a) to
s 22(8)) and may therefore be allowed as a deduction. Note that the deduction (which could be
immediate if, for example, under ss 11(a) or 11(d), or it could take the form of an allowance over a
period if, for example, under s 11(e)) will only be allowed if the specific requirements of the relevant
deduction or allowance provision are met (Interpretation Note No 65 (Issue 3)).
The following is a list of events that will trigger a recoupment, including the specific value (either cost
price or market value) that will be recouped:
l Trading stock applied for the private or domestic use or consumption of the taxpayer (for ex-
ample a restaurant owner (a sole proprietor) using his restaurant for a family celebration and then
serving valuable bottles of wine that are part of his trading stock). The recoupment will be at the
cost price. If the cost price cannot readily be determined, the taxpayer will be deemed to have
recouped an amount equal to the market value of that trading stock (s 22(8)(A)).
Please note! This is the only event that will trigger a recoupment at cost, all the other events
listed below will trigger a recoupment at the market value.
l Trading stock used to make any donation (for example the donation of groceries (trading stock)
by a taxpayer to his church (but not the distribution of free samples of his trading stock for pro-
motional purposes to his customers). The recoupment will be at the market value. However,
where a taxpayer qualifies for the s 18A deduction in respect of a donation of trading stock (see
chapter 7), the recoupment is deemed to be at an amount equal to the deduction granted to him
for that trading stock under s 11(a) (if the trading stock was purchased during the current year) or
s 22(2) (if it was on hand at the beginning of the year as opening stock) (s 22(8)(C)). Thus, the
recoupment at market value (under s 22(8)(B)) will not be applicable.
Unlike a deemed donation for donations tax purposes, if the donee gives any
Please note! consideration for the disposal, it will not be a donation for purposes of s 22(8)
(Interpretation Note No 65 (issue 3) (issued 6 February 2017)).
l Trading stock disposed of, other than in the ordinary course of his trade and for a consideration
less than the market value thereof (for example trading stock forming part of the sale of a going
concern). ‘Otherwise than in the ordinary course of trade’ can be tested by establishing whether
the disposal would surprise an ordinary businessman.
Remember
Before this provision can apply, the sale must also be for a consideration below market
value.
439
The recoupment will be at the market value. The market value that is included in income may be
reduced by the consideration received by or accrued to the seller when selling the trading stock
for less than market value (proviso (b) to s 22(8)).
An arm’s-length buyer of a business as a going concern will usually acquire trading stock at book
value and in these exceptional circumstances where such a large number of trading stock items
are sold together, book value would generally qualify as market value and s 22(8) (Interpretation
Note No 65 (Issue 3)). Such a sale will not qualify to be below market value and no recoupment
(under s 22(8)) will be applicable.
l Trading stock distributed as a dividend in specie (on or after 21 June 1993) to any holder of
shares in that company (remember to also consider a disposal of trading stock to a holder of
shares for less than market value (Interpretation Note No 65 (Issue 3)). This recoupment will be at
the market value.
l Trading stock applied for a purpose other than disposal in the ordinary course of the taxpayer’s
trade and under circumstances other than those referred to above. This will include trading stock
used for purposes of trade (for example cleaning products taken from stock and used to clean
the shop), or trading stock applied as a capital asset after it has been manufactured by the tax-
payer (par (jA) of the gross income definition will be applicable to these assets) (Interpretation
Note No 65 (Issue 3)). This recoupment will be at the market value.
If the amount received or accrued from the disposal of trading stock has been
included in gross income since it is trading stock that was similar to any other
asset manufactured by the taxpayer and that was then subsequently applied as
a capital asset (under par (jA) of the definition of ‘gross income’ in s 1), the
provisions of this section (s 22(8)) will not apply (although it falls within the
ambit). These items are similar to any other asset manufactured and subse-
Please note! quently used as capital assets, which in terms of par (jA) will continue to be
treated as trading stock for tax purposes (proviso (d) to s 22(8))). If a par (jA)
asset is sold for less than market value, the actual selling price (consideration)
will be subject to tax under par (jA) as part of gross income, whilst the remaining
difference between market value and the actual selling price will be included in
income (under s 22(8)(b)(ii)) (Interpretation Note No 11 (Issue 4) (issued 6
February 2017)).
l Trading stock no longer held as trading stock by the taxpayer (thus a change of use of the trad-
ing stock or shares held as trading stock in a company that is wound up, liquidated or deregis-
tered). This recoupment will be at the market value.
Remember
If trading stock is dealt with under s 22(8), a Value-Added Tax (VAT) change in use adjustment
will have to be made by a VAT vendor in terms of s 18(1) of the VAT Act, unless the taxpayer
continues to use the goods for the making of taxable supplies (see chapter 31).
Example 14.5. Trading stock applied, disposed of or distributed
Calculate the effect of the following transactions on the taxable income of the taxpayer (indicate
only the effect of the application, disposal or distribution of the trading stock):
(a) Trading stock, which cost the taxpayer R15 000, is removed by him for private use. The
market value of the trading stock on the date it was used was R17 500.
(b) Trading stock, which cost the taxpayer R15 000, is used by the taxpayer for the purposes of
his trade. The market value of the trading stock on the date it was used was R17 500.
(c) Trading stock, which cost the taxpayer R15 000, is distributed to the holder of shares as a
dividend. The market value of the trading stock on the distribution date was R17 500.
(d) Trading stock, which cost the taxpayer R15 000, is donated to a qualified PBO and a valid
s 18A receipt is obtained. The market value of the trading stock on the date of donation was
R17 500.
(e) Trading stock (a computer), which cost the taxpayer R15 000 to manufacture, is taken from
trading stock and will be used by the taxpayer as a capital asset in the finance department.
The market value of the trading stock on the date of conversion was R17 500.
(f) Trading stock (computers), which cost the taxpayer R15 000 to manufacture, is taken from
trading stock and will be given to the employees as gifts at the Christmas party. The market
value of the trading stock on the date of conversion was R17 500.
440
SOLUTION
(a) Recoupment included in taxable income (s 22(8)(A)): ............................................ R15 000
(b) Recoupment included in taxable income (s 22(8)(B)): ............................................ R17 500
Deduction allowed (s 11(a)) (deemed expenditure under proviso (a) to s 22(8)): .. (R17 500)
(c) Recoupment included in taxable income (s 22(8)(B)): ............................................ R17 500
(d) Recoupment included in taxable income (s 22(8)(C)): ............................................ R15 000
(note that the taxpayer will also qualify for a s 18A deduction of 10% of his
taxable income, limited to the R15 000 donation of trading stock he made
(s 18A(3)(a)(ii))
(e) No recoupment under s 22(8), since par (jA) of the gross income definition will
be applicable when the trading stock is subsequently sold. Also, no capital al-
lowances will be allowed on the computer from the date used in the finance de-
partment up to the date of subsequent disposal. The trading stock, although
treated as a capital asset in the business, will still be treated as trading stock for
tax purposes (proviso (d) of s 22(8)) ....................................................................... Rnil
(f) Recoupment included in taxable income (s 22(8)(B)): ............................................ R17 500
Deduction allowed – salaries (s 11(a)) (deemed expenditure under proviso (a)
to s 22(8)):................................................................................................................ (R17 500)
14.7 Anti-avoidance provisions (s 23F)

Due to the fact that closing stock should be included in taxable income (see 14.2), taxpayers invent-
ed various schemes whereby trading stock was acquired during the current year, but remained
undelivered at the end of the year (i.e. items purchased were neither held nor sold at year-end), and
therefore did not form part of closing stock (as described in s 22(1)). As a result, the taxpayers de-
ducted only the acquisition costs but did not include a ‘balancing amount’ in taxable income as
closing stock. Section 23F introduced three anti-avoidance provisions to counter these schemes.
The first anti-avoidance provision (s 23F(1)) was introduced to prevent a taxpayer from claiming a
deduction regarding this type of acquisition of trading stock by denying the deduction if the trading
stock was
l not disposed of by the taxpayer during the year (i.e. no proceeds were included in gross income
in terms of sales), and
l was not held by him at the end of the year (i.e. no amount is included in taxable income in terms
of closing stock) (for example goods in transit).
The deduction for the trading stock acquired will only be allowed in the first year in which
l the stock is disposed of by him (i.e. proceeds in respect of the sale of that stock are included in
gross income), or
l the value of the stock is included in his closing stock (i.e. an amount is added to taxable income
as closing stock), or
l he can show that the stock was
– neither disposed of by him during such year, nor
– held by him at year-end
due to it being lost. This will also be the case if the trading stock was destroyed or the purchase
thereof cancelled. The expenditure in respect of the acquisition of the stock is then deemed to
have been incurred to the extent that it has actually been paid by him. Therefore, the taxpayer
can, for example, claim a deduction for amounts actually paid in the year the stock is lost.
Remember
When establishing the transaction date, remember that free on board (FOB) as well as cost-
insurance-freight (CIF) means that ownership passes when loading on the ship, train, aeroplane,
truck, etc. This is important because the debt is only actually incurred (the transaction date) once
ownership of the underlying asset passes. Also remember that the s 11(a) deduction for the ac-
quisition of trading stock will be allowed once expenditure is actually incurred, and not only
when it is actually paid (also see chapter 6).
441
The second anti-avoidance provision (s 23F(2)) provides for the situation where
l a taxpayer has disposed of trading stock in the ordinary course of his trade for a consideration
that will not accrue to him in full during that year of assessment, and
l he could deduct the expenditure incurred on the acquisition of the trading stock under s 11(a)
during that or any previous year of assessment (therefore a deduction in terms of opening stock
or acquisition costs was claimed, but no ‘balancing’ addition to the taxable income is made in the
form of proceeds from the sale of the trading stock).
Any deduction will be limited to the amount received or accrued from the disposal of that trading
stock during that year of assessment. An amount that is deductible as opening stock, for example,
shall be limited to the amount received or accrued during that year. Excess deductions will therefore
be disregarded during that year, but may be deducted from the income in a following year. The
deduction in the following years will again be limited to the amount which is received by or accrued
to that person in that subsequent year from that disposal (s 23F(2A)). If any disregarded deductions
still exist once no further proceeds will accrue, these remaining deductions may be claimed at that
time (s 23F(2B)).
Example 14.6. Deferral of acquisition deduction
A taxpayer sold trading stock for R500 000 on the last day of the year of assessment ending
February 2018. Half of the consideration will accrue to him on 28 February 2019, and the other
half will accrue on 29 February 2020. He purchased the trading stock on 28 February 2017 at a
cost of R300 000.
Calculate the effect of the above transactions on the taxable income of the taxpayer for the 2018,
2019 and 2020 years of assessment.
SOLUTION
Gross income ................................................................................................................. Rnil
Less: Deduction for opening value of trading stock (s 22(2)) ........................................ (300 000)
Add: Deemed recoupment (s 23F(2)) ........................................................................... 300 000
Taxable income ...................................................................................................... Rnil
Gross income (50% × R500 000) ................................................................................... R250 000
Less: Deduction allowed by s 23F(2) ............................................................................. (250 000)
Taxable income ...................................................................................................... Rnil
Gross income (50% × R500 000) ................................................................................... R250 000
Less: Deduction allowed by s 23F(2) ............................................................................. (50 000)
Taxable income ...................................................................................................... R200 000
Note
The purchaser’s expenditure is accumulated over the time as and when the amounts become due
and payable, thus R0 (2018); R250 000 (2019) and the total expense of R300 000 (2020).
The third anti-avoidance provision (s 23F(3)) creates a deemed recoupment in the situation where a
taxpayer has disposed of a right or interest in trading stock in the ordinary course of his trade. The
transaction has the effect that his remaining right in the trading stock will not be included in closing
stock. Any expenditure in respect of the remaining right in trading stock (which was previously al-
lowed as a deduction under s 11(a) or was otherwise taken into account, for example, as opening
stock) is deemed to have been recovered or recouped (therefore added to taxable income). If, for
example, a taxpayer sells a copying machine as trading stock (with a cost price of R25 000) for
R50 000 and in the sales contract he stipulates that he will retain a 10% ownership interest in the
machine. There will be a recoupment of R2 500 (R25 000 × 10%) included in the taxpayer’s income
(in terms of s 23F(3)).
442
14.8 Contractors’ work in progress (s 22(2A) and 22(3A))

A building contractor is any person who carries on any construction, building, engineering or other
trade in the course of which improvements are effected by him to fixed property owned by any other
person. Improvements effected by a building contractor, as well as any materials delivered by the
contractor to the client’s fixed property (being property that is not owned by the contractor), will be
deemed to be trading stock held and not disposed of by him until the contract has been completed
(s 22(2A)).
A contract will be deemed to have been completed when the taxpayer has carried out all the obliga-
tions imposed upon him under the contract and has become entitled to claim payment of all amounts
due to him under the contract.
If the building contractor receives progress payments, the cost price of trading stock is the sum of
(a) the cost of material used by the contractor in effecting the improvements, and
(b) such further costs incurred by him that will, in terms of IFRS, be deemed to have been incurred
directly in connection with the contract (direct costs), and
(c) the portion of any other costs incurred by him in connection with the relevant contract and other
contracts that will, in accordance with IFRS, be regarded as having been incurred in connection
with the relevant contract (indirect costs)
less the following three items:
(d) any income received by or accrued to the taxpayer in respect of the contract
(e) any portion of an amount payable to the taxpayer under the contract that has been held from
payment as a retention, but limited to 15% of the total amount payable to him under the contract,
and
(f ) any of the costs identified in the first 3 points above ((a), (b) and (c)) that exceed that portion of
the contract price relating to the improvements actually effected by him.
The total deduction for the last three items ((d), (e) and (f)) may not exceed the sum of the costs iden-
tified in the first three items above ((a), (b) and (c)) (s 22(3A)).
In other words, the work in progress must first be costed under conventional and acceptable stand-
ards, and then it may be reduced by the income already brought into account on the contract, any
retention moneys not yet paid (up to 15% of the whole contract price) and any notional loss incurred
on the work completed so far. Finally, the sum of the deductions is limited to the sum of the costs
making up the work in progress.
A separate valuation is required for each contract.
In terms of IFRS 15 (Revenue from Contracts with Customers), that replaced IAS 11 (Construction
Contracts) for financial years that commenced on or after 1 January 2018 and that may be used to
determine the costs referred to in the second and third items above, three types of relevant costs are
identified to be included in the cost price of the trading stock:
l the costs that relate directly to a specific contract
l the costs that generate or enhance resources of the entity that will be used in satisfying perform-
ance obligations in the future, and
l the costs that are expected to be recovered.
Example 14.7. Contractors’ work in progress
A building contractor shows the following results for Contract A for the year ending on the last
day of February:
Income:
Work certified to date.............................................................................................. R300 000
Less: Retention (20%) ................................................................................................ (60 000)
Progress payments received ...................................................................................... R240 000
Expenses:
Materials ..................................................................................................................... R150 000
Labour ........................................................................................................................ 140 000
Overhead costs .......................................................................................................... 20 000
The total contract price is R500 000, and it is estimated that a loss of R15 000 will be made on
completion of the contract.
Calculate the value of work in progress to be included in closing stock at year-end.
443
Silke: South African Income Tax 14.8ದ
SOLUTION
Total costs:
Materials ............................................................................................................... R150 000
Labour ...................................................................................................................... 140 000
Overhead costs ........................................................................................................ 20 000
R310 000
Less: Progress payments to date ............................................................ R240 000
Retention (limited to 15% of R500 000 = R75 000) ........................ 60 000
Loss to date (R300 000/500 000 × 15 000) ................................... 9 000
(309 000)
Closing stock ............................................................................................................... R1 000
(See chapter 12 for additional notes regarding future expenditure on contracts (s 24C).)
14.9 Securities lending arrangements and collateral arrangements (s 22(4A), (4B)

and (9))
A security lending arrangement (which is the type of transaction referred to in ss 22(4A) and 22(9))
can schematically be explained as follows:
Borrower borrows
Lender lends local securities or a
Loan Sale A third party
local securities local or foreign
buys the securi-
or a local or Government bond to
Identical securities or ties or the bond
foreign Govern- enable him to sell
the same bond are from the borrow-
ment bond to securities or a bond
returned to the lender er
borrower of the same kind to
within 12 months a third party
A collateral arrangement (which is the type of transaction referred to in s 22(4B) and 22(9)) is an
arrangement where one party (the transferor) delivers some form of property, in this case local shares
or a local or foreign Government-issued bond (held as trading stock), to another party (the transfer-
ee). The parties agree that the transferee may use the shares or the bond, in the event of a default by
the transferor, to satisfy any outstanding obligations (or debt) of the transferor to the transferee. If all
obligations are met, identical shares or the same bond should be returned to the transferor within 24
months. Taking collateral is one of the principal ways participants in financial markets reduce their
credit risk.
Identical security is in respect of a listed security, as defined in the Securities

Transfer Tax Act (25 of 2007), that is the subject of a securities lending ar-
rangement:
l a security of the same class in the same company as that security, or
l any other security that is substituted for that listed security in terms of an
arrangement that is announced and released as a corporate action as con-
templated in the JSE Limited Listing Requirements in the Stock Exchange
News Service (SENS) as defined in the JSE Limited Listing Requirements
Please note! (s 1).
Identical share is in respect of a share:
l a share of the same class in the same company as that share, or
l any other share that is substituted for that listed security in terms of an
arrangement that is announced and released as a corporate action as con-
templated in the JSE Limited Listing Requirements in the Stock Exchange
News Service (SENS) as defined in the JSE Limited Listing Requirements
(s 1).
Both a lending arrangement (involving securities or a local or foreign Government-issued bond) and
a collateral arrangement (involving shares or a local or foreign Government-issued bond) entered into
between two taxpayers will not be classified as an acquisition of new shares, bonds or securities by
either the borrower or transferee or the lender or transferor (s 22(4A) and (4B)). It will therefore not be
seen as the acquisition of new trading stock, as it is a lending or collateral arrangement of identical
444
securities, identical shares or the same bond and not a sale. If a lending or collateral arrangement
should fall over the year-end of a taxpayer, the securities, shares or bonds in question will be
deemed to be closing stock of the lender or transferor and not the borrower or transferee (s 22(9)).
14.10 Deemed capital receipts from the disposal of shares (s 9C)

Section 9C provides that
l any amount received by or accrued to a taxpayer (other than a dividend or a foreign dividend), or
l any expenditure incurred
l in respect of an equity share
l shall be deemed to be of a capital nature
l if that share had, at the time of the receipt or accrual of that amount, or the incurral of the ex-
pense
l been held for a period (continuous) of at least three years (s 9C(2)).
Therefore, if an equity share fulfils all the requirements of s 9C, it will automatically be deemed to be
of a capital nature, even if held as trading stock and irrespective of whether a gain or loss is made on
disposal. Any expenditure incurred in relation to the equity share will, after the three-year holding
period, also be deemed to be of a capital nature and will not be deductible. If shares are held in a
partnership, the three-year holding period starts on the date of acquisition of the fractional interest in
the share, by the partner.
Equity share is defined in s 9C(1) as

l an equity share
– including a participatory interest in a portfolio of a collective investment
scheme in securities (i.e. share portfolio, but excluding a Collective In-
vestment Scheme in property), and
– a portfolio of a hedge fund collective investment scheme)
l but excluding a share, which at any time during the period before disposal,
Please note! was
– an interest in a share block company as defined in s 1 of the Share
Blocks Control Act (excluded since these types of investments are nor-
mally held on capital account)
– an unlisted foreign company (as the sale of foreign shares can in certain
instances (par 64B of the Eighth Schedule) already be exempt from tax if
capital in nature), or
– a hybrid equity instrument as defined in s 8E (a share with both equity
and debt features, see chapter 16).
All listed shares on the JSE Ltd (South African and foreign), private company shares, interests in
close corporations and certain collective investment schemes will therefore fall within the ambit of
s 9C and the application of the section will therefore also affect share dealers (see 14.11). Preference
shares with limited dividend rights and rights to return of capital on liquidation (non-participating
preference shares) are not equity shares (Interpretation Note No 43 (Issue 6)).
Disposal is defined as
l a disposal as defined in par 1 of the Eighth Schedule, which means any event, act, forbearance
or operation of law envisaged in par 11 or treated as a disposal for capital gains purposes in
terms of the Eighth Schedule (see chapter 17 for details), or
l any event treated as a disposal in terms of s 9H (which relates to change of residence, ceasing to
be a controlled foreign company or becoming a headquarter company (see chapters 3 and 17
for details) (s 9C(1)).
If equity shares are held as trading stock (see 14.11), s 9C may deem the shares (if held for at least
three continuous years) to be capital on disposal, therefore
l if a taxpayer disposes of equity shares, he must include in his income for that year (recoup) any
expenditure or loss incurred in relation to those shares that was allowed as a deduction from his
income under s 11 during that or any previous year of assessment (for example opening stock)
(s 9C(5)), and
445
l this implies that a deemed recoupment under s 22(8) should technically be included in income
(see 14.6). Since s 9C(7) makes it clear that the provisions of s 22(8) will not apply on the dispos-
al of an equity share held for a period exceeding three years, no recoupment under s 22(8) will
be applicable.
l Expenditure or losses previously allowed as deductions from the income of a

taxpayer, that has already been recouped under s 8(4)(a) (see chapter 13)
or under the provisions of s 19 (see chapter 13 – concession or compromise
in respect of a debt) will not be recouped again under the provisions of
s 9C(5) (proviso (a) to s 9C(5)).
Please note! l Expenditure in respect of equity shares held in a resident REIT (real estate
investment trust) or a controlled company of a REIT (a REIT subsidiary) (as
defined in s 25BB(1) – see chapter 19) will not be recouped again under the
provisions of s 9C(5). This exclusion will only be applicable to the expendi-
ture that was not taken into account as part of the cost price of the shares
(either as the cost of trading stock, opening or closing stock) (proviso (b) to
s 9C(5)).
Example 14.8. Application of s 9C(7)

On 1 March 2014, Ostrich Ltd acquired 100 equity shares in Crocodile (Pty) Ltd for R150 000,
which were held as trading stock. On 1 March 2018, Ostrich Ltd distributed the 100 Crocodile
(Pty) Ltd shares as a dividend in specie when the market value was R300 000.
Calculate all the tax implications for Ostrich Ltd in respect of the sale of the shares for the year of
assessment ending 28 February 2019.
SOLUTION
Opening stock (s 22(2)) ............................................................................................ (R150 000)
Add back: Adjustment under s 9C(5) ....................................................................... R150 000
Note: Due to the application of s 9C(7) there will be no recoupment of the market
value of the shares (of R300 000 in income) distributed as a dividend in specie
in terms of s 22(8)(b)(iii))
Capital gains implications on the sale of shares as s 9C deems the proceeds to
be of a capital nature as the shares were held for a continuous period of longer
than three years (held for four years):
Proceeds (R300 000) less base cost (R150 000) = R150 000 capital gain
Taxable capital gain included at an inclusion rate of 80% ....................................... R120 000
When a taxpayer has disposed of any shares of the same class in the same company that were
acquired by him on different dates, he will be deemed to have disposed of those shares held by him
for the longest period (FIFO method of valuation) (s 9C(6)). This provision only prescribes the deter-
mination of the holding period of the shares sold and not the valuation method of the shares, which
for capital gains tax purposes are prescribed by par 32 of the Eighth Schedule (identification rules –
see chapter 17).
The timing provisions contained in s 42 (asset-for-share transactions – see chapter 20), as part of the
corporate roll-over relief, do not apply for purposes of determining whether the share is an ‘equity
share’ as defined in s 9C. The equity shares acquired in terms of an asset-for-share transaction will
be acquired on the date of the transaction. However, if the asset disposed of in terms of an asset-for-
share transaction is an equity share, the timing provisions contained in s 42 are applicable for pur-
poses of s 9C. The new equity shares acquired in terms of the asset-for-share transaction will be
deemed to have been acquired on the date that the original equity shares (given up in exchange)
were originally acquired (s 42(2)(a)(ii)).
Example 14.9. Application of s 9C
Mr Mulaudzi is a share dealer. Four years ago, he acquired listed shares for a purchase price of
R15 000. He has decided to now sell these shares for R60 000.
Calculate all the tax implications for Mr Mulaudzi in respect of the year of the sale of the shares.
446
SOLUTION
Opening stock (s 22(2)) ............................................................................................ (R15 000)
Add back: Adjustment under s 9C(5) ....................................................................... R15 000
Capital gains implications on the sale of shares because s 9C deems the pro-
ceeds to be of a capital nature as the shares were held for a continuous period
of longer than three years (held for four years):
Proceeds (R60 000) less base cost (R15 000) = R45 000 capital gain – R40 000
(the annual exclusion) = R5 000
Taxable capital gain included at an inclusion rate of 40% ....................................... R2 000
Remember
Section 9C does not provide absolute certainty as to whether the proceeds on a share are capi-
tal or revenue in nature on the sale of shares, since it is only applicable to shares held for a peri-
od of at least three years. If a person sells his shares within three years of acquiring them, they
will not automatically be deemed to be of a revenue nature and fully taxable. He or she will still
be entitled to argue (and will bear the onus of proving) that the profits ought to be capital and not
revenue in nature in terms of s 102 of the Tax Administration Act.
When a company in which the taxpayer holds a share issues the taxpayer with another share in sub-
stitution for the original share because of
l a subdivision of shares, consolidation or any similar arrangement, or
l a conversion from a co-operative or a close corporation to a company (as provided for under
s 40A or 40B)
the original share and the substitution share or shares will be deemed to be one and the same share
(taxpayers will thus not have to start a new time count for the period of shareholding) if
l the taxpayer’s participation rights and interests in the company remain unaltered, and
l no consideration whatsoever passes directly or indirectly from him to the company for the issue of
the substitution share (s 9C(8)).
The taxpayer’s combined period of ownership of both shares will establish whether or not the shares
concerned qualify as equity shares. Any shares paid for (for example rights issues made on shares)
will not qualify under the substitution rule. Such shares cannot qualify for the tax-free status bestowed
by s 9C, unless they are held for at least three years.
Please note! Capitalisation shares will be acquired on the date of issue at a cost of Rnil
(s 40C) and the holding period will run from that date.
Take note of the following special provisions contained in s 9C relating to specific types of trans-
actions:
l If taxpayers are involved in a securities lending arrangement (see 14.9) and identical securities
are returned by the borrower to the lender, they are deemed to be one and the same securities
in the hands of the lender. In other words, the transaction does not represent a disposal of the
securities by the lender for normal tax purposes, nor an acquisition of such securities by the bor-
rower (s 9C(4)). The same would apply to a collateral arrangement. In other words, the transac-
tion does not represent a disposal of the shares by the transferor for normal tax purposes, nor an
acquisition of such shares by the transferee (s 9C(4A)).
l If an amount is received in respect of the disposal of shares in a venture capital company (under
s 12J – see chapter 12) and the amount is recouped in terms of s 8(4)(a) (as it was previously al-
lowed as a deduction from income under s 12J(2)), it will not be deemed to be capital in nature
(s 9C(2A)). Any amount received or accrued in excess of the amount recouped under s 8(4)(a)
will, however, be deemed to be capital in nature if the share was held for at least three continuous
years (s 9C(2)).
447
Anti-avoidance measures applying to immovable property and bare dominium schemes

Section 9C will not apply (and the general principles laid down by the South African tax court will
determine the capital or revenue nature) to equity shares in a company if held by a connected person
(as defined in s 9C(1)) and
l more than 50% of the total value (the 50% calculation is made based on market value of the tainted
immovable property compared to market value of all assets (and not on the basis of net asset val-
ue) – Interpretation Note No 43 (issue 6)) of the company consists of immovable property acquired
within three years before disposal of the shares (to act as an anti-avoidance measure where shares
are sold, rather than the assets, to ensure that the proceeds are treated as capital under s 9C), or
l any other asset acquired within the three-year period, encumbered by a lease or a licence for
which payments are directly or indirectly received by or accrued to a person other than the com-
pany during the same three-year period (s 9C(3)).
A connected person for purposes of s 9C(3), is a connected person as defined in s 1 (see chap-
ter 13), with the exception that a company will be treated as a connected person in relation to another
company in which it holds at least 20% or more of the equity shares or voting rights, notwithstanding
the fact that another holder of shares might hold the majority voting rights in such other company
(s 9C(1)).
In the absence of s 9C(3) a person could buy immovable property and place it in a company where
he holds the shares for at least three continuous years. The shares could then be disposed of and the
amount received will then be deemed to be capital in nature.
Example 14.10. Application of s 9C anti-avoidance measures
Mrs Greeff acquired all the equity shares of Flatco (Pty) Ltd (a shelf company) in Year 1. In
Year 5, she provided Flatco (Pty) Ltd with a guarantee so that it could acquire a block of flats.
The bank provided Flatco (Pty) Ltd with a mortgage bond to finance the acquisition of the flats.
Six months after Flatco (Pty) Ltd acquired the flats, Mrs Greeff sold all the shares in Flatco (Pty)
Ltd.
Discuss the tax implications for Mrs Greeff in respect of the sale of the shares.
SOLUTION
Mrs Greeff is a connected person (as defined in s 1) to Flatco (Pty) Ltd. More than 50% of the
market value of the shares held by Mrs Greeff in Flatco (Pty) Ltd is directly attributable to im-
movable property. The immovable property is tainted because it has been held for less than
three consecutive years. Section 9C(2) will not apply to Mrs Greeff when she disposes of the
shares in Flatco (Pty) Ltd although she has held the shares for longer than three years. The
capital or revenue nature of the amount derived on the disposal of the Flatco (Pty) Ltd shares
must be determined by applying the principles laid down by case law.
(Example adapted from Interpretation Note No 43 (Issue 6))
The provisions of s 9C are not applicable to equity instruments qualifying under

s 8B or 8C since these sections recognise gains made on these shares as part
of remuneration (see chapter 10). (Note, however, that s 9C will apply to subse-
Please note!
quent disposals of shares, once the provisions of ss 8B and 8C are no longer
applicable to the shares (if the five-year period for inclusion under s 8C has
elapsed or once a share has become unrestricted.)
14.11 Share dealers (ss 22, 22B and 40C)

A share-dealing company is a company using shares as its trading stock; thus, buying and selling
shares with the purpose of earning profits in a profit-making scheme (speculation). A share-dealing
company may hold certain shares as assets of a capital nature, whilst other shares are held as trad-
ing stock (of which the proceeds will be revenue in nature).
A share-dealing company will include the proceeds of the shares it disposes of in its gross income
and will claim the cost of the shares it acquires as a deduction (remember that special rules exist for
the determination of the cost price of shares in a CFC (see 14.4 – s 22(3)(a)(iii)). In addition, it will
448
take into account, respectively as opening and closing stock, its holdings of shares at the beginning
and end of its year of assessment in terms of s 22 when determining its taxable income.
The cost of the shares will include
l the acquisition costs
l commissions paid to agents
l the cost of registration of shares in his name
l broker’s fees, and
l securities transfer tax paid on the acquisition of the shares.
Unlike other trading stock, the cost price of shares held as trading stock at the end of its year of
assessment may not be reduced on account of a decrease in market value or any other reason
(s 22(1)). It must be valued at cost, unless one of the following circumstances applies:
l If a company issues shares, share options or other rights for the issue of shares to a person for no
consideration, the expenditure actually incurred will be deemed to be Rnil. These shares or op-
tions will therefore have no cost price (or base cost for capital gains purposes) (s 40C).
l If a company issues shares to a share dealer in exchange for an asset acquired from the share
dealer and the consideration is different from an arm’s length consideration, the value of the
shares obtained as trading stock will be determined according to the provisions of s 24BA (see
chapter 20).
Remember
l If instruments are held as trading stock, the taxpayer may elect that the provisions of s 24J do
not apply and that the instrument will be valued at market value (in terms of s 22(1)(b) read with
s 24J(9)).
l All financial instruments included in closing stock must be valued at cost (regardless the
nature of the holder).
l A share held as trading stock and which fulfils the requirements of s 9C will automatically be
deemed to be capital in nature on disposal (this applies to both gains and losses – see
14.10).
A share-dealing company will still be exempt from tax on its receipts and accruals of dividends
(except dividends arising on share buy-backs (s 10(1)(k)(i)) and certain foreign dividends). Any
expenditure incurred by it in carrying on its business of share dealing, for example bank charges,
internet access charges, cost of telephone calls and technical analysis software to manage the share
portfolio, will be allowed as a deduction in determining its taxable income. This expenditure will be
allowable as having been incurred in the production of income in the form of the proceeds on the
disposal of shares constituting trading stock. It will usually not have been incurred in the production
of the exempt dividend income. If the expenditure was incurred in the production of exempt income,
it would have been prohibited from deduction by ss 11(a) or 23(f ). Section 23(q) also prohibits the
deduction of expenditure incurred to produce foreign dividend income. Expenses will also no longer
be deductible after the shares were held for at least three years, since it is no longer in the produc-
tion of income from the start of Year 4 (s 23(f), since the proceeds on disposal will be capital in nature
under s 9C (Interpretation Note No 43 (issue 6)).
Dividend-stripping schemes
In special circumstances (such as a dividend-stripping scheme), the expenditure incurred to acquire
the shares should be apportioned. In essence, a dividend-stripping operation occurs when a share
dealer buys shares in another target company as trading stock, causes that target company to de-
clare and distribute a tax-free dividend out of its undistributed profits, and then sells the shares. The
value of these shares is now depleted and they will be sold at a ‘loss’ representing the difference
between their cost and their selling price. The share dealer aims to receive
l dividends, which are exempt from tax, and
l proceeds for shares held by it as trading stock, which would be included in gross income.
The share dealer will consequently seek to deduct the cost of the shares and all other associated
costs from the proceeds included in gross income for tax purposes (the costs being more than the
proceeds, and therefore resulting in a loss).
449
If all goes as planned, there are two advantages in this type of operation, i.e.
l a loss to be set off against other income, and
l the effective receipt in the form of tax-free dividends of what would otherwise be the (additional)
taxable proceeds from the disposal of the shares.
An apportionment of the expenditure incurred by a share dealer on the acquisition and maintenance
of shares will be required when the shares are acquired in anticipation of the receipt of a liquidation
dividend. The expenditure is therefore incurred in the production of both taxable income (the portion
of the liquidation distribution that is not a dividend) and exempt income (dividends). The part of the
expenditure incurred in the production of the dividend or exempt portion of the liquidation distribution
will be disallowed as a deduction.
This principle was the subject in a variety of case law, with the most important case being CIR v
Nemojim (Pty) Ltd (1983 A). In this case the court prescribed a formula for the deduction of the ex-
penses incurred to acquire the shares. The taxpayer company bought dormant companies with distri-
butable reserves at a discount as a service to those wishing to be rid of their companies. The tax-
payer then disposed of the companies as part of a classic dividend-stripping operation, first clearing
out their reserves by means of dividends exempt from normal tax. The taxpayer was carrying on the
trade of dealing in shares. The cost of the shares it bought was therefore not of a capital nature and
so complied with the non-capital requirement of s 11(a). It also complied with the requirements of
s 23(g) since it constituted moneys wholly or exclusively laid out or expended for the purposes of
trade, as was at that time required by s 23(g). But was the expenditure incurred in the production of
‘income’ as required by s 11(a) or was the expenditure in respect of amounts derived that did not
constitute ‘income’ (s 23(f ))?
The Appellate Division found that the expenditure was incurred with a dual purpose, and the ex-
penditure had to be apportioned according to the following formula:
D
A = (B + C) ×
(D + E)
where
A = deductible expenses
B = general expenses relating to share dealing
C = total cost of acquisition of shares in companies subjected to dividend-stripping in the year of
assessment
D = total proceeds of the sale of such shares, and
E = total dividends received in respect of such shares.
Example 14.11. Dividend-stripping operation
Company Britsky is a share dealer and acquired the shares in Target Co in terms of a dividend-
stripping operation for R1 000 000. After declaring the cash available in Target Co as a dividend,
Company Britsky sold the remaining shell of Target Co for R200 000.
Prior to the dividend-stripping operation Target Co’s statement of financial position was as fol-
lows:
Assets: R
Bank and cash...................................................................................... 1 000 000
1 000 000
Equity and liabilities:

Share capital......................................................................................... 200 000
Retained income (‘local’ reserves only) ................................................ 800 000
1 000 000
If the transaction was not a dividend-stripping operation, the taxation R
consequences would be:
Less: Deduction for purchases allowed by s 11(a) .............................. (1 000 000)
Add: Dividend received included in gross income .............................. 800 000
Less: Dividend exempt by s 10(1)(k) .................................................... (800 000) nil
Add: Sale of shares included in gross income ..................................... 200 000
(800 000)
continued
450
However, the transaction is a dividend-stripping operation, and therefore the

purchase cost should be apportioned. The taxation consequences will be:
R
(
Less: Deduction for purchases 1 000 000 ×
200 000 ) (200 000)
200 000 + 800 000
Add: Dividend received included in gross income ........................... 800 000
Less: Dividend exempt by s 10(1)(k)................................................. (800 000) nil
Add: Sale of shares included in gross income .................................. 200 000
nil
Dividends treated as income on disposal of certain shares (section 22B)

Section 22B extends the principles laid down in the CIR v Nemojim (Pty) Ltd (1983 A) court case. The
introduction of dividends tax (at a rate of 20% in the hands of the holder of shares (excluding resident
companies)) has given rise to the opportunity for company holders of shares when selling shares to
convert the proceeds to dividends. The dividends received will be exempt from tax and no capital
gains will be payable on the amount. The anti-avoidance dividend-stripping rules will also cover
cross-border dividends, including foreign company dividends to South African holders of shares and
domestic company dividends to holders of shares in foreign companies.
Disposals and agreements for disposals finally agreed to before 19 July 2017
Before
19 July 2017 for disposals
and agreements for
disposals finalised before
that date.
From
19 July 2017 for disposals on or
after that date.
If a taxpayer that is a company disposes of shares in any other company, the amount of any exempt
dividend received by or accrued to the taxpayer in respect of any share held by the taxpayer in that
company will be included in his income (s 22B(2)). The inclusion will, however, not be automatic as
the inclusion of the exempt dividend will only apply:
l to the extent that the exempt dividend is received by or accrues to the taxpayer within 18 months
prior to or as part of the disposal of the shares (s 22B(2)(a))
l if the shares were held as trading stock (immediately before disposing of it) and the taxpayer
holds more than 50% of the equity shares in the other company (s 22B(2)(b)), and
l if the other company (or any company in which it directly or indirectly holds more than 50% of the
equity shares) has
– within a period of 18 months prior to the disposal,
– by reason of or as a result of the disposal incurred any debt
– owing to the person acquiring the shares from the taxpayer (or any connected person of the
purchaser), or
– that is guaranteed or otherwise secured by the purchaser (or his or her connected person) by
reason of or as a result of the disposal (s 22B(2)(c)).
The amount of the exempt dividend that will be included in the taxpayer’s income, if all of the above-
mentioned requirements are met, will be limited to the amount of the debt obtained from the purchas-
er of the shares (s 22B(3)).
Section 22B only refers to debt, which is commonly understood to include any amount owing to or by
a person and will include a loan or an advance.
Disposals on or after 19 July 2017
Before
19 July 2017 for disposals
and agreements for
disposals finalised before
that date.
From
19 July 2017 for disposals on or
after that date.
451
The anti-avoidance provisions contained in s 22B were amended effective for disposals on or after
19 July 2017. The aim of the amendments was to extend the scope of the dividend-stripping rules.
If a taxpayer that is a company disposes of shares in any other company (the target company), the
amount of any exempt dividend received by or accrued to the taxpayer for any shares held by the
taxpayer in the target company will be included in his income (s 22B(2)).
The inclusion of the exempt dividend in income will not be automatic but will only apply:
l to the extent that the exempt dividend qualifies as an extraordinary dividend
l if the company held a qualifying interest in the target company at any time during the 18 months
before the disposal, and
l if the shares were held as trading stock (immediately before disposing of it) (s 22B(2)).
An exempt dividend is a dividend or foreign dividend to the extent that the divi-
dend or foreign dividend is
l not subject to dividends tax (Part VIII of Chapter II – see chapter 19), and
l is exempt from normal tax under s 10(1)(k)(i) or s 10B(2)(a) or (b) (see
chapter 5 for details) (s 22B(1)).
An extraordinary dividend means, in relation to
l a preference share, where dividends are calculated based on a rate of
interest, that portion of the dividends that exceeds an amount calculated at
an interest rate of 15%, or
l for any other share, so much of any dividend received or accrued
– within a period of 18 months prior to the disposal, or
Please note! – in respect, by reason of or as a result of the disposal
that exceeds 15% of the higher of the market value of the share at the begin-
ning of the 18 months or market value at the time of disposal (s 22B(1)).
A qualifying interest is defined in s 22B(1) and means an interest held in another
company (alone or with a connected person in relation to that company) that
constitutes
l if the target company is not a listed company, at least
– 50% of the equity shares or voting rights, or
– 20% of the equity shares or voting rights if no other person (alone or with
a connected person) holds a majority, or
l if the target company is a listed company, at least 10% of the equity shares
or voting rights (s 22B(1)).
The extraordinary dividend will be included in income

l in the year of assessment that the shares are disposed of, or
l if the dividend is received or accrues in a later year of assessment, in that later year (s 22B(2)).
Example 14.12. Exempt dividends treated as income on disposal of certain shares (s 22B)
Sharedealer Ltd owns 60% of the equity shares in Resident Ltd. (The market value of the 60%
shareholding was R3 200 000 18 months before the disposal of the shares – see below). On
1 March 2017, Resident Ltd distributes a dividend (that will qualify for exemption from taxation
under s 10(1)(k)(i)) of R800 000 to Sharedealer Ltd. Sharedealer Ltd sells the 60% shareholding
in Resident Ltd to Purchaser Ltd on 30 September 2017, when the market value of the 60%
shareholding was R2 500 000.
Calculate the tax implications for Sharedealer Ltd (whom you can assume held the shares as
trading stock) regarding the dividend received from Resident Ltd for the year of assessment
ending on 31 December 2018.
452
SOLUTION
Dividend received treated as income (Extraordinary dividend = Excess of
R800 000 over R480 000 (15% of higher of R3 200 000 or R2 500 000)))
(s 22B(1) and (2)) ..................................................................................................... R320 000
Remaining dividend received (R480 000 – excluded from the provisions of
s 22B(2) since it does not qualify as an extraordinary dividend (first 15% of the
higher of market value of the shares 18 months prior to disposal (R3 200 000) or
on the date of disposal (R2 500 000) (s 22B(1)) but included in gross income in
terms of special inclusion par (k)) ............................................................................ R480 000
Exempt: Section 10(1)(k)(i) ....................................................................................... (R480 000)
The Eighth Schedule has provisions pertaining to capital gains and losses
mirroring the provisions of s 22B (thus for holders of shares that are not share
Please note! dealers), these are contained in paragraphs 19 and 43A of the Eighth Schedule
(see chapter 17).
453
15 Foreign exchange
Annelize Oosthuizen and Alta Koekemoer

l discuss how foreign currency amounts should be translated to rand for tax purpos-
es
l discuss when and how foreign exchange differences should be calculated for tax
purposes
l calculate the foreign exchange differences that should be included in or deducted
from income
l determine how foreign exchange differences should be treated when assets are
purchased
l explain and calculate the tax treatment of foreign exchange differences on transac-
tions with connected persons and controlled foreign companies
l apply the provisions of s 24I in tax calculations.
Contents
Page
15.1 Overview ............................................................................................................................. 456
15.2 Translation of foreign currency amounts ............................................................................ 457
15.2.1 Definitions (s 1) ..................................................................................................... 457
15.2.2 General translation rule: (s 25D) .......................................................................... 458
15.2.3 Specific translation rule: Controlled foreign companies (s 9D) ........................... 460
15.2.4 Specific translation rule: Foreign tax rebates and deductions (s 6quat) ............. 460
15.3 Specific translation rule: Exchange differences on exchange items (s 24I)...................... 460
15.3.1 Step 1: Identify the exchange item and determine if s 24I applies (ss 24I(1)
and 24I(2)) ............................................................................................................ 461
15.3.2 Step 2: Determine the ruling exchange rates (s 24I(1)) ....................................... 464
15.3.3 Step 3: Calculate the foreign exchange differences (ss 24I(1) and 24I(4)) ........ 466
15.3.4 Step 4: Determine if the exchange difference should be deferred (ss 24I(7)
and 24I(10A))........................................................................................................ 469
15.3.4.1 Acquisition of assets (s 24I(7)) ............................................................. 469
15.3.4.2 Transactions between companies forming part of the same group
of companies and between connected persons (s 24I(10A)) .............. 472
15.4 Specific translation rule: Hedging instruments .................................................................. 474
15.4.1 Forward exchange contracts (s 24I(1)) .................................................................. 474
15.4.2 Foreign currency option contracts (s 24I(1)) ......................................................... 475
15.5 Specific translation rule: Affected contracts (s 24I(1)) ....................................................... 477
15.5.1 Affected forward exchange contracts (s 24I(1)) .................................................... 477
15.5.2 Affected foreign currency option contracts (s 24I(1)) ............................................ 478
15.6 Sundry provisions ............................................................................................................... 479
15.6.1 Bad debts (s 24I(4)) ............................................................................................. 479
15.6.2 Anti-avoidance rule (s 24I(8)) ............................................................................... 480
15.6.3 Commencement or cessation of application of provisions of s 24I (s 24I(12)) ... 480
15.7 Specific translation rule: Disposal and acquisition of assets (par 43 of the Eighth
Schedule)............................................................................................................................ 480
15.8 Comprehensive example.................................................................................................... 483
455
15.1 Overview
Most taxpayers are influenced in some way or another by fluctuations in the exchange rates at which
the currencies of two countries are exchanged. The change in the value of currencies has specific
normal tax implications.
A taxpayer can enter into various transactions in a foreign currency (i.e. a currency other than rand).
The different transactions can have different tax consequences. In order to calculate the effect of the
transactions on the taxable income of a person, the amounts of the transactions must be translated to
the same currency, namely rand, by applying the following general principles:
l If gross income was received by or accrued to a person in a foreign currency or an expense that
qualifies as a deduction was incurred in a foreign currency, such amounts should be translated to
rand using the general translation rules in s 25D.
l If an expense was incurred for the acquisition of an asset, the cost or market value of the asset
must be translated to rand in order to calculate the capital allowances and/or recoupments by us-
ing the general translation rules in s 25D.
l If an asset that was acquired in a foreign currency is subsequently disposed of, the capital gain
or loss must be calculated by applying the specific translation rules of par 43 of the Eighth
Schedule.
l If an asset that was acquired in rand is subsequently disposed of for a consideration denomi-
nated in a foreign currency, the capital gain or loss must be calculated by applying the specific
translation rules of par 43 of the Eighth Schedule.
l The exchange gains and losses arising on exchange items (i.e. unit of currency, foreign debt,
foreign exchange contract or a forward exchange contract) must be calculated and included in
or deducted from the income of a person by applying the specific translation rules of s 24I.
The different tax provisions and effects on taxable income are summarised in the following diagrams.
Diagram (a) illustrates the relevant provisions if income was received/accrued to in a foreign currency
or if an expense was paid/incurred in a foreign currency:
(a)
EXPENSE/INCOME EXCHANGE ITEM
S 25D S 24I
Deduct the expense or

include the income by Deduct the exchange
converting the amounts loss or include the
to rand exchange gain
(see par 15.2.2) (see par 15.3 – 15.6)
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15.1–15.2 Chapter 15: Foreign exchange
Diagram (b) illustrates the relevant provisions if an asset was acquired and/or disposed of in a for-
eign currency:
(b)
COST OF ASSET EXCHANGE ITEM
S 25D Par 43 S 24I
Claim capital Calculate the

allowances by Deduct the exchange
capital gain or capital
converting the loss or include the
loss on date of
cost to rand exchange gain
disposal of the asset
(see par 15.2.2) (see par 15.3 – 15.6)
(see par 15.7)
15.2 Translation of foreign currency amounts

In order to calculate the taxable income of a person, all the income and expenditure amounts must
be in the same currency, namely rand. If income was received in a foreign currency or an expense
was incurred in a foreign currency, such amounts should be translated to rand.
The South African Income Tax Act makes provision for two categories of rules regarding the transla-
tion of foreign currency amounts:
l the general translation rules (s 25D), and
l the specific translation rules (see 15.2.3 to 15.7).
There should always, firstly, be determined if a specific translation rule is applicable before the gen-
eral translation rules are considered.
Remember
l The translation rules relating to exchange gains and losses arising on exchange items are
determined by s 24I (see 15.3).
l The translation rules relating to capital gains and losses are determined by par 43 of the
Eighth Schedule (see 15.7).
15.2.1 Definitions (s 1)
The following definitions are important for the application of the translation of foreign exchange
amounts:
Average exchange rate
The average exchange rate in relation to a year of assessment is determined by using the closing
spot rates at the end of the daily or monthly intervals during the year of assessment. This average
exchange rate must be applied consistently during the year of assessment.
Spot rate
The appropriate quoted exchange rate at a specific time by any authorised dealer in foreign ex-
change for the delivery of currency.
In calculating the average exchange rate, a taxpayer must determine the closing rate at the end of
each day or month (average exchange rate definition in s 1). Whichever method the taxpayer choos-
es to use, he will have to apply it consistently during that year of assessment.
Natural persons and non-trading trusts have the option to use the average exchange rate for the
relevant year of assessment or the spot rate to translate foreign currency transactions. By implication
companies cannot elect which rate to use. As per the provisions of s 25D(1), companies have to use
the spot rate (see 15.2.2).
457
15.2.2 General translation rule (s 25D)

The general provision in the Act that deals with the translation of foreign exchange is s 25D. The
following methods for translation should be applied as a general rule:
With regard to Method of translation

Non-natural persons, including a trust l Determine the taxable income in the currency in which the
that carries on a trade (s 25D(1)) income or expenditure transaction occurred.
l Translate to rand using the spot rate on the date on which the
amount was so received or accrued or the expenditure was so
incurred.
Natural persons or trusts (other than a l Determine the taxable income in the currency in which the
trust that carries on a trade) (s 25D(3)) income or expenditure transaction occurred.
l Translate to rand by electing the spot rate OR the average
exchange rate for the applicable year of assessment.
A permanent establishment outside l Determine the taxable income in the functional currency
South Africa (s 25D(2)) (note 1) of the permanent establishment (note 2)/(note 3).
l Determine the rand value using the average exchange rate for
l If the permanent establishment is situated in the common
monetary area (i.e. Lesotho, Namibia and Swaziland) then this
method of translation (i.e. using the functional currency) is not
applicable (note 4).
A domestic treasury management l Determine the amounts received by or accrued to or the ex-
company (s 25D(5) and 25D(7)) penditure incurred by the domestic treasury management
company in its functional currency (note 5).
An international shipping company l Determine the amounts received by or accrued to or the ex-
(s 25D(6) and 25D(7)) penditure incurred by the international shipping company in its
functional currency (note 6).
Note 1
‘Functional currency’ is defined in s 1 and distinguishes between the functional currency of a person
and the functional currency of a permanent establishment of a person.
l The functional currency in relation to a person means the currency of the primary economic
environment in which that person’s business operations are conducted (par (a) of the definition of
‘functional currency’).
l The functional currency in relation to a permanent establishment of a person means the currency
of the primary economic environment in which that permanent establishment’s business opera-
tions are conducted (par (b) of the definition of ‘functional currency’).
Factors that are considered when determining whether a currency is a functional currency include
the currency of financing activities, the currency in which sales prices are denominated and settled,
etc.
Note 2
A permanent establishment (as defined by the Organisation for Economic Co-operation and Devel-
opment (OECD)) is defined as a fixed place of business through which the business of the taxpayer
is carried on, for example a branch, factory or workshop.
Note 3
According to s 25D(2A) the translation of taxable income of a permanent establishment outside South
Africa using the functional currency of that permanent establishment, will not be applicable to the
extent that
l the currency is not the functional currency of the permanent establishment, and
l the functional currency of the permanent establishment is the currency of a country with an infla-
tion rate of 100% or more throughout the whole of the relevant year of assessment.
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15.2 Chapter 15: Foreign exchange
If this is the case, s 25D(2) will not apply and the translation rules contained in s 25D(1) and 25D(3)
should be considered. The concept of experiencing unusually high rates of inflation is known as
hyperinflation or a hyperinflationary economy. An example of a country that experienced hyperinfla-
tion is Zimbabwe. International Financial Reporting Standards (IFRS) have a specific standard,
IAS 29, that applies when an entity’s functional currency is that of a hyperinflationary economy.
Note 4
If the permanent establishment is located in the common monetary area, s 25D(2) is not applicable
and s 25D(1) or 25D(3) has to be applied. Countries in the common monetary area, i.e. Namibia,
Swaziland and Lesotho’s currencies are equal to the South African rand. This means that in the trans-
lation of a permanent establishment’s taxable income (located in the common monetary area)
l amounts denominated in rand are left in rand
l amounts denominated in the currency of Namibia, Swaziland or Lesotho are translated to South
African rand at a rate of 1:1, and
l any amounts denominated in any ‘other’ foreign currency (for example US dollars) must be trans-
lated using either s 25D(1) (in the case of a company or a trading trust) or s 25D(3) (in the case of
a natural person or a non-trading trust).
Note 5
South Africa’s domestic treasury management company regime allows listed companies on the JSE
to establish one subsidiary to manage the entire group’s treasury functions free from the exchange
control restrictions of the Reserve Bank. A domestic treasury management company is defined in s 1
as a company that has its place of effective management in the Republic and that is not subject to
exchange control regulations by virtue of being registered with the Department of Financial Surveil-
lance of the South African Reserve Bank. A domestic treasury management company, despite being
a South African resident for tax purposes, generally operates in a functional currency other than rand.
A domestic treasury management company will, however, still be taxed according to all other normal
tax principles.
Note 6
An international shipping company is defined in s 12Q as a resident company that holds shares in
one or more South African ships that are used for the international shipping of passengers or goods.
For a detailed discussion on international shipping companies, please see chapter 6.
Example 15.1. General translation rules
Permanent Ltd, a South African resident, trades in France and the business in France is consid-
ered to be a permanent establishment. During the current year of assessment Permanent Ltd
received Μ10 000 from its business in France. Assume an average exchange rate of Μ1 = R14
and a spot rate on the date on which the receipt took place of Μ1 = R12.
Resident Ltd, a South African resident, has a fixed deposit in a bank in the USA. During the current
year of assessment Resident Ltd received $5 000 interest from his investment. Assume an average
exchange rate of $1 = R11 and spot rate of $1 = R10 on the date on which the receipt took place.
Calculate the amount to be included in the gross income of:
(a) Permanent Ltd
(b) Resident Ltd
(c) Resident Ltd if it were a natural person (South African resident).
SOLUTION
(a) Because Permanent Ltd trades through a permanent establishment in France, its
income from the permanent establishment has to be translated in terms of
s 25D(2) from the functional currency of European Μ to South African rand using
the average exchange rate. The amount to be included in Permanent Ltd’s gross
income is calculated as follows:
Μ10 000 × R14 ..................................................................................................... R140 000
continued
459
(b) Because Resident Ltd does not have a permanent establishment in the USA, the
amount of interest received will be translated in terms of s 25D(1) using the spot
rate. The amount to be included in Resident Ltd’s gross income is calculated as
follows:
$5 000 × R10 ..................................................................................................... R50 000
(c) If the fixed deposit was held by a natural person, s 25D(3) determines that the person can
choose to translate the amount of interest either using the average exchange rate or the
spot rate:
Average rate: $5 000 × R11 ............................................................................... R55 000
OR
Spot rate: $5 000 × R10 ............................................................................... R50 000
The natural person will probably choose the most beneficial method for tax purposes
– thus spot rate resulting in R50 000 being included.
In addition to these provisions, there are specific provisions which relate to gains and losses on foreign
exchange transactions, CFCs and rebates on foreign taxes. These specific provisions always have to
be considered first before the general translations rules (s 25D) are considered.
15.2.3 Specific translation rule: Controlled foreign companies (s 9D)

The rules governing the translation of a CFC’s net income or loss in terms of s 9D are contained in
chapter 21.
15.2.4 Specific translation rule: Foreign tax rebates and deductions (s 6quat)
The rules governing the translation of foreign taxes for purposes of s 6quat are discussed in chapter 21.
Remember
The general translation rules will be used unless a specific translation rule is applicable.
15.3 Specific translation rule: Exchange differences on exchange items (s 24I)

The exchange gains and losses arising on exchange items (i.e. foreign unit of currency, foreign debt,
foreign exchange contract or a forward exchange contract) should not be calculated by using the
general translation rules of s 25D. It must be calculated and included in or deducted from the income
of a person by applying the specific translation rules of s 24I.
The following must be included in or deducted from the income of any of the persons referred to
above when calculating their taxable income:
l any exchange difference arising regarding an exchange item held by that person
l any premium or like consideration received or paid by the person in respect of a foreign
currency option contract entered into or acquired by him (see 15.4.2).
The following four steps summarise the calculation of the exchange difference concerning exchange
items:
Step 1: Identify the exchange item and determine if s 24I applies (see 15.3.1).
Step 2: Determine the ruling exchange rates on the transaction date, realisation date and translation
date (see 15.3.2).
Step 3: Calculate the foreign exchange difference (gain or loss) by multiplying the amount in foreign
currency of the exchange item with the difference between the ruling exchange rates on the
different dates (see 15.3.3, 15.4 and 15.5).
Step 4: Determine if the exchange difference should be deferred and recognised in a later year of
assessment because the underlying asset was not yet brought into use or because it re-
lates to a loan between connected persons or a group of companies (see 15.3.4).
460
Remember
Section 24I(3) is the ‘general charging provision’ of s 24I.
l The consequence of this charging provision is that if a taxpayer has incurred a liability in
foreign exchange for the acquisition of, for example, trading stock, the exchange difference
arising on the date the liability is paid is included in, or deducted from, income in the deter-
mination of his taxable income for that year of assessment.
l The trading stock should, however, be translated in terms of s 25D and is deductible in terms of
the rules of the general deduction formula. Even if the taxpayer pays more for the trading stock at
a later stage because of exchange rate fluctuations, only the initial amount will be deductible
in terms of the general deduction formula. Exchange rate differences should be treated
according to s 24I.
l The underlying transaction will not necessarily be trading stock at all times, but it could also
be an asset or another expenditure or even income. It is, however, important to remember
that the underlying transaction should be treated in terms of normal income tax rules.
l Only the foreign exchange gain or loss in respect of an ‘exchange item’ (debt, which can be
either a liability or an asset (like a foreign debtor or foreign bank account), FEC, FCOC and a
unit of foreign currency) is dealt with under s 24I. No foreign exchange gain or loss is recog-
nised in terms of s 24I relating to the underlying asset or expense. The conversion rules of
s 25D will apply for purposes of calculating any expense (for example a s 11(a) deduction or
capital allowances) and the rules of par 43 of the Eighth Schedule will apply for purposes of
calculating the capital gain or loss on disposal of the underlying asset.
l For accounting purposes (IFRS) the term ‘monetary it’ is used instead of ‘exchange item’
(IAS 21.8).
15.3.1 Step 1: Identify the exchange item and determine if s 24I applies (s 24I(1) and 24I(2))
An ‘exchange difference’ is the foreign exchange gain or foreign exchange loss in respect of an
exchange item during any year of assessment.
An ‘exchange item’ is defined is an amount in a foreign currency
l that is a unit of currency acquired and not disposed of by a person, or
l owing by or to a person in respect of a debt incurred by or payable to him, or
l owed by or to a person in respect of a ‘forward exchange contract’, or
l where a person has the right or contingent obligation to buy or sell in terms of a ‘foreign currency
option contract’.
Remember
Each of these exchange items exists independently of the other three. If trading stock is there-
fore purchased and the supplier is reflected as a creditor denominated in foreign currency, the
debt constitutes an exchange item. If a forward exchange contract is entered into to hedge the
debt, the forward exchange contract constitutes a separate exchange item. Accordingly, ex-
change differences will have to be computed in respect of both exchange items, namely the
debt and the forward exchange contract.
The following table describes the meaning of the four exchange items:
Exchange item Description
Unit of currency A unit in foreign currency, for example dollar notes and coins. Any
cash amount in foreign currency held by a person or held by another
person on his behalf is also included.
Debt ’Debt’ includes creditors and debtors where the debt is invoiced in a
foreign currency. It also includes loans received or granted in a
foreign currency as well as deposits in foreign bank accounts. Mon-
ey market instruments in a foreign currency, bonds in a foreign cur-
rency and traveller’s cheques are also included.
A forward exchange contract An agreement in terms of which a person agrees with another person
to exchange an amount of currency for another currency at some
future date at a specified exchange rate.
A foreign currency option contract An agreement in terms of which a person acquires or grants the right
to buy from or to sell to another person a certain amount of a nomi-
nated foreign currency on or before a future expiry date at a speci-
fied exchange rate.
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Definition of ‘foreign currency’

An important component of the above exchange items is that the exchange item should be in a
foreign currency. A ‘foreign currency’ in relation to any exchange item of a person is any currency
that is not local currency.
It is important to remember that an amount can be in a currency other than rand without qualifying as
a foreign currency (and therefore not be an exchange item as defined). This can be, for example, if
the local currency of debt due is dollar. The definition of ‘local currency’ is discussed below.
Definition of ‘local currency’

‘Local currency’ is
in relation to is
l an exchange item attributable to a permanent l the functional currency (note 1) of that permanent
establishment outside South Africa establishment (note 2)
l a resident (other than a headquarter company l the South African rand
(note 3)) in respect of an exchange item that is
not attributable to a permanent establishment out-
side South Africa
l a non-resident in respect of an exchange item l the South African rand
that is attributable to a permanent establishment
in South Africa
l any headquarter company in respect of an ex- l the functional currency (note 1) of that head-
change item which is not attributable to a perma- quarter company (note 3).
nent establishment outside the Republic
l any domestic treasury management company in l the functional currency (note 1) of that domestic
respect of an exchange item which is not attribut- treasury management company (note 4).
able to a permanent establishment outside the
Republic
l any international shipping company (as defined l the functional currency (note 1) of that interna-
in s 12Q) in respect of an exchange item which is tional shipping company (note 5).
not attributable to a permanent establishment out-
side the Republic
Note 1: ‘Functional currency’ in relation to

l a person means the currency of the primary economic environment in which that per-
son’s business operations are conducted (par (a) of the definition of ‘functional currency’
in s 1), and
l a permanent establishment of a person means the currency of the primary economic
environment in which that permanent establishment’s business operations are conducted
(par (b) of the definition of ‘functional currency’ in s 1).
Note 2: If an exchange item is attributable to a permanent establishment of a person outside South
Africa and the other country (whose currency is used) has an inflation rate of 100% or more
throughout the current year of assessment, the functional currency will not be regarded as
the ‘local currency’.
Note 3: Refer to chapter 21 for a discussion of headquarter companies (s 9I).
Note 4: A domestic treasury management company means a company
l incorporated or deemed to be incorporated by or under any law in force in the Republic
l that has its place of effective management in the Republic, and
l that is not subject to exchange control restrictions by virtue of being registered with the
financial surveillance department of the South African Reserve Bank.
Note 5: Refer to chapter 6 for a discussion of s 12Q.
The exchange differences regarding the exchange items are not always taken into account in calcu-
lating the taxable income of all persons. The exchange gains and losses in respect of exchange
items should only be included in or deducted from the taxable income of the following persons:
462
Unit of currency
ANY COMPANY OR Debt

A TRADING TRUST
Foreign exchange contract
Foreign currency option contract
Foreign exchange contract

A NATURAL PERSON OR
A NON-TRADING TRUST
Foreign currency option contract
A NATURAL PERSON Unit of currency

(holding the exchange
items as trading stock)
Debt
If a natural person holds a single unit of foreign currency or a debt denominated

in foreign currency as trading stock, all the exchange items held by that person
Please note! will be subject to s 24I. Consequently, the exchange differences on all exchange
items held by that person will have to be taken into account in the taxable
income calculation of such person.
All foreign currency gains and losses of a company, irrespective of whether the gains and losses
arise from trade or not should always be recognised.
The exchange gains and losses of an exchange item of a non-resident should only be recognised if
the exchange items are attributable to his permanent establishment in South Africa. If, however, a
non-resident is a controlled foreign company, s 24I will be applied for purposes of s 9D (proviso to
s 24I(2)). Refer to chapter 21 for a discussion on controlled foreign companies.
Example 15.2. Definition of an exchange item

A Ltd’s (a SA resident as defined) year of assessment ends on the last day of February. On
1 December 2018, the company purchased trading stock from a supplier in London for an
amount of £100 000 to be used by its foreign branch in London. The trading stock was delivered
at the company’s branch in London. The functional currency of the branch in London is £. The
debt was paid in full on 31 March 2019. All trading stock was sold by the end of February 2019.
Assume that the exchange rates on the relevant dates are as follows:
1 December 2018 : spot rate ......................................... £1 = R6,60
31 January 2019 : spot rate ......................................... £1 = R6,90
28 February 2019 : spot rate ......................................... £1 = R7,00
Discuss if the debt of £100 000 is an exchange item on which exchange differences should be
calculated.
463
SOLUTION
The local currency of the outstanding debt payable to the supplier in London, which is attribut-
able to the branch in London, is £. This is because the branch is a permanent establishment in
London and the functional currency of the branch (the currency of the primary economic envi-
ronment in which the branch’s operations are conducted) is £. The debt of £100 000 is therefore
not an exchange item since the debt is in local currency and not in a foreign currency.
SARS will generally accept the functional currency used for financial accounting
Please note! purposes as the functional currency of a person if that functional currency was
made in accordance with IAS 21.
15.3.2 Step 2: Determine the ruling exchange rates (s 24I(1))

In order to compute a foreign exchange difference (gain or loss), the relevant exchange item must be
multiplied by the difference between the ruling exchange rates on the different dates (the transaction
date, translation date and realisation date). The date of transaction, translation and realisation de-
pends on the type of exchange item.
1. Transaction date
The ‘transaction date’ of each of the four exchange items is as follows:
Exchange item Transaction date
A unit of foreign currency The date on which it was acquired
A debt owing by a person The date on which the debt was actually incurred
A debt owing to a person The date on which the amount payable under the debt accrued to
him, or on which the debt was acquired by him in any other manner
A forward exchange contract The date on which it was entered into
A foreign currency option contract The date on which it was entered into or acquired
Remember
When establishing the transaction date, remember that free on board (FOB) as well as cost in-
surance freight (CIF) means that ownership passes when loading on the ship, train, aeroplane,
truck, etc. This is important because the debt is only actually incurred (the transaction date) once
ownership of the underlying asset passes. Trade terms, such as FOB, are known as Incoterms
and are published and updated by the International Chamber of Commerce. Incoterms are in-
tended to communicate the risks associated with the transportation and delivery of goods.
2. Translation date
The term ‘translate’ is defined as the restatement of an exchange item in the local currency at the end
of any year of assessment by applying the ruling exchange rate to such exchange item.
The translation date is therefore the last day of a year of assessment, on which date the exchange
items should be translated where the exchange item has not yet been realised.
3. Realisation date
This is the date on which the exchange item is realised.
Exchange item Realisation date

A debt in foreign currency The date
l when (and the extent to which) payment is received or made in
respect of such debt, or
continued
464
Exchange item Realisation date

l when (and the extent to which) the debt is settled or disposed of in
any other manner which includes:
– a change in the foreign currency in which the debt is denomi-
nated
– the waiver of a debt by the creditor
– the prescription of a debt
– the cession of a debt
– the sale of a debt, and
– the write-off of a debt.
A forward exchange contract The date on which payment is received or made in connection with
such forward exchange contract.
A foreign currency option contract The date
l on which payment is received or made for the right in terms of the
foreign currency option contract having been exercised
l when the foreign currency option contract expires without that
right having been exercised, or
l when the foreign currency option contract is disposed of.
A unit of foreign currency The date on which it is disposed of.
For accounting purposes, the three dates (transaction date, translation date and
Please note! realisation date) are in general respectively referred to as the transaction date,
reporting date and the settlement date.
The ruling exchange rates to be used on the different dates for each of the exchange items are set
out below:
Exchange item Transaction date Translation date Realisation date
Unit of foreign currency Spot rate Spot rate Spot rate
Debt Spot rate Spot rate Spot rate
Forward exchange Forward rate Market-related forward Spot rate
contract rate for remaining period
Affected forward Forward rate Forward rate Spot rate
exchange contract
Foreign currency option Nil rate Market value of option Market value of option
contract contract ÷ foreign contract ÷ foreign
(Note 1) currency specified in currency amount
contract specified in contract
Affected foreign Nil rate Amount included or Market value of option
currency option contract deducted from income in contract ÷ foreign
(Note 1) terms of s 24I(3)(b) ÷ currency amount
foreign currency amount specified in contract
specified in contract
Note 1:
The market value of a foreign currency option contract is determined according to the accounting
treatment of the contract:
l If a person determined the market value for accounting purposes which he applied consistently
during the valuation of all his foreign currency option contracts, the market value will be that
amount.
l The market value is the intrinsic value of the foreign currency option contract for any other person.
The intrinsic value in relation to a foreign currency option contract, is the value for the holder or writer
thereof, determined by applying the difference between
l the spot rate on translation date or the date on which the foreign currency option contract is
realised, and
l the option strike rate.
465
The option strike rate is the specified exchange rate as referred to in the definition of ‘foreign curren-
cy option contract’, thus the rate in the foreign currency option contract (s 24I(1)).
Note 2:
A special conversion rule applies when the spot rate is to be used on the transaction date or the date
on which the debt is realised. This rule states that
l if any consideration paid or incurred for the acquisition (or received or accrued for the disposal)
of the debt
l was determined by the application of a rate other than the spot rate on transaction date or realisa-
tion date
l then the spot rate is deemed to be the ‘acquisition rate’ or ‘disposal rate’ depending on the situa-
tion (proviso to the definition of ‘ruling exchange rate’ for a debt in s 24I(1)).
The rate used to convert an exchange item is determined by dividing the amount of the expense or
accrual with the foreign currency amount thereof. For example, the acquisition rate is determined by
dividing the acquisition costs by the foreign exchange amount which represents the costs. The dis-
posal rate is determined in the same manner by dividing the amount received by the foreign ex-
change amount which represents the received amount (s 24I(1)).
The ruling exchange rate must be stated in the format of the quantity of rand for
every foreign currency unit and must be expressed to at least the fourth decimal
in practice (for example $1 = R15,1894).
The spot rate depends on the facts and circumstances of each case and
depends on whether foreign currency needs to be purchased or sold. Whether
the selling rate or the buying rate applies, is determined from the perspective of
the bank or other authorised dealer.
Please note!
l If foreign currency is needed in order to pay for an import or to settle debt in
a foreign currency, the bank will act as the seller of foreign currency. The
selling rate will be used in order to translate the rand amount to a foreign
currency amount.
l The buying rate will be used if goods are exported and foreign currency is
received from a foreign debtor. The bank will then act as the buyer of foreign
currency in order to translate the foreign currency amount to rand.
Alternative rates
It is specifically provided that the Commissioner, having regard to the particular circumstances of a
taxpayer, may prescribe the application of an alternative rate to any of the prescribed rates for use by
a person in intended circumstances, if this alternative rate is used for the purposes of financial report-
ing pursuant to IFRS (proviso to the definition of ‘ruling exchange rate’ in s 24I(1)).
15.3.3 Step 3: Calculate the foreign exchange differences (ss 24I(1) and 24I(4))
An ‘exchange difference’ is the foreign exchange gain or foreign exchange loss in respect of an
exchange item during any year of assessment.
In order to compute a foreign exchange difference (gain or loss), the amount in foreign currency of
the exchange item must be multiplied by the difference between the ruling exchange rates on the
transaction date and
l the translation date (if the exchange item has not been settled at year-end), or
l the realisation date
by using the ruling exchange rates as specified in the definition of ‘ruling exchange rate’.
An exchange difference should be calculated on each exchange item for the year of assessment in
which such exchange item arose, as well as every subsequent year of assessment until and includ-
ing the year of assessment in which it is realised. The following combinations of dates on which
exchange differences should be calculated, are possible:
466
Transaction Realisation Translation Realisation Translation

date date date date date
Four possible situations may occur:
If the exchange item was: then the exchange difference =

1 acquired and realised during the foreign currency amount × (ruling exchange rate on transaction
current year of assessment date of the exchange item during the current year – ruling
exchange rate at which the exchange item is realised)
2 acquired but not realised during foreign currency amount × (ruling exchange rate on transaction
the current year of assessment date of the exchange item during the current year – ruling
exchange rate at which the exchange item is translated at the end
of the current year)
3 acquired in an earlier year of foreign currency amount × (ruling exchange rate at which the
assessment and realised during the exchange item was translated at the end of the immediately
current year of assessment preceding year – ruling exchange rate at which the exchange item
is realised during the current year)
4 acquired in an earlier year of foreign currency amount × (ruling exchange rate at which the
assessment but not realised during exchange item was translated at the end of the immediately
the current year of assessment preceding year – ruling exchange rate at which the exchange item
is translated at the end of the current year).
Example 15.3. Calculation of foreign exchange loss in terms of s 24I: Acquired

and realised during the current year of assessment
A Ltd’s year of assessment ends on the last day of February. On 1 December 2017, the com-
pany purchased trading stock from a supplier in another country for a foreign currency (FC)
amount of FC100 000. The debt was paid on 31 January 2018. All trading stock was sold by the
end of February 2018.
1 December 2017 : spot rate ......................................... FC1 = R6,60
31 January 2018 : spot rate ......................................... FC1 = R6,90
28 February 2018 : spot rate ......................................... FC1 = R7,00
Calculate the effect on the taxable income of A Ltd.
SOLUTION
Cost of stock [FC100 000 × 6,60 (spot rate)] – s 25D
Deduction — s 11(a) .................................................................................................... (R660 000)
Exchange difference (loss)
Debt: FC100 000 × (6.90 – 6,60) – s 24I .................................................................. (R30 000)
Total deduction in 2018 year of assessment ............................................................... (R690 000)
467
Example 15.4. Calculation of foreign exchange loss in terms of s 24I: Acquired but not
realised during the current year of assessment/Acquired in an earlier year of assessment
but not realised during the current year of assessment/Acquired in an earlier year of
assessment and realised during the current year of assessment
A Ltd’s year of assessment ends on the last day of February. On 1 December 2017, the company
purchased trading stock from a supplier in another country for a foreign currency (FC) amount of
FC100 000. The debt was paid on 30 April 2019. All trading stock was sold by the end of
February 2018.
1 December 2017 : spot rate ......................................... FC1 = R6,60
30 April 2019 : spot rate ......................................... FC1 = R7,50
SOLUTION
Cost of stock [FC100 000 × 6,60 (spot rate)]
Deduction — s 11(a) .................................................................................................... (R660 000)
Debt: FC100 000 × (7,00 – 6,60) .............................................................................. (R40 000)
Exchange difference (gain)
Debt: FC100 000 × (6,80 – 7,00) ................................................................................. R20 000
Total inclusion in 2019 year of assessment ................................................................. R20 000
Debt: FC100 000 × (7,50 – 6,80) ................................................................................. (R70 000)
Total net deductions .................................................................................................... (R750 000)
Total net expenditure incurred by A Ltd ...................................................................... (R750 000)
The transaction date is 1 December 2017, the date of the purchase of the trading stock.
The translation date is 28 February 2018 and 28 February 2019, the end of the year of assess-
ment of A Ltd.
The realisation date is 30 April 2019, when the debt is settled.
At 28 February 2018 and 28 February 2019, the debt had not been settled. The exchange differ-
ences for these years of assessments are therefore calculated by multiplying the exchange item
(FC100 000) by the difference between the ruling exchange rate at the translation date
(28 February 2018) and the ruling exchange rate at the transaction date (1 December 2017) for
the 2018 year of assessment and by multiplying the exchange item (FC100 000) by the differ-
ence between the ruling exchange rate at the translation date (28 February 2019) and the ruling
exchange rate at the translation date of the previous year of assessment (28 February 2018) for
the 2019 year of assessment respectively.
The net amount deducted from taxable income (R750 000) equals the amount paid of FC100 000
at the spot rate of R7,50 on realisation date.
Example 15.5. Calculation of foreign exchange loss in terms of s 24I: Application of a rate
other than the spot rate on transaction date and realisation date
On 31 January 2017 ABC Bank Ltd purchased a debt of FC26 000 from a business for R165 000.
ABC Bank sold the same debt to XYZ Bank on 30 April 2017 for R174 000. The year-ends of both
banks are February.
31 January 2017 : spot rate ......................................... FC1 = R6,42
30 April 2017 : spot rate ......................................... FC1 = R6,53
Calculate the effect on the taxable income of ABC Bank.
468
SOLUTION
Cost incurred to acquire debt ......................................................................................... R165 000
Foreign currency amount paid to acquire debt .............................................................. FC26 000
Acquisition rate therefore (R165 000/FC26 000) ............................................................. R6.34615
Exchange difference (gain) to be included in taxable income
Debt: FC26 000 × (6,45 – 6,34615) ................................................................................ R2 700
Consideration received on disposal of debt ................................................................... R174 000
Foreign currency amount of the debt disposed of .......................................................... FC26 000
Disposal rate therefore (R174 000/FC26 000) ................................................................ R6,69231
Exchange difference (gain) to be included in taxable income
Debt: FC26 000 × (6,69231 – 6,45) ............................................................................. R6 300
Reconciliation
Amount paid on transaction date .................................................................................... R165 000
Amount received on realisation date .............................................................................. R174 000
Gain (R2 700 + R6 300) .................................................................................................. R9 000
ABC Bank paid R165 000 to acquire the loan which equates an average exchange rate of
R6,34615/FC. The actual acquisition rate therefore differs from the spot rate of R6,42 on the trans-
action date and it is therefore deemed that the spot rate on the transaction date (acquisition date)
is R6,34615 for purposes of calculating the exchange difference.
ABC Bank received R174 000 on the disposal of the loan which equates to an average exchange
rate of R6,69231/FC. The actual realisation rate therefore differs from the spot rate of R6,53 and it
is therefore deemed that the spot rate on the realisation date is R6,69231 for purposes of calcu-
lating the exchange difference.
Remember
l ‘Spot rate’ is defined in s 1 as the appropriate exchange rate quoted at a specific time by any
authorised dealer in foreign exchange for the delivery of currency.
l ‘Forward rate’ is defined in s 24I(1) as the rate specified in the forward exchange contract, in
other words the rate at which the parties agree to exchange an amount of currency for an-
other currency at some future date.
l Refer to 15.4 for examples dealing with hedging instruments (FECs and FCOCs).
15.3.4 Step 4: Determine if the exchange difference should be deferred (ss 24I(7) and
24I(10A))
In some cases, the exchange gains and losses are not immediately included in or deducted from the
taxable income but are deferred until the happening of a future event.
15.3.4.1 Acquisition of assets (s 24I(7))

An exchange difference that arises on foreign debt used by a person for
l the acquisition, installation, erection or construction of any machinery, plant, implement, utensil,
building or improvements to a building, or
l devising, developing, creation, production, acquisition or restoration of any invention, patent,
design, trade mark, copyright or other similar property or knowledge contemplated in the now
outdated s 11(gA) and 11(gC)
must not be included in or deducted from the taxable income of a person if the underlying asset had
not yet been brought into use in that year of assessment.
The exchange differences that arise from the transaction date until the date that the asset is brought
into use, must be deferred. The accumulated exchange differences amount (that arose in the year(s)
of assessment before the asset was brought into use) must only be taken into account in the year of
assessment during which the asset is brought into use for the purposes of the person’s trade.
469
The same timing rule applies

l to an exchange difference arising from a forward exchange contract or a for-
eign currency option contract entered into in this situation, to the extent to
which it is entered into to serve as a hedge against a debt incurred or to be
Please note! incurred to be used in the manner envisaged, and
l to any premium or other consideration paid or payable for or under a foreign
currency option contract entered into or acquired in this situation, to the ex-
tent to which it is entered into or obtained in order to serve as a hedge
against a debt incurred or to be incurred to be used in the manner envis-
aged.
If the Commissioner is satisfied that

l the debt to be incurred will no longer be incurred
l the debt has not been used for the acquisition of the assets as stated above, or
l the asset, property or knowledge will no longer be brought into use for the purpose of the tax-
payer’s trade
the exchange difference or premium or other consideration may no longer be carried forward, but
must be brought into account in taxable income in that year of assessment (proviso to s 24I(7)).
Example 15.6. Acquisition of assets
A Ltd’s year of assessment ends on the last day of February. The company is a SA resident and
a registered VAT vendor. On 1 November 2017 the company purchases a second-hand machine
from a supplier in another country for a foreign currency (FC) amount of FC100 000. The machine
was shipped free on board (FOB) on 1 November 2017.
It was delivered at the company’s premises on 15 February 2018 and was brought into use on
1 April 2018.
A Ltd incurs the following costs in addition to the purchase price:
Freight and insurance........................................................................... R10 000
Import duty ........................................................................................... R45 000
Value-added tax ................................................................................... R57 120
The purchase consideration is settled in full on 31 May 2017. No FEC is entered into. A Ltd quali-
fies for a s 12C allowance of 20% per year because the machine is second-hand.
Assume that the spot rates on the relevant dates are as follows:
1 November 2017 ........................................................................... FC1 = R6,60
28 February 2018 ........................................................................... FC1 = R6,74
31 May 2018 ................................................................................... FC1 = R7,00
SOLUTION
Year of assessment ended 28 February 2018
Cost of machine
Purchase price (FC100 000 × 6,60)............................................................................. R660 000
Freight and insurance .................................................................................................. R10 000
Import duty................................................................................................................... R45 000
R715 000
Section 12C allowance (20% × R715 000) .................................................................. (R143 000)
Since the machine is brought into use only on 1 April 2018, the s 12C allowance of R143 000
may be claimed for the first time in the 2019 year of assessment.
Exchange difference
Since the machine is brought into use only on 1 April 2018, the exchange loss of R14 000
[FC100 000 × (6,74 – 6,60)] is not deductible in the 2018 year of assessment. The deduction is
therefore deferred to the year during which the machine is brought into use, namely, the 2019
year of assessment.
continued
470

Section 12C allowance (20% × R715 000) .................................................................. (R143 000)
Exchange difference
Deductible exchange difference in respect of 2019 tax year
[FC100 000 × (7,00 – 6,74)] ......................................................................................... (R26 000)
Deductible exchange difference in respect of 2018 tax year (deferred in terms of
s 24I(7)(a))
[FC100 000 × (6,74 – 6,60)] ......................................................................................... (R14 000)
Total deduction in 2019 year of assessment
(R143 000 + R26 000 + R14 000) ................................................................................ (R183 000)
Example 15.7. Acquisition of assets financed by an interest-bearing loan

A Ltd’s year of assessment ends on the last day of August. On 1 June 2017 the company
borrows FC500 000 from a foreign bank. FC375 000 is used to purchase a new machine from a
supplier in another country for a foreign currency amount of FC375 000 and FC125 000 is used
to purchase trading stock on 1 June 2017. The entire supply is free on board (FOB) and the ma-
chine is delivered at the company’s premises on 1 September 2017 and brought into use on that
same date.
The loan bears interest at 8% (simple interest which accrues every six months) and is repayable
on 30 November 2017. No FEC is entered into. A Ltd qualifies for a s 12C allowance of 40% in
the first year, because the machine is new and unused.
Assume that the spot rates on the relevant dates are as follows:
1 June 2017 .................................................................................... FC1 = R6,60
31 August 2017 .............................................................................. FC1 = R6,74
30 November 2017 ......................................................................... FC1 = R7,00
Assume that the average rates were as follows:
1 June 2017 – 31 August 2017 ....................................................... FC1 = R6,65
1 September 2017 – 30 November 2017 ........................................ FC1 = R6,80
Calculate the exchange differences to be included in or deducted from the taxable income of
A Ltd for the 2017 and 2018 years of assessment.
SOLUTION
Year of assessment ended 31 August 2017
Exchange difference on capital portion of the outstanding loan
The exchange difference on the translation date of the loan is a loss of R70 000 [FC500 000 ×
(6,74 – 6,60)]. However, since the machine is brought into use only on 1 September 2017, the
exchange loss of R52 500 in respect of the part of the loan used to finance the acquisition of the
machine [R70 000 × FC375 000/FC500 000] is not deductible in the 2017 year of assessment.
The deduction is therefore deferred to the year during which the machine is brought into use,
namely, the 2018 year of assessment. The exchange loss of R17 500 [R70 000 × FC125 000/
FC500 000] in respect of the part of the loan used to finance the acquisition of the trading stock
will be deductible in the 2018 year of assessment.
Deductible exchange difference in respect of 2017 tax year:
[R70 000 × FC125 000/FC500 000] .......................................................................... (R17 500)
Exchange difference on interest incurred on the loan
Trading stock: FC125 000 × 8% × 92/365 × (6,65 – 6,74)........................................ (R227)
Machine: FC375 000 × 8% × 92/365 × (6,65 – 6,74) = (R681)
However, as this machine is only brought into use during the 2018 year of
assessment, this exchange difference must be deferred until the 2018 year of
assessment (s24I(7)) ................................................................................................ Rnil
Year of assessment ended 31 August 2018
Exchange difference on capital portion of the outstanding loan
FC500 000 × (7,00 – 6,74) ........................................................................................ (R130 000)
Deductible exchange difference in respect of 2017 tax year (deferred in terms
of s 24I(7)(a))
FC375 000 × (6,74 – 6,60)] ....................................................................................... (R52 500)
continued
471
Exchange difference on interest incurred on the loan

Interest accrued in the 2017 year of assessment (September–November):
FC500 000 × 8% × 91/365× (6,80 – 7,00) ............................................................... (R1 995)
(deferred in terms of s 24I(7)(a) in respect of the machine) .................................... (R681)
Exchange difference on interest that accrued in the 2017 year of assessment
(June–August) but that was paid in the 2018 year of assessment
FC500 000 × 8% × 92/365 × (6,74 – 7,00) ............................................................... (R2 621)
Net tax result (–R17 500 – R227 – R130 000 – R52 500 – R1 995 –
R681 – R2 621) ........................................................................................................ (R205 524)
Interest reconciliation:
Interest paid FC500 000 × 8% × 183/365 × 7,00 .................................................. 140 384
S24J amounts (16 762 + 67 813)* ......................................................................... 84 575
Interest not deductible (FC375 000 × 8% × 92/365 × R6,65) ............................... 50 285
Exchange loss 2017 .............................................................................................. 22
Exchange loss 2018 (R1 995 + R681 +R2 621) .................................................... 5 297
140 384
*FC125 000 × 8% × 92/365 × R6,65 = R16 761
*FC500 000 × 8% × 91/365 × R6,80 = R67 814
Please note: Interest should be calculated on a day-to-day basis according to s 24J. It will, how-
ever, not be practical to calculate the exchange differences regarding the interest on a day-to-
day basis (even though if the Act is strictly followed, it should). The average exchange rate will
be accepted for accounting purposes in terms of IFRS in this case and therefore it is submitted
that the same treatment will be allowed for tax purposes from a practical point of view.
15.3.4.2 Transactions between companies forming part of the same group of companies and
between connected persons (s 24I(10A))
Exchange gains and losses in respect of a debt between companies that form part of the same
group of companies and between connected persons should be deferred if certain conditions are
met. The inclusion or deduction of exchange differences is then deferred until realisation of the ex-
change item or until the conditions for deferral no longer applies.
This exchange differences should be deferred if all of the following four requirements are met at the
end of the year of assessment:
1. The person who incurred the debt, or to whom the debt is payable, and the other party to the
contractual provisions of that exchange item
– form part of the same group of companies, or
– are connected persons in relation to each other.
2. No FEC or FCOC has been entered into by that person to serve as a hedge in respect of that
foreign debt incurred by or payable to the person (s 24I(10A)(i)).
Remember
If a FEC or a FCOC has been entered into by the person to serve as a hedge, the exchange
differences should not be deferred. This is the case even though the debt is between companies
forming part of the same group of companies or between connected persons.
3. Such exchange item (or any portion thereof) does not represent, for that person, a current asset,
or a current liability, for the purposes of financial reporting in accordance with the International Fi-
nancial Reporting Standards issued by the International Accounting Standards Board (IFRS)
(s 24I(10A)(a)(i)).
4. Such exchange item (or any portion thereof) is not directly or indirectly funded by any debt owed
to any person who
– is not part of the same group of companies as, or
– is not a connected person in relation to that person or the other party to the contractual provisions
of that exchange item (s 24I(10A)(a)(ii)).
472
Remember
l If the debt is current for purposes of financial reporting, the exchange differences should not
be deferred. This is the case even though the debt is between companies forming part of the
same group of companies or between connected persons.
l If the debt is funded directly or indirectly by any debt owed to a person that is not part of the
same group of companies or that is not a connected person, the exchange differences
should not be deferred.
One of the requirements of this subsection is that the foreign debt (or any portion
thereof) should not represent for that person a current asset or a current liability
for the purposes of financial reporting pursuant to IFRS. The subsection will
therefore only defer exchange differences in respect of a long-term debt. How-
ever, in terms of IFRS, a portion of a long-term debt is recognised annually as a
current liability if the debt or part of the debt is repayable within 12 months after
year-end. It appears from the wording of the Act that the entire gain or loss
Please note! should therefore be recognised if any portion is moved to current assets or
current liabilities for purposes of IFRS. From the ‘Draft Interpretation Note’ it
appears that the intention was for s 24I (10A)(ii) to apply to the entire loan, pro-
vided a portion of the loan is classified as a long-term loan. This is, however, in
contradiction with the current wording of the Act. The current wording of the
provision may therefore have adverse cash flow implications as the tax on the
cumulative exchange differences over the duration of a loan may become pay-
able before the actual cash flow related to the loan realises.
If the exchange difference was deferred in a year of assessment (Year 1) and

l the deferral conditions are no longer met (the parties to the instrument are, for example, no longer
connected persons or no longer form part of the same group of companies) in respect of that ex-
change item in a subsequent year of assessment (Year 2), or
l if the exchange item is realised
an amount in respect of that exchange item must be included in or deducted from the income of that
person in that subsequent year of assessment (Year 2), (or in the year of assessment during which
the exchange item is actually realised).
The amount to be included in or deducted from income shall be determined by multiplying that
exchange item by the difference between
l the ruling exchange rate on the last day of the year of assessment (Year 1) preceding that sub-
sequent year of assessment (Year 2), and
l the ruling exchange rate on transaction date.
Any amount of the exchange differences included in or deducted from the income of that person in
terms of s 24I (in respect of that exchange item for all years of assessment preceding that subse-
quent year of assessment during which the person was a party to the contractual provisions of the
exchange item) must furthermore be deducted from the exchange difference (s 24I(10A)(b)).
Example 15.8. Loan between connected companies (s 24I(10A))

H Ltd, a South African company, lends a foreign currency (FC) amount of FC200 000 to S Plc, a
foreign subsidiary, forming part of the same group of companies, on 1 August 2016. H Ltd’s year
of assessment ends on the last day of September every year. The loan is repaid on 30 June
2020.
1 August 2016 ................................................................................ FC1 = R6,60
30 September 2017 ........................................................................ FC1 = R7,00
30 September 2018 ........................................................................ FC1 = R7,10
30 September 2019 ........................................................................ FC1 = R6,90
30 June 2020 .................................................................................. FC1 = R6,95
The loan is not covered in terms of any forward exchange contract. Calculate the effect on the
taxable income of H Ltd.
473
SOLUTION
Years ended 30 September 2017 and 30 September 2018
Exchange differences
No exchange differences are included in or deducted from income.
Since the loan (the exchange item) was granted between companies forming part of the same
group of companies, s 24I(10A)(a) applies and no exchange differences will be taken into
account until the loan is repaid (realisation date) or until the companies no longer form part of the
same group of companies (provided that the companies are then also not connected persons).
Year ended 30 September 2019
Since the entire loan is going to be repaid on 30 June 2020, the entire loan will be classified as a
current asset for accounting purposes pursuant to IFRS during the year ended 30 Septem-
ber 2019. All the requirements for deferral under s 24I(10A) will therefore no longer be met and
the exchange differences will no longer be deferred. The exchange difference will be calculated
by using the difference between the exchange rate on the last day of the preceding year of as-
sessment (i.e. the rate on 30 September 2018) and the exchange rate on transaction date
(1 August 2016) (s 24I(10A)(b)).
Exchange difference
FC 200 000 × (R7,10 – R6,60) = R100 000 gain to be included in the taxable income of H Ltd
(s 24I(10A)).
FC 200 000 × (R6,90 – R7,10) = (R40 000) loss to be deducted from the taxable income of H Ltd
(s 24I(3)).
Year ended 30 September 2020
Since the loan was realised on 30 June 2020, the exchange difference will be calculated by using
the difference between the exchange rate on the realisation date (i.e. 30 June 2020) and the ex-
change rate on the previous translation date (30 September 2019).
Exchange difference
FC 200 000 × (R6,95 – R6,90) = R70 000 gain to be included in the taxable income of H Ltd.
15.4 Specific translation rule: Hedging instruments

Hedging is the term generally used to refer to a person’s policies and practices to protect himself
against the adverse effects of the risks that arise from various transactions. A person can use finan-
cial instruments (also referred to as derivatives) to eliminate the risks flowing from transactions en-
tered into in a foreign currency. Forward exchange contracts and foreign currency option contracts
are both classified as exchange items (see 15.3.1). Consequently, the exchange losses and gains on
these exchange items should be recognised for tax purposes.
15.4.1 Forward exchange contracts (s 24I(1))

A forward exchange contract is defined as an agreement in terms of which one person agrees with
another to exchange an amount of currency for another currency at some future date at a specified
exchange rate.
In the South African economy, the volatility in currency exchange movements is a fairly general phe-
nomenon. By entering into an FEC, the risks associated with currency fluctuations are avoided. Nor-
mally, the taxpayer concludes an agreement with a bank, in which the bank undertakes to supply the
foreign exchange at a predetermined rate at a future date when the currency is required. Taxpayers
usually use FECs to hedge themselves against unfavourable exchange rate fluctuations, but they
may also be entered into for speculative reasons. Regardless of the reason for entering into FECs, for
tax purposes all FECs are treated in terms of s 24I.
The ruling exchange rate for an exchange item that is a forward exchange contract is
l on transaction date, the forward rate under the forward exchange contract
l on the date it is translated, the market-related forward rate available for the remaining period of
such forward exchange contract, and
l on the date it is realised, the spot rate on that date.
The market–related forward rate is the forward rate at which another FEC for the same amount of
foreign currency could be entered into on the last day of the specific year of assessment that would
expire on the same date as the original FEC. Refer to 15.3 for a discussion on the computation of
exchange differences in terms of s 24I of FECs.
474
Example 15.9. Foreign debt hedged by a matching FEC
purchases trading stock from a supplier in another country for a foreign currency amount of
FC100 000. A matching FEC is entered into to serve as a hedge in respect of the debt. The
forward rate is FC1 = R7,2000. The debt is paid on 30 April 2018. All trading stock was sold by
the end of February 2018.
1 December 2018 : spot rate ........................................................................... FC1 = R6,60
28 February 2018 : spot rate ........................................................................... FC1 = R7,00
30 April 2018 : spot rate ........................................................................... FC1 = R7,50
The market-related forward rate available for a two-month contract at 28 February 2018 (the re-
maining period of the FEC) is FC1 = R7,3600.
SOLUTION
Deduction – s 11(a)...................................................................................................... (R660 000)
Exchange difference
Debt: FC100 000 × (7,00 – 6,60) (loss) .................................................................... (R40 000)
Forward exchange contract: FC100 000 × (7,36 – 7,20) (this is a foreign exchange
gain since the taxpayer currently would have paid more for the same FEC) .............. R16 000
Exchange difference
Debt: FC100 000 × (7,50 – 7,00) (loss) .................................................................... (R50 000)
Forward exchange contract: FC100 000 × (7,50 – 7,36) .......................................... R14 000
Total deduction ............................................................................................................ (R720 000)
Total expenditure incurred (FC100 000 × 7,50) – (FC100 000 × (7,50 – 7,20)) ........... (R720 000)
15.4.2 Foreign currency option contracts (s 24I(1))

A foreign currency option contract (FCOC) is an agreement in terms of which any person acquires or
grants the right to buy from or to sell to any other person a certain amount of a nominated foreign
currency on or before a future expiry date at a specified exchange rate.
Taxpayers enter into FCOCs to hedge themselves against unfavourable exchange rate fluctuations.
FCOCs differ from FECs since, in terms of the FCOC, the taxpayer has an option whether to exercise
his right or not. The premium is normally the price that the taxpayer has to pay for the privilege of
having the right (there is therefore no obligation). The premium (namely the acquisition cost) relating
to the foreign currency option contract, is fully deductible in the year it was entered into.
It could also happen, however, that a taxpayer enters into FCOCs for speculative reasons. Regard-
less of the reason for entering into FCOCs, all FCOCs are treated in terms of s 24I.
Remember
Although performance under the contract is conditional upon the exercise of such an option, the
contract has a market value that changes in accordance with the quoted spot rates of foreign
currencies.
A foreign currency option contract represents an exchange item and exchange differences should
consequently be calculated on the translation date as well as the date of realisation.
The ruling exchange rate for an exchange item that is a foreign currency option contract is
l on transaction date: a nil rate
l on the date it is translated: the rate obtained by dividing the market value of such foreign curren-
cy option contract on that date by the foreign currency amount, as specified in the contract, and
475
l on the date it is realised: the rate obtained by dividing the market value of the foreign currency
option contract on that date by the foreign currency amount as specified in the contract. If the
contract is realised by its disposal, the rate to be used is the one that is obtained by dividing the
amount received or accrued as a result of the disposal of the contract by the foreign currency
amount as specified in the contract.
Remember
The transaction date of a foreign currency option contract is the date on which the contract was
entered into or the date on which it was acquired.
A foreign currency option contract is realised
l when payment is received or made in respect of the right in terms of such foreign currency
option contract having been exercised, or
l when such foreign currency option contract expires without such right having been exer-
cised, or
l when such foreign currency option contract is disposed of.
Similar to the exchange items discussed above, the Commissioner may, having regard to the particu-
lar circumstances of a taxpayer, prescribe an alternative exchange rate to be applied, provided this
alternative rate is used for the purposes of financial reporting pursuant to IFRS (proviso to the defini-
tion of ‘ruling exchange rate’ in s 24I(1)). Refer to 15.3 for a discussion on the computation of ex-
change differences in terms of s 24I of FECs.
Remember
In the determination of the taxable income of any person derived from the carrying on of a trade
by him within South Africa, there must be included in or deducted from the income so derived
any premium or like consideration received by or paid by him in terms of a foreign currency
option contract entered into by him in the course of that trade.
Example 15.10. Foreign currency option contracts
A Ltd enters into an FCOC, which is not an affected contract, on 15 November 2017, in terms of
which it acquires the right to buy FC300 000 at a specified exchange rate of FC1 = R6,80. A
premium of R10 000 is also paid at the inception of the contract. The option is exercised on
31 March 2018. A Ltd’s year of assessment ends on the last day of December.
Assume that the relevant spot rates of exchange are as follows:
31 December 2017 ......................................................................... FC1 = R6,90
31 March 2018 ............................................................................... FC1 = R7,04
SOLUTION
Workings
(1) Ruling exchange rate on translation date
Market value of option contract ÷ foreign currency amount
[(R6,90 – R6,80) × 300 000] ÷ 300 000
= R0,10
Please note that an assumption has been made for purposes of this calculation that the market
value of the contract is the difference between the spot rate on 31 December 2017 and the rate
specified in the contract. It could also have been argued that the market value could have been
determined by means of another rate or method.
(2) Ruling exchange rate on realisation date
Market value of option contract ÷ foreign currency amount
[(R7,04 – R6,80) × 300 000] ÷ 300 000
= R0,24
continued
476

Exchange difference
Gain: FC300 000 × (R0,10 less nil) (this is a foreign exchange gain since the spot
rate at year-end weakened and the taxpayer has to pay more (in proportion) for
the same type of FCOC if he would have entered it now) ....................................... R30 000
Less: Premium s 24I(3)(b)(ii) ........................................................................................... (R10 000)
Net gain ....................................................................................................................... R20 000
Exchange difference
Gain: FC300 000 × (R0,24 less R0,10) ........................................................................... R42 000
Note
The total inclusion in taxable income amounts to R62 000 (R20 000 plus R42 000). This repre-
sents the profit realised by A Ltd: R72 000 [FC300 000 × (R7,04 less R6,80)] less the premium of
R10 000 = R62 000.
The contract will have a zero value if the holder would have generated a loss if
he had exercised his rights according to the contract on translation or realisation
date. In other words, if the spot rate on translation or realisation date is better
Please note! than the rate at which the option can be exercised, the holder will simply not
exercise his option. The only cost to the holder will then be the premium paid to
acquire the option.
15.5 Specific translation rule: Affected contracts (s 24I(1))

An affected contract is a forward exchange contract or a foreign currency option contract (see 15.4)
to the extent that such forward exchange or foreign currency option contract has been entered into
by a person during any year of assessment to serve as a hedge in respect of
l a debt which has not yet been incurred by the person during the year of assessment, or
l an amount payable in respect of a debt which has not yet accrued during that current year of
assessment.
In addition, the debt is to be used to acquire any asset or to finance any expenses or will arise from
the sale of any asset or the supply of any service.
15.5.1 Affected forward exchange contract (s 24I(1))

In order to qualify as an affected forward exchange contract, the debt could also arise from the sale
of any asset or the supply of any services. These activities should, however, be in consequence of an
agreement entered into prior to the end of the year of assessment in the ordinary course of the per-
son’s trade.
Remember
Where a forward exchange contract has been entered into to hedge a debt, the contract and the
debt constitute two separate exchange items. Exchange differences will therefore have to be
determined in relation to both items at the translation and realisation dates.
Most of the time, a taxpayer will enter into a forward exchange contract to serve as a hedge against
future obligations in a foreign currency. Where the future obligation is not in existence at the year-
end, an exchange difference arises in relation to the forward exchange contract, which is not covered
by a matching exchange difference in relation to the future obligation.
To avoid this potential adverse tax effect at year-end (the translation date), the ruling exchange rate
for an affected contract at transaction date as well as the date of translation is the forward rate in
terms of the contract. As a result, no foreign exchange differences arise at the date of translation.
Ruling exchange rate: affected forward exchange contract
The ruling exchange rate for an exchange item that is an affected contract is therefore
l on transaction date, the forward rate under the forward exchange contract
l on the date it is translated, the forward rate under the forward exchange contract, and
l on the date it is realised, the spot rate on that date (definition of ‘ruling exchange rate’ in s 24I(1)).
477
The Commissioner may, having regard to the particular circumstances of a taxpayer, prescribe an
alternative exchange rate to be applied, provided this alternative rate is used for the purposes of
financial reporting pursuant to IFRS (proviso to the definition of ‘ruling exchange rate’ in s 24I(1)).
Example 15.11. Affected forward exchange contract entered as a hedge against debt not
yet incurred at year-end
entered an agreement to purchase trading stock on 31 March 2018 from a supplier in another
country for a foreign currency amount of FC100 000. A five-month – FEC is entered into on
1 December 2017 in expectation of the future transaction. The forward rate is FC1 = R7,20. On
31 March 2018 the transaction goes ahead according to the contract and trading stock of
FC100 000 is acquired on credit. The debt is paid on 30 April 2018. All trading stock was sold by
the end of February 2019.
1 December 2017 : spot rate ........................................................................... FC1 = R6,60
28 February 2018 : spot rate ........................................................................... FC1 = R7,00
28 February 2018 : FEC rate for a two-month contract ................................... FC1 = R7,23
31 March 2018 : spot rate ........................................................................... FC1 = R7,50
30 April 2018 : spot rate ........................................................................... FC1 = R7,60
SOLUTION
Cost of stock
No deduction in terms of s 11(a) since debt not yet incurred...................................... Rnil
Exchange difference
Debt: No deduction since debt not yet incurred .......................................................... Rnil
Affected forward exchange contract: FC100 000 × (7,20 – 7,20) ............................... Rnil
Total deduction in 2018 year of assessment ............................................................... Rnil
Deduction – s 11(a)...................................................................................................... (R750 000)
Exchange difference
Debt: FC100 000 × (7,60 – 7,50) (loss)........................................................................ (R10 000)
Affected forward exchange contract: FC100 000 × (7,60 – 7,20) (gain) ..................... R40 000
Note
The total deduction is equal to the total amount incurred under the FEC
contract for the FC100 000 purchased (FC100 000 × R7.20).
15.5.2 Affected foreign currency option contract (s 24I(1))

A foreign currency option contract can also be an ‘affected contract’ (see 15.4). It sometimes hap-
pens that a taxpayer enters into a FCOC to hedge future liabilities in foreign exchange. In order to
calculate the foreign exchange differences on translation date as well as the date of realisation, the
amount of foreign currency of the affected foreign currency option contract should be multiplied by
the difference between the current exchange rates.
The ruling exchange rate for an affected foreign currency option contract is as follows:
l on transaction date: a nil rate
l on the date it is translated: the rate obtained by dividing any amount included or deducted, as
the case may be, in respect of any premium or like consideration received or paid, by the foreign
currency amount, as specified in the affected contract, and
l on the date it is realised: the rate obtained by dividing the market value of the foreign currency
option contract on that date by the foreign currency amount as specified in the contract. If the
contract is realised by its disposal, the rate to be used is the one that is obtained by dividing the
amount received or accrued as a result of the disposal of the contract by the foreign currency
amount as specified in the contract (s 24I(1)).
478
Example 15.12. Affected foreign currency option contracts
A Ltd enters into an FCOC, which is an affected contract, on 15 November 2017, in terms of
which it acquires the right to buy FC300 000 at a specified exchange rate of FC1 = R6,80. A
premium of R10 000 is also paid at the inception of the contract. The option is exercised on
31 March 2018. A Ltd’s year of assessment ends on the last day of December.
Assume that the relevant spot rates of exchange are as follows:
31 December 2017 ......................................................................... FC1 = R6,90
31 March 2018 ............................................................................... FC1 = R7,04
SOLUTION
The ruling exchange rate on translation date is R0,033333, obtained by dividing the premium of
R10 000 by the amount specified in the contract, i.e. FC300 000. The exchange differences are
as follows:
Exchange difference
Gain: FC300 000 × (R0,033333 less nil) ......................................................................... R10 000
Less: Premium ................................................................................................................ (R10 000)
Net gain .......................................................................................................................... Rnil
Exchange difference
Gain: FC300 000 × (R0,24 less R0,033333) ................................................................... R62 000
Note
The total inclusion in taxable income again amounts to R62 000, but the inclusion is deferred until
the year of assessment during which the option is exercised.
15.6 Sundry provisions
15.6.1 Bad debt (s 24I(4))

Any exchange gain or exchange loss that was recognised in the current or any previous year of
assessment regarding a debt owing to a person, has to be deducted (in the case of an exchange
gain previously recognised) or added back (in the case of an exchange loss previously recognised)
from the taxable income of the person to the extent that the debt has become bad. Section 24I(4) is a
new provision and only applies in respect of years of assessment ending after 1 January 2017.
Example 15.13. Calculation of recoupments in respect of foreign exchange differences

previously recognised
A Ltd’s year of assessment ends on the last day of February. On 1 November 2018, the company
sold trading stock to a client in another country for a foreign currency (FC) amount of FC90 000.
The customer was liquidated and A Ltd wrote off the full selling price as bad debt on 28 February
2018. A Ltd received a payment of 50 cents in the FC from the liquidator of the customer on
10 May 2018.
1 November 2017 : spot rate ......................................... FC1 = R6,60
10 May 2018 : spot rate ......................................... FC1 = R7,00
479
Silke: South African Income Tax 15.6ದ
SOLUTION
Selling price of stock [FC90 000 × 6,60 (spot rate)]
Sales — gross income (s 1) ......................................................................................... R594 000
Exchange difference on debt owing to A Ltd (gain)
Debt due to A Ltd: FC90 000 × (6.90 – 6,60) ............................................................... R27 000
Bad debts written off (FC90 000 × 6,90) – s 11(i) ........................................................ (R594 000)
Exchange gain previously recognised deducted – s 24I(4) ........................................ (R27 000)
Total inclusion in 2018 year of assessment ................................................................. Rnil
Debt recovered (FC90 000 × 0,50 × R7) of R315 000 can be divided as follows:
Section 8(4)(a) recoupment (R621 000 × 0,5) – consisting of original debt of
R297 000 (R594 000/2) ............................................................................................... R297 000
Section 24I(4) recoupment – consisting of half of the exchange difference of
R13 500 (R27 000/2) ................................................................................................... R13 500
15.6.2 Anti-avoidance rule (s 24I(8))

A foreign exchange loss sustained on a transaction entered into by a person, or any premium or
other consideration paid for or under a foreign currency option contract entered into or acquired by
him, will not be allowed as a deduction from his income under the provisions of s 24I(3), if the trans-
action was entered into or the foreign currency option contract was entered into or acquired solely or
mainly to enjoy a reduction in tax by way of a deduction from income.
15.6.3 Commencement or cessation of application of provisions of s 24I (s 24I(12))

When a person holds any exchange item and the provisions of s 24I become applicable to that per-
son at any time during a year of assessment, that exchange item shall be deemed to have been
acquired at that time for the purposes of s 24I (s 24I(12)(a)). The provisions of s 24I would become
applicable, for example, to a natural person if he commenced holding a debt as trading stock.
Similarly, when a person holds any exchange item and the provisions of s 24I cease to apply to that
person at any time during a year of assessment, that exchange item shall be deemed to have been
realised at that time for the purposes of s 24I (s 24I(12)(b)).
15.7 Specific translation rule: Disposal and acquisition of assets (par 43 of the
Eighth Schedule)
When dealing with assets acquired or disposed of in foreign currency, it is necessary to determine
the capital gain or loss in rand. This is needed in order to calculate the taxable capital gain that
should be included in the taxable income of a person (s 26A).
If an asset that was acquired in a foreign currency is subsequently disposed of, the capital gain or
loss must be calculated by applying the specific translation rules of par 43 of the Eighth Schedule.
The same specific translation rules apply if an asset was acquired in rand and is subsequently dis-
posed of for a foreign currency.
Remember
The translation rules relating to exchange gains and losses arising on exchange items are de-
termined by s 24I (see 15.3).
The translation rules relating to capital gains and losses are determined by par 43 of the Eighth
Schedule (see 15.7).
Paragraph 43 provides
l the rules for converting the various components making up the capital gain or loss into rand
(expenditure, proceeds and where applicable, market value)
l the timing of the conversion, and
l the appropriate exchange rate to be used.
480
These rules also affect the manner in which pre-valuation date assets are to be treated (including the
way in which the loss-limitation rules in paras 26 and 27 are to be applied (refer to chapter 17)).
Paragraph 43 makes reference to a number of defined terms, some of which are defined in s 1 whilst
others are defined in par 43(7):
Provision Term Meaning

Paragraph 43(7) ‘foreign currency’ Any ‘currency other than local currency’.
Paragraph 43(7) ‘local currency’ l In relation to a permanent establishment of a person, the func-
tional currency of that permanent establishment (excluding any
currency of a country in the common monetary area)
l In relation to a headquarter company, the functional currency of
that headquarter company
l In relation to a domestic treasury management company, in
respect of amounts that are not attributable to a permanent es-
tablishment outside the Republic, the functional currency of that
domestic treasury management company, or
l In relation to an international shipping company defined in
s 12Q, in respect of amounts that are not attributable to a per-
manent establishment outside the Republic, the functional cur-
rency of that international shipping company
l In all other cases, the currency of South Africa.
Section 1 ‘average Determined in relation to a year of assessment by using the closing
exchange rate’ spot rates over the selected interval (365 days or 12 months).
Section 1 ‘spot rate’ The appropriate quoted exchange rate at a specific time by any
authorised dealer in foreign exchange for the delivery of currency.
The following table provides a summary of the provisions in paras 43(1) and (1A):
Par 43 Where applicable? Translation method Effect
(1) For natural persons and non-trading Determine capital gain or loss CGT is only
trusts where both base cost and on disposal in foreign currency, calculated on the real
proceeds are denominated in the and translate that capital gain gain/loss and not on
same foreign currency or loss into rand by applying the the foreign currency
average exchange rate for the gain/loss.
year of assessment in which
that asset was disposed of or
by applying the spot rate on the
date of disposal of that asset.
(1A) Applies in all other instances where Translate base cost (par 20 CGT is calculated on
par 43(1) does not apply, i.e. expenditure) into local currency the real gain/loss and
l for natural persons and non- at spot rate on the date on the foreign
trading trusts where expenditure was incurred or currency gain/loss.
– base cost is denominated in average rate in the year
local currency and proceeds expenditure was incurred.
in a foreign currency;
– base cost is denominated in a
foreign currency and
proceeds in a local currency;
–
base cost is denominated in Translate proceeds into local
one foreign currency and currency at spot rate on date of
proceeds in another foreign disposal or average rate in the
currency; year of disposal.
l for companies and trading trusts
where base cost and/or proceeds
are denominated in a foreign
currency (whether the same or
different currencies).
481
Example 15.14. The application of paras 43(1) and 43(1A) for different persons
A person acquires an asset for a base cost of US$100 000 in a year of assessment when the
average exchange rate is R7 to the dollar, and then eventually disposes of the asset for
US$120 000 in a year of assessment when the average exchange rate is R9 to the dollar.
Determine the capital gain or loss in terms of par 43 if the person is
1. a natural person, and
2. a company.
SOLUTION
1. The person is a natural person:
Paragraph 43(1) applies as the person is a natural person and both base cost and proceeds
are denominated in the same foreign currency. To determine a natural person’s capital gain
in terms of par 43(1), one would first have to determine the capital gain in dollars and then
translate this gain into rand either at the average exchange rate for the year of assessment of
disposal of the asset or at spot rate on the date of disposal of that asset. The capital gain ex-
pressed in dollars would be US$20 000 (proceeds of US$100 000 less base cost of
US$120 000). The rand equivalent of the capital gain at the average exchange rate of R9 to
the dollar for the year of assessment of disposal would be R180 000 (US$20 000 × R9/US$).
His capital gain would, therefore, be R180 000.
His total gain (which includes his foreign currency gain) amounts to R380 000 ((US$120 000
× 9) – (US$100 000 × 7)). Only R180 000 of this gain is taxed in terms of par 43(1). The bal-
ance of this gain, namely R200 000 (R380 000 less R180 000), results from the devaluation of
the rand against the dollar (US$100 000 × (9 – 7)) and is not taxed in terms of par 43(1).
2. The person is a company
Paragraph 43(1A) applies as the person is a company and therefore par 43(1) cannot be
applicable. In terms of par 43(1A), the total gain of R380 000 (proceeds of R1 080 000
(US$120 000 × R9/US$) less base cost of R700 000 (US$100 000 × R7/US$)) is taxed. In
this instance the capital gain is calculated on both the real gain of R180 000 and on the for-
eign currency gain of R200 000. Although the taxpayer has a choice to translate into local
currency either at spot rate or average rate, only the average rates were provided in this
question.
Example 15.15. Base cost (expenditure) is denominated in one currency; proceeds

in a different currency in the case of a natural person
A natural person acquires an asset for £75 000 (pounds sterling) in a year of assessment when
the average exchange rate is R12 to the pound. He later disposes of the asset for R1 100 000.
Determine the capital gain or loss in terms of par 43 of the natural person.
SOLUTION
To determine the capital gain or loss on disposal par 43(1) cannot be used as base cost and
proceeds are not denominated in the same foreign currency (a requirement of par 43(1)). He
must therefore use par 43(1A). He must first translate the expenditure into rand (using either the
average exchange rate for the year of assessment when the expenditure was incurred or spot
rate on the date expenditure was incurred). This results in a base cost expressed in rand of
R900 000 (using average rate). His capital gain is then R200 000 (R1 100 000 – R900 000).
Although the taxpayer has a choice to translate into local currency either at spot rate or average
rate, only the average rates were provided in this question and therefore used. It seems that
there is no requirement to use the same method for converting both base cost and proceeds.
The taxpayer can therefore use spot rate to convert base cost and average rate to convert pro-
ceeds or the other way around.
Please note that if the taxpayer in this example was a company (or trading trust), the capital gain
would have been calculated in the same manner because par 43(1A) would have been applic-
able regardless of the currency of the proceeds and base cost.
482
Under par 43(1A) circumstances, the taxpayer has a choice to translate into local
currency using either the spot rate or average rate. This seems to contradict s
25D whereby a company or trading trust may only translate income and expendi-
ture into local currency using the spot rate. From the explanatory memorandum of
the 2013 Tax Laws Amendment Act it seems that the intention of the legislator
was to simplify the calculation for natural persons and non-trading trusts where
Please note! the asset is acquired and disposed of in the same foreign currency. Par 43(1A)
was provided as alternative in all other situations, in other words also where the
taxpayer is a company or trading trust. It is unclear whether the legislator intend-
ed to provide for this option under par 43(1A) in the case of companies or trading
trusts. It nonetheless seems from the letter of the Act that this option is currently
available to all companies and trading trusts for purposes of calculating the
capital gain when disposing of non-monetary assets in a foreign currency.
Where a person is deemed to have disposed of an asset and the asset was acquired in a foreign
currency, the amount of the proceeds is deemed to be in the same currency as the currency in which
the asset was actually acquired (base cost) (par 43(5)). An example of such a situation is s 9H that
deems a person who ceases to be a South African resident to have disposed of all his or her assets
on the day before ceasing to be a resident at market value. These assets also include par 2(2) assets
that consist of direct or indirect interests of at least 20% in an entity if 80% of the market value of the
interest in that entity is attributable to South African immovable property. If, in such a case, the base
cost was determined in a foreign currency, for example US dollar, the amount of the proceeds is
deemed to be in the same currency as the currency in which the asset was originally acquired, i.e.
US dollar.
In terms of s 9H, that person is furthermore deemed to have immediately reacquired the assets at
market value. The currency in which the asset was actually acquired will also be the currency of
reacquisition, i.e. US dollar in the example used (par 43(5)).
Where a person has adopted the market value as the valuation date value of any asset contemplated
in par 43, that market value must be translated to rand by applying the spot rate on the valuation date
for purposes of par 43(1A) (par 43(6)).
The provisions of par 43(1A) does not apply to any debt owed (or any right in respect of debt owed)
by a resident in foreign currency (par 43(6A)). This means that any foreign currency gain or loss on
the repayment or discounting of debt owed in a foreign currency should be ignored.
Example 15.16. Comprehensive example

A Ltd’s year of assessment ends on the last day of February. On 1 January 2017 the company
purchases a new manufacturing machine on credit from a supplier in another country for a
foreign currency (FC) amount of FC250 000. The supply is shipped free-on-board (FOB) on
1 January 2017 and the machine is delivered at the company’s premises on 15 January 2017
and brought into use on 5 March 2017.
The purchase consideration is settled in full on 31 May 2018.
A 17-month FEC is entered into on 1 January 2017 to serve as a hedge in respect of the debt on
which date the forward rate is FC1 = R6,65.
A Ltd qualifies for a s 12C allowance of 40% on the new manufacturing machine purchased.
The spot rates on the relevant dates are as follows:
1 January 2017 ............................................................................... FC1 = R6,63
15 January 2017 ............................................................................. FC1 = R6,65
28 February 2017 ........................................................................... FC1 = R6,60
5 March 2017 ................................................................................. FC1 = R7,00
28 February 2018 ........................................................................... FC1 = R7,10
31 May 2018 ................................................................................... FC1 = R6,90
The market-related forward rates are as follows:
l for a 15-month contract at 28 February 2017 (the remaining period of the FEC) is FC1 = R6,70
l for a 15-month contract at 5 March 2017 (the remaining period of the FEC) is FC1 = R6,67
l for a three-month contract at 28 February 2018 (the remaining period of the FEC) is FC1 =
R6,50.
Calculate the effect on the taxable income of A Ltd for the 2017, 2018 and 2019 years of
assessments.
483
SOLUTION
Cost of machine
Purchase price (FC250 000 × R6,63) – no deduction in terms of s11(a) since
capital in nature ........................................................................................................... R1 657 500
Since the machine is brought into use only on 5 March 2016, the s 12C capital allowance may be
claimed for the first time in the 2018 year of assessment.
Exchange difference on translation date (28 February 2018)
Since the machine is brought into use only on 5 March 2017, the exchange gain of R7 500
[FC250 000 × (6,60 – 6,63)] on the outstanding debt as well as the gain of R12 500 on the FEC
[FC250 000 × (6,70 – 6,65)] is not taxable in the 2017 year of assessment. The inclusion is there-
fore deferred to the year during which the machine is brought into use, namely, the 2018 year of
assessment (s 24I(7)(a)).
Section 12C allowance (40% × R1 657 500) ............................................................... (R663 000)
Exchange difference on translation date (28 February 2018)
Debt: Deductible exchange difference (loss) in respect of 2018 tax year
[FC250 000 × (7,10 – 6,60)] ......................................................................................... (R125 000)
Debt: Taxable exchange difference (gain) in respect of 2017 tax year
(deferred in terms of s 24I(7)(a))
[FC250 000 × (6,60 – 6,63)] ......................................................................................... R7 500
FEC: Deductible exchange difference (loss) in respect of 2018 tax year
[FC250 000 × (6.50 – 6,70)] ......................................................................................... (R50 000)
FEC: Taxable exchange difference (gain) in respect of 2017 tax year
(deferred in terms of s 24I(7)(a))
[FC250 000 × (6,70 – 6,65)] ......................................................................................... R12 500
Total net deduction in 2018 year of assessment
– R663 000 – R125 000 + R7 500 – R50 000 + R12 500 ............................................. (R818 000)
Section 12C allowance (20% × R1 657 500) ............................................................... (R331 500)
Exchange difference on realisation date (31 May 2018)
Debt: Taxable exchange difference (gain) in respect of 2019 tax year
[FC250 000 × (6,90 – 7,10)] ......................................................................................... R50 000
FEC: Taxable exchange difference (gain) in respect of 2019 tax year
[FC250 000 × (6,90 – 6,50)] ......................................................................................... R100 000
Total net deduction in 2019 year of assessment ....................................................... (R181 500)
484
16 Investment and funding instruments
Pieter van der Zwan

l determine whether a financial arrangement constitutes an instrument and calculate
the interest in respect of instruments in terms of s 24J
l determine whether interest received by a taxpayer will be subject to tax
l determine whether a taxpayer will be entitled to deduct interest incurred
l identify interest limitations that may be applicable to interest incurred by a taxpayer
and calculate the effect of such limitations
l identify sharia compliant financing arrangements and calculate the tax implications
of these arrangements
l identify the tax implications that may arise when a loan does not bear interest or
bears interest at a low interest rate
l explain and calculate the tax implications of equity instruments held by investors
l explain and calculate the tax implications of equity instruments issued by investees
l identify equity instruments that may constitute hybrid equity instruments or third-
party-backed shares and describe the implications of this classification of the
instrument
l identify debt instruments that may constitute hybrid debt instruments or bear hybrid
interest and describe the implications of this classification of the instrument or
interest
l identify derivative instruments and determine the tax implications of these instru-
ments for the parties involved.
Contents
Page
16.1 Introduction ....................................................................................................................... 486
16.2 Debt instruments ............................................................................................................... 487
16.2.1 Common principles that apply to lenders and borrowers ................................ 487
16.2.1.1 Applications of s 24J....................................................................... 487
16.2.1.2 Meaning of interest ......................................................................... 488
16.2.1.3 Timing provisions of s 24J: Yield to maturity method ..................... 489
16.2.1.4 Timing provisions of s 24J: Alternative methods ............................ 498
16.2.1.5 Transfer or disposal of instruments ................................................ 498
16.2.2 Lender perspective: Taxability of interest received or accrued ....................... 501
16.2.3 Borrower perspective: Deductibility of interest incurred .................................. 501
16.2.3.1 Interest must be incurred in the production of income .................. 502
16.2.3.2 Interest must be incurred in carrying on a trade ............................ 503
16.2.3.3 Interest incurred on loans to acquire shares .................................. 503
16.2.3.4 Interest incurred on loans to acquire shares in a controlled
company ......................................................................................... 503
16.2.3.5 Interest incurred on loans to pay dividends ................................... 505
16.2.4 Deductibility of interest: Limitations .................................................................. 505
16.2.4.1 Interest paid to persons not subject to tax (s 23M) ........................ 505
16.2.4.2 Debt used in acquisition and reorganisation transactions
(s 23N)............................................................................................. 509
16.2.5 Sharia-compliant financing arrangements (s 24JA) ......................................... 511
16.2.5.1 Mudaraba ........................................................................................ 512
16.2.5.2 Murabaha ........................................................................................ 512
16.2.5.3 Diminishing musharaka................................................................... 513
16.2.5.4 Sukuk............................................................................................... 513
485
Page
16.2.6 Interest-free or low interest debt ....................................................................... 513
16.3 Equity instruments ............................................................................................................ 517
16.3.1 Investor perspective ......................................................................................... 518
16.3.2 Investee perspective......................................................................................... 518
16.4 Hybrid instruments ............................................................................................................ 518
16.4.1 Equity instruments with debt characteristics (s 8E and s 8EA) ....................... 518
16.4.1.1 Hybrid equity instruments ............................................................... 520
16.4.1.2 Third-party backed shares.............................................................. 523
16.4.2 Debt instruments with equity characteristics (ss 8F and 8FA) ........................ 525
16.4.2.1 Hybrid debt instruments (s 8F) ....................................................... 526
16.4.2.2 Hybrid interest (s 8FA) .................................................................... 528
16.5 Derivative instruments ...................................................................................................... 529
16.5.1 Interest rate agreements (s 24K) ...................................................................... 529
16.5.2 Option contracts (s 24L) ................................................................................... 531
16.6 Financial institutions and authorised users (ss 24JB and 11(jA)) .................................... 532
16.1 Introduction
Taxpayers enter into arrangements involving financial instruments regularly. The terms of a financial
instrument are normally determined by the taxpayer’s purpose for entering into such an arrangement:
l A taxpayer may acquire a financial instrument as an investment. This could be in the form of an
interest-bearing investment in a debt instrument that provides the taxpayer, as financier, with a
steady stream of income to compensate it for the time value of the funds advanced and the risk
that the borrower may not be able to repay the amounts when due (credit risk). Alternatively, an
investor can invest in shares, which provides it with an ownership interest in a business and
exposure to risks related to the business. Many instruments are developed for the specific needs
of an investor that fall between the categories of a pure debt or pure equity instrument, including
derivative instruments. Financial instruments may be acquired for speculative purposes, with an
intention to hedge a position or as a long-term investment.
l On the other hand, a taxpayer may become a party to a financial instrument to obtain funding.
External funding (other than using retained earnings) can be obtained in the form of debt or by
issuing equity instruments. Debt instruments do not dilute existing ownership, but place an
obligation upon the borrower to repay the debt and interest on it, whether the borrower is in a
position to do so or not. Equity funding dilutes existing ownership when a new owner is
introduced. As the new owner is exposed to the risks of the business being funded, there is no
obligation on the entity to make payments when it is not in a position to do so. The new owner
would, however, also share in the profits to a greater extent when the business performs well.
Similar to financial instruments used for investment purposes, there are many variations of
instruments tailored to the needs of the person obtaining funding that fall between pure debt and
pure equity instruments.
This chapter considers the tax implications of the various financial instruments that a taxpayer may
be a party to. These tax implications are of critical importance when making investment or funding
decisions. This chapter explains the implications of each instrument in the following structure:
Investment perspective Funding perspective
Debt instruments (16.2) Lender implications (16.2.2) Borrower implications (16.2.3 to 16.2.5))
Equity instruments (16.3) Investor implications (16.3.1) Investee implications (16.3.1)
Hybrid instruments (16.4) Hybrid equity (16.4.1 and 16.4.2) and hybrid debt (16.4.3 and 16.4.4)
instruments
Derivative instruments
(16.5)
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16.1–16.2 Chapter 16: Investment and funding instruments
Remember
The instruments considered in this chapter may be denominated in foreign currencies.
Chapter 15 deals with the tax implications of these instruments in more detail.
In most instances transactions involving the instruments discussed in this chapter will be
financial services that are exempt from VAT. Fees charged in relation to transactions in relation to
the instrument may attract VAT. The VAT implications of financial services are discussed in
chapter 31.
16.2 Debt instruments

A debt instrument normally comes into existence when a lender advances an amount to a borrower.
The borrower is obliged to repay the amount advanced as well as a return on this amount in the form
of interest to the borrower. The advance of the capital amount of the debt does not result in any tax
implications for the borrower or the lender as the payment is accompanied by an immediate right to
repayment (lender) or obligation to make repayment (borrower) (see Genn & Co (Pty) Ltd v CIR). The
interest in respect of the debt has tax implications. These are discussed in the sections that follow
below.
16.2.1 Common principles that apply to lenders and borrowers

Section 24J regulates the timing of the accrual and incurral of interest. This provision applies to both
the lender and the borrower. In broad terms, it has the effect of spreading the interest (including any
once-off component thereof, such as a premium or discount) over the period or term of the instrument
by compounding the interest over fixed accrual periods using a predetermined rate. This rate is
referred to as the ‘yield to maturity’.
The section furthermore governs the inclusion of interest accrued in a taxpayer’s gross income and
the deduction of interest incurred from a borrower’s income.
Section 24J uses specific terminology to refer to the borrower and lender. It
refers to a ‘holder’ and ‘issuer’ of an instrument.
l Holder – holds right to receive payment – the person who is entitled to receive
any interest or amounts in terms of an income instrument (for example, a
Please note! person who advanced a loan to another (lender) or invested in bonds
(investor)).
l Issuer – issues the right to payment to the holder – the person who is liable
to pay interest or amounts in terms of an instrument (for example, a person
(borrower) who borrows money from another).
16.2.1.1 Application of s 24J

Section 24J generally applies to instruments. An exception exists for certain investments in instru-
ments made by persons other than companies (see discussion of the lender perspective in 16.2.2).
An instrument is defined as (definition of ‘instrument’ in s 24J(1))
l any interest-bearing arrangement or debt
l the acquisition or disposal of any right to receive interest or the obligation to pay interest in terms
of any other interest-bearing arrangement, and
l a repurchase or resale agreement.
Lease agreements and policies issued by insurers as defined in s 29A are

excluded from the definition of ‘instrument’. Certain sale and leaseback arrange-
ments, entered into between two parties where the receipts and accruals of one
Please note! of the parties are not taxed as income in South Africa, fall within a specific anti-
avoidance rule in s 23G. These arrangements are viewed as financing trans-
actions for tax purposes and constitute instruments to which s 24J applies.
The concepts of interest-bearing arrangement and debt are not defined in the Act. The ordinary
meaning of debt refers to a duty or obligation to pay an amount of money (or goods or services) to
another party under an agreement. An arrangement or debt should bear interest to constitute an
487
instrument. The term ‘interest’ is specifically defined for purposes of s 24J. This definition, which could
be critical to determine whether an arrangement falls within the scope of s 24J or not, is considered
next.
Despite the fact that an arrangement may be an instrument as defined, s 24J

does not apply to an instrument if the holder of that instrument has, throughout
any period during the year of assessment during which the holder holds the
instrument, a right to require the redemption of the instrument at any time during
that period and the instrument does not provide for the payment of any deferred
interest (s 24J(12)). This exclusion for s 24J took effect from years of assessment
Please note! commencing on or after 1 April 2012.
The effect of this exception is that s 24J does not apply to instruments repayable
on demand. The nature of these instruments makes it difficult to determine a
meaningful yield to maturity rate to be applied in terms of the timing provisions of
s 24J. Any amount paid or received in respect of these instruments is taken into
account in taxable income in accordance with the normal principles governing
the timing of accruals as discussed in chapters 3 and 6.
16.2.1.2 Meaning of interest

‘Interest’ is defined to include (definition of ‘interest’ in s 24J(1))
l the gross amount of any interest or similar finance charges, discount or premium payable or
receivable in terms of or in respect of a financial arrangement
l so much of the amount payable by a borrower to a lender in terms of a lending arrangement. A
‘lending arrangement’ is an arrangement in terms of which A (the lender) lends B (the borrower)
instruments and B undertakes to return instruments of the same kind and of the same or
equivalent quantity and quality. Presumably, the intention of the legislature is to treat fees or
amounts payable by the borrower to the lender for entering into the transaction as interest, and
l the absolute value of the difference between all amounts receivable and payable by a person in
terms of a sale and leaseback arrangement as contemplated in s 23G throughout the full term of
such arrangement to which that person is a party.
The circular reference to interest in the definition of interest means that one needs to consider the
ordinary meaning of this term to determine whether or not an amount constitutes interest. Interest is
an amount paid for using another person’s money. This amount can be cash or otherwise (s 24J(10)).
This implies that the reason for the payment should be closely linked to the use of another person’s
funds.
The definition of ‘interest’ specifically states that an amount could be interest whether it is calculated
with reference to
l a fixed or variable rate of interest, or
l is payable or receivable as a lump sum or in unequal instalments during the term of the financial
arrangement.
Remember
The ‘finance charge’ element of a suspensive sale agreement meets the definition of interest.
Suspensive sale agreements are used to finance the acquisition, installation, erection or
construction of any machinery, plant, aircraft, implement, utensil, article or livestock. As a
suspensive sale agreement is an interest-bearing arrangement, it qualifies as an ‘instrument’ for
the purposes of s 24J.
The fact that the definition also includes finance charges similar to interest casts the net for the
application of s 24J wide. Some doubt however exists as to whether ‘similar finance charges’ include
transactions costs (such as fees to arrange the instrument). The definition of interest previously
referred to interest and related finance charges. Despite not specifically dealing with the meaning of
the phrase ‘related finance charges’ in the context of s 24J, the judgment in the case of C: SARS v
South African Custodial Services (Pty) Ltd suggested that certain fees incurred in relation to an
instrument constituted related finance charges for purposes of the repealed s 11(bA). This provided
support for the view that these amounts constituted interest. Some uncertainty exists as to whether
this view can still be supported in light of the amendment of the phrase ‘related finance charges’ to
‘similar finance charges’.
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16.2 Chapter 16: Investment and funding instruments
Discounts and premiums, both payable and receivable, form part of interest and are taxed
accordingly as they form part of the overall yield of an instrument. As these items are treated as
interest for purposes of s 24J, it is not necessary to determine whether the premium or discount may
be of a capital nature or not. The interest inclusion and deduction provisions of s 24J (see 16.2.2 and
16.2.3) apply irrespective of whether the amounts in question are of capital nature or not.
16.2.1.3 Timing provisions of s 24J: Yield to maturity method

Section 24J employs a method that applies a yield to maturity rate to the balance of an instrument to
determine the interest accrued or incurred in respect of that instrument for a specific period. The
provision uses a number of terms, each of which have a specific definition in s 24J(1), to achieve this
outcome. The methodology and the terms used (in bold below) can be illustrated as follows:
Determine total interest charge over instrument’s term (see 16.1.2.2) and express as a yield to maturity
rate that discounts total payments on instrument to initial transaction amount.
Allocate total interest charge to accrual periods over the term of the instrument:
Accrual period 1 Accrual period 2 Accrual period 3 Accrual period

...
Accrual amount (in simple terms, the interest allocated to each accrual period) =
Adjusted initial amount (equivalent of the balance of the instrument for tax purposes) × yield to
maturity % rate (above)
The interest allocated to each accrual period that falls within, or partly within, a year of assessment is
treated as having accrued or been incurred in respect of that instrument during the particular year of
assessment.
Where s 24J applies, the actual interest receipts and interest payments (all
amounts that constitute interest as explained in 16.1.2.2) are excluded from
‘gross income’ and ‘deductions’ (s 11) respectively, since these amounts will be
Please note! included or deducted from taxable income in terms of s 24J based on the yield
to maturity (or alternative) method (s 24J(5)). The effect of s 24J is that it deems
the amounts of interest (determined in terms of s 24J) to accrue or to be incurred
during the year of assessment in which the accrual period falls, regardless of the
actual amounts received or paid during that year.
Each of the terms employed in the above methodology prescribed in s 24J is briefly considered in
more detail next:
Term
The term of an instrument means the period that starts on the date that a person becomes a party to
an instrument and that ends on the date of redemption of that instrument. A person may become a
party to an instrument when the instrument is initially issued or if it is acquired by that person when
the instrument is transferred to it. Redemption occurs when the liability to pay all amounts in terms of
an instrument is discharged. This can happen when the instrument is settled or transferred to another
person (definitions of ‘redemption’ and ‘term’ in s 24J(1)).
489
The term of an instrument has an impact on the contractual cash flows taken into
account in determining the yield to maturity rate. It also affects the number of
accrual periods to which the interest charge will be allocated and therefore the
amount of interest allocated to each accrual period. The duration of the term of
an instrument in turn is dependent on the redemption date of such an
instrument, as explained above.
Date of redemption refers to the date on which all liability to pay all amounts in
Please note! terms of that instrument will be discharged. If the terms of the instrument specify
such a redemption date and this date is not subject to change, whether as a
result of any right, fixed or contingent, of the holder of that instrument or
otherwise, the date specified is the date of redemption. If no redemption date is
specified or if the redemption date specified is subject to change, the date of
redemption will be the date on which, on a balance of probabilities, the liability
to pay all amounts in terms of that instrument is likely to be discharged.
(Definition of ‘date of redemption’ in s 24J(1).)
Accrual period
The accrual periods in respect of an instrument depend on the terms of the instrument. In particular,
the accruals periods depend on whether the instrument requires that regular payments be made at
specific intervals of the same duration, no longer than 12 months each, throughout the term of the
instrument or not.
If an instrument requires such regular payments to be made at intervals of equal length (no longer
than 12 months), the period from one regular payment to the next will be an accrual period. As an
example, if a loan requires monthly repayment of instalments by the borrower, each month will be an
accrual period. Similarly, where a loan requires quarterly payment of instalments, each quarter will be
an accrual period.
If the terms of the instrument do not require regular payments to be made at intervals of equal length
(no longer than 12 months), the taxpayer (holder or issuer, as the case may be) must elect periods of
no longer than 12 months to be used as accrual periods and apply this consistently over the term of
the instrument. An example of such an instrument, would be where a bond is issued at a discount
and does not require any repayment by the issuer for a period of 3 years. In such a case, each party
to the bond must elect periods that it will treat as accrual periods.
Remember
l It is not necessary for the holder and issuer to elect the same accrual period.
l The adopted accrual period must be applied consistently throughout the term of the instrument.
Accrual amount
The ‘accrual amount’ is defined as the amount determined by applying the yield to maturity to the
adjusted initial amount for an accrual period. In language that may be more familiar to accountants,
this amount is calculated as the opening balance of the instrument (determined for tax purposes)
multiplied by the interest rate (which is represented by the yield to maturity rate for tax purposes).
Expressed as a formula, the accrual amount in respect of a particular accrual period is therefore as
follows:
A=B×C
where:
A = the accrual amount,
B = the yield to maturity, and
C = the adjusted initial amount.
The accrual amount so determined is to be adjusted in certain circumstances as indicated by the
provisos to the definition of ‘accrual amount’, namely:
l When a year of assessment commences or ends within an accrual period, the accrual amount is
to be apportioned on a day-to-day basis over the term of the accrual period. This means that
where an accrual period falls partly within a year of assessment and partly in another year of
assessment, the accrual amount must be apportioned to each year of assessment on the basis of
the number of days in each of the years of assessment.
490
l When an instrument is transferred during an accrual period, the accrual amount must be similarly
apportioned to the portion of the accrual period during which the taxpayer was a party to the
instrument prior to the transfer.
l When interest variations occur as a result of amounts received or payments made other than at
the end of an accrual period, the variations must be taken into account by adjusting the accrual
amount.
Initial amount and adjusted initial amount

The terms ‘initial amount’ and ‘adjusted initial amount’ reflect the balance of the instrument at its
commencement and at the start of each accrual period respectively.
The ‘initial amount’ is the issue price or transfer price of an instrument. This is normally determined by
reference to the market value of the consideration given or received by the taxpayer for the issue or
acquisition of the instrument. This market value must be determined on the date that the instrument is
issued or transferred.
In brief terms, the adjusted initial amount refers to the initial amount of the instrument increased by all
accrual amounts (determined in the manner described above) less the amount of actual repayments
made in respect of the instrument. In the case of the holder of an instrument this amount is also
increased by further payments made to the issuer after acquisition of the instrument. Conversely, in
the case of the issuer, the adjusted initial amount is increased by further payments received from the
holder after the instrument was initially issued. In many ways, the calculation of the adjusted initial
amount can be compared with the calculation of the carrying amount of the instrument for accounting
purposes.
The formula to calculate the ‘adjusted initial amount’ can be summarised as follows:
At the beginning of the first accrual period:
Holder Issuer
Transaction value ......................................................................................... Initial amount Initial amount
Plus: Accrual amount for the first accrual period (interest) .......................... xxx xxx
Plus: Any amounts paid by the holder during accrual period ...................... xxx
Plus: Any amounts received by the issuer during accrual period ................ xxx
Less: Any payments received by the holder during the accrual period ....... (xxx)
Less: Any payments made by the issuer during the accrual period ............ (xxx)
Adjusted initial amount at the start of the second accrual period .................. xxx xxx
Plus: Accrual amount for the second accrual period (interest) .................... xxx xxx
Plus: Any amounts paid by the holder during accrual period ...................... xxx
Plus: Any amounts received by the issuer during accrual period ................ xxx
Less: Any payments received by the holder during the accrual period ....... (xxx)
Less: Any payments made by the issuer during the accrual period ............ (xxx)
Adjusted initial amount at the start of the third accrual period ...................... xxx xxx
(The same calculation is performed for each accrual period until the instrument is redeemed or transferred.)
In the context of s 24J, and specifically the above formula, payments or amounts
Please note! also refer to amounts or considerations given or received in forms other than
cash (s 24J(10)).
An anti-avoidance rule exists in the context of the issuer in respect of instruments that form part of a
transaction, operation or scheme that may distort the amount of interest incurred in relation to the
outstanding debt. The adjusted initial amount must be reduced by any payment that the issuer makes
to another person with the purpose or probable effect of that other person making a payment directly
or indirectly to the holder or a connected person to the holder. The rule extends to any payment
made by any party connected to the issuer in pursuance of the transaction, operation or scheme with
the probable effect of that person making a payment directly or indirectly to the holder or a
connected person to the holder. This proviso prevents the adjusted initial amount, on which the
interest deemed to be incurred by the issuer is based, to be kept high in an artificial manner. The
balance of the instrument in the hands of the holder is, however, reduced by the indirect payments
made to the holder. The definition of ‘yield to maturity’ similarly requires such payments to be taken
into account to determine the yield to maturity rate at which the interest incurred by the issuer is
calculated. The effect of these provisos is that the interest deducted is determined with reference to
491
the interest on the net amount borrowed by the group of related persons in terms of the scheme. In
the absences of this proviso, an opportunity may have existed to inflate the amount of interest
deductible by the issuer.
Yield to maturity
This term refers to the compounded rate, determined per accrual period, that discounts all amounts
payable or receivable in terms of an instrument back to its initial amount. Put differently, this is the
rate at which the present value of all amounts payable or receivable in terms of an instrument will be
equal to its initial amount. If the yield to maturity results in negative interest, it must be treated as zero.
If the rate is determined for an instrument that does not bear interest at a fixed rate, the yield to
maturity rate must be determined using the variable applicable on the date that the rate is calculated.
If this variable rate changes, the yield to maturity must be re-determined.
If the terms of the instrument (for example term or payment terms) change, the yield to maturity must
also be re-determined.
Remember
l The initial amount of the instrument will represent the present value (PV), or initial cash flow
(CF0) on a financial calculator.
l If regular and consistent payments are made in respect of the instrument, these amounts
will represent the instalment (PMT) on a financial calculator. The number of periods over
which these payments are made represent the period (n) on a financial calculator. If
payments are not made regularly, or the amounts of payments are not the same, the cash
flow functions must be used.
l The final repayment will represent the future value (FV) of the instrument. If cash flow
functions are used, this will represent the final cash flow.
l The yield to maturity is then calculated by determining the effective interest rate (i), or internal
rate of return (IRR) if the cash flow functions are used.
Practical application of the yield to maturity method

The application of the yield to maturity method of determining the amount of interest incurred or
accrued can be daunting when one considers the technical definitions discussed above. The
following stepped approach is suggested to apply this method:
Step 1: Determine whether s 24J applies: It applies only to an ‘instrument’ (for the issuer) or to an
‘income instrument’ (for the holder) (see 16.2.2 below for the meaning of the term ‘income
instrument’), as defined in s 24J(1).
Step 2: Determine all amounts payable or receivable in terms of any instrument in relation to a
holder or an issuer, as the case may be, of such instrument during the term of the
instrument. These amounts include amounts that represent interest as well as capital in
respect of the instrument.
Step 3: Calculate the yield to maturity: the calculation is to be done with a financial calculator,
unless the rate is given.
Step 4: Determine the initial amount: the amount paid or received for the instrument (issue price or
transfer price).
Step 5: Calculate the accrual amount for the first accrual period: do this by using the formula:
A = B × C. Remember to apportion the amount if the accrual period does not commence or
end on the same day as the start or the end of the year of assessment.
Step 6: Calculate the adjusted initial amount: the calculation is to be done according to the
definition of ‘adjusted initial amount’ (s 24J(1)). The amount calculated represents ‘C’ in the
formula: A = B × C.
Step 7: Calculate the accrual amount for the second accrual period: do this by using the formula:
A = B × C. Remember to apportion the amount if the accrual period does not commence or
end on the same day as the start or the end of the year of assessment.
Step 8: Repeat steps 6 and 7 for the rest of the accrual periods until the end of the term of the
instrument.
Step 9: Reconciliation. The total of the accrual amounts should be equal to the total interest (see
diagram at the start of 16.1.2.3) in respect of the instrument.
492
Example 16.1. Yield to maturity method: Basic calculation

Anja Ltd enters into an agreement on 1 January 2018 whereby it acquires an interest-bearing
instrument with a face value of R100 000 at a discount of 10%. As Anja Ltd holds the right to
payment, it is the holder of the instrument. The instrument has a maturity date of 31 Decem-
ber 2019, when an amount of R130 000 will be repaid. Anja Ltd's financial year ends on
31 December.
Step 1. Determine whether s 24J applies
The interest-bearing instrument meets the definition of an instrument. It is furthermore an ‘income
instrument’ as defined, as it was acquired by the company.
Step 2. Determine the projected cash flows
The cash flows under the agreement are as follows:
Month Cash flow
1 January 2018 ........................................................................................................... (R90 000)
31 December 2019 ..................................................................................................... 130 000
Interest income ........................................................................................................... R40 000
Step 3. Calculate the yield to maturity
The yield to maturity of the instrument is 20,18504%.
(Financial calculator input: PV = -R90 000; PMT = 0; FV = R130 000; n = 2)
Step 4. Determine the initial amount
The initial amount is R90 000, i.e. the amount paid to acquire the income instrument.
Step 5. Calculate the accrual amount for the first accrual period
As the instrument does not require any payments to be made at regular intervals not exceeding
12 months, a period not exceeding 12 months must be elected by the holder as the accrual period.
For purposes of this example, it is assumed that Anja Ltd elected the accrual period to be from
1 January to 31 December of each calendar year. This first accrual period is therefore from
1 January 2018 to 31 December 2018.
Using the formula: Accrual amount (A) = yield to maturity (B) u adjusted initial amount (C)
Accrual amount = R90 000 u 0,2018504
= R18 166,54 (interest to be included in gross income in terms of s 24J(3))
(Adjusted initial amount = R90 000 because there are no accrual amounts in respect of previous
accrual periods.)
Step 6. Calculate the adjusted initial amount
Adjusted initial amount is R90 000 + R18 166,54 – Rnil (no payments were received during this
accrual period) = R108 166,54
Step 7. Calculate the accrual amount for the second accrual period: 1 January 2019 to 31 December
2019
Using the formula: Accrual amount = yield to maturity u adjusted initial amount
Accrual amount = R108 166,54 u 0,2018504
= R21 833,46 (interest to be included in gross income in terms of s 24J(3))
Step 8. Calculate the portion of the accrual amounts deemed to accrue in each year of assessment
Since the accrual periods coincide with Anja Ltd’s years of assessment (both being the calendar
year from 1 January to 31 December) no apportionment is necessary in this example.
Step 9: Reconciliation – The accrual amounts for the two accrual periods (R18 166,54 and
R21 833,46) total R40 000 which is the amount of interest income from the income instrument.
Example 16.2. Yield to maturity method: Discount and zero-coupon bond
A taxpayer entered into an agreement on 1 October 2018 whereby it issued a zero-coupon bond
with a face value of R1 000 000 at a discount of 40%. The bond has a maturity date of 30 Sep-
tember 2021. The taxpayer’s financial year ends on the last day of February. The cash flows
under the agreement are as follows:
Month Cash flow
1 October 2018 ........................................................................................................... R600 000
30 September 2019 .................................................................................................... nil
30 September 2020 .................................................................................................... nil
30 September 2021 .................................................................................................... (1 000 000)
Interest expense incurred by the issuer ...................................................................... R400 000
493
SOLUTION
As the instrument does not require payments to be made at regular intervals not exceeding
12 months, a period not exceeding 12 months must be elected by the holder as the accrual
period. For purposes of this example, it is assumed that the taxpayer elected the accrual period
to be from 1 October to 30 September of each calendar year.
The yield to maturity, for an annual accrual period, is 18,56311% per accrual period.
(Financial calculator input: PV = R600 000; PMT = Rnil; FV = -R1 000 000; n =3)
The incurral of R400 000 interest by the taxpayer is deemed to have been incurred on a com-
pounding accrual basis in accordance with s 24J(2) as follows:
Using the formula: Accrual amount (A) = yield to maturity (B) u adjusted initial amount (C)
Adjusted initial amount = R600 000. (There are no accrual amounts in respect of previous
accrual periods.)
Accrual amount for the 2019 year of assessment
151
= R600 000 u 0,1856311 u Days
365
= R46 077 (interest to be considered for deduction in terms of s 24J(2))
Since the accrual period of the bond is from 1 October to 30 September, the accrual amount for
the 2020 year of assessment is determined in relation to the portion of two accrual periods falling
within the year of assessment (namely, from 1 March 2019 to 30 September 2019 and from
1 October 2019 to 29 February 2020). The accrual amounts in relation to each accrual period are
apportioned on a day-to-day basis over the accrual period. Since the adjusted initial amount
relates to an accrual period, it will differ for the two accrual periods which fall into the year of
assessment in question. Therefore, the adjusted initial amount for the portion of the first accrual
period remains R600 000 and for the second accrual period will equal R600 000 plus the accrual
amount in previous accrual periods (1 October 2018 to 30 September 2019).
214 152
= (R111 379 × ) (R132 054 ((600 000 + 111 379 – Rnil) × 0,1856311) × )
365 366
= R65 302 R54 842
214 151
= (R132 054 × days) (R156 567 ((711 379 + 132 054) × 0,1856311) × )
366 365
= R77 212 R64 772
214
= R156 567 × days
365
Total deemed interest incurred by the issuer equals the sum of the accrual amounts:
= R46 077 R120 144 R141 984 R91 795
= R400 000
The above examples illustrate how the calculation of the accrual amount is performed on the basis of
the accrual periods. Once the accrual amounts have been determined for the accrual periods falling
in a particular year of assessment, an apportionment of the accrual amounts is done in order to
determine the amount accrued or incurred for the year of assessment.
494
Example 16.3. Yield to maturity method: Redemption at premium
A taxpayer acquired an instrument with a face value of R1 000 000, a term of three years and a
six-monthly coupon of 6%, at a discount of R400 000 on 1 October 2018. The coupon dates,
upon which interest is receivable, are 31 March and 30 September. The financial instrument will
be redeemed at a premium of 2% on 30 September 2021. The taxpayer’s financial year ends
February. The cash flows under the agreement are as follows:
Month Cash flow
1 October 2018 ........................................................................................................... (R600 000)
31 March 2019 ............................................................................................................ 60 000
30 September 2019 .................................................................................................... 60 000
31 March 2020 ............................................................................................................ 60 000
30 September 2020 .................................................................................................... 60 000
31 March 2021 ............................................................................................................ 60 000
30 September 2021 .................................................................................................... 1 080 000
Total interest deemed to be accrued .......................................................................... R780 000
Calculate the interest accruing during each of the years of assessment.
SOLUTION
The yield to maturity, for a six-monthly accrual period is 17,50653% per accrual period.
(Financial calculator input: PV = -600 000; PMT = 60 000; FV = R1 020 000; n = 3 × 2 = 6)
In terms of s 24J(3), the accrual by the taxpayer of R780 000 in respect of the income instrument
is calculated as the sum of all accrual amounts in relation to all accrual periods falling within the
taxpayer’s year of assessment. The accrual is thus determined, not on a receipts basis, which is
dependent upon actual cash flows, but rather on an accrual basis as set out below.
Adjusted initial amount = R600 000 (there are no accrual amounts in respect of previous accrual
periods)
151
Accrual for the 2019 year of assessment = R600 000 × 0,1750653 × days
182
Deemed accrual = R87 148 (interest to be included in gross income in terms of s 24J(3))
Since the accrual periods of the financial instrument are from 1 October to 31 March and from
1 April to 30 September, the accrual amount for the 2020 year of assessment is determined in
relation to the portion of three accrual periods falling within the year of assessment (namely, from
1 March to 31 March 2010, from 1 April to 30 September 2019 and from 1 October 2019 to
29 February 2020). The accrual amounts in relation to each accrual period are apportioned on a
day-to-day basis over the accrual period. Since the adjusted initial amount relates to an accrual
period, it will differ for the three accrual periods which fall into the year of assessment in
question. Thus, the adjusted initial amount for the portion of the first accrual period ending on the
31 March 2019 remains R600 000 and the accrual amount is
31
R600 000 u 0,1750653 × days
182
= R17 891
For the second accrual period, ending on 30 September 2019, the adjusted initial amount will
equal R600 000 plus the accrual amount in previous accrual periods (1 October 2018 to
31 March 2019), less any payments receivable:
= R600 000 (R87 148 R17 891) – R60 000
= R600 000 R105 039 – R60 000
= R645 039
Accrual for the accrual period ending on 30 September 2019
= R645 039 u 0,1750653
= R112 924
Accrual for the accrual period ending on 29 February 2020
152
(R645 039 R112 924 – R60 000) × 0,1750653 × Days
183
152
= R697 963 × 0,1750653 × days
183
= R101 490
continued
495
Deemed accrual for the year

= R17 891 R112 924 R101 490
= R232 305 (interest to be included in gross income in terms of s 24J(3))
Adjusted
Portion of accrual periods Calculation of adjusted initial amount
initial amount
1 March to 31 March 2020 R697 963 R645 039 R112 924 – R60 000
1 April to 30 September 2020 R760 152 R697 963 (R101 377 R20 812) – R60 000
1 October 2020 to R833 228 R760 152 R133 076 – R60 000
28 February 2021
Accrual for the 2021 year of assessment
= (R697 963 × 0,1750653 × 31/183) (R760 152 × 0,1750653) (R833 228 × 0,1750653 × 151/182)
Deemed accrual for the year = R20 699 R133 076 R121 023
= R274 798
Adjusted
Portion of accrual periods Calculation of adjusted initial amount
initial amount
1 March to 31 March 2021 R833 228 R760 152 R133 076 – R60 000
1 April to 30 September 2021 R919 097 R833 228 (R121 159 R24 710) – R60 000
Accrual for the 2022 year of assessment

= (R833 228 × 0,1750653 × 31/182) (R919 097 × 0,1750653)
= R24 846 + R160 902
= R185 748 (interest to be included in gross income in terms of s 24J(3))
Total interest accrued in terms of s 24J(3)
= R87 148 R232 305 R274 798 R185 748
= R779 999 (difference of R1 due to rounding)
Example 16.4. Yield to maturity method: Repayment in instalments

A taxpayer is currently experiencing cash flow difficulties. In order to restore its cash flow
position, it requires funding to purchase a new asset. The cost of the asset is R69 280. The
taxpayer has entered into negotiations with an investor who is willing to take up a bond issued by
the taxpayer with the following terms:
l The bond will be issued for an amount of R69 280 on 1 October 2018.
l It does not bear any interest at a coupon on the outstanding amount. This will give the
taxpayer an opportunity to restore its cash flow position without the burden of having to
service the interest obligation in respect of the bond on an annual basis.
l The outstanding amount will be settled in two instalments of R60 000 each. The first will be
made on 30 September 2021 and the second on 30 September 2023.
The taxpayer has a 30 September financial year-end.
Calculate the interest incurred during each of the years of assessment that the instrument is
issued.
SOLUTION
Despite the fact that the bond does not bear interest at a coupon rate, the premium at settlement
constitutes interest for purposes of s 24J (definition of ‘interest’ in s 24J(1)). This bond is
therefore an instrument and within the scope of s 24J.
In terms of s 24J(2), the interest incurred by the taxpayer is calculated as the sum of all accrual
amounts in relation to all accrual periods falling within the taxpayer’s year of assessment. The
accrual is thus determined, not on a receipts basis, which is dependent upon actual cash flows,
but rather on an accrual basis as set out below.
As the bond does not bear interest on a regular basis, a period not exceeding 12 months must
be used as the accrual period. For purposes of this example, the 12 month period from
1 October to 30 September will be used.
continued
496
The yield to maturity is calculated using the cash flow functions on a financial calculator. The
relevant cash flows are:
R
Cash flow 0 (1 October 2018) ..................................................................................... 69 280
Cash flow 1 (30 September 2019) .............................................................................. nil
Cash flow 3 (30 September 2021) .............................................................................. (60 000)
Cash flow 5 (30 September 2023) .............................................................................. (60 000)
These cash flows result in a rate of return (which is the yield to maturity for purposes of s 24J) of
15,000678% p.a.
Adjusted initial amount = R69 280 (there are no accrual amounts in respect of previous accrual
periods)
Accrual for the 2019 year of assessment = R69 280 u 0,15000976
Deemed accrual = R10 393 (interest to be considered for deduction in terms of s 24J(2))
The adjusted initial amount will equal R69 280 plus the accrual amount in previous accrual
periods (1 October 2018 to 30 September 2020), less amounts payable (if any):
= R69 280 (R10 393) – Rnil
= R79 673
= R79 673 × 0,15000678
= R69 280 (R10 393+ R11 951) – Rnil
= R91 624
= R91 624 u 0,15000678
= R69 280 (R10 393 + R11 951 + R13 744) – R60 000
= R45 368
= R45 368 × 0,15000678
= R69 280 + (R10 393 + R11 951 + R13 744 + R6 806) – R60 000
= R52 174
= R52 174 × 0,15000678
As a final check, the adjusted initial amount once the final payment has been made is calculated
as follows:
R69 280 + (R10 393 + R11 951 + R13 744 + R6 806 + R7 826) – R120 000 = Rnil
Note that the methodology followed to determine the yield to maturity and accrual amount for
each of the accrual periods will be similar to that followed in this example in the case of:
l instruments that bear interest at a stated coupon rate where repayment of capital takes place
during the term, as opposed to at the end of the term of the instrument; of
l instruments that bear interest that is either not payable at regular intervals or where the
interest rate does not remain constant throughout the term of the instrument (i.e. initially at 5%
p.a. but increases to 10% p.a. at some stage during the term of the instrument).
497
16.2.1.4 Timing provisions of s 24J: Alternative methods

In addition to the yield to maturity method, s 24J allows taxpayers to determine the amount of interest
incurred or accrued, as the case may be, using an alternative method. An alternative method is
defined as a method of calculating interest in accordance with IFRS for a class of instruments. The
timing of the accrual or incurral of the interest determined in terms of this method must be
substantially similar to the result that would have been achieved if the yield to maturity method had
been applied. If a taxpayer wishes to apply an alternative method, it must do so for all instruments in
a specific class of instruments, and it needs to be applied consistently for all such instruments for all
financial reporting purposes.
Remember
Practically, the application of the alternative method would mean that the amount of interest as
determined in accordance with the following accounting standards would be used as the amount
of interest incurred or accrued, as the case may be, for purposes s 24J:
l IAS 39, the current standard applicable to financial instruments
l IFRS 9, the standard that will replace IAS 39 for financial years commencing on or after
1 January 2018
l Chapters 11 and 12 of IFRS for SMEs.
All these frameworks require certain instruments to be measured at amortised cost using the
effective interest rate method. In most instances, the results of the effective interest rate method
and the yield to maturity method should not differ significantly, if it differs at all.
16.2.1.5 Transfer or disposal of instruments

In addition to governing the timing of the accrual or incurral of interest, s 24J also contains rules to
determine any gain or loss upon transfer or disposal of an instrument. These rules are required to
ensure that the effect of the timing rules, as discussed above, is taken into account correctly when an
instrument is transferred or disposed of. This is necessary since the amounts taken into account for
tax purposes may differ from the actual payments made and/or amounts already due in terms of an
instrument.
Where an instrument is either redeemed or disposed of (transferred) prior to or on its maturity, a gain
or loss must be calculated. This gain or loss must reflect the difference between the net actual cash
flows (including the redemption or transfer cash flow) under the instrument disposed of or redeemed
and the accrual amounts that have been or will be taken into account in the calculation of the
taxpayer’s taxable income. This amount is deemed to have been incurred by (if an adjusted loss
arises) or to have accrued to (if an adjusted gain arises) the taxpayer in the year of assessment in
which the transfer or redemption occurs (s 24J(4)).
Redemption in relation to an instrument means the discharging of all liability to pay

all amounts in terms of an instrument (defined in s 24J(1)).
Please note! Transfer (defined in s 24J(1)) in relation to an instrument includes the transfer,
sale, assignment or disposal of the instrument in any other manner by the holder
or the issuer. It also includes the acquisition of an instrument by the holder or
issuer thereof.
498
The calculation of the adjusted gain or loss on transfer or redemption of an instrument is illustrated by
the diagram below:
Holder, in relation to an income instrument Issuer, in relation to an instrument
Alternative method Alternative method Alternative method Alternative method

not applied: applied: not applied: applied:
Adjusted gain or loss Adjusted gain or loss Adjusted gain or loss Adjusted gain or loss
is the difference is the difference is the difference is the difference
between: between: between: between:
(adjusted initial (initial amount + (adjusted initial (initial amount and
amounts + accrual amounts determined amount + accrual amounts determined
amount + payments using the alternative amounts + payments using the alternative
made) (during the method + payments received) (during the method + payments
accrual period of made) (during the accrual period of received) (during the
transfer or period from transfer or period from
redemption) acquisition until redemption) acquisition until
and transfer or and transfer or
redemption) redemption)
(transfer price or (transfer price or
redemption payment and redemption payment and
+ payments received) (transfer price or + payments made) (transfer price or
(during the accrual redemption payment + (during the accrual redemption payment
period of transfer or payments received) period of transfer or + payments made)
redemption) (during the period from redemption) (during the period from
acquisition until acquisition until
transfer or redemption) transfer or redemption)
:here an adjusted loss on transfer or redemption is calculated in relation to an income instrument,

the loss so calculated may consist of two elements, namely
l interest accrued in terms of s 24J, but never received by the taxpayer, and
l a portion of the original acquisition price or issue price forfeited.
This will be the case, for example, when interest accrues in terms of s 24J(3) and the instrument is
subsequently sold without the holder actually receiving this accrued interest. If, in the case of a
holder of an income instrument, the adjusted loss includes an amount representing an accrual
amount or an amount determined in accordance with an alternative method, and that amount has
been included in the holder’s income in any year of assessment, the amount must be allowed as a
deduction from the holder’s income in the year of transfer or redemption (s 24J(4A)(a)). This is
because the interest accrued has been taxed, but was never actually received by the holder of the
instrument. The deduction reverses the income previously taken into account, but never actually
received.
The converse applies to the issuer of an instrument that has incurred interest in terms of s 24J(2), but
that will not actually be paid by it. It is accordingly provided that if, in the case of an issuer, the
adjusted gain includes an amount representing an accrual amount or amount determined in
accordance with an alternative method and that amount has been allowed as a deduction from the
issuer’s income in any year of assessment, the amount must be included in the issuer’s income in the
year of transfer or redemption. This is because the interest incurred has been deducted, but was
never actually paid by the issuer of the instrument. The inclusion in income would however not be
required where the amount has already been recouped in terms of s 19 (see chapter 13) due to the
reduction or cancellation of a debt (s 24J(4A)(b)).
A recoupment may also arise in the hands of a taxpayer in respect of interest or

related finance charges (including discounts or premiums) incurred in respect of a
financial arrangement when that financial arrangement, including the obligation to
pay the interest or related finance charges, is transferred to another person. The
portion of the obligation for the interest that remains unpaid at the date of transfer
Please note! is treated as a recoupment in the hands of the transferor (s 8(4)(l)). It is submitted
that, in the case of an instrument, the provisions of s 24J(4A)(b), as discussed
above, will apply. The recoupment in terms of s 8(4)(l) would arguably only apply
where interest has been incurred in terms of an arrangement that does not
constitute an instrument and to which s 24J does not apply.
499
Section 24J does not prescribe how the calculated gain or loss on transfer should be treated for tax
purposes. The normal requirements of the Act, including the provisions relating to capital, revenue
and source must still be considered when the gain or loss is taken into account in the determination of
the taxpayer’s taxable income.
Example 16.5. Yield to maturity method: Adjusted gain or loss on transfer

An investor in financial instruments acquires government bond for an amount of R188 317 on
1 December 2017. The bond bears interest at a coupon rate of 11,5% per annum payable six-
monthly and matures at a nominal value of R200 000 on 31 May 2022. The holder sells the bond
on 12 August 2019 for an amount of R185 776. The holder’s financial year ends on 30 June.
The cash flows under the agreement are as follows:
Date Cash flow
1 December 2017 ....................................................................................................... (R188 317)
31 May 2018 (11.5% × R200 000 × 6/12) ................................................................... 11 500
30 November 2018 ..................................................................................................... 11 500
31 May 2019 ............................................................................................................... 11 500
30 November 2019 ..................................................................................................... 11 500
31 May 2020 ............................................................................................................... 11 500
30 November 2020 ..................................................................................................... 11 500
31 May 2021 ............................................................................................................... 211 500
R92 183
A yield to maturity of 6,82740%, applying a six-monthly accrual period, is applicable to the
instrument. (Financial calculator input: PV = -188 317; PMT = 11 500; FV = 200 000; n = 7)
Interest accrued
30
= (R188 317 × 6,8274%) + (R189 674 (R188 317 + R12 857 – R11 500) × 6,8274% × )
183
= R12 857 R2 123
= R14 980
Year of assessment ended 30 June 2019 (1 July 2018 to 12 August 2018)
Interest accrued
43
= R189 674 × 6,8274% × days
183
= R3 043
= (R189 674 + R2 123 + R3 043) – R185 776
= R9 064 (note (1))
Reconciliation
Cash flow
Acquisition price (1 December 2017) ......................................................................... (R188 317)
Coupon (31 May 2018) ............................................................................................... 11 500
Selling price (12 August 2018) ................................................................................... 185 776
Net cash receipt ......................................................................................................... R8 959
Income tax treatment
Interest accrued (2018 tax year) ................................................................................. R14 980
Interest accrued (2019 tax year) ................................................................................. 3 043
Section 24J(4A)(a) deduction (note (1)) ..................................................................... (6 523)
Balance of adjusted loss on transfer (note (2)) ........................................................... (2 541)
R8 959
Notes
(1) Included in the adjusted loss on transfer of R9 064 is an amount of R6 523 (R194 840
(adjusted initial amount on date of sale) less R188 317 (acquisition price)), which represented
taxable income (interest) in the current and previous year of assessment which has not yet
been received in cash. Section 24J(4A) allows this amount to be deducted from the income
of the taxpayer.
(2) The balance of the adjusted loss on transfer, amounting to R2 541 (R9 064 less R6 523), will
be dealt with in terms of the normal provisions of the Act. Since we are dealing with an
investor in financial instruments, this loss will be of a capital nature and not deductible
under s 11(a). The provisions of the Eighth Schedule would however be applicable if an
asset is disposed of. (If it was a dealer, the loss may have been deductible under s 11(a).)
(This example has been adapted from the Explanatory Memorandum on the Income Tax Bill, 1996)
500
16.2.2 Lender perspective: Taxability of interest received or accrued

The lender would be the holder of an instrument if the terminology of s 24J is used. The holder may
be a person who advanced a loan to another person. It could however also be a person who invested
in a debt instrument, such as a bond, issued by another person.
Given the complexity of the methodology prescribed by s 24J, certain persons who are holders of
instruments are not required to apply this provision. This exclusion is achieved by the fact that s 24J
does not apply to all instruments in the case of the holder, but only to income instruments. In the case
of a company, which should have the capacity to perform the complex calculations required by
s 24J, all instruments are income instruments. In the case of any other person (for example natural
persons), an income instrument is an instrument that was issued or acquired at a discount or
premium, or bears deferred interest, and that is expected to have a term that exceeds 12 months.
The effect of this requirement is that only instruments with elements of interest that may cause the
yield to maturity rate to differ significantly from its coupon rate, and a term that could result in the
effect of spreading the interest being material, must be taxed in accordance with s 24J. A natural
person who invests in a debt instrument that only bears interest at a specified rate will not apply the
provisions of s 24J to determine the timing of the accrual of such interest.
‘Deferred interest’ is broadly defined and encompasses

l any interest which is calculated by applying a constant interest rate for the
term of the instrument, but which is not payable or receivable within one
Please note! year from the date of commencement of the ‘accrual period’ as defined, and
l any interest payable or receivable which is not calculated by applying a
constant interest rate throughout the term of the instrument.
Any interest rate that is linked to a recognised base rate or index by applying a
constant factor (for example prime rate plus 1%) is regarded as a constant rate.
The holder of an income instrument must include in its gross income an amount of interest
l WKDW IDOOV LQ DFFUXDO SHULRGV GXULQJ WKH \HDU RI DVVHVVPHQW determined using the yield to
maturity method (see 16.2.1.3), or
l that was determined using an alternative method (see 16.2.1.4) (s 24J(3)).
The holder must include this amount of interest in its gross income, irrespective of whether the
accrual or receipt is of a capital nature or not.
Remember
Not all interest included in the gross income of a taxpayer will be subject to normal tax. The
following exemptions should be borne in mind:
l Interest that accrues to a natural person in respect of a tax free investment is exempt from
normal tax (s 12T(2)).
l A portion of interest from a South African source that accrues to a natural person may be
exempt. In the case of a taxpayer who is, or would have been, at least 65 years of age on
the last day of the year of assessment, an amount of R34 500 is exempt. In the case of all
other persons, an exemption of R23 800 applies. (s 10(1)(i))
l Interest received or accrued to certain non-residents may be exempt from normal tax
(s 10(1)(h)). This interest may however be subject to the withholding tax on interest (ss 50A
to 50H – see chapter 21).
16.2.3 Borrower perspective: Deductibility of interest incurred

The borrower in terms of a debt instrument is referred to as the issuer of the instrument for purposes
of s 24J.
The issuer of an instrument would be entitled to deduct
l interest that falls in accrual periods during the year of assessment, determined using the yield to
maturity method (see 16.2.1.3), or
l interest determined using an alternative method (see 16.2.1.4)
501
from income derived by the issuer from carrying on any trade, provided that such interest is incurred
in the production of the income (s 24J(2)). It is not necessary to consider whether the interest
incurred is of a capital nature or not.
The requirement that interest must be incurred in the production of the income from carrying on the
trade is similar to the requirements of the general deduction formula, as discussed in chapter 6. The
same considerations discussed in that chapter also apply to interest expenditure. The application of
these requirements has specifically been considered in the context of interest by the courts as well
as by SARS in practice and interpretation notes. The legislature has also included specific provisions
dealing with the deductibility of interest into the Act. These considerations and provisions are dis-
cussed next.
16.2.3.1 Interest must be incurred in the production of income

Whether interest is incurred in the production of income involves an enquiry into the purpose of the
expenditure and its actual effect. This in turn requires an assessment of the closeness of the
connection between the expenditure and the income-earning operations. Interest paid on moneys
borrowed to purchase assets giving rise to amounts that are exempt from tax (in terms of s 10), and
therefore does not fall within the definition of ‘income’, is not deductible. Interest will not be
deductible if, for example, it is paid on an amount borrowed to purchase shares that produce exempt
dividends (see chapter 6).
An exception exists in the context of certain interest incurred to fund the

Please note! acquisition of a controlling interest in a company (s 24O). This exception is
considered in 16.2.3.4.
In Financier v COT (1950 SR) a taxpayer borrowed a sum of money at interest for the general
purposes of its business. Certain investments produced no income. The portion of the interest paid
that related to these non-productive investments was disallowed as a deduction. The test applied by
the court was whether the money on which the liability for interest was incurred was borrowed for the
purpose of producing income; whether the effect or result is that income is produced is not the
critical issue. The critical factor was that the purpose was to produce income.
Confirmation that the purpose of a borrowing is the ‘vital enquiry’ is also found in CIR v Standard
Bank of SA Ltd (1985 A). The bank has, in general, like any other bank, borrowed money at a low
interest rate (by accepting deposits) and lent it out at a higher rate. The bank, however, used a
certain portion of the interest-earning money it borrowed to acquire shares. The shares earned non-
taxable dividends. The tax authorities denied a portion of the bank’s interest deduction since it did
not produce taxable income. The court held that the immediate purpose was to obtain floating
capital. The connection between a certain proportion of the interest it paid and the dividends it
received was not close enough to warrant the conclusion that the interest was incurred in the
production of the dividends or was an expenditure incurred in earning an amount not constituting
income. The deduction could therefore not be prohibited by s 23(f).
If the purpose for which money is borrowed excludes any possibility of earning income, any interest
incurred on the borrowed money may not be deducted. For example, should a director borrow
money at interest and lend it to his company interest free, he will not be allowed to claim the interest
he pays as a deduction, for the simple reason that the money borrowed could not earn him any
income.
Taxpayers often borrow money for trade purposes on the security of their private assets. The fact that
the pledged or mortgaged asset is a private asset does not deprive the taxpayer of the right to claim
the interest paid as an allowable deduction; the sole test is the purpose for which the loan was
raised. For example, if a taxpayer mortgages his private residence and invests the money in his
business, the interest paid will be allowed as a deduction, since the purpose of the loan was for trade
purposes.
However, if he mortgages business or trading assets in order to acquire private assets that are not
productive of income (for example a private residence or motor car) the interest will not be allowed as
a deduction, since the purpose of the loan was not for the production of income.
Where interest is incurred for a dual purpose (i.e. a portion of the interest is incurred in the production
of income and a portion not), it would be necessary to apportion the interest to determine the
deduction (see chapter 6).
502
16.2.3.2 Interest must be incurred in carrying on a trade

If a taxpayer borrows money to on-lend the funds and earns interest income or earns interest on
surplus borrowed funds, these activities may not necessarily constitute a trade (see chapter 6). In
practice SARS accepts that if capital is borrowed specifically to on-lend, such a transaction results in
trade income and the expenditure is, therefore, allowable. On this basis it will allow interest incurred
in order to earn interest income as a deduction. The same practice applies to interest incurred in
respect of surplus funds that are invested. The Commissioner’s practice is set out in Practice Note
No 31, the relevant portion of which reads:
While it is evident that a person (not being a moneylender) earning interest on capital or surplus funds
invested does not carry on a trade and that any expenditure incurred in the production of such interest
cannot be allowed as a deduction, it is nevertheless the practice of Inland Revenue to allow expenditure
incurred in the production of interest to the extent that it does not exceed such income. This practice will
also be applied in cases where funds are borrowed at a certain rate of interest and invested at a lower rate.
Although, strictly in terms of the law, there is no justification for the deduction, this practice has developed
over the years and will be followed by Inland Revenue.
Where a taxpayer borrows money to fund the commencement of a trade, it may incur amounts of
interests prior to actually carrying on a trade. The provisions relating to pre-trade expenditure (s 11A
– see chapter 6) will be applicable to expenditure or losses which would have been allowed as a
deduction in terms of s 24J, but which are disallowed as these were incurred before the commence-
ment of a new trade. Section 11A allows for the deduction of these expenses once the trade com-
mences. Once trade commences, interest expenditure incurred will be deductible under the
provisions of s 24J.
16.2.3.3 Interest incurred on loans to acquire shares

Generally, if interest is paid on an amount borrowed to acquire shares, the deduction of interest will
not be allowed. The purpose of the expenditure is to obtain shares that produce exempt dividend
income.
The test of the purpose for which the money is borrowed was also stressed in the case of
CIR v Shapiro (1928 NPD), in which the facts were that, in order to pay for shares in a company from
which he derived salary and commission, a taxpayer borrowed certain moneys on which he had to
pay interest annually. He claimed that the interest should be allowed as a deduction against the
salary and commission received by him from the company. It was held by the court that the salary
and commission were not produced by his shareholding in the company but by the exercise of his
duties in his office as manager. Consequently, the interest paid on the money borrowed to buy the
shares had not been productive of his income. The shares themselves produced exempt dividend
income.
It is interesting to compare this case with CIR v Drakensberg Garden Hotel (Pty) Ltd (1960 A). In this
case a company (Company A) borrowed money in order to acquire the shares of another company
(Company B). Company B owned the property rented by Company A and used to generate business
profits from operating a hotel at the premises. The shares were acquired in order to obtain absolute
control of hired premises from which it derived rent and business profits, thereby ensuring
continuance of its income. It was held that the income from which to deduct the interest was not the
dividend income flowing from the shareholding (which was exempt income) but the other income
derived from its business. It was held that the closeness of the connection between the payment of
interest and the production of the taxpayer’s income was sufficient to warrant its deduction.
It must follow from the principle established in the Drakensberg Garden Hotel case that the interest
paid on the money borrowed to acquire the shares is properly deductible from that income, if the
taxpayer’s purpose in buying shares is to ensure the continuance of the income from trading or
business operations and in doing so to secure an increased income. This is a determination that is
based on the facts and circumstances of each case. The burden of proving the purpose of the
expenditure rests with the taxpayer may be a difficult one to discharge where the funds were used to
acquire shares (s 102(1)(b) of the Tax Administration Act).
16.2.3.4 Interest incurred on loans to acquire shares in a controlled company

A person can either acquire a business by acquiring the shares of a company owns and operates the
business, or by acquiring the business assets from the company. In practice, the former is referred to
as an equity transaction, while the latter is an asset acquisition. As explained above, interest incurred
on a loan used to fund the acquisition of the assets of a business will be deductible, while interest
503
incurred to acquire the shares of the company that houses the business will not be deductible. In
order to achieve interest deductibility in respect of transactions involving the acquisition of shares of
a business, taxpayers structured funding in various manners, some of which involved aggressive tax
planning. During 2013, the National Treasury introduced s 24O into the Act to avoid the need for such
structuring. To overcome the fact that interest incurred to acquire shares is not deductible since it is
not incurred in the production of income or for purposes of carrying on a trade, s 24O deems these
requirements to be met in certain circumstances.
A company will qualify for an interest deduction under s 24O if it issues, assumes or uses debt to
acquire a controlling interest, directly or indirectly, in an operating company in terms of an acquisition
transaction. The terms ‘operating company’ and ‘acquisition transaction’ are defined in s 24O. The
provisions also apply where debt is issued, assumed or used to substitute debt that was previously
issued for this purpose.
An acquisition transaction refers to
l a direct acquisition of equity shares in an operating company, if at the end of the day of the trans-
action the acquiring company is a controlling group company in relation to the target company
and the two companies form part of the same group of companies (as defined in s 41(1)) (par (a)
of the definition of ‘acquisition transaction’ in s 24O(1)), or
l the acquisition of equity shares of a company (target company) that is a controlling group
company in relation to an operating company. At the end of the day of the transaction, the
acquiring company must be a controlling group company in relation to the target company and
the acquiring company and target company must form part of the same group of companies as
defined in s 41(1) (par (b) of the definition of ‘acquisition transaction’ in s 24O(1)).
Remember
A controlling group company is a company that directly holds at least 70% of the equity shares
in a controlled group company (see chapter 20). A group of companies as defined in s 41(1)
excludes certain companies that may not be fully taxable (see chapter 20).
An operating company is defined as a company of which at least 80% of its receipts and accruals
constitute income (definition of ‘operating company’ in s 24O(1))
l that is derived from carrying on a business continuously, and
l where goods are provided or services rendered for consideration in the course or furtherance of
such business.
Section 24O applies an approach that effectively looks through the shares acquired to determine
whether the interest would have been deductible had the business of the company, as opposed to
the shares, been acquired. The requirement that the equity shares must be equity shares in an
operating company is linked to this aspect as the interest would generally be deductible if an
operating business was acquired.
Where a debt is used to finance an acquisition transaction, any interest incurred in respect of that
debt must be deemed to have been
l incurred in the production of income of the company, and
l laid out by the company for purposes of trade (s 24O(2)).
Remember
The deduction of interest allowed under s 24O may be limited by s 23N (refer to 16.2.4.2). This
limitation prevents taxpayers from abusing the concession made available in terms of s 24O.
This deeming provision only applies to the extent that the equity shares constitute a qualifying interest
in an operating company. An equity share acquired directly in an operating company is a qualifying
interest in an operating company (s 24O(3)(a)). If the target company, of which the shares are
acquired, is a controlling group company in relation to an operating company, the value of the
underlying interests in operating companies must be considered to determine the extent to which the
deeming provision applies. The shares in such a target company will constitute qualifying shares in
an operating company to the extent that its value is derived from equity shares held in one or more
operating companies that form part of the same group of companies as the target company
(s 24O(3)(b)). Where more than 90% of the value of the target company’s shares is derived from
equity shares held in operating companies, 100% of the interest expense will be allowed as a
deduction on debt used to acquire the equity share of the target company (proviso to s 24O(3)(b)(ii)).
504
Section 24O only holds a benefit for the issuer of the debt if that company derives
income against which the deduction allowed under s 24O can be used. If an
investment holding company acquires shares in a controlled operating company
in a manner that meets the requirements in s 24O, it may not benefit from the
deeming provisions if the acquirer only derives dividend income from its
Please note! shareholding. In order to benefit from the application of s 24O, the shares in a
controlled company must be acquired by an income-producing entity (for example
an entity in which a business is carried on). If this is not possible, it may be more
beneficial to structure the transaction in a manner in which the debt is used to
acquire the business itself. The provisions of s 23N must be borne in mind in this
regard.
If the composition of the group of companies from which the target company’s shares derive their
value changes, this may impact on the deductibility of the interest incurred that qualifies for a
deduction under s 24O. The portion of the interest that qualifies for a deduction under s 24O (i.e. the
extent to which the equity shares acquired constitutes qualifying shares in an operating company)
must be re-determined when
l the target company ceases to be the controlling group company in relation to any operating
company, or
l an operating company ceases to be an operating company.
The deductibility of the interest under s 24O must also be re-determined if the acquiring company or
acquired company (operating company or target company) ceases to form part of the same group of
companies as defined in s 41(1).
16.2.3.5 Interest incurred on loans to pay dividends

Interest payable on money borrowed for purposes of enabling a company to pay a dividend is not
deductible (ITC 678 (1949)). Interest incurred on a loan account arising from the declaration of a
dividend that remains outstanding is similarly not deductible (CIR v G Brollo Properties (Pty) Ltd and
Ticktin Timbers CC v CIR). The position may be different if the company has surplus funds available
and chooses to declare a dividend but retain the funds for purposes of the company’s business
activities. The resulting loan account can in some circumstances be viewed as funding obtained by
the company for purposes of trade. This was the case in C: SARS v Scribante Construction (Pty) Ltd
where sufficient cash reserves were available to pay the dividend declared in cash but the funds
were retained for purposes justified by the business of the taxpayer.
Interest incurred in respect of a loan to fund a share buy-back, which also constitutes a dividend (see
16.3.1), will similarly not be deductible (Natal Laeveld Boerdery BK v KBI).
16.2.4 Deductibility of interest: Limitations

As a result of the fact that interest is deductible, as discussed above, interest payments may pose a
risk to the tax base. The effect of the deduction is that the taxable income of the payer is reduced
while the taxable income of the recipient increases. If the interest is not taxed in the hands of the
recipient or is taxed at a reduced rate (for example in terms of the withholding tax on interest at 15%)
this may have the effect of eroding the overall tax base in South Africa.
To curb this risk, the legislature introduced certain limitations on the amount of interest that may be
deducted. The introduction of limitations on the amount of interest that may be deducted is a global
phenomenon. As part of its Base Erosion and Profit Shifting project, the OECD and G20 made certain
recommendations for provisions to limit the deductibility of interest (Action Plan 4).
The limitations on the deductibility of interest in the Act are contained in ss 23M and 23N. Both of
these limitations apply to interest, as defined in s 24J(1). The effect of the limitation is that interest
may not be fully deductible if a limitation applies, despite the fact that all the requirements for
deduction (see 16.2.3) are met. It should be noted that these limitations apply in addition to other
provisions that could disallow a deduction of interest, for example s 31, that would limit the
deductibility of interest paid to connected persons at excessive rates or in respect of excessive
amounts of debt (see chapter 21). Each of the limitations is considered in more detail next.
16.2.4.1 Interest paid to persons not subject to tax (s 23M)

The risk of base erosion, as described above, will materialise when a deduction is granted in respect
of interest paid to a person who will not be subject to tax on the interest received. Recipients who are
505
not subject to tax on the interest received include persons whose receipts and accruals are exempt
from tax, for example pension funds (see chapter 5), or foreign persons in whose hands the interest
may be exempt (see 16.2.2). Section 23M was introduced with effect from 1 January 2015 to address
this risk by limiting the amount of interest that may be deducted when interest is paid to certain
persons who are not subject to tax.
Scope of s 23M
The limitation provisions of s 23M will apply when all the requirements below are met:
l The interest must be incurred by a debtor that would be subject to tax in South Africa on its
taxable income. The debtors to whom s 23M applies are persons who are residents or non-
residents that have permanent establishments in South Africa to which a debt-claim is effectively
connected (definition of ‘debtor’ in s 23M(1)).
l The risk for profit shifting through inflated levels of funding and/or interest should exist. While it is
unlikely that profits will be shifted by paying inflated interest to unconnected persons, the risk
may exist for persons that form part of the same economic unit. These persons may be indifferent
as to where the profits ultimately accrue. Section 23M only applies where the above debtor is in a
controlling relationship with the creditor. It would also apply in the case of a back-to-back loan
where the creditor obtained funding from a person that is in a controlling relationship to the
debtor in order to advance a debt to the above debtor (s 23M(2)(a) and (b)).
A controlling relationship is a relationship where a person directly or indirectly

holds at least 50% of the equity shares in a company or where at least 50% of
the voting rights in a company is exercisable by a person (definition of
‘controlling relationship’ in s 23M(1)).
Please note! It is important to note that not all connected persons (see chapter 12) in relation
to a company would be in a controlling relationship with that company for
purposes of s 23M. The 50% threshold that triggers a controlling relationship in
s 23M is set higher than the threshold for persons to be considered connected
in relation to each other.
A specific exemption from the requirement to apply s 23M is available where the creditor with
whom the debtor is in a controlling relationship funded the debt with funding obtained by it from a
foreign bank that is not in a controlling relationship with the debtor. This scenario will arise if the
creditor merely acts as a conduit for the funding obtained from a bank and it can be said that the
debtor essentially obtained the funding from the unconnected foreign bank, rather than the
creditor. This exemption however only applies if the creditor does not charge interest on the loan
at a rate exceeding the ‘official rate of interest’ (as defined in s 1) plus 100 basis points
(s 23M(6)).
l The interest incurred by the debtor must not be taxed in South Africa during the year of assess-
ment in which it is incurred. Section 23M applies if the interest is not subject to tax in the hands of
the person to whom it accrues and is not included in the net income of a controlled foreign
company (CFC) (s 9D) for a foreign tax year that commenced or ended in the year of assessment
(s 23M(2)(i))
Remember
Tax is defined in s 1 as any tax or a penalty imposed in terms of the Act. This arguably also
refers to the withholding tax on interest that is imposed in terms of Part IVB of Chapter II of the
Act (see chapter 21). Interest accrued to a person will therefore not be subject to tax, as
contemplated in s 23M(2)(i), if it is not subject to normal tax or the withholding tax on interest.
Interest received from a South African source by a non-resident may be exempt from normal tax
in terms of s 10(1)(h) as well as the withholding tax on interest if a double tax agreement does
not allow South Africa to impose this tax.
An example of such interest would be interest received from a South African source by a
resident of the United Kingdom, where this person does not have a permanent establishment in
South Africa to which the debt-claim in respect of which the interest paid is effectively connected
(see Article 11(1) of the double tax agreement between South Africa and the United Kingdom).
l The interest should not have been disallowed under another limitation provision. Section 23M
does not apply to interest disallowed under s 23N (see 16.2.4.2) (s 23M(2)(ii)). This requirement
implies that s 23N should be applied first, where both ss 23M and 23N apply to the same interest
(s 23M(5)).
506
Certain property-owning companies issued linked units to pension funds, provident funds, REITs and
insurers. The deduction of the interest incurred in respect of these linked units may potentially be
limited in terms of s 23M. A transitional exclusion from the application of s 23M exists for linked units
issued before 1 January 2013 until legislation to regulate unlisted REITs is introduced (s 23M(6)(b)).
Limitation of interest deduction

Once it has been established that the limitations in s 23M apply to interest incurred, the next step is
to calculate the limitation on the interest deduction. The limitation effectively determines what a
reasonable amount of interest should be on a statutory basis, thereby guarding against a deduction
of excessive levels of interest to benefit from potential profit shifting. The amount of interest allowed
as a deduction is determined according to the following formula:
Maximum interest allowed as a deduction in respect of debts to which s 23M applies
= X + (A% × Y) – Z
X = Interest received by or accrued to the debtor.
A = A percentage calculated using the following formula:
40 × [(average repurchase (repo) rate + 400 basis points)/10]
This percentage may not exceed 60%.
Y = The adjusted taxable income (see below) of the debtor. This amount represents a proxy for the
debtor’s earnings before interest, tax, depreciation and amortisation (EBITDA) calculated using
tax amounts.
The adjusted taxable income of the debtor is calculated as follows (definition of

‘adjusted taxable income’ in s 23M(1)):
Taxable income ............................................................................................................ xxx
Adjust for interest
Less: any interest received or accrued ....................................................................... (xxx)
Plus: any interest incurred .......................................................................................... xxx
Adjust for amounts relating to assets
Plus: amounts allowed as deductions in respect of capital assets............................ xxx
Less: amounts recovered or recouped in respect of allowances of capital assets ... (xxx)
Less: amounts included in income in respect of CFCs (s 9D(2)) ............................... (xxx)
Plus: assessed losses and balance of assessed losses set-off against income....... xxx
Adjusted taxable income .............................................................................................. xxx
Z = Interest incurred by the debtor in respect of debt to which s 23M does not apply, excluding interest in
respect of which the deduction is disallowed in terms of s 23N.
Any excess interest that is not deductible because it exceeds the above limitation may be carried
forward to the next year of assessment. This interest will be deemed to be interest incurred in that
year of assessment (s 23M(4)). Its deductibility must be assessed in light of the interest deduction
limitation in terms of s 23M that applies to that year of assessment. There is no expiry period on the
carrying forward of these interest amounts.
Example 16.6. Limitation of interest deduction under s 23M
Perfect Fit Ltd is a South African resident company that is a subsidiary of Ultimate Fit Plc, a
United Kingdom (UK)-based company (which is also a UK resident for tax purposes) that holds
60% of the shares of Perfect Fit Ltd. Perfect Fit Ltd requires funding to expand its current
operations due to an increasing demand for its product. A loan of R5 000 000 is advanced to
Perfect Fit Ltd by Ultimate Fit Ltd on 1 January 2018. Ultimate Fit Ltd does not have any
operations or activities in South Africa and both companies have a 31 December year-end.
The loan of R5 000 000 was advanced at an interest rate of 10% p.a. The repurchase rate (as
defined in s 1) for the 2018 year of assessment was 5,5% p.a.
Perfect Fit Ltd earned total interest income of R350 000 (exclusive of any interest earned from
any connected person) and incurred a total interest expense of R390 000 (excluding interest
incurred on loan from Ultimate Fit Plc) during the 2018 year of assessment. In addition, Perfect
Fit Ltd deducted allowances of R100 000 in respect of manufacturing machinery under s 12C.
continued
507
The company’s taxable income, after taking into account all interest income, interest expenses
and allowances, amounted to R450 000.
South Africa and the UK entered into a double taxation agreement. Article 11(1) states that South
Africa may not impose any tax on interest income earned by UK residents from a South African
source.
You may assume that the interest incurred by Perfect Fit Ltd is not subject to s 23N.
Calculate the deduction in respect of interest paid to Ultimate Fit Plc by Perfect Fit Ltd for its
SOLUTION
As Perfect Fit Ltd uses the loan to expand its operations, the interest is incurred in the production
of income and for purposes of carrying on its trade. The interest incurred (as determined in
accordance with s 24J) should therefore be deductible in the hands of Perfect Fit Ltd (s 24J(2)).
Ultimate Fit Plc (creditor) and Perfect Fit Ltd (debtor) are in a controlling relationship since
Ultimate Fit Plc holds 60% of the equity shares and voting rights in Perfect Fit Ltd.
Ultimate Fit Ltd does not have a permanent establishment in South Africa; therefore, all interest
income that accrues to Ultimate Fit Plc from a South African source on the loan advanced to
Perfect Fit Ltd will be exempt in terms of s 10(1)(h). In addition, the withholding tax on the interest
will be reduced to Rnil in terms of s 11(1) of the double taxation agreement between South Africa
and the UK.
The provisions of s 23M will apply to the interest incurred by Perfect Fit Ltd on the loan from Ulti-
mate Fit Plc as
l the interest is incurred on a debt owing to a creditor in a controlling relationship with a debtor,
and
l the interest accrued to the foreign creditor will not be subject to South African tax.
The amount of the interest deduction under s 24J(2) must therefore be limited (s 23M(2)).
The limitation on the interest deduction is calculated as follows:
Interest subject to limitation (only the interest incurred in respect of the loan which meets the
requirements of s 23M(2)): R5 000 000 × 10% = R500 000
Deduction limited by s 23M(3) is as follows:
Limit = X + (A% × Y) – Z = R184 200
X = R350 000 (interest income)
Y = The adjusted taxable income is calculated as follows (s 23M(1)):
R
Taxable income ................................................................................................ 450 000
Interest received or accrued to Perfect Fit Ltd ................................................. (350 000)
Interest incurred in respect of loans other than the loan from Ultimate Fit Plc . 390 000
Allowances deducted in respect of capital assets........................................... 100 000
Adjusted taxable income.................................................................................. 590 000
A = 40 × [(5,5 + 4)/10] = 38%
Z = 390 000 (interest incurred in respect of debts not subject to s 23M)
The interest permissible as a deduction in respect of the loan from Ultimate Fit Plc is therefore
R
Interest deductible in respect of the loan from Ultimate Fit Plc (s 24J(2))
before application of the limitation ............................................................................. 500 000
Limitation (deductible interest – s 23M(3))................................................................. 184 200
Interest received or accrued to Perfect Fit Ltd .......................................................... 350 000
Plus: 38% of the adjusted taxable income (R590 000 × 38%) ................................... 224 200
Less: Interest incurred in respect of loans other than the loan from Ultimate Fit Ltd (390 000)
Interest exceeding the limit ........................................................................................ 315 800

Interest deduction (s 24J read with s 23M)................................................................ (184 200)
The interest of R315 800 that was incurred during the 2018 year of assessment and that is not
deductible, will be carried forward to the 2019 year of assessment to be considered for
deduction in that year (s 23M(4)).
continued
508
It should be kept in mind that the provisions of s 23M do not take precedence over or replace the
provisions of s 31 (see chapter 21). Should Perfect Fit Ltd be thinly capitalised, the deductibility
of the interest incurred must be limited to the interest that would have been incurred on the loan
that an independent person dealing at arm’s length would have advanced to it. Similarly, an
adjustment may be required under s 31(2) if the interest charged by Ultimate Fit Plc (10% per
year) exceeds the interest that an independent person dealing at arm’s length would have
charged Perfect Fit Ltd.
16.2.4.2 Debt used in acquisition and reorganisation transactions (s 23N)

As discussed in 16.2.3, interest incurred may not always be deductible. This may, for example, be in
the instance of interest incurred in respect of debt to acquire shares or debts used to fund dividends
paid. Interest incurred on debt used to finance the acquisition of business assets is generally deduct-
ible for tax purposes on the basis that the assets are acquired with the purpose of producing income.
A deduction for interest incurred for a non-deductible purpose could, however, be achieved through
a transfer of assets or income-generating businesses between related persons.
The mechanism involved entails that the acquirer of the assets or business raises the funding to
acquire such assets or business (i.e. a purpose that would result in deductible interest). This may be
the acquisition of the business of a target company of which the shares are acquired, or existing
assets or business within a group. The acquirer may similarly be a new entity established for this
purpose or an existing entity in the group. The funds raised are then transferred to the transferor as
the consideration for the assets or business. The transferor can use the funds for a purpose that may
not necessarily have given rise to deductible interest had the funds been borrowed for this purpose
directly. If the transfer of such assets or businesses happens within an economic unit, the unit may
be indifferent as to the entity in which the interest is incurred, as long as the tax deduction is
achieved. The transfer of assets or businesses can be facilitated in a manner that benefits from roll-
over relief if it takes place within a group of companies (see chapter 20). This transfer that does not
have immediate tax consequences also opens the risk of inflated consideration, and consequently
interest expenditure in respect of inflated funding, given the indifference within the economic unit.
Section 23N was introduced into the Act with effect from1 April 2014 to reduce the risk to the tax
base from the use of excessive debt arising from transactions such as those discussed above. As
these transactions may be used to fund the acquisition of shares in an indirect manner, the same
limitations also apply to the deduction granted in terms of s 24O for interest incurred on funding
raised for the direct acquisition of shares (see 16.2.3.4).
Remember
The debt contemplated in the above discussion may be obtained from a person with whom the
debtor is in a controlling relationship. The provisions of ss 23M and 23N may therefore apply to
the interest in respect of the same debt. In that instance, the provisions of s 23N are applied first
(s 23M(5)). The limitation of s 23M may still apply in respect of the portion of the interest for
which the deduction was not disallowed in terms of s 23N.
Scope of s 23N
The limitations in s 23N apply to interest incurred by an acquiring company in respect of debts used
to fund two types of transactions. It also applies to debts used to redeem, refinance or settle the
debts used for the purposes.
The first type of transaction is a reorganisation transaction (s 23N(2)(a) and (b)). A reorganisation
transaction in this context refers to
l an intra-group transaction to which s 45 applies, or
l a liquidation distribution to which s 47 applies.
Both of these roll-over relief provisions can be used to transfer assets to an acquirer, while the
acquirer obtains or assumes a debt for such acquisition, without an immediate tax implication. This
poses the risk of excessive debt and interest being deductible as a result of this acquisition, as
discussed above.
The second category of transaction, where the limitation applies to the interest in respect of its
funding, is an acquisition transaction (s 23N(2)(c) and (d)). This refers to a transaction in which an
acquiring company acquires an equity share in a company that is an operating company or a
controlling company in relation to an operating company. In order for this transaction to be an
509
acquisition transaction, the company must become the controlling group company in relation to this
acquired company at the end of the day of the transaction (definition of ‘acquisition transaction’ in
s 23N(1)).
The term ‘acquiring company’ is used in the context of s 23N to refer to the com-
pany that acquires the asset(s) in terms of a reorganisation transaction or the
company that acquires the equity shares in an acquisition transaction.
Please note! The term ‘acquired company’ refers to the company that transfers the assets in a
reorganisation transaction or of which the equity shares are acquired in an
acquisition transaction.
These definitions are relevant when calculating the limitation that applies to the
interest incurred in respect of debts to which s 23N applies.
Similarly to s 23M, certain property owning companies issued linked units to pension funds, provident
funds, REITs and insurers. The deduction for the interest incurred in respect of these linked units may
potentially be limited in terms of s 23N. A transitional exclusion from the application of s 23N for
linked units issued before 1 January 2013 has been provided until legislation to regulate unlisted
REITs is introduced (s 23N(5)).
Limitation of interest deduction

The limitation of interest incurred in respect of debt within the scope of s 23N applies in respect of the
year of assessment in which the reorganisation or acquisition transaction is entered into as well as
the following five years of assessment (s 23N(3)). The statutory limitation on the interest deductible
where s 23N applies is determined according to the following formula:
Maximum interest allowed as a deduction in respect of debts to which s 23N applies

= X + (A% × Y) – Z
X = Interest received by or accrued to the acquiring company.

A = A percentage calculated using the following formula:
40 × [(average repurchase (repo) rate + 400 basis points)/10]
This percentage may not exceed 60%.
Y = The highest amount of the adjusted taxable income of the acquiring company determined for the
following years of assessment:
l the year in which the acquisition or reorganisation was entered into
l the year preceding the year in which the acquisition or reorganisation was entered into, or
l the year in which the interest is incurred by the acquiring company (i.e. current year).
This amount represents a proxy for the acquiring company’s EBITDA calculated using tax
amounts. Unlike s 23M, the adjusted taxable income also reflects the company’s additional
borrowing capability based on immovable property owned.
The adjusted taxable income of the acquiring company is calculated as follows:

(definition of ‘adjusted taxable income’ in s 23N(1)):
Taxable income ............................................................................................................ xxx
Adjust for interest
Less: any interest received or accrued ....................................................................... (xxx)
Plus: any interest incurred .......................................................................................... xxx
Adjust for amounts relating to assets
Plus: amounts allowed as deductions in respect of capital assets............................ xxx
Less: amounts recovered or recouped in respect of allowances of capital assets ... (xxx)
Plus: 75% of receipts and accruals derived from letting of any immovable property xxx
Less: amounts included in income in respect of CFCs (s 9D(2)) ............................... (xxx)
Plus: assessed losses and balance of assessed losses set-off against income....... xxx
Adjusted taxable income xxx
Z = Interest incurred by the acquiring company in respect of debts to which s 23N does not apply.
510
Interest in excess of the limitation will be lost for deduction purposes. Section 23N does not make
provision for the carrying forward of disallowed interest. In light of the fact that the interest deductions
in excess of the limitation amount are forfeited, the limitation does not apply until the debt is fully
settled, but only for a limited number of years of assessment (six).
Example 16.7. Limitation of interest in respect of reorganisation and acquisition
transactions
Superrite (Pty) Ltd (Superrite), a retail store, acquired the assets of another group company in
terms of a s 45 intra-group transaction on 1 July 2017. In order to fund the acquisition, Superrite
borrowed R80 000 000 from a bank at a fixed interest rate of 8%. No repayments were made in
respect of the capital balance on this loan between the 2017 and 2019 years of assessment. The
following applies in respect of Superrite’s 2017, 2018 and 2019 years of assessment that ended
on 30 June of each year:
2017 2018 2019
Taxable income 5 000 000 6 000 000 7 000 000
Interest received on a loan to a subsidiary company
included in taxable income 100 000 100 000 100 000
Interest incurred in respect of an overdraft facility at a
bank included in taxable income 400 000 300 000 380 000
Rent received from the leasing of a property included
in taxable income 1 400 000 1 500 000 1 600 000
Average repurchase rate for the year 5% 5,5% 6%
Calculate the amount of interest incurred by Superrite on the reorganisation transaction that may
be claimed as a deduction during its 2019 year of assessment.
SOLUTION
The adjusted taxable income to be used for the years of assessment relevant to determining
the limitation of the interest deduction in terms of s 23N are as follows:
Year Year of
preceding transaction Current
transaction
(2017) (2018) (2019)
Taxable income ............................................................ 5 000 000 6 000 000 7 000 000
Less: Interest received ................................................. (100 000) (100 000) (100 000)
Plus: Interest incurred (in respect of reorganisation
transaction and in respect of overdraft facility)... 6 800 000 6 700 000 6 780 000
Plus: 75% of the receipts or accruals derived from
the letting of any immovable property ................ 1 050 000 1 125 000 1 200 000
Adjusted taxable income for relevant year ................... 12 750 000 13 725 000 14 880 000
Highest adjusted taxable income (Y) ........................... 14 880 000
Calculated percentage (A) (40 × (6+4)/10) .................. 40%
Interest limitation
Interest received (X) ..................................................... 100 000
Calculated percentage (A) × adjusted taxable
income (Y) ................................................................. 5 952 000
Less: Interest incurred in respect of other debt (Z) ...... (380 000)
Interest deductible in respect of bank loan to fund
assets acquired from group company .......................... 5 672 000
16.2.5 Sharia-compliant financing arrangements (s 24JA)

Islamic finance covers financial transactions and instruments that comply with Sharia or Islamic law.
These finance arrangements, also referred to as sharia arrangements, are based on certain specific
principles that have an impact on the form of these arrangements. These principles include that
interest may not be charged. Since the form of sharia arrangements is prescribed by these
principles, taxpayers do not have the same freedom and control over their financial investment
options and the same tax benefits as are available for traditional Western finance options. In some
instances, the tax implications that would follow the form of the transaction may be a hindrance to the
transaction. The National Treasury indicated that it is questionable whether transactions with the
511
same substance (i.e. Islamic finance compared to its Western counterparts) should be treated
differently from a tax perspective. On the basis of these concerns and policy positions, a provision,
s 24JA, was inserted into the Act to specifically deal with the tax implications of sharia-compliant
financing arrangements.
Section 24JA currently deals with four types of sharia-compliant financing arrangements. The effect
of this provision is to deem the financing element of the arrangement to constitute interest for
purposes of s 24J, and consequently be treated similarly to other financing arrangements. It
furthermore determines that certain tax implications arising from the legal form of the arrangement,
for example the disposal of certain assets, will not occur.
The scope of s 24JA is limited to sharia arrangements that are open for participation by members of
the general public and that are presented as compliant with sharia law (definition of ‘sharia arrange-
ment’ in s 24JA(1)). In addition, depending on the type of transaction, the application of s 24JA is
generally limited to products involving banks and listed companies. The exception is sukuk, which
involves an arrangement between the government, certain public entities or listed companies and a
trust.
The amounts that are deemed to be interest in respect of the sharia-compliant

financing arrangements in s 24JA are deemed to be interest as contemplated in
Please note! par (a) of the definition of interest in s 24J(1). The de minimis exemptions and
requirement to withhold tax from certain interest payments apply to these
amounts in the same way that it would apply to any other interest.
Each of the four arrangements with the scope of s 24JA is briefly considered below.
16.2.5.1 Mudaraba
Mudaraba is a sharia arrangement between a bank and its client in terms of which funds are
deposited with the bank by the client. The bank in turn deposits the funds in other sharia
arrangements. The anticipated return that the client will earn on its deposit depends on the amount
deposited and the duration for which the funds are deposited. The bank and the client share the
return earned from the sharia arrangements in which the funds have been deposited in an agreed
manner. The client, however, also bears the risk of loss in respect of the sharia arrangements in
which the bank deposits the funds (definition of ‘mudaraba’ in s 24JA(1)).
This product can be compared to a partnership arrangement, while the return is roughly comparable
to interest on the funds deposited. This type of sharia arrangement is used as an investment or
transactional account offered by banks, usually to retail investors.
Any amount received by or accrued to the client in terms of a mudaraba is deemed to be interest for
purposes of s 24J (s 24JA(2)).
16.2.5.2 Murabaha
Murabaha is a sharia arrangement between a financier and a client. Either the financier or the client
must be a bank or a listed company. The financier acquires an asset from a third party (seller of the
asset) for the benefit of the client on terms and conditions agreed between the financier and client.
The arrangement entails that the client will acquire the asset from the financier within 180 days from
the date that the financier acquires it. The client agrees to pay the financier an amount that will
exceed the price at which the financier acquired the asset. The amount payable by the client will be
calculated with reference to the amount paid for the asset by the financier as well as the duration of
the sharia arrangement. The total amount payable by the client may not exceed an amount agreed by
the parties when the arrangement is entered into. This amount payable by the client to the financier
must be the only amount that the financier receives or that accrues to it (definition of ‘murabaha’ in
s 24JA(1)). This product fulfils a similar role as short-term asset financing in Western financing.
The murabaha is deemed to be an instrument for purposes of s 24J (s 24JA(3)(c)). The amount paid
by the financier to acquire the asset is deemed to be the issue price of this instrument (s 24JA(3)(e)).
The mark-up added by the financier is treated as interest (premium) for purposes of s 24J
(s 24JA(3)(d)).
The acquisition of the asset by the financier and the subsequent disposal of it to the client is dis-
regarded (s 24JA(3)(a)). The client is deemed to have acquired the asset when the financier
acquired it. In addition, the client is deemed to have acquired the asset at the amount paid for its
acquisition by the financier (s 24JA(3)(b)).
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16.2.5.3 Diminishing musharaka

Diminishing musharaka involves a sharia arrangement between a bank and a client. The parties
jointly acquire an asset from a third party (seller of the asset) or the bank acquires an interest in the
client’s asset. The client will acquire the bank’s interest in the assets after the acquisition thereof by
the bank. The amount payable by the client for this acquisition will be paid over time as agreed
between the client and the bank (definition of ‘diminishing musharaka’ in s 24JA(1)).
If the bank and the client acquire an asset jointly, the client is deemed to have acquired the bank’s
interest in the asset for the amount paid by the bank at the time when the seller divested its interest in
the asset (s 24JA(5)(a)). If the client disposed of an interest in its asset to the bank, the disposal is
deemed not to have occurred (s 24JA(5)(b)). The difference between the total instalment payable by
the client to the bank and the price paid by the bank to acquire its interest in the asset is deemed to
be interest for purposes of s 24J (s 24JA(6)).
16.2.5.4 Sukuk
Sukuk is a sharia arrangement where the South African government, any public entity listed in Sched-
ule 2 to the PFMA or a listed company (seller) disposes of an interest in an asset to a trust. The
disposal is subject to an agreement in terms of which the seller undertakes to reacquire the interest in
the asset from the trust on a future date. The reacquisition will take place at the cost paid by the trust
to the seller when the trust acquired the asset (definition of ‘sukuk’ in s 24JA(1)). This arrangement
equates to a form of Islamic government bond or bond issued by a listed company.
The trust is deemed not to have acquired the asset from the seller (s 24JA(7)(a)). Similarly, the seller
is deemed not the have disposed of or reacquired the asset (s 24JA(7)(b)). Any consideration paid
by the seller for the use of the asset held by the trust is deemed to be interest (s 24JA(7)(c)).
The value-added tax implications of sharia arrangements are contained in s 8A

Please note! of the Value-Added Tax Act (see chapter 31) and the transfer duty implications
in s 8A of the Transfer Duty Act (chapter 28).
16.2.6 Interest-free or low interest debt

Persons may wish to enter into debt arrangements with counterparties without charging interest.
These arrangements are normally entered into between persons who are related and do not
necessarily deal with each other at arm’s length. The reasons for not charging interest may include
commercial ones, for example that the counterparty requires funding but does not have the ability to
pay interest (often the case for start-up funding or assistance to related persons in financial distress)
or merely administrative convenience. There could however also be tax reasons for not charging
interest. The tax reasons for not charging interest in respect of a debt instrument include the
following:
l If interest is charged, it may be taxed in the hands of the recipient, but not be deductible in the
hands of the payer. This may happen if the payer uses the borrowed funds for purposes other
than carrying on a trade or in the production of income. This scenario will arise if the debt is used
by the borrower to purchase dividend-yielding shares. It will also occur if the borrower funds the
acquisition of unproductive assets with the funding. This is commonly the case where trusts
borrow funds to acquire holiday homes. The same problem may arise when a shareholder
borrows funds from a company, where the shareholder uses the money to fund private
expenditure.
l In a cross-border context, a group may aim to keep its taxable income in South Africa as low as
possible. This can be achieved if it does not charge interest on funds made available to
connected persons outside of South Africa. If interest were to be charged at arm’s length rates,
the interest will have the effect of moving profits from the payer (that may be located in a low tax
jurisdiction) to South Africa where such profits will be taxed.
l Some debts arise when assets are transferred to trusts that are connected to the taxpayer. As
explained in chapter 24, an estate planning technique involves the freezing of the value of the
estate at a fixed value that will be subject to estate duty when the taxpayer passes away. If
interest accrues to the taxpayer, this value increases. This increase in turn increases the value of
the estate of the taxpayer, which is contrary to the planning undertaken. The value that does not
accrue in the hands of the taxpayer may accrue in an estate planning vehicle, such as a trust, or
513
in the hands of another related person, for example the taxpayer’s spouse or children, as a result
of the fact that no interest is payable to the planner.
l Parties may wish to exchange or obtain a benefit other than in the form of cash in a commercial
transaction with an unrelated person. This could be the case where an employer assists an
employee by advancing a loan to the employee without charging interest or by charging interest
at a rate lower than the market-related rate of interest. As was illustrated in the judgment in
C:SARS v Brummeria Renaissance (Pty) Ltd and Others, a taxpayer may structure transactions as
barter transactions involving interest-free or low interest loans under the false impression that the
absence of cash would mean that the transaction will not attract tax.
A number of anti-avoidance rules exist in the Act to counter the use of interest-free loans to avoid a
tax implication. These anti-avoidance rules are discussed in detail elsewhere in this publication. In
brief, these rules are the following:
l The benefit of using another person’s money without paying interest on it has a commercial value.
It was held in C:SARS v Brummeria Renaissance (Pty) Ltd and Others that this benefit constitutes
an amount. When a taxpayer derives such an amount, it needs to consider whether the amount
should be included in its gross income or not. This includes, amongst others, an assessment
whether the amount is of a capital nature or not. SARS expresses the view in Interpretation Note
No 58 that if the benefit accrues to a taxpayer in exchange for the taxpayer having to provide
something in return (quid pro quo), the amount is arguably not of a capital nature. If the amount
however accrues to the taxpayer fortuitously and without the taxpayer designedly working for it, a
strong argument exists that the amount is of a capital nature (CIR v Pick ’n Pay Employee Share
Purchase Trust) (see chapter 3 for a detailed discussion of the inclusion of amounts in gross
income).
l A specific inclusion in a taxpayer’s gross income exists for the benefit of interest-free or low
interest debt advanced by an employer to an employee. This inclusion is explained chapter 8.
l In a cross-border context, transfer pricing rules, as discussed in chapter 21, would require a
resident taxpayer who made funds available to a connected person who is not a resident to
include the amount of interest that would have been charged between persons dealing at arm’s
length in its taxable income. There are no domestic transfer pricing rules that require a similar
adjustment for interest in respect of loans between two South African residents.
l Value can implicitly be extracted from a company by making funds available to shareholders on
an interest-free loan rather than by declaring a dividend, which would attract dividends tax at a
rate of 20%. A deemed dividend arises for purposes of dividends tax on loans by companies to
certain connected persons where the loan does not bear interest at a rate equal to the official rate
of interest. This is explained in chapter 19.
l If a taxpayer advances funds to another person to acquire income-producing assets, the amount
of interest charged will impact on the net income (profits) that the other person derives from the
asset. If the other person is required to pay interest in respect of the loan, this reduces the profits
that are derived by the person from the asset. The interest amount will constitute income for the
lender. However, if the other person is not required to pay interest in respect of the loan, this will
result in a greater amount of profit remaining in its hands, with no amount accruing to the lender.
The amount of income in respect of which the respective persons are subject to tax may therefore
potentially be manipulated if no interest or interest at a low interest rate is charged in respect of
such a debt. This may be particularly beneficial if the profits from an asset accrue to a person
who is subject to tax at a relatively low rate of tax (for example, a minor child who does not have
any other taxable income).
Section 7 contains attribution rules to attribute this income to the person to whom it would have
accrued had it not been for a donation, settlement or other disposition (i.e. lender). Similar attri-
bution rules exist for purposes of capital gains tax. Where a person advances an interest-free or
low-interest-bearing loan to another person, the courts have held that this constitutes a
continuous donation or other disposition for purposes of s 7 (CIR v Berold and C:SARS v
Woulidge). This principle is confirmed in paragraph 73 of the Eighth Schedule. In light of this
continuous donation or other disposition, an interest-free or low interest loan can trigger the
attribution rules. The attribution rules are explained in more detail in chapter 24.
l The mere fact that a loan does not bear interest does not necessarily give rise to donations tax.
Donations tax is imposed on the disposal of property under a donation by a resident. The oppor-
tunity to charge interest on a loan does not constitute property that is disposed of. The position
may however be different if a right to receive interest has been established and is subsequently
waived. Loans advanced by natural persons to trusts that are connected persons in relation to
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the natural person, or certain companies of which the shares are owned by such a trust, give rise
to a deemed donation in terms of s 7C (see chapters 24 and 26). This deemed donation counters
the artificial freezing of the natural person’s estate for estate duty purposes.
The common law and National Credit Act contain in duplum rules that protect
borrowers from exploitation by lenders by determining that the balance of
unpaid interest cannot exceed the unpaid capital debt owing by the borrower.
These rules do not apply in the above instances, where an amount of interest
Please note!
that would have been charged at a specified rate must be determined for tax
purposes (s 7D). If these rules applied to the determination of the amount to
which anti-avoidance rules apply, this may have provided taxpayers with an
opportunity to distort the quantification of the amount to which such rules apply.
Example 16.8. Interest-free loans

Discuss the tax consequences of the following loans:
1. Summer Ltd advanced a loan of R350 000 to an employee, Thabo Nkosi, to help him finance
the purchase of his first car. The amount is repayable over a period of 5 years. The loan was
advanced to Thabo as part of Summer Ltd’s subsidised employee loan scheme in terms of
which employees may elect to structure a portion of their remuneration as low interest
financing. The loan bears interest at a rate of 5% per annum.
2. Autumn Ltd advanced a loan of R800 000 to Samuel Long, a South African tax resident, who
holds 30% of Autumn Ltd’s issued shares. No terms have been agreed in respect of the loan.
The loan does not bear any interest. Samuel is not employed by the company and has not
conducted any business with the company. If Autumn Ltd declares dividends in future, it is
likely that this loan will be extinguished and that Samuel Long will not receive the future
dividend in cash. Autumn Ltd’s financial year ends on 31 December.
3. Sarah Peters sold a rental earning property to the Winter Trust. She advanced an interest-free
loan of R4 000 000 to the Winter Trust to acquire the property. The Winter Trust is a
discretionary trust in respect of both capital and income distributions. Sarah and her
daughter, Tara (aged 14), are the beneficiaries of the trust. The trust derived R600 000 of
rental income from the property. The trustees made a discretionary distribution of R400 000
of this rental income to Tara. You may assume that had Sarah charged market-related
interest in respect of the loan, the interest would have amounted to R350 000.
4. Spring Ltd, a resident company, entered into a joint venture with Dawn Plc, a foreign
company. The parties formed a new company, Dusk Plc, also a foreign company, through
which the joint venture will be operated. Spring Ltd and Dawn Plc each hold 50% of the
equity shares and voting rights in Dusk Plc. Spring Ltd advanced an interest-free loan of
R10 000 000 to Dusk Plc to fund its operations during the start-up phase of the business. A
bench-marking study performed indicated that a third-party financier would have charged
Dusk Plc interest at a rate of 15% per annum if it advanced funds to it on a similar basis to
the loan that Sprint Ltd advanced to Dusk Plc.
5. Thunder Ltd requires money to fund the construction of residential properties that it intended
renting out. Thunder Ltd entered into an arrangement with the prospective residents in terms
of which the resident will advance funds to Thunder Ltd to construct the properties. These
loans do not bear interest. The residents are entitled to occupy the properties without paying
rent as long as they do not charge Thunder Ltd any interest. The cumulative balance of loans
advanced to Thunder Ltd in this manner amounted to R1 000 000 per unit. If Thunder Ltd
borrowed funds from a third party, without this arrangement, it would have paid interest at a
rate of 10% per annum in respect of the loan. Thunder Ltd would have been able to earn
rental income of R90 000 per annum had it rented the units out to persons without entering
into this arrangement.
6. Lightning Ltd acquired 40% of the equity shares issued by Sunshine Ltd, a company that
experienced financial difficulties. Following the acquisition, Lightning extended an interest-
free loan to Sunshine Ltd. Lightning Ltd advanced the loan to assist Sunshine Ltd in restoring
a profitable business position, as this would benefit Lightning Ltd in the long term through an
increase in the value of the shareholding in Sunshine Ltd.
You may assume that the repurchase rate is 7% per annum.
515
SOLUTION
1. Summer extended an interest-free loan to an employee. This constitutes a fringe benefit (par
2(f ) of the Seventh Schedule). The cash equivalent amount of the fringe benefit is the
difference between the actual interest paid (at a rate of 5% per annum) and the interest
calculated by using the official rate of interest on the outstanding loan (par 11(1) of the
Seventh Schedule). The official rate of interest is determined as the repurchase rate of 7%
plus 100 basis points (1%) (definition of ‘official rate of interest’ in s 1). As the loan amount
exceeds R3 000 and the debt was not used to fund Thabo Nkosi’s studies, the value of the
fringe benefit will not be deemed to be nil.
The loan amount (R350 000) is not a fringe benefit; only the difference in interest as this is the
benefit derived by the employee.
2. Autumn Ltd extended an interest-free loan to Samuel Long, a shareholder, by virtue of his
shares owned. It appears as if the loan is intended to constitute a prepayment of dividends,
which are payable in respect of shares held in the company. Samuel is a natural person who
is a South African tax resident and is a connected person (he holds more than 20% of the
shares of Autumn Ltd) in relation to the company. This loan gives rise to a deemed dividend
(s 64E(4)).
The amount of the deemed dividend is determined as the difference between the interest that
should have been charged at the official rate of interest (in this case 8% per annum) and the
actual interest paid (nil) (s 64E(4)(d)). If the loan was outstanding for the full year of
assessment ending 31 December, the deemed dividend would have amounted to R64 000
(R800 000 × 8%). The dividend is deemed to have been paid on the last day of Autumn Ltd’s
year of assessment (s 64E(4)(c)). The dividend is deemed to be a dividend in specie, which
means that Autumn Ltd is liable for the dividends tax at 20% in respect of the dividend
(s 64E(4)(b)(i)).
It is important to note that the balance of the loan (R800 000) does not give rise to a dividend.
The benefit derived by the shareholder is only based on the interest that he would have paid
had he been required to pay interest on the outstanding loan. This differs from the deemed
dividend rules that applied in terms of the STC regime. If Autumn Ltd were to declare a
dividend of R800 000 to Samuel and extinguish the amount owing by him to the company to
settle the dividend, the amount of R800 000 will be subject to dividends tax.
3. The property was not donated by Sarah Peters when she sold it to the Winter Trust. No
donations tax is payable on the disposal of the proposal in this manner. Sarah Peters (natural
person) advanced a loan to a trust that is connected in relation to Sarah as she and her
relative (daughter) are beneficiaries of the trust (par (a)(ii) of the definition of ‘connected
person’ in s 1(1)). As a result, a donation is deemed to be made by her to the trust annually
(s 7C(1)). The deemed donation is equal to the difference between the interest that should
have been charged at the official rate of interest (in this case 8% per annum) and the actual
interest charged (nil) (s 7C(3)(a)). This donation is deemed to be made on the last day of the
Winter Trust’s year of assessment (the last day of February). Donations tax is imposed on the
donation at a rate of 20%. Assuming that the loan has been outstanding for the full year of
assessment, the deemed donation will be R320 000 (R4 000 000 × 8%)).
In addition to the above donations tax, the anti-avoidance rules in s 7 may apply. It has been
held in CIR v Berold and C:SARS v Woulidge that a low interest rate loan constitutes another
disposition, as contemplated in s 7.
Any income received by Tara, a minor child of Sarah, by reason of a disposition by Sarah will
be deemed to have been received by or accrued to Sarah (s 7(3)). In order to do this
attribution of income to Sarah, it must be established which portion of the distribution made to
Tara would not have been made had Sarah charged market-related interest to the Winter
Trust. No specific method for making this determination was provided in the above cases. As
a result, the determination should be made based on the circumstances of each case. It is
submitted that had interest been payable in respect of two-thirds of the rental income
(R600 000 total rental income of which R400 000 was distributed to Tara), Tara would
arguably only have received rental income of R166 667 (R400 000 – R350 000 (market-
related interest) × (R400 000/R600 000)). An amount of R233 333 (R400 000 – R166 667) of
the rental income distributed to Tara will be deemed to have accrued to Sarah (s 7(3)).
The R200 000 rental income that remains undistributed in the Winter Trust is subject to the
condition that the trustees exercise their discretion. The portion of this amount that is
received by the Winter Trust by reason of a disposition by Sarah will similarly be attributed to
Sarah (s 7(5)). On a similar basis as the calculation performed in respect of the amount
distributed to Tara, the Winter Trust would arguably only have received rental income of R83
333 (R200 000 – R350 000 (market-related interest) × (R200 000/R600 000)). An amount of
R116 667 (R200 000 – R83 333) of the rental income retained in the Winter Trust subject to a
condition will be deemed to have accrued to Sarah (s 7(5)).
continued
516
4. As Spring Ltd holds more than 20% of the equity shares of Dusk Plc and no other person
holds the majority of voting rights (each holds 50%), these companies are connected
persons in relation to each other (par (d)(v) of the definition of ‘connected person’ in s 1(1)).
The loan is advanced by Spring Ltd (resident) to Dusk Plc (not a resident) on terms that are
different from the terms that third parties would have agreed to. This constitutes an affected
transaction as contemplated in s 31(1). Due to the fact that Spring Ltd does not derive any
income to be included in its taxable income, which consequently results in a lower taxable
income than when it had charged interest, Spring Ltd obtains a tax benefit from this term of
the loan. The result is that Spring Ltd should determine its taxable income as if the loan had
been advanced to Dusk Plc on the same terms that persons dealing at arm’s length would
have agreed to (i.e. charged interest at a rate of 15% per annum to Dusk Plc) (s 31(2))
(primary adjustment). In addition, the adjustment amount will be treated as a deemed
dividend in specie paid by Spring Ltd (s 31(3)(i)) (secondary adjustment).
5. The arrangement entered into between Thunder Ltd and the occupants of the residential
units resemble the arrangement dealt with in C:SARS v Brummeria Renaissance (Pty) Ltd and
Others. The benefit derived by Thunder Ltd from using the resident’s funds without paying
interest constitutes an amount. The amount is arguably the interest that Thunder Ltd would
have been required to pay had interest been charged (R100 000 (R1 000 000 × 10%)). As
Thunder Ltd is required to make the unit available to the resident without charging rent while
the loan remains outstanding suggests that this amount is derived from a scheme of profit-
making. The amount should therefore be included in Thunder Ltd’s gross income.
The resident similarly enjoys the benefit of using the unit without an obligation to pay rent to
the owner. The resident does not enjoy this benefit on a fortuitous basis, but rather on the
basis of the interest-free loan advanced to Thunder Ltd. The resident should arguably also
include the amount attached to the rental-free use of the property in his or her gross income.
6. Similarly to the position of Thunder Ltd above, an amount accrues to Sunshine Ltd in the form
of having the use of Lightning Ltd’s funds without having to pay interest. Sunshine Ltd’s
position can however be distinguished from Thunder Ltd’s position as this benefit accrues to
Sunshine Ltd fortuitously and without Sunshine Ltd having to provide something in exchange
for the benefit. This amount that accrues to Sunshine Ltd will arguably be of a capital nature
and therefore not included in its gross income.
16.3 Equity instruments

The alternative to using debt to raise funding is to obtain equity funding. The fundamental difference
between debt and equity funding lies in the exposure to the risks of the funded project or entity and
the resultant returns. As indicated in 16.2, where debt funding is obtained, the borrower is obligated
to repay the debt, irrespective of its financial position. The funder (lender) is exposed to the credit
risk of the borrower. The return that the lender earns on this funding is based on the time value of the
funds made available to the borrower as well as compensation for the credit risk assumed. Pure
equity funding, on the other hand, does not require the funded entity to make any compulsory
repayments of either capital or dividends. The investor is exposed to the risk of ownership in the
funded project or entity. If this entity performs well, the investor shares in this performance in the form
of dividends. If, however, the funded entity does not perform well, the investor is at risk of not
receiving any yield and possibly losing its capital investment. Equity funding is normally raised in the
form of shares issued by a company to investors.
From a tax perspective, a share is defined as any unit into which the proprietary interest in a
company is divided (definition of ‘share’ in s 1). This definition is wide enough to include ordinary
shares, preference shares and any other class of share that a company may issue as long as it
represents a proprietary interest in the company. In some cases, the Act distinguishes between
equity shares and shares that do not constitute equity shares. This distinction is mostly relevant in
cases where relief is to be provided when acquiring ownership in a company (for example for
purposes of the roll-over provisions in ss 41 to 47 (see chapter 20) or in the context of anti-avoidance
legislation (such as ss 8E and 8EA) (see 16.4). The distinction between equity shares and shares that
do not represent equity shares is considered in more detail in chapter 20.
An equity share (defined in s 1) means any share in a company, excluding any

Please note! share that, neither in respect of dividends nor returns of capital, carries any right
to participation beyond a specified amount in distribution.
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16.3.1 Investor perspective

The intention and purpose with which an investor acquires shares will determine the tax implications
of those shares in the hands of the person. If the investor acquires the shares for the purpose of
selling them, the shares may constitute trading stock (see chapter 14) and the proceeds received on
disposal would in that case be included in the taxpayer’s gross income (see chapter 3). The taxpayer
could however also acquire the shares with the intention to hold it as a long-term investment. In this
case, the proceeds on the sale of the shares would generally be of a capital nature and not be
included in the taxpayer’s gross income. The disposal of the shares (assets) would however have
capital gains tax implications (see chapter 17). As discussed in chapter 3, the determination of the
nature of an investment in shares depends on the facts and circumstances of each case and has
been the subject of many cases before the courts in the past. Section 9C (see chapter 14) removes
some of the uncertainty and judgement involved in this determination in the case of certain shares
held for at least three years by deeming the proceeds to be of a capital nature.
The investor would earn a return or yield on its investment in shares in the form of dividends.
Dividends received from South African companies are generally exempt in terms of s 10(1)(k)(i) and
do not constitute income (see chapter 5). These dividends may also be subject to dividends tax at a
rate of 20% (see chapter 19).
16.3.2 Investee perspective

From the perspective of a company that obtains funding by issuing its own shares, a share issue
would generally not have any tax implications. This is an event that gives rise to the receipt of an
amount of a capital nature and is treated as not being a disposal for capital gains tax purposes
(par 11(2)(b) of the Eighth Schedule) (see chapter 17). In recent years, a number of anti-avoidance
provisions, such as s 24BA (see chapter 20), have however been introduced that may impact the
company and counterparty to the transaction if the share issue does not take place under arm’s
length terms.
16.4 Hybrid instruments

In certain circumstances, the tax treatment of either a debt instrument or an equity instrument may be
beneficial to taxpayers. For example, where funds have been advanced to a borrower who will use
the funds for a purpose that does not qualify for a deduction in respect of the interest incurred (such
as acquiring shares), it may be beneficial for the investor to receive dividends that could qualify for
exemption, rather than taxable interest. Similarly, a taxpayer may prefer debt funding, which results in
a deduction of interest from taxable income, if the recipient is not subject to tax on the yield received
or taxed at a lower rate. These considerations are particularly prevalent in a cross-border context
where entities in jurisdictions with different tax rates are involved.
The Act contains a number of anti-avoidance provisions aimed at curbing the use of instruments with
a legal form that could potentially have a favourable tax treatment, while the substance of the
instrument differs from this legal form. Sections 8E and 8EA are aimed at equity instruments (shares)
with substantial debt features, while ss 8F and 8FA target debt instruments with characteristics that
resemble equity instruments. These provisions deem the tax treatment to be in line with the
substance of the instrument as opposed to merely its legal form.
16.4.1 Equity instruments with debt characteristics (s 8E and s 8EA)

Specific anti-avoidance provisions exist in respect of equity instruments (normally shares) that have
debt features. Section 8E deals with hybrid equity instruments, while section 8EA deals with third-
party backed shares.
The implication of an instrument being classified as a hybrid equity instrument or a third-party backed
share is similar. The benefit that a taxpayer may obtain from disguising a debt instrument in the legal
form of an equity instrument lies in the exemption of dividends that the taxpayer receives in respect of
the equity instrument. In order to counteract this, any dividend or foreign dividend that is received by
or accrues to a person in respect of such a hybrid equity instrument or third-party backed share is
deemed to be income received or accrued to the recipient (s 8E(2) and s 8EA(2)). The amount loses
its nature as a dividend, and therefore the possibility to qualify for the exemptions available to
dividends. This treatment is similar to interest, even though the amounts are not deemed to be
interest. Both provisions only affect the nature of the amount in the hands of the recipient. As the
amount is still classified as a dividend in the hands of the payer, it will not qualify for any deduction.
518
The provisions of these two sections share a number of definitions. These definitions are considered
first, before the requirements to be classified as either a hybrid equity instrument or third-party
backed share are explained.
The first common definition is that of a preference share. A share is not necessarily a preference
share for purposes of these provisions based on the label given to the share in a company’s
memorandum of incorporation or the description of the class of shares. The definition includes all
forms of shares (both equity shares and other shares) that may exhibit characteristics not normally
associated with equity ownership. A share will be viewed as a preference share if it is:
l not an equity share, or
l an equity share, where the amount of any dividend or foreign dividend is based on or determined
with reference to a specified rate of interest or the time value of money (definition of ‘preference
share’ in s 8EA(1)).
Remember
An equity share (defined in s 1) means any share in a company, excluding any share that,
neither in respect of dividends nor returns of capital, carries any right to participation beyond a
specified amount in distribution.
Certain preference shares, as discussed above, are outside the scope of the provisions if the funds
obtained by issuing the preferences shares were applied for a qualifying purpose. This exclusion
exists to make it possible to acquire equity shares in active operating companies without triggering
the anti-avoidance rules. This is important for, amongst others, funding used in empowerment trans-
actions. The definition of qualifying purpose also extends to preference shares issued to settle,
redeem or re-finance other funding used for the purposes of acquiring equity shares in active
operating companies.
Funds derived from issuing preference shares will be used for a qualifying purpose if it is applied for
any of the following purposes:
l The direct or indirect acquisition of an equity share in a company that is an operating company at
the time when any dividend or foreign dividend is received in respect of the preference share.
This share can however not be acquired from another company that forms part of the same group
of companies as the acquirer (par (a) of the definition of ‘qualifying purpose’ in s 8EA(1)).
An operating company means (definition of ‘operating company’ in s 8EA(1)):

l any company that carries on business continuously, and in the course or
furtherance of the business provides goods or services for consideration or
carries on exploration for natural resources
Please note! l any company that is a controlling group company in relation to the above-
mentioned company
l any listed company.
It should be noted that this definition of an operating company differs from the
definition in s 24O. The definition in s 8EA is arguably a wider definition than the
definition in s 24O.
l The direct or indirect acquisition of or redemption of another preference share (original prefer-
ence shares) if that other preference share was used for a qualifying purpose as contemplated in
this definition. This will only be a qualifying purpose if that amount that the issuer of the
preference shares (substitutive shares) receives when it issues the shares does not exceed the
outstanding amount of the other preference shares (original shares), including accrued dividends
or foreign dividends, that are acquired or redeemed (par (c) of the definition of ‘qualifying
purpose’ in s 8EA(1)).
l Payment of dividends or foreign dividends in respect of another preference share was used for a
qualifying purpose as contemplated in this definition (par (d) of the definition of ‘qualifying
purpose’ in s 8EA(1)).
l The partial or full settlement by any person of any debt incurred for a purpose that would have
been a qualifying purpose (see three items above), had the debt been preference shares issued
or the re-financing of such a debt (par (b) of the definition of ‘qualifying purpose’ in s 8EA(1)).
Section 8E originally applied to shares, including preference shares. Section 8EA only applied to
preference shares. A number of schemes were developed to circumvent the application of these
provisions by interposing instruments or arrangement rights deriving their value from a share or
519
preference share, as the case may be, between the investor and the share or preference share. This
meant that the anti-avoidance provisions did not find application because the recipients received the
dividend or foreign dividends in respect of such rights, rather than in respect of the shares or
preference shares. To counter this structuring opportunity, the term ‘equity instrument’ was
introduced into both provisions. An equity instrument refers to a right or interest of which the value is
determined directly or indirectly with reference to a share or preference share, as the case may be,
or amounts derived from such shares or preference shares.
16.4.1.1 Hybrid equity instruments
Section 8E uses a combination of the following characteristics of debt instruments to classify certain
shares or equity instruments as hybrid equity instruments:
l a borrower is obliged to make repayments in respect of debt
l debt generally ranks before equity upon liquidation, and
l a lender (investor) would normally be compensated for the funds advanced in terms of a debt
instrument with a return based on an interest rate or the time value of money.
In light of these characteristics, the following shares or rights will be classified as hybrid equity instru-
ments in the circumstances set out below:
Redeemable shares that are not equity shares (par (a) of the definition of ‘hybrid equity instrument’
s 8E(1))
Shares that are not equity shares will be classified as hybrid equity instruments if
l the issuer of the share is obliged to redeem the share in whole or in part, or
l the holder of the share may require redemption of the share in whole or in part
within a period of three years from the date of issue.
The date of issue of a share refers to any of the following dates:

l the date when the share is issued
l any date after the shares have been issued on which the company that
issued the shares undertakes the obligation to redeem the share in whole or
in part
l any date after the shares have been issued that the holder obtains the right
Please note! to require redemption of the share in whole or in part. The mere fact that a
particular holder acquired the share, and therefore also any redemption
right attached to it, does not give rise to a date of issue being established
for purposes of s 8E.
The date of issue plays an important role in determining whether a share is a
hybrid equity instrument as this is that date from which the three years within
which the presence of certain redemption rights or obligations must be
assessed. The potential classification of a share as a hybrid equity instrument
must be re-assessed whenever an event that establishes a date of issue occurs.
Equity shares with redemption features (par (b) of the definition of ‘hybrid equity instrument’ s 8E(1))
An equity share could constitute a hybrid equity instrument based on a combination of its redemption
features and its dividends rights. An equity share will be classified as a hybrid equity instrument if it
meets both the following requirements:
l it has any of the following redemption features:
– the issuer of the share is obliged to redeem the share in whole or in part within three years from
the date of issue
– the holder of the share may require redemption of the share in whole or in part within three
years from the date of issue, or
– no redemption rights exist but at the date of issue of the share, the existence of the company
issuing the share is to be terminated within three years or is likely to be terminated within three
years taking into account all the facts at the time. The distribution on cancellation of the shares
upon liquidation of such a company will equate to a redemption feature.
l it has any of the following dividend rights:
– the share does not rank pari passu (on the same basis) as far as participation in dividends or
foreign dividends is concerned with all other ordinary shares in the capital of the company. If
the ordinary shares of the company consist of a number of classes, the share should not rank
pari passu with at least one of the ordinary share classes
520
– any dividend or foreign dividend on the share must be calculated directly or indirectly with
reference to a specified rate of interest or the time value of money.
Remember
Arrangements that would have qualified as hybrid equity instruments had the prescribed period
in s 8E been 10 years are listed as reportable arrangements in the public notice issued under
s 35(4) of the Tax Administration Act. Paragraphs (a) and (b) of the definition of hybrid equity
instrument, as discussed above, contain prescribed periods.
Preference shares secured by interest-bearing instruments (par (c) of the definition of ‘hybrid equity
instrument’ s 8E(1))
Any preference share that is secured by a financial instrument or that is subject to an arrangement
that a financial instrument may not be disposed of will be classified as a hybrid equity instrument. The
investor’s risk exposure is so closely connected to this financial instrument that its characteristics
may reflect in those of the preference share.
In this context, a financial instrument refers to:

l an interest-bearing arrangement, or
Please note!
l a financial arrangement based on or determined with reference to a spe-
cified rate of interest or the time value of money.
An exception exists for preference shares that meet the above requirements but were issued for a
qualifying purpose. Such preference shares will not be classified as hybrid equity instruments.
Equity instruments deriving their value from hybrid equity instruments (paras (d) and (e) of the
definition of ‘hybrid equity instrument’ s 8E(1))
An equity instrument, as discussed above, that derives its value from any of the above three types of
shares that are classified as hybrid equity instruments or amounts derived from such shares, would
also be classified as a hybrid equity instrument. In addition, where an equity instrument derives its
value from shares and that equity instrument is subject to a right or arrangement that would have
constituted a right of redemption or security that would have resulted in the shares being classified
as hybrid equity instruments, the equity instrument would be classified as such.
A number of instruments that had terms that caused the instrument to fall within
the scope of s 8E existed prior to the introduction of the provision in its current
form. The view existed that if these arrangements were amended with the sole
intention of falling outside the scope of s 8E, such an amendment may fall foul of
the general anti-avoidance provisions in ss 80A to 80L. Taxpayers in this
position are temporarily accommodated by an exclusion from s 8E that applies
to shares or preference shares, issued in terms of an agreement of which the
terms were finally agreed before 1 April 2012, where those shares constitute
Please note!
hybrid equity instruments solely because of a right of redemption or security
arrangement in terms of this agreement. If this right of redemption or security
arrangement was cancelled between 26 October 2016 and 31 December 2017,
the dividends and foreign dividends that accrue in respect of the instrument will
not be treated as income following this cancellation. This implies that s 80B will
not be applied to disregard the cancellation. In addition, the cancellation should
not be treated as a disposal of the share if no consideration was payable in
respect of the cancellation. (s 8E(2A))
Example 16.9. Hybrid equity instrument
Sunshine Ltd requires funding to purchase 26% of the equity shares of Cloud Ltd. The purchase
price of the shares is R2 500 000. Sunshine Ltd has the following options of financing the
investment in the shares of Cloud Ltd:
l Imali Ltd lends R2 500 000 to Sunshine Ltd. The loan will bear interest at a rate of 10% per
annum. This amount is repayable after 5 years. The shares in Cloud Ltd will serve as security
for the loan.
continued
521
l Imali Ltd subscribes for preference shares issued by Sunshine Ltd for an amount of
R2 500 000. The preference shares bear cumulative preference dividends at a rate of 8% per
annum and are redeemable after 5 years. Sunshine may not sell the shares in Cloud Ltd until
all obligations in respect of the preference shares have been settled.
In both cases, Sunshine Ltd will use the dividends received from Cloud Ltd to make repayments
of capital and interest or preference dividends to Imali Ltd.
What are the tax implications of the respective funding options for Sunshine Ltd and Imali Ltd?
SOLUTION
Imali Ltd lends the funds to Sunshine Ltd
Sunshine Ltd
The interest incurred in respect of the loan will not qualify for a deduction in terms of s 24J(2) as it
is incurred for purposes of acquiring shares that produce exempt income. The provisions of
s 24O do not apply to the interest as Sunshine Ltd does not acquire a sufficient shareholding to
become the controlling company in relation to Cloud Ltd.
Imali Ltd
The interest received by Imali Ltd will be included in its gross income. This interest, after the
deduction of expenditure incurred to produce the income, will be subject to income tax at a rate
of 28% in the hands of Imali Ltd.
Imali Ltd subscribes for preference shares issued to it by Sunshine Ltd
Sunshine Ltd
No deduction is available in respect of the preference dividends paid to Imali Ltd.
Imali Ltd
The dividends received by Imali Ltd will be included in its gross income (par (k) of the definition of
‘gross income’). The dividends received will be exempt and will therefore not constitute income
(s 10(1)(k)(i)). As Imali Ltd is a resident company, the dividends paid to it by Sunshine Ltd are
exempt from dividends tax (s 64F(1)(a)). This tax treatment may be more favourable for Imali Ltd
compared to the taxable interest in the case of the loan discussed above.
As the preference shares have a number of characteristics of a debt instrument (fixed repayment
term and yield), it should be considered whether the preference shares constitute hybrid equity
instruments. The terms of the preference shares as potentially resulting in them being classified
as hybrid equity instruments can be assessed as follows:
l The preference shares are not entitled to receive dividends or returns of capital beyond
specified amount. As a result, the preference shares are not equity shares. As no portion of
the preference shares is redeemable within 3 years, the preference shares will not be hybrid
equity instruments in terms of par (a) of the definition of hybrid equity instrument (see note
below). Paragraph (b) of the definition of hybrid equity instrument does not apply as the
shares are not equity shares.
l The Cloud Ltd shares are not financial instruments (interest-bearing arrangements or financial
arrangements determined with reference to a specified rate of interest or the time value of
money). The fact that these shares may not be disposed of by Sunshine Ltd until its
obligations in terms of the preference shares have been settled does not cause the
preference shares to be classified as hybrid equity instruments in terms of par (c) of the
definition of hybrid equity instrument.
l Lastly, from the information available, the preference shares do not derive their value from
instruments that could be classified as hybrid equity instruments (paras (d) and (e) of the
definition of hybrid equity instrument).
Based on the above assessment, it is concluded that the preference shares are not hybrid equity
instruments. The parties are however required to report the arrangement to SARS as the
preference shares would have constituted hybrid equity shares had the period in par (a) of the
definition of hybrid equity instrument been 10 years.
Note
If Sunshine Ltd was obliged to or Imali Ltd entitled to request Sunshine Ltd to redeem any part of
the preference shares within 3 years from the date of issue, the preference shares would have
constituted hybrid equity instruments. If this was the case, the dividends received by Imali Ltd
would have constituted income. As it no longer constitutes dividends received, it would not have
qualified for the exemption available to dividends received (s 10(1)(k)(i)). The tax treatment of the
amounts received by Imali Ltd would have been similar to its position had it received interest in
terms of the loan-funding option discussed above.
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16.4.1.2 Third-party backed shares

Section 8EA applies to third-party backed shares. A third-party backed share is defined as a prefer-
ence share or equity instruments (both concepts discussed above) in respect of which (definition of
‘third-party backed share’ in s 8EA(1))
l an enforcement right is exercisable by the holder of that share or equity instrument, or
l an enforcement obligation is enforceable as a result of any amount of specified dividend, foreign
dividend, return of capital or foreign return of capital attributable to that share not being received
or accruing to the person entitled to it.
The principle behind the concepts of an enforcement right or obligation is that a third party directly or
indirectly guarantees dividends or returns of capital to be paid to the holder of the share (or equity
instrument). This guarantee can be in the form of acquiring the share and thereby paying an amount
to the holder or by way of a guarantee or indemnity arrangement. The presence of such a guarantee
would result in the exposure of the holder of the instrument being substantially similar to debt in
respect of which certain repayments must be made by the borrower.
In light of this objective, an enforcement right means a right, whether fixed or contingent, that the
holder of a share or equity instrument (or a connected person to the holder) has to require any
person other than the issuer of the share or equity instrument (third party) to
l acquire the share (or equity instrument) from the holder
l make any payment in respect of the shares (or equity instrument) in terms of a guarantee,
indemnity or similar arrangement, or
l procure, facilitate or assist with above-mentioned acquisition or payments.
An enforcement obligation refers to any obligation, whether fixed or contingent, of any person other
than the issuer of a share (or equity instrument) to
l acquire the share (or equity instrument) from the holder
l make any payment in respect of the shares (or equity instrument) in terms of a guarantee,
indemnity or similar arrangement, or
l procure, facilitate or assist with above-mentioned acquisition or payments.
As mentioned earlier in the explanation definition of a qualifying purpose, certain exemptions from the
anti-avoidance provisions in s 8EA exist where the funding raised by issuing the shares is used for a
qualifying purpose. The mechanism used in s 8EA to provide for this exemption, and thereby exclude
certain shares from being third-party backed shares, is to disregard enforcement rights exercisable
or enforcement obligations enforceable in terms of arrangements with a list of persons. This exclusion
is, however, only available if the funds derived from issuing the preference shares that may
potentially be third-party backed shares otherwise were applied for a qualifying purpose. This
approach to exclude shares from the scope of s 8EA can be illustrated by the following flow chart:
Did the company use the funds derived by issuing the

preference shares for a qualifying purpose?
Yes No
Do any enforcement rights or obligations, other Do any enforcement rights or obligations exist in
than against persons listed as excluded, exist in relation to the preference share?
relation to the preference share?
No
No Yes Yes
Third-party backed share to which s 8EA applies
The share is not a third-party backed share
523
The persons against whom the enforcement rights or enforcement obligations should be disregarded
if the funds derived from the preference shares were used for a qualifying purpose are (s 8EA(3))
l the operating company to which the qualifying purpose relates (i.e. the company of which the
equity shares were acquired)
l the company that issued the preference shares if those preference shares were issued for any
qualifying purpose
l any other person who directly or indirectly holds at least 20% of the equity shares in
– the operating company to which the qualifying purpose relates
– the issuer of the preference shares if those preference shares were issued for any qualifying
purpose
l any company that forms part of the same group of companies as
– the operating company to which the qualifying purpose relates
– the issuer of the preference shares if those preference shares were issued for any qualifying
purpose
– the other person referred to above who directly or indirectly holds at least 20% in any of the
above two persons.
l any natural person
l any organisation that is a non-profit company (as defined in s 1 of the Companies Act), or a trust
or association of persons, if
– all of the activities of that organisation are carried on in a non-profit manner, and
– none of the activities of that organisation are intended to directly or indirectly promote the
economic self-interest of any fiduciary or employee of that organisation, other than by way of
reasonable remuneration payable to that fiduciary or employee
l any person who holds equity shares in an issuer of a preference share that was issued for a
qualifying purpose, if the enforcement right exercisable or enforcement obligation enforceable
against that person is limited to any rights in and claims against that issuer that are held by that
person.
Similar to s 8E, a number of arrangements with terms that caused the

arrangement to fall within the scope of s 8EA existed prior to the introduction of
the provision. A similar view also existed that if these arrangements were
amended with the sole intention of falling outside the scope of s 8EA, such an
amendment may fall foul of the general anti-avoidance provisions in ss 80A to
80L. Like in s 8E, taxpayers in this position are temporarily accommodated by an
Please note! exclusion from s 8EA that applies to preference shares, issued in terms of an
agreement of which the terms were finally agreed before 1 April 2012, where
those shares constitute third-party backed shares solely because of an
enforcement right acquired in terms of this agreement. If this enforcement right
was cancelled between 26 October 2016 and 31 December 2017, the dividends
and foreign dividends that accrue in respect of the instrument will not be treated
as income following this cancellation. This implies that s 80B will not be applied
to disregard the cancellation (s 8EA(2A))
Example 16.10. Third-party backed shares
Amanzi Ltd is a resident company that sells water-processing equipment to mining businesses.
Amanzi Ltd does not currently have black ownership and has found that it is no longer a preferred
supplier for a number of important customers. A transaction is contemplated in terms of which
Imigodi (Pty) Ltd, a black-owned company, will acquire a 26% equity shareholding in Amanzi Ltd
at a purchase price of R2 500 000.
Imigodi (Pty) Ltd will issue preference shares to Imali Ltd to raise an amount of R2 500 000 that
will be used to purchase the Amanzi Ltd shares. The preference shares will have a right to
cumulative preference dividends determined at a rate of 8% per annum. The preference shares
will be redeemed after 5 years.
continued
524
Imali Ltd requires that Amanzi Ltd, Umfula Ltd (a company that held all the shares of Amanzi Ltd
before the transaction) as well as the shareholders of Imigodi Ltd, who are all natural persons,
provide surety for the payment of preference dividends and the redemption of the preference
shares. In addition, Imali Ltd also required that Imigodi (Pty) Ltd took out credit insurance in
favour of Imali Ltd from a third-party insurer in respect of the redemption of the preference shares
in 5 years’ time.
What are the tax implications of the funding arrangement for Imigodi Ltd and Imali Ltd?
SOLUTION
Imigodi Ltd
No deduction is available in respect of the preference dividends paid to Imali Ltd.
Imali Ltd
As the preference shares have a number of characteristics of a debt instrument (fixed repayment
term and yield), it should be considered whether the shares are hybrid equity instruments. The
terms of the preference shares are similar to those discussed in Example 16.9 and would, for the
same reasons as set out in that example, not cause the shares to be classified as hybrid equity
instruments.
In addition, the fact that a number of persons have provided surety to Imali Ltd for the payment of
both the preference dividends and redemption of the preference shares may cause these
preference shares to be third-party backed shares.
As the preference shares are not equity shares (see Example 16.9 for discussion in this regard),
these shares are ‘preference shares’ as defined in s 8EA.
The preference shares are used to acquire equity shares in Amanzi Ltd. Amanzi Ltd is an
operating company, as defined in s 8EA(1), because it sells goods to mining companies. The
preference share funding will therefore be used by Imigodi (Pty) Ltd for a qualifying purpose, as
defined in s 8EA(1).
The surety for the payment of dividends and the redemption of the preference shares provided
by the persons will result in Imali Ltd having an enforcement right against the Amanzi, Umfula
and the shareholders of Imigodi (Pty) Ltd. However, the following agreements must be
disregarded for purposes of determining whether any enforcement rights are exercisable in
respect of the preference shares: (s 8EA(3)(a)(i))
l the rights against Amanzi Ltd, as the operating company to which the qualifying purpose
relates (s 8EA(3)(b)(i))
l the rights against Umfula Ltd, as a person that holds at least 20% of the equity shares of
Amanzi Ltd, or as a company that forms part of the same group of companies as Amanzi Ltd
(s 8EA(3)(b)(iii)(aa) or s 8EA(b)(iv)(aa))
l the rights against the shareholders of Imigodi (Pty) Ltd, as persons that hold at least 20% of
the equity shares of Imigodi (Pty) Ltd, or natural persons (s 8EA(3)(b)(iii)(bb) or s 8EA(b)(v))
The credit guarantee taken out from a third-party insurer in favour of Imali Ltd will also be an
enforcement right that Imali Ltd holds in respect of the payment of the capital redemption amount
of the preference shares. As the third-party insurer is not a person listed in s 8EA(3), this
arrangement cannot be disregarded for purposes of determining whether an enforcement right
exists in respect of the preference shares. The enforcement right held by Imali Ltd against the
third-party insurer results in the preference shares being classified as third-party backed shares.
The dividends received by Imali Ltd will constitute income. It qualifies for the exemption available
to dividends received (s 10(1)(k)(i)). The tax treatment of the amounts received by Imali Ltd will
be similar to the tax implications had it received interest in respect of a loan.
16.4.2 Debt instruments with equity characteristics (ss 8F and 8FA)

The anti-avoidance provisions in the Act that deal with debt instruments, normally loans, that have
equity features are ss 8F and 8FA. Section 8F considers the terms of the debt instrument to assess
whether the anti-avoidance rule applies, while s 8FA considers the nature of the yield on the
instrument. If s 8F applies, the instrument is classified as a hybrid debt instrument. If s 8FA applies,
the yield (interest) is classified as hybrid interest.
The tax implication of interest paid in respect of a hybrid debt instrument and hybrid interest is
similar. Taxpayers may have a preference for debt, and therefore attempt to disguise equity
instruments in the legal form of debt instruments, due to the fact that interest incurred in respect of a
debt instrument would be deductible. Both provisions apply in respect of interest, as defined in s 24J
(see 16.2.1.2). When the anti-avoidance provisions of ss 8F and 8FA apply, the deduction in respect
of this interest is disallowed (ss 8F(2)(b) and 8FA(2)(b)). This neutralises the tax benefit of classifying
525
the instrument as debt for the taxpayer. The interest is furthermore deemed to be a dividend in
specie paid by the company on the last day of its year of assessment during which the interest was
incurred. The interest is deemed to be a dividend paid in respect of a share to the recipient, which
may attract dividends tax at a rate of 20% (ss 8F(2)(a) and 8FA(2)(a)). This dividend may qualify for
the exemptions from dividends tax, depending on the nature of the beneficial owner (see chapter 19).
As a dividend, the amount would also qualify for the exemptions available for dividends received by
or accrued to the recipient (s 10(1)(k)(i)).
The design of these provisions was amended significantly from 24 February

2016 to prevent taxpayers from structuring debt instruments in a manner so as
to fall within the scope of s 8F in order to benefit from the yield on an instrument
being reclassified as a dividend. This was particularly problematic where the
issuer was not subject to tax in South Africa. In these circumstances, s 8F did
not achieve its purposes of denying an interest deduction in respect of such a
hybrid debt instrument.
Please note! These provisions only apply to interest-bearing arrangements or debt issued by
l a resident company
l a foreign company where the interest is attributable to a permanent estab-
lishment in South Africa
l a controlled foreign company if the interest incurred must be taken into
account in determining the net income of that controlled foreign company.
(definition of ‘instrument’ in s 8F(1))
Sections 8F and 8FA share a number of exclusions where neither of the provisions apply. These
exclusions are
l a debt owed by a small business corporation (see chapter 19)
l an instrument that constitutes a tier 1 or tier 2 capital instrument referred to in the regulations
issued in terms of s 90 of the Banks Act (contained in Government Notice No R.1029 published in
Government Gazette No 35950 of 12 December 2012) issued by a bank (as defined in the Banks
Act) or a controlling company in relation to that bank (thus relief is provided for regulated bank
capital)
l an instrument of any class that is subject to the approval contemplated in s 23(a)(i) of the Short-
term Insurance Act or s 24(a)(i) of the Long-term Insurance Act (relief is provided for regulated
insurer capital)
l linked units in a certain company that are held by a long-term insurer (as defined in the Long-
term Insurance Act), a pension fund, provident fund, REIT (see chapter 19) or short-term insurer
(as defined in the Short-term Insurance Act) if those linked units were acquired before 1 January
2013. This is a temporary exclusion until legislation to regulate unlisted real estate investment trusts
(REITs) is introduced (ss 8F(3)(d) and 8FA(3)(d)).
l an instrument that constitutes a third-party backed instrument. A third-party backed instrument is
an instrument in respect of which an enforcement right is exercisable as a result of any amount
relating to that instrument not being received by or accrued to the person entitled to this. An
enforcement right in this context has a similar meaning to that discussed in 16.4.1.2. This
exclusion aims to ensure that the re-characterisation rules in respect of third-party backed shares
(see 16.4.1.2) will apply to third-party backed instruments, even if the taxpayer attempted to
structure the instrument to fall within s 8F and retain dividend treatment of the yield in an attempt
to avoid the application of s 8EA.
16.4.2.1 Hybrid debt instruments (s 8F)

Only amounts owing by companies in respect of an instrument can constitute a hybrid debt
instrument. Whether the instrument is a hybrid debt instrument depends on the arrangement that the
company has in respect of the instrument. The following arrangements in relation to an instrument will
result in the instrument being classified as a hybrid debt instrument:
Conversion or exchange for shares (par (a) of the definition of ‘hybrid debt instrument’ in s 8F(1))
If the company is entitled to or obliged to either
l convert the instrument (or part thereof) in any year of assessment to shares, or
l exchange the instrument (of part thereof) in any year of assessment for shares.
526
The instrument would, however, not be classified as a hybrid debt instrument if the market value of
the shares is equal to the amount owed in terms of the instrument when the conversion or exchange
takes place. This would be the case if the number of shares depend on the market value of the
shares relative to the outstanding amount on the conversion date. This can be contrasted to a
situation where a fixed number of shares is issued, irrespective of the market value of the shares in
relation to the outstanding amount. The former scenario does not give rise to classification of the
instrument as a hybrid debt instrument while the latter does.
Deferral of an obligation to pay based on solvency (par (b) of the definition of ‘hybrid debt instrument’
in s 8F(1))
If the obligation to pay an amount owed in respect of the instrument on a date or dates falling within
the year of assessment has been deferred because the obligation is conditional upon the market
value of the company’s assets not being less than the liabilities of the company, this amount
constitutes a hybrid debt instrument. This condition should have already resulted in the deferral of an
amount for it to trigger classification as a hybrid debt instrument, as opposed to a potential deferral in
future.
Companies with going concern problems due to insolvent balance sheets are
often required to subordinate certain related party debts. This involves, amongst
others, that the debt is not repayable while the company remains in the insolvent
position. Such a subordination agreement can result in the debt or part thereof
Please note! being classified as a hybrid debt instrument. Where an instrument is a hybrid
debt instrument solely because the payment of amounts has been deferred as a
result of this condition, and this has been certified by a registered auditor, s 8F
will not apply to this instrument (s 8F(3)(f)). The result is that the interest incurred
in respect of this instrument will remain deductible.
No obligation to repay within 30 years (par (c) of the definition of ‘hybrid debt instrument’ in s 8F(1))
Where a company owes an amount to a connected person in relation to that company in terms of an
instrument and is not obliged to fully discharge all liability to pay amounts in respect of the instrument
within 30 years from the date of issue of the instrument, this will result in the instrument being a hybrid
debt instrument. The date of issue from which the 30-year period must be determined is based on the
date that the liability comes into existence. This is the only of the three requirements that requires that
the arrangement must be between a company and a person connected in relation to such a
company.
This provision does not apply to instruments that are repayable on demand. An instrument that can
be converted to or exchanged for another financial instrument (except for a share) must be
considered together with such other financial instrument when assessing whether it is a hybrid debt
instrument based on the above criterion. Classification of an instrument as a hybrid instrument can
therefore not be avoided by merely making provision for replacement of the particular instrument
prior to the expiry of the 30-year period.
Example 16.11. Hybrid debt instruments

Jawbreakers Ltd is a South African resident company with a 31 March year-end and it specialises
in producing some of the biggest jawbreakers. Due to increasing demand, Jawbreakers Ltd is
looking to expand operations but does not have sufficient reserves available to do so.
Jawbreakers Ltd plans to issue debentures that may be converted into ordinary shares of
Jawbreakers Ltd to Jellybean Ltd (an unrelated third party that also has a 31 March year-end) in
order to obtain this funding. This instrument gives Jawbreakers Ltd the flexibility of being able to
settle the debentures should it have funds available, or to capitalise the loan by converting it into
shares if it wishes to do so.
If the debentures are converted into ordinary shares, it will be at a ratio of 1:1. The debentures
will be issued on 1 April 2017 at face value of R1 000 000. The coupon rate on these debentures
is 8% p.a. Interest is payable annually in arrears starting on 31 March 2018. You may assume
that for the 2018 year of assessment interest, as defined in s 24J(1), incurred amounted to
R30 326.
The taxable income before taking into account the above arrangement was R390 000 for
Jawbreakers Ltd and R550 000 for Jellybean Ltd.
Discuss, supported by calculations, the tax implications of the convertible debentures for each of
the companies for the 2018 year of assessment.
527
SOLUTION
Classification of convertible debentures issued:
The convertible debentures constitute instruments as defined (s 8F(1)) as this is an interest-
bearing arrangement and these instruments were issued by a resident company.
As the company (Jawbreakers Ltd) is entitled to convert these instruments into shares, the
instruments meet the definition of hybrid debt instruments in s 8F(1). (Note that if the instruments
were convertible at the option of the holder (as opposed to the company), or convertible for a
number of shares determined with reference to the market value of the shares in relation to the
amount owed in terms of the instrument, the instruments would not have been classified as
hybrid debt instruments (par (a) of the definition of ‘hybrid debt instrument’)).
As a result of being classified as hybrid debt instruments, the interest incurred by Jawbreakers
Ltd would be deemed to be a dividend in specie declared and paid on the last day of the year of
assessment in terms of s 8F(2)(a). This deemed dividend may be subject to dividends tax at a
rate of 20%. As Jawbreakers Ltd is a resident company, the dividend in specie would be exempt
from dividends tax in terms of s 64G(2), provided that Jellybean Ltd has submitted a declaration
and undertaking to Jawbreakers Ltd as required by that section. In addition, any interest payable
by Jawbreakers Ltd would not be allowed as a deduction in terms of s 24J (s 8F(2)(b)).
The effect of this arrangement on the taxable income for the 2018 year of assessment of the two
entities can be illustrated as follows:
Jawbreakers Ltd Jellybean Ltd
R R
Taxable income ............................................................................ 390 000 550 000
Deemed dividend paid (s 8F(2)(a)(ii)) – no deduction allowed .... –
Deemed dividend accrues to Jellybean Ltd in terms of
s 8F(2)(b)) ..................................................................................... 30 326
Dividend exemption: s 10(1)(k)(i) ................................................. (30 326)
390 000 550 000
16.4.2.2 Hybrid interest (s 8FA)

When considering whether an amount is hybrid interest, the yield in respect of a debt owed by a
company in terms of an instrument must be considered. The following characteristics of this yield will
result in it being hybrid interest:
Interest not based on a rate of interest or time value of money (par (a) of the definition of ‘hybrid
interest’ in s 8FA(1))
Any interest that is not determined with reference to
l a specified rate of interest, or
l the time value of money
will be hybrid interest.
An example of interest that would be hybrid interest is a return on a debt instrument that is
determined as a percentage of profits from certain transactions.
Incremental interest linked to profitability (par (b) of the definition of ‘hybrid interest’ in s 8F(1))
Interest determined with reference to an increased interest rate that is linked to an increase in the
profitability of the company is hybrid interest. The amount of such hybrid interest is determined as the
interest calculated at the increased rate less the lowest rate of interest that applied in respect of the
instrument during the current year of assessment and preceding five years of assessment.
Example 16.12. Hybrid interest
Footsy (Pty) Ltd is a resident company with a 28 February 2018 year-end. The company manu-
factures and sells shoes. BigFoot Ltd, a company that is a tax resident in Bermuda, owns all the
shares issued by Footsy (Pty) Ltd. BigFoot Ltd advanced a loan of R50 000 000 to
Footsy (Pty) Ltd on 1 March 2012. The loan agreement is repayable on demand. While the loan
is outstanding, Footsy (Pty) Ltd will be required to pay BigFoot Ltd interest amounting to 90% of
Footsy (Pty) Ltd’s profit before tax.
On 28 February 2018, Footsy (Pty) Ltd realised a profit before tax of R5 000 000 for the year.
Discuss and calculate the tax implications of the interest on the loan for the 2018 year of
assessment for Footsy (Pty) Ltd and BigFoot Ltd.
528
SOLUTION
Interest in respect of the loan is not determined with reference to the time value of money or a
specified rate of interest. The interest in respect of the loan increases as Footsy (Pty) Ltd’s profit
increases. The interest is therefore classified as hybrid interest (definition of ‘hybrid interest’ in
s 8FA(1)).
The interest for the year amounting to R4 500 000 (R5 000 000 × 90%) constitutes hybrid interest.
The interest will be deemed to be a dividend in specie declared and paid on the last day of the
year of assessment (s 8FA(2)(a)). This deemed dividend will be subject to dividend tax at a rate
of 20%. South Africa has not entered into a double tax agreement with Bermuda that could
reduce this rate. As this is a dividend in specie, Footsy (Pty) Ltd will be liable for dividends tax of
R20 000 (R100 000 × 20%).
The interest received by or accrued to BigFoot Ltd will be deemed to be a dividend in specie that
accrues on the last day of the year of assessment. The dividends will be deemed to be from a
South African source as Footsy (Pty) Ltd is a resident company (s 9(2)(a)). The dividends will be
included in its gross income (par (k) of the definition of ‘gross income’ in s1). This amount would,
however, be exempt (s 10(1)(k)(i)).
Footsy BigFoot
(Pty) Ltd Ltd
R R
Deemed dividend paid (s 8FA(2)(b) – no deduction allowed ........... –
Deemed dividend accrues to BigFoot Ltd (s 8F(2)(a)) ..................... 4 500 000
Dividend exemption (s 10(1)(k)(i)) .................................................... (4 500 000)
Effect on taxable income .................................................................. – –
Dividends tax at 20% in respect of dividend in specie (s 8FA(2)(a))
(R4 500 000 × 20%) .......................................................................... 900 000
Note
This example illustrates how the provisions of s 8FA curb schemes that may be aimed at
reducing the South African tax base by structuring an instrument with equity features (profit-
sharing risk) as a loan to achieve a tax deduction of the interest. In the absence of the anti-
avoidance provisions of s 8FA it may have been possible to shift a significant amount of taxable
profits to a low tax jurisdiction via an interest payment. It should however be noted that in a
cross-border context, the transfer pricing rules, as discussed in chapter 21, may also have
counteracted this tax planning.
16.5 Derivative instruments

Taxpayers may use derivative instruments as part of their funding and investment strategies. These
instruments may be held for purposes of hedging against certain risks (for example the risk of
changes in interest rates) or for speculative purposes.
The Act only contains few provisions that specifically deal with the taxation of derivative instruments.
These provisions include ss 24K and 24L, which are discussed in more detail below. These
provisions merely govern the timing of the accrual or incurral of amounts in terms of derivative
instruments. Derivative instruments that are based on exchange rate and foreign currency underlying
items, for example forward exchange contracts, are subject to the provisions of s 24I (explained in
detail in chapter 15).
In light of the lack of specific provisions dealing with the manner in which these instruments are
taxed, the definition of gross income must be considered to determine whether amounts received or
accrued in respect of these instruments must be included in a person’s taxable income (see chapter
3). Conversely, where amounts are paid in terms of these instruments, the deductibility of such
amounts will be governed by the general deduction formula in s 11(a) read with s 23 (see chapter 6).
These instruments may furthermore constitute assets for purposes of the Eighth Schedule, in which
case the disposal thereof may have capital gains tax implications (see chapter 17).
16.5.1 Interest rate agreements (s 24K)

Section 24K regulates the accrual and incurral of amounts in respect of interest rate agreements. An
interest rate agreement is an agreement in terms of which a person
l acquires the right to receive an amount (par (a) of the definition of ‘interest rate agreement’ in
s 24K(1))
– calculated at a rate of interest to a notional principal amount, or
529
– calculated with reference to the difference between any combination of interest rates to a
notional principal amount, or
– that is fixed as consideration in terms of an agreement where the obligation is imposed to pay
any other amount calculated at a specified rate of interest or an amount equal to the difference
between the fixed amount and amount calculated at a specified rate of interest.
l becomes liable to pay an amount (par (b) of the definition of ‘interest rate agreement’ in s 24K(1))
– calculated at a rate of interest to a notional principal amount, or
– calculated with reference to the difference between any combination of interest rates to a
notional principal amount, or
– that is fixed as consideration in terms of an agreement where the obligation is imposed to pay
any other amount calculated at a specified rate of interest or an amount equal to the difference
between the fixed amount and amount calculated at a specified rate of interest.
An example of an interest rate agreement is a fixed-for-floating interest rate swap agreement where a
taxpayer would be liable to make payments of fixed amounts (interest determined at a fixed rate) on a
notional capital amount in exchange for the right to receive amounts determined at a variable interest
rate on a same notional capital amount. This agreement would typically be entered into by a taxpayer
to hedge itself against an exposure to a floating interest rate obligation in terms of a loan agreement.
Section 24K is intended merely to determine the timing of the accrual or incurral of amounts in
respect of interest rate agreements. Its provisions will not interfere with general tax principles, for
example the source principle or the nature of amounts (capital or revenue) accrued or incurred in
respect of such agreements. The amounts contemplated in the above definition are deemed to have
been incurred by or accrued to a taxpayer on a day-to-day basis (s 24K(1)). This approach to the
timing of the accrual or incurral of interest amounts is aligned with the timing provisions in s 24J (see
16.2.1.3 above). Where the amount in respect of the interest rate agreement is determined with
reference to a variable rate, the accrual or incurral amount must be determined using the variable
rate applicable on the date that the amount is calculated (s 24K(3)).
Example 16.13. Interest rate agreement

Follet Ltd obtains a loan on 1 October 2018 for R10m, repayable on 31 March 2019. The loan
bears interest of prime + 2%, payable in arrears. The prime rate on 1 October 2018 is 15%. The
financial director of Follet Ltd has a concern that the prime rate may increase dramatically over
the period of the loan and he therefore arranges for the company to enter into an interest-rate
agreement with a bank as a hedge.
The agreement provides that the bank will pay Follet Ltd interest on a notional amount of
R10 million at prime, while Follet Ltd will pay the bank interest on a notional amount of R10 million
at 15%.
The prime rate increased from 15% to 18% on 1 November 2018 and then remained unchanged
throughout the period of the loan and the interest rate agreement.
The financial year of Follet Ltd ends on the last day of February.
On 31 March 2019, in accordance with the interest rate agreement:
Follet Ltd receives an amount of
(R10m × 15% × 31/365 days) + (R10m × 18% × 151/365 days) ................................ R872 055
Less: Follet Ltd pays an amount of
(R10m × 15% × 182/365 days) ........................................................................ (747 945)
Net receipt of Follet Ltd................................................................................................ R124 110
The portion of the R124 110 to be taken into account in the calculation of the taxable income of
Follet Ltd for the year of assessment ended 28 February 2019 is R98 630, calculated as follows:
Amount receivable by Follet Ltd
(R10m × 15% × 31/365) + (R10m × 18% × 120/365).................................................. R719 178
Less: Amount payable by Follet Ltd (R10m × 15% × 151/365 days) ......................... (620 548)
Net accrual at 28 February 2019 ................................................................................. R98 630
The balance of R25 480 will be taken into account in the 2020 year of assessment.
530
Remember
The s 23H limitation on the deductions allowed for certain expenditure does not apply in respect
of interest-rate agreements to which the provisions of s 24K apply (s 23H(1) (see chapter 6)).
16.5.2 Option contracts (s 24L)

Section 24L of the Act deals with the incurral and accrual of premiums or like considerations in
respect of an option contract. It also applies to consideration paid to acquire an option contract.
An option contract is defined in s 24L(1) as an agreement that has the effect that a person acquires
the option
l to buy or sell a certain quantity of corporal or incorporeal things to or from another person on or
before a specified date at a prearranged price, or
l that an amount of money will be paid to or received from another person before or on a future
date depending on the whether the value of an asset, index, currency, interest rate or other factor
changes in a certain manner in relation to a prearranged value on or before such future date.
The first requirement relates to an option to acquire the underlying item while the second refers to an
option contract that is settled on a net basis without exchange of the underlying item.
This definition however excludes a foreign currency option contract, which is dealt with under s 24I
(see chapter 15).
Similarly to s 24K, this provision does not interfere with the general principles governing the source or
capital or revenue nature of the relevant amounts. It only deals only with the timing of the incurral or
accrual of the relevant amounts. It does, furthermore, not specify what the tax implications of
exercising the right or settling the option contract are. The following amounts payable in terms of an
option contract or in respect of the acquisition of an option contract are deemed to have been
incurred by the payer on a day-to-day basis during the original term of the option contract (s 24L(2)):
l a premium or like consideration paid or payable in terms of an option contract, or
l the consideration paid or payable by a person in respect of the acquisition of an option contract
by that person.
If the option contract is exercised, terminated or disposed of before the end of its original term, the
total of any unclaimed portion of the premium or consideration, attributable to the period from the
date of exercise, termination or disposal until the end of the original term of the option contract, will
be deemed to be incurred on that earlier date (proviso (i) to s 24L(2)).
These provisions will apply to any option contract except an option contract held by a person as
trading stock. The tax treatment of option contracts held as trading stock will therefore be governed
by general principles (proviso (ii) to s 24L(2)).
The section further provides that, if the unclaimed amount includes an amount representing the
‘intrinsic value’ in relation to the option contract, such value will also be deemed to be incurred by the
person concerned on the date of the exercise, termination or disposal of the option contract, in other
words, the earlier date (proviso (iii) to s 24L(2)). The intrinsic amount is the difference between
l the market price or value of an asset, index, currency, rate of interest or any other factor, as
provided for in the option contract, on the date of acquisition of an option contract, and
l the prearranged price or value of an asset, index, currency, rate of interest or any other factor, as
provided for in the option contract (s 24L(1)).
Any premium or like consideration received or receivable by a person in terms of an option contract
is deemed to have accrued to the person on a day-to-day basis during the term of the option contract
(s 24L(3)). When the option contract is exercised, terminated or disposed of at an earlier date, the
unclaimed portion of the premium or like consideration, attributable to the period from the date of
exercise, termination or disposal until the end of the original term of the option contract, will be
deemed to have accrued to the person on such earlier date.
Example 16.14. Option contracts
Mr Option pays an amount of R1 000 on 1 December 2018 in terms of an option contract that
entitles him to buy a certain number of widgets at an agreed price at any time before 29 Febru-
ary 2020. He exercises the option and acquires the widgets on 31 August 2019.
What is the amount deemed to be incurred during the 2019 and 2020 years of assessment?
531
SOLUTION
Number of days from the commencement of the option contract until the end of the current year
(1 December 2018 until 28 February 2019) = 90
Number of days in option contract (1 December 2018 until 29 February 2020) = 456
Therefore, the portion of R1 000 deemed to be incurred in current year is 90/456 × R1 000 =
R197,37
Number of days from the commencement of the current year until date of the exercise of the
option contract (1 March 2019 until 31 August 2019) = 184
Amount deemed to be incurred in the current year prior to exercise of the option contract:
184/456 × R1 000 = R403,51
Amount deemed to be incurred on the date of exercise of the option contract (earlier date):
Number of days from the date of exercise of the option contract until the end of the original term
(from 1 September 2019 to 29 February 2020) = 182
Amount deemed to be incurred on the date of exercise: 182/456 × R1 000 = R399,12 OR
unclaimed amount: R1 000 – R197,37 – R403,51 = R399,12
Total amount deemed to be incurred in current year: R403,51 + R399,12 = R802,63
Therefore total amount deemed to be incurred:
Year ended 28 February 2019 ..................................................................................... R197,37
Year ended 29 February 2020 ..................................................................................... 802,63
Total amount deemed to be incurred ............................................................. R1 000,00
16.6 Financial institutions and authorised users (ss 24JB and 11(jA))
The tax and accounting treatment of financial instruments have diverged significantly as the Interna-
tional Financial Reporting Standards (IFRS) have developed towards measuring liquid financial
instruments at fair value at the end of each reporting period. The measurement of these instruments
at their fair value, as opposed to a historical cost measure, results in mark-to-market adjustments
being recognised in profit or loss for accounting purposes. The differences between the tax and
accounting treatment have resulted in accounting numbers becoming less useful as a benchmark for
SARS to assess tax risk from a tax administration perspective. Entities that enter into large volumes of
transactions involving such financial instruments have to make numerous adjustments between
information presented for financial reporting purposes and information required for tax purposes,
which requires complex systems and can result in inaccuracies. This resulted in the introduction of a
set of rules into the Act from 2014 to simplify the determination of the taxable income of financial
instruments for certain entities with high volumes of these instruments. This regime is contained in
s 24JB.
The provisions of s 24JB apply to FRYHUHGSHUVRQV.
These are persons who are likely to have large volumes of transactions where the complexities
described above will exist. A covered person is defined as (definition of ‘covered person’ in
s 24JB(1))
l any authorised user, as GH㸚QHG LQ V RI WKH Financial Markets Act, that is a company (i.e.
brokers that are members of the JSE), excluding companies of which the principal trading
activities constitute the activities of a treasury operation
l the South African Reserve Bank
l any bank, branch, branch of a bank or controlling company as defined in s 1 of the Banks Act (for
example local banks, local branches of foreign banks, foreign branches of local banks and
controlling companies in respect of banks)
l certain companies or trusts that form part of a banking group (as defined in s 1 of the Banks Act).
Insurance companies, companies that do not form part of a banking group where these
insurance companies hold more than 50% of the shares and subsidiaries of insurance companies
are specifically excluded.
Taxpayers that fall under this provision are required to include or deduct amounts recognised in profit
or loss in their income for financial instruments measured at fair value in profit or loss for accounting
purposes (s 24JB(2)). Certain exceptions exist for amounts where this treatment would disturb the
established tax system, for example dividends or foreign dividends received in respect of such
532
instruments (s 24JB(2)(a) and (b)). Where amounts are taken into account on this basis for purposes
of determining a taxpayer’s taxable income, these amounts are disregarded when they are actually
received or incurred (s 24JB(3)).
For years of assessment commencing on or after 1 January 2018, a specific deduction for doubtful
debts of certain covered persons was introduced (s 11(jA)). This provision applies to banks,
branches and branches of banks as defined in s 1 of the Banks Act as well as companies and trusts
that are covered persons, as indicated above, on the basis that they form part of a banking group.
The application of the specific rule is limited to these entities as they are highly regulated and
subjected to stringent capital requirements. This should eliminate the risk of manipulation of their
impairment allowances for purposes of a tax deduction. It replaces a SARS directive that was issued
in relation to the tax treatment of doubtful debts by banks.
The covered persons to whom the provision applies are entitled to the following deductions for
doubtful debts:
l 25% of the impairment allowance determined in accordance with IFRS 9 in respect of debts other
than those that fall into one of the two categories described below.
l 40% of the impairment allowance determined for debts for which the impairment allowance is
measured in a manner that reflects lifetime expected credit losses in terms of IFRS 9, but that do
not fall into the default category below. This would be debts for which the credit risk has
increased significantly since initial recognition.
l 85% of the impairment allowance relating to amounts in default, as determined by applying the
criteria set out in paras (a)(ii) to (vi) and (b) of the definition of ‘default’ in Regulation 67 of the
regulations issued in terms of s 90 of the Banks Act to the credit exposure, including retail
exposure.
The allowance deducted in a year of assessment must be included in the income of the person to
whom it was granted in the following year of assessment.
533
17 Capital gains tax (CGT)
Alta Koekemoer

l explain the scope of CGT
l determine the persons liable for CGT
l explain the difference between how residents and non-residents are subject to CGT
l list the four building blocks and explain how these building blocks are applied in
the CGT calculation
l calculate a person’s taxable capital gain or assessed capital loss for the year of
assessment
l determine how CGT is calculated on assets held on valuation date and disposed
of after valuation date
l understand the rules for determining the market value of assets for CGT
l know which capital gains and losses must be disregarded, rolled over, attributed
or limited
l understand the CGT consequences of certain events for various entities and per-
sons, such as partnerships, trusts, insolvent and deceased estates
l understand the CGT consequences at the death of an individual
l recognise the various CGT anti-avoidance rules
l recalculate a person’s taxable capital gain or assessed capital loss where certain
events occurred in previous years of assessment, and
l apply the final steps in the CGT calculation required to include the taxable capital
gain in the taxable income.
Contents
Page
17.1 Overview ........................................................................................................................... 537
17.2 The scope of CGT ............................................................................................................. 538
17.3 Persons liable for CGT (par 2) .......................................................................................... 539
17.3.1 Residents (par 2(1)(a))...................................................................................... 540
17.3.2 Non-residents (par 2(1)(b) and par (2(2)) ........................................................ 540
17.3.3 Withholding tax applicable to the disposal of immovable property in South
Africa by non-residents (s 35A) ........................................................................ 541
17.4 The basic rules of CGT ..................................................................................................... 542
17.5 Determination of taxable capital gain and assessed capital losses (paras 3 to 10) ....... 543
17.6 The definition of ‘asset’ (par 1) ......................................................................................... 546
17.7 Disposals (paras 11, 12 and 13) ...................................................................................... 547
17.7.1 Disposal events (par 11(1)) .............................................................................. 548
17.7.2 Non-disposals (par 11(2)) ................................................................................. 548
17.7.3 Deemed disposals (par 12 and s 9H) .............................................................. 549
17.7.4 Time of disposal (par 13) .................................................................................. 554
17.7.5 Disposals by spouses married in community of property (par 14) ................. 556
17.8 Base cost .......................................................................................................................... 556
17.8.1 Qualifying expenditure included in base cost (par 20(1))................................ 557
17.8.2 Qualifying expenditure excluded from base cost (par 20(2) and s 23C) ........ 561
17.8.3 Reduction of base cost (par 20(3)) ................................................................... 561
17.8.4 Concession or compromise in respect of debt (par 12A) ................................ 562
17.8.4.1 Is there a debt benefit? (the definitions of ‘debt’ and ‘debt
benefit’ in par 12A(1)) ..................................................................... 563
535
Page
17.8.4.2
Is the debt benefit specifically excluded from the provisions of
par 12A? (par 12A(6)) ..................................................................... 564
17.8.4.3 What was the purpose of the debt benefit (what was the debt
used for)? (paras 12A(2) to 12A(5)) ................................................ 566
17.8.4.4 The interaction between the provisions of par 12A (reducing
base cost when there is a concession or compromise) and par
20(3) (reducing base cost when the underlying expenditure is
reduced).......................................................................................... 569
17.8.5 Cancellation of contracts (par 20(4)) ................................................................ 569
17.8.6 Limitation of expenditure (par 21) ..................................................................... 570
17.8.7 Donations tax paid by donor or donee (par 22 read with par 20(1)(c)(vii)
and (viii)) ........................................................................................................... 570
17.8.8 Immigrants (par 24) .......................................................................................... 572
17.8.9 Determining base cost of pre-valuation date assets (paras 25 to 27) ............. 572
17.8.10 Valuation date value in respect of s 24J interest-bearing instruments
(par 28).............................................................................................................. 578
17.8.11 Market value of assets on valuation date (par 29) ........................................... 578
17.8.12 Time-apportionment base (TAB) cost (par 30) ................................................. 578
17.8.13 Market value of assets (par 31) ........................................................................ 585
17.8.14 Identical assets (par 32) ................................................................................... 586
17.8.15 Part disposals (par 33)...................................................................................... 586
17.8.16 Debt substitution (par 34) ................................................................................. 589
17.9 Proceeds ........................................................................................................................... 590
17.9.1 Amounts excluded from the definition of ‘proceeds’ (par 35(3))...................... 591
17.9.2 Shares issued by a resident company in exchange for shares in a foreign
company (par 35(1A))....................................................................................... 591
17.9.3 Disposal of certain debt claims (par 35A) ........................................................ 591
17.9.4 Incurred and accrued amounts not quantified (s 24M) .................................... 591
17.9.5 Disposal of assets for unaccrued amounts of proceeds (par 39A) ................. 592
17.9.6 Disposals and donations not at arm’s length or to a connected person
(par 38).............................................................................................................. 592
17.10 Exclusions, roll-overs and attributions .............................................................................. 593
17.10.1 Primary residence exclusion (paras 44 to 51A)................................................ 593
17.10.1.1 Important definitions (par 44).......................................................... 595
17.10.1.2 Apportionment of exclusion if interest is held by more than one
person (par 45(2)) ........................................................................... 595
17.10.1.3 Apportionment of capital gain or loss (par 46 to par 50) ............... 596
17.10.1.4 Relief where a primary residence is transferred from a company,
close corporation or trust (par 51 to par 51A) ................................ 600
17.10.2 Other exclusions (paras 52 to 64E and s 12Q) ................................................ 600
17.10.3 Roll-overs (paras 65 to 67D) ............................................................................. 607
17.10.3.1 Involuntary disposals (par 65) ........................................................ 608
17.10.3.2 Reinvestment in replacement assets (par 66) ................................ 610
17.10.3.3 Transfer of assets between spouses (par 67) ................................ 612
17.10.3.4 Other roll-overs (paras 65B, 67B, 67C and 67D) ........................... 613
17.10.4 Attribution of capital gains (paras 68 to 73) ..................................................... 614
17.10.5 Limitation of losses (paras 15 to 19, 37, 39 and 56) ........................................ 617
17.10.5.1 Certain personal-use aircraft, boats, rights and interests (par 15) 617
17.10.5.2 Intangible assets acquired prior to the valuation date (1 October
2001) (par 16) ................................................................................. 617
17.10.5.3 Forfeited deposits (par 17).............................................................. 618
17.10.5.4 Options (par 18) .............................................................................. 618
17.10.5.5 Shares in a dividend-stripping transaction (par 19) ...................... 618
17.10.5.6 Interest in a company holding certain personal-use aircraft,
boats, rights and interests (par 37)................................................. 620
17.10.5.7 Assets disposed of to a connected person (par 39) ...................... 620
17.10.5.8 Debt owed by connected person (par 56) ..................................... 620
536
17.1 Chapter 17: Capital gains tax (CGT)
Page
17.11 CGT for different entities or persons................................................................................. 621
17.11.1 Companies (paras 74 to 77) ............................................................................. 621
17.11.1.1 Company distributions: Company level consequences (par 75) ... 622
17.11.1.2 Company distributions: Shareholder level consequences
(paras 75 to 77 and s 40C) ............................................................. 623
17.11.2 Trusts (paras 80 to 82) ...................................................................................... 628
17.11.2.1 Trust distributions ............................................................................ 628
17.11.2.2 Treatment of capital gains and losses in respect of a disposal by
a trust (paras 80(1) to 80(2) ............................................................ 629
17.11.2.3 Distributions to another trust ........................................................... 629
17.11.2.4 Distributions to an exempt entity ..................................................... 630
17.11.2.5 Non-resident trusts (par 80(3)) ....................................................... 630
17.11.2.6 Base cost of a discretionary interest (par 81) ................................. 630
17.11.2.7 Death of a special trust’s beneficiary (par 82) ................................ 630
17.11.3 Insolvent estates (par 83) ................................................................................ 630
17.11.4 Deceased persons and deceased estates (par 9HA and s 25) ...................... 631
17.11.5 Partnerships (par 36) ........................................................................................ 634
17.12 Miscellaneous anti-avoidance rules and other special rules ........................................... 635
17.12.1 Value-shifting arrangements (par 23) ............................................................... 635
17.12.2 Reacquired financial instruments (par 42) ....................................................... 635
17.12.3 Pre-sale dividends treated as proceeds (par 43A) .......................................... 635
17.12.4 Leasehold improvements.................................................................................. 636
17.12.5 Transactions in foreign currency (par 43) ........................................................ 637
17.12.6 Base cost of assets of controlled foreign companies (par 43B) ...................... 638
17.12.7 Foreign currency assets and liabilities (paras 84 to 96) .................................. 638
17.13 Final step in the CGT calculation and changes to capital gains or losses in
subsequent years ............................................................................................................. 638
17.13.1 Further capital gains or losses in the case of post-valuation date assets in
terms of paras 3(b)(i), (ii) and 4(b)(i), (ii) .......................................................... 639
17.13.2 Re-determination of pre-valuation date assets in terms of paras 25(2)
and (3) ............................................................................................................... 639
17.1 Overview
Capital gains tax (CGT) was introduced into our South African tax legislation on 1 October 2001. Prior
to this date, any profits on the sale of capital assets were not subject to tax. The introduction of CGT
in 2001 changed this and taxpayers that now dispose of assets need to consider the possible CGT
implications.
The disposal of an asset by a taxpayer will ultimately result in either a taxable capital gain or an
assessed capital loss. The taxable capital gain of a person in a year of assessment is included in his
taxable income and is therefore subject to normal tax. Any assessed capital loss cannot be set off
against taxable income and has to be carried forward to the next year of assessment.
CGT is not a separate tax, like donations tax or estate duty. As CGT is regarded as a tax on income,
it is incorporated into the Income Tax Act. The CGT consequences of the disposal of assets are
determined under the Eighth Schedule to the Act. Section 26A forms the link between the Act and the
Eighth Schedule by including taxable capital gains into taxable income.
Remember
Taxable capital gains are subject to normal tax. CGT is not a separate tax.
References in this chapter to the Schedule are references to the Eighth Schedule, while references to
paragraphs are references to paragraphs of the Eighth Schedule. The following mind map in
Figure 17.1 provides a summary of this chapter:
537
Calculation of taxable
Scope of CGT (17.2)
capital gain/assessed
capital loss (17.5)
Consider roll-overs,
exclusions, attributions,
Basic rules: limitations (17.10)
Building blocks
(17.4)
Consider the different

entities and special
rules (17.11 & 17.12)
Persons liable (17.3)
Final steps (17.13)
17.2 The scope of CGT

While the Eighth Schedule deals with capital gains and losses on the disposal of assets, there is no
section in the legislation that prescribes whether a gain is capital or revenue in nature (except for
s 9C that deals with certain share disposals – refer to chapter 14 for further information regarding
s 9C).
To determine whether the disposal of an asset will result in a capital gain, it first has to be determined
whether the proceeds from the disposal are revenue or capital in nature by applying basic gross
income principles. If the proceeds from the disposal are regarded as revenue in nature, they will be
included in gross income in the framework for the calculation of taxable income and will not be
subject to CGT.
l Proceeds that are taken into account for normal tax purposes as gross
income are specifically excluded from the proceeds that are used to
calculate a capital gain or loss for CGT purposes.
Please note!
l Any expenditure allowed for normal tax purposes is excluded in a similar
way from the base cost that is used to calculate a capital gain or loss for
CGT purposes.
As a general rule, the principal Act takes precedence over the Eighth Schedule. Whatever is included
in gross income should not be taxed under the Eighth Schedule. This brings one to the golden rule:
all gains must either be dealt with under the principal Act or under the Eighth Schedule.
The following diagram illustrates the effect of this golden rule:
Proceeds from Provisions Calculation of gain where asset is
Include in taxable income
disposal applicable sold
Revenue in nature Principal Act Include proceeds (or recoupment) The amount is included
in gross income. in taxable income.
Deduct expenditure or allowance
in terms of principal Act.
Capital in nature Eighth Schedule Calculate proceeds (exclude any Apply inclusion rate to the
gross income amounts). amount and include only
Deduct base cost (exclude any that portion in taxable
deduction allowed in terms of income using the provi-
principal Act). sions of the Eighth
Schedule.
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17.2–17.3 Chapter 17: Capital gains tax (CGT)
The following example illustrates the way a gain should be treated in terms of both the principal Act
and the Eighth Schedule when an asset is sold:
Example 17.1. Treatment of a gain when an asset is sold
Kunene (Pty) Ltd purchased a used manufacturing machine for R500 000 (excluding VAT) on
1 November 2017 and brought it into use in a process of manufacturing on that date. Kunene’s
year-end is 31 December. In May 2018 the machine was sold for R650 000 (excluding VAT) and
not replaced. The machine was used in a process of manufacturing until May 2018.
Assume that Kunene’s taxable income for the year ended 31 December 2018, before taking the
above information into account, is R1,2 million.
Calculate the taxable income of Kunene (Pty) Ltd for the year of assessment ended
31 December 2018. Indicate how the transactions concerning the machine affect other taxable
income, showing the net effect of the principal Act separate from the net effect of the Eighth
Schedule.
SOLUTION
Calculation of taxable income:
Other taxable income ............................................................................... 1 200 000
Net effect of principal Act (excluding Eighth Schedule) on taxable
income:
Less: Section 12C allowance (R500 000 × 20%) .................................... (100 000)
Plus: Section 8(4)(a) recoupment
(R650 000 limited to R500 000 less R300 000 tax value) .............. 200 000 100 000
Net effect of Eighth Schedule on taxable income:

Calculate proceeds (exclude any income taxed in terms of the
principal Act):
Selling price .............................................................................................. 650 000
Less: Section 8(4)(a) recoupment ............................................................ (200 000)
450 000
Calculate base cost (exclude any deduction allowed in terms of
principal Act):
Cost price ................................................................................................. 500 000
Less: Section 12C allowance (R100 000 (2016) + R100 000 (2017)) ....... (200 000)
300 000
Net capital gain:
Proceeds................................................................................................... 450 000
Less: Base cost ........................................................................................ (300 000)
150 000
Taxable capital gain (@ 80%inclusion rate) is included in taxable
income ...................................................................................................... 120 000 120 000
Taxable income ........................................................................................ 1 420 000
When considering the scope of CGT, it is also important to consider that the Eighth Schedule only
applies to the disposal of assets on or after 1 October 2001 (also referred to as ‘the valuation date’).
Because the Eighth Schedule only applies to the disposal of assets on or after ‘the valuation date’,
the valuation date value of pre-valuation date assets needs to be determined in order to exclude the
portion of the capital gain that relates to the period before 1 October 2001. The calculation of the
valuation date value is discussed in 17.8.9.
17.3 Persons liable for CGT (par 2)

The Eighth Schedule refers to a person rather than a taxpayer, which means that every person is sub-
ject to the CGT rules contained in the Eighth Schedule, whether that person is chargeable with tax
and required by the Act to furnish a return, or not.
539
Both residents and non-residents are subject to the provisions of the Eighth Schedule.
When dealing with any tax consequences (including capital gains tax) of non-
Please note! residents, regard should firstly be given to the provisions of any double tax
agreements between South Africa and the non-resident’s country of residence.
17.3.1 Residents (par 2(1)(a))

South Africa has a residence-based tax system, which means that residents are taxed on their world-
wide income, irrespective of where their income was earned. CGT works on the same principle, in
that residents pay tax on capital gains resulting from the disposal of assets situated anywhere in the
world. It does not matter what type of asset it is or where in the world it is located.
17.3.2 Non-residents (par 2(1)(b) and par (2(2))

Contrary to the rules for residents, non-residents are only subject to CGT in South Africa on the
disposal of the following assets:
l immovable (fixed) property situated in South Africa
l any interest in immovable property situated in South Africa, and
l any assets (movable or immovable) that are effectively connected with a permanent
establishment of that non-resident in South Africa.
A permanent establishment is defined in the OECD Model Tax Convention as a

Please note! fixed place of business. This can include, for example, a branch or a factory of
a non-resident in South Africa.
Non-residents are not only subject to CGT on the disposal of physical immovable property situated in
South Africa, but also the disposal of any ‘interest’ in immovable property that is situated in South
Africa.
An ‘interest’ in immovable property situated in South Africa includes
l equity shares in a company
l the ownership of any other entity (including a trust), or
l a vested interest in the assets of a trust.
This means that if a non-resident disposes of his interest in immovable property (for example equity
shares in a company – see meaning of ‘interest’ above), and
l 80% or more of the market value of his interest at the time of its disposal is directly or indirectly
attributable to immovable property in South Africa (that is not held as trading stock), and
l the non-resident (together with his connected persons, if applicable), directly or indirectly, holds
at least 20% of the interest*,
then the resulting gain that the non-resident makes on the disposal of the interest will be subject to
CGT.
* This 20% rule does not apply where the interest is held in a vested trust.
l Immovable property includes rights to variable or fixed payments as con-

sideration for the working of, or the right to work mineral deposits, sources
and other natural resources.
l It is not clear whether the company referred to in par 2(2) must be
Please note! incorporated in South Africa. From the wording, it appears that this provision
applies to both South African and foreign companies. Also note that the
interest can be held indirectly. This provision may therefore be extremely
difficult to administer in practice.
540
Example 17.2. Non-residents and CGT

A resident of Nigeria (a natural person) owns 30% of a Nigerian company. The Nigerian com-
pany holds
l property in Nigeria with a market value of the equivalent of R1 million, and also
l 50% of the shares in a South African company that only owns property in South Africa with a
market value of R10 million.
Assume that the non-residents (both the natural person and the Nigerian company) intend to
dispose of their interests.
(a) Determine whether the Nigerian company will be subject to CGT in South Africa if it dis-
poses of its interest in the SA company.
(b) Determine whether the Nigerian resident (the natural person) will be subject to CGT in South
Africa if he disposes of his interest in the Nigerian company.
SOLUTION (a)
If the Nigerian company disposes of its interest in the SA company:
l The Nigerian company (a non-resident) owns equity shares in a company (the SA company).
l 80% or more of the market value of its interest in the company relates to immovable property
(the South African company only owns property in South Africa, i.e. 100% of R5 million).
l The Nigerian company holds at least 20% of the interest in the SA company (it owns 50% of
the equity shares).
As all the requirements for an ‘interest in immovable property’ situated in South Africa are met,
the Nigerian company will be subject to CGT in South Africa if it disposes of its interest in the
South African company.
SOLUTION (b)
If the Nigerian resident (the natural person) disposes of its interest in the Nigerian company:
l The Nigerian resident (a non-resident) owns equity shares in a company (the Nigerian com-
pany).
l 80% or more of the market value of his interest in the company relates to immovable
property (The Nigerian company owns property in Nigeria worth R1 million and 50% of the
shares in the SA company that owns only fixed property in SA worth R5 million (50% × R10
million). The total value of the assets of the Nigerian company is therefore R6 million. Of this
R6 million, R5 million is attributable to immovable property in South Africa (the interest in the
SA company). R5 million/R6 million = 83%, which exceeds the 80% required.
l The Nigerian resident holds at least 20% of the interest in the Nigerian company (he owns
30% of the equity shares).
As all the requirements for an ‘interest in immovable property’ situated in South Africa are met,
the Nigerian resident will therefore also be subject to CGT in South Africa if he disposes of his
interest in the Nigerian company.
Remember
The worldwide assets of residents and immovable property and assets attributable to a perma-
nent establishment in South Africa of non-residents are within what is known as the ‘CGT net’.
17.3.3 Withholding tax applicable to the disposal of immovable property in South Africa by
non-residents (s 35A)
As mentioned in 17.3.2, non-residents in South Africa are subject to CGT when they dispose of
immovable property situated in South Africa.
In order to facilitate the collection of this normal tax on capital gains from the non-resident, s 35A of
the Income Tax Act was introduced. Section 35A provides that a certain percentage of the proceeds
from the disposal of immovable property in South Africa by a non-resident (the seller) must be
withheld by the purchaser and paid over to SARS.
541
The obligation rests on the purchaser to withhold the following amounts from the amount payable by
him to the seller:
l 7,5% of the amount payable if the seller is a natural person
l 10% of the amount payable if the seller is a company, or
l 15% of the amount payable if the seller is a trust.
The purchaser must complete form NR02 and an IRP6(3) (both these forms can be obtained from
www.sars.gov.za). These forms must then be submitted, together with the payment of the amount
withheld, to SARS within 14 days (if the purchaser is a resident) or 28 days (if the purchaser is a non-
resident).
These withholding tax provisions, however, do not apply if the amounts payable by the purchaser to
the seller in respect of the acquisition of the property in total do not exceed R2 million. See chapter 3
for a detailed discussion of s 35A.
Example 17.3. Withholding of tax from non-resident individual
Marco, a non-resident, sells a South African residential property to Thabo, a South African
resident, for R10 million. The date of the sale is 10 June of the current year of assessment. Thabo
pays the R10 million using R800 000 of his cash savings and R9,2 million by means of a
mortgage bond.
Determine whether the buyer (Thabo) must withhold any tax from the selling price of R10 million
in terms of s 35A.
SOLUTION
Thabo must withhold R750 000 (7,5% of R10 million) from the amount paid to Marco. Marco will
only receive R9,25 million of the selling price. The R750 000 must be paid over to SARS within 14
days after 10 June.
The R750 000 withheld in terms of s 35A is a prepaid tax in respect of Marco’s liability for normal
tax for the current year of assessment. The s 35A withholding tax is therefore not a final tax.
Marco (the non-resident) still needs to submit a tax return to SARS.
17.4 The basic rules of CGT

Capital gains that are taxed are those derived on assets that are disposed of on or after 1 October
2001 (the date CGT was introduced).
l Where assets were acquired before 1 October 2001, the increase in the value of the asset up to
1 October 2001 is excluded for CGT purposes. CGT is only levied on the increase on or after
1 October 2001.
l Where assets were acquired on or after 1 October 2001, the full increase in the value of the asset
is included for CGT purposes.
In order to calculate a capital gain or loss, four requirements have to be met:
(1) There has to be an asset. The definition is wide enough to include virtually any asset.
(2) There must have been a disposal of the asset during the year of assessment. A disposal is the
event that triggers CGT, which includes deemed disposals.
(3) The base cost of the asset must be determined. In general terms, the base cost of an asset
includes the following:
l acquisition cost
l improvement cost
l direct cost in respect of the acquisition and disposal of the asset.
(4) The proceeds on disposal of the asset must be determined (normally referred to as the selling
price of the asset).
Remember
These four requirements (asset, disposal, base cost and proceeds) are considered to be the four
building blocks of CGT. If all four requirements are not present, there cannot be a capital gain or
loss. These four requirements are defined in par 1 of the Eighth Schedule.
542
17.5 Determination of taxable capital gain and assessed capital losses (paras 3
to 10)
If a disposal or deemed disposal of an asset occurred during the year of assessment, the capital
gain or loss should be calculated using the following formula:
Proceeds LESS Base cost EQUALS Capital gain/loss
The following flowchart illustrates the process of determining the taxable capital gain to be included
in taxable income:
Income Tax Act Eighth Schedule

Gross Income .............................. xxx Disposal or deemed disposal of asset
Less: Exempt income .................. (xx)
Income ........................................ xxx Proceeds less base cost
Less: Deductions ....................... (xx)
Plus: Taxable capital gain ........... xxx Capital gain Capital loss
Less: s 11F deduction ................ (xx)
Less: s 18A donations (Apply exclusion/roll-overs)
deduction ....................................
(xx)
= Taxable income ....................... xxx (Apply attributions/limitations)
Apply rates of tax ........................ xxx
Less: Rebates (xx) Sum of all capital gains or losses
= Normal tax payable xxx
Reduce by annual exclusion
(Only natural persons and special trusts)
Aggregate capital gain Aggregate capital loss
Deduct previous assessed capital loss
Net capital gain Assessed capital loss
@ Inclusion rate Carried forward
Taxable capital gain
The following terms in the flowchart can be further explained as follows:

Capital gains or losses (paras 3 and 4)
l Where the proceeds exceed the base cost of the asset, a capital gain is calculated.
– Various capital gains must be disregarded or excluded (see 17.10.1 to 17.10.2) .
– Certain capital gains may be rolled-over. The recognition of these gains is delayed for CGT
purposes until a future event (see 17.10.3).
– Certain gains resulting from a donation can be attributed to the donor (see 17.10.4).
l Where the base cost exceeds the proceeds of the asset, a capital loss is calculated.
– Various capital losses must be disregarded or limited (see 17.10.5).
Please note! A capital gain or loss is determined separately in respect of each asset disposal
during a particular year of assessment.
543
Certain events could require that a capital gain or loss that was calculated on the disposal of an
asset in a previous year of assessment, will have to be re-determined in the current year of assess-
ment, for example where contracts are cancelled (see 17.8.5 and 17.13.1).
Sum of all capital gains or losses

Once the capital gains or losses for each asset that is disposed of are calculated, all the capital
gains and losses are added together (aggregated or totalled).
Annual exclusion (par 5)

Natural persons and special trusts are entitled to an annual exclusion of R40 000 against totalled
capital gains and losses. The annual exclusion is increased to an amount of R300 000 during the
year of assessment in which the taxpayer dies. There is no annual exclusion available to companies
and ordinary trusts.
A ‘special trust’, as defined in par (a) of the definition in s 1 of the Act, is an entity that is created
solely for the benefit of a person or persons (provided that they are relatives) with a disability as
defined. The disability must prevent them from earning sufficient income for their maintenance or
from managing their own financial affairs.
Not all special trusts qualify for the annual exclusion. A ‘special trust’, as defined in par (b) of the
definition in s 1 of the Act, includes a testamentary trust with at least the youngest beneficiary
younger than 18 years of age. This type of trust is not considered a special trust for CGT purposes
and will not qualify for the annual exclusion or any of the special provisions available to the par (a)
special trusts. The only exception to this is the CGT inclusion rate of 40% that is available to both
special trusts as defined (see below for further information regarding the CGT inclusion rate).
Remember
Paragraph 10 determines the inclusion rate of a special trust (which includes both paras (a) and
(b) of the definition) at 40% BUT the rest of Eighth Schedule only refers to a special trust as
contemplated in par (a) of the definition of the Act.
Apart from a special trust, there is no annual exclusion available to legal persons such as
companies and trusts.
The unused annual exclusion available to natural persons and special trusts cannot be carried for-
ward to a following year of assessment. For example, if an individual realises a capital gain of R5 000
in a specific year, then no taxable capital gain would be included in his taxable income for that year
of assessment. This will result in the ‘unused’ balance of R35 000 (R40 000 – R5 000) being ‘lost’ as it
cannot be carried forward to the following year.
Aggregate capital gain or loss (paras 6 and 7)
An aggregate capital gain or loss is the sum of a person’s capital gains or losses for the year (i.e. the
total of all capital gains and losses), less the annual exclusion for the year (applicable only to natural
persons and special trusts). It should be noted that a capital loss is also reduced by the annual
exclusion. For example, if an individual realises a capital loss of R5 000 in a specific year, there will
be no assessed capital loss for that year of assessment, and also no capital loss to carry forward to
the following year of assessment.
Remember
The annual exclusion not only reduces a natural person or special trust’s total capital gains, but
also reduces total capital losses (if applicable).
Net capital gain or assessed capital loss (paras 8 and 9)

A person’s net capital gain or assessed capital loss for the year of assessment is the
l aggregate capital gain or loss for the current year
l less the assessed capital loss brought forward from the previous year.
The assessed capital loss cannot be deducted from a person’s income. It is carried forward to the
following year of assessment. The assessed capital loss is carried forward regardless of whether the
person (which includes a company) is carrying on a trade in a following year of assessment or not.
544
An assessed capital loss can be reduced with an amount of a debt benefit

Please note! (see 17.8.4 and par 12A).
If a person has a net capital gain, it must be multiplied by the applicable inclusion rate, and the result
included in the normal taxable income.
If a person has an assessed capital loss, it is carried forward to the following year of assessment and
cannot be set off against taxable income.
Taxable capital gain (par 10)

The inclusion rates of net capital gains into the normal income tax calculation are as follows (par 10):
Natural persons and special trusts ..................................................................................................... 40%

An insurer’s individual policyholder fund ............................................................................................ 40%
An insurer’s untaxed policyholder fund .............................................................................................. 0%
An insurer’s company policyholder fund and a risk policy fund ......................................................... 80%
Companies, close corporations, ordinary trusts, cooperatives and other incorporated and
unincorporated bodies ........................................................................................................................ 80%
A partnership is not a separate taxable entity, therefore the gains realised by a partnership will be
brought into account proportionately in relation to each partner at the applicable inclusion rate. Public
benefit organisations (PBOs) and other entities that are exempt from normal income tax are in most
circumstances also exempt from CGT (see 17.10.2).
Since a person’s taxable capital gain is added to other taxable income and subject to normal tax, the
effective maximum rates of tax payable on capital gains in the 2018 year of assessment are as follows:
Natural persons and special trusts (assuming the person is taxed at the
maximum marginal rate) ............................................................................................ 40% × 45% = 18%
Ordinary trusts ........................................................................................................... 80% × 45% = 36%
Companies, close corporations and other bodies ..................................................... 80% × 28% = 22,4%
Inclusion in taxable income

Once a person’s taxable capital gain has been determined, it is included in his taxable income in
terms of s 26A of the Act. The taxable capital gain may have an impact on the s 18A deduction for
donations to qualifying PBOs that limits the deductible amount to 10% of the taxpayer’s taxable
income. The taxable capital gain increases the s 18A limitation (refer to chapter 12 for further
information on s 18A).
The taxable capital gain may also have an impact on the s 11F deduction for retirement contributions
as it is taken into account when calculating the 27,5% limitation in respect of taxable income (refer to
chapter 7 for further information on s 11F).
Once the amount to be included in taxable income has been determined, the normal rates of tax are
applied to taxable income to determine the normal tax payable. The capital gain is therefore subject
to normal income tax.
Where the taxpayer has an assessed loss (not an assessed capital loss), the taxable capital gain will
reduce the assessed loss provided it is locally derived. Section 20 of the Act prevents the set off of a
foreign assessed loss against any amount derived from carrying on any trade in South Africa. It also
prevents a foreign assessed loss from being set off against a taxable capital gain, whether derived in
South Africa or not.
Example 17.4. Determination of taxable capital gain

Kabelo Zonke realises a capital gain of R60 000 on the sale of his holiday home, and a capital
loss of R10 000 on the sale of shares in his investment portfolio. He also earned other taxable
income of R200 000 during the same year of assessment. In the previous year of assessment he
had an assessed capital loss of R4 000.
Determine Kabelo’s taxable capital gain and taxable income for the year.
545
SOLUTION
Calculation of taxable capital gain: ...............................................................................
Capital gain on the sale of his holiday home ............................................................... 60 000
Capital loss on the sale of shares ................................................................................ (10 000)
Sum of capital gains and losses ................................................................................... 50 000
Less: Annual exclusion ................................................................................................ (40 000)
Aggregate capital gain ............................................................................................... 10 000
Less: Assessed capital loss (previous year) ................................................................ (4 000)
Net capital gain ............................................................................................................ 6 000
Taxable capital gain (@ 40 %) ..................................................................................... 2 400
Other taxable income ................................................................................................... 200 000
Taxable capital gain ..................................................................................................... 2 400
Taxable income............................................................................................................ 202 400
Example 17.5. Determination of assessed capital loss

Assume the same facts as in Example 17.4, except that Kabelo Zonke now realises a capital loss
of R110 000 on the sale of shares in his investment portfolio.
Determine Kabelo’s assessed capital loss and taxable income for the year.
SOLUTION
Calculation of taxable capital gain: ...............................................................................
Capital gain on the sale of his holiday home ............................................................... 60 000
Capital loss on the sale of shares ................................................................................ (110 000)
Sum of capital gains and losses ................................................................................... (50 000)
Less: Annual exclusion ................................................................................................ 40 000
Aggregate capital loss ................................................................................................ (10 000)
Less: Assessed capital loss (previous year) ................................................................ (4 000)
Assessed capital loss .................................................................................................. (14 000)
Other taxable income ................................................................................................... 200 000
Assessed capital loss (cannot be set-off and is carried forward) ................................ nil
Taxable income............................................................................................................ 200 000
Note
Please note that the annual exclusion reduces the capital loss, and not the assessed capital loss
Therefore, the capital loss is reduced with the annual exclusion in Year 1. Thereafter the capital
loss of R14 000 is carried forward each year until a capital gain arises. The assessed capital
loss can then be set off against the capital gain.
As mentioned in 17.4, in order for a capital gain or loss to be calculated, we need to have all four
building blocks present:
(1) There has to be an asset (see 17.6).
(2) There must have been a disposal or a deemed disposal of the asset during the year of
assessment (see 17.7).
(3) The asset must have a base cost (see 17.8).
(4) There must be proceeds on the disposal of the asset (see 17.9).
Let us start off by looking at the first building block, an asset.
17.6 The definition of ‘asset’ (par 1)

There has to be an asset before a CGT event can take place. This is the first building block of CGT
(see 17.4).
546
The definition of an ‘asset’ in par 1
Property of any nature, whether

l movable or immovable A right or an interest of
and any nature in such
l corporeal or incorporeal
This excludes any currency, but in-
cludes any coin made mainly from gold
or platinum.
The definition above includes both non-capital assets (for example trading stock) and capital assets
(for example land and buildings).
Remember
When dealing with non-capital assets (for example trading stock), the following needs to be
kept in mind:
l Any amount already taken into account for income tax purposes will be excluded from
proceeds and base cost (refer to 17.2).
l When trading stock is acquired, the acquisition cost is claimed as a deduction in the
calculation of taxable income in terms of the general deduction formula. Trading stock will
therefore have a base cost of Rnil (acquisition costs less deduction allowed for normal tax
purposes).
l When trading stock is disposed of, the resultant proceeds are included in gross income.
Proceeds for CGT purposes will therefore also be Rnil (proceeds less amount already
taxed for normal tax purposes).
l The result of these exclusions will be a CGT effect of Rnil on non-capital assets (like
trading stock) as the proceeds and base cost have already been taken into account for
normal income tax purposes.
The definition of an asset is wide enough to include virtually any asset. This includes fixed property,
listed or unlisted shares, gold coins, machinery, plant, vehicles, aircraft and trading stock. Intellectual
property, such as trademarks, copyright and goodwill are also included. Any debit loan (whether
interest bearing or not), fixed deposits, as well as outstanding debtors fall within the definition of an
‘asset’.
A deposit of cash with a bank does not constitute currency and it is not excluded
Please note! from the definition of an asset. The asset is the right to claim the amount
deposited from the bank.
Rights that can be disposed of or turned into money (for example personal rights) are also
considered assets for CGT purposes, for example land claims (see 17.10.2).
*
Remember
l The definition of an asset excludes currency, but includes coins that are made mainly of
gold or platinum.
l Kruger Rands, for example, will be considered to be an asset.
l Where cash is donated, there would be no capital gains tax as cash is not an asset
(currency is excluded). Donations tax would, however, need to be considered.
17.7 Disposals (paras 11, 12 and 13)

For a transaction to be subject to CGT it must either qualify as a disposal or as a deemed disposal
(second building block of CGT – see 17.4). Disposals, as well as specific events that are deemed not
to be disposals, are listed in par 11, while events that are deemed disposals are listed in par 12.
Paragraph 13 deals with the timing of disposals. It is important to determine whether a transaction is
a disposal or not, as CGT is not levied on non-disposals.
547
17.7.1 Disposal events (par 11(1))

A disposal arises when there is an event, act, forbearance or operation of law that results in the
creation, variation, transfer or extinction of an asset and includes the following occurrences:
Par 11(1) Disposal event
(a) Sale, donation, expropriation, conversion, granting, cession, exchange or any other alienation
or transfer of ownership of an asset.
(b) Forfeiture, termination, redemption, cancellation, surrender, discharge, relinquishment, release,
waiver, renunciation, expiry or abandonment of an asset.
(c) Scrapping, loss or destruction of an asset.
(d) Vesting of an interest in a trust asset in a beneficiary.
(e) Distribution of an asset by a company to a holder of shares.
(f) Granting, renewal, extension or exercising of an option.
(g) Decrease in value of a person’s interest in a company, trust or partnership as a result of a
‘value-shifting arrangement’.
Paragraph 11 defines a disposal in very broad terms. In general terms, a disposal has taken place
where a person held an asset at the beginning of a year and no longer holds it at the end of the year.
Example 17.6. Exchange of an asset is also deemed to be a disposal
Jacob Smith purchased a piece of land in 2010 for R200 000. In 2017 he entered into an
exchange transaction with Zanele Dube. The terms of the transaction were as follows:
l Jacob agreed to give Zanele land valued at R300 000 plus cash of R20 000.
l Zanele, in exchange, agreed to give Jacob her holiday home, valued at R320 000.
l In 2018, Jacob sold the holiday home for R340 000.
Calculate the CGT effects of these transactions for Jacob Smith.
SOLUTION
Land
In 2010, Jacob acquired the land for a base cost of R200 000.
As a result of the exchange with Zanele, there has been a disposal of the land in terms of
par 11(1)(a). As this is a barter transaction, the proceeds are equal to the market value. Jacob
received a holiday home valued at R320 000, but only R300 000 of this amount relates to the
land. The remaining R20 000 relates to the cash paid to Zanele. Therefore, in 2017, Mr X will have
a capital gain of R100 000 (R300 000 (R320 000 – R20 000) proceeds less R200 000 base cost)
on the sale of the land.
Holiday home
The base cost of the holiday home is equal to the amount of expenditure incurred in acquiring it.
This is equal to the value by which Jacob’s assets have been reduced as a result of the
transaction. Jacob gave up land valued at R300 000 plus cash of R20 000, decreasing his assets
by R320 000. Therefore, in 2018, Jacob will have a capital gain of R20 000 (R340 000 proceeds
less R320 000 base cost).
17.7.2 Non-disposals (par 11(2))

The following events will not be regarded as disposals of assets and will therefore not give rise to
CGT:
Par 11(2) Non-disposal events
(a) The transfer of an asset by a person as security for a debt; or the release of the security by
the creditor who transfers the asset back to that person when the security is released.
(b) The issuing, cancellation, or extinction of a share in a company; or the granting of an option to
acquire a share or a certificate acknowledging a debt owed by the company.
continued
548
Par 11(2) Non-disposal events

(c) The issuing by a portfolio of a collective investment scheme (unit trust) of participatory in-
terests; or the granting by the scheme of an option to acquire interests in the scheme.
(d) The issuing of debt by or to that person.
(g) A disposal by a person in order to correct an error in the registration of immovable property in
his name.
(h) A transaction under which any security (or bond in respect of securities lending arrangements
entered into on or after 1 January 2017) is lent by a lender to a borrower under a ‘securities
lending arrangement’.
(i) The vesting of a person’s asset in the Master of the High Court or in a trustee in consequence
of the sequestration of the estate of his or her spouse, or the subsequent release of the asset.
(k) When a marketable security (for example a share) is ceded or the rights released for a con-
sideration that consists of other marketable securities in the case directors of companies or
employees to which s 8A (employee share incentive arrangements prior to 26 October 2004)
was applicable.
(l) In respect of shares held in a company, where that company
l subdivides or consolidates those shares;
l converts shares of par value to no par value or of no par value to par value, or
l converts shares (either conversion of a close corporation to a company or the conversion
of a co-operative to a company) solely in substitution of shares held, and
– the proportionate participation rights and interests remain the same, and
– no other consideration (for example cash) passes in consequence of that subdivision,
consolidation or conversion.
(m) Where a person exchanges a qualifying equity share for another qualifying equity share as
contemplated in s 8B (broad-based employee share plans).
(n) Where any share (or bond in respect of any collateral arrangements entered into on or after
1 January 2017) has been transferred in terms of a collateral arrangement.
(o) Where a person disposed of an asset to a person and reacquired that asset from the same
person because of the cancellation or termination of the contract and both persons are
restored to their former positions.
17.7.3 Deemed disposals (par 12 and s 9H)

Certain events are deemed as disposals for the purpose of CGT. The deemed disposal provisions
(excluding the deemed disposal provisions relating to death) can be found in par 12 of the Eighth
Schedule as well as s 9H of the Act.
These deemed disposals generally have two purposes:
l firstly, to calculate a capital gain or loss in respect of certain situations (for example, when
moving an asset out of the CGT net), and
l secondly, to determine base cost in respect of certain situations (for example, when moving an
asset into the CGT net).
In terms of the general deemed disposal rules, a person is deemed to have disposed of an asset at
market value and is deemed to have immediately reacquired the asset at expenditure equal to that
market value (where applicable). The expenditure (market value) at the time of reacquisition must be
treated, where applicable, as an amount actually incurred for the purposes of par 20. In other words,
the market value at the time of reacquisition then become the asset’s base cost.
Remember
In some situations, the deemed disposals under par 12 are used to trigger a capital gain or loss,
and in other cases to establish a base cost equal to market value.
The following events are treated as deemed disposals in terms of par 12 and s 9H:
(1) Deemed disposal if a person commences to be a resident (par 12(2)(a)(i))
A non-resident who becomes a resident moves fully into the CGT net and will be subject to CGT
on his worldwide assets. However, any capital gains or losses that are attributable to the period
of ownership prior to the non-resident becoming a resident, must be disregarded.
549
The non-resident is deemed to have disposed of each of the relevant assets at a cost equal to
its market value and then to have reacquired it at a cost equal to the same market value. This
cost will then be the base cost of the asset. This rule does not apply to assets that were already
within the CGT tax net before residency. This deemed disposal is subject to the provisions of
par 24 (see 17.8.8).
This deemed disposal rule does not apply to
l immovable property (or an interest in immovable property) situated in South Africa or assets
of a ‘permanent establishment’ through which a trade is carried on in South Africa, and
l any right to acquire any marketable security contemplated in s 8A (employee share
incentive arrangements prior to 26 October 2004).
Remember
When a non-resident becomes a resident, the deemed disposal in terms of par 12 results in the
establishment of a base cost equal to market value and does not trigger a capital gain or loss.
(2) Deemed disposal if a person ceases to be a resident (s 9H(2) for persons other than
companies and s 9H(3)(a) for companies)
Where a taxpayer ceases to be a resident of South Africa, he (if it is a natural person) or it (if it is
a non-natural person like a company) is deemed to have disposed of all of its assets (with
certain exclusions).
This would be the case even if the taxpayer continues to have some operations in South Africa.
An example of this is where a taxpayer emigrates to another country but still rents out property
he owns in South Africa. The taxpayer is deemed to have disposed of all his assets at their
market value on the day before ceasing to be a resident. Excluded from this deemed disposal
are assets that will remain within the CGT net (typically fixed property located within South
Africa, since this type of asset is subject to CGT irrespective of the residency status of the
owner). The taxpayer is therefore deemed to have made a capital gain of an amount equal to
the market value of the relevant assets less its base cost.
The deemed disposal occurs before the taxpayer ceases to be a resident and any double tax
agreement between the taxpayer's new country of residence and South Africa must therefore
be ignored. The effect of this is that any double taxation agreement provision that exempts the
taxpayer from a possible CGT exit charge in South Africa, must be ignored. Section 9H was
amended after a decision of the Supreme Court of Appeal (in the Tradehold Limited case) to
confirm that the time of disposal takes place while the taxpayer is still a resident, i.e. just before
the taxpayer ceases to be a resident.
Remember
The deemed disposal rule in terms of s 9H is often referred to as the exit charge. A cessation of
residence will take place in the following circumstances:
l for a person other than a natural person cessation of residence takes place when that person
moves its place of effective management to another country, and
l for a natural person cessation of tax residence takes place when that individual permanently
leaves South Africa.
This deemed disposal rule does not apply to

l immovable property situated in South Africa (excluding an indirect interest in immovable
property in South Africa – see ‘please note’ block below)
l assets of a ‘permanent establishment’ through which a trade is carried on in South Africa
l qualifying equity shares in terms of s 8B (broad-based employee share plans) granted to
the person less than five years before the date on which the person ceases to be a resident
l equity instruments in terms of s 8C (employee share incentive arrangements after 26
October 2004) that have not yet vested at the time that the person ceased to be a resident,
and
l any right to acquire any marketable security contemplated in s 8A (employee share
incentive arrangements prior to 26 October 2004).
550
A person who ceases to be a South African resident is deemed to have also

disposed of his interests in or right to immovable property (at least 20% interest
Pleae note!
in an entity if 80% of the market value of the interest in that entity is attributable
to South African immovable property – see 17.3.2).
In addition to the possible CGT exit charge upon ceasing to be a resident, companies that
cease to be resident are also subject to dividends tax consequences (refer to chapter 19 for
further information with regard to dividends tax). Companies that cease to be resident are
deemed to have declared and paid a dividend in specie that is calculated as the difference
between
l the market value of all the shares in that company on the day immediately before the day on
which the company ceases to be a resident, and
l the sum of the contributed tax capital of all the classes of shares in the company on the
same date.
For dividends tax purposes such a dividend is deemed to have been declared to the
shareholders of the company according to their effective interest in the shares. The company
will be liable for the dividends tax.
See chapter 3 for a detailed discussion of s 9H.
Remember
When a person ceases to be a resident, the deemed disposal in terms of s 9H triggers a capital
gain or loss.
(3) Deemed disposal if a foreign company commences to be a controlled foreign company (CFC)
(par 12(2)(a)(ii))
A foreign company that becomes a CFC moves fully into the CGT net for purposes of s 9D.
The foreign company is deemed to have disposed of each of the relevant assets at a cost equal
to its market value and to have reacquired it at a cost equal to the same market value. This cost
will then be the base cost of the asset.
Remember
When a foreign company becomes a CFC, the deemed disposal in terms of par 12 results in the
establishment of a base cost equal to market value and does not trigger a capital gain or loss.
(4) Deemed disposal if a controlled foreign company (CFC) ceases to be a CFC other than by
becoming a resident (s 9H(3(b))
Where a foreign company ceases to be a CFC, other than by becoming a resident, it is a
deemed disposal for capital gains tax purposes (and income tax purposes) as the CFC moves
out of the CGT net.
The CFC is deemed to have disposed of all its assets at their market value on the day before
ceasing to be a CFC. Excluded from this deemed disposal are assets that will remain within the
CGT net (typically fixed property located within South Africa, since this type of asset is subject
to CGT irrespective of the CFC status of the owner). The CFC is therefore deemed to have
made a capital gain of an amount equal to the market value of the relevant assets less its base
cost (see chapter 3 for a detailed discussion of s 9H). Where a foreign company ceases to be a
CFC as a result of becoming a resident, the CGT consequences are dealt with in terms of par
12(4) (see point (5) of this paragraph),
Remember
When a CFC ceases to be a CFC other than by becoming a resident, the deemed disposal in
terms of s 9H triggers a capital gain or loss.
(5) Deemed disposal if a controlled foreign company (CFC) ceases to be a CFC as a result of
becoming a resident (par 12(4))
A foreign company that ceases to be a CFC as a result of becoming a resident moves fully into
the CGT net and will be subject to CGT on its worldwide assets. Where a company ceases to
be a CFC as a result of becoming a resident, it is deemed to have disposed of all its assets at
551
their market value on the day before ceasing to be a CFC, excluding those assets that are
already within the CGT net (typically fixed property located within South Africa, since this type
of asset is subject to CGT irrespective of the residency status of the owner).
Remember
When a CFC ceases to be a CFC by becoming a resident, the deemed disposal in terms of
par 12 results in the establishment of a base cost equal to market value and does not trigger a
capital gain or loss.
(6) Deemed disposal where a non-resident’s asset becomes an asset of his permanent establish-
ment in South Africa by any means other than acquisition (par 12(2)(b)(i))
When a non-resident brings a foreign asset into South Africa to use in his permanent establish-
ment in South Africa, such an asset is deemed to be disposed of and reacquired at market
value. There is no CGT effect, as only the base cost of the asset is established for future CGT
calculations.
Remember
When a non-resident moves assets into his permanent establishment in South Africa (i.e. into the
CGT net), the deemed disposal in terms of par 12 results in the establishment of a base cost
equal to market value and does not trigger a capital gain or loss.
(7) Deemed disposal if an asset ceases to be an asset of a non-resident’s permanent establishment

in South Africa by any means other than a disposal under par 11 (par 12(2)(b)(ii))
There is an immediate CGT effect as a capital gain or loss will be determined on the difference
between the market value of the asset at that time (proceeds) and the base cost of the asset.
There will be no CGT effect if that asset is sold at a later stage as the asset then falls outside
the CGT net.
Remember
When a non-resident moves assets out of his permanent establishment in South Africa (i.e. out of
the South African CGT net), the deemed disposal in terms of par 12 triggers a capital gain or
loss.
(8) Deemed disposal when a capital asset becomes trading stock (non-capital asset) (par 12(2)(c))
A person is deemed to have disposed of a capital asset if it becomes trading stock, for
example when the intended use of land is changed from a capital asset to trading stock by
subdividing the land and selling the plots. The capital gain will be calculated as the market
value of the capital asset on date of change in intention (proceeds) less the base cost of the
asset.
In terms of the rules dealing with trading stock, the market value of the capital asset on the date
that it becomes trading stock will be deductible as the cost of the trading stock for normal tax
purposes (s 22 of the Act).
Example 17.7. Deemed disposal when a capital asset becomes trading stock
Nthabi (Pty) Ltd deals in immovable property and land. Its financial year ends on the last day of
February. Nthabi’s land portfolio consists of 20 properties – 15 of these properties were acquired
with a speculative intention (i.e. they are owned as trading stock), while five of these properties
were acquired with a capital intention (i.e. they are owned as capital assets). On 31 January
2018 Nthabi changed its intention with regard to one of the five properties held as capital assets
and transferred the land to its speculative land portfolio (i.e. Nthabi changed its intention from
capital in nature to speculative in nature and this particular piece of land is now trading stock).
The original cost of the piece of land that was transferred to the speculative portfolio was
R500 000 when it was acquired in 2011. The market value of the piece of land for the entire
January 2018 was R1 500 000.
Determine the effect of the change of intention on Nthabi (Pty) Ltd’s taxable income for the 2018
year of assessment if you assume that this was the only CGT event in Nthabi’s 2018 year of
assessment.
552
SOLUTION
Nthabi (Pty) Ltd changed its intention from capital to revenue in nature when it moved the land
from a capital asset to trading stock.
In terms of the provisions of par 12 of the Eighth Schedule, a deemed disposal at market value
takes place on 30 January 2018 (in terms of par 13(1)(g)(i) the time of disposal in this case is the
date immediately before the day that the event occurs).
The change from capital asset to trading stock triggers the calculation of a capital gain or loss.
Calculation of taxable capital gain: R
Proceeds (market value on 30 January 2018) .......................................................... 1 500 000
Less: Base cost........................................................................................................ (500 000)
Net capital gain (there are not other capital gains or losses)..................................... 1 000 000
Taxable capital gain (@ 80 %) .................................................................................. 800 000
Opening stock (s 22(2)(b) read together with s 22(3)(ii)) ......................................... (1 500 000)
Closing stock (s 22(1)(a) read together with s 22(3)(ii)) ........................................... 1 500 000
Taxable capital gain .................................................................................................. 800 000
Taxable income......................................................................................................... 800 000
Remember
When a capital asset becomes trading stock, the deemed disposal in terms of par 12 triggers a
capital gain or loss.
(9) Deemed disposal when trading stock becomes a capital asset (par 12(3))
If a person does not dispose of trading stock, but instead begins holding it as a capital asset,
that person is deemed to have
l disposed of that trading stock the day before it ceased to be trading stock for a
consideration equal to market value (this is determined in terms of s 22(8) of the Act), and
l immediately reacquired it at a base cost equal to the same amount (i.e. market value).
Remember
When trading stock becomes a capital asset, the deemed disposal in terms of par 12 results in
the establishment of a base cost equal to market value and does not trigger a capital gain or
loss.
In terms of the rules dealing with trading stock, the market value of the trading stock will be
included as a recoupment in the person’s income (in terms of s 22(8)). This market value will
then be regarded as expenditure actually incurred in calculating the base cost of the asset. On
any subsequent disposal of the asset, the capital gain or loss will be an amount equal to the
proceeds of the disposal less the base cost determined when the asset became a capital
asset.
Example 17.8. Deemed disposal when trading stock becomes a capital asset
Nthabi (Pty) Ltd deals in immovable property and land. Its financial year ends on the last day of
February. Nthabi’s land portfolio consists of 20 properties – 15 of these properties were
acquired with a speculative intention (i.e. they are owned as trading stock), while five of these
properties were acquired with a capital intention (i.e. they are owned as capital assets). On
31 January 2018 Nthabi changed its intention with regard to one of the 15 properties held as
trading stock and transferred the land to its investment land portfolio (i.e. Nthabi changed its
intention from speculative in nature to capital in nature and this particular piece of land is now a
capital asset).
The original cost of the piece of land that was transferred to the investment portfolio was
R500 000 when it was acquired in 2011. The market value of the piece of land for the entire
January 2018 was R1 500 000.
Determine the effect of the change of intention on Nthabi (Pty) Ltd’s taxable income for the 2018
year of assessment if you assume that this was the only CGT event in Nthabi’s 2018 year of
assessment.
553
SOLUTION
Nthabi (Pty) Ltd changes its intention from revenue to capital in nature when it moved the land
from trading stock to a capital asset.
In terms of the provisions of par 12 of the Eighth Schedule, a deemed disposal at market value
takes place on 30 January 2018 (in terms of par 13(1)(g)(i) the time of disposal in this case is the
date immediately before the day that the event occurs).
The change from trading stock to capital asset does not trigger the calculation of a capital gain
or loss and is done to establish a base cost for the ‘new’ capital asset.
Calculation of CGT consequences:
The R1 500 000 market value is the ‘new’ base cost of the transferred land and will
be used for future disposals.
Opening stock (s 22(2)) ............................................................................................... (500 000)
Recoupment (s 22(8) recoupment at market value) .................................................... 1 500 000
Taxable income............................................................................................................ 1 000 000
(10) Deemed disposal when a personal-use asset becomes a non-personal-use asset (excluding
disposals under par 11) (par 12(2)(d))
This situation will, for example, arise when a person starts using a personal computer for
business purposes; it therefore becomes a capital asset used in the trade of that person. The
person will be deemed to have disposed of it at its market value and to have reacquired it at the
same value. The market value constitutes the base cost on the subsequent disposal of the asset.
Remember
l When a personal-use asset becomes a non-personal-use asset, the deemed disposal in
terms of par 12 results in the establishment of a base cost equal to market value and does
not trigger a capital gain or loss.
l This deemed disposal is not applicable to a company, as a company cannot hold a
personal-use asset.
(11) Deemed disposal when a non-personal-use asset becomes a personal-use asset (par 12(2)(e))
This would occur, for example, if a delivery vehicle that was previously used in a person’s trade
is now being used only for private purposes. It then becomes that person’s personal-use asset.
A capital gain or loss will arise on the difference between the market value at the time of the
change in use and its base cost. The subsequent disposal of the asset will give rise to a capital
gain or capital loss, but since the asset has now become a personal-use asset, the capital gain
or loss will be disregarded upon the subsequent disposal in terms of par 53.
Remember
When a non-personal-use asset becomes a personal-use asset, the deemed disposal in terms of
par 12 triggers a capital gain or loss.
(12) A deemed disposal arises on the transfer of an asset between the funds of a long-term insurer
(par 12(2)(f)).
When a long-term insurer transfers an asset from one of its policyholder funds to another, the
transferor fund will be deemed to have disposed of it at its market value and the transferee fund
will be deemed to have acquired it at the same value.
17.7.4 Time of disposal (par 13)

Most of the timing rules for the disposal of assets are provided in par 13. Timing rules are also
provided in other paragraphs, for example par 12, which provides for specific timing rules when
deemed disposals occurred.
554
The time of disposal is an important concept, because it may affect

l the rate at which a capital gain is taxed (any taxable capital gain will
effectively be taxed at the taxpayer’s marginal rate of tax for the year of
Please note! assessment in which the disposal occurs), and
l whether a capital loss may be set off against a capital gain (normal tax will
be payable on the taxable capital gain if the capital loss was only incurred in
a subsequent year of assessment).
Paragraph 13(1) provides the time of disposal of an asset in two situations:

(1) When a specific event, act, forbearance or operation of law occurs, the time-of-disposal rules
apply when that stipulated event occurs, whether it precedes a change of ownership or, for
some unforeseen reason, a change of ownership never occurs. Ten different events are then
specified:
Specific event, act, forbearance or operation of Time of disposal
law
An agreement for the disposal of the asset Date on which the suspensive condition is
subject to a suspensive condition satisfied
An agreement not subject to a suspensive Date of conclusion of agreement (usually the
condition date when the offer is accepted by the seller)
Distribution of an asset on which the beneficiary The date on which the interest vests
holds a vested interest
Where a s8C equity instrument (employee share The date that the equity instrument vests in that
incentive arrangements after 26 October 2004) beneficiary in terms of s 8C
is granted to a beneficiary by a trust
Donation of an asset Date of compliance with all the legal require-
ments for a valid donation, which includes, for
example, acceptance of the donation by the
recipient
Expropriation of an asset Date on which the taxpayer receives the full
compensation for the expropriation that is
agreed to or finally determined
Conversion of an asset Date on which the asset is converted
Granting, renewal or extension of an option Date on which the option is granted, renewed,
or extended
Exercise of an option Date on which the option is exercised
Termination of an option to acquire a share, Date on which the option terminates
participatory interest or debenture of the
company
In the case of a suspensive condition, the time of disposal is suspended pending the
occurrence a specified event. An example of a suspensive condition is a clause in a sales
agreement stating that the sale will only be confirmed if a mortgage bond is granted.
Example 17.9. Time of disposal: Suspensive condition
Lindsay disposed of his luxury townhouse at Ballito to Nantha on 28 February 2018, subject to
Nantha being able to obtain a bond. On 30 June 2018, Nantha obtained the bond, and on
15 August 2018 the property was transferred into his name. Therefore the date of disposal would
be 30 June 2018, when the suspensive condition was fulfilled.
(2) When none of events in (1) above apply, the date of disposal will be the date on which owner-
ship of the asset changes.
555
Apart from par 13, certain other paragraphs, for example par 12 (deemed disposals), also
provide specific timing rules, of which the most important are set out in the table below:
Type of disposal (par 12 and other) Time of disposal
Scrapping, loss or destruction of an asset The date when
l the full compensation is received, or
l if no compensation is payable, the later of
the following dates:
– the date when the scrapping, loss or
destruction is discovered, or
– the date of establishing that no compen-
sation will be payable.
Extinction of an asset including by way of for- Date of the extinction of the asset
feiture, termination, redemption, cancellation,
surrender, discharge, relinquishment, release,
waiver, renunciation, expiry or abandonment
Distribution of an asset by a company to a The date on which that asset is distributed as
holder of shares under par 75 contemplated in par 74 (i.e. the earlier of the
date on which the distribution is paid or
becomes due and payable)
Decrease of a person’s interest in a company, The date on which the value of the interest
trust or partnership as a result of a ‘value-shifting decreases
arrangement’
Deemed disposals under par 12 The day preceding the day that the event occurs
The proceeds from the disposal of a partner’s Each individual partner will have to account for
interest in an asset of a partnership under par 36 the capital gain/loss resulting from the disposal
of his share of the asset on the date that the
proceeds accrue to each individual partner.
Normally the date of disposal.
The person who acquires the asset is deemed to have acquired it at the time of
Please note!
disposal.
17.7.5 Disposals by spouses married in community of property (par 14)

When an asset is disposed of by a spouse who is married in community of property, and that asset
falls within the joint estate of the spouses, the disposal is treated as having been made in equal
shares by each spouse. However, if the asset in question was excluded from the joint estate of the
spouses, the disposal is treated as having been made solely by the spouse making the disposal.
17.8 Base cost

Two of the four building blocks of CGT (asset and disposal) have already been dealt with. The third
building block of CGT is base cost (see 17.4). The base cost of an asset is determined using the
rules in part V (paras 20 to 34) of the Eighth Schedule.
The base cost of assets acquired before 1 October 2001 is determined differently from those
acquired on or after 1 October 2001.
Remember
CGT became effective in South Africa on 1 October 2001.
(1) The base cost of assets acquired before 1 October 2001 (these are known as pre-valuation
date assets) is
l the value on 1 October 2001 (also referred to as the ‘valuation date value’)
l plus any expenditure incurred on or after 1 October 2001.
556
(2) The base cost of assets acquired on or after 1 October 2001 is

l the expenditure incurred in acquiring the asset.
Paragraph 20 sets out the expenditure that may form part of the base cost of an asset (discussed in
detail below).
l In terms of s 102 of the Tax Administration Act the taxpayer bears the
burden of proof to establish the base cost of an asset.
l If this cannot be done, the base cost will be Rnil (or as much as can be
Please note!
established).
l It is therefore essential for the taxpayer to retain all documentation that
verifies the expenditure incurred.
17.8.1 Qualifying expenditure included in base cost (par 20(1))

Paragraph 20 sets out the qualifying expenditure that may form part of the base cost of an asset. The
determination of qualifying expenditure in terms of par 20 is necessary in the following situations:
l determining the base cost of an asset acquired on or after the valuation date
l determining the base cost of a pre-valuation date asset, where the time-apportionment base
(TAB) cost method (one of the methods as discussed in 17.8.9) is adopted as valuation date
value
l applying the possible limitations to the valuation date value (the kink tests as discussed in
17.8.9).
l A taxpayer may not take any amount into account more than once in deter-
mining the base cost of an asset.
Please note! l VAT not allowed as an input tax deduction in terms of the VAT Act will form
part of the qualifying expenditure included in base cost. VAT allowed as an
input tax will be deducted from the base cost (s 23C).
l Only expenditure actually incurred forms part of base cost
The following amounts form part of qualifying expenditure included in base cost (par 20(1)):
Par 20(1) Qualifying expenditure included in base cost
(a) Acquisition or creation cost
(b) Valuation cost (only where the asset was valued for CGT purposes)
(c) Direct cost of acquisition or disposal, including:
l remuneration for services rendered by a surveyor, valuer, auctioneer, accountant,
broker, agent, consultant or legal advisor
l transfer cost (including the cost of a certificate for electrical installation, but excluding any
cost of repairs necessitated by such inspection)
l stamp duty, transfer duty, securities transfer tax or any similar duty
l advertising cost to find a seller or buyer
l sales commission
l any cost in moving the asset
l installation cost, including the cost of foundations and supporting structures
l option cost (excluding an option that was acquired before 1 October 2001 and exercised
after 1 October 2001, in which case the valuation date value of the asset must be
included in the base cost of the asset)
l a portion of the donations tax (par 22) payable by the donor on an asset disposed of by
way of a donation in terms of par 38 (see 17.8.7 for further detail)
l a portion of the donations tax (capital gain/market value) payable by the donee on an
asset disposed of by donation (see 17.8.7 for further detail)
(d) The cost of establishing or defending legal title
l The expenditure will qualify even if the person is unsuccessful in defending legal title.
l This type of base cost expense can occur, for example, where a taxpayer operates a
night club and the city council wishes to expropriate the night club’s premises.
l The cost of legal fees incurred in resisting the expropriation is added to the base cost of
the night club’s premises regardless of the outcome of the case.
continued
557
Par 20(1) Qualifying expenditure included in base cost

(e) Cost of improvements or enhancements to the value of the asset, provided the improvements
or enhancements are still reflected in the state or nature of the asset at the time of its
disposal.
l These improvements include improvements to the common property of owners of
sectional title units and share block units.
l It also includes improvements to a property by a tenant (not deductible for tax purposes),
as they enhance the value of the tenant’s occupational right.
Example 17.10. Cost of improvements and enhancements added to base cost

(a) Janet, the owner of a sectional title unit, has to pay a special levy of R500 for the installation
of a swimming pool on the common property.
(b) Neo installed a swimming pool at her house for R40 000. Three years later, after becoming a
mother and due to her fear of the risk of drowning, she had the swimming pool filled up and
covered it with grass.
Explain whether the cost of the improvements can be added to the base cost of the assets of the
respective taxpayers.
SOLUTION
(a) Since it enhances Janet’s right of use, it may be added to the base cost of the sectional title
unit. Please remember that in order to qualify as an addition to base cost, the swimming
pool must still be part of the asset on the date of the disposal of the sectional title unit.
(b) Since the swimming pool is not part of the property anymore, the R40 000 cannot be added
to the base cost of the house. At the date of the swimming pool’s removal (the filling up of
the pool), it is dealt with as a part disposal (see 17.8.15).
Ownership of fixed property in South Africa can take many forms. Two ways in
which fixed property can be owned is through sectional title units and share
block units.
l Sectional title unit: Ownership of units or sections within a complex or a
Please note!
development. The most common example of sectional title units are
townhouse developments.
l Share block units: Ownership of a share in a company that owns and runs a
building. Ownership of the share block unit establishes the right to use the
building. An example of a share block unit is interest in holiday apartments.
Par 20(1) Qualifying expenditure included in base cost (continued)

(f) Cost of an option acquired before 1 October 2001 where the asset was acquired or disposed
of after 1 October 2001
l The valuation date value of the option must be included in the base cost of the asset.
l This situation is illustrated by the following example: On 1 July 2001, Jonathan paid
R10 000 for a 6-month option to acquire a beach cottage at a price of R300 000. The
market value of the option was R5 000 on 1 October 2001. He exercised the option on
1 December 2001 and paid R300 000 for the cottage. The base cost of the cottage will
therefore be R300 000 + R5 000 = R305 000.
(g) One-third of s 24J interest incurred in financing listed shares or a participatory interest in a
portfolio of a collective investment scheme
l One-third of the interest is included in the base cost of an asset, irrespective of whether
these shares or interests are business related (i.e. held for trade purposes) or private in
nature.
558
Example 17.11. Section 24J interest incurred in financing listed shares

Quinton acquires 2 000 shares in Gentry Limited (a company listed on the JSE) at a cost of
R100 000, which he finances by means of a bank loan. During the year of assessment, he
incurred interest on the loan of R15 000.
Explain whether the interest can be added to the base cost of the shares.
SOLUTION
The shares are listed on a recognised exchange (the JSE). Quinton may therefore add a third
of R15 000 = R5 000 to the base cost of R100 000.
The base cost equals R105 000 as two thirds of the interest is not allowed as part of base cost.
A deduction of the interest of R15 000 is prohibited by s 23(f).
(h) The amount included in ‘gross income’ for income tax purposes, must be included in the
base cost of the asset
Type of asset Income tax provisions Amount included in base cost
(h)(i) Marketable In terms of rules dealing with The market value of the market-
securities or equity employee share incentive able security or the equity instru-
instruments schemes (ss 8A or 8C), the ment taken into account in deter-
acquisition or vesting of mining the gain or loss for normal
marketable securities or equity tax purposes (even if the gain or
instruments results in a gain or loss is nil). See Example 17.12.
loss for normal tax purposes.
(h)(ii)(aa) Lease assets Assets acquired by a lessee The recoupment that is included
from a lessor and there has in the lessee’s income at the end
been a recoupment in terms of of a lease in terms of s 8(5). See
s 8(5). Example 17.13.
(h)(iI)(bb) Fringe benefit The value of the fringe benefit The value placed on the asset in
assets is determined in terms of the determining the fringe benefit,
Seventh Schedule. This value included in a person’s gross in-
is included in the employee’s come in terms of par (i) of the
gross income in terms of gross income definition.
par (i) of the definition of
‘gross income’ as a fringe
benefit.
(h)(ii)(cc) Lease In terms of par (h) of ‘gross The amount included in gross
improvements income’ an amount is included income in terms of par (h) of the
in the lessor’s gross income gross income definition, less the
for obligatory improvements special allowance for lessors
affected by the lessee to land granted in terms of s 11(h) (see
or buildings. chapter 13 for information on
s 11(h)).
(h)(ii)(dd) Debt asset in the In terms of par (c) of ‘gross The base cost of the debt asset
hands of a person income’ an amount is included will be the amount included in
that renders a in a person’s gross income for gross income in terms of par (c).
service any services rendered. If the
person renders the service but
the amount is only payable
after, for example 30 days, the
person that rendered the
service has a debt asset.
continued
559
Type of asset Income tax provisions Amount included in base cost
(h)(iii) Share in a con- In terms of s 9D, the propor- The proportional amount of net
trolled foreign tional amount of the net income of CFC taxed in terms of
company (CFC) income of a CFC in which the s 9D in resident’s hands, adjusted
held directly or resident directly or indirectly with certain amount such as tax-
indirectly has an interest, must be able capital gains and exempt
included in the income of the foreign dividends, will be added
resident during any tax year. to the base cost of the foreign
shares.
Example 17.12. Base cost: Restricted equity instruments (shares) acquired under s 8C
Trevor is employed by Xenon Ltd and is not a share-dealer. In 2014, he acquired a restricted
Xenon Ltd share from the company in exchange for R50 cash (market value was R100). In 2018,
the restrictions are lifted when the share has a R250 value. Trevor eventually sells the share for
R400.
Calculate the capital gain or loss on the sale.
SOLUTION
Proceeds ............................................................................................................................. R400
Less: Base cost (market value when share vests) .............................................................. (250)
Capital gain ......................................................................................................................... R150
Note that Trevor pays R50 cash for the share and he is taxed on a gain of R200 (R250 – R50) in
terms of s 8C. By using the market value when the share vests, the base cost equals the sum of
the R50 cash and the R200 on which Trevor was taxed for normal tax purposes.
Example 17.13. Base cost of asset acquired from lessor at less than market value
Andrew leased land and buildings from Vivian at a rental of R10 000 per annum. The rent paid,
which Andrew claimed as a deduction under s 11(a), was as follows:
R
2014 10 000
2015 10 000
2016 10 000
2017 10 000
2018 10 000
50 000
At the end of the 2018 tax year, Andrew acquired the property from Vivan at a price of R2 000,
even though its market value was R50 000. This was in recognition of the fact that most of the
rentals paid by Andrew were excessive and really in part payment of the purchase price. In
terms of s 8(5) an amount of R48 000 (R50 000 – R2 000) was included in Andrew’s income for
the 2018 tax year. In 2018 Andrew sold the property for R65 000.
Calculate the base cost of the property as well as Andrew’s capital gain.
SOLUTION
The base cost of Andrew’s property is as follows:
R
Amount paid ..................................................................... 2 000 (par 20(1)(a))
Amount included in income in terms of s 8(5) .................. 48 000 (par 20(1)(h)(ii))
Base cost .......................................................................... 50 000
Andrew’s capital gain is therefore R65 000 – R50 000 = R15 000
560

(iv) In the case of a value-shifting arrangement, the person who benefits from the arrangement
must increase the base cost of his interest by the deemed proceeds calculated in terms of
par 23 (see 17.12.1).
(v) Where an asset was inherited by a resident from the deceased estate of a non-resident, the
base cost of the asset is
l the market value of that asset immediately before the death of the non-resident, and
l any expenditure incurred by the executor of the deceased estate in respect of the
inherited asset in the process of the liquidation or distribution of the deceased estate.
Where an asset is inherited from the deceased estate of a resident, the base cost of the asset
will be determined in terms of s 9HA (see chapter 25).
(vi) Where a non-resident
l donates an asset to a resident
l sells an asset to a resident for a consideration not measurable in money, or
l sells an asset to a connected person resident for a non-arm’s length consideration
the base cost of the asset for the resident is the market value of that asset on his date of
acquisition.
Both the special rules in par 20(1)(v) and par 20(1)(vi) above (dealing with
Please note! assets acquired from non-residents) only apply if the asset is not an asset
already with the CGT net (par 2 assets).
17.8.2 Qualifying expenditure excluded from base cost (par 20(2) and s 23C)
The following expenditure incurred by a person in respect of an asset is not included in base cost:
Par/section Expenditure excluded from base cost (continued)
Par 20(2)(a) Borrowing costs (including interest) and raising fees (excluding the one-third of s 24J
interest incurred in the acquisition of listed shares or units in a portfolio of a collective
investment scheme – see 17.8.1)
Par 20(2)(b) Expenditure related to the cost of ownership (holding cost)
l Expenditure on repairs, maintenance, protection (for example the monthly fee paid to
a security company (not the capital cost of the alarm system)), insurance, rates and
taxes or similar expenditure .
Par 20(2)(c) The valuation date value of any option or right to acquire any marketable security contem-
plated in s 8A (employee share incentive arrangements prior to 26 October 2004)
Section 23C Input VAT provided that it has been allowed as an input tax deduction
17.8.3 Reduction of base cost (par 20(3))

The following amounts must reduce the base cost of an asset:
Par 20(3) Amounts that must reduce the base cost of an asset
(a) Expenditure already allowed as a deduction in the calculation of taxable income, for
example capital allowances and s 11(o) deduction
l The exception to this is any previously allowed expenditure regarding a qualifying
share (share held for more than three years). Previously allowed expenditure that
has been added back to taxable income in terms of the recoupment provisions of
s 9C(5) (see chapter 14), can be added to the base cost of the qualifying share.
(b) Expenditure that has been reduced or recovered or paid by another person (irrespective
of whether the recovery took place before or after the expense was incurred)
l Any reduced or recoverable expenditure that is taken into account for normal tax
purposes as a recoupment in terms of s 8(4)(a) or s 19 (in the case of debt
reduction) (see chapter 13), will however not reduce the base cost of an asset.
(c) Any amount received in respect of official development assistance that was granted or
paid for purposes of the acquisition of an asset and the amount is exempt for normal tax
purposes.
561
Example 17.14. Base cost reduction
Khaya buys an asset for R100 cash. After a dispute arises, the seller repays Khaya R10 of the
selling price. Khaya later sells the asset for R150.
Calculate the capital gain or loss on the sale.
SOLUTION
Proceeds ................................................................................................................................ R150
Less: Base cost
Purchase price .............................................................................................. R100
Less: Amount recovered (par 20(3)(b)) ......................................................... (10)
(90)
Capital gain ............................................................................................................................ R60
The base cost of an asset can be reduced in two circumstances:

l if the underlying expenditure is reduced or recovered – par 20(3)(b) as men-
tioned above will apply in this scenario, and
l if the debt associated with the asset is reduced or cancelled – in this case
Please note!
the provisions of debt reduction (par 12A) will apply.
Please refer to 17.8.4 and Example 17.18 for further information regarding the
debt reduction provisions (par 12A), and to compare the working of par 20(3)(b)
to the working of par 12A.
17.8.4 Concession or compromise in respect of debt (par 12A)

Prior to 1 January 2013, any concession or compromise in respect of debt in South Africa had
adverse tax consequences for the debtor who was unable to pay his debt. In an effort to assist local
economic recovery, SARS introduced a uniform tax system to address the normal tax consequences
of debt relief. These debt relief provisions are found in s 19 of the Act and par 12A of the Eighth
Schedule. In order to provide for the different ways in which a debtor may settle his debt, these
provisions were amended again with effect from 1 January 2018. The focus of this chapter will be on
the provisions of par 12A. Refer to chapter 13 for the provisions of s 19.
Before
Years of assessment
commencing before
reductions before that date.
(see the 2017 edition of
Silke)
From
Years of assessments commencing on or
after 1 January 2018 for debt benefits due
to concessions or compromises on or after
that date.
Where a creditor writes off a debt of a debtor, the creditor has disposed of an
asset in terms of paragraph 11. From the creditor’s point of view par 56 needs to
Please note! be considered and from the debtor’s point of view the debt relief provisions in
par 12A need to be considered in all instances where there is a concession or
compromise in respect of debt. A concession or compromise is defined in
subsection 1 of par 12A.
A ‘concession or compromise’ means an arrangement where

l any term or condition in respect of the debt is changed or waived or the obligation is substituted
with another (for example the write-off of bad debt, a compromise with creditors or liquidation); or
l the debt is settled by being converted to or exchanged for shares in that company or applying
the proceeds from shares issued by that company.
(Definition of ‘concession or compromise’ in par 12A(1)).
562
In order to determine the CGT consequences for the debtor where there is a concession or
compromise in respect of debt, the following approach (based on a series of questions that are
asked) is recommended:
NO
Question 1: Is there a debt benefit? Par 12A is not
(see 17.8.4.1) applicable.
YES
Question 2: Is the debt benefit specifically YES

Par 12A is not
excluded from the provisions of par 12A? applicable.
(see 17.8.4.2)
NO
Question 3: What was the debt used for, i.e.

what was the purpose of the debt?
17.8.4.1 Is there a debt benefit? (the definitions of ‘debt’ and ‘debt benefit’ in par 12A(1))
In order for the debt relief provisions in terms of s 19 and par 12A to apply, there needs to be a debt
benefit resulting from a concession or compromise of a debt entered into with a creditor. The
definition of ‘debt’ excludes any tax debt owed to SARS. The definition of ‘debt’ also excludes any
interest amount. Clearly, reduced or cancelled tax debts and the write-off of the interest portion of the
debt has no s 19 or par 12A implications. (Please note that the interest written off will still be
recouped for income tax purposes in terms of s 8(4)(a)). The definition of a ‘debt benefit’ in par 12A is
the same as the definition in s19 which is discussed in detail in Chapter 13 (see 13.10.7). From the
definition of a debt benefit, the following formula can be inferred:
Amount of the debt benefit =

Face value of the claim prior to arrangement > Market value of debt/shares held because of the arrangement
Example 17.15. Debt benefit amount
Jonathan owes Nonthle R550 000 for an asset that he purchased from her two years ago
(R50 000 relates to interest charged by Nonthle). During the 2018 year of assessment Jonathan
proposed to pay Nonthle 20% of the outstanding capital amount and all outstanding interest if
she writes off the remainder of the balance as bad debt. Nonthle agreed to Jonathan’s proposal.
Determine the debt benefit amount.
SOLUTION
Amount of the debt (excluding the interest of R50 000) ............................................. R500 0000
Less: Amount paid by Jonathan (debtor) (R500 000 × 20%) .................................... (100 000)
Face value of the claim prior to the concession or compromise ................................ 400 000
Less: Market value of debt/shares after the concession or compromise .................... (nil)
Debt benefit amount .................................................................................................... 400 000
Note: It is the write off of the debt that is considered a concession or compromise by the
creditor.
563
Remember
An analysis of the definition of a debt benefit (Silke 13.10.7) shows that if the market value of the
debt or shares in respect of the concession or compromise is equal to or exceeds the face value
of the claim prior to arrangement, there is no debt benefit. Consequently, if there is no debt
benefit, par 12A cannot be applicable.
Once it has been established that there is a debt benefit and that an amount can be attributed to the
debt benefit, the second question can be considered, i.e. is the debt benefit specifically excluded
from the provisions of par 12A?
17.8.4.2 Is the debt benefit specifically excluded from the provisions of par 12A? (par 12A(6))
There are six situations where the provisions of par 12A will not be applicable:
(a) Debt owed by an heir to a deceased estate
Debt that
l is owed by an heir of a deceased to that deceased estate, and
l is subsequently reduced by the deceased estate
will not be subject to the debt benefit provisions in par 12A. This will be the case as long as that
debt constitutes ‘property’ as defined (according to the Estate Duty Act) in that deceased
estate.
It is not a requirement that the debt must be subject to Estate Duty. The
Please note! requirement is only that it must constitute ‘property’ as defined in the Estate Duty
Act.
(b) Donated debt

Where the debt benefit qualifies as a donation or a deemed donation for donations tax
purposes, par 12A will not apply. A donation is defined in s 55(1) of the Act as ‘any gratuitous
disposal of property including any gratuitous waiver or renunciation of a right’. A deemed
donation is where any property has been disposed of for a consideration which is not an
adequate consideration (s 58).
It is not a requirement that the donation of the debt must be subject to

Please note! donations tax. The requirement is only that it must constitute a ‘donation’ as
defined for purposes of donations tax.
(c) Employee debt

Where an employee’s debt is reduced by his employer and this reduction constitutes a fringe
benefit in terms of the Seventh Schedule to the Act, such a debt benefit will not be subject to
the debt benefit provisions of par 12A. Fringe benefits will generally attract employees’ tax in
terms of the Fourth Schedule to the Act.
(d) Intra-group debt owed by a dormant group company
Where the debtor and creditor are members of the same group of companies (as defined in s
par 12A(1)) and the debtor is a dormant company, the provisions of par 12A will not apply. A
dormant company is a company that has not carried on any trade, during the year of
assessment during which that debt benefit arises and the immediately preceding year of
assessment.
However, there are two exceptions to the above where the par 12A provisions will still apply
even when it is an intra-group debt of a dormant company that is waived:
l the debt was acquired to fund an asset that was subsequently disposed of by that
company by way of an asset-for-share, intra-group or amalgamation transaction or a
liquidation distribution in respect of which ss 42, 44, 45 or 47 applied, whether directly or
indirectly, or
l the debt was incurred in order to settle or renew any debt incurred by another group
company or a controlled foreign company in relation to any group company, whether
directly or indirectly.
564
(e) Liquidation, winding-up or deregistration

Debt owed by a company (the debtor) to a connected person (the creditor) that is reduced in
the liquidation, winding-up, deregistration or final termination of the existence of the debtor, will
not be subject to the debt benefit provisions of par 12A. Paragraph 12A will not apply to the
extent that the amount of the debt benefit is less than the amount of the creditor’s base cost in
terms of paragraph 20,
However, there are two exceptions to the above where the debt benefit provisions of par 12A
will still be applicable:
(1) (2)*
Where the debt was reduced as part of Where the
any transaction, operation or scheme l the debtor has not taken the necessary
entered into to avoid any tax imposed by steps within 36 months to liquidate or
this Act; and deregister the company, or
The debtor and creditor only became l the debtor has invalidated any of the
connected persons after the debt arose above steps with the result that the com-
or any debt issued in substitution of that pany is not liquidated or de-registered, or
debt arose, and these transactions were
part of a scheme to avoid any tax l the debtor has withdrawn any step taken
imposed by the Act. to liquidate or deregister.
* Any tax which becomes payable as a result of steps not taken, invalidated or withdrawn must be
recovered from the company and the connected person, who are jointly and severally liable for that tax
(f) Intra-group debts settled by issuing shares

Where intra-group debts are reduced or settled by issuing shares in the debtor company and
the debtor and creditor are members of the same group of companies (as defined in par 12A),
the provisions of par 12A will not apply.
However, there are two exceptions to the above where the par 12A provisions will still apply
even when the intra-group debts were reduced or settled by issuing shares in the debtor
company:
l the debt was acquired directly or indirectly to settle or renew any debt incurred by a
company that was not a member of the group of companies at the time the debt was
incurred, or
l the debtor company is not a member of the group of companies at the time the shares are
issued.
Remember
Two of the exclusions to par 12A refer to the term “group of companies” (see paras 12A(6)(d)
and (f)). This term is defined in terms of par 12A(1) as as group of companies in terms of section
41 of the Act. Section 41 refers to section 1 that defines a group of companies as two or more
companies in which one company (the “controlling group company”) directly or indirectly holds
shares in at least one other company (the “controlled group company”). To qualify as part of a
group of companies, however, at least 70% of the equity shares of each controlled group
company must be directly held by:
l the controlling group company;
l one or more other controlled group companies; or
l any combination of the above.
The controlling group company must directly hold 70% or more of the equity shares in at least
one controlled group company.
Section 41 further narrows this definition in section 1 by excluding certain companies from the
definition of a group of companies. Examples of these excluded companies are co-operatives,
a company that is a public benefit organisation or a recreational club, etc.
565
If the debt benefit is not specifically excluded from the provisions of par 12A, it can now be con-
sidered what the purpose of the debt is, i.e. what was the debt used for.
17.8.4.3 What was the purpose of the debt (what was the debt used for)? (paras 12A(2) to
12A(5))
The purpose of the debt, i.e. what the funds were used for, will determine how the debt benefit
amount must be dealt with in the hands of the debtor. For the purposes of this chapter, we will be
looking at two types of assets:
l capital assets, and
l allowance assets.
Trading stock and non-capital expenditure is dealt with in terms of s 19.
l A capital asset is defined as an asset that is not trading stock (for example
land).
Please note!
l An allowance asset is defined as a capital asset on which allowances can
be claimed (for example a s 12C manufacturing asset).
Once it’s been established whether the debt was used to fund a capital asset or an allowance asset,
the actual effect of par 12A on the debtor can be determined:
The debt was originally used (directly or indirectly) to fund, either

l a capital asset, or
l an allowance asset.
Then the effect for

the debtor is:
On a capital asset: On an allowance asset:

l if the capital asset is still held (i.e. owned) l if the allowance asset is still held (i.e.
at the date the debt benefit arises, the owned) at the date the debt benefit
base cost of the asset must be reduced arises, the base cost of the asset must
with the debt benefit amount be reduced with the debt benefit amount
– where the base cost of the asset is – where the base cost of the asset is
reduced to Rnil, the balance of the reduced to Rnil, the balance of the
debt benefit amount is applied debt benefit amount will lead to
against any assessed capital loss. normal income tax consequences in
l if the capital asset is no longer held (i.e. terms of s 19 of the Act (see chapter
no longer owned) at the date the debt 13).
benefit arises, the assessed capital loss l if the allowance asset is no longer held
is reduced with the debt benefit amount. (i.e. no longer owned) at the date the
Where the reduction amount is in excess of debt benefit arises, the total debt benefit
the assessed capital loss (i.e. the assessed amount is subject to normal income tax
capital loss is reduced to Rnil), the debt implications and will be dealt with in
benefit has no further consequences in terms terms of s 19 of the Act (see chapter 13).
of the Eighth Schedule.
566
Example 17.16. Where the debt was used to fund capital assets and one asset is still
held at date the debt benefit arises while the other asset is no longer held
Jeff borrowed R5 million from ABC Bank to acquire two vacant lots. Vacant Lot 1 was purchased
for R3 million and Vacant Lot 2 was purchased for R2 million. Vacant Lot 2 was sold for
R1,2 million, generating a R800 000 capital loss. Jeff used the R1,2 million of proceeds from
Vacant Lot 1 for urgent running expenses. Due to circumstances beyond Jeff’s control,
Vacant Lot 1 has also significantly declined in value. In order to alleviate Jeff’s circumstances,
ABC Bank cancels R3 million of the debt. Of this amount, R2 million of the debt benefit is
attributable to formerly held Vacant Lot 2 and R1 million of the debt benefit is attributable to Vacant
Lot 1.
Explain the CGT consequences of the cancellation of the debt on Jeff.
SOLUTION
Question 1: Is there a debt benefit?
Yes, Jeff’s debt has been reduced with R3 million. The face value of the claim prior to the
arrangement exceeds the market value of the debt with R3 million. R1 million of the debt benefit
is attributable to Vacant Lot 1 and R2 million is attributable to Vacant Lot 2.
The debt benefit amount is R3 million in total.
Question 2: Is the debt benefit specifically excluded from the provisions of par 12A?
No, none of the exclusions (for example a donation or debt to a deceased estate) apply.
Question 3: What was the purpose of the debt?
The debt was used to fund the acquisition of capital assets (land is not an allowance asset as no
allowance can be claimed thereon).
CGT consequences for Jeff:
Vacant Lot 1:
The R1 million amount of debt cancelled that is attributable to Vacant Lot 1 reduces the base
cost of that lot from R3 million down to R2 million as the asset is still held at the date the debt
benefit arises.
Vacant Lot 2:
The R2 million cancelled cannot be applied against the base cost of Vacant Lot 2 because the
asset is no longer held at the date the debt benefit arises. Instead, the R2 million is applied to
eliminate the R800 000 assessed capital loss created by the disposal of Lot 1. No further impact
arises (i.e. the R1,2 million of the unallocated debt benefit does not give rise to a capital gain).
(Source: Explanatory Memorandum on the Taxation Laws Amendment Bill, 2012)
Example 17.17. Where the debt was used to fund an allowance asset and the asset is still
held at the date the debt benefit arises
During its 2017 year of assessment Hakuna (Pty) Ltd borrowed R3,5 million from ABC Bank to
acquire new plant and machinery used in a process of manufacturing. During the 2018 year of
assessment, Hakuna (Pty) Ltd started experiencing serious financial difficulty and the bank sub-
sequently cancelled R1 million of the debt (none of the capital amount had been repaid by
Hakuna (Pty) Ltd).
Explain the CGT consequences of the cancellation of the debt on Hakuna (Pty) Ltd).
SOLUTION
Question 1: Is there a debt benefit?
Yes, Hakuna (Pty) Ltd’s debt has been reduced with R1 million. The face value of the claim prior
to the arrangement exceeds the market value of the debt with R1 million.
The debt benefit amount is R1 million.
Question 2: Is the debt benefit specifically excluded from the provisions of par 12A?
No, none of the exclusions (for example a donation or debt to a deceased estate) apply.
Question 3: What was the purpose of the debt?
The debt was used to fund the acquisition of allowance assets (plant and machinery used in a
process of manufacture qualify for a capital allowance in terms of s 12C).
CGT consequences for Hakuna (Pty) Ltd:
continued
567
The R1 million amount of debt cancelled reduces the base cost of that plant and machinery with
R1 million (the debt benefit amount) as the plant and machinery is still held at the date the debt
benefit arises. The base cost is calculated as follows:
R
Acquisition costs (2017) ............................................................................................ 3 500 000
Less: Amounts claimed for income tax purposes ...................................................... (2 100 000)
s 12C (2017) R3 500 000 × 40% ............................................................................... 1 400 000
s 12C (2018) R3 500 000 × 20% ............................................................................... 700 000
Base cost before arrangement .................................................................................. 1 400 000
Less: Debt benefit amount ......................................................................................... (1 000 000)
New base cost after the concession or compromise ................................................. 400 000
Note
From the information provided it is clear that Hakuna (Pty) Ltd’s received a debt benefit of
R1 million, which represents the debt benefit amount. This debt was used to fund the acquisition
of an allowance asset. The debt benefit amount of R1 million must therefore firstly be applied
against the base cost of R1 400 000. The plant and machinery will therefore have a new base
cost of R400 000 (R1 400 000 – R1 000 000). If the debt benefit amount was more than the base
cost (> R1 400 000), the balance of the debt benefit amount (after applying it against the full
base cost and taking the base cost down to Rnil) will be dealt with in terms of s 19 of the Act
(taxed as a recoupment).
Assume that the debt benefit amount was R3 500 000. Firstly, the base cost will be reduced to
Rnil (R1 400 000 – R3 500 000). Then the balance of the debt benefit amount (R3 500 000 –
R1 400 000) will be dealt with in terms of s 19 of the Act (taxed as a s 8(4)(a) recoupment). The
s 8(4)(a) recoupment will be limited to the amount previously claimed, namely R2 100 000 (see
chapter 13 for further information regarding s 19).
Remember
The order in which the debt benefit amount is applied, depends on the purpose of the debt (the
type of asset that was funded by the debt):
l In the case of capital assets (other than allowance assets), the order is:
1. Base cost (only where the asset is still on hand, otherwise start by setting off the debt
benefit amount against assessed capital loss)
2. Assessed capital loss
3. No capital gain on balance.
l In the case of allowance assets, the order is:
1. Base cost (where asset is still on hand, otherwise start by taxing the debt benefit amount
as a recoupment)
2. Recoupment
3. No balance applicable.
Where debt was used to fund a pre-valuation date asset

Where the debt was used to fund a pre-valuation date asset, par 12A provides that a ‘new’ date of
acquisition and a ‘new’ base cost for the pre-valuation date asset need to be determined before any
debt benefit can be applied.
Firstly, the debtor must be treated as having disposed of that asset immediately before the debt
benefit arises for an amount equal to the market value of the asset at that time.
Secondly the debtor must be treated as having immediately reacquired that asset on that same date
(this results in a ‘new acquisition date’ for the pre-valuation date asset) at a base cost equal to
l the market value at that date
l less any capital gain or plus any capital loss (determined as if the asset had been disposed of at
market value at that time).
This amount (the market value plus any capital loss/less any capital gain) must be treated as the
debtor’s new base cost.
This capital gain or capital loss is not recognised as an actual capital gain or
loss, but is simply used to re-determine the base cost of the asset (if a capital
Please note!
loss, the amount is added to base cost and if a capital gain, the amount is
deducted from base cost).
568
17.8.4.4 The interaction between the provisions of par 12A (reducing base cost when debt is
reduced) and par 20(3) (reducing base cost when the underlying expenditure is
reduced)
Paragraph 12A will only reduce the base cost of an asset if the underlying debt that funded the asset,
is reduced. In terms of the general base cost reductions (see 17.8.3), the base cost of an asset is
also reduced if the underlying expenditure is reduced or recovered. If the asset is no longer held, this
will give rise to a capital gain (see 17.13.1 for the provisions of par 20(3)(b)), unless the reduction or
recoupment of expenditure relates to a concession or compromise in which case par 12A will apply.
Please work through par 17.8.3 to understand the working of par 20(3)(b).
Example 17.18. Interaction between paras 12A and 20(3)(b)
During its 2016 year of assessment Matata (Pty) Ltd borrowed R5 million from ABC Bank to
acquire intellectual property. Matata (Pty) Ltd paid the seller in cash (using the money from the
loan). Due to unforeseen circumstances in 2018, the intellectual property is now worth less than
the purchase price. Assume the intellectual property is a capital asset other than an allowance
asset.
Explain the CGT consequences of the reduction on Matata (Pty) Ltd, if
(a) during the 2018 year of assessment the seller refunds R600 000 to the purchaser pursuant
to the initial sales contract
(b) during the 2018 year of assessment ABC Bank writes off R600 000 on the loan as part of a
debt workout (assume it meets the requirement of a ‘concession or compromise’).
(Source: Explanatory Memorandum on the Taxation Laws Amendment Bill, 2012)
SOLUTION
(a) The R600 000 refund results in a base cost reduction of R600 000 in terms of par 20(3)
because the underlying expenditure is reduced or recovered. If Matata (Pty) Ltd sells the
intellectual property before the seller provides the refund, the R600 000 refund results in a
capital gain.
(b) The R600 000 debt benefit results in a base cost reduction of R600 000 in terms of par 12A
because of the concession or compromise. If Matata (Pty) Ltd sells the intellectual property
before the reduction, the R600 000 debt benefit results in the reduction of Matata (Pty) Ltd’s
assessed capital loss.
Remember
There are also CGT implications for the creditor (see par 17.10.5.8) when debt is written off.
17.8.5 Cancellation of contracts (par 20(4))

The cancellation of contracts has CGT consequences and a distinction must be drawn between the
following situations:
l a contract cancelled in the same year of assessment in which the contract was entered into, and
l a contract cancelled in the subsequent year of assessment in which the contract was entered
into.
Contracts cancelled in the same year of assessment that it was entered into (par 11(2)(o))
Where a contract is cancelled in the same year of assessment that it was entered into, the disposal
and subsequent cancellation of the contract in the hands of the original owner is considered a non-
disposal. This will have the effect that no capital gain or loss calculation will be required. The base
cost in the hands of the original owner will be the exact same amount as it was prior to entering into
the contract.
Contracts cancelled in a subsequent year of assessment that it was entered into (par 20(4))
Where a contract is cancelled in a subsequent year of assessment to which it was entered into, the
base cost of the asset that is reacquired by the original owner is limited to the base cost of that asset
prior to entering into the cancelled contract. Any subsequent expenditure (for example
improvements) incurred by the new owner and recovered from the original owner can also be added
569
to the base cost of the cancelled contract, provided that it complies with the general requirements of
par 20(1) (see 17.8.1).
In addition to the above, any capital loss or gain in a previous year of assessment when the contract
was entered into, is nullified. If the seller calculated a capital loss in the year that the contract was
entered into, the Eighth Schedule deems that the seller realises a capital gain equal to that capital
loss in the year that the contract is cancelled (par 3(c)). By contrast, if the seller calculated a capital
gain in the year that the contract was entered into, the Eighth Schedule deems that the seller realises
a capital loss equal to the capital gain in the year that the contract is cancelled (par 4(c)).
Example 17.19. Cancellation of contracts
Tshego sells his asset with a base cost of R100 000 for R150 000 to Wayne. Wayne immediately
improves the asset at a cost of R20 000. A dispute arises and the selling contract is cancelled.
Tshego reacquires the asset. He agrees to reimburse Wayne for the improvement cost of
R20 000. No other costs were incurred.
Calculate the capital gain or loss on the transactions in Tshego’s hands if
(a) the contract is cancelled in the same year of assessment in which the contract was entered
into, and
(b) the contract is cancelled in a subsequent year of assessment to which it was entered into.
SOLUTION
(a) Where contract is cancelled in the same year it is entered into
It is not a disposal in Tshego’s hands in terms of par 11(2)(o). No capital gain or loss arises. The
improvement expenditure of R20 000 reimbursed by Tshego is added to the base cost of
R100 000, which means the total base cost is equal to R120 000.
(b) Where contract is cancelled in a subsequent year
Year of assessment in which contract is entered into:
Proceeds ....................................................................................................................... 150 000
Less Base cost .............................................................................................................. (100 000)
Capital gain ................................................................................................................... R50 000
Subsequent year of assessment in which contract is cancelled
In terms of par 20(4), Tshego reacquires the asset at a base cost of R120 000 (R100 000
(original base cost) plus R20 000 (subsequent improvement expenditure incurred by Wayne and
recovered from Tshego). The original capital gain of R50 000 calculated in the year the contract
is entered into is cancelled out by a deemed capital loss of R50 000 in the year the contract is
cancelled. Although the objective of the legislature is to nullify the original capital gain, one must
bear in mind that assessed capital losses are dealt with differently from net capital gains for CGT
purposes (see 17.5).
17.8.6 Limitation of expenditure (par 21)

An amount that qualifies as allowable expenditure for CGT purposes shall not be taken into account
more than once in determining a capital gain or loss. In addition to this, no expenditure will be
allowed as qualifying expenditure in terms of par 20(1)(a) to (e) (see 17.8.1) if it is allowable under
any other provision of the Eighth Schedule. This is the case even if the expenditure has been limited
by that other provision.
Paragraph 21 embodies principles similar to those contained in s 23B (the prevention of double
deductions) of the Act (see chapter 12).
17.8.7 Donations tax paid by donor or donee (par 22 read with par 20(1)(c)(vii) and (viii))
A donation of an asset is considered to be a disposal for CGT purposes (par 11(1)(a)). A portion of
the donations tax (see chapter 26 for further information regarding the calculation of the donations
tax) on an asset that is donated should be included in the base cost of the donated asset.
Donations tax paid by the donor
The portion of the donations tax that can be added to the base cost of the donated asset in the
hands of the donor is determined in accordance with a specific formula provided in par 22 (par
20(1)(c)(vii)). The purpose of par 22 is to achieve parity with the estate duty liability that would have
been payable had the donor died on the date of the donation (ignoring the effect of the R100 000
570
donations tax exemption and the R3,5 million estate duty abatement). Where the disposal (the
donation of the asset) results in a capital loss (before donations tax is taken into account), no
donations tax will be included in the base cost.
According to the formula in par 22:
(M – A)
Y = × D
M
In this formula
M = the market value of the donated asset
A = all amounts other than the donations tax taken into account in the determination of the base
cost of the donated asset
D = the total amount of donations tax payable.
Remember
Paragraph 22 applies in respect of donations in terms of par 38 which determines that the donor
is deemed to have disposed of the asset for market value.
Donations tax paid by the donee

When a donor fails to pay donations tax within the prescribed period, the Act provides that the donor
and donee shall be jointly and severally liable for the donations tax (s 59). Where the donee pays the
donations tax, par 22 cannot apply. This is because par 22 is applicable to the donor’s base cost and
not the donee’s base cost (compare par 20(1)(c)(vii) to par 20(1)(c)(viii)). However, the donee will be
entitled to include a portion of the donations tax paid in the base cost of the asset acquired in terms
of par 20(1)(c)(viii).
According to the ratio in par 20(1)(c)(viii) the following amount can be added to the donee’s base
cost:
Capital gain of donor

Y = × Donations tax
Market value of asset
Example 17.20. Donations tax included in base cost

Mr Lethiba donates a 12m yacht to his son on 1 April 2017. The market value of the yacht is
R1 250 000 and its base cost, excluding donations tax, is R750 000. Assuming this is the only
donation made by Mr Lethiba during the 2018 tax year, donations tax of R230 000 ((R1 250 000 –
R100 000) × 20%) is payable.
Calculate Mr Lethiba’s capital gain on the disposal of the yacht and his son’s base cost of the
yacht if
(a) Mr Lethiba (the donor) pays the donations tax, and
(b) Mr Lethiba’s son (the donee) pays the donations tax.
SOLUTION
(a) If the donor pays the donations tax
Mr Lethiba’s capital gain:
Deemed proceeds on disposal par 38(1)(a)) ............................................................. R1 250 000
Less: Base cost
Base cost excluding donations tax......................................................... R750 000
Portion of donations tax paid by donor, calculated in terms of par 22:
Y = (M – A)/M × D
= (R1 250 000 – R750 000)/R1 250 000 × R230 000 ............................. R92 000
(R842 000)
Capital gain ................................................................................................................ R408 000
Base cost to his son (market value on date of donation) ............................................ R1 250 000
continued
571
(b) If the donee pays the donations tax

Mr Lethiba’s capital gain:
Deemed proceeds on disposal (par 38(1)(a)) ............................................................ R1 250 000
Less: Base cost .......................................................................................................... (R750 000)
Capital gain ................................................................................................................ R500 000
Base cost to his son:
Market value on date of donation ............................................................................... R1 250 000
Portion of donations tax paid by donee:
Capital gain of donor
× Donations tax paid by donee
Market value of asset on date of donation
500 000 (see above, excluding donations tax)
× 230 000 (see above) = R92 000
1 250 000
Base cost .................................................................................................................... R1 342 000
Note
The yacht is not a personal-use asset, as its length exceeds ten metres; Mr Lethiba’s capital gain
is therefore not disregarded (see paras 15 and 53).
17.8.8 Immigrants (par 24)

Where non-residents become South African residents, their assets (other than assets already
included in the CGT net) are treated as having being disposed of on the day before they become
South African residents, and then reacquired at market value on the same day.
Due to the fact that the determination of ‘market value’ can sometimes be subjective and easily
manipulated, the Eighth Schedule provides for loss-limitation rules when these assets (that have a
base cost equal to market value) are disposed of at a loss.
17.8.9 Determining base cost of pre-valuation date assets (paras 25 to 27)

Special rules apply to determine the base cost of assets acquired before valuation date. The
‘valuation date’ is
l 1 October 2001, or
l the date on which a person ceases to be a tax exempt person, if this date is after 1 October
2001.
Remember
Where assets were acquired before the valuation date, the increase in the value of the asset
which took place up to valuation date (i.e. before 1 October 2001) is excluded from the CGT net.
The CGT provisions only apply to increases in the realised value of assets that took place on or
after that date.
Example 17.21. Determining profit subject to CGT
An asset with a historical cost of R100 is sold for R700. This asset was originally acquired before
1 October 2001. The capital gain is R600 (R700 – R100). A portion of the gain of R600 refers to
the pre-valuation date period (before 1 October 2001) and is not subject to CGT, but a portion of
this gain of R600 refers to the post-valuation date period (on or after 1 October 2001) and is
therefore subject to CGT.
Discuss how one should determine which part of the R600 is subject to CGT.
572
Acquisition Disposal
date Valuation date date
1 October 2001
R100 Valuation date value = ? R700
Portion of gain not Portion of gain

subject to CGT subject to CGT
Total gain = R600
SOLUTION
The only way to determine which portion of the total gain refers to which period is to determine
the valuation date value. If one assumes that the valuation date value was R200, then the portion
of the gain subject to CGT would be R500 (Proceeds of R700 – Valuation date value of R200).
The valuation date value should therefore be determined to determine which portion of the gain
is subject to CGT.
The valuation date value is determined according to paras 26 to 28. These paragraphs provide for
different valuation date values in different situations. After determining the valuation date value, one
must remember to add expenditure incurred after valuation date (for example improvement cost).
The base cost of an asset that was acquired by a taxpayer before1 October 2001, is the sum of
l the valuation date value (VDV) determined according to paras 26 to 28, plus
l any qualifying expenditure (allowable in terms of par 20) incurred on the asset on or after
valuation date.
The following diagram illustrates how the different valuation date values are determined in different
situations, as well as the effect of the loss-limitation rules (also known as kink tests):
Abbreviations used in diagram

VD = Valuation Date
P = Proceeds
B = Par 20 allowable expenditure incurred before valuation date
A = Par 20 allowable expenditure incurred on/after valuation date
MV = Market Value on valuation date
TAB = Time-Apportionment Base cost method (see 17.8.12)
573
Determine historical gain or loss*
PB+A
P>B+A Historical loss or
Historical gain break-even
(par 26) (par 27)
No election by
Taxpayer elects VDV: taxpayer
l MV
l 20%(P – A)
l TAB
Has taxpayer
determined/
SARS published MV?
Has MV been adopted
and is
P MV?
Yes No
Yes No
Is VDV = TAB
B P Loss-limitation
and rule 4
VDV = P – A VDV = B > MV? (par 27(4))
Loss-limitation l MV,
rule 1 l 20%(P – A) or
(par 26(3)) l TAB
as elected by Yes No
taxpayer
VDV = higher of VDV = lower of

l MV or l MV or
l P–A l TAB
Loss-limitation rule 2 Loss-limitation rule 3
(par 27(3)(a)) (par 27(3)(b))
* The presumption in this calculation is that the general provisions regarding the determination of base
cost and proceeds will apply. Where applicable, exclude VAT and income tax amounts.
The base cost provisions regarding pre-valuation date assets do not apply where
a person has elected to adopt the weighted average method for valuing certain
Please note! categories of identical assets. Typical identical assets are listed shares, gold or
platinum coins and unit trusts. The reason for this is simply that pre-valuation date
assets cannot be separately identified once they have been merged in a pool with
post-valuation date assets.
(1) Valuation date value in a historical gain situation (par 26)

Where the disposal of an asset results in a historical gain situation (i.e. proceeds from the disposal
exceed the qualifying expenditure incurred before, on and after the valuation date), the taxpayer
must adopt one of the following amounts as the valuation date value of the asset (par 26(1)):
l the market value of the asset on valuation date, or
l 20% of (the proceeds of the disposal less allowable expenditure incurred on or after valuation
date), or
l the TAB cost of the asset.
574
The rule above does not apply to

l interest-bearing financial instruments, or
l identical assets (for example shares) where the weighted-average basis of valuation is used.
A person may only apply the market value as the valuation date value where
l the asset has been valued within three years after 1 October 2001, or
Please note! l the price of the asset was published by the Commissioner in the
Government Gazette, or
l the asset was acquired from a spouse who had adopted the market value
as valuation date value.
Remember
Regardless of the fact that the taxpayer determined market value on valuation date, the
election whether to adopt the market value, TAB cost, or 20%-method can only be made in the
year of disposal.
The election of market value as valuation date value is not without its pitfalls. Due to the fact that the
determination of ‘market value’ can sometimes be subjective and easily manipulated, the Eighth
Schedule provides for certain loss-limitation rules (also known as the ‘kink tests’). These special rules
were introduced in an attempt to replace artificial (phantom) losses. Please note that the term ‘kink
test’ is not found in the Act itself, but is borrowed from the United Kingdom where similar rules were
introduced.
Loss-limitation rule 1 (par 26(3))

The first of these loss-limitation rules deals with the situation where a person disposes of a pre-
valuation date asset, and adopts the market value as the valuation date value. If the proceeds from
the disposal of the pre-valuation asset do not exceed that market value, the market value used as the
valuation date value must be replaced with the following amount:
l proceeds
l less the allowable expenditure incurred on/after 1 October 2001 in respect of that asset.
This rule replaces the loss with a neutral position (nil) or reduces the loss.
Example 17.22. Paragraph 26(3): Loss-limitation rule 1
Mr Ditaba disposes of a pre-valuation date asset after the valuation date. He adopts the market
value as the valuation date value of the asset. Other relevant information:
Expenditure incurred before valuation date......................................................................... R100
Expenditure incurred after valuation date ............................................................................ R25
Market value on valuation date ............................................................................................ R200
Proceeds on disposal .......................................................................................................... R150
Calculate Mr Ditaba’s capital gain or loss arising from the disposal of the asset.
SOLUTION
This is a historical gain situation. The market value is greater than proceeds.
Paragraph 26(3) is applicable, in other words loss-limitation rule 1. Therefore the valuation date
value must be replaced with
the proceeds less the expenditure incurred on the asset after valuation date (R150 – R25).
The capital gain will therefore be determined as follows:
Proceeds .............................................................................................................................. R150
Less: Base cost
Proceeds .................................................................................................... R150
Less: Expenditure incurred after valuation date ......................................... (25)
Valuation date value (par 26(3)) ................................................................. R125
Add: Expenditure incurred after valuation date ................................................... 25
(R150)
Capital gain............................................................................................................... Rnil
575
When neither the taxpayer nor SARS can determine the expenditure on a pre-valuation date asset
incurred before valuation date, the taxpayer may adopt only one of the following two amounts as the
valuation date value of the asset:
l the market value of the asset on valuation date, or
l 20% of the proceeds of the disposal of the asset, less allowable expenditure incurred on/after
valuation date.
The TAB method will not be allowed in this situation as the amount of the expenditure cannot be
determined.
This situation is not indicated on the diagram above, as no loss-limitation rule is applicable.
Remember
To determine the expenditure incurred before valuation date, proof of expenditure is required.
Before 1 October 2001, taxpayers did not retain documentation to verify expenditure incurred on
assets, as CGT was not levied at that time. Original evidence of expenditure incurred before
valuation date may therefore not always be easy to find.
Example 17.23. Base cost of pre-valuation date asset when cost is unknown
In 2018, Mr Gumede disposes of an asset that he acquired in 1985 for proceeds of R130 000. He
no longer has a record of the expenditure incurred on the asset. The market value of the asset on
1 October 2001 was R25 000 and he had incurred expenditure of R2 000 on the asset after
1 October 2001. He may adopt as the valuation date value of the asset on 1 October 2001, its
market value (R25 000) or 20% of the proceeds (R130 000) less the expenditure incurred after
1 October 2001 (R2 000), i.e. 20% of R128 000, or R25 600. Since the higher amount will be
R25 600, Mr Gumede will no doubt choose this amount as the base cost of the asset.
Remember
Loss-limitation rule 1 only refers to the situation where the taxpayer can choose between three
methods as valuation date value of the asset (i.e. information regarding expenditure before and
on/after valuation date is known). It does not refer to the situation where the TAB method falls
away (i.e. information regarding the expenditure before and on/after valuation date is not known).
It is therefore presumed that where neither the taxpayer nor SARS can determine the expenditure
incurred on a pre-valuation date asset before valuation date, loss-limitation rule 1 will not apply
and a loss may be created using the market value.
(2) Valuation date value in a historical loss or break-even situation (par 27)
Where the disposal of an asset results in a historical loss or break-even situation (the proceeds from
the disposal of an asset do not exceed the base cost expenditure incurred before, on and after
valuation date), the following rules apply:
(a) If the taxpayer determined market value on valuation date, or it was published by the Com-
missioner, two situations may occur:
l In the first situation, the allowable expenditure incurred before valuation date equals or
exceeds both the proceeds from the disposal of the asset and exceeds the market value of
the asset on valuation date. In this situation, the valuation date value must be taken as the
higher of the
– market value, or
– the proceeds less base cost expenditure incurred on/after valuation date (loss-limitation
rule 2).
Example 17.24. Loss-limitation rule 2 (par 27(3)(a))
Ms Malekane disposes of a pre-valuation date asset after the valuation date. She determined the
market value as R200 on valuation date. Other relevant information:
Expenditure incurred before valuation date ......................................................................... R250
Expenditure incurred after valuation date ............................................................................ R25
Calculate Ms Malekane’s capital gain or loss arising from the disposal of the asset.
576
SOLUTION
This is a historical loss situation. The market value was determined by the taxpayer.
The expenditure incurred before valuation date of R250 exceeds both the proceeds of (R150)
and the market value (R200). Therefore par 27(3)(a) or loss-limitation rule 2 will apply.
The valuation date value will be the higher of
l market value (R200), or
l proceeds less the expenditure incurred on the asset after valuation date (R150 – R25).
Proceeds ............................................................................................................................ R150
Less: Base cost
Valuation date value (par 27(3)(a)) ........................................................... R200
Add: Expenditure after valuation date ............................................................... 25
(225)
Capital loss .......................................................................................................................... (R75)
A typical example of a loss-limitation rule 2 situation is where the value of the asset has declined
steadily from inception as in the case of a wasting asset, such as a mine. Paragraph 27(3)(a)
mostly favours the taxpayer, as the market value is allowed despite the fact that a loss is created.
l In the second situation, the allowable expenditure incurred before valuation date is either
less than the proceeds from the disposal of the asset, or it is equal to or less than the
market value of the asset on valuation date. In this situation, the valuation date value of the
asset must be taken as the lower of the
– market value, or
– the TAB cost of the asset (loss-limitation rule 3).
Example 17.25. Loss-limitation rule 3 (par 27(3)(b))
Mr Jones disposes of a pre-valuation date asset after the valuation date. He determined market
value as R150 on valuation date. The asset was purchased five years prior to the valuation date
and sold five years after the valuation date. Other relevant information:
Expenditure incurred before valuation date ......................................................................... R100
Time apportionment base cost ............................................................................................ R75
Calculate Mr Jones’s capital gain or loss arising from the disposal of the asset.
SOLUTION
This is a historical loss situation. The market value was determined by the taxpayer.
The valuation date value will be the lower of
l market value (R150), or
l time-apportionment base cost (R75).
Proceeds .............................................................................................................................. R50
Less: Base cost.................................................................................................................... (R75)
Capital loss .......................................................................................................................... (R25)
Loss-limiation rule 3 mostly favours the fiscus. The large artificial loss of R100, using market value
(R50 – R150), is replaced with a smaller loss of R25 (using TAB).
(b) If the taxpayer did not determine market value on valuation date, nor was it published by the
Commissioner,
l the taxpayer must adopt the TAB cost of the asset as its valuation date value (loss-limitation
rule 4).
The rules relating to the determination of a valuation date value in the case of a
historical loss of break-even situation do not apply to
Please note! l interest-bearing financial instruments, or
l identical assets (for example shares), where the weighted-average basis of
valuation is used.
577
There is a view that SARS will never know whether the taxpayer ‘determined’
market value. In the
Please note! case of high-value items, it should be noted that SARS will have the market
value. SARS could request the taxpayer to confirm valuation in the case of other
assets.
17.8.10 Valuation date value in respect of s 24J interest-bearing instruments (par 28)
The valuation date value of a s 24J interest-bearing instrument acquired before valuation date is
determined using two alternative methods. These are:
l yield-to-maturity method
l market value method.
17.8.11 Market value of assets on valuation date (par 29)

The market value of assets on 1 October 2001 is determined in terms of par 29. This is a transitional
measure and deals with the requirements regarding the valuation of certain assets on valuation date
(temporary market value rules). In all other cases par 31 will be used to determine market value. The
permanent market value rules are therefore dealt with in par 31 (see 17.8.13).
Remember
The rules in par 29 apply unless there are specific rules governing these situations. The following
specific rules override the par 29 rules:
l s 24J interest-bearing instruments (see 17.8.10)
l identical assets valued on the weighted average method (see 17.8.14).
17.8.12 Time-apportionment base (TAB) cost (par 30)

When a pre-valuation date asset is disposed of after valuation date, the only way to determine the
portion of the gain that is subject to CGT is to determine the valuation date value. The taxpayer must
use one of three methods to determine the valuation date value of the asset (see 17.8.9). One
method to determine valuation date value is the time-apportionment base (TAB) cost method.
Example 17.26. Determine profit subject to CGT using the TAB method
Twenty years after the valuation date, an asset with a historical cost of R100, is sold for R700.
This asset was originally acquired ten years before the valuation date. The capital gain is R600
(R700 – R100). A portion of the gain of R600 refers to the pre-valuation date period and is not
subject to CGT, but a portion of this gain of R600 refers to the post-valuation date period and is
therefore subject to CGT.
Discuss which portion of the R600 is subject to CGT by using principles behind the TAB cost
method.
SOLUTION
The TAB cost method seeks to achieve a linear spread of the historical gain or loss between the
pre- and post-CGT periods.
If the asset has been sold for a profit based on historical cost of R600 (R700 – R100), the period
before 1 October 2001, is ten years and the period after 1 October 2001 is 20 years. It follows
that one third of the profit relates to the pre-CGT period, i.e. R600 × 10/30 = R200. The valuation
date value is determined by adding the gain relating to the pre-CGT period to the original cost:
R100 + (R600 × 1/3) = R300.
The capital gain will then be: R700 less R300 = R400 (i.e. two-thirds of the profit relates to the
post-CGT period, i.e. R600 × 20/30).
578
The following diagram illustrates how the TAB method achieves a linear spread of the gain or loss
over the period:
R700
R300
R100
10 years VD 20 years
This linear spread principle leads to two sets of formulas under the TAB method (par 30):
(1) standard formulas (paras 30(1) and 30(2))
(2) depreciable assets formulas (par 30(4)).
The following abbreviations are used in these formulas:
Y= Valuation date value
P= Proceeds
B= Par 20 allowable expenditure incurred before valuation date
A= Par 20 allowable expenditure incurred on/after valuation date
N= Number of years from acquisition date until the day before valuation date
T= Number of years from valuation date until disposal date
Remember
When performing a standard TAB calculation, the general rule is that expenditure and proceeds
are determined using basic CGT principles. In the case of depreciable assets, this means that
there has to be a relevant cost reduction through capital allowances, while any recoupments
must be deducted from the amount received on disposal of the asset. However, this rule is
varied when the depreciable assets formulas are applicable.
A part of a year is treated as a full year in the formula, for example three years
and one day will be taken as four years.
When determining the number of years prior to and after valuation date (N and T
in the formula), the years are determined as follows:
l Pre-1 October 2001: Start at the date of acquisition and count the com-
pleted years up to, and including 30 September 2001. The final part of the
Please note!
year up to and including 30 September 2001, is counted as a full year.
l Post-1 October 2001: Start at 1 October 2001 and count the number of
completed years ending 30 September up to and including the date of
disposal. The final part of the year immediately preceding the date of
disposal is counted as a full year. It is presumed that T is 2 where the
disposal date is 1 October 2002 (1 October 2001 – 30 September 2002 plus
one day (1 October 2002) taken as a full year).
579
Rand = B Y A P
Valuation date
Period =
N T
Selling expenses incurred on/after the valuation date must be deducted from the
amounts represented by the symbols R, R1 and P for purposes of calculating
TAB. Any reference to ‘expenditure allowable in terms of par 20’ must exclude
selling expenses (except when determining whether the depreciable assets
formulae should be used).
‘Selling expenses’ means expenditure incurred directly for the purposes of dis-
posing of that asset, which would have constituted expenditure allowable in
Please note! terms of par 20 to be added to base cost. This provision only applies when
calculating TAB and not for other CGT purposes.
It is very important to remember that selling expenses remain post-valuation
date expenditure for the purposes of
l determining base cost when calculating a capital gain or loss of a pre-valu-
ation date asset, and
l the loss limitation rules.
(see 17.8.9)
(1) The standard formulas (paras 30(1) and 30(2):

(a) the standard TAB formula
(b) the standard proceeds formula
The standard formulas above are used when
l no capital allowances have been claimed on the asset, or
l expenditure was only incurred before 1 October 2001 (nothing incurred on/after 1 Octo-
ber 2001), or
l the asset was disposed of at a capital loss (or break-even).
The following diagram indicates the application of the standard formulas:
Method incurred Application

Expenditure incurred during a single year of Use standard TAB formula; no limit on period before
assessment before 1 October 2001. 1 October 2001.
Expenditure incurred in more than one year of Use standard TAB formula. Period before 1 October
assessment before 1 October 2001. 2001 limited to 20 years.
Expenditure incurred before, and on/after 1 October Use standard proceeds formula and thereafter
2001. standard TAB formula.
580
Remember
When determining whether expenditure incurred in more than one year, one must refer to years of
assessment.
However, when determining the number of years prior to and after the valuation date (N and T in
the formula), the years are determined by not looking at the years of assessment, but at the years
before the valuation date ending on 30 September 2001, and the years after the valuation date
commencing on 1 October 2001. (A part of a year will be treated as a full year.)
(a) Standard TAB formula in par 30(1)

Under normal circumstance (such as in Example 17.26 above), the only formula
necessary will be
Y = B + (((P – B) × N)/(T + N))
In this formula:
Y= Amount to be determined
B= Par 20 qualifying expenditure before 1 October 2001
P= Proceeds from disposal (less certain selling expenses allowed)
N= Number of years from the date the asset was acquired until the day before 1 October
2001 (limited to 20 years if the qualifying expenditure was incurred in more than one
year of assessment prior to 1 October 2001)
T= Number of years from 1 October 2001 until the date the asset was disposed of
Remember
Improvements to an asset before the valuation date are deemed to have been expended on the
date of acquisition. It was necessary to place a cap on how far back one can deem to have
expended these improvements and the 20-year limit was introduced. There is no limit if all pre-
valuation date expenditure happened in a single year. The 20-year limit will also not trigger where
improvements take place post valuation date, although in this case, a portion of the proceeds will
form part of the post-CGT period.
Example 17.27. Standard TAB formula in par 30(1)

An asset was acquired for R100 ten years before 1 October 2001, and was disposed of for R700
20 years after 1 October 2001. The TAB cost will be as follows:
Y = B + (((P – B) × N)/(T + N))
= (R100) + ((R700 – R100) × 10/30) = R300
The TAB cost is, therefore, R300 and the capital gain on the disposal, using the TAB cost, will be
R400 (R700 – R300).
Test: Two-thirds of the profit relates to the post-CGT period, i.e. R600 × 20/30 = R400.
(b) Standard proceeds formula in par 30(2)

P = (R × B)/(A + B)
Both standard formulas (standard TAB and standard proceeds) are applied when qualify-
ing expenditure was incurred
l before 1 October 2001, and
l on or after 1 October 2001.
The standard proceeds formula is used to determine the proceeds derived from
qualifying expenditure incurred before 1 October 2001.
Thereafter, the standard TAB formula is applied to determine the valuation date value.
581
In this formula:
P= Proceeds to be used in standard TAB formula in par 30(1)
R= Real or actual proceeds from disposal (less certain selling expenses allowed)
B= Par 20 qualifying expenditure before 1 October 2001
A= Par 20 qualifying expenditure on or after 1 October 2001
Remember
The proceeds formula is based on the premise that
l post-valuation date expenditure generates only post-valuation date gain/loss, while
l pre-valuation date expenditure generates both pre-valuation date gain/loss and post-valuation
date gain/loss.
Example 17.28. Standard formulas: Expenditure incurred before and after the valuation date
An asset was acquired for R100 ten years before 1 October 2001, and was disposed of for R700
20 years after 1 October 2001. Improvements of R200 were made ten years after the valuation
date. Calculate the capital gain on the disposal of the asset.
Firstly, the standard proceeds formula should be used to determine the proceeds that relate to
the period before 1 October:
P = (R × B)/(A + B)
700 × 100
=
200 + 100
= R233
Secondly, the TAB cost is determined using the standard TAB formula:
Y = B + ((P (as adjusted) – B) × (N/(T + N)))
= R100+ ((233 – 100) × (10/(20 + 10)))
= R100 + 44
= R144
Thirdly, the total base cost is determined as the TAB cost (R144), plus the expenditure incurred
after the valuation date (R200) = R344.
The capital gain on the disposal using the TAB cost will be R356, i.e. (R700 – R344).
The answer to the formula can be confirmed using the following test (based on the linear spread
principle):
l portion of proceeds that relate to pre-CGT expenditure: R700 × 100/300 = R233
l gain on this pre-CGT expenditure = R233 – 100 = R133
l portion of this gain that relates to post-CGT period = R133 × 2/3 = R89
l portion of proceeds that relate to post-CGT expenditure: R700 × 200/300 = R467
l gain on post-CGT expenditure = R467 – 200 = R267
l total gain relating to post-CGT period = R267 + 89 = R356.
(2) The depreciable assets formulas (par 30(4))

The portion of the capital gain to be allocated to period after 1 October 2001 can be influenced
by the speed with which expenditure has been written off against income, when the following
scenarios are present:
l when expenditure has been incurred before and on/after the valuation date, and
l the asset qualifies for capital allowances.
As a result, in cases where the entire amount of the pre-valuation date expenditure had been
written off against income, the entire gain is deemed to have been earned during the post-
valuation date period. To rectify this problem, the ‘depreciable asset formulas’ were introduced.
Three conditions are required before the ‘depreciable asset formulas’ become applicable:
l the date of the incurred expenditure must be before and on/after the valuation date, and
l the asset in respect of which capital allowances were claimed, must be a depreciable asset,
and
l the proceeds (not reduced by recoupments) must exceed the expenditure (not reduced by
capital allowances). In other words, the asset must have been disposed of at an overall
capital profit.
582
There are two depreciable assets formulas:

(a) the depreciable TAB formula
(b) the depreciable proceeds formula.
Unlike the standard TAB formula that can, under certain circumstance, be
Please note! applied on its own (without the standard proceeds formula), the depreciable
TAB formula can never be applied without the depreciable proceeds formula.
(a) The depreciable TAB formula
Y = B + (((P1 – B1) × N)/(T+N))
In this formula:
Y= Amount to be determined
B1 = Par 20 qualifying expenditure before 1 October 2001, but not reducing it by deductions such
as wear-and-tear
P1 = Proceeds calculated according to the depreciable proceeds formula (see below)
B= Same as standard TAB formula
N= Same as standard TAB formula
T= Same as standard TAB formula
(b) Depreciable proceeds formula
P1 = (R1 × B1)/(A1 + B1)
In this formula:
B1 = Par 20 qualifying expenditure before 1 October 2001, but not reducing it by deductions, such
as wear and tear
P1 = Proceeds to be calculated
R1 = Proceeds from disposal of the asset, but not reducing it by normal tax amounts, such as
recoupments (less certain selling expenses allowed)
A1 = Par 20 qualifying expenditure on or after 1 October 2001, but not reducing it by deductions,
such as wear and tear
Remember
When performing a standard TAB calculation, the general rule is that expenditure and proceeds
are determined using the rules in terms of paras 20 (see 17.8.1) and 35 (see 17.9). In the case of
depreciable assets, this means that there has to be a relevant cost reduction through capital
allowances, while any recoupments must be deducted from the amount received on disposal of
the asset. However, this rule is varied when the depreciable assets formulas are applicable.
Example 17.29. The depreciable assets formulas

A depreciable asset was acquired for R100 ten years prior to 1 October 2001 (the full R100 had
been claimed as capital allowance for tax purposes). The asset was disposed of for R700, 20
years after 1 October 2001. Ten years after the valuation date, improvements to the value of
R200 were done (on which capital allowances of R100 had been claimed up to the date of
disposal). Calculate the capital gain on the disposal of the asset using TAB formulas.
Firstly, one should determine whether the depreciable formulas are applicable. Determine
whether:
l expenditure was incurred before and after the valuation date, and
l the asset is a depreciable asset and capital allowances of R200 were claimed, and
l the proceeds (R700) exceed the expenditure (R300) – in other words, whether the asset was
disposed of at an overall capital profit.
continued
583
Thereafter, the depreciable proceeds formula should be used to determine the proceeds that
relate to the period before 1 October 2001:
P1 = R1 × B1/(A1 + B1)
700 × 100
=
200 + 100
= R233
Next, the TAB cost is determined using the depreciable TAB formula:
Y = B + ((P1 – B1) × (N/(T + N)))
= R0 + ((233 – 100) × (10/(20 + 10)))
= R0 + R44
= R44
The total base cost is the TAB cost (R44), plus the expenditure incurred after valuation date
(R200 – 100) = R144.
The capital gain on the disposal using the TAB cost will be R356; i.e. ((R700 – 200) – R144).
The normal rules for ‘B’ (expenditure is reduced by capital allowance) are
applied from the depreciable TAB formula onwards. Recoupments and capital
allowances are therefore only excluded in ‘P1’ and ‘B1’ respectively for purposes
of the depreciable assets formula.
Please note!
Had the gain been calculated in terms of the standard formulas, B would have
been nil and the P would have been allocated to the post-valuation date period.
In the end, the entire gain would have been attributable to the period after 1
October 2001 and thus subject to CGT.
The following diagram illustrates how the correct formulas should be selected:
l Have capital allowances been claimed on the asset?

l Has expenditure been incurred on/after valuation
date?
l Was the asset disposed of at a capital profit*?
NO to any question YES to all three questions
Has expenditure been incurred

on/after valuation date?
NO YES
Apply the standard

proceeds formula –
Example 17.28
Apply both
depreciable asset
formulas –
Apply the standard TAB formula – Example 17.27 Example 17.29
* Capital profit/loss should be calculated inclusive of income tax amounts.

* In determining this capital profit, selling expenses must be taken into account.
584
SARS has provided a ‘TAB calculator’ on its website (www.sars.gov.za). This

‘TAB calculator’ uses an Excel worksheet that enables the taxpayer to calculate
the time apportionment base cost of an asset by simply keying in the information
Please note! as required by the ‘TAB calculator’. It is no longer necessary for the taxpayer to
apply the formulas or to even know which formulas to select as the program
automatically applies the formulas according to the information supplied by the
taxpayer. However, this does not apply when using the depreciable formulas.
17.8.13 Market value of assets (par 31)

Paragraph 31 is used to determine the ‘market value’ in respect of assets in most non-valuation date
situations and is considered to contain the permanent valuation rules.
The term ‘market value’ is used throughout the Eighth Schedule in circumstances such as
l valuation date (base cost)
l death
l donation
l cessation
l emigration
l commencement of residence, and
l non arm’s-length transactions between connected persons.
Some of these permanent valuation rules, as contained in par 31, are summarised in the table below:
Type of asset Market value
Financial instrument listed on Ruling price on exchange at close of business on last business day before
a recognised exchange disposal
Long-term insurance policy Greater of:
l surrender value
l insurer’s market value (assume policy runs to maturity).
South African collective
investment scheme Management company’s repurchase price.
(securities and property)
Foreign collective investment Management company’s repurchase price or if not available, selling price
scheme in open market.
Immovable farming property l Price based on willing buyer, willing seller at arm’s length in open
market, or
l 30% below fair market value.
Any other asset Price based on willing buyer, willing seller at arm’s length in open market.
Unlisted shares Price based on willing buyer, willing seller at arm’s length in open market,
ignoring any
l restrictions on transferability
l stipulated method of valuation.
It should be noted that the use of the 30% below fair market value for farming property is restricted. It
may only be used in the case of the death of a person or when the immovable property is disposed of
by way of donation or non-arm’s-length transaction if
l fair market value less 30% or Land Bank value was used as valuation for the purposes of pre-
valuation date assets, or
l the then Land Bank value or fair market value less 30% was used as base cost when the im-
movable property was acquired on or after the valuation date by way of inheritance, donation or
non-arm’s-length transaction.
585
Remember
Section 23C provides that VAT should be excluded where the vendor was entitled to an input tax
credit in terms of the Value Added Tax Act of 1991. Non-vendors, or vendors who were not
entitled to claim an input tax credit, may include VAT when determining the market value.
17.8.14 Identical assets (par 32)

Assets that form part of a group of similar assets are generally referred to as identical assets. When
an asset of this nature is sold, it may not be possible to physically identify the particular asset, for
example Kruger Rand coins or shares. Identical assets meet the following requirements:
l Firstly, should any asset be sold, it would realise the same amount, regardless of which asset was
disposed of.
l Secondly, all the assets in the group must share the same characteristics, but should have in-
dividual identification numbers.
To determine the base cost of identical assets, taxpayers must apply one of the following three
methods:
l specific identification
l first in, first out (FIFO), or
l weighted average.
There are no restrictions on the use of the specific identification and FIFO methods; they may be
used for any identical asset. However, the weighted average method may only be used for the
following classes of assets:
l local and foreign listed shares
l participatory interests in collective investment schemes (related to securities or property carried
on inside and outside South Africa)
l gold and platinum coins of which prices are regularly published in newspapers
l s 24J instruments that are listed.
If, for example, the weighted average method had been used in respect of ABC Limited, a listed
share, and that share became unlisted, the weighted average method would no longer be per-
missible in respect of those shares and the taxpayer would be forced to switch to either the specific
identification or FIFO method.
Remember
It is evident from the above that the weighted average method may not be used for
l financial instruments not listed, for example private company shares
l gold and platinum coins of which prices are not published in newspapers (for example a
collection of identical old Roman coins)
l other tangible assets.
The specific identification or FIFO methods will have to be adopted in respect of these assets.
The weighted average must be determined as follows:

l On valuation date – The total market value of the pre-valuation date identical assets, divided by
the number of pre-valuation date identical assets.
l After valuation date – Following each acquisition of an identical asset after valuation date, the
expenditure incurred must be added to the base cost of the identical assets on hand, and
divided by the number of identical assets on hand.
There is no specific rule with regards to the effect that a disposal of an identical asset may have on
the base cost pool of identical assets. Common sense, however, suggests that the pool must be
proportionately reduced by the number of units and base cost of assets sold.
Example 17.30. Weighted average base cost of identical assets

A person purchased 1 000 shares (with an average price of R25 per share) in Ubuntu Ltd for a
total cost of R25 000. If A purchases another 5 000 shares in Ubuntu Ltd for R155 000, the total
cost would be R180 000 and the weighted average price per share would be calculated as R30
(i.e. R180 000/6 000).
586
The valuation method that is selected for specific financial instruments or identical assets must be
applied until all those identical financial instruments are disposed of.
Example 17.31. Identical assets
Mrs Singh holds the following assets:

l 400 units in a unit trust
l 5 000 ordinary shares in Apollo Ltd
l 700 12% preference shares in Apollo Ltd
l 2 (two) Kruger Rand coins.
Which of the above is a holding of identical assets?
SOLUTION
All of the above are holdings of identical assets.
Example 17.32. Identical assets – continued
Mrs Singh uses the specific identification method for the Apollo Ltd preference shares and
ordinary shares and the FIFO method for the Kruger Rand coins.
She is uncertain which valuation method to use for the units in the unit trust that she acquired on
the following dates:
Date purchased Number Cost per unit Total cost
1 October 2016 100 R1,70 R170
1 December 2016 50 R1,80 R90
1 March 2017 200 R1,90 R380
1 August 2017 50 R2,10 R105
Total 400 R745
On 1 September 2017, Mrs Singh sells 120 units comprising 50 units acquired on 1 December
2016, and 70 units acquired on 1 March 2017.
Calculate the base cost according to the
(a) specific identification,
(b) FIFO, and
(c) weighted average
valuation methods.
SOLUTION
(a) Specific identification method
Date purchased Number Cost per unit Base cost
1 December 2016 50 R1,80 R90
1 March 2017 70 R1,90 R133
Total 120 R223
(b) FIFO method
Date purchased Number Cost per unit Base cost
1 October 2016 100 R1,70 R170
1 December 2016 20 R1,80 R36
Total 120 R206
(c) Weighted average method
Cost per unit is R1,8625 (R745/400). Base cost of 120 units is R224 (R1,8625 × 120).
Remember
The weighted average method may not be used where the base cost of an asset was
determined by using TAB (see 17.8.12) because it is necessary to know the acquisition date of
each asset when using this method, and in situations where the assets are pooled, this would be
almost impossible to establish. When the weighted average method is adopted, the loss-
limitation rules for pre-valuation date assets are therefore also not applicable.
587
17.8.15 Part disposals (par 33)

In the event of a part-disposal of an asset, it is necessary to allocate part of the base cost of the
whole asset to the part-disposal in order to determine the capital gain or loss of the disposed of part.
When part of an asset is disposed of, the base cost of the part of the asset that is disposed of, is
Market value* of the asset disposal
Allowable expenditure (base cost) of the entire asset ×
Market value* of the entire asset.
* Market values immediately prior to the disposal of the asset are used.
The remainder of the expenditure would be allowable as base cost on a future disposal of the
retained part.
A similar principle is applied when determining the market value on 1 October 2001 of part of a pre-
valuation date asset that is disposed of.
Example 17.33. Base cost: Part-disposal where part of base cost cannot be directly attributed
Mr Davids has been the owner of a two-hectare piece of vacant land for many years. A
developer offers him R400 000 for half the property. An estate agent values the entire property at
R1 000 000. The market value of the property was R700 000 on 1 October 2001, and Mr Davids
has elected to adopt the market value as the valuation date value.
Calculate the capital gain or loss on the sale of land disposed of.
SOLUTION
Proceeds ....................................................................................................................... R400 000
Less: Base cost of part-disposal (R400 000/R1 000 000 × R700 000) ......................... 280 000
Capital gain ................................................................................................................... R120 000
When a part of the base cost of an asset can be directly attributed to the part of the asset that is
disposed of or retained, an apportionment of the base cost using the formula is not necessary.
Example 17.34. Base cost: Part-disposal where part of base cost can be directly attributed
Ms Mabato purchased two adjoining pieces of land ten years before valuation date within two
months of each other. She paid R50 000 for the first piece and R75 000 for the second piece of
land. Thereafter the two pieces of land were consolidated. On 30 September 2006, she
subdivided the property and sold the original piece of land for R170 000. She adopted the TAB
cost as the valuation date value of the asset.
Calculate the capital gain on the sale of the property.
SOLUTION
Proceeds ....................................................................................................................... R170 000
Less: Base cost R50 000 + [(R170 000 – R50 000) × 10/15] (note 2) .......................... 130 000
Capital gain ................................................................................................................... R40 000
Notes
(1) No apportionment of the base cost is necessary as the allowable expenditure (R50 000) can
be directly attributed to the part of the asset (the first piece of land) that is disposed of.
(2) Because the asset was acquired before 1 October 2001 and the TAB method was adopted
as valuation date value, the standard TAB formula is used to determine base cost.
The following four events will not trigger part-disposal for CGT purposes:
l The granting of an option in respect of an asset. The base cost of the asset will only be affected
when the option is exercised and the asset is disposed of.
l The granting, variation or cession of a right of use of an asset without the receipt or accrual of any
proceeds. When the owner of a property enters into a lease agreement, it is not regarded as a
part-disposal and there is no resulting gain or loss.
l Improvement, by a lessee, of immovable property owned by a lessor. Any disposal of the bare
dominium (the ownership of the improvements without the right of use thereof) in the
improvements is deferred until the end of the lease. The time of disposal therefore occurs when
the lease expires. (See 17.12.4 for a detail discussion of lease improvements).
588
l Replacement of part of an asset where that replacement comprises a repair. This provision
prevents numerous small capital loss claims. This provision does not affect persons who are
entitled to claim repairs as normal tax deductions under s 11(d) of the Act.
Example 17.35. Base cost: Part-disposal where it comprises a repair

Mr Lesedi replaced a broken window in a privately used building. He originally acquired the
building for R500 000; by apportioning the R500 000 base cost (using market values), he
determines that the base cost of the window is R500. He sells the broken window for R50 and
makes a loss of R450.
Discuss the CGT effect of this transaction.
SOLUTION
Where replacement of part of an asset constitutes a repair, it does not trigger the part disposal
rules in the Eighth Schedule. The base cost of the building may therefore not be allocated to the
window. Any proceeds derived from the disposal of the window will be recognised as a capital
gain at the time of its disposal, with no base cost deduction. The R50 will therefore be taxed as a
capital gain. Please note that no normal tax deduction for these repairs can be claimed under
s 11(d) of the Act as this is a privately used building.
17.8.16 Debt substitution (par 34)

Sometimes a debtor settles or reduces his debt by disposing of an asset to the creditor. This would
result in a disposal for both the debtor and the creditor (similar to a barter transaction). The debtor
disposes of an asset and the creditor disposes of his right to claim payment from the debtor.
The capital gain or loss in the hands of the debtor (for disposal of the asset) is determined as follows:
l proceeds: the amount by which the debt owed to the creditor is reduced as a result of the
disposal of the asset
l base cost: the base cost of the asset as determined according to the general base cost rules
(see 17.8.1).
The capital gain or loss in the hands of the creditor (for disposing of his right to claim payment) is
l proceeds: the market value of the asset obtained from the debtor
l base cost: the amount by which the creditor's claim to payment was reduced.
Remember
The creditor will only account for a capital gain or loss in respect of his disposal over the right to
claim payment if the gain or loss is not taken into account for determining his taxable income. If
the creditor is allowed to claim a bad debt deduction in terms of s 11(i) of the Act, there will
generally be no capital gain or loss.
Paragraph 34 is an anti-avoidance provision as it prevents the gain or loss (already determined in

respect of the exchange of the creditor's claim to payment for the asset) from being taken into
account twice in the hands of the creditor. Without this provision the base cost of the asset acquired
(for the creditor) would be the amount of the claim given up by the creditor. This rule determines,
however, that the asset is deemed to be acquired by the creditor at a base cost equal to the market
value of the asset at the time.
Example 17.36. Debt substitution

Mogale owes Angie R1 000. Angie agrees to release Mogale from the debt in return for the
transfer, by Mogale to Angie, of an asset to the value of R900. Mogale acquired the asset at a
cost of R500.
Explain the CGT effect for Mogale and Angie. Assume that this is a loan with no underlying asset
and that the bad debt deduction of s 11(i) of the Act is not applicable.
589
SOLUTION
Effect for Mogale (debtor)
Capital gain = proceeds – base cost = R1 000 – R500 = R500.
Effect for Angie (creditor)
Capital loss = base cost – proceeds = R1 000 – R900 = R100.
The base cost of Angie’s new asset is R900, which is the market value of the asset.
Please note: Without par 34, the loss of R100 would have been accounted for twice (as the base
cost would have been R1 000 instead of R900).
17.9 Proceeds
The fourth and last building block of CGT is proceeds. Whenever there is a disposal of an asset and
the base cost has been determined, the next step in calculating the capital gain or loss is to establish
the proceeds received or accrued on the disposal of the asset.
The proceeds of an asset are determined using the rules in part VI (paras 35 to 43) of the Eighth
Schedule. Proceeds are equal to the total amount received by, or accrued to a person in respect of
that disposal.
The following table provides the meaning of each term that describes ‘proceeds’ in par 35:
Term Meaning
Amount Anything that has a monetary value, including cash.
In respect of The words ‘in respect of’ make it clear that a receipt and accrual must be causally
connected (linked) to the disposal of an asset to qualify as part of the proceeds
from that disposal. A receipt or accrual can therefore precede a disposal.
Received or accrued The meaning of the words ‘received or accrued’ is the same as their meaning for
‘gross income’ as used for gross income in the Act. ‘Received’ means ‘received
by the taxpayer on his own behalf for his own benefit’ (Geldenhuys v CIR (1947)).
‘Accrued’ means ‘to which the taxpayer has become entitled to’ (Lategan v CIR
(1926 CPD)).
Specific inclusions The following amounts are expressly included as proceeds:
l The amount by which any debt owed by a person has been reduced or
discharged. See example 17.37.
l Any amount received by, or accrued to a lessee from the lessor related to
improvements to leased property.
l The amount by which the market value of a person’s interest in a company,
trust or partnership decreases in consequence of a ‘value-shifting arrange-
ment’ (see 17.12.1).
Only the face value of an amount that is payable in future must be taken into
Please note!
account as proceeds. Present values should be disregarded.
Example 17.37. The amount of debt discharged is specifically included in ‘proceeds’
Anele owes Brian R10 000. Anele sells an asset to Charles for R15 000. Anele requests Charles
to settle his (Anele’s) debt with Brian and only gives Charles R5 000 in cash. Determine the
amount of ‘proceeds’ in the hands of Anele.
SOLUTION
The amount of R10 000, paid by Charles to Brian, will constitute part of the proceeds of the
disposal of Anele’s asset. The total proceeds on the disposal of Anele’s asset will therefore be
R15 000 (R5 000 cash plus R10 000 debt discharge).
590
17.9.1 Amounts excluded from the definition of ‘proceeds’ (par 35(3))

The following amounts are excluded from ‘proceeds’:
Paragraph Amounts excluded from proceeds
(a) Amounts taken into account when determining a person’s taxable income for normal tax
purposes, for example, a recoupment of capital allowances.
(b) Any amount that has been repaid or becomes repayable to the purchaser of an asset, for
example where the seller repays part or all of the proceeds to the buyer.
(c) Any reduction of the proceeds as the result of the following:
l the cancellation, termination or variation of an agreement;
l the prescription or waiver of a claim;
l the release from an obligation;
l any other event (for example, if the price of a disposed asset is reduced).
VAT vendors act as agents for SARS. Any output tax levied on the supply (disposal) of an
asset in terms of the VAT Act needs to be paid over to SARS and does not form part of
proceeds.
Example 17.38. Exclusions from proceeds
The following transactions occurred during the same year of assessment: Bob sells a flat to
Yvonne for R400 000. Yvonne pays R380 000 immediately, with the remaining R20 000 to be
paid a month later. When Yvonne complains that there is damp (moisture) in the flat, Bob
decides to give Yvonne a discount of R40 000 on the purchase price. Calculate the proceeds in
the hands of Bob for CGT purposes.
SOLUTION
The proceeds of R400 000 (R380 000 cash plus R20 000 outstanding) should be reduced by the
discount of R40 000. The proceeds, for the purpose of the CGT calculation, are therefore
R360 000 (R380 000 cash plus R20 000 debt less R40 000 discount).
17.9.2 Shares issued by a resident company in exchange for shares in a foreign company
(par 35(1A))
Where a share option or certificate is issued to any person by a resident company in exchange for
shares in a foreign company, it constitutes a disposal (not a non-disposal) in terms of par 11(2)(b).
The proceeds of the disposal equal the fair market value of the shares in the foreign company.
17.9.3 Disposal of certain debt claims (par 35A)

The purpose of this provision is to prevent the understatement of proceeds subject to CGT on the
disposal of an asset, if a portion of the proceeds only accrues in a subsequent year of assessment
and the debt claim (the right to claim payment of the unpaid proceeds) is also subsequently
disposed of. The understatement occurs because the unaccrued proceeds are diverted to the
disposal of the debt.
17.9.4 Incurred and accrued amounts not quantified (s 24M)

Section 24M of the Act deals with the situations where an asset is acquired for an unquantified
amount or where an asset is disposed of for an unquantified consideration. This particular provision
defers the recognition of the incurral of the expense or the accrual of the proceeds until the amount
has been quantified. It does not, however, determine the capital or revenue nature of those amounts.
Any capital losses arising from amounts that have not yet accrued are ring-fenced (see 17.9.5) until
all unquantified amounts have been quantified.
591
17.9.5 Disposal of assets for unaccrued amounts of proceeds (par 39A)

If an asset is sold, and all or parts of the proceeds from the disposal only accrue in future years of
assessments, then
l any capital loss arising from such a disposal is ring-fenced until sufficient proceeds have
accrued to the seller, but
l if it becomes certain that no further proceeds will accrue, any previously ‘ring-fenced’ capital loss
relating to that asset may be taken into account for CGT purposes.
Example 17.39. Ring-fencing of capital losses in respect of unaccrued proceeds
Marc acquired a block of flats in December 2005 at a base cost of R250 000. In March 2016 he
sold the block of flats to Jessica. The contract determined that the purchase price was payable
in annual instalments over three years, with the first payment due on 28 February 2017. Each
instalment was payable only if Jessica achieved a net rental return of at least 10% during the
specific year. Jessica was able to achieve the net rental return of at least 10% during the
required three years and she paid R150 000, R120 000 and R55 000 as required by the contract,
starting on 28 February 2017.
Determine the CGT effect of the above for Marc’s 2017 and 2018 years of assessment.
SOLUTION
The entire proceeds from the disposal of the block of flats do not accrue to Mark in 2017 – they
accrue at the end of each year of assessment, as Jessica achieves the net rental return of at
least 10%.
Any capital losses that arise in this situation are ring-fenced until sufficient proceeds have
accrued to Marc to absorb the capital losses.
R
Calculation of CGT consequences 2017
Proceeds (only R150 000 accrues in 2017) ................................................................. 150 000
Less: Base cost........................................................................................................... (250 000)
Capital loss .................................................................................................................. (100 000)
The capital loss of R100 000 is ring-fenced in terms of the provisions of par 39A
and cannot be set off against any other capital gains and losses of Marc during the
Calculation of CGT consequences 2018
Proceeds ...................................................................................................................... 120 000
Less: Base cost........................................................................................................... 0
Gain ............................................................................................................................. 120 000
Less: Ring-fenced loss in terms of par 39A ................................................................ (100 000)
Capital gain .................................................................................................................. 20 000
The ring-fenced capital loss of R100 000 can be set-off against the capital gain
calculated in 2018.
17.9.6 Disposals and donations not at arm’s length or to a connected person (par 38)
When a person disposes of an asset
l to anyone by means of a donation, or
l to anyone for a consideration not measurable in money, or
l to a connected person for a consideration that does not reflect an arm’s length price
the proceeds of that disposal are deemed to be the market value of that asset on the date of the
disposal.
Paragraph 67, which deals with the roll-over provisions between spouses, takes
Please note! priority over the provisions of par 38. This means that assets transferred between
spouses will not be deemed to be at market value.
Paragraph 38 does not only determine the amount of proceeds for the person who disposes of the
asset, but it also determines the base cost of the acquirer of the asset. The person who acquires the
asset is treated as having acquired it for a base cost equal to the same market value.
592
There are specific instances where this deemed disposal at market value do not apply. These include
l the issue of share options in terms of employee share incentive arrangements prior to 26 October
2004
l the cancellation or repurchase of shares under certain share incentive schemes
l the transfer of equity shares to employees in terms of a broad-based employee share plan
l the disposal of an asset in exchange for shares issued in respect of which the rules of s 40CA
apply
l disposal of land defined as ‘declared land’ (land conservation regarding to nature reserves or
national parks) in terms of s 37D(1).
Example 17.40. Disposal of a depreciable asset between connected persons
Mthemba Ltd and Van Vuuren Ltd are connected persons in relation to each other. Mthemba sells
a fully depreciated asset that was acquired at a cost of R100 to Van Vuuren for R100. The market
value of the asset at the date of disposal was R120.
Explain the CGT consequences.
SOLUTION
In terms of par 38(1)(a), Mthemba Ltd has proceeds of R120 (market value) – R100
(recoupment) = R20, and a base cost of nil (R100 cost reduced by capital allowances of R100 in
terms of par 20(3)(a) = R0), resulting in a capital gain of R20. Van Vuuren Ltd acquires the asset
at a base cost of R120 (par 38(1)(b)).
17.10 Exclusions, roll-overs and attributions

The four building blocks of CGT (asset, disposal, base cost and proceeds) are necessary to
determine the capital gain or loss in respect of each asset (these building blocks have been dealt
with in this chapter in 17.1 to 17.9). The next step would be to calculate the capital gain or loss
(‘proceeds’ less ‘base cost’).
l Where the proceeds exceed the base cost of the asset, a capital gain is determined. However,
the following must be noted:
– Various capital gains must be disregarded.
– Certain capital gains may be rolled-over.
– Certain gains resulting from a donation must be attributed to the donor.
l Where the base cost exceeds the proceeds of the asset, a capital loss is calculated. However,
the following must be noted:
– Various capital losses must be disregarded.
– Certain capital losses must be limited.
Firstly, various capital gains and losses must be disregarded or excluded. Part VII (paras 44 to 50) of
the Schedule deals with the primary residence exclusion and part VIII (paras 52 to 64E) of the Schedule
deals with all other exclusions. In general, any capital gain or capital loss that is subject to an exclusion
must be disregarded before determining a person’s aggregate capital gain or aggregate capital loss.
17.10.1 Primary residence exclusion (paras 44 to 51A)

Where a natural person sells his private residence certain capital gains and losses on the disposal of
the primary residence (par 45(1)) must be disregarded. Because the primary residence has to be
situated in South Africa, the primary residence exclusion is only available to South African residents.
The primary residence exclusion can also apply if the primary residence is held by a special trust. In
terms of the primary residence exclusion rule, there are two possibilities: If the primary residence is
sold for more than R2 million, the first R2 million of the capital gain or loss should be disregarded (the
R2 million gain or loss rule – par 45(1)(a)). If the primary residence is sold for R2 million or less and a
capital gain is realised, the full capital gain is disregarded (the R2 million proceeds rule – par
45(1)(b)).
593
(1) The R2 million gain or loss rule (par 45(1)(a))

A natural person and a special trust must disregard any capital gain or capital loss of up to
R2 million on the disposal of a primary residence (par 45(1)(a)) but only if the R2 million
proceeds rule (par 45(1)(b)) does not apply. Where more than one natural person or special
trust jointly holds an interest in a primary residence, they will have to apportion the capital gain
exclusion of R2 million in relation to each interest held (par 45(2)).
The R2 million primary residence exclusion is not a once-in-a-life-time exclusion, and the
taxpayer will therefore be entitled to this exclusion each time he sells his primary residence.
However, only one residence at a time can be regarded the primary residence of a person
(par 45(3)). There could never be an overlapping period where one person owns two
residences and uses both as primary residences, except under certain circumstances (death,
where residence is offered for sale, in process of erection or if accidently left uninhabitable for
absences not exceeding two years (par 48 applies)). Therefore, a holiday home that is not a
person’s main residence will not qualify for the primary residence exclusion.
(2) The R2 million proceeds rule (par 45(1)(b))
Any capital gain on the disposal of a primary residence by a natural person or special trust is
disregarded if the proceeds from the disposal of that primary residence do not exceed
R2 million (par 45(1)(b)). However, this R2 million proceeds rule does not apply where that
natural person or the beneficiary or spouse of that special trust
l was not ordinarily resident in that residence for the entire period of ownership (after
1 October 2001) (par 45(4)(a)), or
l used that residence or a part thereof for the purposes of carrying on a trade for any portion
of the period of ownership (after 1 October 2001) (par 45(4)(b)).
Paragraph 45(4) sets out circumstances where the R2 million proceeds rule can-
Please note! not be applied. Paragraph 45(4) does, however, not list the 2ha limitation on land
as one of the circumstances where the R2 million proceeds rule cannot apply.
Where the R2 million proceeds rule cannot apply (proceeds from the disposal of the primary
residence exceeds R2 million or the two exclusions (par 45(4)) apply), then the R2 million gain
or loss rule (par 45(1)(a)) may still be applied.
Remember
Although a primary residence is used mainly for purposes other than the carrying on of a trade,
fixed property is excluded from personal-use assets (par 53(3)(b)). The only exclusions from CGT
for a capital gain or loss made on a primary residence are the exclusions in terms of par 45(1).
Example 17.41. Primary residence exclusion – two possibilities
Raymond’s residence was originally purchased on 1 October 2001 for R1 000 000 solely to be
used as a primary residence for the entire period of ownership. Six years later he sold the primary
residence for
(a) R1 500 000
(b) R3 500 000.
Calculate the primary residence exclusion in each instance.
SOLUTION
(a) (b)
R R
Proceeds ................................................................................ 1 500 000 3 500 000
Base cost ................................................................................ (1 000 000) (1 000 000)
Capital gain before primary residence exclusion ................... 500 000 2 500 000
The primary residence exclusion in terms of par 45(1)(b)...... (Note 1) (500 000)
The primary residence exclusion in terms of par 45(1)(a) ...... (Note 2) (2 000 000)
Capital gain ............................................................................ nil 500 000
continued
594
Notes
(1) As the proceeds do not exceed R2 million, the full capital gain of R500 000 is disregarded in
terms of the R2 million proceeds rule (par 45(1)(b)). None of the exclusions apply as the resi-
dence was solely used as primary residence for the entire period of ownership.
(2) The proceeds exceed R2 million. Therefore, the capital gain up to R2 million is disregarded
in terms of the R2 million gain or loss rule (par 45(1)(a)). If the residence was partly used for
trade purposes or not used as primary residence for the entire period of ownership, the
R2 million gain or loss rule (par 45(1)(a)) would also have been applicable regardless of
whether the proceeds exceed R2 million.
17.10.1.1 Important definitions (par 44)

Meaning of ‘residence’
‘Residence’ is defined as ‘any structure, including a boat, caravan or mobile home, which is used as
a place of residence by a natural person, together with any appurtenance belonging to it and
enjoyed with it’ (par 44).
Meaning of ‘primary residence’
The term ‘primary residence’ is defined as a residence in which a natural person or a special trust
holds an ‘interest’ (see below) (par 44). In addition, the natural person or a beneficiary of the special
trust or the spouse of the person or beneficiary must
l ordinarily reside or have resided in the residence and regard it as his or her main residence, and
l use or have used it mainly (more than 50%) for domestic purposes.
Example 17.42. Residence not qualifying as a primary residence

Jane is the owner of a double-storey building. She runs a shop on the ground floor and lives on
the first floor. The area of the ground floor is 110 square meters, whilst the area of the first floor is
100 square meters.
Determine whether the building will qualify as a primary residence.
SOLUTION
As less than 50% of the residence is used for domestic purposes, the entire residence will not
qualify as a primary residence (not mainly used for domestic purposes).
Note
It is clear from the definition that if a company, close corporation or ordinary trust owns a
residence, it will not qualify as a primary residence, even if it is occupied as the primary
residence of the shareholder of the company, member of the close corporation or beneficiary of
the trust.
Meaning of an ‘interest’
An interest is defined as
l any real or statutory right, or
l a share in a share block company which owns the residence, or
l a right of use or occupation
l excluding a right under a mortgage bond and excluding a right or interest in a trust or trust asset
other than a right of a lessee who is not a connected person in relation to that trust (par 44).
This means that a person may hold an interest in a residence by owning it, by holding shares in a
share block company or even by holding a mere right to occupy the residence (for example a 99-
year lease or a usufruct unless the bare dominium is held by a trust).
17.10.1.2 Apportionment of exclusion if interest is held by more than one person (par 45(2))
The R2 million gain exclusion operates on a ‘per primary residence’ basis and not on a ‘per person
holding an interest in the primary residence’ basis. This means that where, for example, two
individuals have an equal interest in the same primary residence and both of them use it as a primary
residence, the R2 million must be apportioned and each will be entitled to a primary residence
exclusion of a maximum of 50% of R2 000 000, i.e. R1 000 000. This would typically apply to spouses
married in community of property where each spouse is deemed to hold a 50% interest in the
residence.
595
Example 17.43. Apportionment of primary residence exclusion
Peter is married in community of property to Paula and the primary residence falls within their
joint estate. The residence was originally purchased on 1 October 2001 for R800 000 solely to be
used as a primary residence. Five years later they sold the primary residence for R3 500 000 in
order to purchase another primary residence. Assume that Peter and Paula had no other capital
gains or losses during the year in question.
Calculate the taxable capital gain for Peter and Paula.
SOLUTION
Peter and Paula’s taxable capital gains are determined as follows:
Total Peter Paula
R R R
Capital gain apportioned par 14 (R3 500 000 –
R800 000) ....................................................................... 2 700 000 1 350 000 1 350 000
The primary residence exclusion in terms of par 45(2) .. (2 000 000) (1 000 000) (1 000 000)
Balance subject to CGT ................................................. 700 000 350 000 350 000
Annual exclusion ............................................................ (40 000) (40 000)
Aggregate capital gain ................................................... 310 000 310 000
Taxable capital gain (R310 000 × 40%) ......................... 124 000 124 000
The apportionment of the R2 000 000 exclusion only applies if more than one natural person or
special trust holds an interest in the residence as primary residence. This means that if a company
holds 30% and a natural person holds the other 70%, then the natural person can claim the full
R2 000 000 exclusion when the residence is sold and not only 70% of R2 000 000. The company will
not be entitled to the R2 000 000 exclusion as it only applies to natural persons and special trusts.
The apportionment furthermore only applies if each of the natural persons holds the residence as
primary residence. Therefore, if individual A holds 30% of the residence and individual B holds the
other 70%, but only individual A uses the residence as primary residence, individual A can claim the
full R2 000 000 exclusion when the residence is sold, and not only 30% of R2 000 000.
17.10.1.3 Apportionment of capital gain or loss (par 46 to par 50)

In order to determine the portion of the capital gain or loss that qualifies for the primary residence
exclusion, the following requirements need to be considered:
l The exclusion is limited to a land size of two hectares (par 46).
When a person disposes of a primary residence together with the land on which it is situated, the
exclusion of the capital gain or loss will apply only to so much of the land, including
unconsolidated adjacent land, as does not exceed two hectares.
l The exclusion is limited to the period occupied as primary residence (par 47).
When a person disposes of a primary residence, the exclusion of the capital gain or loss will
apply only to the period that the person was ordinarily resident in the primary residence. This
means that a person need not be living in the residence at the time of the sale in order to qualify
for the primary residence exclusion. The person only had to use it as primary residence for a part
of the time he or she owned it (after 1 October 2001).
l The exclusion is limited to the residential use of the primary residence (par 49).
When a person disposes of a primary residence, the exclusion of the capital gain or loss will
apply only to the residential use of the property. Any trade or non-residential use of the primary
residence does not qualify for the exclusion.
The capital gain or loss needs to be apportioned regarding each of these three limitations in order to
determine the portion of the capital gain or loss that qualifies for the primary residence exclusion. The
apportionment of these limitations will now be discussed in detail:
(1) Apportionment where the land size exceeds two hectares (par 46)
The primary residence exclusion is only available to the extent that the land upon which the
residence is situated does not exceed two hectares. The land must be used mainly for domes-
tic or private purposes together with the residence and the land must be disposed of at the
same time and to the same person who buys the residence. Where the size of the land exceeds
two hectares, apportionment of the capital gain of the land is required.
596
Example 17.44. Apportionment where the land exceeds two hectares
Jonathan owns a primary residence situated on four hectares of land. The base cost of the
property was R6 million (R2 million for the residence and R4 million for the land). Jonathan
disposes of the property for R8 million of which R5 million is attributable to the land.
Calculate the taxable capital gain for Jonathan.
SOLUTION
Jonathan’s taxable capital gain is determined as follows:
Total Land not Primary
qualifying residence
R R R
Proceeds from disposal (Land of R5 million ×
2ha/4ha is excluded) ................................................... 8 000 000 2 500 000 5 500 000
Less: Base cost (Land of R4 million × 2ha/4ha is
excluded) ......................................................... (6 000 000) (2 000 000) (4 000 000)
Capital gain ................................................................. 2 000 000 500 000 1 500 000
The primary residence exclusion in terms of
par 45(2)(a) (R2 million limited to R1 500 000) ............ (1 500 000) (0) (1 500 000)
Balance subject to CGT .............................................. 500 000 500 000 0
Annual exclusion ......................................................... (40 000)
Aggregate capital gain ................................................ 460 000
Taxable capital gain (R460 000 × 40%) ...................... 184 000
(2) Apportionment for periods not ordinarily resident in the primary residence (par 47)
An adjustment must be made when a person has occupied a residence as his primary
residence for only a part of the period of ownership (after 1 October 2001). The capital gain or
loss to be disregarded in these circumstances must be determined with reference to the period
during which the person concerned was ordinarily resident in the residence. Certain periods of
absence from the primary residence are deemed as still being periods of primary residence
(see par 48 discussed below the example).
Example 17.45. Interrupted residence

Mr Ayanda bought a house on 1 July 2002 for R350 000. He lived in it for 15 years and
considered it as his primary residence, where after he moved into a flat with his family. He then
let the house for five years before disposing of it for R2 150 000.
Determine the portion of the capital gain that will qualify for the primary residence exclusion.
SOLUTION
Mr Ayanda’s taxable capital gain is determined as follows:
Total Period of Period
Absence ordinarily
resident
R R R
Capital gain (Note 1) .................................................... 1 800 000 450 000 1 350 000
The primary residence exclusion in terms of
par 45(2)(a) (R2 million limited to R1 350 000)............. (1 350 000) (0) (1 350 000)
Balance subject to CGT ............................................... 450 000 450 000 0
Annual exclusion .......................................................... (40 000)
Aggregate capital gain................................................. 410 000
Taxable capital gain (R410 000 × 40%) ....................... 164 000
continued
597
Note 1: Of the capital gain of R1 800 000 (R2 150 000 – R350 000), R1 350 000 (R1 800 000 ×
15/20) is attributable to the period during which the house was occupied as his primary
residence, and R450 000 is attributable to the period during which it was not occupied by Mr
Ayanda as his primary residence. Of the capital gain of R1 800 000, R1 350 0000 must therefore
be disregarded, and the balance of R450 000 attributable to the period in which the house was
not occupied as a primary residence will be taxable as a capital gain (par 47).
Please note: The method of apportioning is not prescribed in the Act, but according to the
examples in the Comprehensive Guide to Capital Gains Tax (issued by the SARS) months are used
when apportioning.
Periods of absence deemed to be ordinarily resident (par 48)

A natural person or a beneficiary of a special trust is treated as being ordinarily resident in a
residence for a continuous period of up to two years if he does not reside in it during this period for
any of the following reasons:
l The residence was offered for sale while it was his primary residence and he vacated it due to the
acquisition, or intended acquisition, of a new primary residence.
l The residence was erected on land acquired for the purposes of building his primary residence.
l The residence was accidentally rendered uninhabitable.
l The taxpayer died.
Where the period of absence (in terms of par 48) exceeds two years, the natural
Please note! person or the beneficiary of a special trust is treated as still being ordinarily
resident in the residence, but only for two years out of the total period of
absence.
Example 17.46. Absence from residence pending sale

Mr Ahmed lived in a house as his primary residence for several years before he decided to sell it.
He put the house on the market, but bought another house while trying to sell the first house. He
sold the first house only 18 months after moving into his new house.
Determine the portion of the capital gain that will qualify for the primary residence exclusion.
SOLUTION
The full capital gain on the disposal of the first house will qualify for the exclusion of up to
R2 million, since Mr Ahmed must be treated as having been ordinarily resident in the house until
it was sold, because he vacated it for a period not exceeding two years while it was offered for
sale and vacated it due to the acquisition of a new primary residence (par 48).
(3) Apportionment for non-residential use of the primary residence (par 49)
An adjustment must be made with reference to the period during which part of the residence is
used by a person or beneficiary of a special trust for the purpose of carrying on of a trade
(par 49). This adjustment requires that the capital gain or loss should be adjusted with both the
period of trade use and the part of the residence that is used for trade. Certain periods of
letting, where the person is absent from the primary residence for five years or less, will still be
treated as periods of residential use (see par 50 discussed below the example).
Example 17.47. Non-residential or trade use
Mr Adams lived in a house that he bought on 1 July 2002 for R650 000. The house was his
primary residence for 20 years before he sold it. For the last ten years prior to selling it, he let
approximately 20% of the area of the house to a doctor, who used it as a surgery. He disposed
of the house for R2 850 000.
Calculate the taxable capital gain that should be included in the taxable income of Mr Adams.
598
SOLUTION
Mr Adams’s taxable capital gain is determined as follows:
Total Trade use Residenti
al use
R R R
Capital gain (Note 1) ......................................................... 2 200 000 220 000 1 980 000
The primary residence exclusion in terms of par 45(2)(a)
(R2 million limited to R1 980 000) ...................................... (1 980 000) (0) (1 980 000)
Balance subject to CGT .................................................... 220 000 220 000 0
Annual exclusion ............................................................... (40 000)
Aggregate capital gain ...................................................... 180 000
Taxable capital gain (R180 000 × 40%) ............................ 72 000
Note 1:
Of the capital gain of R2 200 000 (R2 850 000 – R650 000) made on the disposal of the house,
R220 000 (R2 200 000 × 10/20 (period) × 20% (part)) will be taxable as a capital gain, since it is
attributable to non-residential or trade use. The balance of the capital gain, that is, R1 980 000
(R2 200 000 – R220 000) will qualify for the primary residence exclusion of up to R2 million and
R220 000 would be included in aggregate capital gain or aggregate capital loss.
Please note: The method of apportioning is not prescribed in the Act, but according to the
examples in the Comprehensive Guide to Capital Gains Tax months are used when apportioning.
Periods of non-residential use deemed to be residential use (par 50)

In certain circumstances, where the trade constitutes the temporary letting of the primary residence,
the non-residential use will be treated as residential use. A non-trade adjustment in terms of par 49
will not be necessary even though the person or beneficiary of a special trust is absent from it for a
continuous period of up to five years while it is being let. This concession applies if
l the person (or spouse or beneficiary of a special trust) concerned resided in the residence as a
primary residence for a continuous period of at least one year prior to and after the period of
letting, and
l no other residence was treated as his or her primary residence during the period of letting, and
l he or she was either temporarily absent from South Africa during the period of letting or was
employed or engaged in carrying on business in South Africa at a location further than 250 kilo-
metres from the residence during the relevant period (par 50).
Where the period of absence (in terms of par 50) exceeds five years, the natural
person or the beneficiary of a special trust is treated as having used the resi-
Please note!
dence for trade purposes (i.e. not domestic purposes) for the entire period of
absence.
The following diagram illustrates how the R2 million gain or loss rule (par 45(1)(a)) should be applied
when disposing of a primary residence:
599
Capital gain = proceeds (exceeding R2 million*) less base cost.
LESS
The portion of the gain that relates to land that is greater than two
hectares.
LESS
The portion of the gain that relates to the period the property was not
occupied as primary residence.
LESS
The portion of the gain that relates to the trade use of the primary
residence (where more than 50% of the residence is used for trade
purposes, no primary residence exclusion will be allowed).
EQUALS
This portion of the
capital gain does not
qualify for the
R2 million gain
This portion of the capital gain qualifies for the primary residency exclusion and will be
exclusion of R2 million. subject to CGT in full.
* The R2 million proceeds rule (par 45(1)(b)) applies only where the proceeds do not exceed R2 million provided
no apportionment is necessary in terms of paras 47 or 49.
17.10.1.4 Relief where a primary residence is transferred from a company, close corporation or
trust (par 51 to par 51A)
Paragraphs 51 and 51A applied until December 2012. Please refer to the 2013 edition of Silke for a
detail discussion of these provisions.
17.10.2 Other exclusions (paras 52 to 64E and s 12Q)

Part VIII (paras 52 to 64E) of the Schedule deals with all the other exclusions.
(1) Personal-use assets exclusion
A natural person or a special trust must disregard a capital gain or a capital loss determined on
the disposal of a personal-use asset (par 53).
A ‘personal-use asset’ is an asset of a natural person or a special trust that is used mainly for
purposes other than the carrying on of a trade. However, a qualifying asset for which an
allowance is paid for business use, for example a motor car, must be treated as being used
mainly for purposes other than the carrying on of a trade and will, therefore, qualify as a
personal-use asset (par 53(4)). Examples of personal-use assets are personal jewellery, a
private art collection and personal furniture.
The following diagram provides a list of the items excluded from personal-use assets
(par 53(3)):
Any capital loss

l An aircraft with an empty mass exceeding 450 kg. must be disre-
l A boat exceeding ten metres in length (a ‘boat’ being defined as garded in terms of
any vessel used or capable of being used in, under or on the sea or par 15 (to the
internal waters, whether self-propelled or not and whether equipped extent that it is
with an inboard or outboard motor) (par 1). used for purposes
l Any fiduciary, usufructuary or other like interest, the value of which other than trade),
decreases over time. but a capital gain
l A right or interest of whatever nature to or in any of the above assets. must be taken into
account.
continued
600
l A coin made mainly of gold or platinum, the market value of which is

mainly attributable to the material from which it is minted or cast.
l Immovable property.
l A financial instrument Any capital gain
or loss is not dis-
l Any contract, including a reinsurance policy in respect of such a
regarded, but is
contract, under which a person, in return for payment of a premium,
taken into account
is entitled to policy benefits upon the happening of a certain event,
when calculating
but excluding any short-term policy (see below).
the aggregate gain
l Any short-term policy but only to the extent that it relates to any
or loss.
asset that is not a personal-use asset.
l A right or interest of whatever nature to or in any of the above
assets.
Example 17.48. Disposal of personal-use assets

Peter disposes of the following assets:
1. a town house
2. a motor vehicle for which Peter receives a travel allowance from his employer
3. a boat 15 metres in length solely used by Peter for recreational purposes
4. a portfolio of shares listed on the Johannesburg Securities Exchange
Indicate which of the above assets will qualify as personal-use assets.
SOLUTION
1. Town house – not a personal-use asset as immovable property is excluded (could qualify for
primary residence exclusion if Peter used it as his primary residence).
2. Motor vehicle – is a personal-use asset as it is a qualifying asset on which a business allow-
ance is paid.
3. Boat exceeding ten metres in length – not a personal-use asset as specifically excluded (in
terms of par 15 any capital loss must be disregarded but a capital gain must be included).
4. Portfolio of listed shares – not a personal-use asset as financial instruments are excluded.
Note
Because Peter is a natural person, some assets like the motor vehicle will be considered
personal-use assets and any capital gain or loss on the disposal thereof must be disregarded.
This would also be the case if the motor vehicle was sold by a special trust. If, however, the
same motor vehicle was sold by a company, it would not qualify as personal-use asset and the
capital gain or loss would not be disregarded.
(2) Lump sum retirement benefits exclusions (par 54)

A person must disregard capital gains and losses determined in respect of a disposal that
resulted in him receiving
l a lump sum benefit as defined in the Second Schedule, that is, from a pension, pension
preservation, provident, provident preservation or retirement annuity fund, or
l a lump sum benefit from a fund, arrangement or instrument situated outside South Africa
that provides similar benefits under similar conditions to a pension, provident or retirement
annuity fund approved in terms of the Act.
(3) Long-term assurance policies exclusions (par 55)
A person must disregard capital gains or capital losses determined on the disposal of long-
term insurance policies as long as the policy is not a foreign policy. A disposal includes the
selling, maturing or surrendering of a policy. In order to qualify for the exclusion, the person
receiving the proceeds must be
l the original owner or owners of the policy, or
l the spouse, nominee, dependant or the deceased estate of the original owner, or
l the former spouse (of the original owner) who acquired the policy in terms of a divorce
order.
601
In general, second-hand policies will not qualify for this exclusion as the proceeds will not be
received by the original owner. However, although certain policies’ proceeds are not received
by the original owner they can still qualify for this exclusion. These are
l key-man policies in terms of which the employee or director life was insured and any pre-
miums paid by that person’s employer were deducted in terms of s 11(w)
l policies taken out to buy a partner or co-shareholder’s interest in a partnership or company
provided no premium was borne by the insured or his or her connected person, or
l policies ceded to a member or his dependent if the policy was originally taken out on the
life of that member in consequence of his membership to the pension, pension
preservation, provident, provident preservation or retirement annuity fund.
All risk policies are specifically excluded from the application of capital gains
tax provided the policy has no cash or surrender value. A specific exemption
from capital gains tax will also apply in respect of employer-owned long-term
insurance policies if the amount to be taxed is included in the gross income of
Please note! any person, regardless of whether that amount is subsequently exempted from
gross income. Therefore, when policy proceeds from an employer-owned
insurance policy are exempted from gross income, the exemption should not
trigger an adverse capital gains result. In effect, the exemptions should be
broad enough to effectively exempt the policy proceeds from the income tax (in
terms of s 10(1)(gG) or (gH) as well as from the capital gains tax regime (in
terms of par 55).
(4) Disposal of small business assets exclusion (par 57)

Where a natural person makes a capital gain on the disposal of the active business assets of
his small business he can disregard up to R1,8 million of the gain (par 57). A small business
includes interests held through a company or close corporation. A ‘small business’ is defined
as a business where the market value of all the assets does not exceed R10 million as at the
date of disposal of the assets or interests (par 57(1)). Where a person owns more than one
business, the exclusion will only apply where all the assets of the combined businesses do no
exceed R10 million. The assets include all assets of the businesses (active business assets and
other assets).
The purpose of this exclusion contained in par 57 is to provide relief to small business persons
who have invested their resources in their active business assets. The definition of an ‘active
business asset’ refers to both immovable property and assets other than immovable property. If
the active business asset constitutes an asset other than immovable property, the asset must
be used or held wholly or exclusively for business purposes. On the other hand, if the active
business asset constitutes immovable property, it does not have to be held wholly or
exclusively for business purposes. The R1,8 million exclusion will then apply only to the extent
that the immovable property is held for business purposes. This means that if, for example, 30%
of the property is used for the small business and 70% for private purposes, then only 30% of
the gain will qualify for the R1,8 million exclusion. Please note that the definition of an active
business asset specifically excludes
l financial instruments (for example shares), and
l assets held mainly to derive annuities, rental income, foreign exchange gains, royalties or
similar income (par 57(1)).
When a person sells a small business, one must first determine whether the
natural person qualifies for the R1,8 million exclusion by testing whether the
Please note! requirements of a ‘small business’ is met, i.e. the market value of all business
assets do not exceed R10 million. It is only thereafter that the total capital gain
on all the ‘active business assets’ (fixed property and other assets) must be
calculated. Up to R1,8 million of the total capital gain can then be disregarded.
This exclusion of any capital gain up to R1,8 million is available only to a natural person, made
on the disposal of
l an active business asset of a small business owned by him as a sole proprietor, or
l interest in each of the active business assets of a partnership, to the extent of his interest in
the partnership, or
l an entire direct interest, which consists of at least 10% of the equity of a company, in as far
as that interest relates to assets of that company qualifying as active business assets.
602
Remember
The amount to be disregarded is limited to R1,8 million during a person’s lifetime. This means
that, although he or she may qualify for the concession more than once, the aggregate amount
to be disregarded over his or her lifetime may not exceed R1,8 million (par 57(3)).
Where a person operates more than one small business by way of a sole proprietorship, partner-
ship interest or direct interest of at least 10% in the equity of a company, he or she may include
all these businesses in the lifetime exemption of R1,8 million. However, the exemption will be
unavailable if the total market value of all the assets of all his or her small businesses exceeds
R10 million.
For a person to qualify for this exclusion, he or she must

l have held the small business for his or her own benefit for a continuous period of at least
five years prior to the disposal
l have been substantially involved in the operations of the small business during that period
l have attained the age of 55 years or, if younger, have disposed of the asset or interest in
consequence of his ill-health, other infirmity, superannuation or death, and
l have realised all his or her qualifying capital gains within a period of 24 months,
commencing from the date of the first qualifying disposal (par 57(2) and (4)).
Example 17.49. Disposal of small business asset
Elias wishes to retire when he attains the age of 55 in 2018. He operates a taxi business in the
Gauteng Province as a sole proprietor and has done so for the past eight years. He is
substantially involved in the operations of this business, although he does not do any of the
driving himself. He also owns and manages a building that he rents out to a number of tenants.
The cost of the building was R1 000 000 and it market value is currently R3 000 000.
The ten vehicles used in his taxi business have been paid off and the taxis are now more than
five years old. Someone offered to buy his taxi business 'lock, stock and barrel' for R3 200 000 in
February. The purchase price includes an amount of R1 900 000 that relates to self-generated
goodwill that had a Rnil base cost, and the remaining R1 300 000 relates to the purchase price
of the taxies. The original cost of the taxies was R900 000 and capital allowances claimed on the
taxi amount to R900 000.
Calculate the CGT consequences on the disposal of the taxi business.
SOLUTION
The first step is to determine whether the business qualifies as small business. In this instance
the requirements of a ‘small business’ is met as the market value of all business assets does
not exceed R10 million (R3 million (building) plus R3,2 million (assets of taxi business) equals
R6,2 million). Clearly, Elias qualifies for the R1,8 million exclusion.
The total capital gain on the disposal of the active business assets is:
Taxi
Proceeds R400 000 (R1 300 000 less R900 000 recoupment)
Base cost R0 (R900 000 less R900 000 capital allowances claimed)
Therefore the capital gain is R400 000.
Goodwill
Proceeds R1 900 000
Base cost Rnil
Therefore the capital gain is R1 900 000 (R1 900 000 less Rnil).
Total capital gain
= R400 000 + R1 900 000 = R2 300 000
Elias will have attained the age of 55 in 2018, and will have owned or held an interest in the
active assets for more than five years. He will have been substantially involved in the operations
of the business. He may, therefore, disregard up to R1,8 million of the total capital gain of
R2,3 million realised in the year that he disposes of his taxi business and only the balance of
R500 000 will be included in his sum of capital gains and losses.
continued
603
Note
If the business was conducted in a close corporation (CC), the CGT calculation would have
looked different. Elias would have disposed of his interest in the CC, and not the separate assets.
The proceeds of the interest would have been R3 200 000 and the base cost would have been
the amount that Elias paid for his interest in the CC. Elias would have also disregarded up to
R1,8 million of the total capital gain made on the disposal of his interest in the CC as it relates to
active business assets.
(5) Disposal of microbusiness assets exclusion (par 57A)

Where a person disposes of micro business assets (as defined in terms of the Sixth Schedule),
he must disregard any capital gain or capital loss in respect of the disposal by that business of
any asset used mainly for business purposes. See chapter 23.
(6) Options exclusion (par 58)
A person must disregard a capital gain or loss determined in respect of the exercise of an
option when, as a result of the exercise of the option by him, he acquires or disposes of an
asset in respect of which the option was granted. The cost of the option may, however, form
part of the base cost of the asset under par 20.
For example, a person may buy the option to acquire an asset. Since the option will effectively
terminate when it is exercised and the asset is acquired, a capital loss will arise. Any capital
gain or loss on the exercise of the option must be disregarded, since the cost of the option is
included in the base cost of the asset acquired.
(7) Compensation for personal injury, illness or defamation – exclusion (par 59)
A person must also disregard a capital gain or loss determined in respect of compensation for
personal injury, illness or defamation. This provision applies only to compensation for personal
injury to natural persons and beneficiaries of special trusts.
(8) Gambling, games and competitions – exclusion (par 60)
A natural person must disregard a capital gain or loss determined on a disposal relating to any
form of gambling, game or competition, as long as the particular form of gambling, game or
competition is authorised by and conducted under the laws of South Africa. However, the
following capital gains on gambling, games and competitions will be subject to CGT:
l foreign winnings by natural persons
l illegal gambling games and competitions in South Africa
l capital gains by companies, trusts and other non-natural persons from any gambling,
games or competitions whether local or foreign and whether lawful or unlawful.
(9) Collective investment scheme in securities – exclusion (par 61)
Any capital gain or loss made by a holder in a portfolio of a collective investment scheme in
securities (non-property investments, generally shares) must be determined only upon the dis-
posal of that participatory interest by that holder. The capital gain or capital loss must be deter-
mined with reference to the proceeds from the disposal of that participatory interest and its
base cost. Any capital gain or loss made by a portfolio of a collective investment scheme must
be disregarded meaning the portfolio of a collective investment scheme does not pay tax on
any capital gain, nor does it take into account any capital loss.
(10) Donations to public benefit organisations and other exempt persons – exclusions (par 62)
A person must disregard a capital gain or capital loss determined in respect of the donation or
bequest of an asset by that person to
l the Government of the Republic in the national, provincial or local sphere, as contemplated
in s 10(1)(a)
l a public benefit organisation contemplated in par (a) of the definition of ‘public benefit
organisation’ in s 30(1) that has been approved by the Commissioner in terms of s 30(3)
l a person approved by the Commissioner in terms of s 10(1)(cA) (for example certain
persons conducting scientific research or who promotes agriculture) or (d)(iv)
l a political party referred to in s 10(1)(cE) or body corporate and share block company refer-
red to in s 10(1)(e), or
l a recreational club, which is a company, society or other organisation as contemplated in
the definition of ‘recreational club’ in s 30A(1) that has been approved by the Commissioner
in terms of s 30A.
604
(11) Exempt persons (par 63)

A person, body or institution that is exempt from tax in terms of s 10 must disregard the capital
gain or capital loss in respect of the disposal of any asset. This exclusion only applies to
persons who are fully exempt from tax with regard to all gross income in terms of s 10. Public
benefit organisations and recreational clubs that are partially exempt are therefore excluded
from the par 63 exclusion. They may however qualify for the par 63A exclusion.
(12) Capital gains or losses of public benefit organisations (par 63A)
A public benefit organisation (PBO) approved by the Commissioner in terms of s 30(3) must
disregard any capital gain or capital loss determined in respect of the disposal of an asset if
l that asset was not used in carrying on any business undertaking or trading activity, or
l the whole of the use of that asset was directed at
– a purpose other than carrying on a business or trading activity, or
– carrying on a business undertaking or trading activity contemplated in s 10(1)(cN)(ii)(aa),
(bb) or (cc).
Remember
Where the public benefit organisation ceases to be a public benefit organisation in terms of
s 30(3), the valuation date value must be determined in respect of its ‘exempt’ assets on date of
cessation.
(13) Disposals by small business funding entities (par 63B)

Any capital gain or loss made by a small business funding entity on the disposal of an asset
must be disregarded (see chapter 5 for more detail on small business funding entities).
Any capital gain or loss made on the donation of an asset to a small business
Please note!
funding entity is not disregarded.
(14) Assets used to produce exempt income (par 64)

A person must disregard a capital gain or capital loss for the disposal of an asset that is used
by him solely to produce amounts that are exempt from normal tax.
Assets that are used to produce the following receipts and accruals are excluded from this
exclusion:
l s 10(1)(cN) (the exemption for a PBO because par 63A provides a specific exemption)
l s 10(1)(cO) (the exemption for a recreational club)
l s 10(1)(i) (the basic interest exemption available to natural persons)
l s 10(1)(k) (the exemption available in respect of local dividends), or
l s 12K (the exemption for certified emission reductions).
(15) Awards under the Restitution of Land Rights Act (par 64A)
In terms of the Restitution of Land Rights Act, persons who were dispossessed of their land as
a result of discriminatory laws or practices may claim compensation. The compensation may be
in the form of a restitution of a right to land, or an award or compensation.
A person who has put in a claim for land restitution effectively disposes of his or her claim for
the amount of the award or compensation received.
Any capital gain or loss in respect of a disposal of this nature, including that derived by virtue of
measures as contemplated in Chapter 6 of the National Development Plan: Vision 2030 (the
NDP) of the South African Government, must be disregarded (par 64A).
(16) Disposal of equity shares in foreign companies (par 64B)
Paragraph 64B disregards the capital gain or loss on the disposal of equity shares in a foreign
company by a resident provided certain requirements are met. This is called the capital gains
tax participation exemption and can be divided into two categories:
l the general participation exemption that applies to the disposal of foreign equity shares by
residents
l a specific participation exemption that applies to the disposal of foreign equity shares by
headquarter companies.
605
This par 64B exclusion does not apply to par 2(2) interests (more than 80% of the value of the
foreign company’s assets consists of fixed property in South Africa and at least 20% of the equity
shares are held by the person).
(a) General participation exemption (par 64B(1))
A person (other than a headquarter company) must disregard any capital gain or capital
loss in respect of the disposal of equity shares in foreign companies if the following
conditions are met:
l The person (alone or as part of the same group of companies) have held at least 10%
of the equity shares and voting rights of the foreign company for at least 18 months
prior to the disposal (with interim holdings by group members taken into account for
this purpose).
l The transferred foreign equity shares must be disposed of to a non-resident (other than
a controlled foreign company or a connected person).
l The person must receive consideration that equals or exceeds the market value of the
foreign equity shares transferred. For purposes of this requirement, the receipt of
shares will not be taken into account as consideration.
Remember
When a South African resident company ceases to be a resident, the deemed disposal rules of
s 9H apply and the company is deemed to have disposed of all of its assets (with the exception
of immovable property or assets attributable to a permanent establishment in South Africa) at
their respective market values on the day before ceasing to be a resident. In addition, if a South
African company that ceases to be a resident had, in the three years preceding the date on
which it ceases to be a resident, disregarded any capital gain in terms of par 64B(1) upon the
disposal of equity shares in a foreign company, s 9H(3)(e) triggers a claw-back of the
disregarded capital gain into the tax calculation of the resident company.
The effect of this claw-back provision is that if a resident company was allowed to disregard a
capital gain with the disposal of foreign equity shares in terms of par 64B(1) in the three years
preceding it ceasing to be a resident, then upon ceasing to be a resident, the following occurs:
l that resident company has to account for a deemed disposal on all of its assets at market
value in terms of s 9H(3)(a), and
l the amount of any capital gain that was disregarded in the preceding three years in terms of
the provisions of par 64B(1) will be deemed to be a net capital gain that has to be included
in the company’s taxable income calculation when it ceases to be a resident (s 9H(3)(e)). It
is important to note that no capital losses can be offset against this deemed net capital gain.
(b) Headquarter company participation exemption (par 64B(2))

A headquarter company must disregard any capital gain or capital loss in respect of the
disposal of equity shares in foreign companies if the headquarter company (whether alone
or together with other group members) holds a participation interest of at least 10% of the
equity shares and voting rights of the transferred foreign company.
The requirement that the shares must be held for a minimum period of 18 months,
was deleted in respect of headquarter companies. The exemption for
headquarter companies stems from the fact that the headquarter company has
a number of other deviations from the general rules. Firstly, the headquarter
Please note! company may not participate in the reorganisation roll-over rules (see 16.9).
Secondly, all conversions to a headquarter company will trigger immediate tax
(see 5.2.3). Headquarter company provisions were brought in to allow for the
headquarter company to operate somewhat freely from the South African net
(because the funds are derived offshore and being redeployed offshore).
606
Foreign return of capital (par 64B(4))

A person must also disregard any capital gain determined in respect of any ‘foreign return of
capital’ received by or accrued to that person from a ‘foreign company’ where that person
(together with any other company in the same group of companies as that person) holds at least
10% of the total equity shares (and voting rights) in that company.
Remember
‘Foreign return of capital’ means any distribution (excluding the foreign dividend portion) that is
paid or payable by a foreign company regarding any share in that foreign company. Income tax
legislation in the country in which the foreign company is effectively managed must be used to
determine the dividend portion and the non-dividend portion of the distribution. If the foreign
country does, however, not have any applicable laws in relation to company distributions, the
foreign country’s company law characterisation will prevail.
Excluded from the participation exemption (par 64B(5))

The par 64B exclusion does not apply to the disposal of an interest in a foreign collective
investment scheme in securities nor to any foreign returns of capitals by these schemes.
(17) Disposal of s 8C restricted equity instruments (par 64C)
Any capital gain or loss on the disposal of a restricted equity instrument to a connected person
(in terms of s 8C(4)(a), 8C(5)(a) or 8C(5)(c)) must be disregarded (see chapter 8 for more detail
on restricted equity instruments). The intention of the legislature is to defer any capital gain or
loss until the s 8C equity instrument is unrestricted and vests for purposes of s 8C.
(18) Land donated under the Restitution of Land Rights Act (par 64D)
Any capital gain or loss in respect of the donation of land or a right to land by the owner of the
land (by virtue of measures as contemplated in Chapter 6 of the NDP), must be disregarded.
Remember
Paragraph 64A is from the perspective of the person that has a claim to a piece of land whereas
par 64D is from the perspective of the owner of a piece of land.
(19) Disposal by trust in terms of a share incentive scheme (par 64E)

Any capital gain or loss in respect of the disposal of an asset by a trust in terms of a share
incentive scheme, where the trust beneficiary has a vested right to the amount, must be
disregarded, if the amount is included in the income or taken into account in the gain or loss of
that trust beneficiary in terms of s 8C.
(20) Disposals by an international shipping company – s 12Q
Any capital gain or loss made by an international shipping company must be disregarded (see
chapter 21 for more detail on international shipping companies).
17.10.3 Roll-overs (paras 65 to 67D)

Certain capital gains may be rolled over before determining a person’s aggregate capital gain or
loss. The recognition of these gains is delayed for CGT purposes or rolled over until a future event
occurs. Part IX (paras 65 to 67C) of the Schedule deals with roll-overs. Certain roll-over provisions are
contained in the main Act, in ss 41 to 47 (corporate rules) and s 9HA (assets bequeathed to a
spouse).
The following diagram illustrates the three important roll-over provisions dealt with below:
Paragraphs 65, 66 and 67 deal with the deferment of capital gains
Involuntary disposal of Reinvestment in Transfer of assets

assets replacement assets between spouses
(par 65) (par 66) (par 67)
607
The taxpayer opts for the application of paras 65 and 66.

Please note!
No such option exists in terms of par 67.
17.10.3.1 Involuntary disposals (par 65)

Paragraph 65 deals with involuntary disposals, that is, instances where an asset is destroyed, lost,
expropriated or stolen and the person receives compensation (such as an insurance pay-out) and
the proceeds are used to acquire a replacement asset.
The following diagram illustrates the requirements of par 65:
If a person disposes of an asset (other than a financial instrument);
and
the disposal took place by way of operation of law, theft or destruction and proceeds accrue to him by way
of compensation in respect of that disposal (involuntary disposal);
and
the proceeds are equal to or exceed the base cost of the assets;
and
an amount at least equal to the receipts and accruals from the disposal has been or will be expended to
acquire one or more replacement assets;
and
all these replacement assets constitute assets contemplated in s 9(2)(k) or (j), that is, certain immovable
property and assets attributable to a permanent establishment in South Africa;
and
the contracts for the acquisition of the replacement asset or assets have been or will be concluded within
12 months after the date of disposal of the asset;
and
the replacement asset will be brought into use within three years of the disposal of the asset and that asset is
not deemed to have been disposed of and reacquired by that person;
then
the taxpayer can choose to defer any capital gain in the year of disposal, as follows:
l In the case of a non-depreciable replacement asset, the capital gain is deferred to the date when the
replacement asset is disposed of (par 65(5)).
l In the case of a depreciable replacement asset, the capital gain will be taxed in proportion to the capital
allowances claimed on the replacement asset (par 65(4)).
l The third requirement (proceeds must be equal to or exceed base cost) en-
sures that a capital loss is not deferred.
l If the person concerned fails to conclude a contract or bring the
replacement asset into use within the prescribed period, he must treat the
deferred capital gain as a capital gain on the date on which the prescribed
Please note! period ends. In addition, he must determine interest at the ‘prescribed rate’ on
the capital gain from the date of the disposal to the end of the prescribed
period. The interest so determined must then be treated as an additional
capital gain made on the last day of the prescribed period (par 65(6)).
l There is no requirement that the replacement asset must fulfil the same
function as the old asset.
608
Paragraph 65 also provides for a few specific situations:

(1) When the replacement asset is a depreciable asset (par 65(4))
When the replacement asset is a ‘depreciable asset’ (defined in par 1), the person must treat a
certain portion of the disregarded capital gain (determined on the disposal of the original asset)
as a capital gain in each year of assessment during which the replacement asset is being
depreciated.
The amount to be treated as a capital gain in the year of assessment equals:
Allowance for the replacement asset allowable in the
current year of assessment
Total capital gain ×
Total allowance allowable on replacement asset for
all years of assessment
Example 17.50. Replacement of depreciable asset with single replacement asset
Arson Ltd. purchased a machine on 28 February 2014 at a cost of R100 000. On 28 February
2015 the machine was destroyed in a fire. The company received R120 000 from its insurer as
compensation. Arson Ltd. purchased and started using a more advanced replacement machine
on 30 June 2015 at a cost of R150 000. Arson Ltd. has a 30 June year-end.
Determine the capital gain to be brought into account in the 2015 to 2018 years of assessment.
SOLUTION
The capital gain on disposal of the old machine amounts to R20 000. Under par 65 this must be
disregarded and spread over future years of assessment in proportion to the capital allowances
to be claimed on the replacement asset.
The capital allowances on the new machine will be as follows:
2015: R150 000 × 40% = R60 000
2016: R150 000 × 20% = R30 000
2017: R150 000 × 20% = R30 000
2018: R150 000 × 20% = R30 000
The capital gain of R20 000 must be recognised as follows:
2015: R20 000 × R60 000/R150 000 (40%) = R8 000
2016: R20 000 × R30 000/R150 000 (20%) = R4 000
2017: R20 000 × R30 000/R150 000 (20%) = R4 000
2018: R20 000 × R30 000/R150 000 (20%) = R4 000
Note
Had there been a recoupment (s 8(4)), it would have been taxed to the same extent as the
capital gain.
(2) When the person who has made the election acquires more than one replacement asset
(par 65(3))
When the person who has made the election acquires more than one replacement asset, he
must allocate the capital gain on the disposal of the original asset. The gain must be allocated
to each replacement asset in the same ratio as the amount of receipts and accruals, from
disposal of the original asset spent on each particular replacement asset, bears to the total
amount expended in acquiring all the replacement assets.
Example 17.51. Allocation of capital gain across multiple replacement assets.
Pluto Ltd acquired a machine on 1 October 2014 at a cost of R200 000. On 28 February 2018 a
flood irreparably damaged the machine. The insurer paid out R240 000, being the replacement
cost. Pluto Ltd decided to replace the old machine with two smaller machines, X and Y.
Machine X cost R180 000 and machine Y cost R60 000.
Allocate the capital gain between the machines.
609
SOLUTION
The capital gain on disposal of the old machine will be allocated to the replacement machines as
follows:
Machine X: R180 000/R240 000 × R40 000 = R30 000
Machine Y: R60 000/R240 000 × R40 000 = R10 000
These capital gains will be brought into account in future years of assessment in accordance
with the respective capital allowances claimable in respect of each of the machines
(3) When the replacement asset is disposed of before the full amount of the previously disregarded
capital gain has been taxed (par 65(5))
If the full amount of the previously disregarded capital gain apportioned to a depreciable asset
has not yet been treated as a capital gain by the time the replacement asset is disposed of, the
person concerned must treat the amount not yet otherwise regarded as a capital gain as a
capital gain from the disposal of the replacement asset in that year of assessment. This has the
effect of an ongoing chain of relief in respect of depreciable replacement assets (provided that
all the roll-over requirements are met when replaced again).
The periods of 12 months and three years (required by par 65) may be extended by a
maximum of six months at the discretion of the Commissioner, on application by the taxpayer, if
all reasonable steps were taken to conclude a contract or bring the replacement asset into use.
l The above rules do not apply to replacement assets that constitute

personal-use assets (par 65(7)).
Please note!
function as the old assets.
17.10.3.2 Reinvestment in replacement assets (par 66)

Paragraph 66 applies to all disposals where the taxpayer was entitled to claim a capital allowance on
the asset and the proceeds on disposal are used to acquire a replacement asset.
The following diagram illustrates the requirements of par 66:
If a person disposes of an asset
and
the replaced asset qualified for capital allowances under ss 11(e), 11D(2), 12B, 12C, 12DA, 12E, 14, 14bis
or 37B
and
the proceeds are equal to or exceed the base cost of the assets
and
an amount at least equal to the receipts and accruals from the disposal has been or will be expended to
acquire one or more replacement assets that will all qualify for a capital deduction or allowance in terms of
ss 11(e), 11D(2), 12B, 12C, 12DA, 12E or 37B
and
all these replacement assets constitute assets contemplated in s 9(2)(j) or 9(2)(k)
and
the contracts for the acquisition of the replacement asset or assets have been or will be concluded within
12 months after the date of disposal of the asset
and
the replacement asset will be brought into use within three years of the disposal of the asset and that asset
is not deemed to have been disposed of and reacquired by that person
then
the taxpayer can choose to tax the capital gain in proportion to the capital allowances claimed on the
replacement asset (par 66(4)).
610
l When a person fails to conclude a contract or to bring a replacement asset into

use within the prescribed period, the election falls away and he must treat the
previously disregarded capital gain as a capital gain on the date that the
relevant period ends. He must also determine interest at the prescribed rate on
the capital gain from the date of the disposal to the date that the relevant
period ends and treat that interest as a capital gain when determining his
Please note! aggregate capital gain or aggregate capital loss (par 66(7)).
function as the old asset. The only requirement is that the replacement asset
must qualify for an allowance under the specified sections of the Act.
l The third requirement (proceeds must be equal to or exceed base cost)
ensures that a capital loss is not deferred.
A person must include a portion of the disregarded capital gain contemplated above in his
aggregate capital gain or loss in each year of assessment during which the asset is being depre-
ciated (see Example 17.52).The amount to be treated as a capital gain in the year of assessment
equals:
Allowance for the replacement asset allowable in the
current year of assessment
Total capital gain ×
Total allowance allowable on replacement asset for
all years of assessment
(See example 17.52.)
Paragraph 66 also provides for a few specific situations:
(1) When the person who has made the election acquires more than one replacement asset
(par 66(3))
When a person acquires more than one replacement asset, he must apportion the capital gain
derived from the disposal of the original asset to each replacement asset in the same ratio as
the receipts and accruals from the disposal of the original asset spent in acquiring each of the
replacement assets bear to the total amount of those receipts and accruals expended in
acquiring all the replacement assets (see Example 17.51).
(2) When the replacement asset is disposed of before the full amount of the previously disregarded
capital gain has been taxed (par 66(5))
When a person disposes of a replacement asset and any portion of the disregarded capital
gain that is apportioned to that asset as contemplated above has not yet been treated as a
capital gain, he must treat that portion of the disregarded capital gain as a capital gain from the
disposal of the replacement asset.
(3) If a person ceases to use a replacement asset for the purposes of his trade and the full amount
of the previously disregarded capital gain has not yet been taxed (par 66(6))
If a person ceases to use a replacement asset for the purposes of his trade and any portion of
the disregarded capital gain that is apportioned to that asset has not yet been treated as a
capital gain as explained above, he must treat that portion of the disregarded capital gain as a
capital gain.
Example 17.52. Reinvestment in a similar asset
Choice (Pty) Ltd. acquired a new machine for R100 000 from a local supplier (not a connected
person) on 1 October 2014. The machine was brought into use immediately and qualified for the
s 12C allowance.
Due to the rapid expansion of the operations of Choice (Pty) Ltd., it was decided to replace this
machine with a technologically more advanced machine. On 1 November 2015 the old machine
was sold for R150 000 and a new machine was purchased at a cost of R450 000. The new
machine was brought into use on 15 November 2015 and also qualifies for the s 12C allowance.
The company’s year-end is the last day of December each year.
Calculate the normal tax implications for Choice (Pty) Ltd arising from the above transactions,
assuming that the company elects to apply the provisions of par 66. (Assume that the company
has no other capital gains or losses for the relevant tax years.)
611
SOLUTION
Old machine:
Original cost ................................................................................................................... R100 000
Less: Section 12C allowance (2014 tax year) (40% of R100 000) ............................... 40 000
Section 12C allowance (2015 tax year) (20% of R100 000) ............................... 20 000
Income tax value on date of sale ................................................................................... R40 000
Recoupment on old machine:
Proceeds of R150 000 (limited to cost price of R100 000) ............................................ R100 000
Less: Income tax value on date of sale (calculated above) ......................................... 40 000
Section 8(4)(a) recoupment ........................................................................................... R60 000
This recoupment is not fully included in income (for income tax purposes) if the
taxpayer has elected the provisions of par 66 (s 8(4)(e)). Instead, the inclusion in the
taxpayer’s income in the 2015 tax year will be R60 000 × 40% .................................... R24 000
The inclusion in the 2016, 2017 and 2018 tax years will be R60 000 × 20% ................. R12 000
New machine:
Original cost ................................................................................................................... R450 000
Less: Section 12C allowance (2015 tax year) (40% of R450 000) ................................. 180 000
Income tax value at end of year ..................................................................................... R270 000
Capital gain on disposal of old machine:
Proceeds on disposal .................................................................................................... R150 000
Less: Section 8(4)(a) recoupment ................................................................................. 60 000
R90 000
Less: Base cost (income tax value calculated above)................................................... 40 000
Capital gain .................................................................................................................... R50 000
The capital gain of R50 000 on the old machine must be rolled over. The company
must account only for 40% of the capital gain of R50 000 in the 2015 year of assess-
ment. This means 40% × R50 000 = R20 000 multiplied with the inclusion rate of R16 000
80% should be included in taxable income ...................................................................
The inclusion in the 2016, 2017 and 2018 tax years will be R50 000 × 20% × 80% ..... R8 000
Note
If the company disposes of the new machine or ceases to use it for the purposes of its trade in a
year of assessment before the full capital gain has been brought into account, it must treat the
balance of the capital gain that has not yet been brought into account as a capital gain in that
year.
17.10.3.3 Transfer of assets between spouses (par 67)

Paragraph 67 provides a form of ‘roll-over relief’ with regard to disposals between spouses. The
transferor must disregard any capital gain or loss determined in respect of the disposal of an asset to
his or her spouse (transferee). The transferee is treated as having
l acquired the asset on the same date on which it was acquired by the transferor
l acquired the asset for an amount equal to the base cost expenditure incurred by the transferor
prior to the disposal
l incurred that expenditure on the same date and in the same currency that it was incurred by the
transferor
l used the asset in the same manner that it was used by the transferor in the period prior to the
disposal, and
l received an amount equal to an amount received by the transferor in respect of that asset that
would have constituted proceeds on disposal of that asset had that transferor disposed of it to a
person other than the transferee.
(Paragraph 67(1))
Therefore, if the transferee subsequently disposes of the asset, he or she will calculate the capital
gain or capital loss in the same way as the transferor would have calculated it. Also, if the transferee
subsequently disposes of the asset, he or she will be treated as if the same type of asset was
disposed of, for example a personal-use asset, as long as it is used in the same way.
612
This relief will be unavailable if the asset is disposed of to a spouse who is not a
Please note! resident, unless the asset is an asset that remains in the tax net for non-
residents, for example, immovable property situated in South Africa or assets of
a permanent establishment in South Africa (par 67(3)).
A person must also be treated as having disposed of an asset to his or her spouse for the purposes
of this roll-over provision if the asset is transferred to the spouse is
l in consequence of a divorce order or an agreement (dividing the assets) made in a court order,
and
l in settling an accrual claim of the deceased spouse against the surviving spouse where an asset
of the surviving spouse is transferred to the deceased estate.
In settling an accrual claim of the deceased spouse, the surviving spouse is treated as having
disposed of the assets immediately before the death of the deceased spouse. This means that the
surviving spouse will not be subject to normal tax on capital gains on the transfer of the assets to the
deceased estate in terms of the accrual claim.
(Paragraph 67(2))
Paragraph 67 does not apply to a person who dies on or after 1 March 2016 if
his or her surviving spouse inherits any asset. In such a case s 9HA determines
the roll-over consequences for the deceased spouse and s 25 determines the
Please note! roll-over consequences for the surviving spouse in respect of the assets
bequeathed (see 17.11.2). The provisions of par 67, however, still apply to
determine the base cost of assets inherited from the predeceased spouse that
died before 1 March 2016.
Example 17.53. Donations between spouses where one spouse is a non-resident
During the year of assessment Mrs Abanda (a non-resident) got married (out of community of
property) to Mr Abanda (a resident). Mrs Abanda had no assets on date of marriage. Mr Abanda
then transfers the following assets to Mrs Abanda (which remains a non-resident):
Asset Base cost Market value
Holiday home in KwaZulu-Natal ............ R1 500 000 R3 000 000
Listed shares ........................................ R5 000 000 R7 000 000
How should the above disposals be treated for CGT purposes?
SOLUTION
As Mr Abanda disposes of the assets to Mrs Abanda, a non-resident, a capital gain of
R2 000 000 (R7 000 000 – R5 000 000) will arise on the disposal of the listed shares. The capital
gain arising on the disposal of the holiday home to Mrs Abanda must be disregarded in terms of
par 67 in the hands of Mr Abanda as this is an asset contemplated in par 2(1)(b). With regard to
the holiday home Mrs Abanda must be treated as having
l acquired the holiday home on the same date as Mr Abanda for an amount equal to the base
cost to Mr Abanda (in the same currency), and
l used the holiday home in the same manner that it was used by Mr Abanda for the period
prior to disposal.
17.10.3.4 Other roll-overs (paras 65B, 67B, 67C and 67D)

(1) Disposal by a recreational club (par 65B)
A recreational club (approved in terms of section 30A) may elect that any capital gain in
respect of the disposal of an asset in order to acquire a replacement asset may be rolled over
when determining that club’s aggregate capital gain or aggregate capital loss. The asset must
be used wholly or mainly for purposes of providing social and recreational facilities and
amenities for members of that club.
(2) Transfer of a unit by a share block company to a member (par 67B)
When a company that operates a share block scheme transfers a unit in immovable property to
a person who holds a share in it, the company must disregard any capital gain or capital loss
determined on the disposal of that unit. The shareholder must disregard any capital gain or loss
on the disposal of the share.
613
The holder is deemed to have acquired the property for the cost of the share, which includes
the amount of the loan account, at the date that the holder acquired the share.
(3) Conversions and renewals of mineral rights and communications licences (paras 67C and 67D)
Where certain old mineral rights or communications licences are converted or renewed, the
new right or licence will be treated as one and the same asset as the original right or licence.
17.10.4 Attribution of capital gains (paras 68 to 73)

Certain capital gains resulting from a donation can be attributed to the donor. These capital gains are
disregarded in the hands of the recipient and are deemed to accrue to the donor and will be
included in the aggregate capital gain or loss of the donor. Part X (paras 68 to 73) of the Schedule
deals with the attribution rules. Attribution rules are therefore special rules that will effectively shift the
liability for tax on capital gains to the person who made a ‘donation, settlement or other disposition’.
The Act contains similar income tax provisions that may deem a person’s income to be that of
another person (see 24.6).
The attribution rules in paras 68 to 73 are summarised and compared to similar income tax provisions
in the following diagram:
Event for CGT purposes Par CGT consequences Similar income tax provision
Gain vested in a spouse 68 Taxed in hands of donor spouse Section 7(2)
Gain vested in a minor (not a 69 Taxed in the hands of donor Sections 7(3) and 7(4)
step child) parent (can be a step child)
Gain not vested in beneficiary 70 Taxed in hands of donor Section 7(5)
because it’s subject to a
condition (for example exer-
cise of trustee’s discretion)
Gain vested in beneficiary but 71 Taxed in hands of donor Section 7(6)
can be revoked by donor
Asset or gain vested in non- 72 Taxed in hands of donor Section 7(8)
resident beneficiary
Section 7 income and capital 73 The amount that can be deem- None
gain taxed in the hands of the ed a capital gain in the hands of (Principles from the
donor. Selling price left out- the donor is limited to Woulidge case are applied
standing as an interest-free or l the interest saving enjoyed – see 24.6.9)
low-interest loan less
l any income deemed back
to the donor in terms of s 7
Remember
In the application of paras 68 to 73 the person liable to pay the tax is entitled to recover it from
the person who would have been liable for the tax in the absence of paras 68 to 72 (s 90).
There is no provision equal to s 7(7) in the Eighth Schedule because the donor has a right to
regain ownership of the asset and the asset may therefore not be disposed of.
For the attribution rules under paras 68 to 73 to apply, there must first be a ‘donation, settlement
or other disposition’. Also note that where the donor no longer exists, for example he is
deceased, no attribution can occur. If a gain is distributed to a non-resident beneficiary and
par 72 is not applicable (for example the donor is deceased), then the trust will be subject to tax
on the capital gain.
614
Each of these six attribution rules will now be discussed in detail:

(1) Capital gains made by a spouse are attributed to the donor spouse (par 68)
Paragraph 68 consists of two parts:
Paragraph 68(1) Capital gain made from a donation Paragraph 68(2) Capital gain made from a trade
by a spouse: with a spouse:
When a spouse’s capital gain may be attributed When a spouse derives a capital gain
wholly or partly to l from a trade carried on in partnership with the
l a donation, settlement or other disposition other spouse or connected with a trade of the
made by the other spouse, or other spouse, or
l a transaction, operation or scheme made, l from the other spouse or a partnership or pri-
entered into or carried out by the other spouse vate company (at a time when that spouse
then it will be deemed to be made by the other was a partner or the sole, main or one of the
spouse, if carried out mainly for the purpose of principal holders of shares)
l reducing, or then, to the extent that the capital gain derived by
l postponing or the spouse exceeds the amount to which the
spouse is reasonably entitled, regard being had to
l avoiding
l the nature of the relevant trade, or
the other spouse’s liability for any tax, duty or levy
that would otherwise have become payable under l the extent of the spouse’s participation in it, or
any Act administered by the Commissioner. l the services rendered by the spouse, or
Therefore, the spouse who initiated the transaction l any other relevant factor
is made liable for the tax on the capital gain. it must be disregarded by that spouse and must
instead be taken into account by the other spouse.
Remember
It is only par 68(1) that requires that the transaction be entered into or carried out mainly for the
purpose of avoiding any tax, duty or levy administered by the Commissioner.
For the other attribution rules (paras 68(2) to 72), this is not a requirement.
(2) Capital gains made by a minor child are attributed to the donor parent (par 69)
If a capital gain is made by a minor child and it can be attributed wholly or partly to a donation,
settlement or other disposition made by a parent of the child
l then it will be taxed in the hands of the parent and not in the hands of the minor child
(similar to s 7(3)).
The capital gain would also be considered the parent’s if it vests in the minor or is treated as
vested in him or is used for his benefit during the year of assessment in which it arises.
This rule also applies where the minor child’s capital gain may be attributed to a donation made
by another person in return for a donation made by the parent of the child in favour of the other
person concerned (or his family). This provision is similar to s 7(4) of the Act.
Remember
The parent who is liable for the tax is entitled to recover it from the minor child who is actually
entitled to the proceeds on the disposal of the asset (s 90).
(3) Capital gains that arise as a result of a conditional donation are attributed to the donor (par 70)
When a person makes a donation whereby a capital gain (attributable to the donation) will not
vest in the beneficiaries until some fixed or contingent event occurs
l then the capital gain will be taxed in the hands of the donor, as long as the capital gain or
any portion of it has not vested in any resident beneficiary during the year of assessment.
The person who made the donation (as well as the person receiving the donation) must be a
resident throughout the year. The capital gain or portion of it will be taxed in the hands of the
donor and disregarded when determining the aggregate capital gain or loss of the trust. The
stipulation or condition may be imposed by the donor or anyone else. This provision is similar to
s 7(5) of the Act.
615
Example 17.54. Conditional donations
Mr Abro donates shares to a discretionary family trust. The trust deed provides that the trustees
may distribute income derived by the trust and gains made on its assets to the beneficiaries
entirely at their discretion. The trust eventually sells the shares at a capital gain of R150 000. The
trust does not distribute the capital gain. It uses the proceeds to buy other assets.
Determine in whose hands the capital gain will be taxed.
SOLUTION
The capital gain will be attributed to Mr Abro in terms of par 70, as vesting is subject to the hap-
pening of some contingent event (the exercising of the trustee’s discretion).
(4) Capital gains that arise as a result of a revocable donation are attributed to the donor (par 71)
When a donation confers upon a resident beneficiary, who has the right to receive a capital
gain or portion thereof, subject to the donor’s right to revoke the right or confer it upon another
person, and the donor retains the powers of revocation
l then any capital gain or portion of a capital gain that has vested in a beneficiary during a
year of assessment under the right must be disregarded by the beneficiary and instead
taxed in the hands of the donor.
The person who made the donation must be a resident throughout the relevant year of assess-
ment. This provision is similar to s 7(6) of the Act.
(5) Capital gains of a non-resident that arise as a result of a donation by a resident are attributed to
the resident donor (par 72)
When a resident makes a donation, settlement or other disposition to any person (excluding a
non-resident entity similar to a public benefit organisation referred to in s 30 of the Act) and a
capital gain arises during the year of assessment (attributable to that donation) and it has
vested in or is treated as having vested in a non-resident during the year of assessment
l then it must be disregarded by the non-resident and instead taken into account by the
resident donor.
This provision does not apply where donations are made to the resident’s ‘controlled foreign
entities’, as defined in s 9D.
This provision is similar to s 7(8) of the Act.
Paragraph 72 applies to any capital gain made as a result of the donation, not
Please note!
only to South African source capital gains.
(6) Attribution of income and capital gains

Paragraph 73 limits the total amount of
l the s 7 income that is deemed to accrue to the donor plus
l the capital gain attributed to him in terms of the attribution rules of the Schedule
to ‘the amount of the benefit derived from that donation, settlement or other disposition’.
According to par 73(2) ‘the amount of the benefit derived from that donation, settlement or other
disposition’ means
l the amount by which the donee has benefited from the fact that the donation, settlement or
disposition was made for or an inadequate consideration
l including a consideration in the form of interest.
Remember
Where the asset has been financed by a low or interest-free loan from the donor, the capital gain
amount that can be deemed the donor’s is limited to
l the interest saving enjoyed by the trust less
l any income deemed to be the donor’s in terms of s 7.
616
Example 17.55. Parent: Minor disposition with interest-free loan

On 1 March 2013 Lorna lent R100 000 interest-free to the Lorna Family Trust. Had the trust bor-
rowed the funds to purchase the shares, it would have paid interest at the annual rate of 15%.
The discretionary beneficiaries of the trust are Lorna and her two minor children, Peter and
Harry. The trustee used the funds to purchase some listed shares in Green Ltd, a company listed
on the JSE Ltd. On 28 February 2018, the trustee sold the shares at a capital gain of R205 000
and vested it in Peter (16) and Harry (14) in equal shares. Assume that no dividends were ever
received on the listed shares.
Determine in whose hands the capital gain will be taxed.
SOLUTION
There has been a donation, settlement or other disposition in that no interest has been charged
on the loan. The following interest would have been payable on the loan (on or after valuation
date) had the funds been borrowed from the bank (all tax years end on 28 February):
2014:15% × R100 000 ................................................................................................... R15 000
2015: ............................................................................................................................. R15 000
2016: ............................................................................................................................. R15 000
2017: ............................................................................................................................. R15 000
2018: ............................................................................................................................. R15 000
R75 000
In terms of paras 69 and 73, R75 000 of the capital gain of R205 000 will be taxed in the hands of
Lorna, whilst the balance of R130 000 will be taxed in the hands of Peter (R65 000) and Harry
(R65 000).
17.10.5 Limitation of losses (paras 15 to 19, 37, 39 and 56)

Capital losses in respect of certain assets must be disregarded in determining the aggregate capital
gain or aggregate capital loss of a person. The reason for these provisions are generally anti-
avoidance.
17.10.5.1 Certain personal-use aircraft, boats, rights and interests (par 15)
The capital loss is disregarded to the extent that the following assets are not used in carrying on a
trade:
l an aircraft with an empty mass exceeding 450 kg
l a boat exceeding ten metres in length (a ‘boat’ being defined as any vessel used or capable of
being used in, under or on the sea or internal waters, whether self-propelled or not and whether
equipped with an inboard or outboard motor) (par 1)
l any fiduciary, usufructuary or other like interest, the value of which decreases over time
l a right or interest of whatever nature to or in any of the above assets.
This means that any capital loss on the disposal of a boat exceeding ten metres in length, used only
for private purposes, should be disregarded. Any capital gain should, however, be included. In terms
of par 53 the above assets are excluded from the definition of ‘personal-use assets’ (see 17.10.5.1).
If a par 15 asset is used for both private and trade purposes, an apportionment
Please note! should be made. Only the portion of the capital loss relating to private use will
be disallowed in terms of par 15.
17.10.5.2 Intangible assets acquired prior to the valuation date (1 October 2001) (par 16)
Any capital loss on intangible assets acquired prior to 1 October 2001 is disregarded if:
l the assets were acquired from a connected person, or
l the assets were associated with a business taken over by this person or any connected person.
This means that any capital loss on the disposal of an intangible asset acquired prior to 1 Octo-
ber 2001 and associated with a business taken over by that person, must be disregarded. Intangible
assets generally refer to patents, designs, trademarks, copyrights and goodwill.
617
17.10.5.3 Forfeited deposits (par 17)

Any capital loss on a forfeited deposit must be ignored if the deposit was made for the purposes of
acquiring an asset that was not intended for use wholly and exclusively for business purposes.
Paragraph 17 does not apply to
l gold or platinum coins of which the market value is mainly attributable to the material from which it
is made (for example Kruger Rands)
l immovable property (excluding a primary residence)
l financial instruments (for example shares), or
l any right or interest in these assets.
17.10.5.4 Options (par 18)

Any capital loss on the disposal of an option to acquire an asset not intended for use wholly and
exclusively for business purposes. Disposal includes any event where the option is abandoned,
allowed to expire or is disposed of in any manner other than the exercise of the option (par 18).
Paragraph 18 does not apply to
l gold or platinum coins of which the market value is mainly attributable to the material from which
it is made (for example Kruger Rands)
l immovable property (unless the property is intended to be a primary residence)
l financial instruments (for example shares), or
l any right or interest in these assets.
17.10.5.5 Shares in a dividend-stripping transaction (par 19)

Dividend stripping in general refers to a situation where the value of a share is diminished by the
extraction of an exempt dividend and the share is thereafter disposed of at a diminished value.
Paragraph 19 is an anti-avoidance provision aimed at dividend stripping situations whereby a portion
of the capital loss must be disregarded upon the disposal of such a share. It applies in one of the
following two situations:
Situation 1: (par 19(1)(a)) Situation 2: (par 19(1)(b))

If a person disposes of a share at a capital loss If a person disposes of a share at a capital loss
l as a result of a share buy-back by the l as a result of circumstances other than a share
company, or the liquidation, winding-up or buy-back, liquidation, winding-up or deregistra-
deregistration of that company tion of that company
l then the capital loss is disregarded to the l then the capital loss is disregarded to the
extent that ‘exempt dividends’ are received or extent that ‘extraordinary exempt dividends’ are
accrues to that person within 18 months prior or received or accrue to that person within
as part of that disposal. 18 months prior or as part of that disposal
(other than a disposal in terms of s 29B in
respect of long-term insurers).
Clearly, par 19(1)(b) will only apply in circumstances where the situation as set out in par 19(1)(a)
does not apply.
The terms ‘exempt dividends’ and ‘extraordinary exempt dividends’ are defined in terms of
paras 19(3)(b) and (c) respectively:
‘Exempt dividends’ means any dividend or foreign dividend that is
l not subject to any dividends tax, and
l exempt from normal tax in terms of ss 10(1)(k)(i) or 10B(2)(a) or (b).
‘Extraordinary exempt dividend’ is defined as
l so much of the amount of the aggregate of any ‘exempt dividend’ received or accrued within the
period of 18 months prior to or as part of the disposal
l as exceeds 15% of the proceeds received or accrued from the disposal (or part disposal).
The period of 18 months excludes any days during which the person concerned
l had an option to sell or was under a contractual obligation to sell or had made (and not closed) a
short sale of, substantially similar financial instruments
l was the grantor of an option to buy substantially similar financial instruments, or
618
l otherwise diminished the risk of loss on the share by holding one or more contrary positions with
respect to substantially similar financial instruments.
Remember
Paragraph 19 applies in two situations when a person disposes of shares at a capital loss:
l Where the capital loss is a result of a share buy-back or as part of the liquidation, winding up
or deregistration of the company, the person must disregard so much of the capital loss that
does not exceed any exempt dividends.
l Where the capital loss is a result of circumstances other than those described in the first
bullet point, the person must disregard so much of the capital loss as does not exceed any
extraordinary exempt dividends.
Example 17.56. Dividend stripping as a result of a share buy-back, liquidation, winding up

or deregistration of the company (par 19(1)(a))
Ace Ltd., a SA resident company who is not a share-dealer, owns shares in Bongo Ltd. (a JSE-
listed SA resident company) which it acquired for R100 000 on 1 March 2005. On 31 May 2017 B
Ltd. buys back 10% of its shares from all its shareholders. The directors advise the shareholders
that 75% of the consideration is a dividend while the remaining 25% is a return of capital. Ace
Ltd. receives R20 000 as consideration for the buy-back.
Calculate Ace Ltd's capital gain or loss.
SOLUTION
Proceeds (return of capital R20 000 × 25%) ................................................................. R5 000
Less: Base cost (R100 000 × 10%) ............................................................................... (10 000)
Capital loss .................................................................................................................... (R5 000)
The dividend portion of the consideration of R15 000 (R20 000 × 75%) is an ‘exempt dividend’ in
terms of par 19 because it is not subject to normal tax or dividends tax. The capital loss is
disregarded to the extent that any ‘exempt dividend’ is received by or accrues to Ace Ltd as a
result of the share buy-back.
Exempt dividend received or accrued as a result of the share buy-back ..................... R15 000
Capital loss disregarded (limited to R15 000 exempt dividend).................................... R5 000
Capital loss allowed (R5 000 – R5 000) ......................................................................... Rnil
Example 17.57. Dividend stripping in other circumstances (par 19(1)(b))

Hunter Ltd, who is not a share-dealer, purchased a share in Coco (Pty) Ltd on 1 March 2016 for
R550 000. On 30 April 2017 Hunter Ltd receives a dividend of 400 000. Hunter Ltd sells the
shares on 1 May 2017 for R100 000.
Calculate Hunter Ltd's capital gain or loss.
SOLUTION
Proceeds ..................................................................................................................... R100 000
Less: Base cost ........................................................................................................... (550 000)
Capital loss .................................................................................................................. (R450 000)
The capital loss is disregarded to the extent that any extraordinary exempt dividend is received
by or accrues to Hunter Ltd within 18 months prior to or as part of the disposal. The capital loss
that is disregarded is calculated as follows:
Extraordinary exempt dividend (capital loss disregarded):
Dividend received or accrued within 18 months before date of disposal ................... R400 000
Less: 15% of proceeds (15% × R100 000) ................................................................. 15 000
Capital loss disregarded ............................................................................................. R385 000
Capital loss allowed (R450 000 – R385 000) ............................................................... R65 000
619
According to SARS’ Tax Guide for Share Owners, par 19 has the practical effect that it will not apply
to an individual holding share in a resident company or non-resident JSE-listed company because
dividends from these companies are subject to the dividends tax. It will, however, apply to resident
companies receiving dividends from such companies because such dividends are exempt from
dividends tax under s 64F(a). In the case of foreign dividends par 19 will apply to
l an individual who enjoys the participation exemption in s 10B(2)(a), and
l a company that enjoys the participation exemption in s 10B(2)(a) or the same country exemption
in s 10B(2)(b).
17.10.5.6 Interest in a company holding certain personal-use aircraft, boats, rights and interests
assets (par 37)
Paragraph 37 is an anti-avoidance provision. Its purpose is to prevent persons from avoiding the dis-
regarding of capital gains and losses in respect of personal-use assets, by holding these assets in a
company or trust.
17.10.5.7 Assets disposed of to a connected person (par 39)

Where a person disposes of an asset to connected person and the transaction results in a capital
loss, this loss is ‘clogged’ in terms of par 39. A person must disregard capital losses (‘clogged’
losses) on the disposals of assets to a person who
l was his connected person immediately before the disposal, or
l is a member of the same group of companies immediately after the disposal, or
l is a trust with a beneficiary that is a member of the same group of companies immediately after
the disposal.
The disregarded or ‘clogged’ capital loss may only be deducted from capital
gains arising from disposals of assets to the same connected person. These
Please note! disposals can be in the same or a subsequent year of assessment, provided that
the other person is still the first person’s connected person at the time of the
subsequent disposals.
Connected persons are defined in s 1 of the Act, but the definition of connected person in par 39 is
narrower for the purposes of par 39. A connected person in relation to a natural person only includes
the parent, child, stepchild, brother, sister, grandchild or grandparent of that natural person.
The ‘clogged’ loss rule does not apply where a share incentive trusts disposes of a right, a
marketable security or equity instrument to the beneficiaries of the trust.
Example 17.58. Disposals to connected person
In Year 1, Gama (Pty) Ltd sells an office building to a fellow subsidiary, Ray (Pty) Ltd, at a capital
loss of R7 000 000. In Year 4, Gama (Pty) Ltd sells a block of listed shares to Ray (Pty) Ltd at a
capital gain of R5 000 000.
Explain the CGT consequences.
SOLUTION
Gama (Pty) Ltd must disregard the capital loss of R7 000 000 in Year 1, since Ray (Pty) Ltd is its
connected person, but it may carry forward the capital loss and set it off against the capital gain
of R5 000 000 made on the subsequent disposal of shares to Ray (Pty) Ltd.
The capital gain of R5 000 000 in respect of the shares will, therefore, be tax-free, while Gama
(Pty) Ltd may carry forward the balance of the capital loss of R2 000 000 (R7 000 000 –
R5 000 000) to set off against capital gains on future disposals to Ray (Pty) Ltd.
If Ray (Pty) Ltd had ceased to be a connected person of Gama (Pty) Ltd before Year 4, Gama
(Pty) Ltd’s capital loss of R7 000 000 would have fallen away.
17.10.5.8 Debt owed by connected person (par 56)

A loss arises when a person waives or cancels any debt due to him. Where a capital loss arises on
the waiver or cancellation of debt owed by a connected person, the capital loss must be disregarded
(par 56(1)). The capital loss on the disposal of a loan or debt owed by a connected person must
however not be disregarded to the extent that the amount of the debt benefit
620
l reduced the base cost of an asset of the debtor in terms of par 12A
l reduced any assessed capital loss of the debtor in terms of par 12A
l is or was included in the gross income of the person acquiring that debt and which the creditor
proves to be the case
l is or was included in the capital gain of the person acquiring that debt and which the creditor
proves to be the case, or
l is or was included in the gross income of the debtor or reduces the assessed loss of the debtor in
terms of s 20(1)(a).
(Par 56(2))
This provision overrides par 39 which deals with losses on the disposal of
assets to a connected person. This means that where the asset consists of any
loan or debt owed by a connected person, the provisions of par 56 will prevail
Please note!
where the debt or loan is waived, reduced or cancelled. If the capital loss is
then allowed in terms of one of the exceptions to par 56 (see par 56(2)), the
capital loss will not be clogged in terms of par 39.
Example 17.59. Cancellation of debt owed by a connected person (par 56)

During 2018, Lesedi lent R200 000 to her son, Bill, who used the loan to pay for his studies. In
2018, Lesedi cancelled the loan after Bill failed to make any payments on the loan.
Determine whether Lesedi will be entitled to claim the capital loss.
SOLUTION
Lesedi must disregard the loss on the loan cancellation because the debtor is a connected
person and none of the exceptions in terms of par 56(2) apply.
Example 17.60. Cession of debt at less than face value to person who will be subject to
tax on capital gain (par 56(2)(d))
Peter and Paul are brothers. Paul owes Peter R500 000 for a flat Paul acquired for investment
purposes. Peter needs the cash and sells the claim to his sister, Carla, for R400 000. Carla does
not normally deal in debts or claims.
Determine the capital loss in Peter’s hands.
SOLUTION
It is reasonable to assume that when Paul repays the loan, Carla will realise a capital gain of
R100 000. In terms of par 56(2)(d), Peter will be entitled to a capital loss of R100 000 provided
Peter can prove that the R100 000 is included in the determination of Carla’s aggregate capital
gain or loss.
17.11 CGT for different entities or persons
17.11.1 Companies (paras 74 to 77)

Companies is a specialised field and is dealt with in detail in chapter 19. You are advised to first
study the tax implications for companies in chapter 19 before considering the CGT implications. Part
XI of the Schedule incorporates special rules that apply when a company distributes cash or other
assets in respect of shares. A share in relation to a company refers to any unit into which the
proprietary interest in that company is divided. It does not matter whether or not the share carries a
right to participate beyond a specified amount in a distribution or not (definition of ‘share’ in s 1 of the
Act). Because the company is a taxpayer separate from its owners (persons holding shares in that
company), any distribution by the company has implications for both the company and the share-
holder. It is clear that company distributions have an impact on two levels:
l at the company level (see 17.11.1.1), and
l at the shareholder level (see 17.11.1.2)
621
Because of these two levels, a company distribution will affect both the company’s equity and its
assets. On the equity side, company distributions can be classified either as dividends or as a return
of capital. Generally, most distributions will qualify as dividends and will be subject to dividends tax.
However, where the distribution consists of contributed tax capital (CTC), a return of capital is
received by the shareholder. Depending on whether the intention of the shareholder is capital or
revenue of nature, the return of capital will have either CGT or normal income tax implications for the
shareholder.
On the asset side, company distributions can be made in the form of cash and/or assets. A
distribution in assets is referred to as an in specie distribution. The amount of a company distribution
is
l the amount of cash if cash was distributed, or
l the market value of the asset if it is an in specie distribution.
For tax purposes, company distributions generally only affect the shareholder. However, in specie
distributions also lead to tax implications for the company because of the disposal of an asset. Para-
graph 75 provides for the CGT treatment of in specie distributions. Where a company makes a distri-
bution of an asset to a shareholder
l it must be treated as having disposed of the asset to that person
l on the ‘date of distribution’
l for an amount equal to its market value of the asset on that date
and that person must be treated as having acquired that asset on the date of distribution and for
expenditure equal to the market value of that asset on that date, which expenditure must be treated
as an amount of expenditure actually incurred for the purposes of par 20(1)(a).
The date of the distribution
The CGT consequences of company distributions are triggered on the following dates of distribution:
l For the distribution of an asset in specie, it is the earlier of
– the date on which the distribution is paid, or
– when it becomes due and payable.
l For distributions other than the distribution of an asset in specie, it is
– the date on which the distribution is paid (where the company that makes the distribution is a
listed company), or
– the earlier of
• the date on which the distribution is paid, or
• becomes due and payable
(where the company that makes the distribution is not a listed company).
(Defined in par 74.)
17.11.1.1 Company distributions: Company level consequences (par 75)

Where a company makes an in specie distribution, it must be treated as having disposed of the asset
for an amount equal to its market value (par 75). The market value of the asset may also affect the
company’s taxable income in terms of
l s 22(8) (in the case of trading stock), or
l s 8(4)(k) (in the case of allowance assets) and par 38 (for CGT purposes in the case of allowance
assets and capital assets).
A suitable adjustment must be made under par 35(3)(a) to reduce the proceeds by the amounts
already subjected to normal tax. If the company and the holder of its shares are connected persons,
the provisions of par 39 must also be considered where a capital loss arises. (In terms of this
provision the loss may only be set off against capital gains arising in a subsequent year provided
they arose from the disposal of an asset to the same connected person provided he is still a
connected person at that stage (par 39(2)).
622
Example 17.61. Distributions by a company

Ay (Pty) Ltd has 100 issued ordinary shares of which Kevin owns 90 and Leoni owns 10. Among
other assets, Ay (Pty) Ltd owns shares in Zulu (Pty) Ltd, an unconnected company, as well as
land. The Zulu (Pty) Ltd shares have a market value of R180 000 and a base cost of R200 000.
The land has a market value of R20 000 and a base cost of R7 000.
Ay (Pty) Ltd distributes the shares in Zulu (Pty) Ltd to Kevin and the land to Leoni. Both
distributions come partly from profits and partly from shares.
Determine the CGT consequences for Ay (Pty) Ltd.
SOLUTION
The distributions of shares and land qualify as disposals at market value.
Ay (Pty) Ltd realises a capital loss of R20 000 from the disposal of the shares and a capital gain
of R13 000 from the disposal of the land. As Kevin is a connected person in relation to Ay (Pty)
Ltd, Ay (Pty) Ltd may only set off the capital loss of R20 000 against capital gains arising from
transactions with him (par 39(2)).
Remember
The definition of ‘connected person’ in s 1 in respect of a company includes any person who
individually or jointly with any connected person in relation to himself, holds, directly or indirectly,
at least 20% of the company’s equity shares or voting rights. In the case of a shareholder that is
a company, no other shareholder should hold the majority of the voting rights.
17.11.1.2 Company distributions: Shareholder level consequences (paras 75 to 77 and s 40C)

Where a shareholder receives an in specie distribution, it must be treated as having acquired that
asset on the date of distribution and expenditure is equal to the market value of that asset on that
date (base cost of the asset in terms of par 20(1)(a)). Although there are no immediate CGT
consequences, par 75 determines the base cost for future disposals. Where a shareholder receives a
cash distribution, there are no consequences in terms of par 75 as cash is excluded from the defini-
tion of an asset.
The equity side of the company distribution has further tax implications for the shareholder
depending on whether the distribution is classified as a
l dividend, or
l a return of capital.
Company distributions that qualify as dividends will be subject to dividends tax (the definition of a
‘dividend’ is discussed in chapter 19). Dividends are normally distributed from sources other than
‘contributed tax capital’. On the other hand, where the company distributes contributed tax capital,
the holder of shares is liable for CGT on the distribution received to the extent that the distribution
qualifies as a ‘return of capital’ or ‘foreign return of capital’. This is of course the case where the
receipt or accrual is capital of nature.
Remember
Any distribution by a company is either
l a ‘return of capital’ or 'foreign return of capital' (a distribution from ‘contributed tax capital’)
and therefore subject to CGT if shareholder’s intention is of a capital nature, or
l a ‘dividend’ (a distribution from sources other than ‘contributed tax capital’) and subject to
dividends tax.
There are certain exceptions to this rule (see chapter 19).
CGT treatment of a ‘return of capital’ (including 'foreign return of capital')

There are two possibilities:
l Where the shareholder fully disposes of the share, the receipt or accrual of a ‘return of capital’ is
treated as proceeds in a disposal. This includes the receipt or accrual of a ‘return of capital’ in
share buyback and liquidation transactions. Please note that shares are considered identical
assets and the base cost should be determined in terms of the rules of par 32. Where a capital
loss is realised, the capital loss may be ring-fenced in terms of paras 19 or 39.
623
l Where the share is not fully disposed of, the receipt or accrual of a ‘return of capital’ in the share-
holder’s hands can result in different treatments depending on the date on which the ‘return of
capital’ is received by or accrues to the shareholder. These treatments are contained in paras 76,
76A and 76B.
This edition of Silke deals only with the rules relating to the CGT treatment of a
‘return of capital’ or ‘foreign return of capital’ received on or after 1 April 2012
Please note! (par 76B). Please refer to the 2015 edition of Silke for a detailed discussion of
the CGT treatment of a ‘return of capital’ or 'foreign return of capital' received
before 1 April 2012 (dealt with in paras 76 and 76A).
Rules for the CGT treatment of a ‘return of capital’ (or 'foreign return of capital') received on or after
1 April 2012 where the share is not fully disposed of and not a pre-valuation date asset (par 76B)
Where a return of capital is received by or accrues to a shareholder prior to the full disposal of that
share, par 76B deals with the CGT treatment. The first step is to reduce the base cost of the share by
the amount of that cash or the market value of that asset on the date that the amount is received or
accrued, whichever is the earlier (par 76B(2). In step two, where the return of capital exceeds the
base cost, the excess must be treated as a capital gain in the year of assessment in which that
amount the amount is received or accrued (par 76B(3).
Remember
The provisions that apply on or after 1 April 2012 apply regardless of the identification method
used (FIFO, specific identification or weighted average method).
Example 17.62. CGT treatment of a ‘return of capital’ where the share is not a pre-
valuation date asset
Shareholder A holds all the shares in Company X. The base cost of the shares acquired after
1 October 2001 by Shareholder A is R150. Company X makes a return of capital distribution to
Shareholder A on 1 May 2018, but Shareholder A does not fully dispose of the shares.
Determine the CGT treatment for Shareholder A if
(a) Company X makes a return of capital distribution of R100 to Shareholder A.
(b) Company X makes a return of capital distribution of R400 to Shareholder A.
SOLUTION
(a) In step one (par 76B(2), the return of capital amount distributed to Shareholder A must be
applied in reduction of the base cost. The new base cost amount will be R50 (R150 less
R100). Step two (par 76B(3)) does not apply as the return of capital does not exceed the
base cost. No immediate CGT consequences arise.
(b) In step one (par 76B(2), the return of capital amount distributed to Shareholder A must first
be applied in reduction of the base cost to Rnil (R150 less R150). In step two (par 76B(3)),
the amount in excess of the base cost (R400 less R150 = R250) will trigger a capital gain
in the hands of Shareholder A.
Pre-valuation date assets

Where that share constitutes a pre-valuation date asset, the base cost and the date of acquisition of
that share need to be re-determined. For this purposes the shareholder must be treated as having
l disposed of that share at a time immediately before the return of capital is received or accrues
and
l reacquired that share at that same time (deemed to be a new share acquired on the return of
capital distribution date).
The new base cost is deemed to equal
l market value at the time immediately before the return of capital is received or accrues
l less any capital gain that would have been determined had the share been disposed of at market
value at that time, or
l plus any capital loss that would have been determined had the share been disposed of at market
value at that time (par 76B(1)(ii)).
624
This is not an actual disposal and the capital gain or capital loss is not
recognised as such, but used to re-determine base cost (if a capital loss, the
Please note! amount is added to base cost and if a capital gain, the amount is deducted from
base cost).
After having determined a new base cost, the shareholder follows the steps contained in s 76B(2)
and 76B(3). The first step is to reduce the new base cost of the share by the return of capital amount
on the date that the amount is received or accrued, whichever is the earlier (par 76B(2). In step two,
where the return of capital exceeds the new base cost, the excess must be treated as a capital gain
in the year of assessment in which that amount the amount is received or accrued (par 76B(3).
Example 17.63. CGT treatment of a ‘return of capital’ where the share is a pre-valuation
date asset
Shareholder A holds all the shares in Company X. The cost price of the shares held by Share-
holder A was R150 when A acquired the shares on 30 September 2001. Company X makes a
return of capital distribution to Shareholder A on 1 May 2018, but Shareholder A does not fully
dispose of the shares.
Determine the CGT treatment for Shareholder A if Company X makes a return of capital
distribution of R100 to Shareholder A when the market value of the asset is R300 and the
valuation date value calculated on 1 May 2018 is R200.
SOLUTION
The share constitutes a pre-valuation date asset in relation to that shareholder. The base cost of
the asset as well as the acquisition date of the asset first needs to be re-determined.
The new acquisition date of the asset will be 1 May 2018. The new base cost of the asset will be
the market value immediately before the return of capital amount is distributed (R300) less the
capital gain of R100 (where proceeds equal the market value (R300) less base cost (R200)) less
the return of capital amount of R100. The new base cost is therefore R100. This is not an actual
disposal, but only a re-determination of base cost. The capital gain of R100 is therefore not
recognised as such (par 76B(1)).
Thereafter the steps in par 76B(2) and (3) should be applied.
In step one (par 76B(2), the return of capital amount distributed to Shareholder A must be
applied in reduction of the base cost. The new base cost amount will be Rnil (R100 less R100).
Step two (par 76B(3)) does not apply as the return of capital does not exceed the base cost.
625
Schematically, the CGT consequences of a return of capital or foreign return of capital received or
accrued on or after 1 April 2012 can be summarised as follows:
Return of capital/
Foreign return of capital*
Where the share is fully Where the share is not fully

disposed of: The amount Where the share is not fully
disposed of and the share is
disposed of and the share
must be treated as proceeds not a pre-valuation date asset:
represents a pre-valuation date
in a disposal. Step 1: Reduce the base cost asset (apply par 76B(1)):
of the share with the amount
Notes: The share is deemed to have
distributed (par 76B(2). No
The base cost is calculated disposed of and reacquired at the
immediate CGT effect.
using par 32 (provisions return of capital date. The new
Step 2: Where the amount
relating to identical assets). base cost is calculated as follows:
exceeds the base cost, the
Where a capital loss arises, excess amount must be Firstly, a notional capital gain or
the implications of paras 19 treated as a capital gain loss must be calculated as follows:
and 39 should be (par 76B(3). Proceeds = the market value of
considered. the share immediately before the
return of capital is received.
Base cost = valuation date value
(see paras 26, 27 and 32)
Secondly, the new base cost is
calculated using:
The market value of the share
immediately before the return of
capital is received
l less the notional capital gain
(if a notional capital gain), or
l plus the notional capital loss
(if a notional capital loss).
Thirdly, follow the steps in
paras 76B(2) and 76B(3):
Step 1: Reduce the new base
cost of the share with the amount
distributed (par 76B(2). No imme-
diate CGT effect.
Step 2: Where the amount
exceeds the base cost, the
excess amount must be treated
as a capital gain (par 76B(3).
*Paragraph 64B disregards any capital gain or loss on the disposal of equity shares in a foreign company
provided an interest of at least 10% is held – the exclusion also applies to the receipt of a ‘foreign return of
capital’.
Remember
Every company that makes a distribution (as well as every person who pays a distribution on
behalf of the company) must, by the time of the distribution or payment, notify that other
person in writing of the extent to which the distribution or payment constitutes a return of
capital.
Where a return of capital is received in respect of a share that is listed on a recognised
exchange and a price was quoted on that exchange for that share, the market value of that
share for purposes of par 76B is equal to the sum of
l the ruling price of that share at the close of business on the last business day before the
accrual of the return of capital or foreign return of capital, and
l the amount of the return of capital or foreign return of capital.
Winding-up, liquidation and deregistration (par 77)

A holder of shares of a company that is being wound up, liquidated or deregistered must be treated
as having disposed of all his shares held in the company on a certain date. This date will be the
earliest of the following dates:
l the date of dissolution or deregistration, or
626
l in the case of liquidation or winding-up, the date when the liquidator declares in writing that no
reasonable grounds exist to believe that the holders of shares will receive any further distributions
(par 77(1)).
Where a return of capital is received by or accrues to that holder of shares after the above dates, the
return of capital must be treated as a capital gain in determining that holder of shares’ aggregate
capital gain or aggregate capital loss for that year of assessment (par 77(2)). The effects of paras 19
and 39 (loss-limitation rules) also need to be considered in respect of any capital loss that arises during
the liquidation process.
Example 17.64. Return of capitals in winding-up, liquidation or deregistration

Ophelia owns 20 shares in Uniform Ltd with an aggregate base cost of R500. The company ran
into financial difficulty and the directors placed the company into liquidation on 1 June 2017. On
20 October 2017 the liquidator distributed R100 return of capital in cash to Ophelia. At the same
time, he declared that all remaining proceeds would go to creditors and shareholders should not
expect any further distributions. Following some investigation, the liquidator came across some
hidden assets belonging to the company and was able to make a final distribution to Ophelia of
R30 in cash on 10 March 2018. The company was finally dissolved on 10 March 2018. None of
the distributions described constitute dividends.
What is the capital gains tax effect of the distributions?
SOLUTION
In terms of par 77(1) Ophelia is deemed to have disposed of her shares on 20 October 2017. In the
2018 tax year she will have a capital loss of R400 (R100 proceeds in terms of par 76(1)(b) less
R500 base cost). In terms of par 77(2) she will have a capital gain of R30 in the 2019 tax year.
Share buy-backs
According to the definition in s 1, a ‘return of capital’ includes an amount received by a holder of
shares as consideration for the repurchase by the company of its own shares (buy-backs). However,
excluded from a ‘return of capital’ is any amount so transferred to the extent that the amount
constitutes a consideration for the general repurchase of securities as prescribed by paras 5.68 and
5.72 to 5.81 of s 5 of the JSE Limited Listings Requirements, i.e. where the seller on the open market
cannot readily identify the purchaser.
The holder of shares is liable for CGT on the distribution received to the extent that consideration
paid in a share buy-back qualifies as a ‘return of capital’ (a distribution from ‘contributed tax capital’).
To the extent that the consideration does not qualify as a ‘return of capital’ (a distribution from
sources other than ‘contributed tax capital’) it is a dividend and the holder of shares is liable for
dividends tax. The anti-avoidance rules in terms of paras 19, 39 and 43A also need to be considered.
Example 17.65. Buy-back of shares (not general buy-back of listed shares)

Phoebe owns 80% of all Tango Ltd’s shares (not listed). The base cost of Phoebe’s shares is
R3 000 000. Phoebe surrenders all of her shares in Tango Ltd for a R4 500 000 distribution. Of
this amount, R1 200 000 represents contributed tax capital and R3 300 000 qualifies as a
dividend.
What are the CGT implications arising from the above transactions?
SOLUTION
Phoebe realises a capital loss of R1 800 000 upon disposal of her shares (R1 200 000 return of
capital less the R3 000 000 base cost of the shares redeemed). The use of this capital loss is
limited by the clogged loss rule of par 39.
Distribution of shares for no consideration (capitalisation issues) s 40C

When a company makes a distribution of shares for no consideration (issues capitalisation shares),
the shareholder is deemed to have acquired the capitalisation shares at no cost on the date of
distribution. Thus, the base cost of such a share to the shareholder is Rnil. Similarly, s 40C provides
for a base cost of Rnil in the hands of the shareholder when the company issues shares or an option
or other right for the issue of shares to a person for no consideration.
627
Example 17.66. Shares for no consideration

On 1 March 2017, Simon Peterson acquired 10% (10 000 shares) of the issued equity shares of
Abro Construction Ltd for R25 000 as an investment. On 15 January 2018, Abro Construction Ltd
issued one share for no consideration for every five ordinary shares held. Before the issue of
shares for no consideration, Abro Construction Ltd had 100 000 equity shares of R1 each. The
shares for no consideration that the shareholders received were equity shares of R1 each and, in
paying up the shares, the company applied R20 000 of its retained profit.
On 19 February 2018, Simon Peterson sold all his shares in Abro Construction Ltd for R45 000.
Calculate the effect of the above transactions on Simon Peterson’s taxable income for the 2018
year of assessment.
SOLUTION
Shares received for no consideration................................................................................. Rnil
Capital gain
Proceeds ......................................................................................................... R45 000
Less: Base cost (R25 000 (old shares) + Rnil (shares for no consideration))
(note 1) .................................................................................................. (25 000)
Capital gain ..................................................................................................... 20 000
Less: Annual exclusion (R40 000 limited to) ................................................... (20 000)
Aggregate capital gain .................................................................................... nil
Taxable capital gain (R0 × 40%) ........................................................................................ nil
Taxable income ................................................................................................................. Rnil
Notes
(1) Simon Peterson received 2 000 ((10 000/5) or (R20 000 × 10%)) ordinary shares of R1 each
for no consideration. The base cost of the 2 000 shares that Simon received is Rnil.
17.11.2 Trusts (paras 80 to 82)

Trusts is a specialised field and is dealt with in detail in chapter 24. You are advised to first study the
tax implications for trusts in chapter 24 before considering the CGT implications. Some of the next
paragraphs (par 17.11.2.1 to 17.11.2.2 and 17.11.2.5 to 17.11.2.6) are extracted from chapter 24.
17.11.2.1 Trust distributions

A trust will have a disposal for CGT purposes in one of two ways:
l either by the disposal of an asset to a third party (for example the sale of a trust asset to a third
party), or
l by vesting a trust asset in a beneficiary (par 11(1)(d)).
Disposal to a third party

A disposal of an asset to a third party at arm’s length will result in a normal capital gain calculation.
The selling price will be the proceeds, and the base cost for the trust will mostly be the market value
when the trust acquired the asset, either by way of a bequest, donation or purchase.
Vesting of a trust asset in a beneficiary (par 11(1)(d))

Vesting means that the beneficiary is unconditionally entitled to the asset, even though the date of
enjoyment (delivery or registration) might be postponed. Vesting can occur before or at distribution.
When an asset vests in a beneficiary, the proceeds will be deemed to be the market value, as the
trust and the beneficiary are connected persons (par 38). The base cost for the trust will usually be
the value when the trust acquired the asset, either by way of a bequest, donation or purchase.
To the extent that the beneficiary has a vested interest in an asset, the time of disposal of that asset is
the date on which the interest vested in the beneficiary (par 13(1)(a)(iiA)).
Vesting might arise in terms of the trust deed or in consequence of the exercise of a trustee’s
discretion. However, even though a beneficiary might be entitled to 50% of the capital of the trust, for
example, it doesn’t mean that an interest in an asset vests in that beneficiary. The trustee may decide
to sell the asset to a third party and distribute an amount of cash to the beneficiary or even jointly
628
distribute some assets between the beneficiaries. For the application of CGT, it specifically requires
the vesting of an interest in an asset (par 11(1)(d)). The question to ask is whether or not the
beneficiary may insist upon a distribution of a specific asset.
17.11.2.2 Treatment of capital gains and losses in respect of a disposal by a trust (paras 80(1)
to 80(2)
Treatment of capital gains
When the trust disposes of an asset, the trust is liable for CGT unless a special rule applies to divert
the CGT liability to another person. The special rules only allow for a capital gain (not a capital loss)
to be shifted to a resident beneficiary either when the resident beneficiary acquires an interest in an
asset (par 80(1)) or when the beneficiary acquires a vested interest in the gain and not the asset
(par 80(2)). The gain must then be disregarded by the trust and included in the beneficiary’s
calculation of his aggregate capital gain or loss. The special rules are subject to the donor provisions
(attribution rules in paras 68, 69 and 71) that will effectively shift the liability for CGT to a person who
made a ‘donation, settlement or disposition’, i.e. a spouse, parent of a minor child and a person
retaining the power of revocation. Any capital gain retained in the trust due to a contingent event
could not vest in a beneficiary and can therefore not be subject to the special rules (paras 80(1) and
80(2)). The donor provision (par 70) may apply in such a scenario.
If the beneficiary is a public benefit organisation or an exempt person (as listed in par 62(a) to (e)),
these special provisions are not applicable (see 17.11.2.4). These provisions are also subject to the
exclusion available on the disposal of an asset by a trust in terms of a share incentive scheme
(par 64E) (see 17.10.2).
The total amount of the income that is deemed to accrue to a donor in terms of the donor provisions
in the main Act (s 7) and the capital gain attributed to him in terms of the Eighth Schedule (paras 68
to 72) may not exceed ‘the amount of the benefit derived from the donation, settlement or other
disposition’ (par 73). This limitation provision has the effect of applying the Woulidge principle of the
limitation of the amount that could be diverted to the donor to the amount of the benefit actually
received by the trust. See Example 24.13 and par 17.10.4 in this chapter.
Treatment of capital losses.
The special rules (paras 80(1) and (2)) allow for only a gain to be shifted to a resident beneficiary. It
is therefore clear that a loss is trapped in the trust. If there is no ‘donor’ and the attribution rules
(paras 68 to 72) are not applicable, there are two possible ways whereby a gain can be kept in the
trust for purposes of using any ‘trapped’ losses, namely
l distribute a gain to a non-resident (exchange control provisions need to be considered as the
funds might be blocked in South Africa), or
l delay vesting of a gain in a beneficiary until a subsequent year.
A loss that arises from a transaction between connected parties is ring-fenced (par 39). The trust and
its beneficiaries are connected persons (definition of ‘connected person’ in s 1). The planning
aspects mentioned above are thus relevant only if the loss is not ring-fenced.
17.11.2.3 Distributions to another trust

If a gain arises in a trust during the year of assessment and it vests in another trust (second trust) that
only distributes it to its beneficiaries, par 80(2) cannot apply to the beneficiaries of the second trust.
The capital gain vests in the hands of the second trust in terms of par 80(2) and it cannot be further
attributed. If the amount is then distributed to the beneficiaries of the second trust, it will not be taxed
in their hands as the gain has already been taxed in the second trust’s hands. It follows that a capital
gain of a trust can only be attributed once.
Example 17.67. Capital gain distributed to another trust as beneficiary

Trust B is a beneficiary of Trust A and Walter is a beneficiary of Trust B. Trust A disposed of an
asset, which gave rise to a capital gain that the trustee vested in Trust B. The trustee of Trust B
then distributed the amount to Walter. All parties are residents and the vesting of all capital gains
took place during the same year of assessment.
Determine how the taxable gain should be taxed.
629
SOLUTION
In terms of par 80(2) the capital gain must be disregarded by Trust A and accounted for by
Trust B. The capital gain vests in Trust B in terms of par 80(2) and can therefore not be taxed in
Walter’s hands.
17.11.2.4 Distributions to an exempt entity

If a trust distributes an asset to its beneficiary that is an exempt entity (as listed in par 62(a) to (e)),
the trust, not the beneficiary, will be taxed on the capital gain (proceeds equals market value (par
38)). This is because the provisions of paras 80(1) and 80(2) are not applicable to exempt entities
(see 17.11.2.2). To avoid this situation, the asset can be donated (not distributed) to the exempt
entity provided the exempt entity is not a beneficiary of the trust. In such an instance the capital gain
or loss arising on the donation will be excluded in the hands of the trust in terms of par 62.
17.11.2.5 Non-resident trusts (par 80(3))

A non-resident trust is liable for tax in South Africa only on South African source income or income
that is deemed to be from a source in South Africa. The Eighth Schedule applies only to non-
residents in respect of the disposal of permanent establishment assets and immovable property or an
‘interest’ in immovable property in South Africa (par 2). Paragraph 80(3) is an anti-avoidance
provision and applies if a non-resident trust sells an asset that is not subject to the Eighth Schedule
but would have been subject to CGT had the trust been a resident. In such an instance the gain will
be taxed in South Africa when a resident beneficiary receives an interest in that capital gain in a
succeeding (not current) year of assessment (par 80(3)). This is the CGT equivalent of an anti-
avoidance provision in the main Act (s 25B(2A)) and will also only be applicable if the capital gain
was not yet subject to tax in South Africa (see 24.14 and Example 24.16).
17.11.2.6 Base cost of a discretionary interest (par 81)

A person’s interest in a discretionary trust has a base cost of Rnil (par 81). It is submitted that this
implies that the beneficiary’s spes or hope to receive something from the trust is Rnil, but once an
asset vests in a beneficiary, the market value of that asset may be used as the base cost of the
beneficiary when the asset is disposed of at a future date.
17.11.2.7 Death of a special trust beneficiary (par 82)

When the beneficiary of a special trust dies, the trust must continue to be treated as a special trust for
the purposes of the tax on capital gains until the earlier of the following dates:
l the date of disposal of all the assets held by the trust, or
l two years after the date of death of the last beneficiary.
17.11.3 Insolvent estates (par 83)

When the estate of a natural person has been sequestrated, the person before sequestration and his
insolvent estate will be treated as one and the same person for normal tax purposes (s 25C). The
disposal of assets by a person’s insolvent estate is treated in the same manner as if they had been
disposed of by the person himself (par 83(1)). The effect of this provision is that the insolvent estate
will be entitled to disregard and exclude the same amounts that the person would have been entitled
to disregard or exclude had he disposed of the assets before sequestration. Any assessed loss and
assessed capital loss may be carried forward to the insolvent estate seeing that the person prior to
sequestration and the insolvent estate are treated as one and the same person for determining the
assessed capital loss. However, any assessed capital loss remaining in the insolvent estate at the
time it is finally terminated will be lost (par 83(2)).
Example 17.68. Disposal by the insolvent estate
The trustee of Mr Al’s insolvent estate disposes of his primary residence for a gain of R750 000.
This amount will be disregarded in the same way as if the residence had been disposed of by
Mr Al himself.
630
17.11.4 The deceased and the deceased estate (ss 9HA and 25)
Until 28 February 2016,

paras 40 and 41 apply in
respect of a person who
dies on or before that date
See Silke 2017 edition
From 1 March 2016, ss 9HA and 25 come

into operation and apply in respect of a
person who dies on or after that date
See 17.11.3 (discussed here)
From 1 March 2016, the rules previously contained in paras 40 and 41 move to the main Act and are
set out in ss 9HA and 25. These provisions set out the tax treatment of both capital assets and
revenue assets after date of death.
In the case of death of a taxpayer, three taxpayers are involved:
The deceased That person’s The heirs or

person in the year of & deceased estate & legatees of the
death (s 9HA) (separate taxable decease (s 25)
entity) (s 25)
These three taxpayers will now be discussed in detail:

(1) The deceased person (s 9HA)
A deceased person must be treated as having disposed of all his assets for an amount equal to
their market value (determined in terms of par 31) on the date of his death (s 9HA(1)). This rule
does not apply in the following assets:
l assets awarded to the surviving spouse (the rules in terms of s 9HA(2) will then apply)
l any long-term insurance policy of the deceased if the capital gain or loss on the disposal of
the policy would be disregarded in terms of par 55, and
l any interest of the deceased in any pension, pension preservation, provident, provident
preservation or retirement annuity fund in the Republic (or any similar fund or instrument
outside the Republic) if the capital gain or loss on the disposal of the interest would be
disregarded in terms of par 54.
Where an asset is awarded to a spouse that is a resident
l in terms of a will or intestate succession, or
l as a result of a re-distribution agreement, or
l in settling an accrual claim,
the deceased is deemed to have disposed of the assets for an amount equal to the base cost
(for CGT purposes) or tax value (for income tax purposes) of the asset on the date of that
person’s death (s 9HA(2)). This will effectively result in no capital gain or loss being realised, in
other words, the base cost or tax value is rolled over to the resident spouse.
If an asset is transferred directly to an heir or legatee (not a resident spouse), the heir or
legatee is treated as having acquired that asset at market value (determined in terms of par 31)
(s 9HA(3)).
The working of s 9HA(1)–(3) can be illustrated with the following example: If an asset with a
base cost of R100 and a market value of R300 on date of death is bequeathed to an heir or
legatee (not a resident spouse), a capital gain of R200 (proceeds of R300 less base cost of
R100) has to be taken into account in the deceased’s last assessment. The heir or legatee
acquires an asset with a base cost of R300. However, if this asset is transferred to the surviving
resident spouse, a capital gain of Rnil has to be taken into account in the deceased’s last
assessment and the base cost of R100 is rolled over to the surviving resident spouse.
631
The deceased person will also be entitled to

l an annual exclusion of R300 000 in the year of death
l the personal-use asset exclusion
l a primary residence exclusion, and
l a potential small business asset exclusion in terms of par 57. (Where any portion of the
R1,8 million exclusion is not used by the deceased, it will be available to his deceased
estate).
(2) The deceased estate (s 25)
Section 25(2) deals with assets acquired by the deceased estate from the deceased (in other
words assets not directly awarded to an heir and legatees, including the spouse). In terms of
s 25(2) a deemed base cost must be determined as follows:
l Except for assets that will be awarded to the resident surviving spouse, the deceased
estate is treated as having acquired all assets from the deceased at a cost equal to their
market value at the date of death of the deceased (s 25(2)(a)). Where an asset will be
awarded to the resident surviving spouse, the deceased estate is treated as having
acquired the asset from the deceased at a cost equal to the deceased’s base cost
(s 25(2)(b)).
l In both cases the deemed base cost amount is treated as expenditure incurred by the
deceased estate in terms of par 20(1) and it may be increased by any further par 20 expend-
iture the deceased estate may incur.
Section 25(3)(a) deals with the CGT treatment when these assets are disposed of by the
executor of the deceased estate to an heir or legatee, including the surviving spouse. The
estate will be treated as having disposed of the assets for proceeds equal to the expenditure
incurred by the estate in respect of that asset (that is, deemed base cost amount in terms of
s 25(2)). There will, therefore, be no capital gain or loss on the disposal of the assets by the
estate to an heir or legatee.
The working of s 25(2)–(3) can be illustrated by the following example: An asset with a base cost
of R100 and a market value of R300 on date of death is transferred to the estate of the deceased
before being awarded to the beneficiary (not a resident spouse). The deceased estate is then
treated as having acquired the asset from the deceased at a deemed base cost of R300 plus
further expenditure incurred by the deceased estate. Assume that no further expenditure is
incurred in respect of this asset and the asset is later transferred to the heir or legatee at a date
when the market value is R350. In terms of s 25(3) the estate will be treated as having disposed
of the assets for proceeds equal to the deemed base cost of R300, resulting in a capital gain of
Rnil (proceeds of R300 less base cost of R300). The R350 market value will have no CGT effect.
Apart from the rebates (s 6) and medical credits (ss 6A and 6B), the deceased estate must be
treated as if it is a natural person (s 25(5)). For CGT purposes this means that the estate is en-
titled to the same exclusions and relief provisions as a natural person, including the annual
exclusion of R40 000 and the inclusion rate of 40% (s 25(5)).
(3) Heirs and legatees
According to SARS (Interpretation Note No 12) an ‘heir or legatee’ means a definite heir or
legatee with vested rights. Heirs who have rejected their inheritance cannot be said to be ‘heirs
or legatees’. If a deceased died without a will, it does not mean that there are no ‘heirs or
legatees’. The heirs will be ascertainable in accordance with the principles of the laws of
intestate succession.
Where the asset is awarded to an heir or legatee that is not a resident surviving spouse
Section 25(3)(b) deals with assets acquired by the heir or legatee from the deceased estate. It
determines the base cost of the asset for the heir or legatee at a cost equal to the deemed base
cost of the deceased estate (that is, the market value on the date of death plus any further
par 20 expenditure incurred by the executor).
Section 25(6) provides relief where the normal tax on the deceased’s capital gain exceeds 50%
of the net value of his estate, before the tax itself is taken into account as a debt due by the
estate. In such a case the heir or legatee can elect to pay the amount of tax that exceeds 50%
of the net value of the estate if
l the heir or legatee would have been entitled to the one or more of the assets giving rise to
the capital gain, and
632
l the executor of the estate would have to dispose of any asset of the estate for the purpose
of paying the tax on the capital gain.
The result is that the heir or legatee may then choose to have the asset distributed to him, if he
agrees to pay the tax within three years after the date on which the executor obtained
permission to distribute the assets of the estate (in terms of s 35(12) of the Administration of
Estates Act). In terms of s 25(7), this amount of tax payable by the heir or legatee becomes a
debt due by the heir or legatee. The Commissioner will therefore recover the tax due from the
heir or legatee, and not the estate, when this provision applies.
Where the asset is awarded to the resident surviving spouse
Section 25(4) deals with assets acquired by the surviving spouse from the deceased estate. It
determines the base cost for the surviving spouse at a cost equal to the deemed base cost of
the deceased estate (that is, the base cost of that asset at the date of death of the deceased
plus any further par 20 expenditure incurred by the executor). This amount is treated as
expenditure in terms of par 20(1) (base cost in the hands of the surviving spouse) (s 25(4)(b)).
The surviving spouse is furthermore treated as having acquired that asset
l on the same date that the deceased acquired that asset
l incurred further expenditure on the date and in the same currency in which it was incurred
by the deceased or the deceased estate, and
l used that asset in the same manner as the manner in which that asset had been used by
the deceased and the deceased estate
(s 25(4)(c).
Example 17.69. Sections 9HA and 25
Mr Ready died on 1 April 2016. He was married out of community of property.

His only assets (at market value on date of death) were: R
Primary residence (base cost: R1 800 000) ............................................................... 4 000 000
Cash ........................................................................................................................... 400 000
Shares in listed companies (base cost: R100 000) .................................................... 280 000
Holiday house (base cost: R1 000 000) ..................................................................... 2 000 000
Note
Mr Ready left the holiday house to his wife. He left the primary residence to his daughter.
According to the will, the executor of the estate had to use the cash to pay all the cost and
liabilities of the estate and if there is a shortfall, he has to sell the shares to pay the cost and the
liabilities. Any residue has to be split equally between the deceased’s wife and daughter.
After paying estate cost of R55 000 and settling the outstanding balances on the bonds of
R20 000 on the holiday house and R50 000 on the primary residence, the executor realised that it
was not necessary to sell the shares. He therefore distributed half of the shares to the
deceased’s wife and half to his daughter. The shares had a value of R350 000 on the date that
they were distributed to the heirs. The balance of the cash was also split and each of the heirs
received 50%. Assume that none of the assets were awarded directly to the beneficiaries, but
that the assets were first transferred to the estate and then awarded to the beneficiaries.
Calculate the taxable capital gain for both the deceased and the estate. Assume that all
taxpayers are residents of South Africa.
SOLUTION
Taxable capital gain – Deceased (Mr Ready) R
Primary residence:
Proceeds (s 9HA(1) – market value upon death) ..................................................... 4 000 000
Less: Base cost ........................................................................................................ (1 800 000)
2 200 000
Less: Primary residence exclusion ........................................................................... (2 000 000)
Capital gain .............................................................................................................. 200 000
Cash (not an ‘asset’ in terms of the Eighth Schedule) .............................................. nil
continued
633
Shares in listed companies:

Proceeds (half to spouse at base cost of R50 000 (R100 000/2) (s 9HA(2)) plus half
to daughter at market value upon death of R140 000 (R280 000/2) (s 9HA(1))) ...... 190 000
Less: Base cost ........................................................................................................ (100 000)
Capital gain .............................................................................................................. 90 000
Holiday home:
Proceeds (to spouse at base cost of R1 000 000) (s 9HA(2)) .................................. 1 000 000
Less: Base cost ........................................................................................................ (1000 000)
Capital gain .............................................................................................................. nil
Net capital gain......................................................................................................... 290 000
Less: Annual exclusion (limited to R300 000) ........................................................... (290 000)
Taxable capital gain (included in taxable income) @ 40% ....................................... nil
Taxable capital gain – Deceased estate

Primary residence:
Proceeds (s 25(3)(a))................................................................................................ 4 000 000
Less: Base cost (s 25(2)(a)) ..................................................................................... (4 000 000)
nil
Cash (not an ‘asset’ in terms of the Eighth Schedule) .............................................. nil
Shares in listed companies: R
Proceeds ((s 25(3)(a))) ............................................................................................. 190 000
Less: Base cost (R50 000 (s 25(2)(b)) plus R140 000 (s 25(2)(a)) ........................... (190 000)
Capital gain nil
Holiday home:
Proceeds ((s 25(3)(a))) ............................................................................................. 1 000 000
Less: Base cost (s 25(2)(b)) ..................................................................................... (1000 000)
Less: Annual exclusion (limited to R40 000) ............................................................. ( nil)
Net capital gain......................................................................................................... nil
Taxable capital gain (include in taxable income) @ 40% ......................................... nil
Note
The liabilities (estate cost and outstanding bonds) have no effect on the capital gains tax calcu-
lations.
17.11.5 Partnerships (par 36)

A partnership is not a separate legal entity and it is not a taxpayer. The individual partners must bear
the consequences of CGT.
Disposal of partnership assets when a partner join or withdraws from the partnership
According to common law, every time that a partner joins or leaves, the existing partnership is
dissolved and a new partnership is formed. These strict common law principles would therefore
trigger a disposal of the entire interest of the partners each time a partner joins or leaves the
partnership. Because of the practical difficulties, SARS does not follow this strict legal approach.
Instead, SARS regards each partner as having a fractional interest in the partnership assets.
Therefore, when a partner withdraws from the partnership and is paid out for his share, there will be a
disposal in respect of the leaving partner’s interest, and a capital gain or loss must be determined for
each of the partnership’s assets. The remaining partners will have an increase in their base costs in
respect of each of the partnership’s assets.
Because partners are connected persons, the proceeds received by the leaving partner is deemed
the market value of his partnership interest. When valuing the interest, SARS accepts that the good-
will need not be included in the market value of his interest where he did not pay for the goodwill on
admission to the partnership.
634
Disposal of a partnership asset to a third party

In terms of par 36, the proceeds on the disposal of a partner’s interest in a partnership asset are
treated as having accrued to each partner at the time of disposal of that asset, in proportion to each
partner’s interest in the partnership. When there is a disposal of an asset to a third party, the
proceeds must be apportioned among the partners according to the partnership agreement, or if one
does not exist, according to partnership law. (In the absence of a specific asset-surplus-sharing ratio,
the proceeds will normally be allocated according to the profit-sharing ratio.)
17.12 Miscellaneous anti-avoidance rules and other special rules

There are a few anti-avoidance rules as well as a few special rules contained in the Schedule that
have not yet been dealt with in this chapter yet. These rules are only applied in specific
circumstances or for specific types of assets.
17.12.1 Value-shifting arrangements (par 23)

A deemed disposal occurs where the value of a person’s interest decreases in terms of a ‘value-
shifting arrangement’ which is defined as
l an arrangement by which a person retains an interest in a company, trust or partnership
l but the market value of his interest decreases, following a change of the interests in that com-
pany, trust or partnership,
l while the value of his connected person’s direct or indirect interest in it increases or his con-
nected person acquires a direct or indirect interest in it.
(Par 1).
A typical example of a value-shifting arrangement is when a parent who owns interest in a partner-
ship sells a portion of his interest to his children at a discount, thereby reducing the value of his own
interest. He has effectively shifted value from himself to his children. In terms of this anti-avoidance
rule in the Eighth Schedule, a disposal is then deemed to have occurred (par 11(1)(g)). The amount
by which the market value of his interest has decreased as a result of the arrangement (par 35(2)) will
equal proceeds and his base cost will be determined according to the formula in par 23.
17.12.2 Reacquired financial instruments (par 42)

A special rule applies when a person makes a capital loss on the disposal of a financial instrument
and he or his connected person acquires (or enters into a contract to acquire) a financial instrument
of the same kind and of the same or equivalent quality within a period that starts 45 days before the
date of the disposal and ends 45 days after that date (therefore a 91-day period). In terms of par 42 the
loss cannot be taken into account at the time of disposal, but is carried forward and added to the
base cost of the replacement asset.
17.12.3 Pre-sale dividends treated as proceeds (par 43A)

Anti-avoidance rules were introduced that deem certain pre-sale dividends in dividend stripping
schemes as ordinary revenue (see s 22B) or as proceeds for capital gains tax purposes (par 43A).
These anti-avoidance rules (s 22B and par 43A) are aimed at schemes where pre-sale dividends are
declared in order to reduce the value (and ultimately the selling price) of the target company shares.
The result is a tax benefit for the shareholder company who will, in terms of the scheme, receive a
tax-free dividend in the place of taxable proceeds. The anti-avoidance rules were introduced to
convert these tax-free dividends into ordinary revenue (s 22B) or capital gain proceeds (par 43A)
depending on whether the shares are capital or revenue in nature. The provisions of par 43A only
applies in respect of a qualifying interest which is defined as an interest held by a company (alone or
together with his connected persons) in a
l non-listed company, if it constitutes at least 50% of the equity shares or voting rights or at least
20% of the equity shares or voting rights provided no other company (alone or together with his
connected persons) holds the majority of the voting rights or equity shares in that non-listed
company, or
l listed company, if it constitutes at least 10% of the equity shares or voting rights in that listed
company.
635
Par 43A determines that if any company held a qualifying interest at any time during the period of
18 months prior to the disposal, the amount of any exempt dividend that constitutes and extra-
ordinary exempt dividend will be taken into account as proceeds from the disposal of those shares.
‘Exempt dividends’ means any dividend or foreign dividend that is
l not subject to any dividends tax, and
l exempt from normal tax in terms of ss 10(1)(k)(i) or 10B(2)(a) or (b).
‘Extraordinary exempt dividend’ is defined as
l in relation to a preference share (where dividends are determined in relation to a percentage), so
much of the dividends as exceeds 15%, and
l in relation to any other share, so much of the dividends as exceeds 15% of the of the higher of
– the market value at the beginning of the period of 18 months, or
– the market value at the date of the disposal
received or accrued within the period of 18 months prior to or as part of the disposal.
17.12.4 Leasehold improvements

In the absence of par 33(3)(c), when a lessee attached an asset (such as a building) to the land of a
lessor, there would be an immediate disposal by the lessee of the bare dominium in the assets con-
cerned, while the right of use would be retained by the lessee until the end of the lease. According to
par 33(3)(c), there is no part-disposal of an asset by a lessee when that lessee improves or enhances
the leased asset. Instead, disposal is deferred until the end of the lease, and the time of disposal
therefore occurs when the lease expires (par 13(1)(b)).
For the lessee, this provision defers the disposal of the bare dominium until the termination of the
lease, when the entire disposal of the asset will occur (bare dominium and right of use).
For the lessor, the base cost of the leasehold improvements will be determined on the termination
date of the lease, and the disposal will therefore only occur on disposal of the improved property.
The following table provides a summary of the CGT consequences of leasehold improvements:
Factor Effect on lessor Effect on lessee

Time of disposal Disposal only occurs on disposal of the A disposal of the bare dominium in the
improved property. improvements is not a part-disposal
(par 33(3)(c)), but is deferred until the
end of the lease. The time of disposal
therefore occurs when the lease
expires (par 13(1)(b)).
Obligatory improvements Obligatory improvements affected will Obligatory improvements under s 11(g)
affected in terms of lease not constitute a disposal of an asset for are allowed as a deduction. On dis-
agreements CGT purposes, but the acquisition of an posal (termination of the lease),
asset. The base cost of the improve- amounts allowed as a deduction under
ments under par 20(1)(h)(ii)(cc) is the s 11(g) must be excluded from base
amount included in gross income cost (par 20(3)(a)(i)).
(par (h)), less any allowance granted
under s 11(h).
Voluntary improvements No expenditure will be added to the Expenditure incurred will form part of
affected base cost of the land, since none was the base cost in terms of par 20(1)(a).
incurred.
Compensation paid by Compensation will form part of the base Compensation (reduced by recoup-
lessor cost of the improvements acquired in ments) will be included in proceeds in
terms of par 20(1)(e). terms of par 35(1)(b).
636
Example 17.70. Voluntary leasehold improvements by lessee

Trader (Pty) Ltd. entered into a ten-year lease for a shop on 2 February 2017 with Landlord (Pty)
Ltd., and voluntarily spent R300 000 (VAT excluded) on the shop-front and fixtures on which no
income tax allowances could be claimed. The companies are not connected persons. The lease
agreement is silent with regard to lease improvements. The value of the bare dominium of
disposal is equal to the total value of the improvements (R300 000), less the value of the right of
use for the next ten years ((R203 406). The bare dominium of the improvements calculated over
the remaining term of the lease is therefore R96 594.
(1) Indicate the CGT-consequences for
l Trader (Pty) Ltd (the lessee), and
l Landlord (Pty) Ltd (the lessor).
(2) Indicate the CGT consequences for Trader (Pty) Ltd (the lessee) and Landlord (Pty) Ltd (the
lessor) assuming that in terms of the lease agreement the lessee was obliged to affect lease
improvements.
SOLUTION
(1) The CGT consequences for:
Trader (Pty) Ltd (the lessee):
The lease agreement of the lessee constitutes an asset in his hands. The time of disposal
occurs when the lease expires (par 13(1)(b)), in other words, at the end of the ten-year
lease. According to par 33(3)(c) there is no part-disposal of an asset by a lessee when that
lessee improves or enhances the leased asset.
In terms of par 20(1) the expenditure will form part of the base cost of the asset (i.e. the
lease agreement). The base cost will therefore be R300 000. If no compensation for the
improvements is received on termination of the lease, the capital loss will be R300 000
(proceeds (R0) less base cost (R300 000)). A capital loss of R300 000 will therefore be
allowed at the time of the expiry of the lease. There is no limitation on this loss in terms of the
Eighth Schedule,
Landlord (Pty) Ltd (the lessor):
Expiration of the lease period is considered to be an acquisition of an asset, not a disposal.
Since voluntary improvements were affected, no expenditure will be added to the base cost
of the land. Disposal will only occur later when there is disposal (by the lessor) of the land on
which the improvements are situated.
(2) If the lessee was obliged to affect lease improvements in terms of the lease agreement, the
CGT consequences would be
Trader (Pty) Ltd (the lessee):
Obligatory improvements of R300 000 would be allowed as a tax deduction in terms of
s 11(g). On disposal (termination of the lease) amounts allowed as a deduction under
s 11(g) must be excluded from base cost (par 20(3)(a)). If no compensation for the
improvements is received on termination of the lease, the capital gain/loss would be Rnil
(proceeds (R0) less base cost (R300 000 – R300 000)). Therefore, no capital gain or loss.
Where an amount above the contract amount is spent, it would result in a capital loss at the
end of the lease term.
Landlord (Pty) Ltd (the lessor):
Obligatory improvements affected will not constitute a disposal of an asset for CGT pur-
poses, but the acquisition of an asset. The base cost of the improvements under
par 20(1)(h)(ii)(cc) is the amount included in gross income (par (h)), less any allowance
granted under s 11(h). If no s 11(h) deduction was allowed, the lease improvements would
have a base cost of R300 000. This amount will be added to the base cost of the asset.
17.12.5 Transactions in foreign currency (par 43)

When dealing with assets acquired or disposed of in foreign currency, it is necessary to determine
the capital gain or loss in rand. This is needed in order to calculate the taxable capital gain that
should be included in the taxable income of a person (s 26A).
If an asset that was acquired in a foreign currency is subsequently disposed of, the capital gain or
loss must be calculated by applying the specific translation rules of par 43 of the Eighth Schedule.
The same translation rules apply if an asset was acquired in rand and is subsequently disposed of in
a foreign currency. The detail of these translation rules are discussed in chapter 15 (see 15.7).
637
Remember
l The general provision in the Act that deals with the translation of foreign exchange is found in
s 25D (see 15.2.2).
l The translation rules relating to exchange gains and losses arising on exchange items are
determined by s 24I (see 15.3).
l The translation rules relating to capital gains and losses are determined by par 43 of the
Eighth Schedule (see 15.7).
17.12.6 Base cost of assets of controlled foreign companies (par 43B)

If a controlled foreign company abandons it’s currency and adopts a new currency after a period of
hyper-inflation (inflation of 100% or more), a special rule (par 43B) in respect of the base cost of
assets acquired before the hyper-inflationary currency was abandoned, applies. Paragraph 43B
determines that for the purposes of determining the base cost of an asset, the asset is deemed to
have been acquired in that new currency on the first day of the foreign tax year of the controlled
foreign company, and for an amount equal to the market value of the asset on the date on which the
new currency was adopted by it. The new acquisition date and the new base cost amount will apply
as if the affected assets were brought into the South African tax net for the first time.
17.12.7 Foreign currency assets and liabilities (paras 84 to 96)

Part XIII (paras 84 to 96) contained rules dealing with gains and losses from holding foreign monetary
assets (‘foreign currency assets’) and settling ‘foreign currency liabilities’. These rules did not,
however, apply to persons to whom (or transactions in respect of which) s 24I applies. These provi-
sions were extremely complicated. Taxpayers were often required to spend significant time and
resources to review ordinary day-to-day currency movements solely for purposes of the tax compu-
tation. Therefore, these capital gain and loss rules (Part XIII of the Schedule) were repealed effective
for years of assessment commencing from 1 March 2011.
17.13 Final step in the CGT calculation and changes to capital gains or losses
in subsequent years
Final step in the CGT calculation
If a person has a net capital gain, it must be multiplied by the inclusion rate applicable to that specific
entity to determine that person’s taxable capital gain. This fact, as well as the different inclusion rates
and special rules that apply to specific entities, was discussed in 17.11. Once a person’s taxable
capital gain has been determined, it is included in his taxable income in terms of s 26A. Thereafter
the normal rates of tax are applied to his taxable income to determine the normal tax payable by him.
A capital gain is therefore subject to normal tax.
Remember
Because capital gains and losses do not occur on a regular basis, they may be excluded from
the taxpayer’s basic amount for the purpose of estimating the first provisional tax payments of
the taxpayer. The capital gains in a year of assessment therefore do not affect the calculation of
provisional tax in a later year of assessment.
It is nonetheless possible for certain events to occur in subsequent years that may require a recalcu-
lation of the capital gain or loss.
When capital gains or losses change in subsequent years

This occurs where there was a disposal of an asset in a previous year of assessment, the capital gain
or loss was determined and taken into account in that year of assessment and thereafter certain
events occurred causing the capital gain or loss previously calculated to be incorrect. The capital
gain or loss previously calculated should be corrected.
From 1 January 2016, a new provision applies in respect of the corrections: Where a contract is can-
celled in a subsequent year, the capital gain or loss on the original disposal will be cancelled out by
recognising a capital gain equal to the original capital loss or a capital loss equal to the original
capital gain (see 17.8.4 for a detailed discussion). All other corrections in subsequent years are still
dealt with in 17.13.1 and 17.13.2.
638
The following diagram illustrates how the correction of the capital gain or loss for pre-valuation date
assets is dealt with differently from the correction of the capital gain or loss for assets acquired on or
after valuation date.
Valuation Date
1 October 2001
Assets acquired before 1 October 2001 Assets acquired on or after 1 October 2001
Recalculate capital gains or losses (start from Further capital gain or loss arises in subsequent
scratch) (see 17.13.2). year (no recalculation) (see 17.13.1).
17.13.1 Further capital gains or losses in the case of post-valuation date assets in terms
of paras 3(b)(i), (ii) and 4(b)(i), (ii)
Apart from the cancellation of a contract in terms of par 20(4) (see 17.8.4), there are four other
situations relating to the correction of a capital gain or loss incurred in a previous year of assessment.
The following four situations may cause a further capital gain or loss to arise in the current year of
assessment on an asset that was already disposed of in a previous year of assessment:
(1) The receipt or accrual of further proceeds in the current year in respect of an asset disposed of
in a prior year will give rise to a capital gain in the current year. This will occur if the proceeds
have not been taken into account in determining the capital gain or loss on disposal of the
asset in the previous year (par 3(b)(i)).
(2) If part of the proceeds is reduced in a subsequent year, a capital loss will occur in the current
year. In terms of par 4(b)(i) the capital loss will be so much of the proceeds as the person is no
longer entitled to as a result of the
l cancellation, termination or variation of any agreement
l prescription or waiver of a claim, or
l release from an obligation or any other event.
The proceeds may have become irrecoverable, repaid or become repayable. This will happen,
for example, where the debtor to whom an asset has been sold is sequestrated or liquidated.
(3) If any portion of the base cost that was taken into account in determining a capital gain or loss
in a previous year is recovered or recouped in the current year, a further capital gain will arise
in the current year. The recovery or recoupment may take place in the form of a cash refund or
repossession of the asset, but excludes the cancellation or reduction of all or part of any debt
incurred in acquiring the asset (par 3(b)(ii)).
(4) If the base cost increases in a subsequent year, a capital loss will occur (par 4(b)(ii). The cap-
ital loss equals any allowable par 20 expenditure incurred during the current year of assess-
ment in respect of the asset. The expenditure must not have been taken into account during
any previous year. An example is additional expenditure incurred after the disposal of an asset
that was not anticipated at the time of disposal of the asset.
These further capital gains or losses will be calculated, unless the additional or reduced amount has
been taken into account in terms of par 25(2).
17.13.2 Re-determination of pre-valuation date assets in terms of paras 25(2) and (3)
Paragraph 25(2) and (3) deals with the re-determination of capital gains and losses in respect of pre-
valuation date assets required when any of the following four events occur:
(1) Additional proceeds are received or accrued.
(2) Any proceeds already taken into account become
l irrecoverable, or
l repayable, or
l the taxpayer is no longer entitled to those proceeds
– as a result of the cancellation, termination or variation of an agreement, or
– due to the prescription or waiver of a claim or the release from an obligation or any other
event in that year.
639
(3) Additional base cost expenditure is incurred.

(4) Expenditure taken into account in a prior year as base cost has been recovered or recouped in
a subsequent year (par 25(2)).
When a re-determination is required, it simply means that the capital gain or loss on disposal of the
asset must be re-determined from scratch, taking into account all amounts of proceeds and expend-
iture from the date on which the asset was first acquired. Re-determination is necessary for the
following reasons:
l Any capital gain or loss determined under the first disposal may have been eliminated by the
loss-limitation rules in paras 26 and 27, and this could cause hardship or confer an undue benefit
on a taxpayer.
l Where the TAB method was used with the first disposal, any subsequent capital gain or loss
would otherwise not be time-apportioned.
640
18 Partnerships
Redge de Swardt

l describe the legal status of a partnership
l apply the provisions of the Act that specifically applies to partners
l explain and apply how specific deductions apply to partners
l explain the tax consequences for partners on dissolution or termination of a part-
nership agreement
l calculate a partner’s taxable income.
Contents
Page
18.1 Introduction ...................................................................................................................... 641
18.2 Legal status of a partnership ........................................................................................... 642
18.3 Normal tax consequences for a partnership and its partners (s 24H) ........................... 642
18.4 Accrual of partnership income ........................................................................................ 644
18.5 Connected persons ......................................................................................................... 644
18.6 Employment relationship ................................................................................................. 645
18.7 Specific deductions and allowances .............................................................................. 646
18.7.1 Annuities paid to former employees or partners or their dependents
(s 11(m)) ........................................................................................................... 646
18.7.2 Partnership contributions to a fund (s 11(l)) .................................................... 646
18.7.3 A partner’s contribution to a pension fund, provident fund or retirement
annuity fund (s 11F) ......................................................................................... 647
18.7.4 Key person insurance contributions (s 11(w)) ................................................. 649
18.7.5 Capital allowances ........................................................................................... 650
18.7.6 Motor vehicle expenses ................................................................................... 650
18.7.7 Allowance for bad debt (s 11(i)) ...................................................................... 651
18.8 Fringe benefits ................................................................................................................. 652
18.9 Turnover tax ..................................................................................................................... 653
18.10 Limited partnerships (partnerships en commandite)(s 24H(4))...................................... 653
18.11 Dissolution/termination of partnership agreement .......................................................... 653
18.12 Default by partner ............................................................................................................ 654
18.13 Comprehensive example................................................................................................. 655
18.1 Introduction
A partnership is a legal relationship between two or more persons who carry on a business and to
which each contributes either money or labour or anything else with the objective of making a profit
and of sharing it between them. A partnership is not subject to normal tax. The individual partners of
a partnership are liable for their proportionate share of the normal tax on the partnership’s taxable
income. The partnership is, however, liable for VAT on taxable supplies made by the partnership and
not its individual partners (see chapter 31).
The Income Tax Act contains specific provisions whereby income received and expenses incurred
by a partnership are deemed to be received and incurred by the individual partners (s 24H). In
certain cases, the partnership is deemed to be an employer of the partners to allow for specific
deductions in the partners’ hands that only apply to employees. The formation and dissolution of a
partnership may also have specific normal tax consequences for the individual partners. Before these
principles are discussed in detail, it is important to understand the legal nature of a partnership as
well as the different types of partnerships that exists.
641
18.2 Legal status of a partnership

A partnership is not a separate legal persona distinct from the individuals who constitute it. This
means that the partnership cannot legally own assets and cannot be held liable for any obligation
incurred. The individual partners own assets used for purposes of the partnership. The individual
partners may also be held liable for obligations incurred.
There are different types of partnerships. The most basic form of partnership is the general partner-
ship where all the partners manage the business and are personally liable for its debts. A limited
partnership is one in which certain partners are not involved in the management of the business and
also only liable for the partnership debt to a limited extent. The liability of limited partner is usually
limited to the partner’s partnership contribution. A silent partner is one who shares in the profits and
losses of the business, but who is not involved in the management of business and whose associa-
tion with the business is not publicly known.
18.3 Normal tax consequences for a partnership and its partners (s 24H)
A partnership is not liable for normal tax. The individual partners are liable for normal tax on the
partnership’s taxable income. The Act provides that where any trade or business is carried on in
partnership, each partner is deemed to be carrying on such trade or business (s 24H(2)). It also
provides that where the partnership receives income, it is deemed to be received by each member of
the partnership. The same applies for any deduction or allowance for which the partnership may have
qualified. Deductions and allowances are allocated to the individual partners. The portion of income,
deductions and allowances allocated to a specific partner, is the same as the ratio that the partners
agreed in which they will share partnership profits and losses (s 24H(5)).
The taxpayer in Grundlingh v C:SARS (FB 2009) was a South African resident and a partner of a legal
partnership in Lesotho. The court had to consider whether the taxpayer's share of the profits of the
Lesotho partnership was taxable only Lesotho. The double tax agreement between South Africa and
Lesotho provides that the profits of an enterprise of a Contracting State shall be taxable only in that
state unless the enterprise carries on business in the other contracting state through a permanent
establishment situated therein (article 7(1) of the DTA). The taxpayer argued that the Lesotho part-
nership was an enterprise of Lesotho and therefore only taxable in Lesotho. However, the court held
that
l neither the South African Income Tax Act nor the Lesotho Income Tax Act recognise a partner-
ship as a separate legal taxable entity
l the taxpayer (i.e. the partner) is deemed to carry on the business of the Lesotho partnership
l the individual partners, and not the partnership, are tax entities, liable to pay taxes
l the Lesotho partnership is not an enterprise, liable to pay tax in Lesotho, and therefore article 7(1)
of the DTA is not applicable.
When calculating the taxable income of the partners, it is SARS’s practice that one first determines
the taxable income of the partnership as if it is a separate taxable entity. This amount of taxable
income is then apportioned among the partners according to their agreed profit-sharing ratio. The
partners are then individually assessed on their respective shares of the partnership income after
taking into account any income derived from sources outside the partnership. Each partner pays tax
according to his total taxable income (including his share of the partnership income) and the exemp-
tions, deductions and rebates available to him. In this way, the same net effect is achieved as if
income and expenses were separately apportioned between the respective partners (as contemplat-
ed in s 24H).
Should the determination of the taxable income of a partnership result in an assessed loss, the as-
sessed loss is apportioned among the partners according to their rights to participate in profits or
losses. Each partner is deemed to carry on the trade carried on by the partnership and is entitled to
set off his share of the assessed loss against any income derived during the same year from sources
outside the partnership, subject to the provisions of s 20 and 20A (see chapter 12).
In determining the taxable income or assessed loss of a partnership, the Commissioner must have
regard to the terms of the partnership agreement. If, in terms of the agreement, salaries are payable
to the partners or interest is to be credited on capital contributions made by them, the salaries or
interest will be allowed as a ‘deduction’ to the partnership. These amounts will then be included in the
taxable incomes of the relevant partners. It is, therefore, the practice of the Commissioner to subject
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18.3 Chapter 18: Partnerships
a partner to tax on his transactions with the partnership as if he were a third party. Partnerships and
the partners are treated as distinct entities for this purpose.
Please note! The provisions of s 24H also apply to foreign partnerships. Foreign partnerships
are discussed in chapter 21.
A partner’s normal tax liability can be calculated in terms of the following framework:
FRAMEWORK FOR CALCULATING A PARTNER’S NORMAL TAX LIABILITY
Income and expenses of the partnership:
Income
Gross income from trading .................................................................................................................. Rx
Interest received on credit balance of bank account .......................................................................... x
Dividends received by partnership ...................................................................................................... x
Expenses
Salaries paid to employees.................................................................................................................. (x)
Salaries paid to partners ...................................................................................................................... (x)
Contribution to pension fund (contributions of partners and employees) ............................................ (x)
Contributions to medical scheme (contributions of partners and employees) .................................... (x)
RAF contributions made on behalf of partners .................................................................................... (x)
Bad debt .............................................................................................................................................. (x)
Life insurance premiums on the lives of partners ................................................................................ (x)
Depreciation ........................................................................................................................................ (x)
Interest paid in respect of partners’ capital ......................................................................................... (x)
Net profit Rx
STEP 1: Calculate taxable income from partnership:

Net profit as per statement of comprehensive income ........................................................................ Rx
Adjusted for income and expenses that are subject to special rules in the individual partners’
hands:
Less: Interest received on credit balance of bank account ................................................................ (x)
Less: Dividends received by partnership ........................................................................................... (x)
Add: Bad debt .................................................................................................................................... x
Add: Contributions to funds not deductible in terms of s 11(l) ........................................................... x
Add: Life insurance premiums on the lives of partners (not deductible in terms of s 11(w)) .............. x
Add: Depreciation ............................................................................................................................... x
Less: Wear-and-tear ............................................................................................................................ (x)
Adjusted partnership taxable income Rx
Split adjusted partnership taxable income between: Rx
Trade income from partnership ............................................................................................. a
Interest received on credit balance of bank account ............................................................ b
Dividends received by partnership ....................................................................................... c
STEP 2: Calculate partner’s pro rata taxable income from partnership

Partner’s share of partnership’s taxable income (Ra × profit sharing ratio)......................................... Rx
Partner’s share of partnership’s interest income (Rb × profit sharing ratio) ........................................ x
Partner’s share of partnership’s dividend income (Rc × profit sharing ratio) ...................................... x
STEP 3: Add partner’s personal income from partnership
Salary from partnership........................................................................................................................ x
Interest received from partnership ....................................................................................................... x
Contributions to pension fund, provident fund and retirement annuity fund paid by partnership .......
x
Contributions to medical aid scheme paid by partnership .................................................................. x
Net rental income ................................................................................................................................. x
continued
643
STEP 4: Claim exemptions and deductions per partner

Less: Interest exemption in terms of s 10(1)(i) ..................................................................................... (x)
Less: Dividend exemption in terms of s 10(1)(k) ................................................................................. (x)
Taxable income before specific deductions ........................................................................................ Rx
Less: Other deductions (s 11(a) and 11(e) as well as travel cost) ...................................................... (x)
Less: Bad debts (s 11(i)) .................................................................................................................... (x)
Less: Contributions to pension fund (s 11F) ........................................................................................ (x)
Less: Donations (s 18A) ....................................................................................................................... (x)
Taxable income ................................................................................................................................... Rx
Normal tax liability of partner ............................................................................................................... Rx
Less: Primary, secondary and tertiary rebates .................................................................................... (x)
Less: Medical fees tax cred (ss 6A and 6B credits) ............................................................................ (x)
Normal tax liability ................................................................................................................................ Rx
Example 18.1. Deemed income and expenses

For the 2018 year of assessment, Majola and de Wet Medical Practitioners (a 50:50 partnership
between P Majola and K de Wet) received income of R450 000. Tax deductible expenses of
R160 000 were incurred.
Determine P Majola’s taxable income.
SOLUTION
Partnership net profit
Income R450 000
Less: Expenses (160 000)
Net profit ...................................................................................................................... R290 000
Partner’s pro rata taxable income from partnership
Partnership net profit .................................................................................................... R290 000
P Majola’s share in the partnership net profit (50% × R290 000) R145 000
Note
P Majola will be liable for tax on the above amount even if he does not receive the amount. The
reason for this is that the income is deemed to have accrued to and expenses are deemed to be
incurred by P Majola (s 12H(5)).
18.4 Accrual of partnership income

Income is deemed to accrue to or be received by a partner on the same day on which it accrues to
or is received by the partners in common (this refers to the day on which the income accrues to or is
received by the partnership) (s 24H(5)). This applies irrespective of any contrary rule contained in
any law or the partnership agreement.
The effect of the above rule is that partners will be subject to normal tax on an amount that is re-
ceived by or that accrues to the partnership irrespective of whether or when the amount is distributed
to the partners. The partnership agreement may, for example, provide that profits are only distributed
to partners after the end of a financial year. Despite such clause in a partnership agreement,
amounts are deemed to be received by or to accrue the partners in the same ratio in which they have
agreed to share profits and losses at the same time that the amount is received by or accrued to the
partnership.
18.5 Connected persons

The Act contains a number of provisions aimed at combating tax avoidance where transactions are
entered into between connected persons. These are generally aimed at ensuring that transactions
between connected persons are conducted on an arm’s length basis. A connected person in relation
to a partner of a partnership is any other partner of the partnership, as well as any connected person
in relation to other partners in the partnership (par (c) of the definition of ‘connected person’ in s 1).
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18.5-18.6 Chapter 18: Partnerships
Example 18.2. Connected person in relation to the partner
Khosi and Dino are partners in a partnership. Khosi is also a beneficiary of a family trust. In
these circumstances the following persons are connected persons:
l Khosi and Dino are connected persons because they are partners in the same partnership.
l Khosi and her family trust are connected persons (par (b) of the definition of ‘connected
person’ provides that a beneficiary of the trust is a connected person in relation to the trust).
l Dino and Khosi’s family trust are connected persons. Since Khosi and her family trust are
connected persons and Khosi and Dino are connected persons, Dino is also a connected
person in relation to Khosi’s family trust.
18.6 Employment relationship

There is also no employment relationship between a partner and a partnership. In COT v Newfield
(1970 RAD) the court confirmed that the relationship between partners is one of agency and not
employer-employee.
Since a partnership does not qualify as an employer of a partner, a salary paid to a partner is not
subject to employees’ tax (see definition of ‘employer’ in par 1 of the Fourth Schedule). A partner is,
for this reason, a provisional taxpayer (see chapter 11).
Although a partnership qualifies as a ‘person’ (the definition of ‘person’ in the Interpretation Act, 1933,
includes ‘any body of persons corporate or unincorporated’), amounts paid by a partnership to a
partner do not qualify as ‘remuneration’ as defined in the Fourth Schedule. The definition of ‘remuner-
ation’ in the Fourth Schedule includes ‘salary, leave pay, wage, overtime pay, bonus, gratuity, com-
mission, fee, emolument, pension, superannuation allowance, retiring allowance or stipend’, which
requires a relationship akin to an employee or service provider and therefore does not apply to part-
ners and partnerships.
The Act provides that a partner in a partnership is deemed to be an employee of the partnership and
a partnership is deemed to be the employer of the partners for purposes of the following specific
cases:
l s 11F, which allows a partner to claim a deduction (subject to specific limitations) for contribu-
tions made to a pension fund, provident fund or retirement annuity fund (see 18.7.3)
l s 11(l), which allows a partnership to claim a deduction for contributions made for the benefit of a
partner to a pension fund, provident fund or retirement annuity fund (see 18.7.2)
l contributions made by a partnership for the benefit of a partner to a pension fund, provident fund
or retirement annuity fund are to be regarded as a taxable benefit (par 12D of the Seventh
Schedule), and
l paragraph 2A of the Seventh Schedule, which provides that a partner is deemed to be an em-
ployee of a partnership for purposes of par 2 of the Seventh Schedule. The effect of par 2A is that
a partner must include fringe benefits in his gross income in terms of par (i) of the definition of
‘gross income’ and will be subject to normal tax on the fringe benefits provided by the partner-
ship, similar to fringe benefits provided to an employee. Although the value of a fringe benefit will
be included in a partner’s gross income, it will still not be subject to employees’ tax.
The following provisions of the Act which specifically apply to employees, will not apply to partners in
a partnership:
l par (d) of the definition of ‘gross income’ (termination gratuities) because this paragraph specifi-
cally refers to an office holder, employee or employer
l a salary payable to a partner is not subject to employees’ tax
l the provisions of s 8(1) that determine the taxable portion of a travel allowance, subsistence
allowance and an allowance granted to the holder of a public office
l s 23(m) that limits the deductions that relate to any employment or office held by a person, and
l s 12M that provides that amounts that are incurred by a taxpayer as contributions to a medical
scheme in respect of a former employee (or dependent of a former employee) may be deducted
from the taxpayer’s income.
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18.7 Specific deductions and allowances

18.7.1 Annuities paid to former employees or partners or their dependents (s 11(m))
A specific deduction is provided for for annuities paid to former employees, former partners and
dependents of such former employees or partners (s 11(m)). In the case of a former employee, the
deduction is allowed if the former employee has retired on grounds of old age, ill health or infirmity.
In the case of a former partner in a partnership, the person must have been a partner in the partner-
ship for at least five years and should have retired from the partnership on grounds of old age, ill
health or infirmity. The deduction is only allowed if the annuity paid is reasonable having regard to the
services rendered by the partner prior to his retirement and the profits made by the partnership. The
annuity may also not represent consideration payable to the former partner for his interest in the
partnership.
A deduction is also allowed for annuities paid to a dependent of a former employee or former partner.
The deduction is only allowed if the annuity is paid to a person who is dependent for his maintenance
upon a former employee or former partner, or in the case where a former employee or former partner
is deceased, to a person who was so dependent immediately prior to the employee or partner’s
death.
The amount of the deduction that may be claimed is not subject to a limitation.
Example 18.3. Annuities paid to former employees and partners
Cebisa, Fezeka and Esihle had been in partnership for the past 10 years and shared profits and
losses equally. Esihle retired as partner on 1 March 2017 due to ill health. Cebisa and Fezeka
decided to pay an annuity of R12 000 per month to Esihle (assume that the amount of the annuity
is reasonable in light of the services that she rendered to the partnership and the partnership’s
profits). The first payment was made on 31 March 2017. This amount was paid in addition to an
amount of R1 500 000 that was paid to Esihle on 1 March 2017 for her interest in the partnership.
One of the partnership’s employees, Nceba, died during February 2016. The partners decided to
pay an annuity of R2 000 per month to her husband for a five-year period for the maintenance of
their two minor children. The first payment was made on 31 March 2016.
Discuss whether the annuities that were paid to Esihle and Nceba’s husband qualify for a deduc-
tion in terms of s 11(m).
SOLUTION
Annuity paid to Esihle:
Esihle had been a partner for longer than five years. She retired due to ill health. The amount of
the annuity is reasonable in the light of the services that she rendered to the partnership and the
partnership’s profits. The annuity did not represent a payment for her interest or goodwill in the
partnership (a fixed amount of R1 500 000 was paid for this). The annuities may therefore be
deducted in terms of s 11(m).
Annuity paid to Nceba’s husband:
The annuity paid to Nceba’s husband qualifies for a deduction in terms of s 11(m). Although the
amount is paid to Nceba’s husband (and he was not necessarily dependent on her for his
maintenance), the amount still qualify for deduction in terms of s 11(m) since the amount is paid
for the benefit of Nceba’s two minor children (who had been dependent on her for their mainte-
nance).
18.7.2 Partnership contributions to a fund (s 11(l))

Where an employer makes a contribution to a pension fund, provident fund or retirement annuity fund
for the benefit of an employee, the employer may claim a deduction of the amount contributed
(s 11(l)). The deduction is also allowed if the amount is contributed for the benefit of a former em-
ployee, or any dependent or nominee of a deceased employee or former employee.
A partner in a partnership is, for purposes of this deduction, deemed to be an employee of the part-
nership. The partnership is deemed to be the employer of the partners. Since partners are otherwise
not employees of a partnership (there is no employer – employee relationship between a partnership
and its partners), this deeming provision makes it possible for a partnership to claim a deduction
where it makes a contribution to one of these funds for the benefit of a partner, a former partner, or
any dependent or nominee of a deceased partner or former partner.
646
Where an employer makes a contribution to a pension fund, provident fund or

retirement annuity fund for the benefit of an employee, the contribution qualifies
as a taxable benefit for the employee (par 2(l) of the Seventh Schedule). A
Please note! partner is, for this purpose, also deemed to be an employee of the partnership
(par 2A of the Seventh Schedule). The contribution therefore creates a taxable
fringe benefit in the partner or employee's hands (see 18.8).
18.7.3 A partner’s contribution to a pension fund, provident fund or retirement annuity fund
(s 11F)
A natural person is allowed to deduct the contributions made to a pension fund, provident fund or
retirement annuity fund, subject to certain limitations (s 11F; see chapter 7). For purposes of this
deduction, a partner in a partnership is deemed to be an employee of the partnership. The partner-
ship is deemed to be the employer of the partners (s 11F(5)). This means that a partner may also
deduct contributions to a pension fund, provident fund or retirement annuity fund.
The total amount deducted in a particular year of assessment may not exceed the lesser of (s 11F(2)):
l R350 000, or
l 27,5% of the higher of the person’s:
– remuneration as defined in par 1 of the Fourth Schedule, or
– taxable income as determined before allowing this deduction and a deduction for donations
made (the deduction for donations is made in terms of s 18A), or
l the person’s taxable income before allowing for this deduction and the inclusion of any taxable
capital gain.
For purposes of the above calculation, the person’s remuneration should exclude any retirement fund
lump sum benefit, retirement fund lump sum withdrawal benefit and severance benefit.
If an employer makes a contribution to a pension fund, provident fund or retirement annuity fund for
the benefit of an employee, the contribution creates a taxable fringe benefit in the employee’s hands
(par 2(l) of the Seventh Schedule). For purposes of this fringe benefit, a partner is deemed to be an
employee of a partnership (par 2A of the Seventh Schedule). A partnership’s contribution to a part-
ner’s pension fund, provident fund or retirement annuity fund will therefore be a taxable fringe benefit
in the partner’s hands. An amount equal to the taxable fringe benefit is deemed to have been con-
tributed by the employee or partner (s 11F(4)).
A person’s remuneration, as defined in par 1 of the Fourth Schedule, is taken into account when
calculating the deductible portion of contributions made to a pension fund, provident fund or retire-
ment annuity fund. In the case of partner, it is not clear whether a salary paid to a partner should be
regarded as remuneration for purposes of this deduction. As discussed in par 18.6, a partner is not
an employee of a partnership and a salary paid to a partner does not qualify as remuneration as
defined in the Fourth Schedule. However, since s 11F(5) provides that the partner is deemed to be an
employee of a partnership, it was probably the intention of the legislature that a salary paid to a
partner be regarded as remuneration for purposes of calculating the deductible portion of the contri-
bution made.
Example 18.4. A partner’s contribution to a retirement annuity fund

Kabelo is a partner in a partnership. During the 2018 year of assessment, he received a salary of
R860 000 from the partnership. His share of the partnership profit for the year was R500 000.
During the year he sold an investment property and realised a taxable capital gain of R300 000.
Kabelo contributed 12% of his salary from the partnership to a retirement annuity fund.
Calculate the amount of Kabelo’s contribution to the retirement annuity fund that he may claim as
a deduction.
647
SOLUTION
Contribution to retirement annuity fund (R860 000 × 12%) ........................................ R103 200
The deductible portion of the above contribution is calculated by following the
following steps:
Step 1: Calculate the person’s remuneration (As discussed above, it is not clear
whether a salary that a partner receives from a partnership qualifies as
remuneration for purposes of this deduction. However, it is assumed that it was
the legislature’s intention that if a partner receives a salary from a partnership, the
salary should be regarded as remuneration for purposes of this deduction.) ........... R860 000
Step 2: Calculate the person’s taxable income before deducting contributions
made to a pension fund, provident fund or retirement annuity fund and donations
Salary from partnership .............................................................................................. R860 000
Partnership profit........................................................................................................ 500 000
Taxable capital gain................................................................................................... 300 000
Taxable income.......................................................................................................... R1 660 000
Step 3: Calculate 27,5% of the higher of the above remuneration and taxable
income (R1 660 000 × 27,5%) ................................................................................... R456 500
made to the pension fund, provident fund or retirement annuity fund and the
inclusion of taxable capital gain
Salary from partnership .............................................................................................. R860 000
Partnership profit........................................................................................................ 500 000
Taxable income.......................................................................................................... R1 360 000
Step 5: Determine which is the lesser of the following values:
l R350 000
l R456 500 (27,5% of the higher of remuneration and taxable income before deducting the
contribution to a fund and donations)
l R1 360 000 (taxable income before deducting contributions made to a fund and the inclusion
of taxable capital gain).
The lesser of the above amounts is R350 000. Since the amount that Kabelo contributed to the
retirement annuity fund is less than R350 000, she may claim the full amount of R103 200 con-
tributed as a deduction.
Example 18.5. A partner and partnership’s contribution to a retirement annuity fund

If in the previous example the partnership contributed 12% of Kabelo’s salary from the partner-
ship to the retirement annuity fund in addition to Kabelo’s own contribution of 12% of his salary,
calculate the amount of the contribution to the retirement annuity fund that Kabelo may claim as
a deduction. Assume that the full amount contributed by the partnership qualifies as a taxable
fringe benefit in Kabelo’s hands. Also assume that the remainder of the facts in the previous
example remain the same.
SOLUTION
Contribution to retirement annuity fund (Kabelo’s contribution (R860 000 × 12%)
+ Taxable fringe benefit (R860 000 × 12%)). The amount contributed by the
partnership to the retirement annuity fund is a taxable fringe benefit in Kabelo’s
hands. This amount is deemed to be a contribution made by Kabelo to the
retirement annuity fund ............................................................................................. R206 400
The deductible portion of the above contribution is calculated by following the
following steps:
Step 1: Calculate the person’s remuneration
Salary from partnership ............................................................................................. R860 000
Taxable fringe benefit ............................................................................................... 103 200
R963 200
continued
648

made to a pension fund, provident fund or retirement annuity fund and donations.
Partnership profit....................................................................................................... 500 000
Taxable capital gain.................................................................................................. 300 000
Taxable income......................................................................................................... R1 763 200
Step 3: Calculate 27,5% of the higher of the above remuneration and taxable
income (R1 763 200 × 27,5%) R484 880
made to the pension fund, provident fund or retirement annuity fund and the
inclusion of taxable capital gain
Partnership profit....................................................................................................... 500 000
Taxable income......................................................................................................... R1 463 200
Step 5: determine which is the lesser of the following values:
l R350 000
l R484 880 (27,5% of the higher of remuneration and taxable income before deducting the
contribution to a fund and donations)
l R1 463 200 (taxable income before deducting contributions made to a fund and the inclusion
of taxable capital gain).
The lesser of the above amounts is R350 000. Since the amount that Kabelo contributed to the
retirement annuity fund is less than R350 000, she may claim the full amount of R206 400 con-
tributed as a deduction.
18.7.4 Key person insurance contributions (s 11(w))

A taxpayer may deduct the premiums payable under a so-called ‘key person insurance policy’ of
which the taxpayer is the policyholder (s 11(w); see chapter 12). These insurance policies are taken
out by a business to compensate the business for financial losses or the extended incapacity of an
important person in the business.
One of the requirements to claim key person insurance contributions as a deduction under s 11(w), is
that the policy must relate to the death, disablement or illness of an employee or director of the tax-
payer. The partners of partnership are not employees or directors of the partnership. This means that
where a partnership takes out a key person insurance policy on the life of a partner, the partnership
will not be entitled to deduct the premiums paid under s 11(w). These premiums are also not deduct-
ible in terms of s 11(a), since it is expenditure of a capital nature. When the policy matures and the
remaining partners receive the proceeds, the amounts are not included in the partners’ gross in-
come, since it represents a receipt of a capital nature.
Where a partnership takes out a key person insurance policy on the life of an employee, the premi-
ums paid will qualify for a deduction under s 11(w).
l A person should disregard the capital gain or loss for a disposal that
results in the receipt of an amount in respect of policy that was taken out
to insure against the death, disability or illness of that person by any oth-
er person who is a partner of the person (par 55(1)(c) of the Eighth
Please note! Schedule; see chapter 17). The policy should be taken out for the pur-
pose of enabling the other person to acquire the person’s interest in the
partnership upon the death, disability or illness of the person. The per-
son whose life is insured should not pay the premium on the policy while
the other person is the beneficial owner of the policy.
l The proceeds from a key person insurance policy is excluded from es-
tate duty in the deceased partner’s estate if certain conditions are com-
plied with. See chapter 25
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18.7.5 Capital allowances

The property of the partnership does not belong to the partnership as such since, as already noted, a
partnership is not a legal entity. The property of the partnership, whether originally introduced into the
partnership by one or more of the partners or subsequently bought by the partnership, belongs jointly
to the individual partners who are its co-owners. Any capital allowances granted on assets must be
apportioned between the partners according to the ratio in which they share profits or losses. Re-
coupments are included in their incomes in the same proportions.
Not all property used in a partnership business is necessarily owned jointly by the partners. A partner
may contribute property or buy assets for use in the partnership, it being the clear intention that they
are not to form part of the property of the partnership, but are to be owned by the particular partner.
In that event, it is submitted that the capital allowances that are deductible must be allowed in full to
the partner who owns the assets. Certain capital allowances are calculated on the cost to the taxpay-
er of the particular asset. Therefore, when a partner lays out the cost, and the asset does not belong to
the partnership, that partner is the taxpayer who enjoys the benefit of the capital allowances. The capi-
tal allowances on such assets are therefore not deducted in the calculation of the ‘taxable income’ of
the partnership, but are only claimed as a deduction in the calculation of the taxable income of the
individual partner.
18.7.6 Motor vehicle expenses

Since partners are not employees of a partnership, the provisions of the Act relating to travel allow-
ances do not apply to partners (s 8(1); see chapter 8). Partners may claim motor vehicle expenses
based on the actual costs incurred in respect of a vehicle and the actual distance travelled for busi-
ness purposes. The portion of the vehicle expenses incurred for private purposes is not deductible (s
23(b)). The partner must retain adequate records, such as a logbook and receipts of expenses to
prove the amount of vehicle expenses incurred for business purposes.
Partners are, however, deemed to be employees of a partnership for fringe benefit purposes (par 2A
of the Seventh Schedule; see 18.8 and chapter 8). Where a vehicle is owned by the partnership and
the right of use of the vehicle is granted to a partner, the value of the taxable benefit (and any poten-
tial reductions of such value due to business usage and expenses incurred by the partner) will be
determined in terms of par 7 of the Seventh Schedule (see chapter 8).
A partner will therefore only be allowed to claim the actual cost incurred in respect of a vehicle for
business purposes (based on actual distance travelled and actual cost incurred) if the partner owns
the vehicle.
Remember
l The provisions of s 8(1)(b) of the Act in respect of travel allowances are not applicable to a
partner of a partnership. This is because a partnership (or the other partners) is not a princi-
pal in relation to a partner. Section 8(1)(b) requires that a principal has to pay an allowance to
a recipient. A partner may therefore not use the deemed cost tables in calculating the amount
expended in respect of travelling for business purposes.
l A travel allowance is not a fringe benefit. Travel allowances are dealt with in s 8 of the Act,
whereas fringe benefits are dealt with in terms of the Seventh Schedule.
Example 18.6. Motor vehicle expenses

Mabhuti is a partner in a partnership and shares in 40% of the profits and losses of the partner-
ship. On 1 March 2017 Mabhuti purchased a motor vehicle in terms of an instalment credit
agreement. The cash purchase price of the vehicle was R273 600. Mabhuti incurred interest of
R29 780 during the period between 1 March 2017 and 28 February 2018. Passenger cars are
written off for tax purposes over a five-year period in terms of Interpretation Note No 47. The total
cost for the maintenance, insurance and fuel for this vehicle for the 2018 year of assessment was
R80 000. Mabhuti paid for all these expenses. The vehicle was used by Mabhuti for both busi-
ness and private purposes. He kept a logbook of his business and private kilometres travelled
during the year; he travelled 25 000 km for business purposes and 16 000 km for private purpos-
es.
continued
650
The partnership’s income and expenses for the period 1 March 2017 to 28 February 2017 were
as follows:
Income:
Gross profit from trading ........................................................................................... 3 000 000
Expenses:
General partnership expenses (all deductible) ......................................................... (1 650 000)
Salary paid to Mabhuti............................................................................................... (280 000)
Salary paid to other partners ..................................................................................... (530 000)
Net profit .................................................................................................................... R540 000
Calculate Mabhuti’s taxable income for the 2018 year of assessment.
SOLUTION
STEP 1: Calculate taxable income from partnership
Taxable income of partnership...................................................................................... R540 000
Partner’s share of partnership’s taxable income (R540 000 × 40%) ............................. R216 000
Salary from partnership ................................................................................................. 280 000
Less: Business component of vehicle use, calculated as:
Capital allowance on the vehicle (R273 600/5) ......................................... R54 720
Insurance and fuel .................................................................................... 80 000
Interest incurred on the vehicle ................................................................. 29 780
R164 500
Business component of vehicle use
(R164 500 × 25 000 km/(25 000 km + 16 000 km) ........................................................ (100 305)
Taxable income ............................................................................................................. R395 695
18.7.7 Allowance for bad debt (s 11( i))

A deduction is allowed for any debt due to a taxpayer that became bad during the year of assess-
ment. The deduction is only allowed if the amount was included in the taxpayer’s gross income in the
current or previous years of assessment (s 11(i); see chapter 12). When debt due to a partnership
becomes bad during the year of assessment, the deduction is apportioned among the partners
according to their profit-sharing ratios. A deduction is only allowed in a specific partner’s hands to
the extent that the amount was included in the partner’s gross income in the current or previous years
of assessment.
On admitting a new partner to the partnership, the new partner may acquire an interest in debt that is
owed to the partnership. Should the debt subsequently become bad, the new partner may not claim
a deduction for bad debt, since the amount would not have been included in the partner’s gross
income in the current or previous years of assessment. The debt written off will result in a capital loss
for the new partner (see chapter 17).
Example 18.7. Bad debt allowance

One of the three partners of a partnership retired on 28 February 2017. The partners shared prof-
its and losses equally. Khosi was admitted as a partner to the partnership with effect from
1 March 2017.
The amount owed by one of the partnership’s debtors on 28 February 2017 became irrecovera-
ble during the 2018 year of assessment. An amount of R300 000 was written off as bad debt.
The original two partners may claim a deduction in terms of s 11(i) of R100 000 (R300 000 × 1/3)
each. The new partner is not entitled to a deduction in terms of s 11(i). The debt written off will
result in a capital loss in Khosi’s hands (see in chapter 17).
When partners take over the interest of an outgoing partner, the principles discussed above relating
to bad debt will similarly apply to the remaining partners. The remaining partners will acquire the
outgoing partner’s interest in debt owed to the partnership. If the debt subsequently becomes bad,
the remaining partners will only be entitled to claim a deduction for bad debt to the extent that the
651
amount was included in their gross incomes in the current or previous years of assessment. The
remaining partners will therefore not be entitled to deduct the portion of the bad debt that relates to
the debt they acquired from the outgoing partner. The debt written off will result in a capital loss for
the remaining partners (see chapter 17).
When debt that was written off is later recovered, the amount so recovered is included in the person’s
gross income (par (n) of the definition of ‘gross income’ read with s 8(4)(a); see chapter 4). The
amount is, however, only included in the person’s gross income to the extent that the person claimed
a deduction for the bad debt. If a specific partner did not claim a deduction for bad debt when the
debt became bad (for example, the specific partner had not been admitted as a partner at the time
when the debt became bad), the partner’s share in the amount recovered is not included in the
partner’s gross income, since it is of a capital nature (such amount will also not be subject to CGT
since there was no disposal of an asset).
18.8 Fringe benefits

A partner is deemed to be an employee of partnership for fringe benefit purposes (par 2A of the
Second Schedule; see chapter 8). The effect of this is that partners will be subject to income tax on
fringe benefits provided by the partnership, similar to fringe benefits provided to an employee. The
valuation of fringe benefits is discussed in chapter 8.
Example 18.8. Right of use of motor vehicle owned by the partnership

John is a partner in a partnership and shares in 40% of the profits and losses of the partnership.
On 1 March 2017 the partnership purchased a motor vehicle for R300 000. John was granted the
right of use of the vehicle from 1 March 2017 to 28 February 2018. John kept a logbook of his
business and private kilometres travelled during the 2018 year of assessment. He travelled
25 000 km for business purposes and 16 000 km for private purposes.
The partnership’s income and expenses for the period 1 March 2017 to 28 February 2018 are as
follows:
Income:
Gross profit from trading .............................................................................................. 3 000 000
Expenses:
General partnership expenses (all deductible) ............................................................ (1 650 000)
Salary paid to John ....................................................................................................... (280 000)
Salary paid to other partners ........................................................................................ (530 000)
Depreciation on vehicle provided to John (depreciation is determined over a period
of four years for accounting purposes) (R300 000/4) ................................................... (75 000)
Net profit ....................................................................................................................... R465 000
Calculate John’s taxable income for the 2018 year of assessment. Note that passenger vehicles
are written off for tax purposes over a five-year period in terms of Interpretation Note No 47. As-
sume that the retail market value of the vehicle was R300 000 on 1 March 2017.
SOLUTION
Net profit........................................................................................................................ R465 000
Add: Depreciation ........................................................................................................ 75 000
Partnership taxable income........................................................................................... R540 000
Partner’s share of partnership’s taxable income (R540 000 × 40%) ............................. R216 000
Salary from partnership ................................................................................................. 280 000
Taxable benefit from the right of use of motor vehicle (R300 000 × 3,5% × 12) ........... 126 000
Less: Business component of vehicle use
(R126 000 × 25 000 km / (25 000 km + 16 000 km) ...................................................... (76 829)
Taxable income ............................................................................................................. R545 171
Note
Refer to chapter 8 for a detailed explanation of how to determine the value of the taxable benefit
from the right of use of the motor vehicle, as well as the business component deduction.
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18.9–18.11 Chapter 18: Partnerships
18.9 Turnover tax

An elective turnover tax applies to micro businesses (see chapter 23). The turnover tax effectively
replaces income tax and capital gains tax. In general, a person may elect to be subject to the turn-
over tax if the person’s turnover for the year of assessment does not exceed R1 000 000. With regard to
a partner, the following specific rules apply (par 3(g) of the Sixth Schedule):
l Where any of the partners in the partnership is not a natural person, the partners may not elect to
be subject to the turnover tax.
l Where a partner is a partner in more than one partnership at any time during the year of assess-
ment, that partner may not elect to be subject to the turnover tax.
l Where the qualifying turnover of the partnership for the year of assessment exceeds R1 000 000,
the partners may not elect to be subject to the turnover tax.
18.10 Limited partnerships (partnerships en commandite)(s 24H(4))

A limited partnership is one in which certain partners are not involved in the management of the
business and also only liable for the partnership debt to a limited extent. The liability of a limited
partner is usually limited to the partner’s partnership contribution.
A limited partner is defined in the Act as a member of the partnership en commandite, an anonymous
partnership or similar partnership or a foreign partnership. A limited partner’s liability towards a
creditor of the partnership is limited to the amount that the partner contributed to the partnership, or
limited in any other way (definition of ‘limited partner’ in s 24H(1)).
The deductions or allowances that may be claimed by a limited partner may not in aggregate exceed
the sum of the amount for which the partner may be held liable to any creditor of the partnership and
any income received by or accrued to the partner from the partnership business (s 24H(3)). Any
deductions or allowances that are disallowed because they exceed these amounts, are carried
forward to the succeeding year of assessment. These amounts may be deducted in the succeeding
year of assessment, but will be subject to the above limitation for the succeeding year of assessment
(s 24H(4)).
18.11 Dissolution/termination of partnership agreement

A partnership may be dissolved in a number of ways, such as ceasing to trade, the death or retire-
ment of a partner, or the admission of a new partner. If any of these events occur, the agreement
between the partners at the time is cancelled. If the partnership continues to trade after one of these
events, for example when a partner dies, retires or a new partner is admitted to the partnership, a
new agreement is entered into between the continuing partners. This means that the old partnership
ceases to exist, and a new partnership is formed.
The tax consequences of payments made to former partners after the dissolution of the partnership
depend on what the payments were made for. Before a number of scenarios are considered, it is
important to remember the following principles:
l Income is deemed to accrue or be received by a partner at the same time it accrues or is re-
ceived by the partnership (s 24H(5)). This means that even though a partner may not have re-
ceived income from the partnership, the amount is deemed to accrue to the partner when it is
received by or when it accrues to the partnership.
l Where a taxpayer disposes of income after it accrued to the taxpayer, the amount is still taxable
in the taxpayer’s hands (CIR v Witwatersrand Association of Racing Clubs (1960 A); see chap-
ter 3).
l An amount received for the disposal of a right will be of a capital nature if the right forms part of
the taxpayer’s income-producing structure (WJ Fourie Beleggings v C:SARS (2009 SCA) and
Stellenbosch Farmers' Winery Ltd v CIR (2012 SCA); see chapter 3).
l The disposal of an interest in a partnership asset qualifies as a disposal of an asset for CGT
purposes (see chapter 17).
l An increase or decrease in a partner’s interest in the partnership assets triggers a part disposal
of the partnership assets for CGT purposes (see chapter 17).
Where a former partner receives a lump sum amount from the remaining partners for his share of the
partnership profit for the year up to the date of dissolution, the amount should be included in the
former partner’s gross income. The lump sum amount in this scenario represents a payment of an
653
amount that already accrued to the former partner. This is so because an amount is deemed to
accrue to a partner at the same time it is received by or accrues to the partnership (s 24H(5)). If, on
dissolution of the partnership, the parties agree to amend the partnership agreement with regards to
the sharing of profits and the outgoing partner receives less than the amount that accrued to him
during the year prior to dissolution, he will still be liable for tax on the amount that accrued to him. The
difference between the amount that accrued to him and the amount that he agrees to receive will
result in a capital loss in his hands. If the agreement results in him receiving more than the amount
that accrued to him, the excess amount will be a capital gain in his hands.
If, on dissolution of the partnership, the outgoing partner receives an amount from the other partners
as consideration for his share of the partnership assets, the amount will be of a capital nature in his
hands. The amount will qualify as proceeds from the disposal of an interest in the partnership assets
and will be subject to CGT (see chapter 17). If this amount is paid to the outgoing partner in instal-
ments over an agreed period, the amount that accrued to the outgoing partner is still of a capital
nature. The amount is treated as having accrued to the outgoing partner at the time of disposal for
CGT purposes (par 36 of the Eighth Schedule; see chapter 17). However, if, on dissolution of the
partnership, the remaining partners agree to pay an annuity over a specific period to the outgoing
partner, the amount will be included in the outgoing partner’s gross income. This is because par (a)
of the definition of ‘gross income’ provides that any amount received or accrued by way of annuity is
specifically included in a person’s gross income.
Example 18.9. Dissolution of partnership

Mpho, Lungelo and Nelson each contributed R1 000 000 on 1 March 2009 to form a partnership
that acquired a commercial property for R3 000 000. The three partners shared profits and losses
equally. For the period 1 March 2017 to 28 February 2018 the property was rented out for R30 000
net per month. On 30 November 2017 Mpho sold his interest in the partnership asset in equal
shares to Lungelo and Nelson for R1 800 000 in total. Mpho received R1 890 000 on 30 November
2017, which was made up as follows:
l R900 000 from Lungelo for half of Mpho’s interest in the partnership asset
l R900 000 from Nelson for half of Mpho’s interest in the partnership asset
l R90 000 from the partnership representing Mpho’s share in the net rental income received from
1 March 2017 to 30 November 2017.
Calculate the effect of the above on Mpho’s taxable income for his 2018 year of assessment.
SOLUTION
Income
Profit from partnership (representing Mpho’s interest in the net rental income
received) ........................................................................................................................ R90 000
Proceeds from disposal of interest in partnership asset (this amount is not included
in Mpho’s income, since it is of a capital nature) ........................................................... nil
Taxable capital gain (see chapter 17)
Proceeds from disposal of interest in partnership asset ....................... R1 800 000
Less: Base cost of interest in partnership asset (the base cost of
Mpho’s interest in the partnership asset is equal to his initial
contribution to the partnership) ............................................................. (1 000 000)
Capital gain ........................................................................................... R 800 000
Less: Annual exclusion.......................................................................... (40 000)
Aggregate capital gain.......................................................................... 760 000
Taxable capital gain (R760 000 x 40%) ................................................ 304 000
Taxable income ..................................................................................... 394 000
18.12 Default by partner

Partners are in general jointly and severally liable for the debt incurred by the partnership. This
means that a partnership creditor may recover an amount due to him jointly from all the partners, or
from any of the individual partners.
If a partnership incurs a loss and one of the partners is unable to contribute his share of the loss, the
other partners will have to contribute to make good the loss. The assessed loss in these partners’
654
18.12–18.13 Chapter 18: Partnerships
hands will be limited to the amount for which they were liable under the partnership agreement. This
is because deductions and allowances are allocated to partners in the same ratio in which the profits
or losses of the partnership are shared (s 24H(5)(b)). The amount that the partners contributed to
make good the loss incurred by the defaulting partner will be an expense of a capital nature. These
partners will have a claim against the partner who could not contribute his share of the loss. If the
amount becomes irrecoverable, these partners will realise the capital loss (see chapter 17).
Example 18.10. Partnerships: Comprehensive example
Paul (aged 34) and Ebrahim (aged 65) started SolMac Electronics on 1 March 2009 as a partner-
ship when they each contributed R100 000 to the partnership. Ebrahim retired as a partner on
28 February 2017. One of SolMac Electronics’ employees, Ashwin (aged 36), acquired Ebrahim’s
interest in the partnership on 1 March 2017 for R400 000 (this amount was made up of R100 000
for Ebrahim’s partnership contribution and R300 000 for Ebrahim’s interest in the partnership
assets). Paul and Ashwin share equally in the profits and losses of the partnership. The income
and expenses of the partnership for the year that ended on 28 February 2018 were as follows:
Income
Gross income from trading operations ..................................................................... R2 830 000
Interest received on credit balance of bank account ............................................... 60 000
Dividends (the partners own 100 000 of the ordinary shares of Electron (Pty) Ltd
and received a dividend of R2,60 per share) ........................................................... 260 000
Expenses
Salaries paid to employees (the partnership employed 4 employees throughout
the year of assessment who each received an annual salary of R144 000) ............. (432 000)
Unemployment insurance fund contributions (UIF) and skill development levies
(SDL) in respect of employees’ salaries ................................................................... (8 640)
Salaries paid to partners (R800 000 to each partner) ............................................... (1 600 000)
Contribution to employees’ pension fund (the partnership contributes an amount
equal to 8% of its employees’ salaries to a pension fund on behalf of the
employees) ............................................................................................................... (34 560)
Contribution to partners’ pension fund (the partnership contributes an amount
equal to 8% of its partners’ salaries to a pension fund on behalf of the partners) .... (128 000)
Short-term insurance premiums ................................................................................ (68 000)
Life insurance premiums on the lives of partners ..................................................... (12 000)
Depreciation on office furniture (the office furniture was purchased on 1 March
2016 for R75 000. The office furniture is depreciated over four years for
accounting purposes. Interpretation Note 47 provides for a write-off period of six
years on furniture.) ................................................................................................... (18 750)
Interest paid in respect of partners’ capital contributions (Paul and Ashwin each
made a capital contribution of R100 000 on 1 March 2009 and 1 March 2017
respectively. Interest on the partner’s capital contributions are calculated at the
end of each year at a rate of 12% per annum) ......................................................... (24 000)
Net profit ................................................................................................................... R824 050
Additional information relating to Ashwin:

l He contributes 8% of his monthly salary from the partnership to the partnership’s pension fund
in addition to the partnership’s contribution.
l He contributes R1 680 per month to a retirement annuity fund.
l He contributes R1 850 per month to a medical scheme. Ashwin is the only dependant on the
scheme.
l He received R36 000 net rental income during the 2018 year of assessment.
Calculate Ashwin’s taxable income for the 2018 year of assessment. You may assume that the
provisions of s 20A are not applicable.
655
SOLUTION
Partnership net profit................................................................................................. R824 050
Adjusted for income and expenses that are subject to special rules in the individu-
al partner’s hands:
Add: Life insurance premiums on the lives of partners (note 1) ............................... 12 000
Add: Excess wear and tear (note 2) ......................................................................... 6 250
Partnership taxable income R842 300
Ashwin’s share in partnership taxable income (R842 300 × 50%) ........................... R421 150
Salary from partnership ............................................................................................. 800 000
Interest received from partnership (R100 000 × 12%) .............................................. 12 000
Contributions to pension fund paid by partnership (R800 000 × 8%) (note 3) ......... 64 000
Net rental income ...................................................................................................... 36 000
Income ...................................................................................................................... R1 333 150
Less: Interest exemption in terms of s 10(1)(i) (note 4) ............................................. (23 800)
Less: Dividend exemption in terms of s 10(1)(k)(i) (note 5) ...................................... (130 000)
Taxable income before specific deductions ............................................................. 1 179 350
Less: Contributions to pension fund and retirement annuity fund (note 6) ............... (148 160)
Taxable income (note 7) ........................................................................................... R1 031 190
Notes
(1) The expense is of a capital nature and therefore not deductible.
(2) Depreciation claimed for accounting purposes ............................................... 18 750
The amount that may be claimed as a deduction in terms of s 11(e) read
with Interpretation Note No 47 (R75 000/6)....................................................... (12 500)
6 250
(3) The contribution made by the partnership to the partner’s pension fund is a taxable fringe
benefit in the partner’s hands.
(4) Ashwin Macebele received the following amounts of interest:
Interest from the partnership on his capital account ....................................... 12 000
Interest on partnership bank account (R60 000 × 50%) (this amount is
included in Ashwin’s share in the partnership profit) ........................................ 30 000
42 000
Ashwin is entitled to an interest exemption of R23 800 for the 2018 year of
assessment. The exemption is limited to the amount received.
(5) Included in Ashwin’s share in the taxable income of the partnership is a dividend of
R130 000 (R260 000 × 50%). This dividend accrued to Ashwin in terms of s 24H and he is
entitled to the dividend exemption of s 10(1)(k)(i).
(6) Ashwin’s contribution to the pension fund and retirement annuity fund that is deductible in
terms of s 11F is calculated as the lower of:
l R350 000
l 27,5% of the higher of
– R1 179 350 (taxable income), or
– R820 000 (remuneration (R800 000 salary + R20 000 fringe benefit)
Therefore R 324 321,25 (27,5% of R1 179 350), and
l R1 179 350 taxable income.
Ashwin’s total contribution to the pension fund and retirement annuity fund is R148 160
(R64 000 (own contribution to pension fund) + R20 160 (own contribution to retirement
annuity fund) + R64 000 (fringe benefit from partnership contribution to Ashwin’ pension
fund that is deemed to be an amount contributed by Ashwin to the fund)). The maximum
amount that Ashwin may claim as a s 11F deduction is R324 321,25 (the lesser of the above
three amounts). However, since Ashwin contributed less than this amount to these funds, he
will be allowed to deduct his full contribution.
(7) Ashwin will be entitled to a medical scheme fees tax credit of R3 636 (R303 × 12) in respect
of the 2018 year of assessment (s 6A).
656
19 Companies and dividends tax
Pieter van der Zwan

l identify entities that are treated as companies for tax purposes
l calculate the taxable income for a company using the methodology required by the
ITR14 tax return
l explain and calculate the effective rate at which distributed company profits are
taxed
l apply the definition of a dividend
l explain and calculate the tax implications if a company pays a dividend
l apply the definition and calculate the contributed tax capital of a company
l explain and calculate the tax implications if a company pays a return of capital
l describe and apply the specific tax implications of close corporations, foreign
companies, non-profit companies, small business corporations, companies that
operate in special economic zones, personal service providers, REITs and co-
operatives.
Contents
Page
19.1 Overview ............................................................................................................................. 658
19.2 Taxation of companies ........................................................................................................ 658
19.2.1 Companies for income tax purposes ................................................................... 658
19.2.2 Taxation of company profits ................................................................................. 659
19.2.3 Tax implications of distribution by companies ..................................................... 662
19.3 Taxation of dividends .......................................................................................................... 664
19.3.1 Definition of a dividend ......................................................................................... 664
19.3.2 Taxation of dividends ........................................................................................... 666
19.3.3 Dividends tax: Introduction................................................................................... 667
19.3.4 Dividends tax: Dividends subject to dividends tax (s 64E).................................. 667
19.3.5 Dividends tax: Liability for dividends tax and withholding obligation
(ss 64EA, 64G, 64H) ............................................................................................. 668
19.3.6 Dividends tax: Exemptions from dividends tax (s 64F and 64FA) ....................... 675
19.3.7 Dividends tax: Rate (ss 64E and 64G(3)) ............................................................. 677
19.3.8 Dividends tax: Deemed dividends subject to dividends tax (s 64E(4))............... 678
19.3.9 Dividends tax: Timing (s 64E(2)) .......................................................................... 679
19.3.10 Dividends tax: Payment of dividends tax and returns (s 64K) ............................. 680
19.3.11 Dividends tax: Refund of dividends tax (ss 64L and 64LA) ................................. 681
19.4 Taxation of returns of capital............................................................................................... 681
19.4.1 Definition of contributed tax capital ...................................................................... 681
19.4.2 Returns of capital .................................................................................................. 684
19.5 Companies with specific tax implications ........................................................................... 685
19.5.1 Close corporations................................................................................................ 686
19.5.2 Foreign companies ............................................................................................... 686
19.5.3 Non-profit companies ........................................................................................... 687
19.5.4 Small business corporations (s 12E) .................................................................... 687
19.5.5 Companies operating in special economic zones (ss 12R and 12S) .................. 690
19.5.6 Personal service providers (par 1 of the Fourth Schedule and s 23(k)) ............. 691
19.5.7 Real Estate Investment Trusts (REITs) (s 25BB) .................................................. 691
19.5.8 Co-operatives ....................................................................................................... 697
657
19.1 Overview
Many business and investment activities in South Africa are conducted by companies. The incorpora-
tion, operation and governance of companies are governed by the Companies Act (Act 71 of 2008).
A company is a juristic person with a separate legal personality from its shareholders and directors.
Amongst others, this means that the assets and liabilities of the company are those of the company
rather than its shareholders. Similarly, the company conducts business in its own name and the
resulting profits belong to the company. The business and affairs of a company are managed by or
carried out under the direction of the directors of the company.
The rights of shareholders are determined by the rights attaching to the shares that they hold in the
company. This generally includes voting rights and rights to receive certain distributions made by the
company. The relationship between the company’s shareholders, directors and other interested
parties is governed by the Companies Act, the company’s founding document, the memorandum of
incorporation (MOI), rules of the company and other agreements, such as shareholder agreements.
As a legal person, a company is taxed separately from the persons who hold the shares of the
company. This chapter explains the tax treatment of a company and its shareholders in the following
manner:
Overview of the components of the taxation of companies (19.2)
Shareholders
Taxation of distributions to
shareholders (19.3 and 19.4)
Company Taxation at company level (19.2.2)
Companies with specific characteristics that impact its taxation (19.5)
19.2 Taxation of companies

Profits generated by a company are taxed at two levels. The profits are taxed in the hands of the
company as a taxpayer in its own right. Upon distribution of these profits to the shareholders a further
layer of tax may be imposed. This section of the chapter considers the entities that are taxed in this
manner and the interaction between the two components of taxation levied on company profits.
19.2.1 Companies for income tax purposes

The term ‘company’, as used in the Act, has a wider meaning than only companies to which the
provisions of the Companies Act apply. This means that entities other than companies governed by
the Companies Act may also be taxed in the manner described in this chapter.
The term ‘company’ is defined in s 1 and specifically includes
l Any company, association or corporation incorporated under any law in the Republic as well as a
body corporate formed under a law in the Republic (par (a) of the definition of ‘company’ in s 1).
Companies incorporated in terms of the Companies Act are included in this category of
company.
l A company incorporated under the law of a foreign country or a body corporate formed under
such law (par (b) of the definition of ‘company’ in s 1). The specific tax implications of foreign
companies are discussed in 19.5.2.
l Any co-operative (par (c) of the definition of ‘company’ in s 1). This term is in turn defined in s 1 to
refer to an association of persons in terms of s 7 of the Co-operatives Act (Act 14 of 2005). An
overview of the specific tax regime that applies to co-operatives is provided in 19.5.8.
658
19.2 Chapter 19: Companies and dividends tax
l An association (other than a company or a close corporation) formed in the Republic to serve a
specified purpose beneficial to the public or a section of the public (par (d) of the definition of
‘company’ in s 1). These associations often enjoy certain tax concessions, as described in further
detail in chapter 5.
l A portfolio comprised in certain investment schemes carried on outside the Republic (foreign
collective investment schemes) (par (e)(ii) of the definition of company in s 1). The taxation of
portfolios of collective investment schemes are discussed in more detail in chapter 5.
l A portfolio of a collective investment scheme in property that qualifies as a REIT as defined in
par 13.1(x) of the JSE Limited Listings Requirements. The special tax regime that applies to
REITs is considered in 19.5.7.
l A close corporation (CC) (par (f) of the definition of ‘company’ in s 1). The application of the
company tax regime to CCs is discussed in 19.5.1.
Remember
Any reference in the Act and in this chapter to a company refers to all the entities listed in the
definition of ‘company’ above.
The definition of a company specifically excludes a foreign partnership. This means that a foreign
entity that meets the definition of a foreign partnership (s 1) will not be taxed in the manner that a
company is taxed in South Africa, even if its name appears to be a company (for example, certain
limited liability companies treated as fiscally transparent in the jurisdictions where they are incor-
porated). The normal tax consequences pertaining to such foreign partnerships are discussed in
chapter 18.
Companies are classified as public or private companies for purposes of the Act. The classification
criteria employed in the Act differ from those in the Companies Act. The characteristics of companies
that are recognised as public companies, for purposes of the Act, are listed in s 38(2). Any company
that is not a public company is classified as a private company for purposes of the Act (s 38(3)).
Remember
The distinction between public and private companies, as defined in s 38, only has the following
effect:
l Donations by public companies are exempt from donations tax (s 56(1)(n)).
l Directors of private companies are specifically included in the definition of an employee for
purposes of employees’ tax.
l Anti-avoidance rules relating to attribution of amounts to spouses (s 7(2) and par 68 of the
Eighth Schedule) and the determination of the cash equivalent value of a fringe benefit arising
on residential accommodation in which the employee has an interest ((par 9(3)(ii)(aa) of the
Seventh Schedule) only apply to shareholding in private companies.
As a result of the fact that a company is a legal or juristic person without physical existence, as
opposed to a human being, the Tax Administration Act (TAA) requires that a human should be
responsible for all acts, matters and things that the company is required to do in terms of any tax Act.
Every company carrying on a business or having an office in the Republic must at all times be
represented by an individual residing in the Republic (called the company’s public officer). The
public officer must be a person who is a senior official of the company and be approved by SARS.
The public officer must be appointed within one month after the company begins to carry on
business, or acquires an office in the Republic (s 246 of the TAA (see chapter 33)).
19.2.2 Taxation of company profits
Taxable income
A company is liable for normal tax on the profits of the company. A company’s normal tax liability is,
similarly to any other taxpayer, determined on its taxable income. The principles for determining
taxable income, as discussed in chapters 2 to 6, apply to the calculation of the taxable income of a
company (i.e. gross income less exempt income less deductions).
Remember
Companies are not entitled to certain deductions or exemptions in the calculation of its taxable
income that may be available to natural persons, for example the interest exemption in s 10(1)(i).
659
In practice, the calculation of this taxable income is often performed on the basis of the tax com-
putation that must be furnished on the company income tax return (ITR14). This calculation requires
the taxpayer to calculate its taxable income using its accounting profit or loss as a starting point. The
return requires that the effect of certain income or expenses recognised in profit or loss for
accounting purposes be reversed and replaced with the amount of the relevant deduction or income
amount determined in accordance with the Act. The level of detail of these adjustments depends on
the size and tax status of the company.
The company tax return provides the following framework for the calculation of the taxable income of
a company:
Framework for the calculation of a company’s taxable income
Net profit or loss as reflected on the statement of profit or loss ....................................... Rxxx
Debit adjustments
Less: Non-taxable amounts credited to the statement of profit or loss (note 1) ........... (xxx)
Less: Special allowances available for tax purposes that were not claimed in the
statement of profit or loss (note 2) ................................................................................ (xxx)
Credit adjustments
Add: Non-deductible amounts debited to the statement of profit or loss (note 3)........ xxx
Add: Amounts not credited to the statement of profit or loss (note 4) .......................... xxx
Add: Allowances/deductions granted in previous years of assessment that are
reversed in the current year (note 5) ............................................................................ xxx
Add: Recoupment of allowances or expenses previously allowed as deductions
(note 6) ......................................................................................................................... xxx
Add: Amounts specifically to be included in the determination of taxable income
before s 18A donations (note 7) ................................................................................... xxx
Add: Taxable capital gains (s 26A) (note 8) ..................................................................... xxx
Less: s 18A donations deduction (see chapter 7) ............................................................ (xxx)
Less: Assessed losses brought forward from previous years of assessment (see
chapter 12) ........................................................................................................................ (xxx)
Taxable income for the year of assessment ...................................................................... xxx
Note 1
Amounts may constitute income for accounting purposes but not be subject to normal tax. This
adjustment removes the effect of such amounts that are included in accounting profit or loss. An
example of an item that may be reflected in this adjustment is dividend income that is included in
accounting profit or loss but would be exempt from normal tax (see chapter 5).
Note 2
The Act contains a number of allowances and deductions that are not available for accounting
purposes or where the amount of the deduction may differ from the expense recognised in the
company’s accounting profit or loss. This adjustment ensures that the amount of the tax allow-
ance or deduction is reflected in taxable income. An example of such an item would be an
accelerated wear and tear allowance allowed in terms of s 12C in respect of certain manufac-
turing equipment (see chapter 13).
Note 3
All expenses taken into account when determining accounting profit or loss may not be allowed
as a deduction for tax purposes. This adjustment reverses the effect of the expense included in
accounting profit or loss. An example of this adjustment would be expenditure incurred in
respect of fines, which is not deductible for tax purposes (s 23(o)), but still represents an
expense for accounting purposes.
Note 4
Amounts may be subject to normal tax without being taken into account for accounting purposes
or be subject to tax at an earlier stage than when these amounts are included in accounting
profit or loss. This adjustment is required to ensure that taxable income reflects these items
correctly from a tax perspective. An example of an item that is typically included in this adjust-
ment is amounts received in advance that would be included in gross income (see chapter 12)
but has not been recognised as revenue yet for accounting purposes.
Note 5
Certain allowances are required to be added back into taxable income in the subsequent year of
assessment. This adjustment includes the allowance into taxable income in this manner. An
example of this adjustment would be inclusion of the prior year of assessment’s deduction for
allowance for doubtful debt in accordance with s 11(j) (see chapter 12).
continued
660
Note 6
When an amount that was previously allowed as an allowance or deduction is subsequently
recovered by a taxpayer a recoupment is may be required for tax purposes. This adjustment
includes these recoupments in the calculation of taxable income. An example of a recoupment
that would be included in this adjustment is the recoupment required in terms of s 8(4)(a) (see
chapter 13).
Note 7
The Act requires certain amounts that are determined specifically for tax purposes to be
included in taxable income of a taxpayer. As these amounts would not have been taken into
account in the determination of accounting profit or loss, it needs to be included by a specific
adjustment. The inclusion of imputed net income from a controlled foreign company (see chapter
21) is an example of such an item.
Note 8
Companies are required to include their taxable capital gain in their taxable income. This taxable
capital gain is determined by applying an inclusion rate of 80% to the net capital gain for the
year of assessment (see chapter 17).
A company is subject to normal tax on its taxable income for a year of assessment. This is no differ-
ent from any other taxpayer. Unlike natural persons or trusts, a company’s year of assessment does
not necessarily end on the last day of February of a particular year. A company’s year of assessment
would normally coincide with its financial year.
Tax rate
The taxable income of a company is generally subject to normal tax at a rate of 28%. The taxable
income of some companies is, however, subject to other tax rates. Specific rates of tax apply to the
taxable income of
l small business corporations (see 19.5.4)
l companies that derive income within a special economic zone (see 19.5.5)
l companies that mine for gold, which are subject to tax on a formula-based rate
l companies from carry on long-term insurance business, which are taxed on a five-fund approach
(s 29A).
Remember
Companies are not entitled to all the rebates available to natural persons, for example a
company is not entitled to a primary rebate or the rebate for medical aid contributions. They may,
however, deduct other rebates, for example rebates for foreign tax paid (s 6quat).
Example 19.1. Basic company tax computation

The statement of profit or loss for Blue Cross (Pty) Ltd for the financial year ended 28 February
2018 is as follows:
Sales (note 1) ............................................................................................................... R2000 000
Cost of sales ................................................................................................................ (R800 000)
Gross profit .................................................................................................................. R1200 000
Salaries ........................................................................................................................ (R450 000)
Depreciation (note 3) ................................................................................................... (R100 000)
Repairs ......................................................................................................................... (R15 000)
Profit from the sale of machinery (note 4) .................................................................... R30 000
Local dividends received ............................................................................................. R35 000
Interest received .......................................................................................................... R28 000
Profit before tax ............................................................................................................ R728 000
Note 1
Blue Cross (Pty) Ltd received a payment in advance of R40 000 from a customer. At year-end
the goods still had to be delivered to the customer. This amount has not yet been recognised as
revenue for accounting purposes.
Note 2
Blue Cross (Pty) Ltd entered into learnership agreements that qualify for allowances in terms of
s 12H. The allowance amounts to R60 000.
continued
661
Note 3
The equipment qualified for an accelerated allowance of R150 000 in terms of s 12C during the
Note 4
The machinery was sold for R320 000 on 30 August 2017. The recoupment of allowances for tax
purposes amounted to R20 000. No capital gain or loss was realised on the disposal.
Calculate the normal taxable payable by Blue Cross (Pty) Ltd for the year of assessment ended
on 28 February 2018.
SOLUTION
The taxable income for Blue Cross (Pty) Ltd for the year of assessment ended 28 February 2018
is calculated as follows:
Profit before tax ........................................................................................................... R728 000
Less: Non-taxable amounts credited to the statement of profit or loss .........................
Local dividends received (exempt from normal tax in terms of s10(1)(k)) .................. (R35 000)
Accounting profit from sale on machinery (note 1) ...................................................... (R30 000)
Less: Special allowances available for tax purposes that were not claimed
in the statement of profit or loss ...................................................................................
Allowance in respect of manufacturing equipment (s 12C) (note 2) ........................... (R150 000)
Learnership allowances (s 12H) ................................................................................. (R60 000)
Add: Non-deductible amounts debited to the statement of profit or loss
Accounting depreciation (note 2) ................................................................................ R100 000
Add: Amounts not credited to the statement of profit or loss
Revenue received in advance (note 3) ........................................................................ R40 000
Add: Recoupment of allowances or expenses previously allowed as deductions
Recoupment on sale of machinery (note 1) ................................................................. R20 000
Taxable income ............................................................................................................ R613 000
Normal tax payable (R613 000 × 28%) ........................................................................ R171 640
Note 1
The profit from the sale of machinery (R30 000) that is reflected in the statement of profit or loss
was calculated with reference to the accounting book value of the machinery. The Act requires
that any recovery of previously allowed deductions be included in taxable income. This amount
(R20 000) is calculated based on the tax value of the machinery, as opposed to the accounting
book value. The adjustments reverse the effect of the accounting profit and include the
recoupment determined in terms of the Act in taxable income.
Note 2
The deduction allowed in respect of the equipment for accounting purposes is determined in
terms of the relevant accounting standard. This amount is calculated in accordance with
accounting principles that require it to take into account the useful lives and residual values of
the assets. For tax purposes, the allowance must be determined in terms of s 12C. The adjust-
ments remove the accounting depreciation from the taxable income calculation and replace it
with the allowance determined in accordance with s 12C.
Note 3
Amounts are included in gross income at the earlier of receipt or accrual. Even though this
amount has not yet been recognised as revenue for accounting purposes, it has been received
by Blue Cross (Pty) Ltd and should therefore be taken into account in the company’s taxable
income.
19.2.3 Tax implications of distributions by companies

The Companies Act allows a company to make certain distributions to its shareholders. The Com-
panies Act does not distinguish between dividends and other forms of distributions made to share-
holders. From a tax perspective, a distinction however exists between returns of capital and dividends.
Conceptually, a return of capital takes place when a company returns an amount that was previously
contributed to the company by a shareholder when the company issued shares to a shareholder. Any
amount transferred by the company to its shareholder(s), other than a return of capital, would be
classified as a dividend. These amounts would usually be paid from profits value generated by the
company.
662
In broad terms, a return of capital would not attract a further layer of tax, while a dividend would be
subject to dividends tax at a rate of 20%. The dividend income is generally exempt from normal tax in
the hands of the shareholder as it represents a distribution made from profits that have already been
subject to normal tax (see 19.2.2). As the amounts available for returns of capital are limited to
amounts contributed to the company in exchange for issuing shares, companies that make regular
distributions to its shareholders are likely to make such distributions in the form of dividends paid
from company profits as opposed to from capital contributed to the company.
Example 19.2. Effective tax rate calculation
Bingle (Pty) Ltd is a resident company with one shareholder, Mr Dlamini (33 years old).
Bingle (Pty) Ltd had a profit before tax of R1 000 000 for the financial year ended 28 February
2018. You may assume that the company’s taxable income equals its accounting profit before
tax. Bingle (Pty) Ltd distributed all the available profit after tax to Mr Dlamini on 28 February
2018.
Calculate the tax payable by both Bingle (Pty) Ltd and Mr Dlamini in respect of Bingle (Pty) Ltd’s
profits and the distribution thereof for the 2018 year of assessment.
SOLUTION
Normal tax payable by Bingle (Pty) Ltd:
Taxable income .......................................................................................................... R1 000 000
Normal tax payable (R1 000 000 × 28%) ................................................................... R280 000
Normal tax payable by Mr Dlamini in respect of the distribution of Bingle (Pty) Ltd’s
profits:
Dividend received from Bingle (Pty) Ltd (par (k) of the definition of gross income
in s 1).......................................................................................................................... R720 000
Dividend exemption s10(1)(k) .................................................................................... (R720 000)
Effect on taxable income ............................................................................................ Rnil
Dividends tax liability of Mr Dlamini (withheld by Bingle (Pty) Ltd):
Amount available for distribution as a dividend (R1000 000 – R280 000).................. R720 000
Dividends tax on this distribution (R720 000 × 20%) ................................................. R144 000
Note
The effective tax rate on distributed company profits can be calculated as follows:
Total tax paid by both persons on the distributed profits (R280 000 + R144 000)..... R424 000
Effective tax rate on distributed company profits (R424 000/ R1 000 000 × 100) ...... 42,4%
If Mr Dlamini carried on the business as a sole proprietor, his taxable income
would have been taxed at the progressive tax scale that applies to natural per-
sons. In this instance, the tax payable would have amounted to R314 993 after
taking into account the primary rebate that he would be entitled to.
Remember
It is important to realise that normal tax and dividends tax are two distinct taxes, even though
both are imposed in terms of the Income Tax Act. Each of these taxes has its own set of rules,
including exemptions. Even though a dividend is exempt from normal tax in terms of s 10(1)(k), it
could still be subject to dividends tax.
The concepts of dividends and returns of capital and the tax consequences of each are more
intricate than the simplistic explanation above. The following sections of this chapter consider the
detailed tax implications and requirements relating to each of these components of distributions of
value by companies.
663
19.3 Taxation of dividends
19.3.1 Definition of a dividend

The Act previously contained a complex definition of a dividend with a number of deemed inclusions
and exclusions. This definition was replaced by the current definition that came into effect from
1 January 2011. A dividend is defined in s 1(1) as
l any amount transferred or applied
l by a company that is a resident
l for the benefit or on behalf of any person
l in respect of any share in that company.
The definition includes amounts transferred or applied by the company and may be by way of
l a distribution made by the company (par (a) of the definition of ‘dividend’), or
l as consideration for the acquisition of any share in that company (par (b) of the definition of
‘dividend’). The acquisition of its own shares by a company is commonly referred to as a share
buy-back.
The definition contains three specific exclusions where a transfer would not constitute a dividend
even though all the above requirements have been met (par (i) to (iii) of the definition of ‘dividend’).
From the above definition, it is clear that the following aspects need to be considered when deciding
whether a transfer constitutes a dividend as defined or not:
Amount
The word ‘amount’ is not defined in the Act. The courts have held that within the context of gross
income, ‘amount’ means not only money but the value of every form of property, whether corporeal or
incorporeal, which has a money value (Lategan v CIR 1926 CPD (2 SATC 16); CIR v Butcher Bros
(Pty) Ltd 1945 AD (13 SATC 21)). It was held in CSARS v Brummeria Renaissance (Pty) Ltd, 69 SATC
205 that where a right has a monetary value, the fact that it cannot be alienated or turned into money
does not negate such value. It is submitted that the same meaning should be ascribed to the term
‘amount’ in the context of the definition of ‘dividend’. A dividend is therefore not only the transfer of
cash to a shareholder, but also the transfer of ‘every form of property’. A dividend in a form other than
cash is commonly referred to as a dividend in specie.
Transferred or applied by a company that is a resident

All of the entities discussed in 19.2.1 are considered to be companies for purposes of the Act. Any
amount transferred or applied by any of these entities in respect of proprietary interest held in that
entity could be a dividend. This would, for example, include amounts paid by a CC to its member or
by a co-operative to its members.
If the company is not a resident of South Africa for tax purposes, the nature of the distributions made
by that company need to be considered in light of the definitions of ‘foreign dividend’ and ‘foreign
return of capital’ to determine the tax implications.
In respect of a share in that company

The reason for the transfer of the amount needs to be considered in order to conclude whether a
transfer constitutes a dividend or not. The phrase ‘in respect of’ was described in Stevens v C: SARS,
69 SATC 1 as connoting a causal relationship. In the context of the definition of a dividend, the
reason for the transfer of the amount by the company should be connected to the share held in the
company, rather than another unrelated reason. If a shareholder is also an employee of the company
and receives remuneration for services rendered to the company, the amount transferred by the
company would not be transferred in respect of his shares, but in respect of the services that he
renders. The remuneration paid to such employee (who is also a shareholder) would therefore not
constitute a dividend.
Remember
A share refers to any unit into which the proprietary interest of a company, as described in 19.2.1
is divided. In the case of a company as contemplated in the Companies Act, these units would
be shares. In the case of other entities included in the definition of a ‘company’, this would
depend on the nature of the entity, for example in the context of a CC or co-operative, a share
will refer to membership of the entity.
664
A dividend may arise when an amount is transferred to a shareholder as a going concern distribution,
liquidation distribution or when amounts are paid as a result of the redemption, cancellation or buy-
back of issued shares. The important determination from the perspective of determining whether it
constitutes a dividend or not is the reason for the transfer rather than the circumstances under which
it is made.
The mere fact that an amount is transferred to a person other than the shareholder does not preclude
it from being a dividend. If an amount is paid by a company to the spouse of a shareholder by reason
of the share held in the company by the shareholder, this transfer would still constitute a dividend. In
a case such as the example, it should be considered whether a second transaction, possibly a
donation if no consideration is received by the shareholder, has occurred.
Specific exclusions from the definition of ‘dividend’

The following transfer of amounts do not give rise to a dividend, even if the transfer meets all the
above requirements:
l To the extent that the amount that is transferred or applied results in a reduction of the company’s
contributed tax capital, the amount is not a dividend (par (i) of the definition of ‘dividend’). These
transfers do not give rise to dividends as it would be classified as returns of capital (see 19.4.2).
l To the extent that the amount that is transferred or applied constitutes shares in the company
making the transfer, the amount is not a dividend (par (ii) of the definition of ‘dividend’). This
exclusion exists as there has not been an outflow of value by the company to the shareholder if
such value is merely held by the shareholder in the form of another share in the company after
the transfer of the share by the company. This would typically be the case when a company
issues capitalisation shares to its existing shareholders based on the shares they already hold.
l To the extent that the amount that is transferred or applied constitutes the acquisition by a listed
company of its own shares on the JSE Limited by way of a general repurchase of securities as
contemplated in subpar (b) of par 5.67(B) of the JSE Listings Requirements (par (iii) of the
definition of ‘dividend’). The reason for this exclusion from the definition of ‘dividend’ is that, as a
practical matter, the purchaser cannot distinguish this purchase from any other purchase on the
JSE Limited (this share buy-back must comply with the requirements prescribed by par 5.67 to
5.81 of s 5 of the JSE Limited Listing Requirements). It is important to note that not all share
repurchases by listed companies are general repurchases of its securities.
The following diagram can be used to determine whether an amount transferred by a company
constitutes a ‘dividend’ as defined in s 1:
The amount could be transferred or

Did a company that is a resident transfer or apply an applied by way of a distribution made
amount for the benefit or on behalf of any person? by the company or as consideration
for the acquisition of any share in the
YES company.
Was the amount so transferred or applied in

respect of any share in the company?
YES
Did the amount so transferred or applied:
result in a reduction of contributed tax

capital of the company (see 19.4).
To such extent, the amount so
OR transferred or applied does not
constitute a dividend.
constitute shares in the company?
OR
NO The amount so transferred or applied
constitute the acquisition by a listed
company of its own shares on the JSE constitutes a dividend.
Limited by way of a general repurchase of
securities?
665
Example 19.3. Definition of ‘dividend’

On 1 April 2018, XDF Ltd, a resident company, paid a dividend of R1,50 per share to its 1 million
holders of ordinary shares as well as a 10% preference share dividend to its holders of
preference shares.
On 31 May 2018, Adco Holdings (Pty) Ltd was voluntarily liquidated and distributed R4 000 000
to its holders of equity shares, of which R200 000 represented a reduction in Adco Holdings
(Pty) Ltd’s contributed tax capital.
On 15 July 2018, ABS (Pty) Ltd acquired 10% of its ordinary shares in terms of a share buy-
back. ABS (Pty) Ltd paid the relevant shareholders R1 000 000 of which R100 000 represented a
reduction in ABS (Pty) Ltd’s contributed tax capital.
On 15 October 2018, Edco Ltd, a listed company, acquired 10% of its equity shares in terms of a
general repurchase of its own securities as contemplated in subpar (b) of par 5.67(B) of s 5 of
the JSE Listings Requirements. The requirements prescribed by par 5.68 and 5.72 to 5.81 of s 5
of the JSE Listings Requirements were complied with. Edco Ltd paid the relevant shareholders
R1 000 000 of which R100 000 represented a reduction in Edco Ltd’s contributed tax capital.
On 15 December 2018, DLM (Pty) Ltd, a resident company, paid an amount of R1 000 000 at the
instance of its sole holder of shares to his wife.
On 1 January 2019, XYZ Ltd capitalised R100 000 of its retained income to share capital and
issued one ordinary capitalisation share for each 5 ordinary shares held to its shareholders.
Determine which of the above amounts transferred or applied by the relevant companies, con-
stitute dividends as defined.
SOLUTION
The dividend paid by XDF Ltd on 1 April 2018 to its holders of equity shares as well as the
dividend paid to its holders of preference shares will qualify as dividends. These are amounts
transferred for the benefit of shareholders in the company in respect of shares held by the
shareholders in the company.
The amount of R200 000 distributed by Adco Holdings (Pty) Ltd on 31 May 2018 that
represented a reduction in Adco Holdings (Pty) Ltd’s contributed tax capital, is not a dividend.
The balance of the amount distributed (R3 800 000) is a dividend since it is an amount
transferred for the benefit of shareholders in the company in respect of shares held by the
shareholders in the company.
The amount of R100 000 distributed by ABS (Pty) Ltd on 15 July 2018 that represented a
reduction of its contributed tax capital, is not a dividend. The balance of the amount distributed
(R900 000) is a dividend since it is an amount transferred as consideration for the acquisition of
shares in the company and is transferred for the benefit of shareholders in the company in
respect of shares held by the shareholders in the company.
The amount transferred by Edco Ltd on 15 October 2018 is not a dividend since it qualifies as a
general repurchase of Edco Ltd’s own securities as contemplated in subpar (b) of par 5.67(B) of
s 5 of the JSE Listings Requirements and is therefore specifically excluded from the dividend
definition. These amounts will be treated as proceeds upon the disposal of the shares by the
shareholders.
The amount paid on 15 December 2018 by DLM (Pty) Ltd to the wife of its holder of shares,
qualifies as a dividend, since it was paid on behalf of a holder of shares.
The amounts transferred to XYZ Ltd’s shareholders on 1 January 2019 constitute shares in the
company. Paragraph (ii) of the definition of ‘dividend’ provides that these amounts do not
constitute dividends.
19.3.2 Taxation of dividends

A shareholder receives a dividend if a company transfers amounts in a manner that meets the defini-
tion of ‘dividend’, as discussed in 19.3.1. The payment of a dividend by a company and resultant
receipt or accrual of the dividend, whether in cash or in specie, to the recipient has the following tax
implications:
l Any amount received or accrued by way of a ‘dividend’ as defined is included in a taxpayer’s
gross income (par (k) of the definition of gross income).
l Most dividends are exempt from normal tax (s 10(1)(k)(i)). There are, however, certain instances
where the dividends may not be exempt. These are fully discussed in chapter 5.
l The beneficial owner of the dividend (generally the shareholder) may be subject to dividends tax
on a cash dividends paid to it. The company that pays the cash dividend (or intermediary) will
generally be liable to withhold the dividends tax at a rate of 20%. The company is liable for
666
dividends tax on dividends in specie. Certain shareholders are exempt from dividends tax and
others may be subject to a reduced dividends tax rate due to the application of a double tax
agreement. Dividends tax is discussed in detail in below in 19.3.3 to 19.3.11.
In addition to the above tax consequences of a dividend, a dividend in specie may also result in the
disposal of the distributed asset by the company and the acquisition of this asset by the shareholder.
This disposal could result in normal tax consequences for the company declaring the dividend in
specie, which will depend on whether the asset was held by the company as trading stock or a
capital asset. These normal tax consequences of the disposal of the asset are discussed in chapters
14 and 17 respectively.
19.3.3 Dividends tax: Introduction

Where a company declared a dividend prior to 1 April 2012, the company was liable for 10% secon-
dary tax on companies (STC) on the net amount of dividends declared during a specific dividend
cycle. STC was repealed with effect from 1 April 2012 and replaced by dividends tax. Dividends tax
is levied at a rate of 20%, subject to certain exemptions and reductions, on any dividend paid by a
company on or after 1 April 2012.
Remember
l STC was a tax payable by a company on the net amount of a dividend declared by the com-
pany during a specific dividend cycle. This tax distorted accounting profits of South African
companies, in comparison to their international counterparts, and posed certain challenges
when it came to the application of treaty relief in respect of taxes on dividends.
l Dividends tax, on the other hand, is a tax that is mostly imposed on the beneficial owner
(recipient) of the dividend on the amount of any cash dividend paid by a company. The
beneficial owner remains liable for the dividends tax although the company is generally
obliged to withhold dividends tax from any dividend paid.
The flow of the provisions of the Act relating to dividends tax is relatively difficult to follow at first
glance. This complication stems from the fact that the system consists of a mixture of withholding
taxes imposed on the recipient of certain dividends and the imposing of tax on the company paying
the dividends in other cases. The following approach to applying the requirements of the Act relating
to dividends tax is suggested:
Step 1: Determine if a dividend or deemed dividend is subject to dividends tax. If it is, establish the amount
of the dividend (19.3.4 and 19.3.8).
Step 2: Identify the person(s) liable for and/or required to withhold the dividends tax (19.3.5).
Step 3: Determine whether an exemption may be available. If an exemption is available, consider the
procedure to be followed by the person liable or that is required to withhold the dividends tax to apply the
exemption. (19.3.6.).
Step 4: If no exemption applies, determine and apply the appropriate tax rate to the dividend (19.3.7).
Step 5: File dividends tax return and make payment (19.3.9 to 19.3.11).
19.3.4 Dividends tax: Dividends subject to dividends tax (s 64E)

Dividends tax is levied on the amount of any dividends paid by any company, other than a head-
quarter company (s 64E(1)).
All dividends as defined in s 1 (see 19.3.1) are subject to dividends tax. This includes both dividends
paid in cash or dividends distributed in the form of assets. A distinction is made between cash
dividends and dividends consisting of distributions of assets in specie throughout the dividends tax
legislation. The main reason for this distinction is that a portion of a cash dividend can be withheld to
pay the dividends tax to SARS. This is not possible for a dividend where an asset other than cash, for
example a share or a building, is distributed to a shareholder. As a result, cash dividends are subject
667
to dividends tax in the form of a withholding tax, while dividends consisting of a distribution of an
asset in specie is subject to dividends tax in the form of a tax imposed on the distributing company.
The term ‘dividend’, for purposes of dividends tax, also extends to foreign dividends paid by a
foreign company listed on a South African securities exchange (for example the JSE) (definition of
‘dividend’ in s 64D(1)). This means that these dividends, despite being foreign dividends, will be
subject to dividends tax. Dividends paid by these foreign companies are not subject to dividends tax
if they consist of the distribution of assets in specie.
Dividends paid by the foreign companies in respect of shares listed on a South

African exchange may also be subject to tax in the jurisdiction where the
company is a tax resident or incorporated. In order to avoid double taxation on
these dividends, a reduction of the dividends tax (rebate against the dividends
tax) is available (s 64N(1)). This reduction is equal to the amount of any tax paid
Please note! to any sphere of government of a country other than South Africa, without a right
of recovery, in respect of the dividend (s 64N(2)). The foreign tax has to be
translated to rand at the same exchange rate that is applied to the dividend
(s 64N(4)). The rebate may not exceed the dividends tax imposed on the
dividend (s 64N(3)). The company or regulated intermediary that applies the
rebate to reduce the dividends tax withheld must obtain proof of the tax paid to
the foreign government (s 64N(5)).
Remember
As dividends paid to residents by foreign companies in respect of shares listed on a South
African exchange are subject to dividends tax, the foreign dividend received is not subject to
normal tax in the hands of the recipient. These foreign dividends qualify for a full exemption for
normal tax purposes (s 10B(2)(d)).
In the case of a cash dividend, the cash amount of that dividend is subject to dividends tax. Where
the dividend is distributed in the form of a distribution of an asset in specie, the amount that is subject
to dividends tax will depend on the nature of the asset distributed. The amount of the dividend will be
l in the case where the asset distributed is a financial instrument listed on a recognised stock
exchange (local or foreign) and for which a price was quoted on that exchange, the ruling price
for the financial instrument on that stock exchange at close of business on the last business day
before the dividend is deemed to be paid (see 19.3.9), or
l in the case of an asset other than such a listed financial instrument, the market value thereof on
the date that the dividend is deemed to be paid (s 64E(3)).
If the amount of a dividend is denominated in a currency other than rand, the amount must be con-
verted to rand by applying the spot rate on the date that the dividend is paid (s 64E(5)).
Remember
Where a foreign company declares a dividend in respect of shares that are not listed on a South
African securities exchange, the dividend does not qualify as a dividend for the purposes of divi-
dends tax. Such a dividend is therefore not subject to dividends tax in South Africa.
19.3.5 Dividends tax: Liability for dividends tax and withholding obligation
(ss 64EA, 64G, 64H)
The person on whom the liability for dividends tax rests depends on the type of distribution made by
the company.
Cash dividends
In the case of a cash dividend, the beneficial owner of the dividend is liable for the dividends tax in
respect of the dividend (s 64EA(a)). The beneficial owner is defined as the person entitled to the
benefit of the dividend attaching to a share (s 64D). The beneficial owner is not necessarily the
shareholder. As an example, the person entitled to the benefit of a dividend that accrues to a trust,
may be a beneficiary with a vested right to that dividend income, even though the shares are held by
the trust.
The obligation to collect and administer the dividends tax should be distinguished from the liability for
the tax. The obligation to withhold the tax from the payment of the dividend to the beneficial owner
668
and pay this amount to SARS rests upon the company paying the dividend (s 64G(1)). If the dividend
is paid to the beneficial owner via regulated intermediaries, the obligation to withhold the dividends
tax shifts to that regulated intermediary (ss 64G(2)(c) and 64H(1))). If the dividend passes through a
number of regulated intermediaries before it is eventually paid to the beneficial owner, the
withholding obligation rests upon the final regulated intermediary who does not pay the dividend to
another regulated intermediary (s 64H(2)(b)).
The withholding agent (either the company or regulated intermediary) may be relieved from its
obligation to withhold the dividends tax if it holds certain declarations and written undertakings by the
beneficial owner that it qualifies for exemption from the tax (see 19.3.6). It may similarly only be
obliged to withhold the tax at a reduced rate if it holds certain declarations and written undertakings
by the beneficial owner that it qualifies for treaty relief (see 19.3.7). The person responsible to with-
hold the dividends tax needs access to the beneficial owner to obtain this information about the
beneficial owner. The main reason why the final regulated intermediary, as opposed to the company,
would in some instances be responsible to withhold the tax is that the company may not have suffi-
cient or regularly updated information on the beneficial owners of the dividends where a regulated
intermediary is involved.
The following persons are regulated intermediaries to whom the obligation to

withhold dividends tax may be shifted, as explained above (s 64D):
l A central securities depository participant as contemplated in s 32 of the
Financial Markets Act. A central securities depository participant is a person
who holds in custody and administers securities or an interest in securities.
l An authorised user as defined in s 1 of the Financial Markets Act. This is a
person who is authorised by an exchange in terms of the exchange rules to
perform such security services as the exchange rules may permit. This may
include an authorised share broker.
l An approved nominee as contemplated in s 76(3) of the Financial Markets
Act. A nominee is a person who acts as the registered shareholder of
securities or an interest in securities on behalf of other persons. A nominee
Please note!
is usually not the beneficial shareholder, but only acts as the shareholder on
behalf of another person.
l A nominee that holds investments on behalf of clients as contemplated in
s 9.1 of Chapter 1 and s 8 of Chapter II of the Codes of Conduct for Admin-
istrative and Discretionary Financial Service Providers, 2003. In terms of
these provisions, an administrative financial service provider and a discre-
tionary financial service provider must establish a nominee company with
the main object of being the registered holder and custodian of the invest-
ments of clients. Such nominee company is a regulated intermediary for
dividends tax purposes.
l A portfolio of a collective investment scheme in securities.
l A transfer secretary that is a person other than a natural person and that has
been approved by the Commissioner, or
l A portfolio of a hedge fund collective investment scheme.
Distribution of an asset in specie

If the dividend consists of a distribution of an asset in specie, the company that declares the dividend
is liable for the dividends tax in respect of that dividend (s 64EA(b)). This tax liability rests upon the
company as it is not possible to withhold a portion of the asset distributed to the beneficial owner in
order to pay the dividends tax. The dividends tax is therefore an additional tax on the value of the
asset distributed, as opposed to a portion of the amount declared as a dividend by the company.
The dividends tax payable in respect of a dividend consisting of a distribution of

an asset in specie is a cost for the company paying the dividend. Unlike the
dividends tax withheld in respect of a cash dividend that reduces the amount
Please note! that a specific shareholder receives, which means that the tax cost is borne by
the shareholder, the dividends tax in respect of a distribution of an asset in
specie reduces the company’s overall distributable reserves. This dividends tax
impacts all shareholders, not only the person to whom the distribution is made.
669
Example 19.4. Dividends tax in respect of various types of dividends

Casio (Pty) Ltd has a 28 February financial year-end. The company’s shareholders are Mr Mpe-
mvu, who holds 30% of the shares, and Mr Mbotho, who holds the remaining 70% of the shares.
They are both residents.
During the financial year ended on 28 February 2018, Casio (Pty) Ltd made the following
distributions to its shareholders:
l Casio (Pty) Ltd declared a dividend of R2 000 000 on 30 April 2017 after the finalisation of its
results for the previous financial year. Mr Mpemvu elected to receive his portion of the
dividend in cash, while a building to the value of R1 400 00 was transferred to Mr Mbotho in
respect of his portion of the dividend.
l Casio (Pty) Ltd invested some of the excess cash reserves of the company in shares of
Sharp Ltd that are listed on the JSE. The shareholders had differing views on this investment.
On 31 August 2017 the shares in Sharp Ltd were distributed to the shareholders to enable
each to deal with the funds as he deemed fit. The quoted value of the Sharp Ltd shares held
by Casio (Pty) Ltd at the close of business was R1 180 000 on 30 August 2017 and
R1 200 000 on 31 August 2017.
Explain the dividends tax implication of each of the above distributions made by Casio (Pty) Ltd.
SOLUTION
The amounts, including the building and Sharp Ltd shares, distributed by Casio (Pty) Ltd during
2018 to its shareholders will constitute dividends as defined in s 1 as the amounts are transferred
to them by reason of the shares held in the company. These dividends will be subject to
dividends tax. As both of the shareholders are natural persons, none of the exemptions to
dividends tax apply (see 19.3.6).
Cash distribution to Mr Mpemvu
The amount of R600 000 distributed to Mr Mpemvu is a cash dividend. The dividends tax in
respect of this dividend will amount to R120 000 (R600 000 × 20%). Mr Mpemvu is liable for the
dividends tax. Casio (Pty) Ltd will be required to withhold the dividends tax from the amount paid
to Mr Mpemvu. The net amount of the dividend paid to Mr Mpemvu will therefore be determined
after taking into account the dividends tax withheld. He will receive R480 000 (R600 000 –
R120 000) from Casio (Pty) Ltd.
Transfer of the building to Mr Mbotho
This dividend consists of a distribution of an asset in specie. The dividends tax will be imposed
on the market value of the building. The dividends tax in respect of this dividend will amount to
R280 000 (R1 400 000 × 20%). Casio (Pty) Ltd is liable for the dividends tax. This means that the
building to the value of R1 400 000 will be transferred to Mr Mbotho by Casio (Pty) Ltd. In
addition, Casio (Pty) Ltd will be required to pay an amount of R280 000 to SARS in respect of the
dividends tax. The effect of this distribution is a reduction in the distributable reserves of Casio
(Pty) Ltd by R1 400 000 (in the form of the building transferred) as well as a further R280 000 in
the form of the dividends tax liability.
In addition to the dividends tax liability, the transfer of the building may result in recoupments (if
the company deducted allowances in respect of the building), capital gains tax as well as trans-
fer duty or VAT implications for Casio (Pty) Ltd.
Transfer of the Sharp Ltd shares
This dividend also consists of a distribution of an asset in specie. The dividends tax will be
imposed on the quoted price of the shares on the last day before the dividend is deemed to be
paid. In this case, the dividend is deemed to be paid when it becomes due and payable upon
the declaration of the dividend. The ruling price for the Sharp Ltd shares on the JSE at the close
of business on the last business day before the dividend is deemed to be paid must be used as
the value of the dividend for purposes of dividends tax. The dividends tax in respect of this
dividend will amount to R236 000 (R1 180 000 × 20%). Casio (Pty) Ltd is liable for the dividends
tax.
Like the building transferred to Mr Mbotho, the transfer of the shares may have capital gains tax
implications as the distribution is deemed to be a disposal of the shares at market value. It may
also have STT implications (see chapter 29).
670
Example 19.5. Dividends paid to regulated intermediaries

VLC Ltd is a listed company. It paid cash dividends of R3 000 000 to its ordinary shareholders on
30 October 2018. The ordinary shareholders of VLC Ltd are
l VLC Holdings Ltd, a resident company that owns 55% of the ordinary shares of VLC Ltd
l a portfolio of the Nero Managed Fund, a collective investment scheme in securities, that
owns 20% of the ordinary shares of VLC Ltd
l various smaller investors who invested in VLC Ltd who hold the remaining shares in a
dematerialised form through a number of CSD Participants (the share trading platforms
provided by their banks, etc.).
Indicate the party responsible to withhold dividends tax in respect of the dividends paid by
VLC Ltd.
SOLUTION
VLC Ltd would generally be required to withhold dividends tax in respect of dividends paid by
the company. It is, however, not required to withhold dividends tax in respect of dividends paid
to regulated intermediaries (s 64G(2)(c)).
Dividends paid to VLC Holdings Ltd
VLC Ltd is responsible to withhold the dividends tax (if any). As VLC Holdings Ltd only holds
55% of the ordinary shares of VLC Ltd, these companies will not form part of the same group of
companies. VLC Holdings Ltd should therefore submit a declaration of its exemption from divi-
dends tax to VLC Ltd together with a written undertaking to inform VLC Ltd should this change
for VLC Ltd not to withhold dividends tax on the payment (see 19.3.6 below).
Dividends paid to the portfolio of the Nero Managed Fund
The portfolio of the Nero Managed Fund is a regulated intermediary. VLC is not required to
withhold dividends tax in respect of the dividends paid to the portfolio of the Nero Managed
Fund. No declarations or undertakings are required to be held by VLC Ltd.
The portfolio of the Nero Managed Fund will be required to withhold dividends tax on the
payment of the dividends to the persons holding participatory interests in the portfolio. It would
have to consider for each such payment whether the payment is made to another regulated
intermediary (for example, another portfolio of a collective investment scheme such as a portfolio
that invests in portfolios of other collective investment schemes (often referred to as fund of
funds)). In such a case, the portfolio of the Nero Managed Fund would not be required to with-
hold dividends tax, despite not holding a declaration from such an intermediary (s 64H(2)(b)). It
would be required to withhold dividends tax in respect of dividends paid to all other persons,
except if the person has submitted a declaration stating that it qualifies for an exemption from
dividends tax and a written undertaking to inform the portfolio of the Nero Managed Fund should
this change.
Dividends paid to the various CSD Participants
Like the portfolio of the Nero Managed Fund, the CSD Participants are regulated intermediaries.
VLC is not required to withhold dividends tax in respect of the dividends paid to these CSD
Participants. No declarations or undertakings are required to be held by VLC Ltd. The CSP
Participants would be required to withhold the dividends tax when they pay the amounts to the
investors.
Note
If the dividends were declared in the form of a distribution of assets in specie by VLC Ltd (for
example an unbundling of shares held by VLC Ltd in another company), the obligation to obtain
declarations and undertakings to support the exemption of the dividend in the hands of the
beneficial owner of such dividend would have rested on VLC Ltd. This would have been the case
despite the presence of regulated intermediaries between VLC Ltd and the beneficial owners of
the dividends (s 64FA(1)(a))
19.3.6 Dividends tax: Exemptions from dividends tax (ss 64F and 64FA)
Dividends may be exempt from dividends tax depending on the nature of the beneficial owner of the
dividend, the nature of the company paying the dividend or certain characteristics of the dividend
itself. Unless specifically indicated, the exemptions listed below all apply to both cash dividends as
well as distributions of assets in specie. In the case of a cash dividend that qualifies for exemption,
the company or regulated intermediary does not have to withhold dividends tax if an exemption
applies and the documentation requirements below are met. In the case of a dividend that consists of
671
a distribution in specie that qualifies for exemption, the company would not be liable for the dividends
tax if the documentation requirements are met.
A company paying a cash dividend is required to obtain the following documentation from the
beneficial owner of the dividend for all dividends that are exempt in terms of s 64F (see brackets
below for each exemption) (s 64G(2)):
l a declaration in the prescribed form that states that the dividend is exempt from the dividends tax
in terms of s 64F, and
l a written undertaking in the prescribed form to inform the company in writing should the
circumstances affecting the exemption change or the person ceases to be the beneficial owner.
Where the company distributes a dividend in specie, it has to obtain the above documentation in
relation to the beneficial owner of the dividends from the person to whom the dividend is paid
(s 64FA(1)(a)).
The person to whom the payment is made has to submit these documents to the company paying the
dividend by the date specified by the company, or, if no date is specified, the date of payment of the
dividend (s 64G(2)(a)(i) and (ii)).
The declaration and written undertaking are not required where the beneficial owner of the dividend
forms part of the same group of companies, as defined in s 41, as the company paying the dividend
(ss 64FA(1)(b) and 64G(2)(b)).
If a company pays a cash dividend to a regulated intermediary, the company is not required to obtain
the declaration and written undertaking. In this instance, the withholding obligation rests upon the
regulated intermediary (see 19.3.5).
A regulated intermediary that pays the dividend to a person that is not another regulated intermediary
needs to hold the declaration and written undertaking, as described above, submitted to it by the
person to whom the dividend is paid. A regulated intermediary may be similarly relieved of its obliga-
tion to withhold the dividends tax if it obtains a declaration from a vesting trust to which a payment is
made that the sole beneficiary of such a trust is another regulated intermediary (s 64H(2)(a)(aa)). The
requirement to hold these documents applies to the final regulated intermediary through which a
dividend passes to the beneficial owner ((s 64H(2)(b)). The regulated intermediary needs to hold this
declaration and written undertaking by a date determined by the regulated intermediary, or if no date
is specified, the date of payment of the dividend, in order for it to be relieved from its obligation to
withhold dividends tax (s 64H(2)).
Remember
If the person to whom the dividend is paid did not submit the declaration or undertaking to a
company or regulated intermediary by the dates specified, but does so subsequently, the divi-
dends tax withheld at the time of payment of the dividend may be refunded. The refund process
is explained in 19.3.11.
Exemptions based on the nature of the beneficial owner

The beneficial owner of a dividend is the person entitled to the benefit of the dividend attaching to a
share (s 64D). Dividends paid to the following beneficial owners are exempt from dividends tax:
l A company which is a resident (s 64F(1)(a)). The reason for this exemption is to avoid dividends
tax being levied more than once on the same amount when the company receiving the dividend
transfers it to its ultimate shareholders through a number of companies. This exemption from
dividends tax applies irrespective of the extent of the resident company’s shareholding in the
company declaring the dividend.
Example 19.6. Dividends declared to another company that is a resident

On 1 June 2018 Cape Logistics (Pty) Ltd (which is a resident) declared and paid a cash divi-
dend of R100 000 to its sole shareholder, NedSA (Pty) Ltd (also a resident).
NedSA (Pty) Ltd is a company that holds investments in various other companies. It has three
shareholders who each hold 33,33% of its issued shares. Two of the shareholders are natural
persons and the other is InvestCo (Pty) Ltd (a resident company). On 31 August 2018, NedSA
(Pty) Ltd declares a dividend to its shareholders of an amount equal to the cash dividend it
received from Cape Logistics (Pty) Ltd.
Calculate the amount of dividends tax that is levied in respect of the dividends paid by the
respective companies. You may assume in each case that the recipient of the dividend is its
beneficial owner.
672
SOLUTION
Dividend paid by Cape Logistics (Pty) Ltd to NedSA (Pty) Ltd
l No dividends tax is levied in respect of this dividend. This is because NedSA (Pty) Ltd is a
resident company. The dividend is exempt from dividends tax (s 64F(1)(a)). As Ned-
SA (Pty) Ltd holds all the shares of Cape Logistics (Pty) Ltd, these entities form part of the
same group of companies. Cape Logistics (Pty) Ltd is not required to obtain any declara-
tions of undertakings from NedSA (Pty) Ltd. The dividends would be exempt from normal tax
in the hands of the NedSA (Pty) Ltd (s 10(1)(k)(i))
Dividend paid by NedSA (Pty) Ltd to its shareholders
l No dividends tax is levied in respect of the dividend paid to InvestCo (Pty) Ltd. This is
because InvestCo (Pty) Ltd is a resident company. The dividend is exempt from dividends
tax (s 64F(1)(a)). As InvestCo (Pty) Ltd does not form part of the same group of companies
of NedSA (Pty) Ltd, NedSA (Pty) Ltd needs to obtain a declaration of its exemption and
written undertaking from InvestCo (Pty) Ltd in order not to withhold dividends tax on the
distribution. The dividends would be exempt from normal tax in the hands of the InvestCo
(Pty) Ltd (s 10(1)(k)(i))
l Dividends tax must be withheld as levied in respect of the dividends paid to the two natural
persons. The dividends tax on these dividends would amount to R13 333 (R100 000 ×
33,33% × 2 × 20%). The dividends would be exempt from normal tax in the hands of the
natural person shareholders (s 10(1)(k)(i))
Remember
Certain dividends paid to resident companies that are exempt from both dividends tax and
normal tax may be treated as income or proceeds, as the case may be, if such dividends were
received within 18 months before the disposal of the shares in respect of which they are received
or as part of the disposal. The relevant anti-dividend stripping rules to be considered in this
regard are discussed in chapters 14 and 17.
l The government of the Republic in the national, provincial or local sphere (s 64F(1)(b)).
l A public benefit organisation that is approved by the Commissioner in terms of s 30(3)
(s 64F(1)(c)).
l A closure rehabilitation trust as contemplated in s 37A (s 64F(1)(d)).
l An institution, board or body contemplated in s 10(1)(cA) (s 64F(1)(e)). This is any institution,
board or body that
– in the furtherance of its sole or principal object conducts scientific, technical or industrial
research, or
– provides necessary or useful commodities, amenities or services to the state or members of the
general public, or
– carries on activities designed to promote commerce, industry or agriculture or any branch thereof.
l A fund contemplated in s 10(1)(d)(i) or (ii) (s 64F(1)(f )). This is a pension fund, provident fund,
retirement annuity fund, any friendly society registered under the Friendly Societies Act 25 of
1956 and any medical scheme registered under the provisions of the Medical Schemes Act 131
of 1998.
l A person contemplated in s 10(1)(t ) (s 64F(1)(g)). This includes the Council for Scientific and In-
dustrial Research (the CSIR), the South African Inventions Development Corporation and the
South African National Roads Agency Ltd.
l A non-resident beneficial owner where the dividend was declared by a foreign company in
respect of shares that are listed on a South African securities exchange (s 64F(1)(j)). This exemp-
tion ensures that foreign dividends paid by foreign companies listed on a South African securities
exchange to foreign shareholders do not attract dividends tax.
l A portfolio of a collective investment scheme in securities (s 64F(1)(k)).
l Any fidelity or indemnity fund contemplated in s 10(1)(d)(iii) (s 64F(1)(n)).
l A small business funding entity as contemplated in s 10(1)(cQ) (s 64F(1)(i)).
673
Exemptions based on characteristics of the dividend

Where a dividend is subject to another form of tax, the dividend will generally not be subject to
dividends tax. The following dividends are exempt from dividends tax on this basis:
l A dividend that constitutes income of any person (s 64F(1)(l)) (examples of these dividends
include dividends that are not exempt from normal tax (see chapter 5) or hybrid equity instru-
ments and third-party backed shares (see chapter 16)). As these dividends are already subject
to normal tax, they are exempt from dividends tax.
Example 19.7. Dividends subject to normal tax

Zokwakha Ltd established an employee share trust, Umsebenzi Trust, for the benefit of its
employees. Certain qualifying employees are beneficiaries of the trust while employed by
Zokwakha Ltd. The Umsebenzi Trust holds 10% of the shares issued by Zokwakha Ltd.
The trust receives dividends from its shareholding and these dividends are distributed at year-
end to the employees. All distributions by the Umsebenzi Trust are made at the discretion of the
directors of Zokwakha Ltd (who act as the trustees of the trust). The trustees exercise their
discretion and make the distributions based on each beneficiary’s service performance and
contribution to Zokwakha Ltd during the year.
The employees do not have any rights in or linked to the shares of the trust. You may assume
that they do not restrict equity instruments in terms of s 8C.
During the 2018 year of assessment, Zokwakha Ltd paid out a cash dividend of R1 000 000 in
total to all its shareholders (who are all natural persons except for the Umsebenzi Trust). The
Umsebenzi Trust received dividends amounting to R100 000 and distributed the full amount on
28 February 2018 to one of the beneficiaries, Mr Hangala, for his excellent performance during
the past year.
Discuss the tax treatment of the dividends distributed by Zokwakha Ltd to its shareholders as
well as the amount received by Mr Hangala from the Umsebenzi Trust.
SOLUTION
The dividend of R100 000 paid to Mr Hangala will not be exempt from normal tax as it is a
dividend accrued to him in respect of services rendered to Zokwakha Ltd (s10(1)(k)(i)(ii)). This
would be the case as the dividend is more closely related to his employment than a shareholding
interest that he has in Zokwakha Ltd as the distribution was subject to the fact that he had to be
employed by Zokwakha Ltd in order to be a beneficiary of the trust. In addition, the trustees
exercised their discretion based on his work performance. The dividend is therefore subject to
normal tax in his hands.
The impact of this amount on Mr Hangala’s taxable income (normal tax) is the following:
Dividend received from Umsebenzi Trust
(par (k) of the definition of gross income in s1) .......................................................... R100 000
No dividend exemption applies (s10(1)(k)(i)(ii)) ......................................................... –
Effect on taxable income (normal tax) ........................................................................ R100 000
Mr Hangala will not be liable for dividend tax on the R100 000 as the dividend constituted
income in his hands (s 64F(1)(l)). No dividend tax will therefore be withheld by Zokwakha Ltd on
this amount. However, Zokwakha Ltd must calculate and withhold employees’ tax (PAYE) on this
amount and pay it over to SARS on behalf of Mr Hangala as the dividend constitutes
remuneration (par (g)(ii) of the definition of remuneration in the Fourth Schedule).
The remaining dividends of R900 000 (R1000 000 – R100 000) that are paid by Zokwakha Ltd to
the other shareholders will be subject to dividends tax. Zokwakha Ltd must withhold dividends
tax of R180 000 (R900 000 × 20%) and pay it over to SARS on behalf of the remainder of the
shareholders.
l A natural person (or deceased estate or insolvent estate of such person) in respect of a dividend
paid in respect of a tax-free investment as contemplated in s 12T (s 64F(1)(o)).
l A dividend that was subject to STC (s 64F(1)(m)).
l A distribution of certain residential property (distribution in specie) in a manner that complied with
the requirements to transfer such properties to a natural person without triggering capital gains
tax (par 51A of the Eighth Schedule) (s 64FA(1)(c)).
l The distribution of a unit in specie by a share block company to its member as contemplated in
par 67B(2) of the Eighth Schedule (see chapter 17) (s 64FA(1)(d)).
674
Exemptions based on the nature of the company paying the dividend

The following exemption from dividends tax is premised on the fact that a special tax regime applies
to the company paying the dividend:
l A dividend paid by a registered micro business (see chapter 23). This exemption only applies to
the extent that the aggregate amount of dividends paid by the registered micro business to all
shareholders in that registered micro business during the year of assessment in which the
dividend is paid does not exceed R200 000 (s 64F(1)(h)).
Some of the above exemptions from dividends that are based on the nature of the beneficial owner
created opportunities for taxpayers to structure their affairs in a manner aimed to reduce the
dividends tax by transferring the right to the dividend to a person in whose hands the dividend may
be exempt when paid to that person as beneficial owner. A number of anti-avoidance rules have
been put in place to ensure that the beneficial owner of the dividend is deemed to be the transferor of
the right to receive the dividend, as opposed to the person to whom the beneficial ownership has
been shifted prior to the dividend being paid. The obligation to withhold dividends tax will depend on
the nature of the deemed beneficial owner, as opposed to the actual beneficial owner to whom the
dividend has been transferred.
In summary, these anti-avoidance rules state the following:
l Where a person in whose hands as beneficial owner the dividend would be exempt from
dividends tax in terms of s 64F(1) (see above) acquired the right to a dividend by way of a
cession and the dividend was either announced or declared before the acquisition, the person
ceding the right is deemed to be the beneficial owner of the dividend (s 64EB(1)). This rule will,
however, not apply where the person to whom the right is ceded holds all the rights attaching to
the share after the cession (s 64EB(1)).
l Where certain persons who are exempt beneficial owners of dividends (these persons are listed
in s 64EB(2)(a)) borrow a share in a OLVWHG FRPSDQ\ from another person and a dividend was
announced or declared before the share was borrowed, the dividend is deemed to be a dividend
paid by the borrower for the benefit of the lender (s 64EB(2)).
l Where a person in whose hands as beneficial owner the dividend would be exempt from
dividends tax in terms of s 64F(1) (see above) acquired a share in a OLVWHGFRPSDQ\ (or any right
in respect of the share) from another person (seller) after a dividend is announced or declared
and the acquisition is part of a resale agreement between the person acquiring the share and the
seller (or any company forming part of the same group of companies as the seller), the seller (or
group company) is deemed to be the beneficial owner of the dividend (s 64EB(3)).
19.3.7 Dividends tax: Rate (ss 64E and 64G(3))

If a dividend does not qualify for the exemptions discussed above, dividends tax is levied on the
dividend at a rate of 20% applied to the amount of the dividend paid.
Dividends paid by resident companies between 1 April 2012 to 21 February

2017 were subject to dividends tax at a rate of 15%. This rate changed to 20%
with effect from 22 February 2017 and applies to any dividend paid on or after
this date.
If the Minister of Finance announces a change in the dividends tax rate in the
Please note! national annual budget, this change takes effect from the date mentioned in that
announcement (s 64E(1)(a)(ii)). A rate announced in this manner continues to
apply for a period of 12 months from this date, to allow for the legislative process
to amend the rate to be followed. This change is, however, subject to Parliament
passing the legislation to give effect to the announcement within 12 months
(s 64E(1)(b)).
Dividends paid to beneficial owners who are resident in a jurisdiction with which South Africa con-
cluded a double tax agreement may be eligible for relief in respect of the dividends tax imposed by
South Africa on dividends paid to such persons by South African companies (see chapter 21).
The application of the treaty relief to dividends tax to be withheld from dividends paid to qualifying
beneficial owners works on a similar basis as the application of exemptions (see 19.3.6).
675
If the dividends tax is to be withheld by the company paying the dividend, the company must
withhold dividends tax at a reduced rate if the person to whom the dividend is paid has submitted the
following to the company:
l a declaration by the beneficial owner of the dividend, in a form prescribed by SARS, that the
dividend is subject to a reduced rate as a result of the application of a double tax agreement
(s 64G(3)(i)), and
l a written undertaking, in the form prescribed by SARS, to inform the company in writing should
the circumstances affecting the reduced rate change or the person cease to be the beneficial
owner (s 64G(3)(ii)).
This declaration and written undertaking have to be submitted to the company by a date specified by
the company or if no date is specified, the date of payment of the dividend (s 64G(3)(a) and (b)).
If the dividends tax has to be withheld by a regulated intermediary, a similar declaration and written
undertaking have to be submitted to the regulated intermediary by the person to whom the dividend
will be paid and who wishes to make use of the treaty benefit (s 64H(3)).
Remember
If the person to whom the dividend is paid did not submit the declaration or undertaking to a
company or regulated intermediary by the dates specified, but does so subsequently, the
dividends tax withheld in excess of the reduced rate at the time of payment of the dividend may
be refunded. The refund process is explained in 19.3.11.
Example 19.8. Dividends not subject to dividend tax
Bheka Ltd is a South African resident company with a February financial year-end. The company
is a wholesaler of locally produced vegetables.
A number of companies, including three foreign companies, hold the ordinary shares issued by
Bheka Ltd. The foreign shareholders are Wales Ltd (which holds 15% of the issued ordinary
shares), Eng Ltd (which holds 7% of the issued ordinary shares) and Scot Ltd (which holds 5% of
the issued ordinary shares). All three entities are residents of the United Kingdom for tax
purposes. You may further assume that none of these entities have a permanent establishment in
South Africa.
On 25 February 2018, Bheka Ltd declared and paid out a cash dividend of R1 000 000 in total to
its shareholders. Bheka Ltd received declarations from Wales Ltd and Scot Ltd that state that
these entities are entitled to the benefits in relation to dividends in terms of the double tax
agreement between South Africa and the United Kingdom. The entities also provided Bheka Ltd
with an undertaking to inform it should the tax status change. No correspondence has been
received from Eng Ltd.
Discuss whether the dividends paid to each of the three UK companies will be subject to
dividend tax in South Africa and, if so, what amount of dividends tax should be withheld by
Bheka Ltd.
SOLUTION
The dividends received by the three foreign companies will not be exempt from dividends tax as
the beneficial owners of the dividends are not resident companies (s 64F(1)(a)).
As residents of the United Kingdom, the recipients of the dividends may qualify for relief in terms
of the double tax agreement (DTA) between South Africa and UK (Article 1 of the DTA). As
dividends tax is a tax on income, the treaty relief applies to it (Article 2(1) of the DTA and BGR 9).
Article 10(2) of the DTA (amended by the Protocol) allocates the following taxing rights to South
Africa, as the contracting state in which the company paying the dividends is a resident, in
respect of the dividends:
‘However, such dividends may also be taxed in the Contracting State of which the company
paying the dividends is a resident and according to the laws of that State, but if the beneficial
owner of the dividends is a resident of the other Contracting State, the tax so charged shall not
exceed:
(a) 5 per cent of the gross amount of the dividends if the beneficial owner is a company which
holds at least 10 per cent of the capital of the company paying the dividends; or
(b) 15 per cent of the gross amount of the dividends in the case of qualifying dividends paid
by a property investment company which is a resident of a Contracting State; or
(c) 10 per cent of the gross amount of the dividends in all other cases.’
(You may assume that Bheka Ltd is not a property investment company.)
continued
676
This could in turn result in a reduction in the rate at which the dividends tax should be withheld
by Bheka Ltd. Bheka Ltd may only withhold the dividends tax at a reduced rate if the relevant
declarations and written undertakings have been submitted to it by the beneficial owners of the
dividends (s 64G(3)).
Wales Ltd
As Wales Ltd, as the beneficial owner of the dividends, holds at least 10% of the capital of
Bheka Ltd, it qualifies for a reduced rate of 5% of the gross amount of the dividends (Article
10(2)(a) of the DTA). Since it submitted the required documentation to Bheka Ltd, Bheka Ltd
should withhold dividends tax of R7 500 (R150 000 × 5%) from the dividends paid to Wales Ltd.
Scot Ltd
As Scot Ltd, as the beneficial owner of the dividends, does not hold at least 10% of the capital of
Bheka Ltd, it qualifies for a reduced rate of 10% of the gross amount of the dividends
(Article 10(2)(c) of the DTA). Since it submitted the required documentation to Bheka Ltd,
Bheka Ltd should withhold dividends tax of R5 000 (R50 000 × 10%) from the dividends paid to
Scot Ltd.
Eng Ltd
As Eng Ltd, as the beneficial owner of the dividends, does not hold at least 10% of the capital of
Bheka Ltd, it qualifies for a reduced rate of 10% of the gross amount of the dividends
(Article 10(2)(c) of the DTA). However, since it did not submit the required documentation to
Bheka Ltd, Bheka Ltd should withhold dividends tax at the normal rate of 20%. The dividends tax
withheld on the dividends paid to Eng Ltd will be R14 000 (R70 000 × 20%). If Eng Ltd submits
the declaration and written undertakings to Bheka Ltd subsequently, the excess dividends tax
above the 10% may be refunded to it (see 19.3.11).
19.3.8 Dividends tax: Deemed dividends subject to dividends tax (s 64E(4))

Unlike its predecessor, STC, the dividends tax regime does not contain numerous rules aimed at
taxing disguised dividends. At the time when dividends tax came into effect, the definition of a
‘dividend’ (see 19.3.1) was broadened to encompass all transactions that would in reality constitute
dividends. The dividends tax regime contains only one specific anti-avoidance rule that deems a
dividend to arise in instances where amounts are extracted from a company by way of a loan rather
than a distribution. Shareholders may be tempted to extract value in this manner, as opposed to a
dividend, as the dividend will attract dividends tax while the loan does not. In both instances, the
shareholder will have the benefit of the cash extracted from the company. The deemed dividend rule
in s 64E(4) addresses the risk that such loans will be used to avoid dividends tax.
A deemed dividend may arise where any amount is owing to a company during a year of assessment
in respect of a debt by the following persons:
l a person that is a resident of South Africa for tax purposes, that is not a company and that is a
connected person in relation to the company, or
l a person that is a resident of South Africa for tax purposes, that is not a company and that is a
connected person in relation to the above person.
This debt only gives rise to a deemed dividend if the debt arose by virtue of a share held in the
company by the first-mentioned person above.
The amount of the deemed dividend is calculated as the difference between a market-related interest
in respect of the debt and the amount of interest payable in respect of the debt (s 64E(4)(b)(ii)(aa)).
In this context, a market-related interest in respect of the debt is specifically defined as the interest
that would have been payable had interest been provided for the period of the debt that falls in the
year of assessment at the official rate of interest. The official rate of interest is the South African
repurchase rate plus 100 basis points (definition of ‘official rate of interest’ as defined in s 1). If the
debt bears interest at a rate that exceeds this market-related interest rate, the deemed dividend will
be equal to nil (s 64E(4)(b)(ii)(bb)).
This dividend is deemed to have been paid on the last day of the company’s year of assessment
during which the debt was owing to the company (s 64E(4)(c)). This dividend is deemed to be a
distribution of an asset in specie, which means that the company, as opposed to the beneficial
owner, is liable for the dividends tax (s 64E(4)(b)(i)).
677
Example 19.9. Deemed dividend: Low interest loans to shareholders
For the period 1 January 2018 to 30 June 2018, DFH (Pty) Ltd granted a R1 000 000 interest-free
loan to Louis Oosthuizen. Louis is a resident and DFH’s sole shareholder. The debt was granted
at Louis’ instance in his capacity as shareholder. DFH has a 30 June year-end.
Determine whether DFH is deemed to have paid a dividend for dividends tax purposes. Assume
that the official rate of interest remained at 8% per annum during the period 1 January 2018 to
30 June 2018.
SOLUTION
Louis Oosthuizen is a resident, a connected person in relation to DFH (refer to par (d)(iv) of the
definition of ‘connected person’ in s 1) and not a company. The debt was granted by virtue of the
shares that Louis held in DFH. DFH is consequently deemed to have paid a dividend for
dividends tax purposes. The amount of the dividend is R39 890 (R1 000 000 (outstanding
balance of the debt) × 8% (official rate of interest) × 182/365 (the period that Louis owed the
amount during DFH’s 2018 year of assessment). DFH is therefore deemed to have paid a
dividend in specie of R39 890 on 30 June 2018.
Notes
(1) If the debt was not made available to Louis Oosthuizen, but to a relative of Louis, DFH would
still be deemed to have paid a dividend if the relative is a resident. The reason for this is that
Louis’ relative would be a connected person in relation to Louis (par (a) of the definition of
‘connected person’ in s 1).
(2) If it is not intended that Louis repays the debt, the capital amount of the debt would have
qualified as a dividend that was paid by DFH on 1 January 2018. The reason for this is that
‘dividend’ is defined in s 1 as any amount that is transferred or applied by a company for the
benefit or on behalf of any person in respect of any share in the company.
(3) If DFH subsequently declares the loan balance owing to it by Louis as a dividend, this
dividend amounting to R1 0000 000 would be subject to dividends tax. As the dividends
paid by distributing the right to repayment (an asset) to Louis, DFH will be liable for the
dividends tax.
Section 64B(4) does not apply to the extent that the amount owing to a company in respect of a debt
was deemed to be a dividend that was subject to STC (s 64B(4)(e)). The amount of debts that arose
before 1 April 2012 and had not been repaid before that date could have been subject to STC.
19.3.9 Dividends tax: Timing (s 64E(2))

The liability for dividends tax arises when a dividend is paid, as opposed to the date on which the
dividend is declared.
The timing of the payment of a dividend is based on a deemed payment rule contained in s 64E(2).
The timing of a dividend depends on whether the dividend is distributed by a listed company or not,
as well as whether the dividend is paid in cash or not. Dividends are deemed to be paid for purposes
of dividends tax on the following dates:
l in the case of a cash dividend that is distributed by a listed company, on the date on which the
dividend is actually paid in cash (s 64E(2)(a)(i))
l in the case of a cash dividend distributed by a non-listed company, the earlier of the date on
which the dividend is paid or becomes due and payable (s 64E(2)(a)(ii)), or
l in the case of any dividend that consists of a distribution of an asset in specie, the earlier of the
date on which the dividend is paid or becomes due and payable (s 64E(2)(b)).
Example 19.10. The date on which dividends tax is levied
On 15 June 2018 ISO Logistics (Pty) Ltd (not a listed company) declared a dividend of R15 per
share, payable to shareholders registered on 30 June 2018. The dividend was paid on
5 July 2018.
Indicate the date on which dividends tax is levied.
678
SOLUTION
Dividends tax is levied on the date that a dividend is paid. In the case of a non-listed company
that distributes a dividend other than a dividend in specie, a dividend is deemed to be paid on
the earlier of the date on which it is paid or the date on which it becomes due and payable.
The date on which the dividend becomes due payable is 30 June 2018. This date is deemed to
be the date on which the dividend is paid. Dividends tax is therefore levied on 30 June 2018.
If ISO Logistics had been a listed company, dividends tax would have been levied on
5 July 2018, the date on which the dividend was actually paid.
Remember
The deemed dividend that arises in respect of a loan owing to a company, as described in
19.3.8, has a specific timing rule. This dividend is deemed to have been paid on the last day of
the year of assessment during which the debt was owing to the company.
19.3.10 Dividends tax: Payment of dividends tax and returns (s 64K)

When a company or regulated intermediary pays a dividend, it is required to submit a return in
respect of that dividend and, if it was liable for or required to withhold the dividends tax, pays this
dividends tax to SARS.
Returns
Any person who paid a dividend is required to submit a return in respect of that dividend to SARS by
the last day of the month following the month during which the dividend was paid (s 64K(1A)(a)). This
requirement applies to the company that pays the dividend, whether in cash or as a distribution of an
asset in specie, or regulated intermediaries that on-pays the dividend. In practice, the DTR02 return
has to be submitted by companies and regulated intermediaries that pay dividends.
Persons who receive dividends that are exempt or partially exempt (see 19.3.6), other than dividends
in respect of tax-free investments, are required to similarly submit a return in respect of those
dividends received to SARS by the last day of the month following the month during which the
dividend was received (s 64K(1A)(b)).
A company or regulated intermediary that did not withhold dividends tax as a result of an exemption
or applied a reduced rate in terms of a tax treaty when withholding dividends tax must submit any
declaration submitted to it by or on behalf of the beneficial owner that is relied on in determining the
amount of the dividends tax withheld to SARS (s 64K(4)). In practice, these declarations only have to
be submitted to SARS when requested from the company or regulated intermediary.
Payment of dividends tax

The beneficial owner of a cash dividend is liable for the dividends tax. This beneficial owner must pay
the dividends tax to SARS by the last day of the month following the month during which the dividend
is paid by the company that declared the dividend. The beneficial owner will, however, not be liable
to pay this amount to SARS if the tax has been paid by another person (s 64K(1)(a)). As discussed in
19.3.5, the company or regulated intermediary that pays the dividend to the beneficial owner is
required to withhold and pay the dividends tax over to SARS. If the dividends had been withheld by
these persons, the beneficial owner is not liable to make the payment.
Remember
A withholding agent, a company or regulated intermediary that is required to withhold the
dividends tax in respect of cash dividends would be personally liable for the dividends that it
withheld but did not pay to the Commissioner.
The company or intermediary that is obliged to withhold dividends tax from any cash dividend paid
must pay the dividends tax to the Commissioner by the last day of the month following the month
during which the dividend is paid by the company or intermediary (s 64K(1)(c)). Similarly, a company
that is liable for the dividends tax payable in respect of a dividend that consists of a distribution in
specie must pay the dividends tax by the last day of the month following the month during which the
dividend is paid by the company (s 64K(1)(b)).
679
If a person fails to pay the dividends tax within the periods described above, interest will be charged
on the outstanding balance at the prescribed rate from the end of the period at which the dividends
tax was payable (s 64K(6)). No percentage-based penalties are imposed for late payment of
dividends tax.
Remember
The amount of dividends tax that must be paid to SARS may be reduced by an amount refunded
in terms of s 64L or 64M (see 19.3.11).
19.3.11 Dividends tax: Refund of dividends tax (ss 64L and 64LA)
If the declaration for
l a dividends tax exemption (see 19.3.6), or
l a reduced rate by reason of the application of a double tax agreement (see 19.3.7)
is not received by a company or regulated intermediary from a person to whom a dividend is paid,
within the required period, dividends tax has to be paid or withheld in respect of the dividend at a
rate of 20%.
Such amounts withheld may be refundable if the beneficial owner submits the relevant declaration
and written undertakings to the company or regulated intermediary within a period of three years after
payment of the dividend (ss 64L(1), 64LA(1) and 64M(1)). This refund is available notwithstanding the
provisions of the TAA relating to refunds. A refund may also be available where a company or
regulated intermediary withheld dividends tax but should have reduced the amount by the rebate for
foreign tax from this dividends tax, provided that the rebate is claimed within three years after the
payment of the dividend (ss 64L(1A) and 64M(1A)).
The manner in which the refund mechanism operates depends on whether the withholding was
performed by the company paying and declaring the dividend or a by regulated intermediary.
Where the company that paid a cash dividend withheld dividends tax from the dividend and subse-
quently obtained the declaration and written undertaking within the period allowed, the dividends tax
is refundable as follows:
l from any dividends tax withheld by the company within a period of one year after the date on
which the declaration was submitted (ss 64L(2)(a)), or
l if the refund exceeds the amounts recoverable within the year after the declaration has been
obtained, as described above, the company can recover the difference from SARS, provided that
the company submits the claim for recovery to SARS before the expiry of four years from the date
that the dividends tax was withheld (ss 64L(2)(b), 64L(3)).
Example 19.11. Withholding and refunding of dividends tax by the company that declared
and paid the dividend
Croydon (Pty) Ltd is a company that is a resident. The company is not a listed company and has
1 000 000 issued ordinary shares. On 15 June 2018 Croydon (Pty) Ltd declared a dividend of
R5 per share held by shareholders on 31 July 2018. The dividend was paid to its shareholders
on 5 August 2018.
Zorgvliet (Pty) Ltd, a company that is a resident, holds 500 000 shares in Croydon (Pty) Ltd.
Croydon (Pty) Ltd and Zorgvliet (Pty) Ltd are not part of the same group of companies. When
Croydon (Pty) Ltd paid the dividend in respect of its shares it had not received a declaration
from Zorgvliet (Pty) Ltd that it is exempt from dividends tax. Zorgvliet (Pty) Ltd submitted the
relevant declaration to the company on 5 August 2018.
Because Croydon (Pty) Ltd had not received a declaration from Zorgvliet (Pty) Ltd by
31 July 2018 that it is exempt from dividends tax in terms of s 64F(a), Croydon (Pty) Ltd withheld
R375 000 (500 000 shares × R5 × 15%) dividends tax from the dividend of R2 500 000 that it
declared to Zorgvliet (Pty) Ltd and paid R2 125 000 to the company. (The dividend is deemed to
be paid on 31 July 2018, the date that the dividend became payable. The relevant declaration
must have been submitted on this date.)
continued
680
19.3–19.4 Chapter 19: Companies and dividends tax
Because Zorgvliet (Pty) Ltd submitted the relevant declaration before 31 July 2018 (three years
after payment of the dividend), Croydon (Pty) Ltd must refund the R375 000 dividends tax. The
R375 000 refund must first be paid out of the dividends tax that Croydon (Pty) Ltd withholds from
any dividend declared during the period 5 August 2018 (when the relevant declaration was sub-
mitted) and 5 August 2018 (one year after the relevant declaration was submitted by Zorgvliet
(Pty) Ltd). If the dividends tax withheld by Croydon (Pty) Ltd during this period is less than the
R375 000 refund, the difference must be claimed by Croydon (Pty) Ltd from the Commissioner.
The amount recovered from the Commissioner must then be refunded to Zorgvliet (Pty) Ltd.
Where a company has paid dividends tax in respect of a dividend in specie because it did not
receive a declaration from or on behalf of the beneficial owner by the required date that the beneficial
owner is exempt from dividends tax or that the dividend is subject to a reduced rate by reason of a
double tax agreement, the dividends tax may become refundable. The company may claim a refund
from SARS within three years from the date that the dividend was paid if the beneficial owner submits
the relevant declaration and written undertaking to the company (s 64LA).
Dividends tax refundable to a regulated intermediary must be refunded from dividends tax withheld
by that regulated intermediary after the date that the declaration was submitted by the person
(s 64M(2)). Unlike in the case where a company withheld and paid the dividends tax, the regulated
intermediary cannot recover the dividends tax from SARS.
19.4 Taxation of returns of capital
19.4.1 Definition of contributed tax capital

Contributed tax capital is a notional amount that must be determined for tax purposes. This concept
was introduced into the legislation with effect from 1 January 2011 as part of the process to simplify
the definition of a dividend. That definition became extremely complex previously as a result of
numerous inclusions and exclusions aimed at distinguishing capital from distributable profits.
Conceptually, contributed tax capital represents the balance of
l amounts contributed to the company by shareholders when subscribing for shares
l after deducting any distributions of these amounts back to the shareholders.
This can be contrasted to the profits or reserves that accumulated in the company from sources other
than shareholder contributions. When the former is distributed to a shareholder, this constitutes a
return of capital. The distribution of the latter will generally give rise to a dividend, which will be sub-
ject to tax as discussed in 19.3.
The definition of contributed tax capital requires that a balance must be calculated for each class of
share issued by the company. The part of the definition that relates to a company that was a resident
on 1 January 2011, when this definition was introduced, involves that contributed tax capital of such a
company must be determined as follows (par (b) of the definition of ‘contributed tax capital’ in s 1(1)):
The stated capital or share capital and share premium of a class of shares of the company
immediately before 1 January 2011 ............................................................................................. Rx
Less: So much of the stated capital or share capital and premium that would have been a
dividend, as defined before 1 January 2011, had the stated capital or share capital
and premium been distributed by the company immediately before 1 January 2011
(see please note below).................................................................................................... (Rx)
Add: The consideration that the company received for the issue of shares on or after
1 January 2011 Rx
Add: If the shares of the class include shares that were converted from another class of
shares, any consideration that the company received in respect of the conversion and
the contributed tax capital attributed to the converted shares ........................................ Rx
Less: Amount transferred to a shareholder on or after 1 January 2011 that has been deter-
mined by the directors of the company to be a transfer from contributed tax capital ..... (Rx)
Less: In the case of convertible shares where some of the shares have been converted to
another class of shares, so much of the contributed tax capital attributed to the shares
that were converted .......................................................................................................... (Rx)
Contributed tax capital balance for the class of shares ............................................................... Rx
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The amount that would have constituted a dividend in terms of the definition of
‘dividend’ that applied before 1 January 2011 is calculated as follows:
1. Any amount transferred on or after 1 January 1974 (but before 1 January
2011) from the company’s reserves (excluding share premium) to its share
capital or share premium account. If this amount was applied in paying up
capitalisation shares, the capitalisation shares should have been equity
shares. This amount is referred to as capitalised profits.
2. Less: Any reduction in the company’s share capital or share premium
(before 1 January 2011) to the extent that it represented a distribution of its
capitalised profits. A reduction in the company’s share capital or share
premium could have been as a result of
Please note! l the reduction in the nominal value of the company’s share capital
l the acquisition, cancellation or redemption of some of its shares, or
l the company losing some of its paid-up share capital as a result of a
loss actually incurred and the company then partially reducing its share
capital to account for the loss.
Despite the fact that the definition of a dividend was amended and the concept
of contributed tax capital was introduced in 2011, this calculation may still be
relevant to companies that came into existence before 2011 but have not yet
entered into any transactions that required them to determine the balance of
their contributed tax capital. Such companies are unlikely to have made
transfers to their shareholders that reduced contributed tax capital.
Example 19.12. Contributed tax capital
On 1 January 2011, AX Logistics (Pty) Ltd’s stated capital was 100 000 ordinary shares of R1,00
each. On 15 April 2013 it issued 50 000 convertible preference shares at R3,00 each. On
1 August 2014 it distributed R20 000 to its ordinary shareholders. The directors of AX Logistics
(Pty) Ltd determined that the distribution was a distribution from contributed tax capital. AX
Logistics (Pty) Ltd’s preference shareholders converted 10 000 of their convertible preference
shares to ordinary shares on 1 February 2017.
What is the amount of AX Logistics (Pty) Ltd’s contributed tax capital after each of the above
events?
SOLUTION
AX Logistics (Pty) Ltd has two classes of shares, ordinary shares and convertible preference
shares. Contributed tax capital should be determined separately for each of the classes of
shares.
Ordinary shares
Stated capital on 1 January 2011 ................................................................................ R100 000
Distribution of contributed tax capital .......................................................................... (20 000)
Balance of contributed tax capital attributed to ordinary shares ................................. R80 000
Convertible preference shares
Consideration received for issuing the convertible preference shares........................ R150 000
Balance of contributed tax capital attributed to convertible preference shares .......... R150 000
After the conversion of convertible preference shares to ordinary shares on 1 February 2017,
AX Logistics (Pty) Ltd’s contributed tax capital will be:
Ordinary shares
Contributed tax capital allocated to convertible preference shares converted to
ordinary shares (see calculation below) ...................................................................... 30 000
Convertible preference shares
Contributed tax capital allocated to the preference shares that was converted to
ordinary shares (R150 000/50 000 shares × 10 000 shares) ....................................... (30 000)
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Contributed tax capital is increased by the consideration received by or accrued to the company for
the issue of shares after 1 January 2011. Consideration for the issue of shares would not only include
cash or the value of an asset received by the company, but arguably also the value of services
provided by a person to the company as consideration for a share issue, or the cancellation of a loan
account owed by the company as consideration for a share issue.
Where the company transfers an amount to a particular shareholder, which reduces the balance of
contributed tax capital for the class of share held by this person, the amount transferred to a
particular shareholder may not exceed an amount determined as follows:
Total amount of contributed tax capital The number of shares of that class held
attributable to that class immediately × by that shareholder
before the transfer Total number of shares of that class
In order for such transfer to constitute a reduction in the company’s contributed tax capital, the
directors of the company (or another person or body of persons with comparable authority) must
have determined, by the date of the transfer, that the transfer constitutes a transfer of contributed tax
capital. Without this determination, no reduction in contributed tax capital can occur and the amount
distributed would consequently be a dividend. This determination could, for example, take the form of
a company resolution.
The definition of contributed tax capital contains a specific prescription as to

how the contributed tax capital of a company that became a resident on or after
1 January 2011 should be determined (par (a) of the definition of contributed tax
capital).
The starting point for the calculation of the contributed tax capital of such a
company is the market value of all the shares of a specific class immediately
Please note! before the company becomes a resident (as opposed to the stated share
capital or share premium). The effect of this starting point is that distributions
equal to this amount may be made by the company in future without constituting
a dividend.
The remainder of the calculation of the contributed tax capital of such a
company is comparable to the calculation above, with the exception that only
movements from the date that the company became a resident are taken into
account.
With effect from 19 July 2017, an anti-avoidance rule aimed at preventing the artificial creation of con-
tributed tax capital in a South African group of companies, which is ultimately foreign owned, was
introduced (s 8G). Non-resident companies are generally not subject to capital gains tax on the dis-
posal of shares that they hold in South African resident companies (refer chapter 17). If a South
African company declares dividends to a non-resident shareholder, the dividend will not be exempt
from dividends tax (refer 19.3.6.). A non-resident company could, however, attempt to avoid this
dividends tax by implementing the following transaction: If the non-resident contributes shares in a
South African company (existing company) to another South African company (new holding com-
pany), this increases the contributed tax capital of the new holding company with the market value of
the shares that it received as consideration for the issuing of new shares to the non-resident share-
holder. This disposal of the shares in the existing company by the non-resident does not have any
capital gains tax implications. This enables the existing company to distribute its accumulated profits
to the new holding company. This distribution qualifies for an exemption from dividends tax. The new
holding company in turn, as a result of the above transaction, has sufficient contributed tax capital to
distribute these same amounts to the non-resident shareholder as a return of capital, which does not
attract dividends tax, as discussed above.
In light of the above, the newly introduced anti-avoidance rule is aimed at transactions where a
resident company (issuing company) issues shares to a non-resident company (subscribing com-
pany), where the issuing company forms part of the same group of companies as the subscribing
company after the transaction. In the context of s 8G, the existence of a group of companies must be
assessed based on a threshold of 50%, as opposed to 70% in the definition of a group of companies
in s1 (as discussed in chapter 20) (s 8G(1)). The rule applies to the extent that the consideration paid
by the subscribing company for the shares issued to it consists of shares in another resident com-
pany (target company) that forms part of the same group of companies as the subscribing
683
company (s 8G(2)). When s 8G applies to a transaction, the amount to be added to the contributed
tax capital of the issuing company as a result of such a transaction must be determined as:
A = B × C/D
Where:
A= amount to be added to the contributed tax capital of the issuing company
B= total contributed tax capital attributable to the class of shares of the target company
acquired by the issuing company. This amount must be determined in terms of
par (b) of the definition of contributed tax capital from the date that the target com-
pany formed part of the same group of companies as the subscribing company
(s 8G(3)).
C= number of shares of the class acquired by the issuing company
D= total number of shares of the class issued by the target company
The rule also extends to a situation where the issuing company uses the consideration it receives
from the subscribing company directly or indirectly to acquire shares in a target company.
The definition of contributed tax capital that applies when a person becomes a resident after
1 January 2011 (par (a) of the definition of contributed tax capital in s 1) will not apply to a class of
shares issued by the issuing company before it became a resident (s 8G(4)).
19.4.2 Returns of capital

The definition of a return of capital resembles the definition of a dividend, as discussed in 19.3.1, in
many respects. This definition is, however, the inverse of a definition of a dividend.
Similarly to the definition of a dividend, a return of capital is defined in s 1(1) as
l any amount transferred or applied
l by a company that is a resident
l for the benefit or on behalf of any person
l in respect of any share in that company.
Also, similarly to the definition of a dividend, the definition of a return of capital includes amounts
transferred or applied by the company by way of
l a distribution made by the company (par (a) of the definition of ‘return of capital’), or
l as consideration for the acquisition of any share in that company (par (b) of the definition of
‘return of capital’).
The definition of a return of capital also contains similar exclusions to the definition of a dividend for
transfers that consist of shares in the company and general repurchases of its own shares by a com-
pany as contemplated in subpar (b) of par 5.67(B) of s 5 of the JSE Limited Listings Requirements,
where that acquisition complies with any applicable requirements prescribed by paras 5.68 and 5.72
to 5.81 of s 5 of the JSE Limited Listings Requirements.
The fundamental difference between these definitions lies in the effect of the transfer on the
contributed tax capital of the company. A transfer to a shareholder will only be a return of capital to
the extent that it results in a reduction in the contributed tax capital of the company. In contrast, a
transfer to a shareholder will be a dividend to the extent that it does not result in a reduction in the
contributed tax capital of the company.
The capital gains tax consequences of a distribution by a company are dealt with in PART XI of the
Eighth Schedule. As a general rule, one can say that, to the extent that a company distribution
qualifies as a dividend, the distribution is subject to dividends tax rather than capital gains tax. To the
extent that the distribution does not qualify as a dividend, the capital gains tax provisions must be
considered for the distribution received. In broad terms, a return of capital reduces the base cost of
the shares in respect of which the return of capital is received. To the extent that the return of capital
exceeds this base cost, it gives rise to a capital gain for the shareholder. The capital gains tax
consequences of company distributions are discussed in detail in chapter 17.
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19.4–19.5 Chapter 19: Companies and dividends tax
Example 19.13. Returns of capital and dividends
Faith (Pty) Ltd and Themba Dindi own 60% and 40% respectively of the ordinary shares of Expo-
nent Ltd. Faith (Pty) Ltd acquired its shares at a cost of R1 400 000 in 2012. Themba Dindi
acquired his shares at a cost of R900 000 in 2008.
Exponent Ltd distributed an amount of R1 950 000 to its shareholders on 28 February 2018.
Exponent Ltd had contributed tax capital of R2 500 000 by this date.
Explain and calculate the tax implications of the distribution for both shareholders if directors of
Exponent Ltd determine that:
l the full amount of the distribution reduces Exponent Ltd’s contributed tax capital
l no portion of the distribution has the effect of reducing Exponent Ltd’s contributed tax
capital.
SOLUTION
Full distribution reduces Exponent Ltd’s contributed tax capital.
If the full amount of the distributions reduces Exposure Ltd’s contributed tax
capital balance, this distribution would be a return of capital. The return of capital
reduces the base cost of the shares in respect of which the return of capital is
received (par 76B(2) of the Eighth Schedule).
No portion of it would constitute a dividend.
Tax implications for Themba Dindi
Base cost of the investment in Exposure Ltd ............................................................ R900 000
Less: Return of capital (R1 950 000 × 40/100) ......................................................... (R780 000)
Base cost of the investment in Exposure Ltd after the return of capital .................... R120 000
Tax implications for Faith (Pty) Ltd
Base cost of the investment in Exposure Ltd ............................................................ R1 400 000
Less: Return of capital (R1 950 000 × 60/100) ......................................................... (R1 170 000)
Base cost of the investment in Exposure Ltd after the return of capital .................... R230 000
Note
The reduction in the base cost of the investments in the Exponent Ltd shares does not have an
immediate cash tax impact for either of the shareholders. The cash tax impact will only occur
when they dispose of the shares. At that time, the reduced base cost will result in a greater
capital gain than would have been the case had the base cost not been reduced.
No portion of the distribution reduces Exponent Ltd’s contributed tax capital.
If no portion of the distribution reduces Exposure Ltd’s contributed tax capital balance, this distri-
bution would be a dividend. No portion of it would be a return of capital.
Tax implications for Themba Dindi
The dividend received by Themba Dindi would be subject to dividends tax at a rate of 20%. This
dividends tax would amount to R156 000 (R1 950 000 × 40% × 20%). Exposure Limited is
required to withhold this amount from the dividend paid to Themba Dindi.
Tax implications for Faith (Pty) Ltd
The dividend received by Faith (Pty) Ltd would be exempt from dividends tax (s 64F(1)(a)).
Exposure Limited is not required to withhold any dividends tax if Faith (Pty) Ltd provided it with a
declaration of its exemption and a written undertaking to inform it if this status changes.
Note
Unlike the return of capital, the dividend has an immediate cash tax impact for Themba Dindi. It
has no tax impact for Faith (Pty) Ltd as no dividends tax is levied on the payment. The
distribution does also not reduce the base cost of Faith (Pty) Ltd’s investment in the shares of
Exponent Ltd.
19.5 Companies with specific tax implications

It may be necessary to deviate from the above principles of company taxation to cater for specific
characteristics of certain types of companies. These deviations may be based on policy reasons (for
example, a more favourable tax regime afforded to small business corporations and companies
operating in special economic zones), to curb avoidance risks that the entity may pose (for example,
personal service provider entities) or to reflect the character of the entity (for example, real estate
investment trusts (REITs)).
685
This section of the chapter considers specific categories of companies that require special
consideration from a tax perspective. The tax regime applicable to them may differ in some regards
from the normal rules discussed up to this point or have specific additional considerations that apply
to these companies.
19.5.1 Close corporations

Close corporations are entities governed under the Close Corporations Act (Act 69 of 1984), which
share many similarities with companies. These entities are generally used by smaller businesses that
have a limited number of owners (members).
As indicated in 19.2.1, a close corporation is a ‘company’ for tax purposes. The tax treatment of
profits generated by the close corporation and distributions to its members is similar to any other
company. This includes the following:
l The tax rate that applies to a close corporation, which is currently 28%.
l Distributions to members fall within the definition of a dividend, as discussed in 19.3.1. These
distributions are subject to dividends tax and would generally be exempt from normal tax in the
hands of the recipient (s 10(1)(k)(i)).
l A close corporation is a provisional taxpayer (par (b) of the definition of ‘provisional taxpayer’ in
par 1 of the Fourth Schedule).
l A close corporation must, in terms of s 246 of the Tax Administration Act (see chapter 33), be
represented by a public officer, who will be its ‘representative taxpayer’.
As a result of the fact that the governing legislation uses different terminology from the Companies
Act, a number of definitions in the Act make specific mention to the position of a close corporation
and the application of the definition to it. This includes the following:
l A close corporation is specifically excluded from being classified as a public company
(s 38(2)(b)). It is therefore treated a private company for tax purposes.
l The term ‘director’ is defined in s1 to include any person who, in respect of a close corporation,
holds any office or performs any function similar to the office or functions of a director of a
company other than a close corporation. A director of a close corporation for purposes of the Act
is not necessarily a member of the close corporation. A person who participates in management
may also be a director as defined. This definition is relevant for purposes of employees’ tax (see
chapter 10).
From a corporate law perspective, close corporations are in the process of being phased out. No
new close corporations have been allowed to be registered from 1 May 2011. These entities also
suffer from certain limitations, for example restrictions relating to persons who may be members, that
could make it difficult to continue to conduct business in a close corporation as the size of the
business grows and opportunities arise for it to be included in a larger corporate structure. For these
reasons, close corporations are often converted to companies. When a close corporation is con-
verted to a company, the close corporation and the resultant company are, for purposes of the Act,
deemed to be one and the same person (s 40A).
19.5.2 Foreign companies

A foreign company is a company that is not a resident (definition of ‘foreign company’ in s 1).
Residency of a company is discussed in detail in chapter 3. Similar to other non-residents, a foreign
company will only be liable for normal tax in South Africa if it receives, or has accrued, income from a
South African source.
The tax rate applicable to the taxable income of foreign companies is 28% (par 3(a) of Appendix I to
the Income Tax Act). For years of assessment that ended prior to 1 April 2012, foreign companies
were subject to tax at a higher rate on its South African source income than resident companies.
Dividends declared by foreign companies are not subject to dividends tax (except if the dividend is
paid in respect of a share listed on the JSE). The effect of this is that the South African activities of a
foreign company (for example a South African branch) will be subject to 28% normal tax on its South
African source income. After-tax profits remitted by the foreign company will not be subject to further
tax in South Africa. It may, however, be subject to income tax and taxes upon distribution of the
profits in the country where the foreign company is a resident for tax purposes.
When a foreign company carries on business or has an office in South Africa, it must at all times be
represented by an individual residing in the Republic (the company’s public officer) (s 246 of the Tax
Administration Act (see chapter 33)).
686
19.5.3 Non-profit companies

The Companies Act distinguishes between profit and non-profit companies. The provisions of the
Companies Act apply to non-profit companies with some modifications to reflect the nature of these
entities. All the objects of a non-profit company must be public benefit objects or an object relating to
one or more cultural or social activities, or communal or group interests. All assets and income of the
non-profit company must be applied to advance these objects.
The mere fact that a company is a non-profit company does not impact on its tax treatment. The
purpose of the entity may, however, impact on the nature of its receipts and accruals (in particular,
whether these amounts are derived from a scheme of profit-making or not). Specific exemptions may
be available to the entities or certain amounts received by or accrued to it. These include the
following:
l Non-profit companies may be approved as public benefit organisations (s 30), recreational club
(s 30A) or small business-funding entity (s 30C). Some of the receipts or accruals of the organisa-
tion may be exempt from normal tax (ss 10(1)(cN), 10(1)(cO), 10(1)(cQ)).
l A non-profit company formed to promote the common interest of persons carrying on a particular
kind of business, profession or occupation (s 30B). All the receipts and accruals of such a non-
profit company will be exempt from normal tax (s 10(1)(d)).
l A non-profit company established for purposes of managing the collective interests common to
all its members may qualify for an exemption in respect of levies received by or accrued to it as
well as a partial exemption in respect of other receipts and accruals (s 10(1)(e)). This exemption
applies to home owners’ associations.
These exemptions are discussed in more detail in chapter 5.
In addition to the above exemptions, certain special deductions may be allowed to non-profit
companies. A non-profit company, that carries on any sporting activity that falls under a code of sport
administered and controlled by a national federation, may deduct certain expenditure incurred in the
development or promotion of the sport or payments made to other entities for this purpose, despite
not necessarily carrying on a trade (s 11E).
The definition of a ‘company’ also includes associations established to serve a

specified purpose beneficial to the public or a section of the public. A number
Please note! of exemptions are available in respect of certain of associations. These exemp-
tions are discussed in detail in chapter 5.
19.5.4 Small business corporations (s 12E)

Small businesses have the potential to create employment and in this manner contribute to economic
growth. A number of tax concessions have been introduced since 2001 to assist these businesses.
Concessions are provided to small business corporations, as discussed below, and micro busi-
nesses, which could elect to be subject to turnover tax (see chapter 23).
Definition of small business corporation

To qualify as a ‘small business corporation’, the following requirements must be complied with:
l The entity must be a close corporation, co-operative, private company or personal liability
company (as contemplated in s 8(2)(c) of the Companies Act).
l All the holders of shares (proprietary interests) in the entity must at all times during the year of
assessment be natural persons.
l The entity’s gross income may not exceed R20 000 000.
If the entity carried on a trade for less than 12 months, the amount of R20 million
must be apportioned to reflect the number of months that the entity carried on a
Please note! trade, relative to 12 months. For purposes of this calculation, an entity must be
deemed to have carried on a trade for a full month if it carried on such a trade
during part of a month.
l The shareholders of the entity may at no time during the year of assessment hold shares or have
an interest in any other company, other than
– an interest in a company listed on a South African exchange
687
– an interest in a portfolio of certain foreign investment schemes that are comparable to a

portfolio of a collective investment scheme in participation bonds or a portfolio of a collective
investment scheme in securities where members of the public are invited to contribute to and
hold interests in the scheme
– an interest in a portfolio of a collective investment scheme in property that qualifies as a REIT
as defined in par 13.1 (x) of the JSE Limited Listings Requirements
– an interest in a body corporate (as contemplated in s 10(1)(e)(aa))
– an interest in a share block company (as contemplated in s 10(1)(e)(bb))
– an interest in a non-profit company as defined in s 1 of the Companies Act, 2008, which was
formed solely for purposes of managing the collective interests common to all its members (as
contemplated in s 10(1)(e)(cc))
– less than 5% of the interest in a social or consumer co-operative (or a co-operative burial
society)
– an interest in a friendly society
– less than 5% of the interest in a primary savings co-operative bank or private savings and
loans co-operative bank
– an interest in a venture capital company as defined in s 12J (see chapter 12)
– an interest in a company, close corporation or co-operative that has not carried on any trade
during any year of assessment and has not during any year of assessment owned assets with
a market value of more than R5 000, or
– any terminating company, co-operative or close corporation. The company must have taken the
steps contemplated in s 41(4) to liquidate, wind-up or deregister. If the company withdraws
any of these steps, or does anything to invalidate a step with the result that the company will
not be liquidated, the other company in which the terminating company's shareholders hold
shares, will no longer qualify as a small business corporation.
l The entity may not be a ‘personal service provider’ as defined in par 1 of the Fourth Schedule
(see 19.5.6 and chapter 10).
l Not more than 20% of the total receipts and accruals of the entity (excluding those of a capital
nature) may consist collectively of investment income and income from rendering personal
services.
The last requirement, which relates to the business activities of the entity, is aimed at excluding com-
panies that generate passive income or income from personal effort of skilled connected persons
from benefitting from the concession.
Investment income, as contemplated in the definition above, refers to the following:
l any income in the form of dividends, foreign dividends, royalties, rental derived from immovable
property, annuities or income of a similar nature
l interest from interest-bearing instruments (s 24J) (with the exception of interest on certain co-
operative banks) amounts in respect of interest rate agreements (s 24K) and any other income
that is subject to the same treatment as income from money lent in terms of the tax legislation,
and
l any proceeds derived from investment or trading in financial instruments (including futures,
options and other derivatives), marketable securities or immovable property.
The term ‘personal service’ is defined as:
l any service in the field of accounting, actuarial science, architecture, auctioneering, auditing,
broadcasting, consulting, draftsmanship, education, engineering, financial service broking,
health, information technology, journalism, law, management, real estate broking, research, sport,
surveying, translation, valuation or veterinary science
l if, and to the extent, that the service is performed personally by any person who holds an interest
in that company, co-operative or close corporation or by any connected person in relation to such
a person.
The services will, however, not be regarded as personal services if the company, co-operative or
close corporation employs at least three full-time employees throughout the year of assessment in its
business of rendering services. A person who holds a share in the company or is a member of the
co-operative or close corporation as well as their connected persons must be excluded for purposes
of determining whether the entity employs at least three full-time employees in the manner described.
This exclusion encourages entities to create full-time employment opportunities for persons other
than the owners of the businesses rendering the services listed and their relatives.
688
Tax benefits
The taxable income of a small business corporation is subject to normal tax at a reduced tax rate.
The following tax rate structure applies to these entities any year of assessment ending during the
12 months ending 31 March 2018:
Taxable income
Where the taxable income – Rates of tax
Does not exceed R75 750 ....................................... 0% of taxable income
Exceeds R75 750 but does not exceed
R365 000.................................................................. 7% of the amount by which the taxable
income exceeds R75 750
Exceeds R365 000 but does not exceed
R550 000.................................................................. R20 248 plus 21% of the amount by which
the taxable income exceeds R365 000
Exceeds R550 000 ................................................... R59 098 plus 28% of the amount by which
the taxable income exceeds R550 000
If a small business corporation is also a qualifying company that has taxable

income attributable to income derived within a special economic zone (SEZ)
(s 12R – see 19.5.5), then the tax payable on that amount of taxable income
must be the lesser of the tax determined in terms of the above table or 15%
Please note! (current rate for qualifying companies under s 12R). This means that a small
business corporation that operates a business within a SEZ will not forfeit the
advantages of the SEZ regime merely because it is a small business corpo-
ration, but can benefit from being taxed at the most advantageous rate of tax.
Small business corporations enjoy the benefit of certain accelerated tax allowances, such as an
immediate 100% write-off in respect of manufacturing assets (s 12E(1)) and, at the election of the tax-
payer, either a write-off under s 11(e) or a 50:30:20 write-off rate under s 12E(1A) over a three-year
period for all other assets (see chapter 13). These accelerated allowances are aimed at alleviating
some of the cash flow pressures that a small business may experience when investing in capital
assets.
In addition, a small business corporation qualifies as a ‘small, medium or micro-sized enterprise’.
These entities enjoy an income tax exemption in respect of amounts received from a small business-
funding entity, as discussed in more detail in chapter 5 (s 10(1)(zK)). Expenditure funded from such
amounts received from small business-funding entities will, however, not give rise to the following
consequences, which would all result in a duplication of the benefit:
l a deduction in respect of expenditure to acquire trading stock (s 23O(2))
l expenditure included in the base cost of assets (s 23O(5))
l deductions or allowances in respect of assets (s 23O(3))
l a deduction in respect of expenditure that would otherwise qualify for deduction in terms of s 11
(s 23O(6)).
Example 19.14. Small business corporation
EngCo is a private company with two shareholders who are both natural persons. EngCo
provides a broad range of engineering services to mines in South Africa. EngCo’s shareholders
do not own shares in any other company. EngCo employs 10 full-time employees who are not
connected to its shareholders.
During its 2018 year of assessment that ended on 31 March 2018, EngCo’s turnover was
R15 million, none of which relates to investment income. Its taxable income before deducting any
capital allowances was R1,5 million. On 1 May 2017 EnCo acquired a manufacturing asset for
R300 000 and IT equipment for R250 000.
Discuss whether EngCo qualifies as a small business corporation and calculate its income tax
liability for its 2018 year of assessment.
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SOLUTION
EngCo qualifies as a small business corporation because: 1) it is a private company; 2) all its
shareholders are natural persons; 3) its shareholders do not own shares in any other company;
4) its turnover for the year of assessment was below R20 million; 5) since it employs more than
three full-time employees who are not connected to its shareholders, its engineering services do
not qualify as ‘personal services’; and 6) its income from investments and personal services are
therefore not more than 20% of its total receipts.
EngCo’s tax liability for its year of assessment ending on 31 March 2018 is:
Taxable income before capital allowances ................................................................ R1 500 000
Less: Capital allowance on manufacturing asset (R300 000 × 100%) (s 12E(1)) ...... (300 000)
Less: Capital allowance on IT equipment (R250 000 × 50%) (12E(1A))) .................. (125 000)
Taxable income.......................................................................................................... R1 075 000
Tax liability (R59 098 + ((R1 075 000 – R550 000) × 28%)) ....................................... R206 098
Remember
For a detailed discussion of s 12E, refer to Interpretation Note No 9 (Issue 2) (issued on 26 July
2016).
19.5.5 Companies operating in special economic zones (ss 12R and 12S)
The Special Economic Zones Act (Act 16 of 2014) came into operation with effect from 9 February
2016. This legislation provides for the designation, promotion, development, operation and manage-
ment of Special Economic Zones (SEZs). This measure is aimed at driving industrial and economic
growth and has been identified by the Government as a mechanism to contribute to economic growth
and development goals. Amongst other things, the SEZ regime provides a number of tax benefits to
persons conducting businesses within these zones.
Qualifying companies
The tax benefits available to companies operating in SEZs are limited to qualifying companies. For
purposes of the tax concessions, a ‘special economic zone’ refers to a special economic zone
defined in the Special Economic Zones Act (designated as such in terms of s 23(6) of that legislation)
and that has been approved by the Minister of Finance to benefit from the tax concession (definition
of ‘special economic zone’ in s 12R(1) and s 12R(3)).
The term ‘qualifying company’ is defined in s 12R as a company
l that is incorporated in South Africa or in any part thereof, or that has its place of effective man-
agement in South Africa, and
l that carries on a trade in a special economic zone, as approved for tax purposes, and
l that trade is carried on from a fixed place of business situated within a special economic zone,
and
l that derives at least 90% of its income from the carrying on of such trade within one or more
special economic zones.
Certain types of business activities are not eligible for the benefits of the tax concession, even if
carried on in a manner that meets the above criteria. A company would not be classified as a qualify-
ing company if it conducts any of the following activities classified under ‘Section C: Manufacturing’
in the most recent Standard Industrial Classification Code (referred to as the SIC Code) issued by
Statistics South Africa (s 12R(4)(a) and (b)):
l distilling, rectifying and blending of spirits (SIC Code 1101)
l manufacturing of wines (SIC Code 1102)
l manufacturing of malt liquors and malt (SIC Code 103)
l manufacturing of tobacco products (SIC Code 12)
l manufacturing of weapons and ammunition (SIC Code 252)
l manufacturing of bio-fuels if that manufacturing negatively impacts on food security in the
Republic, or
l any additional activities classified in the SIC Code, which the Minister of Finance designated by
Notice in the Government Gazette.
690
Companies that pose a risk of abuse of the tax concession (in particular the reduced tax rate of 15%)
are also excluded from being qualified companies. For this reason, a company would also not be a
qualifying company if more than 20% of the company’s deductible expenditure incurred, or its
income received or accrued, arises from transactions with certain connected persons (s 12R(4)(c)).
Such dealings with connected persons would disqualify the company if the connected person is one
of the following persons:
l a resident, or
l a non-resident, if the income or expenditure is attributable to a permanent establishment of the
non-resident in South Africa.
The taxable income of both of these connected persons would be subject to tax in South Africa on
profits that could potentially be moved to the qualifying company in the absence of this exclusion.
The provisions of s 12R, and therefore the tax concessions available to qualifying companies, cease
to apply in respect of any year of assessment commencing on or after the later of 1 January 2024 or
10 years after the commencement of the carrying on of a trade in a SEZ (s 12R(5)). As the Special
Economic Zones Act only came into effect from 9 February 2016, the latter is likely to always be the
later of the two dates.
Tax benefits
Income tax is levied at a rate of 15% on the taxable income attributable to income derived by a
qualifying company within a SEZ.
Remember
If a small business corporation is also a qualifying company that has taxable income attributable
to income derived within a SEZ, the tax payable on that amount of taxable income must be the
lesser of the tax determined in terms of the tax rate table applicable to small business
corporations (see 19.5.2) and the above rate of 15%.
In addition to a reduced income tax rate, these qualifying companies within SEZ qualify for accele-
rated capital allowances under s 12S (see chapter 13). Employment tax incentive benefits are also
available where to employees employed within these SEZs (see chapter 10).
19.5.6 Personal service providers (par 1 of the Fourth Schedule and s 23(k))
Taxpayers may attempt to save tax by offering their services to employers through a company or trust
rather than in their personal capacity. In the absence of specific provisions to curb the tax benefits
arising from this practice, the use of a company may have benefitted the person from the perspective
of the timing of tax payments, the rate at which the income is taxed and the deductions available
against the income.
Such companies (and trusts used for the same purpose) are targeted by anti-avoidance provisions
that apply to personal service providers (defined in par 1 of the Fourth Schedule (see chapter 10)). If
the personal service provider is a company, the normal tax rate is 28%. Dividends paid by this
company are subject to dividends tax at a rate of 20%.
The benefit that such a company may have gained from deductions available in determining its
taxable income is negated by specific limitation of the deductions available to the company (s 23(k)).
The items in respect of which deductions are allowed are to a large extent comparable with the
deductions that a natural person may claim against remuneration (s 23(m)). Amounts paid to
employees, which constitute income for the employee, represent a notable difference. This deduction
is required to avoid double taxation in respect of amounts paid to employees of the personal service
provider. The deductions available to personal service providers are discussed in detail in chapter 6.
The normal tax payable by a personal service provider is collected in the form of employees’ tax,
similar to a natural person who earns remuneration from employment, and provisional tax, similar to
any other company. This employees’ tax must be withheld at the company tax rate of 28%. The
employees’ tax implications of personal service providers are discussed in more detail in chapter 10.
19.5.7 Real Estate Investment Trusts (REITs) (s 25BB)

Real estate investment trusts (REITs) are listed companies that manage a portfolio of real estate
properties (i.e. immovable property assets). From a commercial and investment perspective, a REIT
offers an investor the benefit of investing in a portfolio of immovable properties. This overcomes the
691
problem of having to raise funding to invest in and be exposed to the risks of a limited number of
properties. Investors also enjoy the benefit of not having to manage the properties. The interest that
the investor has in a property investment scheme may be more liquid than owning the underlying
property itself.
REITs provide investors with ongoing dividend income and the potential for long-term capital gains
through share price appreciation. The dividend income would be derived from rental income earned
by the REIT, while capital appreciation would be based on the appreciation in the value of the
properties in which the REIT has an interest.
In the absence of a special tax regime for REITs, investors would derive exempt dividend income
from the REIT. Interest and other expenditure incurred by the investor to acquire the shares in the
REIT and produce this dividend income would not be deductible on the basis that it is not incurred in
the production of income or for purposes of carrying on a trade. This would be the case even though
the dividends are indirectly derived from rental income, which would have constituted income had
the investor acquired the interest in the properties directly. Prior to the introduction of the REIT,
regime investors could invest in property unit trusts (PUT), where rental income flowed through the
entity to the investor, or property loan stocks (PLS), where a large portion of the value of the
investment was attributed to a debenture in respect of which the investor earned taxable interest
income.
A ‘linked unit’ is defined in s 1 as a unit comprising a share and a debenture in a

Please note! company, where that share and that debenture are linked and are traded together
as a single unit. Such a linked unit would typically have existed in a PLS structure.
The REIT regime was introduced in 2012. This regime introduced tax rules aimed at providing flow-
through treatment for distributed rental income and taxation of capital gains at the investor level only.
Definition of a REIT
A REIT is defined as a resident company of which the shares are listed on a South African exchange
as shares in a REIT, as defined in the JSE Limited Listings Requirements (definition of ‘REIT’ in s 1).
These listing requirements include, in broad terms, that
l The REIT entity must be primarily engaged in property activities, which include the holding and
development of properties for letting and retention as investments or the purchase of land for
development of property for retention as investments. The entity must have a minimum amount of
gross assets reflected in its financial statements.
l The REIT entity’s level of gearing must be below certain prescribed limits.
l The REIT entity must derive a specified portion of its revenue from rental revenue and distribute a
specified portion of its distributable profits within a specified period after its financial year-end.
Basic tax regime

The basic tax regime that applies to REITs deals with two components of the investments made,
namely treatment of annual income on the property investments (yield) and the treatment of gains
that may arise upon disposal.
Annual income of the REIT

REITs are partially treated as conduits for tax purposes. Amounts received by the REIT will not be
subject to tax in the REIT’s hands if distributed to the shareholders by way of a qualifying distribution
(see below). The mechanism used to achieve this outcome is that a deduction is available to the REIT
for the amount of qualifying distributions made during a year of assessment, provided that the
company is a REIT on the last day of the year of assessment (s 25BB(2)(a)(i)). The deduction in
respect of qualifying distributions may not exceed the taxable income of the REIT before taking into
account assessed losses carried forward and its taxable capital gains (s 25BB(2)(b)). The effect of
this is that the deduction cannot create an assessed loss.
692
A number of specific deductions are available when calculating the taxable

income of a REIT:
l Where a REIT is a beneficiary of a foreign vesting trust, which is liable for
income tax in the country where it is formed, the REIT may deduct a portion
of the foreign tax from its income. This amount is the foreign tax payable by
the trust that is attributable to the REIT’s interest in the trust. The deduction
for such foreign tax is allowed before the deduction for qualifying distribu-
tions by the REIT is taken into account (s 25BB(2A)(a)).
Please note! l A REIT may deduct any foreign taxes on income. The amount of this
deduction is limited to the taxable income attributable to the amounts in
respect of which such taxes are payable. The deduction is allowed before
taking the qualifying distribution deduction and the deduction for donations
(see below) into account (s 25BB(2A)(b)).
l REITs may deduct the amounts of bona fide donations made by it to
organisations contemplated in s 18A(1)(a) or (b) (see chapter 7). The
deduction in respect of donations may, however, not exceed 10% of the
REIT’s taxable income before the deduction for qualifying distributions
(s 25BB(2A)(c)).
The distributions received from a REIT will be subject to normal tax in the shareholders’ hands who
receive such distributions from the REIT as the dividend received does not qualify for exemption (see
s 10(1)(k)(i)(aa)). The distribution would not be subject to dividends tax (s 64F(1)(l)). Dividends, other
than distributions, paid by the REIT, for example dividends arising from a share buy-back, are
exempt from normal tax. These dividends are subject to dividends tax.
l Interest received by a person in respect of a debenture that forms part of a

linked unit (see PLS above) in a company that is a REIT or controlled
company must be deemed to be a dividend received by that person. The
treatment of this interest is similar to the treatment of a dividend, as
discussed above (s 25BB(6)(a)).
l Interest received by a REIT or controlled company in respect of a debenture
Please note! that forms part of a linked unit in a property company must similarly be
deemed to be a dividend received by the REIT or controlled company
(s 25BB(6)(b)).
l Interest paid in respect of a linked unit by a REIT or controlled company
must be deemed to be a dividend paid for dividends tax purposes and not
interest for the purposes of the withholding tax on interest (s 25BB(6)(c)).
l Interest paid by a REIT or controlled company could constitute a qualifying
distribution (definition of qualifying distribution in s 25BB(1)).
Gains on the disposal of interests in properties

A company that is a REIT on the last day of its year of assessment may disregard capital gains or
capital losses in respect of the disposal of the following assets (s 25BB(5)):
l immovable property
l a share or a linked unit in a company that is a REIT on the date of disposal, or
l a share in a company that is a controlled company on the date of disposal.
The exemption of these disposals from capital gains tax in the hands of the REIT is necessary to
ensure that investors are not exposed to capital gains tax when the REIT disposes of its interest in
properties and again when the investor disposes of its interest in the REIT. Capital gains realised in
respect of these disposals would therefore only be subject to capital gains tax when the investor
disposes of its interest in the REIT.
A company that is a REIT on the last day of its year of assessment is not entitled to deduct
allowances in respect of immovable property (s 25BB(4)). As no allowances would have been
deducted in respect of a property, its disposal should not give rise to any recoupments that may be
taxable in the hands of the REIT. The only tax implication upon disposing of the interest in property
would therefore be the capital gains that are exempt as discussed above.
693
A REIT may not deduct the allowances in respect of immovable property in

terms of (see chapter 13 for details on the allowances)
l s 11(g) – deduction in respect of leasehold improvements
l s 13 – deduction in respect of buildings used in a manufacturing process
Please note! l s 13bis – deduction in respect of buildings used by hotel keepers
l s 13ter – deduction in respect of residential buildings
l s 13quat – deduction in respect of the erection or improvement of buildings
in the urban development zones
l s 13quin – deduction in respect of commercial buildings, and
l s 13sex – deduction in respect of certain residential units.
Example 19.15. Basic REIT taxation
Kulungile Properties Ltd is a South African company with a 28 February financial year-end. Its
shares are listed as real estate investment trust (REIT) shares on the JSE. The company owns
three malls, all three of which are situated in Johannesburg. The company’s main business is to
earn rental income from these properties. The malls were all purchased on 1 March 2017 at a
total cost price of R10 000 000 each.
Kulungile Properties Ltd has 1 000 000 shares in issue. These shares are held by a number of
shareholders, including Mr Njabulo Dumisa and Mr Jan Botha.
Mr Dumisa holds 2% of the shares of Kulungile Properties Ltd, which he acquired at a cost of
R240 000. He borrowed an amount of R150 000 from a local bank to acquire the shares, while
he funded the remaining R90 000 from surplus cash reserves. He incurs annual interest on this
loan at a rate of 12% per annum. Mr Botha owns 1% of the issued shares, which he acquired at
a cost of R125 000.
The following is an extract from Kulungile Properties Ltd’s statements of financial position for the
three years from 2018 to 2020:
As at As at As at
28 February 28 February 29 February
2018 2019 2020
Investment property at fair value: R36 000 000 R46 000 000 R30 000 000
Mall 1............................................. R12 000 000 R13 000 000 R15 000 000
Mall 2............................................. R12 000 000 R13 000 000 R15 000 000
Mall 3 (note 1) ............................... R12 000 000 – –
Mall 4............................................. R20 000 000 R22 000 000
Other current assets (rent receivables,
deposits, cash, etc.)............................... R1 000 000 R1 500 000 R1 800 000
Total assets ............................................ R37 000 000 R47 500 000 R53 800 000
Long-term liabilities secured by the
investment properties above .................. R18 500 000 R17 500 000 R17 300 000
Equity:
Share capital ....................................... R12 000 000 R12 000 000 R12 000 000
Retained income: R 6 500 000 R18 000 000 R24 500 000
Opening balance .......................... – R6 500 000 R18 000 000
Net rental income for the year (rental
income less funding costs and
operating expenditure) .................. R2 000 000 R3 000 000 R4 000 000
Unrealised fair value movements
for the year .................................... R6 000 000 R3 000 000 R 6 000 000
Accounting gain on disposal of
Mall 3 ............................................. – R8 000 000 –
Distribution of profits to
shareholders (assume distribution
made on 28 February every year) . (R1 500 000) (R2 500 000) (R3 500 000)
Total equity and liabilities ....................... R37 000 000 R47 500 000 R53 800 00
Listed price per share ............................ R19 R31 R37
continued
694
Note 1
On 31 August 2018 Kulungile Properties Ltd sold Mall 3 for R20 000 000. It re-invested most of
the gains realised when it acquired ownership of Mall 4 at a cost of R19 000 000.
Note 2
On 28 February 2020, after having received the final distribution for the year, Mr Botha sold his
entire shareholding at the current listed share price of R37 per share to another shareholder.
Calculate the effect of the above information on the taxable income of Kulungile Properties Ltd,
Mr Dumisa and Mr Botha for the 2018, 2019 and 2020 years of assessment. In addition, you are
required to explain the dividends tax implications of the distributions made to the shareholders.
SOLUTION
2018 2019 2020
Taxable income of Kulungile Properties Ltd:
Net rental income (given) ............................................. R3 000 R4 000
R 2 000 000 000 000
Fair value gains not included in taxable income
(note 3) ......................................................................... – – –
Qualifying distributions (s 25BB(2)(a)(i)) (note 1) ........ (R2 500 00 (R3 500 00
(R1 500 000) 0) 0)
No capital allowance on buildings (s 25BB(4)) ............ – – –
Sale of Mall 3: (note 3)
– Capital gain disregarded in terms of s 25BB(5) .....
– No recoupments when the property is disposed –
of ........................................................................... –
Taxable income ............................................................ R500 000 R500 000 R500 000
2018 2019 2020

Mr Dumisa:
Dividend received from Kulungile Properties Ltd ......... R30 000 R50 000 R70 000
(2018: R1 500 000 × 2%; 2019: R2 500 000 × 2%;
2020: R3 500 000 × 2%) (included in gross income,
par (k))
Dividend exemption does not apply to distributions
received from REIT (s 10(1)(k)(i)(aa)) (note 1) ............... – – –
Interest incurred in the production of REIT dividends
(note 2) ........................................................................... (R18 000) (R12 000) (R12 000)
Effect on taxable income ................................................ R12 000 R38 000 R58 000
No dividends tax must be withheld on the distributions by the REIT as the dividends constitute
income in Mr Dumisa’s hands (s 64F(1)(l)).
Mr Botha:
Dividend received from Kulungile Properties Ltd ......... R15 000 R25 000 R35 000
(2018: R1 500 000 × 1%; 2019: R2 500 000 × 1%;
2020: R3 500 000 × 1%) (included in gross income,
par (k))
Dividend exemption does not apply to distributions
received from REIT (s 10(1)(k)(i)(aa)) (note 1) ............... – – –
Sale of shares in Kulungile Properties Ltd (assuming
that the shares were held for investment purposes)
Taxable capital gain: (note 3)
Proceeds (1 000 000 × 1% × R37) ..... R370 000
Base cost ............................................. (R125 000)
Capital gain .......................................... R245 000
Annual exclusion .................................. (R40 000)
Taxable capital gain, included at 40% R205 000 R82 000
Effect on taxable income................................................ R225 000 R150 000 R150 000
No dividends tax must be withheld on the distributions by the REIT as the dividends constitute
income in Mr Botha’s hands (s 64F(1)(l)).
continued
695
Note 1
As all Kulungile Properties Ltd’s income consists of rental income, the distributions made meet
the definition of qualifying distributions (see below). The amounts that are deducted in the hands
of the REIT (and therefore not included in its taxable income) are included in the taxable income
of each shareholder to whom the distribution is made.
Note 2
As the REIT distributions received by Mr Dumisa are not exempt, it constitutes income. The
interest is incurred in the production of this income. It may be debatable whether the income
produced in carrying on a trade, as contemplated by s 24J(2), is deductible. For purposes of this
example, this is presumed to be the case.
Note 3
Any capital gain made in respect of the disposal of a property by a REIT must be disregarded.
Capital gains are not taxed at the level of the REIT, but rather when the gain is realised in the
hands of the investor (in this case, Mr Botha). When Mr Botha sells his shares in the REIT for R37
each, this value of the shares sold reflects his interest in the realised capital gain when Mall 3
was sold by the REIT in 2018 as well as his interest in the unrealised gains that exist in respect of
Malls 1,2 and 4. If the REIT were to dispose of its interest in Malls 1, 2 or 4, it would not be
subject to capital gains tax on that disposal. If it had been, gains derived from the same growth
in the value of the properties may have been subject to capital gains tax in the hands of both Mr
Botha and the REIT.
A controlled company refers to a company that is a subsidiary, as defined in

IFRS 10, of a REIT. This entity may be a resident or foreign company. In prac-
tice, a REIT may hold some of its investments in property through such subsid-
iaries under its control.
Similar tax treatment to that of a REIT applies to such controlled companies with
Please note! regard to qualifying distributions made, exemption of distributions received in
the hands of the recipient, eligibility for allowances in respect of immovable
property and capital gains tax in respect of the disposal of certain property
interests. This treatment that mirrors the REIT tax regime is necessary to achieve
flow-through taxation throughout the structure in which a REIT owns its property
interests.
Qualifying distributions
The mechanism that is central to the conduit tax treatment of REIT income is the concept of a
qualifying distribution as this determines the amount that is taxed in the hands of the recipient as
opposed to the REIT. As indicated earlier, a deduction is allowed in the hands of the REIT for any
qualifying distribution made during the year of assessment, if the company is still a REIT at the end of
the year of assessment. The same mechanism applies to qualifying distributions made by controlled
companies. Any reference in the discussion below to a REIT would therefore similarly apply to a
controlled company (s 25BB(2)).
The definition of a qualifying distribution in s 25BB has two components.
Firstly, it specifies which payments made by a REIT would constitute qualifying distributions if the
other requirements in the definition are met. Dividends paid or payable by the company (other than a
dividend in the form of a share buy-back) or interest incurred in respect of a debenture that forms
part of a linked unit in the company if the amount thereof is determined with reference to the financial
results of the company may be qualifying distributions.
The second component of the definition relates to the source of the amounts distributed. In order for
a distribution to be a qualifying distribution, at least 75% of the gross income received by or accrued
to the REIT in the preceding year of assessment must consist of rental income, as defined (par (b) of
the definition of ‘qualifying distribution in s 25BB(1)). In relation to a REIT’s first year of assessment,
this requirement must be applied with regard to the gross income of the REIT for that first year of
assessment (par (a) of the definition of ‘qualifying distribution in s 25BB(1)).
Any amounts imputed into the income of the REIT in relation to controlled foreign
Please note! companies must not be included in gross income used to apply 75% test.
696
The term ‘rental income’ has a wider meaning for purposes of applying the 75% test than its ordinary
meaning. This wider definition is necessary to ensure that not only amounts received from the actual
rental of properties, but also the yield from investments in property-owning companies that would
pass through the REIT to the investor, are acknowledged for purposes of achieving flow-through
taxation. Rental income, for purposes of s 25BB, includes the following:
l Amounts received or accrued in respect of the use of immovable property, which would generally
consist of rentals received. It also includes penalties and interest charged for the last payment of
such amounts (par (a) of the definition of ‘rental income’).
l Amounts received or accrued as a dividend (other than consideration in a share buy-back) from
a company that is a REIT at the time that the dividend is distributed (par (b) of the definition of
‘rental income’).
l Amounts received or accrued as a qualifying distribution from a company that is a controlled
company at the time of the distribution (par (c) of the definition of ‘rental income’).
l Amounts received or accrued as a dividend, including certain interest in respect of debentures
that are linked units, from a company that is a property company at the time of the distribution
(par (d) of the definition of ‘rental income’).
A property company is a company

l where 20% or more of the company’s equity shares or linked units are held
by a REIT or a controlled company (whether alone or together with any other
company forming part of the same group of companies as the REIT or
controlled company), and
Please note! l where 80% or more of the value of the company’s assets is directly or
indirectly attributable to immovable property (the value of the company’s
assets is the value reflected on the annual financial statements of the com-
pany for the previous year of assessment prepared in accordance with the
Companies Act or IFRS).
(s 25BB(1))
l The amount of any recoupment or recovery in terms of s 8(4) in respect of amounts previously
deducted in terms of ss 11(g), 13, 13bis, 13ter, 13quat, 13quin or 13sex (see chapter 13). These
items are included in the definition to avoid once-off distortions to the ratio as a result of the
disposal of older properties.
In summary, the definition of ‘qualifying distribution’ can be illustrated as follows:
Qualifying distribution:
Dividend
>/=75% of gross income consist REIT
of rental income OR
OR
Interest in respect of
REIT subsidiary debenture forming
(controlled company) part of a linked unit in
dividend from a property
from controlled company
Amount in respect of use
the company
Qualifying distribution
of immovable property
Dividend from a REIT
Dividend or foreign
company
19.5.8 Co-operatives
Co-operatives are governed in South Africa by the Co-operatives Act (Act 14 of 2005). This legislation
defines a co-operative as an autonomous association of persons that united voluntarily to meet their
common economic and social needs and aspirations through a jointly owned and democratically
controlled enterprise organised and operated on co-operative principles. Section 3 of the
Co-operatives Act sets out the principles that a co-operative should comply with and in accordance
with which it should operate. These entities differ from other companies in a number of ways. The
697
differences include, amongst others, that voting rights are based on membership (each member has
one vote). Members are required to provide capital to the co-operative and may receive a return on
this capital at a fixed percentage that is limited in the constitution. As a co-operative exists for the
common benefit of its members, a co-operative may, however, allocate its surpluses to members
based on the value of transactions that the member conducted with the co-operative during a
specified period of time.
For income tax purposes, a co-operative is a company and is subject to tax on the same basis as any
other company. Section 27 provides specific rules in relation to deductions allowed in the hands of a
co-operative for distributions of surplus amounts to its members (ss 27(1), 27(2)(a) and (h), 27(8)).
These provisions essentially regulate the amount that can be shifted from the taxable income of the
co-operative to the member. It implicitly also regulates the amount of the co-operative’s surplus that
will be taxed in own hands and be taxed as a dividend upon distribution. Section 27 further provides
for special allowances in respect of certain buildings of agricultural co-operatives (ss 27(2)(b) and (3)
to (5)).
Section 27 is burdened with the fact that many references in this provision refer to previous legislation
that governed co-operatives. The Department of Trade and Industry has recommended that the tax
regime applicable to co-operatives should be reformed.i
i Department of Trade and Industry, (2012), Integrated Strategy on the Development and Promotion of Co-operatives.
698
20 Companies: Changes in ownership and
reorganisations
Pieter van der Zwan

l classify shares issued by a company as equity shares
l determine and calculate the tax implications when a company issues shares
l determine and calculate the tax implications when a company buys its own shares
back from shareholders
l determine and calculate the tax implications when shares are sold without roll-over
relief
l determine and calculate the tax implications when a business is sold without roll-
over relief
l identify transactions that qualify for roll-over relief
l determine and calculate the tax implications of a transaction that qualifies for roll-
over relief
l identify the possible application and calculate the impact of anti-avoidance
provisions that apply as a result of a transaction that qualified for roll-over relief.
Contents
Page
20.1 Overview ........................................................................................................................... 701
20.2 Changes in shareholding.................................................................................................. 701
20.2.1 Classification of shares ..................................................................................... 702
20.2.2 Share issues and changes in rights ................................................................. 703
20.2.1.1 Issuing of shares for consideration other than cash (s 40CA) ....... 704
20.2.1.2 Issuing shares for consideration that does not equal the value of
the shares (s 24BA and definition of ‘value shifting arrangement’
in the Eighth Schedule) ................................................................... 705
20.2.1.3 Conversions and changes in rights attaching to an issued share 707
20.2.3 Share buy-back transactions ............................................................................ 707
20.2.4 Sale of shares by a shareholder ....................................................................... 710
20.3 Acquisition and disposal of a business ............................................................................ 710
20.4 Special rules: Introduction and concepts ......................................................................... 713
20.4.1 Group of companies ......................................................................................... 713
20.4.2 Asset classification for purposes of the corporate rules .................................. 715
20.4.2.1 Trading stock .................................................................................. 716
20.4.2.2 Capital asset ................................................................................... 716
20.4.2.3 Allowance asset .............................................................................. 716
20.4.3 Steps to liquidate, wind up or deregister .......................................................... 716
20.4.4 Common relief mechanisms employed in the corporate rules ......................... 716
20.4.5 Common anti-avoidance mechanisms employed in the corporate rules ......... 719
20.5 Special rules: Asset-for-share transactions (s 42)............................................................ 722
20.5.1 Definition and scope ......................................................................................... 722
20.5.1.1 Domestic asset-for-share transaction (par (a) of the definition of
‘asset-for-share transaction’ in s 42(1)) .......................................... 722
20.5.1.2 Cross-border asset-for-share transaction (par (b) of the
definition of ‘asset-for-share transaction’ in s 42(1))....................... 725
20.5.1.3 Exclusions from the scope of s 42 (s 42(8A)) ................................. 726
699
Page
20.5.2
Relief.................................................................................................................. 726
20.5.2.1 Person who transferred the asset and acquired equity shares in
the company ................................................................................... 726
20.5.2.2 Company that acquired the asset ................................................... 726
20.5.2.3 Asset-for-share transactions involving elements of consideration
other than equity shares (ss 42(4) and 42(8)) ................................ 727
20.5.3 Anti-avoidance rules (ss 42(5) to 42(7)) ........................................................... 729
20.6 Special rules: Substitutive share-for-share transactions (s 43) ........................................ 731
20.6.2 Relief ................................................................................................................. 731
20.7 Special rules: Amalgamation transactions (s 44) ............................................................. 732
20.7.1.1 Domestic amalgamation transaction (par (a) of the definition of
‘amalgamation transaction’ in s 44(1)) ............................................ 732
20.7.1.2 Cross-border amalgamation transactions (para (b) and (c) of
the definition of ‘amalgamation transaction’ in s 44(1)) .................. 733
20.7.1.3 Exclusions from the scope of s 44 (ss 44(13) and 44(14)) ............. 734
20.7.2 Relief ................................................................................................................. 734
20.7.2.1 Amalgamated company.................................................................. 734
20.7.2.2 Resultant company ......................................................................... 735
20.7.2.3 Shareholders of the amalgamated company ................................. 735
20.7.3 Anti-avoidance rules (s 44(5))........................................................................... 737
20.8 Special rules: Intra-group transactions (s 45) .................................................................. 737
20.8.1.1 Domestic intra-group transaction (par (a) of the definition of
‘intra-group transaction’ in s 45(1)) ................................................. 737
20.8.1.2 Cross-border intra-group transaction (par (b) of the definition of
‘intra-group transaction’ in s 45(1)) ................................................. 738
20.8.1.3 Exclusions from the scope of s 45 (s 45(6)) ................................... 738
20.8.2 Relief ................................................................................................................. 739
20.8.2.1 Transferor company ........................................................................ 739
20.8.2.2 Transferee company ....................................................................... 739
20.8.3 Anti-avoidance rules (ss 45(3A), (4), (4A), (4B)) .............................................. 740
20.9 Special rules: Unbundling transactions (s 46) ................................................................. 743
20.9.1.1 Domestic unbundling transaction (par (a) of the definition of
‘unbundling transaction’ in s 46(1)) ................................................ 743
20.9.1.2 Cross-border unbundling transaction (par (b) of the definition of
‘unbundling transaction’ in s 46(1)) ................................................ 744
20.9.1.3 Exclusions from the scope of s 46 (ss 46(6A), 46(7) or 46(8)) ....... 744
20.9.2 Relief ................................................................................................................. 745
20.9.2.1 Unbundling company ..................................................................... 745
20.9.2.2 Shareholder of the unbundling company ....................................... 746
20.10 Special rules: Liquidation, winding-up and deregistration (s 47) .................................... 747
20.10.1.1 Domestic liquidation distribution (par (a) of the definition of
‘liquidation distribution’ in s 47(1)) .................................................. 747
20.10.1.2 Cross-border liquidation distribution (par (b) of the definition of
‘liquidation distribution’ in s 47(1)) .................................................. 748
20.10.1.3 Exclusions from the scope of s 47 (ss 47(6)) ................................. 748
20.10.2 Relief ................................................................................................................. 749
20.10.2.1 Liquidating company ...................................................................... 749
20.10 2.2 Holding company ............................................................................ 749
20.10.3 Anti-avoidance rules (s 47(4))........................................................................... 750
700
20.1–20.2 Chapter 20: Companies: Changes in ownership and reorganisations
20.1 Overview
Most businesses do not remain static throughout their existence. The operations of a business may
be expanded internally by innovation or introducing new lines of business. A business may also
follow a strategy of external growth by acquiring existing businesses that complement or expand the
existing operations, or eliminate competition. The acquisition of such new businesses can take place
by acquiring the assets and liabilities of the business or by purchasing an ownership interest in the
business.
In the case of a business operated in a company, the acquisition of an ownership interest would
involve the acquisition of shares in the business. Businesses may wish to dispose of certain
operations in a similar fashion from time to time. This disposal can again take place in the form of the
sale of the assets and liabilities that constitute a business or by way of a sale of an ownership stake in
the business.
It is also likely that certain changes in the ownership structure of a company may occur during its life
cycle. This change could be a transfer of ownership to a new owner through a sale of shares. Not all
changes in the ownership structure of a business would necessarily involve a full disinvestment by
the existing owners. Partial changes in ownership include the introduction of a new shareholder (for
example, when a new equity investor or shareholders who comply with the requirements of BBBEE
legislation are introduced) or the disinvestment by only some of the existing owners (for example, a
shareholder who wishes to exit the business and liquidate the value accumulated over time).
Some restructuring transactions do not necessarily result in an effective change in ownership, but
only impact on the way in which the existing owners hold their existing ownership interests (for
example, the introduction of an intermediate holding company between the ultimate owners and
companies housing business operations).
This chapter considers the tax implications of these changes in ownership and reorganisation of busi-
nesses. The focus of the chapter is on businesses housed in companies. The respective elements of
the transactions are discussed as follows:
Shareholders Changes in shareholding (20.2)
Roll-over relief
available
(20.4–20.10)
Company that houses Acquisition or disposal of business

a business assets and liabilities (20.3)
Remember
The transactions discussed in this chapter are likely to be subject to various legal and regulatory
requirements that should be considered in addition to the tax implications. These include:
l Companies Act (71 of 2008)
l Competition Act (89 of 1998)
l Exchange Control Regulations
l Securities Services Act (36 of 2004)
l Listing requirements of exchanges
l Industry specific legislation and regulations, for example in the banking or mining industry.
20.2 Changes in shareholding

A number of transactions may result in a change in shareholding in a company.
Shareholders in a company may have similar rights as a result of the shares that they hold. Owner-
ship of a company could, however, also consist of various classes of ownership. This presents itself
in the form of different classes of shares, where each class entitles its shareholders to a specific
bundle of rights issued by the company (see 20.2.1). The rights attaching to the various share
classes determine the composition of a company’s ownership structure.
A new shareholder may subscribe for shares in the company (see 20.2.2). While the new shareholder
acquires an interest in the company in this manner, the shareholding of the existing shareholders
701
dilutes proportionately. The company can repurchase the shares held by a specific shareholder who
wishes to exit from the company’s ownership structure (see 20.2.3). In contrast to a share issue, a
share buy-back results in the proportionate interest of the remaining shareholders increasing. Both a
subscription and share buy-back transaction involve a transaction between the company and a
shareholder (or prospective shareholder). Alternatively, a specific shareholder can dispose of its
shareholding to a purchaser who acquires that interest in the company’s ownership structure (see
20.2.4). This has no direct impact on the effective interests of the other shareholders of the company;
only on the specific seller and purchaser.
This section of the chapter considers the tax implications of the above-mentioned aspects and
transactions in more detail.
20.2.1 Classification of shares

The Companies Act allows a company to issue different classes of shares. Each class may have
certain preferences, rights, limitations and other terms associated with that class. The Companies Act
does not prescribe the designation of the class of shares to be used by a company. Classes of
shares often encountered in practice include ordinary shares, common shares, preference shares or
even Class A or B shares. The specific preferences, rights, limitations and other terms associated
with a specific class of shares that a company is authorised to issue must be set out in the
company’s memorandum of incorporation (s 36 of the Companies Act).
From an income tax perspective, the term ‘share’ refers to any unit into which the proprietary interest
in a company is divided (definition of ‘share’ in s 1(1)). Put differently, any unit of ownership in a
company will meet the definition of a share. This definition of a share for income tax purposes is
aligned with the definition of a share for purposes of the Companies Act. Practically, this means that
any share described in a company’s memorandum of incorporation should also constitute a share for
income tax purposes.
The rights attaching to certain classes of shares may be so limited that it could be questionable
whether holders of these shares truly participate in ownership of the company. A distinction is made
for tax purposes between equity shares and shares that are not equity shares. The concept of an
‘equity share’ is defined as any share in a company but excludes a share that does not carry rights to
participate beyond a specified amount in respect of dividends and returns of capital (definition of
‘equity share’ in s 1(1)). A share that presents its holder with a limited right to participate in return of
capital as well as dividends is likely to provide its holder with limited ownership exposure and be
similar to a debt instrument in many respects.
Example 20.1. Classification of shares
Zebra Ltd’s memorandum of incorporation makes provision for the following classes of shares to
be issued by the company:
l Ordinary shares: Each ordinary share entitles the shareholder to one vote. The ordinary
shareholders are entitled to receive dividend distributions and returns of capital without any
limitation from profits and reserves available after all other classes of shares have received
their distributions.
l Preference shares: A preference share does not entitle the shareholder to any voting rights
except in relation to matters that directly affect their entitlement to dividends. Each
preference share will be issued for R100 000. The shareholders are entitled to returns of
capital to a maximum amount of the R100 000 initially contributed when the share was
issued. In addition, the preference shareholders are entitled to an annual cumulative dividend
equal to 8% of the issue price of the preference share (i.e. R100 000 × 8%).
l Class B shares: Each Class B shareholder has one vote in relation to affairs affecting
Zebra Ltd’s manufacturing division. Each Class B share will be issued for R100 000. The
shareholders are entitled to returns of capital to a maximum amount of the R100 000 initially
contributed when the share was issued. Class B shareholders are entitled to annual
dividends based on the profits of Zebra Ltd’s manufacturing division for the period.
Which of the shares that Zebra Ltd is authorised to issue will constitute equity shares?
702
20.2 Chapter 20: Companies: Changes in ownership and reorganisations
SOLUTION
A share will not be an equity share if it does not have the right to participate in dividend
distributions and returns of capital beyond a specified amount. All other shares will be equity
shares. Voting rights attached to shares do not impact on its classification as equity shares. It
should be noted that some requirements in the Act require both voting rights and equity shares
held by the taxpayer to be considered.
Ordinary shares
An ordinary shareholder is entitled to dividend distributions or returns of capital from any profits
remaining after distributions have been made in respect other classes of shares. Neither of these
distributions is limited to a specified amount. The ordinary shares are equity shares.
Preference shares
The preference shareholders may not receive returns of capital beyond the initial issue price of
R100 000. In addition, they are not entitled to receive dividends beyond an amount of R8 000 per
annum. As the rights to participate in both dividends and returns of capital are limited to
specified amounts, the preference shares are not equity shares.
Class B shares
The Class B shareholders may not receive returns of capital beyond the initial issue price of
R100 000. The dividend distributions to which they are entitled are not limited to a specified
amount, but depend on the profits of the manufacturing division. As these profits vary, the
amount of dividend distribution to Class B shareholders vary without any limitation on the amount.
The Class B shares are equity shares.
The outcome would have been similar had the Class B shares carried a fixed or limited right to
dividends, but the right to participate in returns of capital beyond a specified amount.
Remember
The distinction between equity shares and shares that are not equity shares is relevant in the
following instances:
l Application of anti-avoidance provisions to deny persons who do not hold true ownership
interests in a company from enjoying the tax benefits of ownership. Examples of this include:
– application of the anti-avoidance rules aimed at equity instruments with debt character-
istics (ss 8E and 8EA) (see chapter 16).
l Favourable tax treatment may be available to persons who hold or acquire a true ownership
interest (equity share) in a company. The converse is also true, in the sense that this
favourable tax treatment is denied in respect of shares that are not equity shares. Examples
of these instances include:
– Classification of companies as forming a group of companies (see 20.4.1). This would
entitle the companies to the benefits of roll-over treatment when undertaking certain
reorganisation transactions (see 20.4 to 20.10) or exclusion from the rules that apply to
concessions and compromises when restructuring debt obligations within the group (s 19
and par 12A of the Eighth Schedule) (see chapters 13 and 17).
– Roll-over relief that is only available to transactions involving equity shares (ss 42, 44 and
46) (see 20.4 to 20.10).
– The participation exemption in respect of yields derived from substantial ownership of
foreign companies (s 10B and par 64B of the Eighth Schedule) (see chapter 21).
– Tax concessions based on the acquisition of an ownership interest in the underlying
business and related risks when acquiring equity shares in a company (for example
ss 12J and 24O) (see chapters 12 and 16).
20.2.2 Share issues and changes in rights

A company may issue authorised shares in circumstances governed by ss 38 to 41 of the Companies
Act. With the exception of capitalisation shares or shares issued in terms of conversion rights
associated with previously issued securities, shares may only be issued for adequate consideration.
This consideration may be in the form of cash or otherwise.
The action of a company issuing its own shares would generally not attract tax. The amount that the
company receives from the subscribing shareholder is of a capital nature and not included in the
company’s gross income. The creation and transfer of the rights to the shareholder are specifically
excluded from giving rise to a disposal by the company for capital gains tax purposes (par 11(2)(b)
of the Eighth Schedule). In addition, the issuing of a company’s own shares does not constitute a
transfer of securities for Securities Transfer Tax (STT) purposes (see chapter 29).
703
From the subscribing shareholder’s perspective, subscribing for shares in a company establishes a
cost for the shares in its hands. This cost will be relevant when the shareholder subsequently
disposes of the shares.
Remember
When a company issues shares or grants options or other rights in respect of shares to a person
for no consideration, the person will be deemed to have incurred nil expenditure to acquire
those shares, options or rights (s 40C).
The Act provides specific guidance in relation to some transactions involving the issuing of shares by
a company. As the issuing of shares by a company does not have any immediate tax implications, a
number of anti-avoidance rules also exist to prevent these transactions from being misused to obtain
improper tax benefits. The specific provisions and related anti-avoidance rules are explained below.
20.2.1.1 Issuing of shares for consideration other than cash (s 40CA)

The courts held that the issuing of its own shares by a company does not give rise to expenditure
incurred by the company as the company’s net assets are not diminished as a result of the
transaction (C:SARS v Labat Africa Ltd 74 SATC 1, 2011 (SCA)). As a result, transactions where a
company issues its own shares as consideration to the counterparty will arguably not entitle the
company to a deduction. An example of this includes issuing shares to employees as part of an
incentive scheme.
The Labat Africa case dealt with the acquisition of certain assets (trade marks) by the company. The
outcome of the case was that the company was not entitled to allowances in respect of the trade
mark. Even though the judgment did not specifically deal with this, it is submitted that the shares
issued by the company constituted an amount received by the counterparty on which it could have
been subject to tax. Following this judgment, specific provisions were introduced to avoid a situation
where the lack of a tax cost of assets funded by share issues could hinder company formations and
share-based asset acquisitions.
If a company acquires any asset and issues shares as consideration, the company is deemed to
have incurred expenditure equal to the market value of the shares immediately after the acquisition of
the asset (s 40CA(a)). This expenditure forms that basis for any allowances or deduction in respect of
the asset and also the cost of the asset. The provision applies in respect of both trading stock or
capital assets. The provision does not address the determination of the expenditure incurred by the
counterparty to acquire the shares. It is, however, submitted that if the principles discussed in
chapter 6 apply, the expenditure incurred by this person will be equal to the value of the outflow (i.e.
the market value of the asset transferred to the company in exchange for the shares).
Remember
When a company issues its own shares in exchange for the issuing of shares to it by another
company (cross share issue), the same principle as discussed above applies.
A similar principle applies in respect of an asset acquired by a company in exchange for debt issued
(for example a bond) by the company. In this instance, the company is deemed to have incurred
expenditure equal to the debt amount to acquire the asset (s 40CA(b)).
Example 20.2. Acquisition of an asset in exchange for issuing shares
Lithole (Pty) Ltd owns a factory building. The building was acquired 10 years ago at a cost of
R10 million. Lithole (Pty) Ltd deducted allowances on the building in terms of s 13. The total
allowances deducted to date amount to R5 million. Due to its location, the market value of the
property has appreciated to R12 million immediately before the transaction.
Ingonyama Ltd is interested in acquiring the property to expand its manufacturing operations.
Ingonyama Ltd entered into a transaction with Lithole (Pty) Ltd in terms which Lithole (Pty) Ltd
transfers to factory building to Ingonyama Ltd. As consideration for the factory building, Ingo-
nyama Ltd issues 1 000 ordinary shares (2% of the issued shares of Ingonyama Ltd) to
Lithole (Pty) Ltd. The Ingonyama Ltd shares issued to Lithole (Pty) Ltd are valued at R12 million
immediately after the transaction.
What are the tax implications of the transaction for Ingonyama Ltd and Lithole (Pty) Ltd?
704
SOLUTION
As Ingonyama Ltd is not a listed company and Lithole only acquires 2% of its issued ordinary
shares, the transaction does not constitute an asset-for-share transaction, as contemplated in
s 42. No roll-over relief therefore applies to the transaction.
Ingonyama Ltd
Ingonyama Ltd is deemed to have incurred expenditure amounting to R12 million (market value of
the shares issued immediately after the transaction) to acquire the factory building (s 40CA(1)(a)).
This amount is the basis for:
l any allowances available to Ingonyama Ltd in respect of the building (s 13 allowances in
terms of s 13 as Ingonyama Ltd will conduct manufacturing activities in the building), and
l the determination of the base cost of the building in the hands of Ingonyama Ltd.
The market value of the property received as consideration for issuing the ordinary shares is
added to Ingonyama Ltd’s contributed tax capital in respect of ordinary shares (par (b)(ii) of the
definition of ‘contributed tax capital’ in s 1).
Lithole (Pty) Ltd
No provision of the Act explicitly deals with Lithole (Pty) Ltd’s tax implications as a result of the
transaction. The general principles as discussed in chapters 3 and 6 apply. Lithole (Pty) Ltd
receives an amount equal to the market value of the shares received. This amount gives rise to
recoupments in respect of previously deducted allowances of R5 million. This amount is also
taken into account in the calculation of Lithole (Pty) Ltd’s proceeds for capital gains tax purposes.
The proceeds are calculated as follows:
Proceeds on disposal of asset (market value of shares received) (par 35 of Eighth
Schedule) ........................................................................................................................ R12 million
Less: Amount taken into account in gross income as recoupment (par 35(3) of the
Eighth Schedule) ............................................................................................................. (R5 million)
Proceeds ......................................................................................................................... R7 million
Base cost ........................................................................................................................ (R5 million)
Capital gain ..................................................................................................................... R2 million
The expenditure incurred by Lithole (Pty) Ltd to acquire the Ingonyama Ltd shares is equal to the
market value of the property given up to acquire the shares (R12 million). This forms the basis for
the base cost of the Ingonyama Ltd shares when Lithole (Pty) Ltd sells it in future.
20.2.1.2 Issuing shares for consideration that does not equal the value of the shares (s 24BA
and definition of ‘value shifting arrangement’ in the Eighth Schedule)
The fact that the issuing of shares does not attract immediate tax implications results in this
transaction being susceptible for misuse. It can provide a mechanism to shift value between persons
without attracting the tax consequences that should arise if a disposal for value had taken place. This
value could potentially be shifted between connected persons, for example between family members
or from a natural person to a connected trust. A number of anti-avoidance provisions are aimed at
preventing this outcome.
Value mismatch involving shares issued in exchange for assets (s 24BA)

Where a company acquires an asset from a person in exchange for issuing shares to the person and
the consideration between the parties differs from the consideration that independent persons
dealing at arm’s length would have agreed to, the following anti-avoidance rules apply (s 24BA(2)):
l Where the market value of the asset immediately before the transaction exceeds the market value
of the shares issued after the transaction, this implies that value has been transferred from the
transferor of the asset to the company and/or the other shareholders. The excess market value of
the asset over the value of the shares is deemed to be capital gain (which would have been the
tax consequence arising on the transfer of the shares to the beneficiary(s) of the value)
(s 24BA(3)(a)(i)). In addition, the expenditure incurred in respect of the acquisition of the shares
acquired by the person must be reduced by the excess amount (s 24BA(3)(a)(ii)).
l Where the market value of the shares immediately after the issue exceeds the market value of the
asset immediately before the disposal, this implies that value has been extracted out of the
company. The excess of the value of the shares issued over the value of the asset, is deemed, for
purposes of dividends tax, to be a dividend LQVSHFLH paid by the company on the date when the
shares are issued (s 24BA(3)(b)). The result is that the value extracted in this manner may be
subject to dividends tax at 20% (see chapter 19).
705
These rules apply notwithstanding the fact that the issue of shares is not a
disposal by a company. It should furthermore be noted that the above anti-
Please note!
avoidance rules apply, even if roll-over relief (see 20.4 to 20.10) applies to a
transaction (s 41(2)).
There are a number of exceptions from the scope of s 24BA where the transaction should not pose a
significant risk of a value mismatch or where the avoidance has already been countered by another
provision. The anti-avoidance rules in s 24BA do not apply in the following instances:
l Where a company acquires an asset from a company that forms part of the same group of com-
panies as the acquiring company immediately after the acquisition of the asset (s 24BA(4)(a)(i)).
l Where the person that transfers the asset(s) to the company holds all the shares in the company
immediately after the acquisition (s 24BA(4)(a (ii)). This rule may apply to companies, trusts or
natural persons that transfer assets to wholly-owned companies.
l Where the transferor of the asset was deemed to have disposed of the asset for an amount
received or accrued equal to the market value of the asset by reason of the fact that the person
and the company are connected persons (par 38 of the Eighth Schedule). It is submitted that this
provision (par 38 of the Eighth Schedule) will not apply when roll-over relief (for example the relief
afforded in respect of asset-for-share transactions in s 42) applies (s 24BA(4)(b)).
Example 20.3. Share transactions involving a value mismatch
Peter Roux owns all the shares of Crane (Pty) Ltd. He established the company and its business
in 2002. He subscribed for all the shares at a cost of R100 when Crane (Pty) Ltd was incor-
porated. The current market value of the Crane (Pty) Ltd shares is R30 million after the business
has grown successfully.
Peter now wishes to transfer the shares to his family trust, the Roux Family Trust, to ensure that
his legacy remains protected for future generations. The shares will be transferred to a new
company, Newco (Pty) Ltd. Before the share transfer, the Roux Family Trust owns all the shares
of Newco (Pty) Ltd. The Roux Family Trust acquired the shares for a subscription price of R100.
Peter Roux will transfer all his shares in Crane (Pty) Ltd to Newco (Pty) Ltd in exchange for 15%
of the issued shares in Newco (Pty) Ltd. Following the transaction, Peter will hold 15% of the
Newco (Pty) Ltd shares and the Roux Family Trust the remaining 85%.
What are the tax implications of the transaction in terms of which Peter will transfer the Crane
(Pty) Ltd shares to Newco (Pty) Ltd, assuming that the transfer constitutes an asset-for-share
transaction as contemplated in s 42?
SOLUTION
Peter Roux
As the transfer of the Crane (Pty) Ltd shares to Newco (Pty) Ltd constitutes an asset-for-share
transaction, Peter will be deemed to have disposed of the Crane (Pty) Ltd shares to Newco
(Pty) Ltd for an amount equal to the base cost of the Crane (Pty) Ltd shares (i.e. R100)
(s 42(2)(a)(i)(aa)). No capital gain will arise and the Newco (Pty) Ltd shares acquired by Peter will
have a base cost of R100 (s 42(2)(a)(ii)(aa))
As a result of the transaction, Peter contributes an asset (Crane (Pty) Ltd shares) with a value of
R30 million to Newco (Pty) Ltd and receives shares with a value of R4,5 million (R30 million ×
15%) as consideration. Peter would arguably not have agreed to this consideration had the
Crane (Pty) Ltd shares been disposed of to an independent person with whom he dealt with at
arm’s length, as opposed to Newco (Pty) Ltd where a connected person in relation to Peter (the
Roux Family Trust) owns 85% of the shares. Section 24BA therefore applies to the transaction.
As a result of the application of s 24BA, the excess amount of R25,5 million (i.e. the difference
between the market value of the asset (Crane (Pty) Ltd shares) immediately before the
transaction (R30 million) and the market value of the consideration shares issued to Peter
immediately after the transaction (R4,5 million)) will reduce the expenditure that Peter is deemed
to have incurred to acquire the Newco shares (s 24BA(3)(a)(ii)). This leaves the Newco (Pty) Ltd
shares with a nil cost in his hands.
Newco (Pty) Ltd
Newco (Pty) Ltd will be deemed to have acquired the Crane (Pty) Ltd shares from Peter at the
base cost of the Crane (Pty) Ltd shares in his hands (s 42(2)(a)(i)(aa)).
continued
706
As a result of the application of s 24BA, a capital gain will be deemed to arise in the hands of
Newco (Pty) Ltd as a result of issuing the shares. This results from the fact that the market value
of the asset (Crane (Pty) Ltd shares) immediately before the transaction (R30 million) exceeds the
market value of the consideration shares issued to Peter, immediately after the transaction (R4,5
million). The excess amount of R25,5 million (R30 million – R4,5 million) is deemed to be a capital
gain in the hands of Newco (Pty) Ltd (s 24BA(3)(a)(i)).
Value shifting arrangements

The provisions of the Eighth Schedule that apply to value shifting arrangements (see chapter 17) are
also, amongst others, aimed at value shifting achieved through issuing shares. A value shifting
arrangement will exist where a person retains an interest in a company, but a change of rights or
entitlements of the interests in that company, other than at market value or arm’s length terms, occurs
and causes
l the market value of the interest of the person who retains an interest in the company to decrease,
and
l the market value of an interest of a connected person in relation to such person to increase or a
connected person to acquire an interest in that company.
The following relatively simple set of facts illustrates a scenario where a value shifting arrangement
takes place: A natural person holds all the shares in a company. The person wishes the transfer his
shareholding to a trust that is connected in relation to the trust. In order to achieve this, the company
issued shares entitled to 99% of the company’s value to the trust for no consideration. This trans-
action results in a dilution of the value of the natural person’s shareholding, while the trust acquires
an interest in the company. As the shares are not issued to the trust for consideration, the transaction
does not take place at arm’s length terms. If the shares of the company have value, this will be a
value shifting arrangement.
The effect of a value shifting arrangement is that the person who retains an interest in the company is
deemed to have made a disposal of an asset (par 11(1)(g) of the Eighth Schedule). The proceeds in
respect of this deemed disposal equals the decrease in value of the person’s interest in the company
(par 35(2) of the Eighth Schedule). The base cost of the shares in the company is partially allocated
to the deemed disposal (par 23 of the Eighth Schedule). The value shifting provisions are discussed
in more detail in chapter 17.
20.2.1.3 Conversions and changes in rights attaching to an issued share

A variation of an asset, including a conversion of an asset, gives rise to a disposal for capital gains
tax purposes (par 11(1)(a) of the Eighth Schedule). In the context of shares, a change in the bundle
of rights attaching to a share or the conversion from one class of share to another class with
substantially different rights will constitute a disposal of the original shares. The change in rights may
give rise to capital gains tax implications in the hands of the shareholder.
A number of exceptions exist in this regard. The following conversions of shares do not give rise to a
disposal:
l the change in interest when a co-operative is converted to a company (s 40B)
l the conversion of a member’s interest in a close corporation to shareholding in a company when
the close corporation is converted into a company (s 40A)
l the conversion of shares of par value to shares of no par value (or vice versa), provided that the
conversion is solely in substitution of the shares held by the person, that person’s proportionate
participation rights and interests remain unchanged and no consideration passes to the person
as a result of the conversion (par 11(2)(l) of the Eighth Schedule).
20.2.3 Share buy-back transactions

A company may acquire its own shares from a shareholder in terms of s 48 of the Companies Act.
The same requirements that apply to any other distribution by the company apply to a share buy-
back (s 46 of the Companies Act). This includes that the share buy-back must be authorised and the
company should, amongst others, meet the liquidity and solvency test following the share buy-back.
Additional requirements apply where significant interests (5% or more of the issued shares of a
particular class) are repurchased. A share buy-back impacts on the remaining shareholders as it
reduces the number of issued shares (which effectively increases each shareholder’s proportionate
interest in the company), but also reduces the net asset value of the company by the buy-back
consideration.
707
From a tax perspective, the acquisition by a company of shares in that company will either be a
dividend or a return of capital. If, and to the extent that, the repurchase results in a reduction in the
contributed tax capital of the company, the share buy-back transaction will constitute a return of
capital. The remainder of the share buy-back consideration paid by the company will constitute a
dividend.
The tax implications of dividends and returns of capital are explained in detail in chapter 19. In brief,
the main implications of a share buy-back will be:
l The dividend component of the share buy-back price may be subject to dividends tax at a rate of
20%. This rate may be reduced if treaty relief applies. This dividend may qualify for exemption
from dividends tax.
l The dividend amount received by or accrued to the shareholder that disposes of the shares will
be included in its gross income (par (k) of the definition of gross income) but should be exempt
from normal tax (s 10(1)(k)(i)).
l The acquisition of the shares by the company gives rise to a disposal in the hands of the share-
holder. This disposal may attract capital gains tax.
l The component of the share buy-back price that constitutes a dividend was already included in
gross income (see above) and will generally not form part of the proceeds on the disposal
(par 35(3)(a) of the Eighth Schedule). Certain dividends that were not subject to normal tax or
dividends tax that were received by or accrued to a shareholder company within 18 months prior
to the disposal of shares or as part of the disposal of shares may be treated as income or pro-
ceeds, as the case may be (s 22B and par 43A of the Eighth Schedule). These rules will to apply
to transactions where a company buys shares back from another company that holds a signifi-
cant shareholding (as defined in the definitions of qualifying interest in s 22B(1) and par 43A(1) of
the Eighth Schedule) in the first mentioned company.
l The component of the share buy-back price that constitutes a return of capital will generally
constitute of proceeds on the disposal of the shares for capital gains tax purposes. To the extent
that this amount exceeds the base cost of the shares, a capital gain will arise. If the return of
capital amount is relatively low in comparison with the dividend amount, this may result in a
capital loss on the disposal. This capital loss may have to be disregarded if the dividend com-
ponent of the repurchase price was exempt from dividends tax (par 19 of the Eighth Schedule).
The circumstances in which the capital loss has to be disregarded are explained in detail in
chapter 17.
l The redemption or cancellation of a security is a transfer of the security. This means that the
share buy-back that results in a redemption and/or cancellation of the share attracts STT at a rate
of 0,25% on the share buy-back price.
Example 20.4. Share buy-back transaction
Teko Ltd has a number of shareholders. This includes, Karabo, a natural person, and Linoko
(Pty) Ltd. Karabo and Linoko (Pty) Ltd each hold 10% of Teko Ltd’s issued shares. Karabo
purchased the shares for R100 000 in 2012, while Linoko (Pty) Ltd acquired its 10% shareholding
in 2015 at a cost of R500 000.
Teko Ltd has excess cash reserves available and its management decided that it would be in the
best interest of the company and remaining shareholders to use these funds to buy back some
of the issued shares. Karabo and Linoko (Pty) Ltd are the two shareholders who took up the offer
for Teko Ltd to acquire their shares. Each of them will receive R900 000 from Teko Ltd as consid-
eration for their shareholding disposed back to Teko Ltd. Teko Ltd has contributed tax capital of
R2 million available. The directors of the company informed Karabo and Linoko (Pty) Ltd that
R200 000 of the total consideration of R900 000 paid to each of them will reduce Teko Ltd’s
contributed tax capital.
What are the implications of the share buy-back transactions for Teko Ltd, Karabo and Linoko
(Pty) Ltd? All persons involved are residents of South Africa for tax purposes.
SOLUTION
The amount received in respect of the disposal of the shares by Karabo and
Linoko (Pty) Ltd, respectively, will be classified as follows from a tax perspective:
To the extent that the amount reduces contributed tax capital, this constitutes a
return of capital (see 19.4.)....................................................................................... R200 000
Remaining amount transferred to the shareholder in respect of the acquisition of
shares in Teko Ltd constitutes a dividend ................................................................ R700 00
Total consideration paid to shareholder for acquiring shares in Teko Ltd................ R900 000
continued
708
Karabo
The dividend received by Karabo is exempt from normal tax (s 10(1)(k)(i)). The
dividend is subject to dividends tax at a rate of 20% (R700 000 × 20%) ................. R140 000
Karabo disposes of the shares in Teko Ltd. The capital gain or loss on this disposal is deter-
mined as follows:
Total amount received in respect of the disposal ............................................ R900 000
Less: Amount included in gross income (dividend included in terms of par (k) of
the definition of gross income) (par 35(3) of the Eighth Schedule) .......................... (R700 000)
Proceeds (as defined in par 35 of the Eighth Schedule) .......................................... R200 000
Less: Base cost (expenditure incurred to acquire the Teko Ltd shares) .................. (R100 000)
Capital gain on disposal ........................................................................................... R100 000
Note
If the base cost of the Teko Ltd shares in Karabo’s hands was R500 000 (as is the case in the
hands of Linoko (Pty) Ltd), a capital loss of R300 000 would have arisen. This capital loss arises
mainly as a result of the fact that a large portion of the consideration was received in the form of
a dividend. As this dividend was, however, subject to dividends tax, it is not an exempt dividend
as contemplated in par 19 of the Eighth Schedule. This capital loss would not have been
disregarded in Karabo’s hands.
Linoko (Pty) Ltd
The dividend received by Linoko (Pty) Ltd is exempt from normal tax (s 10(1)(k)(i)).
The dividend is also exempt from dividends tax (s 64F(1)(a)) ................................. –
Linoko (Pty) Ltd disposes of the shares in Teko Ltd. The capital gain or loss on this
disposal is determined as follows:
Proceeds on the disposal, calculated in a similar manner as the calculation for
Karabo above ........................................................................................................... R200 000
Less: Base cost (expenditure incurred to acquire the Teko Ltd shares) .................. (R500 000)
Capital loss on disposal............................................................................................ (R300 000)
This capital loss arises mainly as a result of the fact that a large portion of the consideration was
received in the form of a dividend. The dividend was exempt from both normal tax and dividends
tax (see above). It therefore constitutes an exempt dividend, as defined in par 19(3)(b) of the
Eighth Schedule. As a result, the capital loss should be limited. The capital loss must be
disregarded by Linoko (Pty) Ltd to the extent that the capital loss does not exceed the exempt
dividends (par 19(1)(a) of the Eighth Schedule).
Capital loss (as calculated) ...................................................................................... R300 000
Exempt dividend (see above) ................................................................................... R700 000
As a result of the fact that the exempt dividend exceeds the capital loss, the full capital loss must
be disregarded by Linoko (Pty) Ltd.
The tax implications, when shares are cancelled and the reserves of the company are distributed
upon the liquidation, deregistration or winding-up of the company, are similar to those of a share buy-
back. The cancellation or redemption of a security in the event of the liquidation, deregistration or
winding-up of the company is not a transfer for purposes of STT (par (c) of the definition of ‘transfer’
in s 1 of the STT Act).
Remember
The subscription for shares by the new shareholder and a simultaneous share buy-back from a
disposing shareholder can have the same economic result as a sale of the shares by the
disposing shareholder to the new shareholder. Unlike a disposal of the shares, a subscription
and share buy-back arrangement may in some circumstances not attract capital gains tax or
dividends tax. If the transaction is solely or mainly structured in this manner to obtain the tax
benefit, the transaction may susceptible to the application of the general anti-avoidance rules by
SARS or of being viewed as a simulated transaction by the courts if this arrangement does not
reflect the real intention of the parties (see chapter 32).
An arrangement in terms of which:
l a company buys back shares from one or more shareholders for an aggregate amount
exceeding R10 million, and
l issued or is required to issue any shares within 12 months of entering into that arrangement
or from the date of any share buy-back in terms of that arrangement
constitutes a reportable arrangement (see chapter 33).
With effect from 19 July 2017, anti-avoidance rules aimed at dividend stripping and share buy-
back transactions were introduced in s 22B and par 43A of the Eighth Schedule. These rules
will, amongst others, apply to the type of transactions described above. The rules are explained
in detail in chapters 14 and 17.
709
20.2.4 Sale of shares by a shareholder

The tax implications of disposing shares are in principle similar to the tax implications when dis-
posing any other asset. The purpose and intention with which the shareholder holds the shares, as
discussed in chapter 3, must be considered to determine whether the proceeds received upon
disposal constitute income or are of a capital nature.
If the shareholder held the shares with a long term-investment intention, the disposal should generally
be subject to capital gains tax. Capital gains tax is considered in detail in chapter 17. The following
aspects are particularly relevant when considering capital gains tax that arises on the sale of shares:
l Stamp duties and STT incurred when the shares were acquired are included in the base cost of
the shares (par 20(1)(c)(iii) of the Eighth Schedule).
l Shares are identical assets. Specific methods are prescribed to determine the base cost of the
shares. The selection of a method will impact on the timing and amount of capital gains or losses
arising on disposal (par 32 of the Eighth Schedule).
l Returns of capital received prior to the disposal of the shares may have had the effect of
reducing the base cost (par 76B of the Eighth Schedule).
l Small businesses are often incorporated with a very low amount of share capital (for example
R100), which will be the base cost of the shares. If the value of the business grows significantly,
the capital gain arising on disposal may be significant due to the low base cost. This may to
some extent be mitigated by the fact that a valuation date value should be determined in respect
of shares acquired before 1 October 2001 (par 32 of the Eighth Schedule).
l Specific anti-avoidance rules exist to avoid the artificial realisation of losses on financial instru-
ments, which include shares (par 42 of the Eighth Schedule). In addition, specific rules aimed at
countering the conversion of proceeds into exempt dividends must be considered (par 43A of the
Eighth Schedule).
l A person who owns an interest in a small business through shares in the business may qualify for
the partial exclusion from capital gains tax on the disposal of small business assets (par 57 of the
Eighth Schedule).
If the shares were acquired and held with the intention to sell as part of a scheme of profit-making,
the shares will be held as trading stock. The proceeds that accrue to the seller when the shares are
sold will be included in its income.
Remember
If a taxpayer holds certain equity shares for a period of three years or longer, the proceeds on
disposal may be deemed to be of a capital nature (s 9C). Refer to chapter 14 for a detailed
explanation of the circumstances in which the deeming rule applies.
The sale of shares is a transfer of securities that is subject to STT (see chapter 29).
The purchaser of the shares establishes a cost at the time of acquisition. If the shares are held as
capital assets, the cost will be reflected in the base cost of the shares when they are eventually sold.
If the shares are held as trading stock, this cost will be taken into account in taxable income as any
other trading stock would be taken into account (see chapter 14).
20.3 Acquisition and disposal of a business

A business normally consists of a collection of assets. If a business is sold as a going concern, these
assets are likely to include:
l trading stock on hand at the date of sale
l trade receivables outstanding at the date of sale
l capital assets in respect of which allowances were available, for example manufacturing
equipment that qualified for s 12C allowances or office furniture that qualified for a wear-and-tear
allowance in terms of s 11(e)
l capital assets that did not qualify for any allowances, for example administrative buildings
acquired before the introduction of s 13quin, and
l goodwill.
When a business is disposed of as a going concern, the purchaser will often also assume the liabil-
ities associated with the business, for example outstanding trade payables at the date of sale.
710
The purchaser may also assume contingent liabilities associated with the busi-
ness (for example, warranty or leave pay liabilities that depend on future returns
Please note! of products or continued employment of employees). SARS issued Interpretation
Note No 94 that deals with the treatment of contingent liabilities assumed in the
hands of the seller and purchaser.
The consideration that the purchaser incurs in respect of the business may consist of a cash consid-
eration, a consideration other than cash (for example issuing shares) as well as the assumption of the
seller’s obligations. The total consideration, often also referred to as the purchase price, must be
allocated to the assets sold. This purchase price allocation is relevant from the seller’s perspective as
the proceeds may:
l be taxed as income (for example, the amount received in respect of trading stock)
l result in a recoupment of allowances previously deducted (for example, the amount received in
respect of manufacturing equipment) (see chapter 13)
l not have any tax implications (for example, the amount received for the transfer of trade
receivables that consist of amounts already taxed), or
l be subject to capital gains tax (for example, the amount received in respect of capital assets,
such as goodwill) (see chapter 17).
Similarly, the purchase price allocation will be of relevance to the purchaser as this determines the
amounts in respect of which deductions may be available (either in terms of s 11(a) or capital
allowances) and those in respect of which no deduction would be allowed (for example, amounts
incurred to acquire goodwill, which is of a capital nature).
Example 20.5. Sale of business without roll-over relief
Pepper Ltd wishes to dispose of its retail business line and focus on its manufacturing opera-
tions. Pepper Ltd’s management concluded a transaction in terms of which it will sell the retail
business to Salt Ltd for R10 million in cash and the assumption of the liabilities associated with
the retail business from Pepper Ltd.
The balance sheet of the retail business is as follows on the date of the sale:
Tax Market value
Original cost allowances or (sold as part of a
deductions going concern)
Administrative building (acquired in 2002) R2 000 000 R nil R3 000 000
Retail store building (acquired in 2010) ... R3 000 000 R900 000 R3 500 000
Trade receivables ..................................... R1 000 00 R nil R1 000 000
Trading stock ............................................ R2 000 000 R2 000 00 R2 000 000
Trade payables......................................... (R1 500 000) R nil (R1 500 000)
Goodwill .................................................... R nil R nil R2 000 000
Total value of the retail business .............. R 10 000 000
Discuss the tax implications of the transaction for Pepper Ltd and Salt Ltd.
SOLUTION
Pepper Ltd (Seller)
The consideration received in respect of the disposal of assets consists of:
Cash consideration .............................................................................................. R10 000 000
Obligations assumed by the purchaser (par 35(1)(a) of the Eighth
Schedule) ............................................................................................................ R1 500 000
Total consideration to be allocated to assets disposed of .................................. R11 500 000
Consideration received in respect of the disposal of:
Administrative building (note 1) ........................................................................... R3 000 000
Retail store building (note 2) ................................................................................ R3 500 000
Trade receivables (note 3)................................................................................... R1 000 000
Trading stock (note 4).......................................................................................... R2 000 000
Goodwill (note 5) ................................................................................................. R2 000 000
continued
711
Note 1
As no allowances were deducted in respect of the administrative building (it was acquired prior
to the introduction of s 13quin in 2007, no recoupments will arise when it is disposed of. The
capital gain or loss on disposal is calculated as:
Proceeds .................................................................................................................. R3 000 000
Base cost .................................................................................................................. R2 000 000
Capital gain on the disposal of the administrative building .............................. R1 000 000
Note 2
A recoupment of the allowances previously deducted in respect of the retail store
building arises when recovered through the sale of the property ............................ R900 000
The capital gain or loss on disposal is calculated as:
Proceeds (R3 500 000 – R900 000) .......................................................................... R2 600 000
Base cost (R3 000 000 – R900 000) ......................................................................... R2 100 000
Capital gain on the disposal of the retail store building............................................ R500 000
Note 3
The proceeds received in respect of the disposal of trade receivables are not included in gross
income. The sales transactions that gave rise to the receivable were already included in gross
income when the amounts accrued to the taxpayer. In addition, no capital gain or loss would
generally arise in respect of trade receivables sold at face value.
Note 4
The calculation of Pepper Ltd’s taxable income includes a deduction in respect
of the cost of the trading stock (either in terms of s 11(a) if the stock was pur-
chased in the current year of assessment or s 22 if the stock was purchased in a
prior year and was included in opening stock) ........................................................ (R2 000 000)
Proceeds upon disposal of trading stock included in gross income ........................ R2 000 000
SARS indicates in Interpretation Note No 65 (at par 4.3.2) that all circumstances surrounding the
disposal of trading stock must be taken into account to determine whether the stock is disposed
of at market value when considering whether an additional recoupment will arise in terms of
s 22(8)(b)(ii). SARS indicates that factors such as the fact that all stock on hand is being
disposed of may have a bearing of the price of the stock. In such cases, the book value of the
stock, rather than the retail market value, may represent the market value.
Note 5
The proceeds received in respect of the disposal of goodwill is of a capital nature. The disposal
of an asset (goodwill) gives rise to the following capital gain:
Proceeds .................................................................................................................. R2 000 000
Base cost .................................................................................................................. R nil
Capital gain on the disposal of goodwill ................................................................... R2 000 000
Salt Ltd (Purchaser)
At the time when Salt Ltd acquires the administrative and retail store buildings, these properties
are no longer new and unused. Salt Ltd will not be able to deduct allowances in respect of the
purchase price of the properties. The purchase price allocated to it (R3 000 000 and R3 500 000
respectively) will be relevant in determining the base cost of the properties when Salt Ltd
disposes of it.
Salt Ltd’s position in respect of the purchase price paid for goodwill (R2 000 000) will be similar
to that of the properties above.
Salt Ltd will not be able to deduct the purchase price paid for the trade receivables
(R1 000 000). In addition, it will not be entitled to deductions for bad debt (s 11(i)) or allowances
for doubtful debt (s 11(j)) in respect of these receivables as the income that it relates to was not
included in Salt Ltd’s income.
Salt Ltd will be entitled to deduct the cost of the trading stock (s 11(a))............ (R2 000 000)
Salt Ltd will not be entitled to deduct the amounts paid to settle the trade payables as it
assumed this debt as part of the consideration incurred by it to acquire the above assets.
Remember
The sale of business assets may also have VAT and transfer duty implications. These are discus-
sed in detail in chapters 28 and 31.
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20.4 Special rules: Introduction and concepts

The implementation of capital gains tax in 2001 necessitated the simultaneous introduction of a set of
relief measures to ensure that capital gains tax did not hinder businesses from structuring its affairs in
the most efficient economic manner. Certain transactions, in terms of which persons that form part of
an economic unit, transferred assets in a manner where they retained a substantial interest in the
assets that take place on a tax-neutral basis. A set of relief measures, commonly referred to as the
corporate rules, were introduced in Part III of Chapter II of the Act (ss 41 to 47) to fulfil this role. The
scope of these relief measures are to some extent narrowed by a number of anti-avoidance rules in
each provision to prevent it from being abused to avoid tax.
The application of the corporate rules overrides any provision to the contrary
contained in the Act. A number of anti-avoidance rules, however, still apply
despite the application of the corporate rules to a transaction. These are:
l s 24BA (see 20.2.1.2)
l provisions governing value-shifting arrangements (see 20.2.1.2 and chap-
ter 17)
l anti-dividend stripping and share buy-back rules (s 22B and par 43A of the
Eighth Schedule (see chapters 13 and 17)
l the general anti-avoidance rules in s 103 and Part IIA of Chapter III of the
Please note! Act (see chapter 32).
The implication of the last mentioned is that transactions, to which the corporate
rules apply that are entered into solely or mainly to obtain a tax benefit, may be
susceptible to attack in terms of the general anti-avoidance rules (GAAR) by
SARS.
In addition, it should be noted that the corporate rules do not necessarily pro-
vide relief from all taxes that may apply to a transaction. As an example, trans-
actions could still be subject to donations tax even if the corporate rules apply.
A number of concepts that are central to the application of these relief measures are considered in
more detail below. This is followed by a detailed explanation of each of the relief measures in 20.5 to
20.10.
20.4.1 Group of companies

The concept of a group of companies is used in a number of instances in the Act where relief is
provided on the basis that entities form part of the same economic unit. This includes many of the
corporate rules. It also includes other relief measures, for example:
l exemption from the application of the value mismatch provisions in s 24BA if the parties involved
form part of the same group of companies immediately after the transaction (see 20.2.1.2)
l exemption from donations tax on donations made by a company to another company that forms
part of the same group of companies (s 56(1)(r)) (see chapter 26)
l deductibility of interest incurred in respect of debt to acquire equity shares to become the
controlling company in relation to another company (s 24O) (see 16.2.3.4)
l relief from the tax implications of concessions or compromises in respect of debt between per-
sons who form part of the same group of companies (s 19 and par 12A of the Eighth Schedule)
(see chapters 13 and 17).
Remember
The fact that persons who are related to each other enter into transactions may hold certain risks
for the fiscus from a tax planning perspective. Many anti-avoidance rules apply where persons,
who are connected persons in relation to each, other transact with each other. The concept of
connected persons, as used in these anti-avoidance rules, is discussed in more detail in
chapter 13. Companies that form part of the same group of companies would generally also be
connected persons in relation to each other. All connected persons would, however, not neces-
sarily form part of the same group of companies. The connected person test applies a lower
threshold than the requirements to form part of the same group of companies.
The Act contains two definitions of a group of companies. The first definition is a broader definition of
the concept and is provided in s 1. The second version is a narrower version, which is based on the
definition in s 1, with certain exclusions. This second version is defined in s 41(1). When dealing with
legislation applicable to companies that form part of the same group of companies, it is important to
establish whether the particular provision applies to a group of companies, as defined in s 1 (broader
definition), or s 41 (the narrower definition).
713
Section 1 definition of a group of companies

This definition determines that a group of companies will exist where the following requirements are
met:
l a company (controlling group company) directly holds at least 70% of the equity shares of at
least one other company (controlled group company), and
l the controlling group company, alone or together with other controlled group companies, holds at
least 70% of the equity shares in another company (also referred to as a controlled group
company).
A group of companies must consist of at least two companies, but may include more companies.
The following is an example of a group of companies that consists of three companies:
Company A
Controlling group company
100% 50%
Company B 20% Company C
Controlled group company Controlled group company
Company A and B form part of the same group of companies, as Company A directly holds at least
70% of the equity shares of Company B. Company A, B and C also form a group of companies as
Company A, together with another controlled group company (Company B), holds at least 70% of
Company C’s equity shares (50% (Company A’s interest) + 20% (Company B’s interest) = 70%).
Section 41 definition of a group of companies

The definition of a group of companies in s 41 is used mainly for purposes of allowing taxpayers to
benefit from the corporate rules, but is also applied elsewhere in the Act. This definition is narrower
than the definition in s 1, as discussed above, as it excludes certain entities that are not subject to tax
in South Africa from forming part of the group of companies. This is necessary to ensure that the
corporate rules are not used to shift tax implications into an entity that is not subject to tax. If this was
possible, the corporate rules could have been used to avoid paying tax, as opposed to deferring the
tax implications until the gains are realised outside the economic unit at a later stage. In addition, the
definition in s 41 excludes certain groups of companies that may only exist temporarily.
The following entities, all of which have tax implications that are different from those of a normal
resident company, are excluded from being part of a group of companies for purposes of the
definition in s 41:
l a co-operative
l an association formed in the Republic to serve a specified purpose beneficial to the public or a
section of the public
l a foreign collective investment scheme
l a non-profit company as defined in s 1 of the Companies Act, 2008
l a company whose gross income is exempt from tax in terms of s 10
l a company that is a public benefit organisation or a recreational club approved by the Commis-
sioner in terms of s 30 and 30A
l a company formed under the laws of a country other than South Africa, unless the company has
its place of effective management in South Africa, and
l a company that has its place of effective management outside South Africa.
Companies that are not South African tax residents are excluded from the definition by exclusions in
the last two bullets. This significantly limits the extent to which roll-over relief applies in cross-border
groups.
714
In addition, a share that would have been an equity share (which in turn could have resulted in
companies forming a group of companies) is, for purposes of the definition of ‘group of companies’ in
s 41, deemed not to be an equity share, if:
l the share is held as trading stock, or
l any person is under a contractual obligation to sell or purchase the share, or has an option to sell
or purchase the share (unless the obligation or option provides for a sale or purchase of the
share at its market value).
The fact that the shares are held as trading stock (with an intention to dispose of) or with an obliga-
tion or option to be disposed of are both indications that the shareholding, and therefore the exist-
ence of the group of companies, may be of a temporary nature. If these shares, which are possibly
only held in the short term, result in the existence of a group of companies, the relief available to
companies that form part of the same group of companies, as defined in s 41, is not available.
Example 20.6. Group of companies
US Co, a company incorporated and effectively managed in the United States directly holds
100% of the equity shares in SA Co1 and SA Co2. SA Co2 holds 100% of the equity shares in
SA Co 3. SA Co1, SA Co2 and SA Co3 are all incorporated and effectively managed in South
Africa. All of the shares are held on capital account. There are no contractual obligations, rights
or options to purchase or sell the shares under particular circumstances.
Does US Co, SA Co1, SA Co2 and SA Co3 form part of the same group of companies as defined
in s 1 and in s 41(1)?
SOLUTION
Group of companies as defined in s 1:
US Co, SA Co1, SA Co2 and SA Co3 meet the requirements of the definition of group of
companies in s 1 because US Co directly holds at least 70% of the equity shares in SA Co1 and
SA Co2. As such, SA Co1 and SA Co2 are ‘controlled group companies’ as defined. US Co
indirectly holds at least 70% of the equity shares in SA Co3 through SA CO2 (controlled group
company).
SA Co2 and SA Co3 also form part of a group of companies as defined in s 1 because SA Co2
holds at least 70% of the equity shares in SA Co3.
Group of companies as defined in s 41(1):
Since US Co is a foreign company it is excluded from the definition of ‘group of companies’ for
purpose of the corporate roll-over relief provisions. SA Co1 and SA Co2 do not form part of a
group of companies. This is because there is no permitted company which alone or together with
other permitted companies hold 70% or more of the equity shares in SA Co1 or SA Co2.
SA Co2 and SA Co3 form part of a group of companies as defined in s 41(1) because SA Co2
holds at least 70% of the equity shares in SA Co3 and the companies are not excluded from the
definition of ‘group of companies’ in s 41(1).
(Adapted from Interpretation Note No 75 (Issue 2) (22 September 2014)
20.4.2 Asset classification for purposes of the corporate rules

The corporate rules apply to various types of transfers of assets, as described in more detail in each
of the provisions in ss 42 to 47. For purposes of all these provisions, an asset refers to an asset as
defined for capital gains tax purposes (see chapter 17).
The classification of assets transferred in terms of transactions that qualify for relief (in terms of the
corporate rules) is important for a number of reasons. Firstly, the application of the definition of the
transaction in respect of which relief applies often requires the nature of the assets involved to be
considered (i.e. trading stock or capital assets) to determine whether the relief is available or not.
Secondly, the nature of the assets involved impact on the tax implications. In the case of capital
assets, base cost characteristics are transferred, while in the case of trading stock, characteristics
relevant for purposes of application of s 22 are transferred. If the asset is an allowance asset, the
relief measures provide for historic allowances not to be recouped in the hands of the transferor, but
for this potential recoupment to only arise in the hands of the transferee. Similarly, the corporate rules
provide that allowances already claimed by the transferor may not be duplicated in the hands of the
transferee.
715
20.4.2.1 Trading stock

The term ‘trading stock’ has its ordinary meaning as described in the definition in s 1 (see chap-
ter 14). For purposes of an asset-for-share transaction, amalgamation transaction, intra-group trans-
action and liquidation distribution, the ‘term trading stock’ also includes livestock or produce, as con-
templated in the First Schedule to the Act (see chapter 22) (definition of ‘trading stock’ in s 41(1)).
20.4.2.2 Capital asset

In the context of the corporate rules, an asset will be a capital asset if that asset is not trading stock
(definition of ‘capital asset’ in s 41(1)). The classification of an asset as a capital asset requires
consideration of, amongst others, the purpose for which and the intention with which a person holds
or acquires the asset.
20.4.2.3 Allowance asset

A capital asset will be an allowance asset if a deduction or allowance has been allowed in respect of
that asset otherwise than for capital gains tax purposes. An example of an allowance asset will be a
building that qualified for allowances in terms of s 13quin. If, however, the building was acquired
before 2007 and did not qualify for s 13quin allowances, the building will be a capital asset but not an
allowance asset.
The term ‘allowance asset’ also includes debts contemplated in s 11(i) or (j) in respect of which a bad
debt deduction or doubtful debt allowance has been deducted. The implication of this specific
inclusion is that the characteristic that a bad or doubtful debt allowance has been claimed is trans-
ferred to the transferee when the corporate rules apply.
20.4.3 Steps to liquidate, wind up or deregister

A number of corporate rules require that the existence of an entity that existed prior to the transaction
must be terminated. This can be done by liquidation, winding-up or deregistration of that entity. To
qualify for the relief in terms of the corporate rules, steps must be taken to liquidate, wind up or
deregister that company within a specified period (currently 36 months). If this is not done, the relief
afforded is reversed.
The steps to be taken to liquidate, wind up or deregister a company depend on whether the
company is liquidated, wound up or deregistered. The steps to be taken are (s 41(4)):
l the company must:
– in the case of a liquidation or winding-up, lodge a resolution authorising the voluntary winding
up of the company in terms of its governing legislation
– in the case of deregistration of the company, lodge a request for the deregistration of the
company in the prescribed form and manner to the CIPC or equivalent person in the case of
a foreign company
l the company must submit a copy of the resolution or request to SARS
l in the case of a liquidation or winding-up, the company must dispose of all assets and settle as
liabilities, with the exception of assets required to satisfy liabilities reasonably expected to arise to
any sphere of government and the costs of liquidation or winding-up
l all returns or information required to be submitted or furnished to SARS by the end of the relevant
period during which these steps must be taken, must be submitted or furnished, or arrangements
for the submission of outstanding returns or information must have been made with SARS.
20.4.4 Common relief mechanisms employed in the corporate rules

The corporate rules aim to defer the tax implications that would result from the disposal of an asset
rather than to completely exempt the gains from being taxed at any point in time. The mechanism
used in a number of the rules to achieve this outcome is that the asset is deemed to be disposed of
by the transferor at an amount equal to the cost of the asset for tax purposes. This effectively places
the transferee in the shoes of the transferor in relation to the asset. In particular, this mechanism
entails the following:
l An asset that is trading stock is deemed to be disposed of the amount taken into account in the
transferor’s taxable income in respect of that stock (either as a deduction in terms of s 11(a) or as
opening or closing stock in terms of s 22, depending on whether the asset was acquired in the
current or a previous year of assessment). This means that the deemed amount received upon
716
disposal equals the deduction, which results in no gain or loss being included in the taxable
income of the transferor. The transferee is deemed to acquire the trading stock for expenditure
equal to this amount. If the trading stock is sold by the transferee, the full gain between the selling
price and the cost of the stock in the hands of the transferor will arise and be taxed in the hands
of the transferee.
Example 20.7. Roll-over relief in respect of trading stock

A transferor transfers trading stock to a transferee in terms of a transaction that qualifies for roll-
over relief.
The transferor purchased the trading stock for an amount of R1 million. The stock has a market
value of R1,5 million at the time of the transaction that qualifies for roll-over relief.
The effect of the roll-over relief for the respective parties will be:
Transferor
Deduction of the purchase price of the stock (s 11(a) or s 22) ................................ (R1 000 000)
Income: deemed disposal at cost taken into account for s 11(a) or s 22 ................ R1 000 000
Effect on taxable income .......................................................................................... –
Transferee
Deemed to have acquired the stock at an amount equal to the cost taken into
account by the transferor for purposes of s 11(a) or s 22 ........................................ (R1 000 000)
Sale of stock to independent person at market value included in gross income R1 500 000
Effect on taxable income .......................................................................................... R500 000
This taxable gain in the hands of the transferee represents the gain that would have arisen in the
hands of the transferor, but that was deferred in terms of the roll-over relief until such time as the
transferee disposed of the trading stock to an external party.
l A capital asset is deemed to be disposed of for an amount equal to its base cost (as determined
for capital gains tax purposes (see chapter 17)). The effect of this deeming provision is that the
proceeds and base cost upon disposal are equal. This results in no capital gain or loss arising on
the disposal of the asset. The transferee is deemed to have acquired the capital asset at an
amount equal to this base cost. If the transferee disposes of the capital asset, the full gain
between the proceeds upon the disposal and the base cost of the asset in the hands of the
transferor will arise and be taxed in the hands of the transferee.
Example 20.8. Roll-over relief in respect of capital asset that does not qualify for
allowances
A transferor transfers a building that did not qualify for any allowances to a transferee in terms of a
transaction that qualifies for roll-over relief. The transferor purchased the building for an amount of
R1 million during 2005. The building’s market value has appreciated to R1,5 million at the date of
the transaction.
Transferor
As the building did not qualify for allowances, no recoupment will arise in the hands of the
transferor. The disposal of an asset will result in a capital gain or loss:
Proceeds: Deemed to be equal to the base cost...................................................... R1 000 000
Base cost .................................................................................................................. (R1 000 000)
Capital gain or loss in the hands of the transferor..................................................... –
Transferee
Assuming that the transferee does not use the property in a manner that qualifies for any allow-
ances, no deduction will be granted in respect of it. If the transferee were to sell the property in
10 years’ time at its then market value of R5 million, the capital gains tax implications will be:
Proceeds ................................................................................................................... R5 000 000
Base cost: Deemed to have acquired from transferor at an amount equal to
expenditure incurred by the transferor to acquire the building ................................. (R1 000 000)
Capital gain on disposal ........................................................................................... R4 000 000
continued
717
This capital gain consists of two components, namely:

The capital gain that would have arisen in the hands of the transferor that was
deferred in terms of the roll-over relief until the transferee disposed of the asset to
an external party (R1 500 000 – R1 000 000) ............................................................ R500 000
The capital gain relating to the appreciation in the value of the property after the
date of the transaction that qualified for roll-over relief (R5 000 000 – R1 500 000) . R3 500 000
l If the capital asset constitutes an allowance asset, the above roll-over mechanism is comple-
mented by a provision that states that no recoupment of allowances deducted by the transferor
will arise on the disposal. The transferee is not allowed to deduct any amounts in respect of the
amounts previously deducted by the transferor, as this would give rise to a duplication of the
deduction of the amount already deducted by the transferor in the hands of the transferee. The
two persons involved are deemed to be one and the same person for purposes of determining
whether the transferee qualifies for a deduction or allowances in respect of the asset.
Some roll-over relief provisions only apply if an asset that was held by the trans-
feror as an allowance is acquired by the transferee as an allowance asset or
trading stock. If a REIT (or controlled company), as the transferee acquires
Please note! immovable property, it will not be entitled to allowances in respect of this
property (see chapter 19). Despite the fact that the REIT does not acquire the
asset as an allowance asset or trading stock, the same roll-over treatment as
described above will apply to these assets.
If the transferee disposes of the asset, the transferee and transferor are similarly deemed one and
the same person for purposes of determining the amount of allowances to be recouped or
recovered. This means that the transferee is required to not only take into account a recoupment
of amounts deducted in respect of the asset by itself, but also the amounts previously deducted
by the transferor.
Where a REIT (or controlled company) acquires an asset from a person in terms
of a transaction that qualifies for roll-over relief, the REIT and transferor are not
Please note! deemed one and the same person for purposes of allowances recovered or
recouped.
Example 20.9. Roll-over relief in respect of capital asset that qualified for allowances
A transferor transfers a building in respect of which allowances were granted in terms of s 13quin
to a transferee. The transaction qualifies for roll-over relief. The transferor purchased the building
for an amount of R1 million during 2010. It has deducted allowances amounting to R400 000 up to
the date of the transfer. The building’s market value has appreciated to R1,5 million at the date of
the transaction.
Transferor
No allowances claimed by the transferor must be recovered or recouped in its taxable income.
The disposal of an asset will result in a capital gain or loss:
Proceeds: Deemed to be equal to the base cost...................................................... R600 000
Base cost (R1 000 000 – R400 000).......................................................................... (R600 000)
Capital gain or loss in the hands of the transferor..................................................... –
Transferee
The transferee and transferor are deemed to be one and the same person for purposes of
determining the allowances available to the transferee. This means that the transferee will be
entitled to allowances in terms of s 13quin even though the property was not new and unused
when transferred to it. This allowance is available on the basis that the property was new and
unused when the transferor acquired it.
continued
718
If the transferee were to sell the property in 15 years’ time, after having deducted the remaining
R600 000 as allowances in terms of s 13quin, at its then market value of R5 million, the tax impli-
cations will be:
Recoupment of allowances deducted by the transferor and transferee ................... R1 000 000
The recoupments consist of:
Recoupment of allowances deducted by the transferor that would have been
recouped in its hands if roll-over relief was not available ......................................... R400 000
Recoupment of allowances deducted by the transferee since acquiring the
property ..................................................................................................................... R600 000
The capital gains tax implications of the disposal will be:

Proceeds (R5 000 000 – R1 000 000) ....................................................................... R4 000 000
Base cost: Deemed to have been acquired by incurring the expenditure incurred
by the transferor (R1 000 000) less allowances deducted by transferor and
transferee (R1 000 000) ............................................................................................ –
Capital gain on disposal ........................................................................................... R4 000 000
This capital gain consists of two components, namely:
an external party ((R1 500 000 – R400 0000) – (R1 000 000 – R400 000)) ............... R500 000
date of the transaction that qualified for roll-over relief ............................................. R3 500 000
]
Remember
For the remainder of this chapter, the term tax cost will be used to refer to:
l the purchase price (for s 11(a) purposes) or value of stock on hand (for s 22 purposes) of
trading stock
l the base cost of a capital asset, as contemplated in par 20 of the Eighth Schedule (see
chapter 17).
l If a business, which is disposed of as a going concern, includes a contract that involved

– amounts that accrued to the transferor that qualified for allowances in terms of s 24 in respect
of amounts not yet received (see chapter 12)
– amounts received by the transferor in terms of a contract that entitled it to an allowance in
respect of future expenditure it has to incur in terms of s 24C (see chapter 12)
– amounts deducted in respect of future repairs to ships in terms of s 24P (see chapter 13)
in the preceding year of assessment or that would have been allowed had the contract not been
transferred, the following roll-over mechanisms apply:
– allowances previously granted to the transferor must not be included in the transferor’s income
– the persons must be deemed to be one and the same person for purposes of determining
whether the transferee is entitled to an allowance and for determining the income to be
included in the transferee’s income.
In addition to fact that the transferee takes over the tax costs of the assets transferred to it, the
following characteristics of the assets in the hands of the transferor are also deemed to be the same
in the hands of the transferee:
l The date of acquisition of the asset as well as the amounts and dates of expenditure incurred in
respect of the asset. If the asset is acquired as a capital asset, this refers to amounts that would
be allowed to be included in its base cost (par 20 of the Eighth Schedule). This enables the
transferee to determine the valuation date value of an asset in the same manner as the transferor
would have determined the value (see chapter 17). In the case of trading stock, this refers to
amounts that would be deducted in respect of the trading stock.
l Any valuation of the asset effected by the transferor for valuation date value purposes is deemed
to have been obtained by the transferee (see chapter 17).
20.4.5 Common anti-avoidance mechanisms employed in the corporate rules

Each corporate rule has its own anti-avoidance provisions. These anti-avoidance provisions are con-
sidered in the detailed discussion of each corporate rule in 20.5 to 20.10. A number of the corporate
rules use the same ring-fencing anti-avoidance mechanism described below.
719
The roll-over mechanism described in 20.4.4 could be used to transfer an asset, and therefore also
unrealised gains in respect of the asset, to a transferee that has tax losses, which can be used
against this gain when it is realised. Ring-fencing rules prevent such gains transferred to the trans-
feree from being set off against tax losses that the transferee may otherwise have. These following
rules often apply where an asset that was acquired in terms of a transaction that qualified for roll-over
treatment is disposed of by the transferee within 18 months of the transaction:
l The portion of any capital gain arising on the disposal of a capital asset by the transferee that
does not exceed the gain that would have arisen had the asset been disposed of at its market
value at the time of the transaction (i.e. the beginning of the 18-month period), may not be set off
against any assessed capital loss or in the determination of the transferee’s net capital gains
(which may include capital losses in respect of other assets). This gain should be included
separately as a taxable capital gain in the transferee’s taxable income at the relevant inclusion
rate. This taxable capital gain cannot be set off against any assessed loss or balance of
assessed loss of the transferee.
Example 20.10. Ring-fencing anti-avoidance rule – capital gains

A transferor transferred a building in respect of which no allowances were deducted to the trans-
feree. The transaction qualified for roll-over relief. The transferor purchased the building for an
amount of R1 million during 2010. At the time of the transaction that qualified for roll-over relief,
the building had a market value of R1,5 million.
The transferee owns a portfolio of shares, held as capital assets, of which the value has
depreciated significantly over the past year. The shares were acquired at a cost of R2 million, but
only has a market value of R1,2 million at present.
Three months after the transfer of the building to it, the transferee sells the building for an amount
of R1,6 million. It simultaneously sells the portfolio of shares to realise the capital loss in order to
reduce its net capital gain for the year.
The tax implications of the two transactions for the transferee before application of the ring-
fencing anti-avoidance rule would be:
Sale of the building
Proceeds ................................................................................................................... R1 600 000
Base cost: Deemed to have acquired the building for expenditure incurred by the
transferor if roll-over relief applied ............................................................................ (R1 000 000)
Capital gain in the hands of the transferee ............................................................... R600 000
This capital gain consists of two components:
an external party (R1 500 000 – R1 000 000) ............................................................ R500 000
date of the transaction that qualified for roll-over relief (R1 600 000 – R1 500 000) . R100 000
Sale of the portfolio of shares
Proceeds ................................................................................................................... R1 200 000
Base cost .................................................................................................................. (R2 000 000)
Capital loss................................................................................................................ (R800 000)
Application of the ring-fencing anti-avoidance rule

The ring-fencing rule applies to so much of the capital gain that would have arisen had the
building been disposed of at its market value at the time of the transaction that qualified for roll-
over relief. This gain would have been:
Proceeds if the property was disposed of at market value at the time of the
transaction that qualified for roll-over relief ............................................................... R1 5000 000
Base cost of the asset at the time of the transaction that qualified for roll-over
relief .......................................................................................................................... (R1 000 000)
Capital gain that the ring-fencing rule applies to ...................................................... R500 000
continued
720
The effect of the ring-fencing rule is that R500 000 of the capital gain of R600 000 that arises
when the transferee disposes of the building cannot be set off against the capital loss that arose
on the disposal of the shares. The remaining capital gain of R100 000 on the sale of the building
can be set off against the capital loss of R800 000 suffered on the sale of the shares. A capital
loss of R700 000 will be carried forward by the transferee. The ring-fenced capital gain of
R500 000 will be included in its taxable income at an inclusion rate of 80% (i.e. R400 000 included
as a taxable capital gain). This gain may also not be set off against any assessed losses that the
transferee may have available.
l If the corporate roll-over rule allows for losses to be rolled over (in other words, the tax cost of the
asset transferred may exceed the market value at the time of the transaction), an additional rule
normally exists to prevent capital losses in respect of assets transferred to the transferee
company where it can be used against capital gains arising from the disposal of other assets by
the transferee. This rule determines that so much of a capital loss in respect of the disposal of an
asset, as does not exceed the loss that would have arisen had the asset been disposed of at its
market value at the time of the transaction (i.e. the beginning of the 18-month period), must be
disregarded in determining the transferee company’s aggregate capital gain or loss. This capital
loss may only be deducted from a capital gain determined in respect of the disposal of another
asset acquired in terms of the transaction through which the loss was transferred.
l Any recoupment that arises on the disposal of an allowance asset that does not exceed the
recoupment that would have arisen had the allowance asset been disposed of at its market value
at the time of the transaction (i.e. the beginning of the 18-month period) is similarly ring-fenced.
This recoupment is deemed to be attributable to a separate trade, where the taxable income of
this trade may not be set off against any assessed loss or balance of assessed loss of the
transferee.
Example 20.11. Ring-fencing anti-avoidance rule – income
A transferor transferred a machine in respect of which allowances were deducted in terms of

s 12C to a transferee. The transaction qualified for roll-over relief. The transferor purchased the
machine for an amount of R1 million and deducted allowances of R600 000 before the transfer. At
the time of the transaction that qualified for roll-over relief, the machine had a market value of
R800 000.
The transferee deducted further allowances of R200 000 in respect of the machine in terms of
s 12C before it sold the machine for R700 000 six months after the transaction that qualified for
roll-over relief.
The transferee has been in an assessed loss position for a number of years of assessment. It has
a balance of assessed loss of R20 million and an assessed loss for the current year (excluding
the recoupment on the sale of the machine) of R5 million.
The tax implications of the sale of the machine for the transferee, before application of the ring-
fencing anti-avoidance rule, would be:
Proceeds ................................................................................................................... R700 000
Tax value of the machine (R1 million – R600 000 – R200 000) ................................. R200 000
Recoupment (s 8(4)(a)) ............................................................................................. R500 000
Application of the ring-fencing anti-avoidance rule

The ring-fencing rule applies to so much of the recoupment that would have arisen had the
machine been disposed of at its market value at the time of the transaction that qualified for roll-
over relief. This recoupment would have been:
Proceeds if the machine was disposed of at market value at the time of the trans-
action that qualified for roll-over relief ....................................................................... R800 000
Tax value if the machine was disposed of at the time of the transaction that
qualified for roll-over relief (R1 000 000 – R500 000) ................................................ (R500 000)
Recoupment that the ring-fencing rule applies to ..................................................... R300 000
The effect of the ring-fencing rule is that the portion of the recoupment that relates to the
recoupment deferred under the roll-over relief (R300 000) cannot be set off against assessed
losses or the balance of the assessed loss of the transferee. The transferee will be liable for
normal tax on this amount despite its assessed loss position.
The recoupment that relates to the allowances of R200 000 that the transferee deducted in
respect of the machine may be set off against such assessed losses or balance of assessed
losses.
721
This ring-fencing provision does not apply in respect of allowance assets acquired
Please note! by a REIT (or controlled company) in terms of a transaction that qualified for roll-
over relief.
l The portion of any gain arising on the disposal of trading stock that does not exceed the gain that
would have arisen had the trading stock been disposed of at its market value at the time of the
transaction (i.e. the beginning of the 18-month period) is ring-fenced in a similar manner as the
recoupments described above. This ring-fencing does generally not apply to trading stock that is
regularly and continuously disposed of by the transferee. The reason for this exception is that it
may not be practically possible to distinguish trading stock acquired in a transaction to which the
corporate rules applied from trading stock acquired subsequently in the normal course of
business.
20.5 Special rules: Asset-for-share transactions (s 42)

Relief is available to transactions where a person transfers an asset to a company and retains an
interest in the asset through substantial ownership in the company. This relief was initially afforded to
company formations, with a separate provision that applied to transactions where the assets con-
tributed to the company were shares in another company. The main reason for this distinction was
that the early version of the corporate rules contained certain exclusions for the transfer of financial
instruments as these could be used to facilitate avoidance transactions. These two sets of rules were
combined into a single relief measure that now applies to transactions in terms of which an asset
(whether it be shares or any other assets) is transferred to a company in exchange for ownership in
the company.
20.5.1 Definition and scope

The relief measures in s 42 apply to asset-for-share transactions. The definition of an asset-for-share
transaction consists of two parts. The first part, in par (a), generally applies to domestic transactions.
The second part, in par (b), facilitates certain cross-border asset-for-share transactions.
20.5.1.1 Domestic asset-for-share transaction (par (a) of the definition of ‘asset-for-share

transaction’ in s 42(1))
A transaction will be an asset-for-share transaction if it meets all the following requirements:
l A person transfers an asset, other than a restraint of trade or personal goodwill, to a company.
Remember
The definition of an asset-for-share transaction does not place any restriction on the nature of the
person who transfers the asset to the company. A trust can therefore transfer an asset to a com-
pany and qualify for the relief if all the other requirements are met.
l The market value of the asset equals or exceeds its tax cost.
l The company to which the asset is transferred is a resident company.
l The company issues an equity share in that company to the person as consideration for the
asset.
Remember
Roll-over treatment may be available in respect of assets transferred to a company in exchange
for the assumption of certain debt by that company (see 20.5.2.3).
722
l The person who transferred to asset:

– holds a qualifying interest in the company at the close of the day of the disposal, or
The following interests in the company will be qualifying interests as contem-

plated in the definition of an asset-for-share transaction: (definition of ‘qualifying
interest’ in s 42(1))
l an equity share held in a company listed on a South African exchange or a
company that will be listed within 12 months after the transaction as a result
of which the person holds the share
l an equity share held by that person in a company that forms part of the
Please note! same group of companies as the person, or
l the person holds equity shares in a company, where those shares constitute
at least 10% of the equity shares of that company and that confers at least
10% of the voting rights in the company to the person.
The definition of asset-for-share transaction also provides for certain restruc-
turing of interests held in portfolios of collective investment schemes in securities
or hedge funds. An equity share held by a person in such a portfolio will also
constitute a qualifying interest.
– is a natural person who will be engaged on a full-time basis in the business of the company (or
a controlled group company in relation to the company) of rendering a service.
This requirement was introduced as an alternative to holding a qualifying interest

in order to assist professional partnerships to use the rollover relief when incor-
porating their businesses. This introduction of an alternative requirement was
necessary where a large number of partners acquired shareholding in the incor-
Please note! porated business, which resulted in each holding less than the threshold
required for a qualifying interest. This alternative is often useful in practice where
restructurings occur while members of the company’s management do not hold
substantial shareholdings.
l The purpose and intention with which the asset is held and acquired must fall within one of the
following combinations:
In the hands of the person who In the hands of the company Circumstances where applied
transferred it that acquired it
Trading stock Trading stock Any
Capital asset Capital asset Any
Only if the person and company do not
Capital asset Trading stock form part of the same group of com-
panies
An exception exists for certain transactions where listed company shares are
disposed of to a company and following a series of asset-for-share transactions
within a 90-day period, the company holds a substantial interest in the listed
company (proviso to par (ii) to par (a) of the definition of ‘asset-for-share
transaction’ in s 42(1)). This exception makes provision for the fact that if a
company wishes to acquire a substantial shareholding in a listed company, it
Please note! may be required to acquire the shares from a number of shareholders of the
listed company. It is often impractical for the acquirer to ascertain and trace the
purpose and intention of each of these shareholders from whom the listed
shares are acquired. A similar exception applies to equity shares in portfolios of
a collective investment scheme in securities or a hedge fund collective invest-
ment scheme. The requirements do furthermore not apply where any asset is
disposed by a person to a portfolio of a hedge fund collective investment
scheme.
723
Example 20.12. Asset-for-share transactions
Discuss whether each of the following transactions constitute an asset-for-share transaction as

contemplated in s 42:
l Scenario A: Thabo Dlamini owns a property in his own name as an investment property. He
intends to transfer the property to a South African company (Newco (Pty) Ltd) in exchange
for all the issued ordinary shares of Newco (Pty) Ltd and a cash amount of R500 000. Newco
(Pty) Ltd raised the cash by borrowing this amount from a financial institution to fund the
acquisition of the property. Newco (Pty) Ltd will continue to hold the property as an
investment property.
l Scenario B: Thandi Dlamini speculates with properties. She intends to transfer her current
stock of properties to a South African company (Newco (Pty) Ltd) in exchange for all the
issued ordinary shares of Newco (Pty) Ltd. She intends to hold the Newco (Pty) Ltd shares
as a capital investment and carry on the property speculation business in Newco (Pty) Ltd
as opposed to in her personal capacity.
l Scenario C: Nobomi Ngwanya owns a number of properties in her own name as investment
properties. She intends to sell the properties to a property-owning company, Property Ltd.
Property Ltd will issue 25% of its issued preference shares to Nobomi as consideration. The
preference shares have a capital value of R1 500 000, at which it can be redeemed at any
time, and bear preference dividends at a fixed rate of 10% per annum. The intention of the
parties is that Property Ltd will use the rental income generated by the properties to redeem
the preference shares held by Nobomi.
l Scenario D: Johan Botha holds all the shares of Broker (Pty) Ltd, a small insurance
brokerage business. He received an offer from Insure Ltd, a listed company, to sell the
shares in Broker (Pty) Ltd to it in exchange for an equity interest in Insure Ltd. Insure Ltd will
issue 0,25%, with a value of R3 million, of its issued shares to Johan as consideration for the
Broker (Pty) Ltd shares.
l Scenario E: Piet du Toit holds all the shares of Tyres (Pty) Ltd, a tyre retail business. He
received an offer from a larger company, Car Ltd, that carries on a vehicle spare part retail
business, to sell the shares in Tyres (Pty) Ltd to. Car Ltd will issue one of its issued shares to
Piet as consideration for the Tyres (Pty) Ltd shares. These shares have a market value of
R2 million. One of the conditions of the transaction is that Piet will be in the full-time employ-
ment of Car Ltd for a period of three years following the transaction.
l Scenario F: The Khumalo Family Trust holds all the shares of Red Investments (Pty) Ltd, a
company that owns a paint business. The trustees of the Khumalo Family Trust wish to
interpose a holding company between the trust and Red Investments (Pty) Ltd. The Khumalo
Family Trust will transfer the Red Investments (Pty) Ltd shares to Holdco (Pty) Ltd in
exchange for all the issues shares of HoldCo (Pty) Ltd.
You may assume that the market value of the assets transferred to the respective companies
exceeds the tax cost in all instances. You may furthermore assume that all ordinary shares
referred to may participate in dividend distributions and returns of capital to the extent of the
company’s profits or available distributable reserves. All persons are residents of South Africa for
tax purposes.
SOLUTION
Scenario A
Thabo transfers the property (asset) to a resident company (Newco (Pty) Ltd). The ordinary
shares issued by Newco constitute equity shares. As Thabo will hold all the shares in Newco (Pty)
Ltd, he will have a qualifying interest in Newco (Pty) Ltd at the close of the day of the transaction.
The property was held by Thabo as a capital asset and will continue to be held for this purpose
by Newco (Pty) Ltd. This is an asset-for-share transaction. As illustrated in Example 12.14 below,
the relief in terms of s 42 will only apply to the extent that the consideration for the transaction
constituted equity shares.
Scenario B
Thandi transfers the properties (assets) to a resident company (Newco). The ordinary shares
issued by Newco constitute equity shares. As Thandi will hold all the shares in Newco, she will
have a qualifying interest in Newco at the close of the day of the transaction. The properties were
held by Thandi as trading stock and will continue to be held for this purpose by Newco. This is an
asset-for-share transaction.
continued
724
Scenario C
Nobomi transfers the properties (assets) to a resident company (Property Ltd). The preference
shares issued by Property Ltd do not constitute equity shares as the right to participate in returns
of capital is limited to an amount of R1 500 000 and the right to participate in dividends to an
annual dividend of 10% of the outstanding capital value of the preference shares. Nobomi will
divest herself from the properties through this transaction, as opposed to retaining an ownership
interest. This is not an asset-for-share transaction.
Scenario D
Johan transfers the shares in Broker (Pty) Ltd (assets) to a resident company (Insure Ltd). The
ordinary shares issued by Insure Ltd constitute equity shares. As the shares of Insure Ltd are
listed, Johan will hold a qualifying interest despite not holding at least 10% of the issued equity
shares of Insure Ltd. The Broker (Pty) Ltd shares were held by Johan as capital assets.
Irrespective of whether Insure Ltd intends to hold the shares as capital assets or trading stock
(Johan and Insure Ltd are not part of the same group of companies), this will be an asset-for-
share transaction.
Scenario E
Piet transfers the shares in Tyres (Pty) Ltd (assets) to a resident company (Car Ltd). The ordinary
shares issued by Car Ltd constitute equity shares. Piet will hold less than 10% of the issued
equity shares of Car Ltd and therefore not hold a qualifying interest at the close of the day of the
transaction. Even though he will be employed by Car Ltd on a full-time basis, the transaction will
not be an asset-for-share transaction as Car Ltd’s business in which Piet is employed does not
involve the rendering of a service. If, however, Car Ltd carried on a service business as opposed
to a spare parts retail business, the transaction could have been an asset-for-share transaction.
Scenario F
The Khumalo Family Trust transfers the shares in Red Investments (Pty) Ltd (assets) to a resident
company (Holdco (Pty) Ltd). The ordinary shares issued by Holdco (Pty) Ltd constitute equity
shares. The Khumalo Family Trust will hold all of the issued equity shares of Holdco (Pty) Ltd and
therefore a qualifying interest at the close of the day of the transaction. The Red Investments (Pty)
Ltd shares were held by the Khumalo Family Trust as capital assets and it appears as if the
intention is that it will continue to be held for this purpose by Holdco (Pty) Ltd. This is an asset-for-
share transaction.
20.5.1.2 Cross-border asset-for-share transaction (par (b) of the definition of ‘asset-for-share

In a cross-border context, a transaction will be an asset-for-share transaction if all the following
requirements are met:
l A company (transferor company) transfers an equity share in a foreign company that is held as a
capital asset to another foreign company (transferee company).
Remember
The definition does not have a specific requirement in respect of the residence of the transferor
company. The transferor company can be a resident company or a foreign company.
l The market value of the equity shares transferred equals or exceeds its base cost.
l The transferee company issues an equity share in the transferee company to the transferor
company as consideration for the asset.
l Immediately before the equity shares are disposed of, the transferee and transferor companies
form part of the same group of companies (s 1 definition – see 20.4.1) and the transferee
company is a controlled foreign company in relation to a resident company that forms part of this
group of companies.
l At the close of the day of the disposal, one of the following requirements is met:
– more than 50% of the equity shares of the foreign company (of which the equity shares are
disposed of) are directly or indirectly held by a resident (alone or with any company that
forms part of the same group of companies as the resident), or
– at least 70% of the equity shares in the transferee company are directly or indirectly held by a
resident (alone or with any company that forms part of the same group of companies as the
resident).
The scope of this provision is significantly narrower than the definition that applies in respect of
domestic transactions. This definition only allows for roll-over treatment in respect of the restructuring
shareholdings in foreign companies between companies in the same group of companies.
725
20.5.1.3 Exclusions from the scope of s 42 (s 42(8A))

The relief that is available in respect of asset-for-share transactions will not be available, even if the
transaction meets the definition of an ‘asset-for-share transaction’, where:
l Both parties to the transaction agree in writing that the relief does not apply. The parties will make
this election if they do not wish for the tax implications to be rolled-over to the company. The
reasons for this decision may be based on the tax position of the person who transfers the asset
(for example, if this person is in a position where it has tax losses available to it against which the
gains can be set off) or on the fact that the purchasers may wish to obtain the benefit of a tax cost
equal to the purchase price.
Remember
The relief measures in s 42 apply automatically to a transaction that meets the definition of an
asset-for-share transaction unless the parties elect for it not to apply.
l The disposal would not be taken into account for purposes of determining the taxable income or
assessed loss of the person who disposes of the asset.
l The disposal would not be taken into account for purposes of determining the proportional
amount of the net income of a controlled foreign company that is taken into account in the income
of a resident.
l The asset constitutes a debt owing by or a share in the company to which the asset is disposed.
This exclusion exists to ensure that the relief measure is not applied to share buy-back
transactions or the capitalisation of debts owing by the company.
20.5.2 Relief
20.5.2.1 Person who transferred the asset and acquired equity shares in the company
The income tax implications of an asset-for-share transaction for the person that disposes of an asset
and acquires equity shares in a company are the following:
l No gain (trading stock), capital gain (capital asset) or recoupment (allowance asset) will arise in
the hands of the person as a result of application of the roll-over mechanism described in 20.4.4
(ss 42(2)(a)(i) and s 42(3)).
l The person will be deemed to have acquired the equity shares in the company at a tax cost equal
to the tax cost of the assets transferred (s 42(2)(a)(ii)).
l The person will be deemed to have acquired the equity shares on the same date that the person
acquired the assets transferred (s 42(2)(a)(ii)).
When assessing whether the person has held the equity shares for a period of at
least three years for purposes of s 9C, the date of acquisition (and therefore
from which the shares have been held) must be the actual date when the equity
Please note! shares were acquired, if the assets transferred by the person were not equity
shares. For all other purposes, for example determining the valuation date value
of the equity shares, the person is, however, still deemed to have acquired the
equity shares on the date that the person transferred the asset to the company.
l Any valuation that the person obtained in respect of the asset for purposes of determining its
valuation date value for capital gains tax must be deemed to have been obtained in respect of
the equity shares that the person now holds (s 42(2)(c)).
20.5.2.2 Company that acquired the asset

The income tax implications of an asset-for-share transaction for the company that acquires an asset
and issues its own equity shares are the following:
l The tax cost of the asset in the hands of the company is based on the tax cost of the asset in the
hands of the person. In addition, the characteristics of the asset in the hands of the person are
transferred to the company. These implications are effected through the roll-over mechanism
described in 20.4.4 (ss 42(2)(b) and 42(3)).
l The amount that the company received for issuing the shares, for purposes of calculation of its
contributed tax capital, is deemed to be the tax cost of the assets acquired where
– the person holds at least 10% of the equity shares in the company and these shares confer at
least 10% of the voting rights in the company to the person, or
726
– the natural person is engaged on a full-time basis in the business of the company (or con-
trolled group company) of rendering a service. (s 42(3A))
The above rules in relation to the tax cost of the assets acquired and calculation
of contributed tax capital of the company do not apply to certain transactions
where listed company shares are disposed of to a company and, following a
series of asset-for-share transactions within a 90-day period, the company holds
a substantial interest in the listed company (proviso to s 42(2)(b) and proviso to
s 42(3A)). Practical difficulties exist in tracing the tax costs of listed shares
Please note! acquired from a number of different previous shareholders. The tax cost of the
listed shares acquired will be based on its market value. Similarly, the amount
added to contributed tax capital will be based on the market value of the listed
shares.
The same rules apply in respect of equity shares acquired in a portfolio of a
collective investment scheme in securities. The exception to the contributed tax
capital rule also applies where the asset is disposed of to a portfolio of a hedge
fund collective investment scheme.

This example is based on the same set of facts as Scenario B in Example 20.12. Thandi incurred
expenditure amounting to R5 million to acquire the four properties. The properties were acquired
between 2014 and 2017. The four properties, and therefore also the Newco (Pty) Ltd shares, are
currently valued at R9 million.
Discuss and calculate the application of the relief measures in terms of s 42 to the transaction to
Thandi and Newco (Pty) Ltd.
SOLUTION
Thandi Dlamini
Thandi will be deemed to have disposed of the properties at an amount equal to the cost taken
into account in her taxable income in respect of the trading stock (R5 million). As a result, no gain
will be included in her taxable income (s 42(2)(a)(i)).
Thandi is deemed to have acquired the Newco (Pty) Ltd shares for expenditure equal to
R5 million (s 42(2)(a)(ii)). This will form the base cost when the shares are disposed of in future.
Thandi is deemed to have acquired the shares in respect of each property on the date that she
acquired that property (s 42(2)(a)(ii)). As the properties are not equity shares, the date from
which she has held the Newco (Pty) Ltd shares for purposes of the three-year holding
requirement in s 9C will be the date when she disposed of the properties to Newco (Pty) Ltd.
Newco (Pty) Ltd
Newco (Pty) Ltd is deemed to have acquired the properties at expenditure equal to the
expenditure incurred by Thandi to acquire each property and on the same dates that she
incurred the expenditure (ss 42(2)(b) and 42(3)). This expenditure is added to Newco (Pty) Ltd’s
contributed tax capital (s 42(3A))
Note
Section 42 applies to each asset disposed of to Newco (Pty) Ltd. Thandi and Newco (Pty) Ltd
may agree in writing that the relief provisions do not apply to certain of the properties. They may
wish to do so if the market value and tax cost are relatively close to each other and it would be
unnecessarily onerous taking into account the anti-avoidance rules in s 42 to use the relief.
20.5.2.3 Asset-for-share transactions involving elements of consideration other than equity

shares (ss 42(4) and 42(8))
The consideration paid by the company may include consideration other than only the equity shares
issued to the person who transferred the asset to it. This consideration may include cash considera-
tion, consideration that remains outstanding on a loan account, the issuing of shares that are not
equity shares or the assumption of debt from the person by the company.
Where a person disposes of an asset to a company in terms of an asset-for-share transaction and
also becomes entitled to consideration other than the equity shares issued to it by the company, the
disposal of the assets by the person must be apportioned. The asset must be separated into a part
that is deemed to be disposed of in terms of an asset-for-share transaction that qualifies for relief and
727
a part that is deemed not to constitute an asset-for-share transaction. The basis for this apportion-
ment is based on the relative market values of the elements of the consideration. If a person disposes
of an asset to a company in terms of an asset-for-share transaction and receives equity shares, which
make up 80% of the market value of the consideration, and cash for the remaining 20%, the roll-over
relief measures described above will only apply in respect of 80% of the tax cost of the assets. The
other 20% of the assets are deemed to be disposed of other than in terms of an asset-for-share
transaction, which means that the normal tax implications follow from this disposal without any relief
(s 42(4)).

This example is based on the same set of facts as Scenario A in Example 20.12. Thabo incurred
expenditure amounting to R900 000 to acquire the property in 2010. The property did not qualify
for any allowances. The property is currently valued at R1,5 million. The ordinary shares issued
by Newco (Pty) Ltd to Thabo are valued at R1 million.
Discuss and calculate the application of the relief measures in terms of s 42 to the transaction to
Thabo and Newco (Pty) Ltd.
SOLUTION
Thabo Dlamini
Thabo will be deemed to have disposed of the property at an amount equal to its base cost to the
extent that he receives equity shares in Newco (Pty) Ltd. The portion of the property deemed to
be disposed of in this manner is:
R800 000 × (R1 000 000)/(R1 000 000 + R500 000) = R600 000
Thabo will not realise any capital gain on the disposal of this portion of the disposal.
He will, however, realise a capital gain on the disposal of the remaining portion of the property
that does not qualify for roll-over relief. This capital gain is determined as follows:
Proceeds on disposal ................................................................................................. R500 000
Base cost of the property that does not qualify for relief (R900 000 – R600 000) ....... (R300 000)
Capital gain on disposal.............................................................................................. R200 000
Thabo is deemed to have acquired the Newco (Pty) Ltd shares for expenditure equal to
R600 000 (s 42(2)(a)(ii)). This will form the base cost when the shares are disposed of in future.
Thabo is deemed to have acquired the shares on the date that he acquired that property
(s 42(2)(a)(ii)).
Newco (Pty) Ltd
To the extent that the relief applied, Newco (Pty) Ltd is deemed to have acquired
the property at expenditure equal to the expenditure incurred by Thabo to acquire
each property and on the same dates that he incurred the expenditure (ss 42(2)(b)
and 42(3)). Newco (Pty) Ltd’s expenditure incurred to acquire the property is:
Expenditure deemed to be expenditure incurred by Thabo to the extent that the
transaction qualified for relief .................................................................................... R600 000
Expenditure incurred in cash by Newco (Pty) Ltd ..................................................... R500 000
Expenditure incurred by Newco (Pty) Ltd to acquire the property ............................ R1 100 000
The expenditure that relates to the issued shares and to which the relief applied (R600 000) is
added to Newco (Pty) Ltd’s contributed tax capital (s 42(3A))
Despite the above rules, roll-over treatment may be available in respect of certain debts assumed by
the company from the person, even though these debts are not equity share consideration (s 42(8)).
If the following debts are assumed by the company, roll-over treatment still applies to the disposal of
the asset to the company, provided that the transaction meets the definition of an asset-for-share
transaction:
l A debt secured by the asset disposed of by the person in terms of the asset-for-share trans-
action, if this debt was incurred (s 42(8)(a))
– more than 18 months before the asset-for-share transaction, or
– within the period of 18 months before the asset-for-share transaction at the same time when
the asset was acquired, or
– within the period of 18 months before the asset-for-share transaction if it constitutes a re-
financing of either of the above debts.
728
The roll-over relief applies if the secured debt or an equivalent amount of debt is assumed by the
company.
l Any amount of debt attributable to, and that arose in the normal course of business where any
business undertaking is disposed of as a going concern to the company in terms of an asset-for-
share transaction (s 42(8)(b)).
If these debts have been assumed by the company and roll-over treatment applied in respect of the
disposal of the asset, the person must, upon the subsequent disposal of the equity shares in the
company, treat the face value of the debt so assumed as
l an amount received or accrued in respect of the disposed equity share, if the equity share is held
as a capital asset (s 42(8)(A))
l income during the year of disposal of the equity share, if the equity shares are held as trading
stock (s 42(8)(B)).
This tax treatment ensures that the benefit that the person obtains as a result of the debt assumption
by the company does not remain untaxed. The benefit will, however, only be taxed when a realisation
event (disposal of the equity shares) takes place. This tax treatment applies even if the person still
has potential exposure to the debt as a result of being liable as surety for its settlement.
Remember
In the context of the corporate rules, debt includes contingent liabilities (definition of ‘debt’ in
s 41). Although a contingent liability has not yet been incurred, it is deemed to be a debt
incurred for roll-over relief purposes.
20.5.3 Anti-avoidance rules (ss 42(5) to 42(7))

The relief in respect of asset-for-share transactions is subject to a number of anti-avoidance rules.
Ring-fencing of gains in respect of the asset upon subsequent disposal

The first of the anti-avoidance rules is a ring-fencing provision in relation to the gains in respect of the
assets when realised in the hands of the company within 18 months of the asset-for-share transaction
(s 42(7)). This ring-fencing rule employs the mechanism described in 20.4.5. As an asset-for-share
transaction requires that the market value of the asset transferred must be equal to or exceed its tax
cost, the capital loss ring-fencing mechanism does not apply in this instance.
Prevention of conversion of revenue gains into capital gains

The second anti-avoidance rule is aimed at preventing the use of asset-for-share transactions to
convert gains that would have been income in nature into being capital in nature. This risk arises
where assets, which if disposed of by the person would have resulted in income or recoupments
arising in its hands, are transferred to a company in terms of an asset-for-share transaction. If the
person acquires the equity shares in the company as capital assets, the disposal of the assets may
be facilitated by the disposal of the equity shares in the company. In the absence of an anti-avoid-
ance rule, the full gain arising on the disposal of the equity shares could be capital in nature, even
though the shares derive their value from these assets with potential income gains attaching to it.
To counter this type of tax planning, the disposal of any equity share in a company acquired by a
person in terms of an asset-for-share transaction within 18 months from the date of the asset-for-
share transaction may give rise to income (s 42(5)). This will be the case where more than 50% of the
market value of the assets disposed of by the person to the company in terms of a transaction to
which the corporate rules applied consisted of allowance assets or trading stock. In this case, to the
extent that the amount received by or accrued to the person in respect of the disposal of equity share
is less than or equal to the market value of that equity share at the beginning of the 18-month period,
this amount must be included in the income of the person. Any excess in the amount received by or
accrued to the person upon disposal of the equity share must be taxed in accordance with the
person’s intention and purpose for which the share is held.
729
Example 20.15. Disposal of shares within 18 months

This example is based on the same set of facts as Scenario B in Example 20.12 and 20.13.
A year after the transaction, Thandi received an unexpected opportunity to sell all the Newco
(Pty) Ltd shares. She sold all the Newco (Pty) Ltd for an amount of R15 million.
Discuss the tax implications of the disposal of the Newco (Pty) Ltd shares for Thandi.
SOLUTION
Assuming that Thandi can discharge the burden of proving that the Newco (Pty) Ltd shares were
not held as part of a scheme of profit-making, but rather with a long-term investment intention,
the proceeds will be of a capital nature. As explained in Example 20.13, the provisions of s 9C
will not deem the proceeds to be of a capital nature as Thandi only held the Newco (Pty) Ltd
shares for a period of one year.
The anti-avoidance rule in s 42(5) will apply as all four properties transferred to Newco (Pty) Ltd
were held as trading stock by Thandi. The extent to which the amount Thandi received upon the
disposal of the Newco (Pty) Ltd shares is equal to the market value of the Newco (Pty) Ltd shares
at the date of the transfer of the properties (R9 million) must be included in her income.
The capital gain on the disposal of the shares is calculated as follows:
Amount received on disposal of Newco (Pty) Ltd shares .......................................... R15 000 000
Less: Amount included in income (par 35(3) of the Eighth Schedule)....................... (R9 000 000)
Proceeds .................................................................................................................... R6 000 000
Base cost of the Newco (Pty) Ltd shares (see example 20.14.) ................................ (R5 000 000)
Capital gain on disposal ............................................................................................ R1 000 000
This anti-avoidance rule does not apply where the person disposes of the equity
share acquired in terms of the asset-for-share transaction in terms of a sub-
sequent
l intra-group transaction, as contemplated in s 45 (see 20.8)
Please note! l unbundling transaction, as contemplated in s 46 (see 20.9)
l liquidation distribution, as contemplated in s 47 (see 20.10)
l involuntary disposal, as contemplated in par 65 of the Eighth Schedule (see
chapter 17)
l deemed disposal upon the death of the person (see chapter 25).
Person ceases to be sufficiently interested or involved in the company

The relief available in respect of asset-for-share transactions is afforded on the basis that the person
remains sufficiently interested in the ownership of the asset after the transaction. This is achieved by
the requirement that the person must hold a qualifying interest in the company or be employed in its
business, as discussed in 20.5.1.2.
If this ownership interest ceases within a period of 18 months from the date of the asset-for-share
transaction, the relief may be forfeited. This forfeiture of the benefit of the relief will occur when:
l the person ceases to hold at least 10% of the equity shares of the company that confers at least
10% of the voting rights in the company to it
l the person ceases to hold an equity share in a company that forms part of the same group of
companies as the person, or
l the person ceases to be engaged on a full-time basis in the business of the company or a
controlled group company, as contemplated in the definition of an asset-for-share transaction.
If any of the above events occur, the person is deemed to have disposed of all the equity shares
acquired in terms of the asset-for-shares transaction that are still held when the event takes place, for
an amount equal to its market value at the date of the asset-for-share transaction (s 42(6)(a)(aa)). The
person is deemed to immediately thereafter re-acquire the shares for the amount (s 42(6)(a)(bb)).
This deemed disposal and re-acquisition has the effect that the gains, in respect of which the tax
implications have been deferred because the transaction qualified for roll-over relief, are now taxed
when it turns out that the relief should not have been afforded.
730
A similar provision exists in respect of cross-border asset-for-share transactions when the person and
the foreign company (transferee) cease to form part of the same group of companies, or the foreign
company (transferee) ceases to be a controlled foreign company in relation to a resident that forms
part of the same group of companies (s 42(6)(b)).
This anti-avoidance rule does not apply when the person ceases to hold a quali-
fying interest in the company as a result of
l an intra-group transaction, as contemplated in s 45 (see 20.8)
l an unbundling transaction, as contemplated in s 46 (see 20.9)
Please note!
l a liquidation distribution, as contemplated in s 47 (see 20.10)
l an involuntary disposal, as contemplated in par 65 of the Eighth Schedule
(see chapter 17)
l a deemed disposal upon the death of the person (see chapter 25).
Remember
In addition to the specific anti-avoidance rules contained in s 42, it should be borne in mind that
the application of s 42 is subject to the application of s 24JB (see 20.2.1.2), the value shifting
rules in the Eighth Schedule (see chapter 17) and the general anti-avoidance rules (see chapter
32). See Example 20.3, which illustrates this interaction.
20.6 Special rules: Substitutive share-for-share transactions (s 43)

Following the enactment of s 43 in 2012 with a relatively wide scope, the definition of a substitutive
share-for-share transaction was significantly narrowed in 2013.
This provision is briefly considered below.

Following the above-mentioned amendment, a substitutive share-for-share transaction refers to a
transaction between a person and company in terms of which (definition of ‘substitutive share-for-
share transaction’ in s 43(1)):
l a person disposes of an equity share in the form of a linked unit in the company, and
l acquires an equity share other than a linked unit in the company.
A ‘linked unit’ is defined in s 1 as a unit comprising a share and a debenture in a

company, where that share and that debenture are linked and are traded
Please note!
together as a single unit. Such a linked unit would typically exist in a property
loan stock (PLS) structure.
The provision is aimed at facilitating the conversion of linked units in a company into equity shares
without a tax implication. If linked units in a PLS structure are converted into equity shares in a REIT,
this conversion would constitute a substitutive share-for-share transaction.
20.6.2 Relief
If a person disposes of a linked unit and acquires another equity share in the company in terms of a
substitute share-for-share transaction, the relief afforded to the person entails that (s 43(2)):
l the person is deemed to have disposed of the linked unit at its tax cost in the manner discussed
in 20.4.4
l the person is deemed to have acquired the equity share on the latest date that a linked unit,
which was disposed of, was acquired by the person
l the person is deemed to have acquired the equity share at a tax cost equal to that of the linked
unit.
731
If a person disposes of a linked unit that was acquired before 1 October 2001,
and therefore constitutes a pre-valuation date asset, and acquires an equity
share other than a linked unit in terms of a substitutive share-for-share trans-
Please note! action, a disposal at market value is deemed to take place at the time of the
conversion. This deemed disposal does not trigger any immediate tax implica-
tions, but is only deemed to occur for purposes of establishing a cost and date
of acquisition of the equity shares acquired by the person (s 43(1A)).
If a company issues an equity share in terms of a substitutive share-for-share transaction, the issue
price of the linked unit that is disposed of by the person is deemed to be the contributed tax capital
in respect of the class of equity share issued (s 43(4A)).
If a person that disposes of a linked unit becomes entitled to an equity share in the company and
consideration other than a dividend, foreign dividend or equity share, the relief will only apply partially
to the transaction (ss 43(4)(a) and 43(4)(b)(i)). The tax cost of the part of the transaction to which the
relief applies is based on the ratio of the market value of the equity shares to the total consideration
received by the person (s 43(4)(b)(i)).
20.7 Special rules: Amalgamation transactions (s 44)

Two companies may wish to merge their businesses into a single entity for a number of reasons. This
includes synergy benefits and cost savings. This outcome may be achieved in a tax neutral manner if
the transaction constitutes an amalgamation transaction within the scope of s 44.

The relief available to merger or amalgamation transactions apply to amalgamation transactions, as
defined in s 44(1). The definition of an amalgamation transaction has three components. The first
component is mainly aimed at domestic transactions (par (a) of the definition). The last two compo-
nents are aimed at cross-border transactions (paras (b) and (c) of the definition).
20.7.1.1 Domestic amalgamation transaction (par (a) of the definition of ‘amalgamation

A transaction is an amalgamation transaction if all the following requirements are met:
l A resident company (amalgamated company) disposes of all its assets.
The amalgamated company is not required to dispose of assets it elects to use

to:
Please note! l settle debts incurred in the ordinary course of its business, or
l satisfy any reasonably anticipated liability to any sphere of government of
any country and the costs of administration of the liquidation or winding-up.
l The assets are disposed of to another resident company (the resultant company).
l The disposal is done by means of an amalgamation, conversion or merger transaction.
l The existence of the amalgamated company must be terminated as a result of the transaction.
Example 20.16. Amalgamation transactions

Discuss whether each of the following transactions constitute an amalgamation transaction as
l Scenario A: Sweetzy (Pty) Ltd is a company involved in manufacturing sweets. It has 10
shareholders. An opportunity to merge its business into that of Chocie Ltd, a large company
also involved in the same industry, has been identified to benefit from synergies that exist.
Sweetzy (Pty) Ltd will transfer its whole business to Chocie Ltd in exchange for 10% of the
shares of Chocie Ltd. The Chocie Ltd shares will be distributed to the 10 natural persons,
following which the existence of Sweetzy (Pty) Ltd will be terminated. Each Sweetzy (Pty) Ltd
shareholder will hold between 0,25% and 1,5% of the issued shares of Chocie Ltd after the
transaction.
continued
732
l Scenario B: Shoes Ltd is a company that primarily manufactures shoes but has also devel-
oped a clothing line in recent years. An opportunity to merge its clothing line with that of Shirt
Ltd, a large company also involved in the clothing industry, has been identified to benefit
from synergies that exist. Shoes Ltd will transfer its clothing line business to Shirt Ltd in
exchange for 20% of the shares of Shirt Ltd.
You may furthermore assume that all shares referred to may participate in dividend distributions
and returns of capital to the extent of the company’s profits or available distributable reserves.
All persons are residents of South Africa for tax purposes.
SOLUTION
Scenario A
Sweetzy (Pty) Ltd, a resident company, will dispose of all its assets to Chocie Ltd, also a resident
company. The transaction will be in the form of a merger of the two businesses. The existence of
Sweetzy (Pty) Ltd will be terminated following the transaction. The transaction will be an amalga-
mation transaction as contemplated in s 44. Sweetzy (Pty) Ltd will be the amalgamated company
and Chocie Ltd the resultant company.
Scenario B
Shoes Ltd, a resident company, will only dispose of some of its assets to Shirt Ltd, also a
resident company. As Shoes Ltd will only dispose of a division, the existence of Shoes Ltd will
not be terminated as a result of the transaction. The transaction is not an amalgamation trans-
action as contemplated in s 44. It may be possible to structure the transaction in terms of which
Shoes Ltd’s clothing business is transferred to Shirt Ltd as an asset-for-share transaction.
20.7.1.2 Cross-border amalgamation transactions (paras (b) and (c) of the definition of
‘amalgamation transaction’ in s 44(1))
The first type of cross-border transaction that will constitute an amalgamation transaction for pur-
poses of s 44 is one where all the following requirements are met: (par (b) of the definition of ‘amal-
gamation transaction’ in s 44(1)):
l A foreign company (amalgamated company) disposes of all its assets, other than those used to
settle debts that arose in the ordinary course of its business, and anticipated liabilities and
administration costs relating to its liquidation or winding-up.
l The assets are disposed of to a resident company (the resultant company).
l The disposal is done by means of an amalgamation, conversion or merger transaction.
l Immediately before the transaction, any shares in that amalgamated company are held as capital
assets.
This definition refers to an inbound amalgamation in terms of which the assets of a foreign company
are transferred to a resident company, and therefore into the South African tax net.
The second type of cross-border transaction that meets the definition of an amalgamation transaction
in s 44(1) is a transaction that complies with all the following requirements: (par (c) of the definition of
‘amalgamation transaction’ in s 44(1)):
l A foreign company (amalgamated company) disposes of all its assets, other than those used to
settle debts that arose in the ordinary course of its business, and anticipated liabilities and
administration costs relating to its liquidation or winding-up.
l The assets are disposed of to another foreign company (the resultant company).
l This disposal is done by means of an amalgamation, conversion or merger transaction.
l Immediately before the transaction, the following requirements are met:
– the amalgamated company and resultant company form part of the same group of companies
– the resultant company is a controlled foreign company in relation to a resident that forms part
of the same group of companies, and
– any shares in that amalgamated company that are directly or indirectly held by the resultant
company are held as capital assets.
l Immediately after the transaction, more than 50% of the equity shares of the resultant company
are directly or indirectly held by a resident (alone or with companies that form part of the same
group of companies).
733
20.7.1.3 Exclusions from the scope of s 44 (ss 44(13) and 44(14))

The provisions of s 44 do not apply to the following transactions, despite the fact that the transaction
meets the definition of an amalgamation transaction as described above:
l A disposal of an asset by an amalgamated company to a resultant company in terms of a
domestic amalgamation transaction (par (a) of the definition of amalgamation transaction) where
the resultant company and the shareholder of the amalgamated company formed part of the
same group of companies immediately before and after the disposal, if the amalgamated com-
pany, resultant company and the shareholder of the amalgamated company jointly elect so
(s 44(14)(g)). A similar exclusion exists for cross-border amalgamation transactions (in terms of
par (b) of the definition of amalgamation transaction).
l Any transaction that is a liquidation distribution, as defined in s 47 (see 20.10) (s 44(14)(a)). This
exclusion avoids any overlap that may exist between the two relief measures.
l Any transaction, if the resultant company is any of the following entities in whose hands the tax
treatment of the assets may differ from the treatment in the hands of the amalgamated company:
– a co-operative (s 44(14)(b))
– any association (other than an incorporated association or close corporation) formed in South
Africa to serve a specified purpose, beneficial to the public or a section of the public
(s 44(14)(b))
– a non-profit company as defined in s 1 of the Companies Act (s 44(14)(c))
– a public benefit organisation or recreational club approved as such by SARS (s 44(14)(f))
– a company in whose hands any amount that constitutes gross income would be exempt from
tax (s 44(14)(e))
– a portfolio of a collective investment scheme in securities (unless the amalgamated company is
also a portfolio of a collective investment scheme in securities) (s 44(14)(bA))
– is a portfolio of a hedge fund investment scheme (unless the amalgamated company is also a
portfolio of a hedge fund collective investment scheme) (s 44(14)(bB)).
In addition, the relief measures do not apply where the amalgamated company has not taken steps to
liquidate, wind up or deregister (see 20.4.3) within 36 months after the transaction. SARS may allow
the period to be extended (s 44(13)(a)).The same outcome would apply if the steps have been taken,
but have subsequently been withdrawn or anything has been done to invalidate any step taken,
which will result in the company not being liquidated, wound up or deregistered (s 44(13)(b)). Any tax
that becomes payable as a result of the required steps not being taken within the prescribed period
or being withdrawn or invalidated subsequently, may be recovered from the resultant company.
20.7.2 Relief
The relief afforded in respect of amalgamation transactions affect three parties, namely the amalgam-
ated company, its shareholders and the resultant company. The tax implications of an amalgamation
transaction for each of these parties or groups of parties are discussed below.
20.7.2.1 Amalgamated company

The income tax implications of an amalgamation transaction for the amalgamated company that dis-
poses of its assets are the following:
the hands of the amalgamated company as a result of application of the roll-over mechanism
described in 20.4.4 (ss 44(2) and 44(3)). In the case of a cross-border amalgamation, this treat-
ment only applies if the market value of the asset is equal to or exceeds its tax cost. This prevents
tax losses being brought into the South African tax net using an amalgamation transaction.
734
The relief described above only applies to the extent that the amalgamated com-
pany disposes of its assets to the resultant company in exchange for the following
consideration (s 44(4)):
l any equity share(s) in the resultant company
l the assumption of debts of the amalgamated company by the resultant com-
pany that were incurred by the amalgamated company
– more than 18 months before the disposal
– within 18 months before the disposal, but only if
• the debt constitutes a refinancing of the above debt, or
Please note! • arose in the ordinary course of the amalgamated company’s business
which is disposed of as a going concern to the resultant company.
In this context, debt includes contingent liabilities (definition of ‘debt in s 41).
In all the above instances, the debt must not have been incurred by the amalgam-
ated company for the purpose of procuring, enabling, facilitating or funding the
acquisition of any asset in terms of the amalgamation transaction by the resultant
company. If this is the case, this may represent a divestment transaction, which
should not qualify for roll-over relief.
If the consideration includes any other components (for example cash consid-
eration) the roll-over relief will not apply to the transaction to the extent of this
consideration.
l The amalgamated company must disregard the disposal of any equity shares in the resultant
company for purposes of determining its taxable income or assessed loss (s 44(8)).
20.7.2.2 Resultant company

The income tax implications of an amalgamation transaction for the resultant company that acquires
the assets from the amalgamated company are the following:
l The tax cost of the asset in the hands of the resultant company is based on the tax cost of the
asset in the hands of the amalgamated company. In addition, the characteristics of the asset in
the hands of the amalgamated company are transferred to the resultant company. These implica-
tions are effected through the roll-over mechanism described in 20.4.4 (ss 44(2) and 44(3)). It is
important to note that this roll-over treatment only applies to the extent that the resultant company
acquires the assets in exchange for equity shares in the resultant company or the assumption of
debts indicated in 20.7.2.1 above.
l The amount that the resultant company receives as a result of issuing shares in exchange for the
assets acquired in an amalgamation transaction, for purposes of increasing its contributed tax
capital, is based on the contributed tax capital of the amalgamated company. This amount is
determined as the contributed tax capital of the amalgamated company at the time of termination
of its existence multiplied by the ratio of the value of the amalgamated company shares held by
shareholders other than the resultant company divided by the total value of all its shares
(s 44(4A)). All the contributed tax capital of the amalgamated company, to the extent not already
attributable to the resultant company, is effectively transferred to the resultant company’s
contributed tax capital when an amalgamation transaction takes place.
20.7.2.3 Shareholders of the amalgamated company

The shareholders of the amalgamated company will ultimately exchange their shares in the amal-
gamated company for shares in the resultant company by virtue of the shares held in the amalgam-
ated company and in pursuance of the amalgamation transaction. The availability of the relief meas-
ures to these shareholders depends on the purpose with which the respective shares are held and
will be held in future. The relief only applies in the following circumstances (s 44(6)(a)(i) and (ii)):
Nature of the amalgamated company share in Nature of the resultant company share in the
the hands of the shareholder hands of the shareholder
Capital asset Capital asset or trading stock
Trading stock Trading stock
735
The relief available to shareholders who meet the above requirements is:
l The shareholder is deemed to have disposed of the equity shares held in the amalgamated
company for an amount equal to its tax cost (s 44(6)(b)(i)). No gain or loss should arise on the
disposal of the amalgamated company shares.
l The shareholder is deemed to have acquired the equity shares in the resultant company on the
same date that it acquired the shares in the amalgamated company and for cost equal to the
expenditure incurred in respect of the tax cost of those shares in the amalgamated company
(s 44(6)(b)(ii)). In addition, these costs are deemed to have been incurred on the expenditure on
the same date that it incurred such expenditure in respect of the amalgamated company shares
(s 44(6)(b)(iii)).
l The shareholder is deemed to have performed any valuation of the amalgamated company
shares for purposes of establishing its valuation date value for capital gains tax in respect of the
equity shares acquired in the resultant company (s 44(6)(b)(iv)).
l An equity share in the resultant company that is acquired by the shareholder is deemed not to be
an amount transferred or applied for the benefit of the shareholder by the amalgamated company
(s 44(6)(c)). No dividend or return of capital will arise.
If the shareholder becomes entitled to any consideration other than equity

shares in the resultant company, the above relief provisions only apply to the
extent of the equity shares in the resultant company. This is determined using
the ratio between the value of the equity shares in the resultant company to the
total consideration received by the shareholder. (s 44(6)(d))
Please note! To the extent that the other consideration does not exceed the market value of
all the assets of the amalgamated company less its liabilities and contributed tax
capital of all classes of shares immediately before the amalgamation, it must be
deemed to be an amount transferred or applied for the benefit of a person in
respect of a share by the amalgamated company for purposes of determining
whether a dividend or return of capital is made by the amalgamated company.
(s 44(6)(e))
Example 20.17. Amalgamation transactions – Relief
This example is based on the same facts as Scenario A in Example 20.16. The business that
Sweetzy (Pty) Ltd disposes of consists of manufacturing equipment, goodwill and a number of
retail properties.
One of the shareholders of Sweetzy (Pty) Ltd is Mr Ushukela. He holds 15% of the issued shares
of Sweetzy (Pty) Ltd. He acquired the shares in 1996 at a cost of R60 000. He obtained a
valuation for purposes of determining the valuation date value of R500 000 in respect of the
Sweetzy (Pty) Ltd shares during 2002. He intends to hold the Chocie Ltd shares in the long term.
Discuss the tax implications of the amalgamation transaction for Sweetzy (Pty) Ltd, Chocie Ltd
and Mr Ushukela.
SOLUTION
Sweetzy (Pty) Ltd
The roll-over mechanism described in 20.4.4 will apply when Sweetzy (Pty) Ltd transfers the
assets of its business to Chocie Ltd in terms of an amalgamation transaction (ss 44(2) and 44(3)).
As a result, the transfer will not impact on its taxable income or taxable capital gains. As Chocie
Ltd only issues equity shares to Sweetzy (Pty) Ltd as consideration for the transfer, the relief will
apply to the full value of the assets transferred (s 44(4)) (see note).
Sweetzy (Pty) Ltd must disregard any recoupments or capital gains that may have arisen on the
distribution of the Chocie Ltd shares to Sweetzy (Pty) Ltd’s shareholders (s 44(3)).
Note
If Sweetzy (Pty) Ltd received the 10% equity shares in Chocie Ltd (assume value R6 million) as
well as R2 million in cash for transferring its business to Chocie Ltd, the above relief would only
have applied to 75% (R6 million/(R6 000 000 + R2 000 000) of the tax cost of the respective
assets transferred. The 25% of the assets transferred in exchange for the cash consideration
would not have qualified for the relief. The calculation of the effect of this apportionment is similar
to the calculation in Example 20.14.
continued
736
Chocie Ltd
The assets acquired by Chocie Ltd would be subject to the roll-over treatment as described in
20.4.4. The result of this is that any gains deferred in the hands of Sweetzy (Pty) Ltd will realise in
the hands of Chocie when it disposes of the assets. In addition, Chocie Ltd will step into the
shoes of Sweetzy (Pty) Ltd as far as allowances in respect of the assets are concerned.
The tax cost of the assets acquired by Chocie Ltd will increase its contributed tax capital.
Mr Ushukela
As Mr Ushukela held the Sweetzy (Pty) Ltd shares as capital assets and will also hold the
Chocie Ltd shares as capital assets, he will qualify for the relief in s 44. He will be deemed to
have disposed of the Sweetzy (Pty) Ltd shares at an amount equal to the expenditure incurred to
acquire it, resulting in no capital gain or loss in his hands. He is deemed to have acquired the
Chocie Ltd shares for the same expenditure (R60 000) and on the same date (date in 1996) as he
acquired the Sweetzy (Pty) Ltd shares. The valuation he obtained in respect of the Sweetzy (Pty)
Ltd shares (R500 000) for purposes of determining the valuation date value will also apply in
respect of the Chocie Ltd shares when he disposes of these in future.
Lastly, the distribution of the Chocie Ltd shares to him must be disregarded.
20.7.3 Anti-avoidance rules (s 44(5))

The relief in respect of amalgamation transactions is subject to a ring-fencing provision that applies
to gains and losses arising on the transferred assets if realised in the hands of the resultant company
when it disposes of the assets within 18 months of the amalgamation transaction (s 44(5)). This ring-
fencing rule employs the mechanism described in 20.4.5.
20.8 Special rules: Intra-group transactions (s 45)

Entities within a group of companies are viewed as parts of the same economic unit. The relief in s 45
is aimed at facilitating the moving of assets within such a group without any immediate tax implica-
tions.

The definition of an intra-group transaction consists of two components. The first component (par (a)
of the definition) is aimed at domestic intra-group transactions, while the second component (par (b)
of the definition) caters for certain cross-border intra-group transactions.
20.8.1.1 Domestic intra-group transaction (par (a) of the definition of ‘intra-group transaction’ in
s 45(1))
A transaction is an intra-group transaction if all the following requirements are met:
l Any asset is disposed of by a company (transferor company).
Remember
The definition of a group of companies in s 41(1) excludes foreign companies that do not have
their place of effective management in South Africa. This implies that the transferor contem-
plated in this definition should be a resident company in order to form part of the same group of
companies as the transferee company.
l The asset is disposed of to a resident company (transferee company).

l The transferor company and transferee company form part of the same group of companies at
the end of the day of the transaction.
l The transferee company acquires the asset from the transferor company with the following
purpose:
Nature of the asset in the hands of the transferor Nature of the asset in the hands of the transferee
Capital asset Capital asset
Trading stock Trading stock
737
Example 20.18. Intra-group transactions

Discuss whether each of the following transactions constitute an intra-group transaction as con-
templated in s 45:
l Scenario A: Barca Ltd owns all the shares of Messi Ltd and Neymar Ltd. Messi Ltd sells
manufacturing equipment that is used to produce soccer balls to Neymar Ltd on a loan
account. Neymar Ltd will use the equipment in the same manner.
l Scenario B: The Chiefs Trust Ltd owns all the shares of Itumeleng Ltd and Siphiwe Ltd.
Itumeleng Ltd sells manufacturing equipment used by it to produce soccer balls to Siphiwe
Ltd on a loan account. Siphiwe Ltd will use the equipment in the same manner.
l Scenario C: The SA Properties Ltd owns all the shares of Udonga Ltd and Uphahla Ltd.
Udonga Ltd sells a property that it held as trading stock to Uphahla Ltd on loan account.
Uphahla Ltd will use the property as a capital asset.
All entities or persons are residents of South Africa for tax purposes.
SOLUTION
Scenario A
As Barca Ltd holds more than 70% of the equity shares of Messi Ltd and Neymar Ltd, the three
companies form part of the same group of companies. The equipment is disposed of by two
companies within the group of companies. The equipment will retain its nature as a capital asset
in the hands of Neymar Ltd. This transaction is an intra-group transaction.
Scenario B
The Chiefs Trust Ltd holds more than 70% of the equity shares of Itumeleng Ltd and Siphiwe Ltd.
As the Chiefs Trust is not a company, it cannot be the controlling group company. The entities do
not constitute a group of companies. The transfer of the equipment between Itumeleng Ltd and
Siphiwe Ltd is not an intra-group transaction. The outcome would have been similar if a natural
person held the shares of Itumeleng Ltd and Siphiwe Ltd.
Scenario C
As SA Properties Ltd holds more than 70% of the equity shares of Udonga Ltd and Uphahla Ltd,
the three companies form part of the same group of companies. The property is disposed of
between two companies within the group of companies. As the property was held as trading
stock by Udonga Ltd but will be held as a capital asset by Uphahla Ltd going forward, this will
not be an intra-group transaction. If it qualified as an intra-group transaction, it may have enabled
taxpayers to benefit from the reduced rate of tax applicable when capital assets are disposed of
by trading stock assets within a group in terms of a transaction that enjoyed roll-over relief.
20.8.1.2 Cross-border intra-group transaction (par (b) of the definition of ‘intra-group transaction’
in s 45(1))
A transaction is also an intra-group transaction if all the following requirements are met:
l Any equity share(s) in a foreign company that is held as a capital asset is disposed of by a
company (transferor company).
l The equity shares(s) is disposed of to another company (transferee company).
l The equity share is disposed of in exchange for the issuing of debt or shares that are not equity
shares by the transferee company.
l The transferee company acquires that equity share as a capital asset.
l Before the transaction and at the end of the day of the transaction, all the following requirements
are met
– both companies form part of the same group of companies (s 1 definition)
– the transferor company is a resident company or a controlled foreign company in relation to a
resident that forms part of the same group of companies
– the transferee company is a resident company or a controlled foreign company in relation to a
resident that forms part of the same group of companies.
20.8.1.3 Exclusions from the scope of s 45 (s 45(6))

meets the definition of an intra-group transaction as described above:
l At the time of the disposal, the transferor company and transferee company agree in writing that
s 45 should not apply to the disposal (s 45(6)(g)). The parties may make this election based on
the tax position of the transferor company (for example, if it has tax losses which can be used
738
against the gains that arise on the disposal). In the context of intra-group transactions, the parties
may specifically wish to not apply the relief due to the onerous anti-avoidance rules, some of
which apply for up to six years from the date of the transaction (see 20.8.3).
l All the receipts and accruals of the transferee are exempt from tax on one of the following bases:
(s 45(6)(b))
– it is an entity contemplated in s 10(1)(cA)
– it is an approved public benefit organisation (s 10(1)(cN))
– it is an approved recreational club (s 10(1)(cO))
– it is a retirement fund, benefit fund or other entity contemplated in s 10(1)(d)
– it is an entity contemplated in s 10(1)(t).
l The asset was disposed of by the transferor company in exchange for equity shares issued by
the transferee company (s 45(6)(c)). This exclusion ensures that there is no overlap between the
relief is s 45 and the relief in s 42.
l The asset constitutes a share that is distributed by the transferor company to the transferee
company (s 45(6)(d)). This exclusion ensures that there is no overlap between the relief in ss 45
and 46.
l The asset was disposed of by the transferor company to the transferee company in terms of a
liquidation distribution, as contemplated in s 47 (see 20.10). This exclusion applies irrespective of
whether the relief applied or of the purpose for which the transferee company acquired the asset
(s 45(6)(e)). This exclusion ensures that there is no overlap between the relief in ss 45 and 47.
l The asset constitutes a share in the transferee company (s 45(6)(f)). This exclusion ensures that
the relief does not apply to a share buy-back transaction.
20.8.2 Relief
The relief provisions in s 45 affect the transferor company and transferee company involved in an
intra-group transaction. The relief for both these parties are considered below.
20.8.2.1 Transferor company

The income tax implications of an intra-group transaction for the transferor company that disposes of
its assets are the following:
the hands of the transferor company as a result of application of the roll-over mechanism
described in 20.4.4 (ss 45(2) and 45(3)). An exception exists in the context of a cross-border
intra-group transaction (par (b) of the definition of intra-group transaction) entered into a between
a transferor company, that is a controlled foreign company in relation to a resident, and a trans-
feree company that is a resident. In the case of such a transaction, this treatment only applies if
the market value of the asset is equal to or exceeds the tax cost. This prevents tax losses being
brought into the South African tax net using an intra-group transaction.
20.8.2.2 Transferee company

The income tax implications of an intra-group transaction for the transferee company that acquires
the assets from the transferor company are the following:
l The tax cost of the asset in the hands of the transferee company is based on the tax cost of the
asset in the hands of the transferor company. In addition, the characteristics of the asset in the
hands of the transferor company are transferred to the transferee company. These implications
are effected through the roll-over mechanism described in 20.4.4 (ss 45(2) and 45(3)).
Example 20.19. Intra-group transactions – Relief
This example is based on the same facts as Scenario A in Example 20.18.

Messi Ltd initially acquired the manufacturing equipment at a cost of R2 500 000 and claimed
allowances amounting to R2 000 000 in respect of it in terms of s 12C. The equipment is disposed
of for an amount of R3 000 000 in cash. This amount represents the market value of the
equipment, which has increased due to the fact that the specific model is no longer produced by
the supplier.
Discuss the effect of the roll-over relief in terms of s 45 for Messi Ltd and Neymar Ltd.
739
SOLUTION
Messi Ltd
The roll-over relief mechanism described in 20.4.4 applies. This means that Messi Ltd is deemed
to have disposed of the equipment at its base cost of R500 000 (R2 500 000 – R2 000 000). No
capital gain arises in its hands. No allowances will be recouped by Messi Ltd (ss 45(2) and
45(3)).
Neymar Ltd
The roll-over relief mechanism described in 20.4.4 applies. Neymar Ltd is deemed to have
acquired the equipment at the same base cost that Messi Ltd is deemed to have disposed of it.
Neymar Ltd can only deduct allowances in respect of the remaining R500 000 of the cost of the
equipment. If Neymar Ltd were to dispose of the equipment, the recoupment would include the
allowances deducted by it (R500 000) as well as the allowances deducted by Messi Ltd
(R2 000 000) (ss 45(2) and 45(3)).
20.8.3 Anti-avoidance rules (ss 45(3A), (4), (4A), (4B))

The relief in respect of intra-group transactions is subject to a number of anti-avoidance rules.
Ring-fencing of gains or losses in respect of assets upon subsequent disposal
A ring-fencing provision applies to gains and losses in respect of the assets when realised in the
hands of the transferee company if it disposes of the assets within 18 months of the intra-group
transaction (s 45(5)). This ring-fencing rule employs the mechanism described in 20.4.5.
Remember
The ring-fencing rule does not apply to involuntary disposals as contemplated in par 65 of the
Eighth Schedule. It does also not apply to disposals that would have constituted involuntary dis-
posals if the asset had not been a financial instrument.
De-grouping rules (s 45(4))

The relief afforded to taxpayers who enter into intra-group transactions is premised on the fact that
the taxpayers form part of the same economic unit. This is based on the fact that they form part of the
same group of companies. If either of the parties to the intra-group transaction ceases to form part of
the same group of companies, the relief is retracted.
The de-grouping rule affects a transferee company that acquired an asset in terms of an intra-group
transaction (s 45(4)(a)(i)). It also applies to a transferee company that acquired an asset that was
initially disposed of in terms of an initial intra-group transaction and subsequently disposed to the
particular transferee that holds it at the time of de-grouping, using the corporate rules to defer a
capital gain or capital loss that arose on these disposals (s 45(4)(a)(ii)). If this is the case, the benefit
from the relief obtained in the intra-group transaction is still enjoyed within the group. In order to enjoy
this benefit, the group of companies should remain intact, as would have been the case where the
asset was disposed of to the transferee directly in terms of the intra-group transaction.
If the above transferee company ceases to form part of the same group of companies as the trans-
feror in the initial intra-group transaction (or a controlling group company in relation to this transferor)
within six years from the date of the transaction, the de-grouping rule applies. For purposes of the
discussion below, this ceasing to form part of the same group of companies is referred to as a de-
grouping event.
If the transferor company or the transferee company is liquidated, wound up or

deregistered and a resident company (holding company) holds at least 70% of
the equity shares of that company, the holding company and the company that
Please note! is liquidated, wound up or deregistered must be deemed to be one and the
same person. The effect of this is that the de-grouping event will only occur if the
holding company and remaining counterparty to the intra-group transaction
cease to form part of the same group of companies (s 45(4)(c))
The effect of this rule for the transferee company that has not yet disposed of the asset acquired in
terms of a domestic intra-group transaction is:
l A deemed capital gain equal to the greatest capital gain that would have been determined for
any disposal of the asset in terms of an intra-group transaction during the six years preceding the
de-grouping event, determined as if the roll-over relief had not applied, will arise. This requires
740
that the market value of the asset at the time of each intra-group transaction on which a capital
gain would have arisen in the absence of the roll-over relief to be determined. If the market value
of the asset at the time of the de-grouping event is lower than the greatest of such market values
at the time of the intra-group transactions, the deemed capital gain is based on the market value
at the time of the de-grouping event. The capital gain determined in this manner is deemed to
arise in the year of assessment during which the de-grouping event occurs.
The base cost of the asset in the hands of the transferee company must be increased by this
deemed capital gain amount. This ensures that the gain is not taxed again when the transferee
actually disposes of the asset in future. If the asset is an allowance asset, its cost or value on
which allowances are based is also increased by 50% of this amount. The basis on which the
allowances are calculated will therefore also reflect the fact that the relief initially afforded was
reversed (s 45(4)(b)(i)).
l A recoupment will arise on the date of the de-grouping event in respect of allowance assets. This
recoupment is calculated as the greater of:
– the greatest recoupment that would have been determined in respect of any disposal of the asset
in terms of an intra-group transaction during the six years preceding the de-grouping event,
calculated as if the roll-over relief had not applied, or
– the recoupment that would be included in the income of the transferee company if the asset was
disposed of at its market value on the date of the de-grouping event.
Again, the cost or the value of the asset for purposes of future allowances (other than industrial
policy project allowances (s 12I)) must be increased by this amount in the hands of the transferee
company (s 45(4)(b)(ii)).
l Lastly, the taxable income of the transferee company must include an amount determined as the
greatest inclusion in taxable income that would have been determined in respect of any disposal
of the asset in terms of an intra-group transaction during the six years preceding the de-grouping
event, calculated as if the roll-over relief had not applied. If the market value of the asset at the
time of the de-grouping event is lower than the market value that gives rise to such greatest
inclusion in taxable income, the deemed inclusion in taxable income is based on the market value
of the asset at the time of the de-grouping event. Similarly to the above two rules, the cost of the
asset in the hands of the transferee company is increased by this amount to ensure that the gain
is not taxed again in future (s 45(4)(b)(iii)). This rule would typically apply to trading stock
acquired by the transferee company in terms of an intra-group transaction. The de-grouping rules
do not apply with regard to trading stock that was acquired in terms of an intra-group transaction
if this trading stock is regularly and continuously disposed of by the transferee company. The
reason for this exclusion is that it is likely to be impractical to distinguish between the items
acquired in the intra-group transaction and those acquired subsequently.
Example 20.20. Intra-group transactions – De-grouping anti-avoidance rule

This example is based on the same facts as Scenario A in Example 20.18 and Example 20.19.
Three years after the intra-group transaction, Messi Ltd introduces a new shareholder who holds
51% of its issued shares to ensure that it has the necessary BBBEE credentials to supply soccer
balls to the government. As a result, Barca Ltd’s shareholding in Messi Ltd is diluted to 49% of its
issued shares. The current market value of the equipment is R1 500 000 on the date when this
transaction takes place.
Discuss the impact of the above-mentioned events on the intra-group transaction that Messi Ltd
and Neymar Ltd entered into three years earlier.
SOLUTION
As a result of the transaction entered into by Messi Ltd, it no longer forms part of the same group
of companies as Barca Ltd and Neymar Ltd. This event triggers the application of the de-
grouping rules in s 45.
Messi Ltd
The de-grouping rules do not affect the transferor company.
Neymar Ltd
The effect RI the de-grouping rules is that Neymar Ltd's taxable income must include the greater
of:
l recoupment that would have arisen had the equipment been disposed of at the time without
the roll-over relief (R2 000 000 recoupment of the allowances deducted by Messi Ltd)
continued
741
l recoupment that would have arisen if the equipment is disposed of on the day of the de-
grouping event (R500 000 deducted by Neymar Ltd since the transaction and R1 000 000 of
the allowances deducted by Messi Ltd before the intra-group transaction (s 45(4)(b)(ii)).
The recoupment of R2 000 000 is the greater of the amounts and would arise on de-grouping.
Neymar Ltd must furthermore take into account the lesser of:
l greatest capital gain that would have arisen had the equipment been disposed of without roll-
over relief:
Market value at the time of the intra-group transaction ................................ R3 000 000
Less: Recoupment that would have arisen at this time ................................ (R2 000 000)
Proceeds at the time of the intra-group transaction ..................................... R1 000 000
Base cost of the equipment at this time (R2 500 000 – R2 000 000) ........... (R500 000)
Greatest capital gain at the time of an intra-group transaction if roll-over
relief did not apply ........................................................................................ R500 000
l the capital gain that would have arisen if the asset was disposed of at its market value on the
date of the de-grouping event:
Market value at the time of the de-grouping event....................................... R1 500 000
Less: Recoupment that would have arisen at this time ................................ (R1 500 000)
Proceeds at the time of the intra-group transaction ..................................... R nil
Base cost of the equipment at this time (R2 500 000 – R2 500 000) ........... (R nil)
Capital gain if equipment disposed of at the time of de-grouping ................. R nil
The capital gain of R nil is the lesser amount. No capital gain will therefore arise in the hands of
Neymar Ltd on de-grouping.
De-grouping charges, based on a similar mechanism as described above, apply to cross-border

intra-group transactions if the parties involved cease to form part of the same group of companies or
cease to be a controlled foreign company in relation to a resident that forms part of this group of
companies. The de-grouping charge will only arise if the equity shares acquired in terms of the intra-
group transaction have not yet been disposed of at the time of the de-grouping event (ss 45(4)(bA)
and 45(4)(d)).
Disguised sales transactions

Roll-over relief is afforded to intra-group transactions on the understanding that these transactions
are used to reorganise assets within a group rather than to sell the asset for cash. A number of
schemes exist that used the relief available for intra-group transactions to transfer assets to a trans-
feree company (either for cash or on loan account), following which the group aimed to divest itself of
the transferee company. A group may be able to receive cash for this divestment in the form of
dividends funded from cash consideration payable in the intra-group transaction or the transfer, and
subsequent settlement, of a loan that arose as part of the intra-group transaction.
In order to curb this form of avoidance using intra-group transactions, a de-grouping event is
deemed to take place if the intra-group transaction forms part of a transaction, scheme or operation
in terms of which:
l the consideration received or accrued in respect of the intra-group transaction, or
l more than 10% of any amounts derived directly or indirectly from such consideration
is disposed of by the transferor (or other company that forms part of the same group of companies as
the transferor) to a person outside the group of companies for no consideration, non-arm’s length
consideration or in the form of a distribution (s 45(4B)). This anti-avoidance rule only applies if the
consideration is disposed of within two years from the date of the intra-group transaction.
The consideration obtained by the transferor company in an intra-group transaction would also
present an opportunity to realise some of the value transferred by the transferor company using the
roll-over relief, on a tax-free basis, if the tax cost of the consideration is equal to its market value. This
scenario would arise where, for example, a transferor company disposed of an asset with a market
value of R1 million and a tax cost of R300 000 to a transferee company on loan account in terms an
intra-group transaction. Even though the gain of R700 000 will realise if the transferee company
disposes of the asset acquired, the transferor company may be able to realise the R1 million value of
the asset transferred in cash by transferring the loan of R1 million to an external person in exchange
for cash of R1 million. If the loan has a tax cost of R1 million, this transfer will have no tax implications
for the transferor. A similar arrangement may be entered into using preference shares, rather than a
loan.
742
In order to close this avoidance opportunity for the transferor, the tax cost of the debt or preference
shares will be nil in the hands of the transferor company if (s 45(3A)(a) and (b)):
l the consideration by a transferee company in an intra-group transaction is funded directly or
indirectly by the issuing of debt or shares (not equity shares)
l this debt or these shares are issued by a company that forms part of the same group of
companies as the transferor or transferee company
l the debt or shares are used directly or indirectly for the purposes of facilitating or funding the
intra-group transaction.
The result of the nil tax cost is that the loan or preference shares acquired by the transferor in terms
of an intra-group transaction cannot subsequently be disposed of on a tax-free basis. Specific
provision has been made to ensure that the settlement of the debt or redemption of the preference
shares do not result in tax implications due to the nil tax cost (ss 45(3A)(c) and (d)).
20.9 Special rules: Unbundling transactions (s 46)

Where the value of shares is derived from shareholding by a company in another company, the
shareholders of the company may wish to unbundle the various components, that contribute to the
value of the shares, into separate shareholdings. The purpose of an unbundling could be to distribute
value to shareholders or to separate different elements of the value from one another to create better
performing companies. The unbundling may, however, also be forced by regulations. If a company
distributes certain substantial shareholdings in other companies to its shareholders, this transaction
may qualify for relief if it is an unbundling, as contemplated in s 46.

The definition of an unbundling transaction contains two parts. The first part deals with transactions
that mainly take place in a domestic context (par (a) of the definition of an unbundling transaction).
The second part describes an unbundling transaction in a cross-border context (par (b) of the defini-
tion of unbundling transaction).
20.9.1.1 Domestic unbundling transaction (par (a) of the definition of ‘unbundling transaction’ in
s 46(1))
An unbundling transaction occurs if all the following requirements are met:
l A resident company (unbundling company) makes a distribution.
l The distribution consists of all the equity shares that the unbundling company holds in another
resident company (unbundled company).
l The distribution of the equity shares in the unbundled company is made to any shareholder of the
unbundling company in accordance with its effective interests in the unbundling company.
l The distribution is made in one of the following circumstances:
– all the equity shares of the unbundled company are listed on a South African exchange or will
be listed on a South African exchange within 12 months of the unbundling transaction
– the shareholder to which the distribution is made forms part of the same group of companies
as the unbundling company, or
– the distribution is made in pursuance of an order by the Competition Tribunal or the Competi-
tion Appeal Court.
l The equity shares in the unbundled company constitute a substantial shareholding in one of the
following ways:
– If the unbundled company is not a listed company immediately before the distribution, the
equity shares distributed represent more than 50% of the equity shares of the unbundled
company.
– If the unbundled company is a listed company immediately before the distribution, the
threshold depends on whether any other person holds the same or more shares than the
unbundling company. If another person holds the same number of shares or more than the
unbundling company, the equity shares distributed must be more than 35% of the equity
shares of the unbundled company. If this is not the case, the threshold is that the equity shares
distributed must be more than 25% of the equity shares of the unbundled company.
743
Example 20.21. Unbundling transactions

Discuss whether each of the following transactions constitute an unbundling transaction as con-
templated in s 46:
l Scenario A: Concrete Holdings (Pty) Ltd holds all the shares of Concrete (Pty) Ltd. Con-
crete (Pty) Ltd holds 80% of the shares in Wall (Pty) Ltd. A decision has been made that
Concrete (Pty) Ltd will distribute all of its shareholding in Wall (Pty) Ltd to Concrete
Holdings (Pty) Ltd.
l Scenario B: The shares of Sand (Pty) Ltd are widely held by a number of shareholders. The
largest shareholder holds 21% of the issued share capital. Sand (Pty) Ltd holds 80% of the
shares in Stone (Pty) Ltd. A decision has been made that Sand (Pty) Ltd will distribute all of
its shareholding in Stone (Pty) Ltd to the shareholders.
SOLUTION
Scenario A
Concrete (Pty) Ltd, a resident company, will distribute all the shares that it holds in another
resident company (Wall (Pty) Ltd) to its shareholders in accordance with the effective share-
holding in Concrete (Pty) Ltd. The distribution will be made to Concrete Holdings (Pty) Ltd, which
holds all the shares of Concrete (Pty) Ltd and therefore forms part of the same group of
companies as Concrete (Pty) Ltd. The shares distributed constitute more than 50% of the issued
equity shares of Wall (Pty) Ltd. This is an unbundling transaction as contemplated in s 46.
Concrete (Pty) Ltd is the unbundling company and Wall (Pty) Ltd the unbundled company.
Scenario B
Sand (Pty) Ltd, as resident company, will distribute all the shares that it holds in another resident
company (Stone (Pty) Ltd) to its shareholders in accordance with their effective shareholding in
Concrete (Pty) Ltd. As the distribution is not made by a company that is listed or to be listed in
the next 12 months, is not made to a company that forms part of the same group of companies
as Concrete (Pty) Ltd and is not made in pursuance of an order by the Competition Tribunal or
the Competition Appeal Court, this is not an unbundling transaction.
20.9.1.2 Cross-border unbundling transaction (par (b) of the definition of ‘unbundling transaction’
in s 46(1))
In a cross-border context, a transaction will be an unbundling transaction if all the following require-
ments are met:
l The equity shares in a foreign company (unbundled company) are held by
– a resident company, or
– a controlled foreign company (unbundling company).
l Immediately before the distribution below, the unbundling company holds more than 50% of the
equity shares of the unbundling company and all the shares are held as capital assets.
l All the equity shares in the unbundled company that are held by the unbundling company are
distributed to any shareholder of the unbundling company in accordance with its effective
interests in the unbundling company.
l The shareholder to whom the distribution is made:
– is a resident and forms part of the same group of companies as the unbundling company (s 1
definition), or
– is not a resident, but is a controlled foreign company in relation to any resident that forms part
of the same group of companies as the unbundling company (s 1 definition).
20.9.1.3 Exclusions from the scope of s 46 (ss 46(6A), 46(7) or 46(8))

The provisions of s 46 do not apply to the following transactions, despite the fact that the transactions
meet the definition of an unbundling transaction as described above:
l If the shareholder and unbundling transaction agree in writing that s 46 will not apply to the distri-
bution of shares in an unlisted unbundled company by an unlisted unbundling company to a
shareholder where the unbundled company is a controlled group company in relation to the
shareholder immediately before and after the transaction (s 46(8)).
744
l In the context of a domestic unbundling transaction, where, immediately after the distribution in
terms of the unbundling transaction, 20% or more of the shares in the unbundled company are
held by disqualified persons (alone or with their connected persons (who are also disqualified
persons)) (s 46(7)(a)). For these purposes, the following persons are disqualified persons
(s 46(7)(b)):
– a person who is not a resident
– the government of the Republic in the national, provincial or local sphere
– an approved public benefit organisation
– an approved recreational club
– a retirement fund or benefit fund (as contemplated in s 10(1)(d)(i) or (ii))
– an exempt person contemplated in s 10(1)(cA) or 10(1)(t).
This exclusion aims to ensure that the equity shares are not transferred to a significant extent to a
person in whose hands it would not be subject to tax upon disposal from a person in whose
hands it would have been subject to tax, using the relief afforded to unbundling transactions.
l A distribution of shares in an unbundled company made by an unbundling company that is a
REIT or controlled company. A specific pass-through tax regime applies to REITs, which could be
disturbed if these unbundling transactions were to be allowed (see 19.5.7).
20.9.2 Relief
An unbundling transaction would normally have tax implications for the unbundling company and its
shareholders. The relief measures available to these persons are discussed below.
20.9.2.1 Unbundling company

The income tax implications of an unbundling transaction for the unbundling company that distributes
the shares it holds in the unbundled company are the following:
l The unbundling company must disregard the distribution for purposes of determining its taxable
income, assessed loss or net income if it is a controlled foreign company (s 46(2)). This means
that no recoupment or capital gain will arise in the hands of the unbundling company when it
disposes of the shares in the unbundled company.
l The contributed tax capital of the unbundling company is reduced proportionately to reflect the
value unbundled. Following an unbundling transaction, the contributed tax capital of the
unbundling company must be adjusted by applying the ratio between the value of the unbundling
company shares immediately after the unbundling transaction relative to the value of its shares
immediately before the distribution (s 46(3A)(a)).
The contributed tax capital of the unbundled company is also adjusted accord-
ingly when an unbundling transaction takes place. The total contributed tax
capital of this company is deemed to be the total of (s 46(3A)(b)):
[Unbundling company CTC before transaction × (market value of the distributed
Please note! shares before the transaction / market value of the unbundling company shares
before the transaction)]
and
[Unbundled company CTC before the transaction × (shares held in the
unbundled company by persons other than the unbundling company before the
transaction) / (all shares held in that company before the transaction)]
l The distribution made in terms of the unbundling transaction must be disregarded for purposes of
any dividends tax liability of the unbundling company resulting from the distribution of the shares
in specie (s 46(5)).
Remember
The tax cost of the unbundled company shares in the hands of the unbundling company is not
transferred to the shareholder of the unbundling company. This tax cost is lost in the process of
the unbundling transaction, as there is no increase in the tax cost of the shares in the hands of
the shareholder who now holds the unbundled company shares.
745
20.9.2.2 Shareholder of the unbundling company

The income tax implications of an unbundling transaction in the hands of the shareholder that
acquires the shares in the unbundled company are:
l The shareholder must allocate a portion of the tax cost of the shares held in the unbundling
company to the unbundled company shares that it receives in terms of the unbundling trans-
action. A similar apportionment of any valuation obtained for the unbundled company shares for
capital gains tax purposes is required. This allocation has the effect that the tax cost of the
unbundling company shares is reduced, while tax cost is attached to the unbundled company
shares received. This portion allocated from the unbundling company shares to the unbundled
company shares is based on the following ratio (s 46(3)(a)(i) and (v)):
(market value of the unbundled company shares at the end of the day)
(sum of the market values of the unbundled company and
unbundling company shares at the end of that day)
Binding General Ruling 29 (BGR29) provides guidance on the determination of the day on which
the above values must be determined in a listed context. It requires that the prices of the respect-
ive shares on the last day to trade (LDT) +1 must be used.
If the unbundling company shares were acquired by the shareholder during the
two-year period preceding the unbundling from a connected person in whose
Please note! hands any amount is received in respect of the disposal of the shares was not
subject to tax, a limitation applies in respect of the expenditure to which the
above allocation rules apply (s 46A). This rule is aimed at ensuring that the
expenditure is not artificially inflated.
l The expenditure relevant to the tax cost that has been allocated to the unbundled company
shares must be deemed to be incurred on the same dates that it was incurred in respect of the
unbundling company shares (s 46(3)(a)(iv)).
l The unbundled company shares must be deemed to have been acquired on the same date that
the shareholder acquired the unbundling company shares. This does, however, not apply when
determining whether the unbundled company is a qualifying share for purposes of the three-year
holding period in s 9C (s 46(3)(a)(ii)).
l The unbundled company shares will have the same nature as the unbundling company shares in
the hands of the shareholder. In other words, if the shareholder holds the unbundling company
shares as capital assets, the unbundled company shares will similarly be held as capital assets.
If the unbundling company shares are held as trading stock, the unbundled company shares will
be acquired as trading stock (s 46(3)(a)(iii)).
l The rules relating to returns of capital received by or accrued to the shareholder do not apply in
respect of the distribution (s 46(5A)).
If the shareholder holds the shares in the unbundling company in terms of a right
to acquire marketable securities to which s 8A applied, the unbundling trans-
Please note! action will result in a portion of the gain in respect of the securities having to be
included in the shareholder’s income (s 46(4)).
Example 20.22. Unbundling transactions – Relief

Concrete Holdings (Pty) Ltd acquired the Concrete (Pty) Ltd shares as capital assets for an
amount of R30 million during 2013. Concrete (Pty) Ltd acquired the 80% shareholding in Wall
(Pty) Ltd for an amount of R20 million in 2014. Concrete (Pty) Ltd held the Wall (Pty) Ltd shares
as a capital asset.
Prior to the distribution, the Concrete (Pty) Ltd shares were valued at R63 million and 80% share-
holding in Wall (Pty) Ltd was valued at R18 million. These values reflected a discount as a result
of the fact that the majority interest in Wall (Pty) Ltd was held in the Concrete (Pty) Ltd group
structure, which also included some loss-making operations.
continued
746
Immediately after the distribution, the shares of Concrete Holdings (Pty) Ltd will be valued at
R100 million, the shares of Concrete (Pty) Ltd at R45 million and the 80% shareholding in Wall
(Pty) Ltd at R20 million.
The contributed tax capital of Concrete (Pty) Ltd before the transaction was R5 million. The con-
tributed tax capital of Wall (Pty) Ltd before the transaction was R2 million.
Discuss the relief measures that will apply to the unbundling transaction for the parties involved.
SOLUTION
Wall (Pty) Ltd (unbundling company)
The unbundling transaction has no impact on the taxable income of Wall (Pty) Ltd as its shares
are the subject being transferred.
The unbundling transaction affects the unbundling company’s contributed tax capital (CTC).
After the transaction, Wall (Pty) Ltd’s CTC will be equal to (s 46(3A)(b)):
Share of Concrete (Pty) Ltd’s CTC (R5 000 000 × (R18 000 000/R45 000 000)) ....... R2 000 000
Portion of Wall (Pty) Ltd’s own CTC (R2 000 000 × (R20%/100%)............................. R400 000
Wall (Pty) Ltd CTC after the transaction ..................................................................... R2 400 000
Concrete (Pty) Ltd (unbundling company)

Concrete (Pty) Ltd must disregard the distribution of the Wall (Pty) Ltd shares for purposes of
determining its taxable income (s 46(2)). It must also disregard the distribution for purposes of its
liability to pay dividends tax in respect of the shares distributed (s 46(5)).
Concrete (Pty) Ltd’s CTC must be adjusted after the transaction to R3 571 428 (R5 000 000 ×
(R45 000 000/R63 000 000).
Concrete Holdings (Pty) Ltd (shareholder)
Concrete Holdings (Pty) Ltd must apportion the expenditure it incurred to acquire the Con-
crete (Pty) Ltd shares between the Concrete (Pty) Ltd shares and the 80% shareholding in Wall
(Pty) Ltd after the transaction. This allocation is (s 46(3)(a)(i) and (v)):
Expenditure allocated to the Wall (Pty) Ltd shares ................................................... R9 230 769
(R30 000 000 × R20 000 000/(R45 000 000 + R20 000 000)
Expenditure allocated to the Concrete (Pty) Ltd shares ........................................... R20 769 231
(R30 000 000 – R9 230 769)
The characteristics (date of acquisition, purpose for which it was held and valuations obtained)
of the Concrete (Pty) Ltd shares also apply in respect of the Wall (Pty) Ltd shares (s 46(3)(a))
This example illustrates that the relief mechanism employed by s 46 has the following effects:
l The base cost of the Wall (Pty) Ltd shares of R20 million is not carried over to Concrete
Holdings (Pty) Ltd. This base cost is forfeited as a result of the relief.
l The combined CTC of the unbundled and unbundling companies after the transaction
(R5 971 428) may be less than the combined CTC of the entities before the transaction
(R7 000 000). The relief may result in an amount of CTC being forfeited.
20.10 Special rules: Liquidation, winding-up and deregistration (s 47)

A company may become redundant in a group structure. If this happens, the company can be liquid-
ated and its assets transferred to the shareholders of the company. The transfer of assets as a result
of the liquidation, winding-up or deregistration of a company may in some instances be done in a tax-
neutral manner using the corporate rules if the transfer is done in terms of a liquidation distribution.

The definition of a liquidation distribution has a part that deals with domestic liquidation distributions
(par (a) of the definition of ‘liquidation distribution’ in s 47(1)) and a part that deals with cross-border
liquidation distributions (par (b) of the definition of ‘liquidation distribution’ in s 47(1)).
20.10.1.1 Domestic liquidation distribution (par (a) of the definition of ‘liquidation distribution’ in
s 47(1))
A transaction is a liquidation distribution if all the following requirements are met:
l A resident company (liquidating company) disposes of all its assets.
747
The liquidating company is not required to dispose of assets it elects to use to

Please note! l settle debts incurred in the ordinary course of its business
l satisfy any reasonably anticipated liability to any sphere of government of
any country and the costs of administration of the liquidation or winding-up.
l The assets are disposed of by the shareholders of the company in anticipation of or in the course
of the liquidation, winding-up or deregistration of the company.
The transaction is, however, only a liquidation distribution to the extent that the assets are disposed
of to another resident company (holding company) that forms part of the same group of companies
as the liquidating company on the date of the disposal.
Example 20.23. Liquidation distributions

Discuss whether each of the following transactions constitutes a liquidation distribution as
l Scenario A: Ship Ltd owns all the shares of Sail Ltd. The layered group structure has
become redundant and the group wishes to liquidate Sail Ltd and transfer its business to
Ship Ltd. Ship Ltd will continue to operate the business in the same manner in which it was
operated by Sail Ltd.
l Scenario B: Mafungwashe Thole owns all the shares in a company. The company’s only
asset is a property in which Mafungwashe resides. She wishes to liquidate the company and
distribute the property to her, in her capacity as the sole shareholder of the company.
SOLUTION
Scenario A
As Ship Ltd holds more than 70% of the equity shares of Sail Ltd, the companies form part of the
same group of companies. Sail Ltd will dispose of its assets to Ship Ltd in anticipation of the
liquidation of Sail Ltd. This transaction is a liquidation distribution transaction. Sail Ltd is the
liquidating company and Ship Ltd the holding company.
Scenario B
Even though Mafungwashe holds all the shares in the company, she is a natural person and does
not form part of the same group of companies as the company. This transaction is not a liquida-
tion distribution transaction.
20.10.1.2 Cross-border liquidation distribution (par (b) of the definition of ‘liquidation distribution’
in s 47(1))
In a cross-border context, a transaction is a liquidation distribution if all the following requirements
are met:
l A controlled foreign company in relation to a resident (liquidating company) disposes of all its
assets, other than those used to settle debts that arose in the ordinary course of its business, and
anticipated liabilities and administration costs relating to its liquidation or winding-up.
l The assets are disposed of by the shareholders of the company in anticipation of or in the course
of the liquidation, winding-up or deregistration of the company.
l Immediately before the disposal, each of the shares in the liquidating company that is held by the
holding company is held as a capital asset.
The transaction is, however, only a liquidation distribution to the extent that the assets are disposed
of to one of the following companies (holding company):
l a resident company that forms part of the same group of companies (s 1 definition) as the
liquidating company on the date of the disposal, or
l a controlled foreign company in relation to any resident and, immediately after the transaction,
more than 50% of the equity shares of the holding company are held by a resident.
20.10.1.3 Exclusions from the scope of s 47 (ss 47(6))

meets the definition of a liquidation distribution as described above:
l if the holding company and liquidating company agree in writing that s 47 does not apply
(s 47(6)(b))
748
l if the holding company is one of the following exempt persons (s 47(6)(a)):

– an approved public benefit organisation
– an approved recreational club
– an exempt person contemplated in ss 10(1)(cA), 10(1)(cP), 10(1)(d), 10(1)(e) or 10(1)(t).
In addition, the relief measures do not apply where the liquidating company has not taken steps to
liquidate, wind up or deregister (see 20.4.3) within 36 months after the transaction. SARS may allow
the period to be extended (s 47(6)(c)(i)). The same outcome would apply if the steps have been
taken, but any step has subsequently been withdrawn or anything has been done to invalidate any
step taken, which will result in the company not being liquidated, wound up or deregistered
(s 47(6)(c)(ii)). Any tax that becomes payable as a result of the required steps not being taken within
the prescribed period or being withdrawn or invalidated subsequently, may be recovered from the
holding company.
20.10.2 Relief
The relief measures that apply to liquidation distributions affect the liquidating company and the
holding company. The tax treatment of the disposal by each of these companies is discussed below.
20.10.2.1 Liquidating company

The income tax implications of a liquidation distribution for the liquidating company that disposes of
its assets to the holding company are the following:
the hands of the liquidating company as a result of application of the roll-over mechanism
described in 20.4.4 (ss 47(2) and 47(3)). An exception exists in the context of a cross-border
liquidation distribution (par (b) of the definition of ‘liquidation distribution’) in terms of which an
asset is disposed of by a liquidating company to a holding company that is a resident. In the
case of such a transaction, this roll-over relief only applies if the market value of the asset is equal
to or exceeds the tax cost. This prevents tax losses being brought into the South African tax net
using an intra-group transaction.
The relief described above only applies to the extent that (s 47(3A))
l equity share(s) in the liquidating company held by the holding company are
disposed of as a result of the liquidation, winding-up or deregistration of the
liquidating company, or
l the holding company assumes debts incurred by the liquidating company
Please note! – more than 18 months before the disposal
– within 18 months before the disposal, but only if
the debt constitutes a refinancing of the above debt, or
arose in the ordinary course of the liquidating company’s business,
which is disposed of as a going concern to the holding company.
In this context, debt includes contingent liabilities (definition of ‘debt in s 41).
20.10.2.2 Holding company

The income tax implications of a liquidation distribution for the holding company that acquires the
assets from the liquidating company and that disposes of its shares in the liquidating company when
it is terminated are the following:
l The tax cost of the asset in the hands of the holding company is based on the tax cost of the
asset in the hands of the liquidating company. In addition, the characteristics of the asset in the
hands of the liquidating company are transferred to the holding company. These implications are
effected through the roll-over mechanism described in 20.4.4 (ss 47(2) and 47(3)). It is important
to note that the roll-over treatment only applies to the extent that the holding company disposes of
its equity shares in the liquidating company or assumes debts specified above.
l The holding company must disregard the disposal of the shares held in the liquidating company
as a result of the liquidation, winding-up or deregistration of that liquidating company when deter-
mining its taxable income, assessed loss or aggregate capital gain or capital loss (s 47(5)(a)). It
must similarly disregard any return of capital by way of a distribution of cash or an asset in specie
by the liquidating company in anticipation of or in the course of its liquidation, winding-up or
deregistration (s 47(5)(b))
749
Example 20.24. Liquidation distribution – Relief

Ship Ltd incurred expenditure of R40 million to acquire the shares in Sail Ltd during 2014.
Discuss the effect of the roll-over relief in terms of s 47 for Ship Ltd and Sail Ltd.
SOLUTION
Sail Ltd
The roll-over relief mechanism described in 20.4.4 applies. This means that Sail Ltd is deemed to
have disposed of the business assets at their tax costs. No allowances will be recouped by
Sail Ltd when it distributes the assets to Ship Ltd (ss 47(2) and 47(3)).
Ship Ltd
The roll-over relief mechanism described in 20.4.4 applies. Ship Ltd is deemed to acquire the
business assets at the same base cost that Sail Ltd is deemed to have disposed of it. Ship Ltd
will only be entitled to deduct allowances in respect of the assets on the remaining tax costs. If
Ship Ltd were to dispose of the assets, the recoupment would include the allowances deducted
by Ship Ltd itself as well as the allowances deducted by Sail Ltd (ss 47(2) and 47(3)).
Ship Ltd must disregard the disposal of its shares in Sail Ltd and the effect of any distribution of
the assets from Sail Ltd (s 47(5)). The base cost of R40 million is lost during this process.
20.10.3 Anti-avoidance rules (s 47(4))

The relief in respect of liquidation distributions is subject to a ring-fencing provision that applies to
gains and losses arising on the assets when realised in the hands of the holding company if it
disposes of the assets within 18 months of the liquidation distribution (s 47(4)). This ring-fencing rule
employs the mechanism described in 20.4.5.
750
21 Cross-border transactions
Pieter van der Zwan

l identify what factors should be considered to determine the tax implications of a
cross-border transaction
l determine whether the income is received or accrues from a South African source
or not
l apply the provisions of the relevant tax treaty that South Africa has entered into to a
cross-border transaction
l calculate the South African tax liabilities, including withholding taxes, of a person
who is not a resident of South Africa for tax purposes
l calculate the normal tax consequences of cross-border transactions for South
African tax residents, including identifying specific exemptions that may apply and
the availability of rebates or deductions for foreign taxes
l apply the controlled foreign company rules to an investment that a resident holds in
a foreign company
l identify whether a transaction is subject to transfer pricing requirements and make
the necessary adjustments if the transfer pricing rules apply
l determine whether a taxpayer qualifies for the benefits of a special cross-border
tax regime and explain the benefits available to it.
Contents
Page
21.1 Overview ......................................................................................................................... 753
21.2 Principles of South African taxation of cross-border transactions ................................. 754
21.3 Source............................................................................................................................. 756
21.3.1 Source of dividend income ............................................................................. 757
21.3.2 Source of interest income ............................................................................... 757
21.3.3 Source of royalty income and know-how payments ....................................... 758
21.3.4 Source of amounts derived from the disposal of assets and exchange
differences ...................................................................................................... 759
21.3.5 Source of amounts received from a retirement fund ...................................... 759
21.3.6 Source of employment income ....................................................................... 760
21.3.7 Source of rental income .................................................................................. 760
21.3.8 Source of income from business activities ..................................................... 761
21.4 Tax treaties ..................................................................................................................... 762
21.4.1 Integration with domestic law ......................................................................... 763
21.4.2 Application and scope .................................................................................... 763
21.4.3 Allocation of taxing rights and elimination of double taxation ........................ 765
21.4.3.1 Income from immovable property ................................................. 766
21.4.3.2 Dividends ...................................................................................... 766
21.4.3.3 Interest .......................................................................................... 767
21.4.3.4 Royalties ........................................................................................ 767
21.4.3.5 Employment-related income ......................................................... 767
21.4.3.6 Students ........................................................................................ 769
21.4.3.7 Artists and sportsmen ................................................................... 769
21.4.3.8 International traffic ........................................................................ 770
21.4.3.9 Business profits ............................................................................. 770
21.4.3.10 Capital gains ................................................................................. 773
751
Page
21.4.3.11 Other income................................................................................. 774
21.4.3.12 Capital ........................................................................................... 774
21.4.4 Special provisions ........................................................................................... 775
21.5 South African taxation of income of non-residents ........................................................ 775
21.5.1 Tax liability and obligations ............................................................................. 775
21.5.2 Withholding taxes ............................................................................................ 776
21.5.2.1 Common features of withholding taxes imposed in respect of
payments to non-residents ........................................................... 777
21.5.2.2 Withholding from amounts paid to non-resident sellers of
immovable property (s 35A) ......................................................... 782
21.5.2.3 Tax on foreign entertainers and sportspersons (ss 47A to 47K) 783
21.5.2.4 Withholding tax on royalties (ss 49A to 49H) ................................ 784
21.5.2.5 Withholding tax on interest (ss 50A to 50H) ................................. 785
21.5.3 Comprehensive example: Taxation of cross-border transactions by non-
residents .......................................................................................................... 787
21.6 South African taxation of income of residents ................................................................ 788
21.6.1 Normal tax liability ........................................................................................... 788
21.6.2 Specific exemptions available to residents in respect of foreign sourced
amounts ........................................................................................................... 789
21.6.2.1 Exemption of certain foreign dividends and capital gains
(s 10B and par 64B of the Eighth Schedule) ................................ 789
21.6.2.2 Exemption for foreign employment income (s 10(1)(o)) ............... 790
21.6.2.3 Exemption for foreign pensions and welfare payments
(s 10(1)(gC)).................................................................................. 790
21.6.2.4 Exemption for international shipping activities by domestically
flagged ships (s 12Q) ................................................................... 790
21.6.3 Rebates and deductions for foreign tax (s 6quat) .......................................... 790
21.6.3.1 Rebate for foreign tax ................................................................... 791
21.6.3.2 Deduction for foreign tax .............................................................. 797
21.6.4 Comprehensive example: Taxation of cross-border transactions by
residents .......................................................................................................... 798
21.7 Controlled foreign companies (CFCs)............................................................................ 801
21.7.1 Overview of the effect of the CFC regime ....................................................... 801
21.7.2 Application of CFC rules (s 9D definitions and s 9D(2))................................. 804
21.7.2.1 Definition of a CFC and related concepts .................................... 804
21.7.2.2 Inclusion of amount in resident’s taxable income (s 9D(2)) ......... 806
21.7.2.3 Net income of a CFC (ss 9D(2A) and 9D(6)) ................................ 808
21.7.3 Income not subject to CFC rules (ss 9D(9) and 9D(9A))................................ 812
21.7.3.1 Foreign business establishment exclusion (ss 9D(9)(b),
9D(9)(fB) and 9D(9A)) ................................................................... 812
21.7.3.2 Amounts that have already been subject to tax in South Africa
(ss 9D(9)(d) and 9D(9)(e)) ............................................................ 817
21.7.3.3 Amounts that have already been subject to the CFC rules
(s 9D(9)(f) ...................................................................................... 818
21.7.3.4 Intra-group passive income (s 9D(9)(fA)) ..................................... 818
21.7.3.5 Amounts attributable to certain policyholders (s 9D(9)(c)) .......... 818
21.7.4 Practical approach to applying CFC rules ..................................................... 819
21.8 Transfer pricing (s 31) .................................................................................................... 821
21.8.1 Basic principles............................................................................................... 822
21.8.1.1 Transactions that are subject to transfer pricing in South Africa . 822
21.8.1.2 Transfer pricing adjustments (ss 31(2) and 31(3)) ....................... 823
21.8.2 Thin capitalisation ........................................................................................... 824
21.8.3 Exceptions where transfer pricing rules do not apply .................................... 825
21.8.3.1 High-taxed CFC exemption (s 31(6)) ............................................ 825
21.8.3.2 Equity loan exemption (s 31(7)) .................................................... 826
21.8.4 Compliance and reporting requirements ........................................................ 826
21.9 Special cross-border tax regimes in South Africa ......................................................... 827
21.9.1 Headquarter company regime........................................................................ 827
752
21.1 Chapter 21: Cross-border transactions
21.1 Overview
Global trade has increased exponentially over the past few decades as technology and access to
global markets have improved significantly. As a result, parties who are situated in different juris-
dictions often transact with each other. Examples of such transactions include foreign persons setting
up business operations in South Africa or rendering services to South Africans (inbound trans-
actions). Conversely, South African businesses may carry on trade in other parts of the world (out-
bound transactions). These transactions are referred to as cross-border transactions in this chapter.
Cross-border transactions are not limited to business transactions, but may also extend to cross-
border investment transactions.
Cross-border business and investment transactions pose a challenge from an income tax per-
spective as the transaction may attract tax in more than one jurisdiction. Acknowledgement of the tax
effects of the transaction in the other jurisdiction is required by the respective tax authorities to
ensure that various layers of tax do not become an obstacle and hindrance to cross-border trade.
From an economic perspective, cross-border trade should generally be encouraged as it plays an
important role in the economy of a country.
The interaction of tax laws of various jurisdictions, however, also present opportunities to structure
transactions in a manner that attempts to avoid or reduce paying tax in all jurisdictions involved.
These transactions aim to avoid or reduce tax in a legal manner by using differences that may exist
between the tax legislation in different countries. This behaviour has attracted the attention of
governments over the years, which has resulted in the introduction of many anti-avoidance rules
aimed at closing loopholes that may exist for cross-border transactions. The most recent global
attempt to curb this behaviour was undertaken by the Organisation for Economic Co-operation and
Development (OECD) and the G20. This project culminated in the publication of a number of action
plans with measures by the OECD to tackle base erosion and profit shifting (BEPS).
In recent times, the moral acceptability of structures that avoid or reduce tax using legal means has
come into question, for example during investigations by the United Kingdom government into the tax
affairs of large technology companies. These concerns are largely based on the premises that the
taxes being avoided deprives the ordinary citizens of the countries affected of funds required for
basic services that the government should be providing. These debates raise difficult questions to
businesses around the nature of the planning and structuring that they may be willing to undertake in
relation to cross-border arrangements.
This chapter explains the South African tax rules applicable to cross-border transactions. The
explanation is laid out as follows:
Principles of taxation of cross-border transactions (21.2)
Principles applicable to transactions by residents and non-residents:

Source concept (21.3) Application of tax treaties (21.4)
Application to transactions by non-residents (21.5) Application to transactions by residents (21.6)
Anti-avoidance applicable to residents:

Controlled foreign company structures (21.7)
Anti-avoidance: Transfer pricing rules (21.8)
753
Remember
Cross-border transactions may also be subject to the exchange control requirements in South
Africa. These requirements are contained in the Exchange Control Regulations, as promulgated
in terms of the Currency and Exchanges Act. Even though these requirements do not necessarily
relate to the taxation of cross-border transactions, they have to be borne in mind when
undertaking such a transaction as it may impact on the implementation and execution of the
transaction.
21.2 Principles of South African taxation of cross-border transactions

South Africa introduced a residence-based system of tax in 2001. This means that persons who are
residents of South Africa for tax purposes are subject to income tax in South Africa on their worldwide
income (par (i) of the definition of ‘gross income’ in s 1). Persons who are not residents of South
Africa for tax purposes (referred to as non-residents in this book) are only subject to income tax in
South Africa on amounts that they derive from a source in South Africa (par (i) of the definition of
‘gross income’ in s 1). The income tax in respect of amounts derived by such persons from a South
African source is often in the form of a withholding tax for ease of collection. In addition, non-
residents may also be subject to capital gains tax if they dispose of certain South African sourced
assets (see chapter 17).
The starting point for determining the South African tax implications of any cross-border transaction is
to establish whether or not the person who derives income from the transaction is a resident of South
Africa for tax purposes. Tax residence is discussed in detail in chapter 3.
A cross-border transaction may be subject to tax in the following jurisdictions in the hands of the
recipient:
l The jurisdiction where the income is sourced (source country). This tax is imposed on the
grounds that the income was derived in this country, using its resources, irrespective of the
residence of the recipient.
l The jurisdiction where the recipient of the income is a resident (country of residence). This tax
arises if the jurisdiction where the recipient is a tax resident follows a residence-based tax system
(like the one in South Africa).
The imposition of tax on the same amount in the hands of the same persons by more than one
country may result in it no longer being economically feasible for the person to undertake the
transaction. This can be a hindrance to cross-border trade. A number of mechanisms have been
developed to prevent double taxation from obstructing cross-border trade. When determining the
South African tax implications of a cross-border transaction, it should be considered whether one of
the following mechanisms apply:
l Countries that follow a residence-based system of tax would normally provide relief to its
residents for certain foreign taxes incurred in respect of cross-border transactions. South Africa
provides this relief to its residents in terms of s 6quat.
l Certain cross-border transactions are exempt from tax. This may be an exemption afforded by
the source country or the country of residence.
l Agreements to avoid double tax imposed on the residents of a country when they transact in
another country may be entered into by the governments of the respective countries. These
agreements are referred to as tax treaties or double tax agreements (DTA). A tax treaty may limit
the right of one of the countries involved (source country or country of residence) to impose taxes
that it would normally be imposed in the absence of the treaty.
The following approach to determine the South African tax implications of a cross-border transaction
is proposed in this chapter:
754
Determine the residence of the person that derives income from a

cross-border transaction (chapter 3)
For transactions by
If the person is a resident: residents or If the person is a non-resident:
non-residents:
Include amount in gross Include amount in gross

income Determine the income or taxable capital
source of the gains if derived from a South
income (21.3) African source
Consider any exemption in the

Act (for example, the
exemption for foreign
Consider whether the
dividends)
Consider whether amount is subject to a
a tax treaty has withholding tax
been concluded
If no exemption exists, between South
consider whether South Africa Africa and the
Yes
may tax this type of income in other country and
terms of the relevant tax treaty if it has, determine
effect on the Normally
specific type of exempt from No
income (21.4) normal tax
If South Africa may tax income
in terms of the treaty,
determine whether relief is
available for foreign tax Consider if there is any
imposed on the transaction in exemption for this income
terms of s 6quat (rebate or in the Act
deduction)
If no exemption exists,
consider whether South Africa
may tax this type of income in
terms of the relevant tax treaty
and whether the amount of tax
is limited
Comprehensive examples of how this approach is applied to both residents and non-residents are
provided at the end of 21.1.5 and 21.1.6.
From the above diagram it is evident that the concept of source of income is central to the taxation of
both residents and non-residents. Tax treaties also impact the tax implications for transactions under-
taken by both residents and non-residents. These central aspects to the taxation of any cross-border
taxation are discussed next, followed by an explanation of the tax rules specifically applicable to
transactions by non-residents (21.1.5) and residents (21.1.6).
755
Remember
Cross-border transactions are often denominated in foreign currency. These transactions may
also give rise to exchange items in the form of amounts owing between the parties that are
denominated in foreign currencies. The conversion of these foreign currencies to rand and the
tax implications of exchange items resulting from these transactions are discussed in detail in
chapter 15.
21.3 Source
Prior to 2001 South Africa followed a source-based tax system. At the time the concept of source
played an important role to determine the income tax liability of both residents and non-residents.
Under the current residence-based tax system, the source of income is relevant in the context of non-
residents to determine whether an amount will be subject to tax. A resident is subject to income tax in
South Africa whether the amount received or accrued to it was derived from a South African source
or not. The concept of source is however still important when determining the tax liability of residents.
For example, if a resident derives income from a source outside of South Africa, a rebate may be
available to the resident in respect of foreign tax suffered on that income (see 21.6.3).
The source of income may be determined in terms of statutory source rules or common law
established in case law.
Statutory source rules

The Act governs the source of a number of income streams (s 9). The statutory source rules con-
tained in the Act largely reflect the source principles applied in tax treaties. These rules deal mostly
with passive income, for example interest and royalties.
Remember
A number of the statutory source rules refer to the presence of a permanent establishment in
South Africa or abroad. A taxpayer will have a permanent establishment in another jurisdiction if
it carries on business through a fixed place situated in that jurisdiction. The concept of
permanent establishment is discussed in more detail in 21.4.3.9.
Common law source principles

If the source of a specific type of income is not specified in the legislation, the source of the income
must be established by considering case law. In light of the fact that South Africa applied a source-
based tax system previously, a large body of case law exists on this subject. The authority in South
Africa for the determination of the source of an amount is found in CIR v Lever Brothers & Unilever
Ltd (1946 AD) where Watermeyer CJ said (at 8):
The word ‘source’ has several possible meanings. In this section it is used figuratively, and when so used in
relation to the receipt of money one possible meaning is the originating cause of the receipt of the money,
another possible meaning is the quarter from which it is received. A series of decisions of this Court and of
the Judicial Committee of the Privy Council upon our Income Tax Acts and upon similar Acts elsewhere
have dealt with the meaning of the word ’source‘ and the inference, which, I think, should be drawn from
those decisions is that the source of receipts, received as income, is not the quarter whence they come, but
the originating cause of their being received as income and that this originating cause is the work which the
taxpayer does to earn them, the quid pro quo which he gives in return for which he receives them. The work
which he does may be a business which he carries on, or an enterprise which he undertakes, or an activity
in which he engages and it may take the form of personal exertion, mental or physical, or it may take the
form of employment of capital either by using it to earn income or by letting its use to someone else. Often
the work is some combination of these.
Based on the above, where the source of income must be determined with reference to case law, as
opposed to being defined in a statutory source rule in s 9, the inquiry involves into two questions:
l What is the originating cause of the income?
l Where is the originating cause located?
In many instances it may not be difficult to determine and locate the originating cause of income. If an
amount has more than one originating cause, the source of the income will be based on the dominant
cause (CIR v Black (1957 AD)). In certain circumstances where an amount has more than one
dominant cause, apportionment of the source may be appropriate (CIR v Nell (1961 AD)). The above
756
case law illustrates the potential difficulties that may arise when determining the originating cause and
source of income. Although the case law provides guidance in determining the source of income, it is
almost impossible to extract general principles from these cases. The courts have frequently pointed
out that it is dangerous to generalise with regard to source. Each case has to be decided on its own
facts.
The overall approach to be adopted is indicated by the following passage, quoted in Liquidator,
Rhodesian Metals Ltd v COT (1938 AD) (at 379):
Source means not a legal concept but something which the practical man would regard as a real source of
income. The ascertaining of the actual source is a practical hard matter of fact.
Remember
Some of the tax treaties that South Africa has entered into contain rules that determine where
income is deemed to arise. A deemed source rule in a tax treaty overrides the application of the
statutory or common law source rules as the treaty provisions become part of the Act (see 21.4).
The source rules and guidance in relation to a number of income streams commonly encountered in
cross-border transactions are discussed below.
21.3.1 Source of dividend income

The source of dividend income depends on the residence of the company that pays the dividend. If
the dividend is paid by a South African resident company, the source of the dividend will be in South
Africa (s 9(2)(a)). If the dividend is a foreign dividend paid by a company that is not a South African
tax resident, the source of the dividend will be outside South Africa (s 9(4)(a)). This dividend will be a
foreign dividend (definition of ‘foreign dividend’ in s 1).
21.3.2 Source of interest income

Interest income may be from a South African source based on either of the following indicators:
l the residence of the person paying the interest, or
l the place where the funds or credit obtained is being used or applied.
Interest incurred by a person who is a South African resident is from a South African source
(s 9(2)(b)(i)). If a South African resident, however, incurs interest that is attributable to its permanent
establishment outside South Africa, the residence of the payer will not result in the source of the
interest being from South Africa. Alternatively, interest received by or accrued to a person in respect
of the use or application of funds or credit in South Africa will be from a South African source
(s 9(2)(b)(ii)). If the funds or credit is used in South Africa, the payer’s residence is not relevant. Any
interest that does not meet one of the criteria to be from a South African source is derived from a
source outside South Africa (s 9(4)(b)).
The above rules apply to interest as defined in s 24J. This definition is explained in chapter 16.
Remember
As the source of interest income was legislated in 2011, it is not necessary to consider case law,
for example the Lever Brothers & Unilever Ltd case, to establish the source of interest. This does
not mean that the case law relating to the source of interest is redundant. The doctrine of ‘origi-
nating cause’, which stems from the judgment in the Lever Brothers case, continues to be
authority when determining the source of any income that is not prescribed in the Act.
Example 21.1. Source of interest income

Investisseur Ltd, a Mauritian tax resident, advanced a loan of R10 million to Shishini (Pty) Ltd, a
South African tax resident. The loan bears interest at a fixed rate of 11% per annum. Shishini
(Pty) Ltd used the funds to start its business in South Africa.
What is the source of the interest received by Investisseur Ltd?
757
SOLUTION
As the source rules for interest have been legislated, it is not necessary to consult case law to
determine the source of the interest that accrues to the respective persons.
The interest that accrues to Investisseur Ltd is from a South African source as it is incurred by a
South African tax resident, Shishini (Pty) Ltd. As the funds are used in its South African
operations, the interest is not attributable to any permanent establishment of Shishini (Pty) Ltd
outside South Africa (s 9(2)(b)(i)).
Note
Even if Shishini (Pty) Ltd was not a South African tax resident, the interest would still have been
from a South African source based on the fact that the funds were used in South Africa
(s 9(2)(b)(ii)).
21.3.3 Source of royalty income and know-how payments

A royalty refers to any amount that is received or accrues in respect of the use, right of use or
permission to use intellectual property as listed in s 23I. This definition of intellectual property
includes patents, designs, trade marks and copyrights as defined in the relevant South African
legislation as well as similar foreign legislation. Intellectual property also extends to any property or
right of a similar nature and knowledge connected to the use of these items (definition of ‘intellectual
property’ in s 23(1)).
Similar to interest income, royalty income may be from a South African source based on
l the residence of the person paying the royalty
l the place where the intellectual property is used or may be used.
Royalties incurred by a person who is a South African resident are from a South African source
(s 9(3)(c)). If a South African resident, however, incurs royalties that are attributable to its permanent
establishment outside South Africa, the residence of the payer will not result in the source of the
royalties being from South Africa. Alternatively, royalties received by or that accrue to a person in
respect of the use or right to use intellectual property in South Africa will be from a South African
source, irrespective of the residence of the payer (s 9(2)(d)). Any royalties that do not meet one of the
criteria to be from a South African source are derived from a source outside South Africa (s 9(4)(c)).
The source of income derived from
l the imparting of, or the undertaking to impart, any scientific, technical, industrial or commercial
knowledge or information
l the rendering of, or the undertaking to render, any assistance or service in connection with the
application or use of such knowledge or information
is based on the same principles as royalties. This income is commonly referred to as know-how pay-
ments.
Know-how payments incurred by a person who is a South African resident are from a South African
source, unless the amount is attributable to a permanent establishment outside South Africa (s
9(3)(e)). Alternatively, know-how payments received by or that accrue to a person in respect of the
imparting of such knowledge or information and assistance or services relating to such information
for use in South Africa are from a South African source (s 9(2)(f)).
Remember
The same withholding tax applies to income derived in the form of royalties and know-how pay-
ments (see 21.5.2.4 for a detailed discussion of the withholding tax).
Example 21.2. Source of royalty income

Inventeur Ltd, a Mauritian tax resident company, developed intellectual property and registered a
patent in Mauritius. It makes its intellectual property available to Production (Pty) Ltd, a South
African company. Production (Pty) Ltd uses the patented technology in its manufacturing busi-
ness in South Africa and pays Inventeur Ltd a usage-based royalty.
Discuss the source of the royalty income received by Inventeur Ltd from Production (Pty) Ltd.
758
SOLUTION
The patent registered in Mauritius constitutes intellectual property as it is a patent defined in the
Mauritian equivalent of the South Africa Patents Act (par (e) of the definition of ‘intellectual
property’ in s 23I(1)). The amounts payable by Production (Pty) Ltd constitute royalties as they
are paid in respect of the use of this intellectual property (s 9(1)). As the source rules for royalties
have been legislated, it is not necessary to consult case law to determine the source of the royal-
ties that accrue to Inventeur Ltd.
The royalties that accrue to Inventeur Ltd are from a South African source as they are incurred by
a South African tax resident, Production (Pty) Ltd. As the intellectual property is used in
Production (Pty) Ltd’s South African manufacturing operations, the royalties are not attributable to
any permanent establishment of Production (Pty) Ltd outside South Africa (s 9(2)(c)). The fact
that the patent is not registered in South Africa does not affect the source of the income.
Note
Even if Production (Pty) Ltd was not a South African tax resident, the royalties would still have
been from a South African source based on the fact that the intellectual property was used in
South African-based manufacturing operations (s 9(2)(d)).
21.3.4 Source of amounts derived from the disposal of assets and exchange differences
Amounts derived from the disposal of assets may be subject to tax in South Africa as income
(including recoupments) or capital gains. The source of the amounts received or accrued when an
asset is disposed of depends on the nature of the asset disposed of.
If the asset disposed of is immovable property, the source of the amount will be in South Africa if the
immovable property is situated in South Africa. The source of amounts derived from the disposal of
any interest in or right to immovable property (for example, certain shares that derive 80% or more of
their market value from immovable property in South Africa) will also be in South Africa if the property
is located in South Africa (s 9(2)(j)). Rights to and interests in immovable property in this context have
the same meaning as discussed in chapter 17.
If the asset disposed of is movable property, the source of the amounts derived from the disposal of
such asset by a resident will be in South Africa if (s 9(2)(k)(i))
l the asset is not attributable to a permanent establishment outside South Africa, and
l the proceeds from the disposal of that asset are not subject to tax on income in any foreign
country.
,I D QRQUHVLGHQW GLVSRVHV RI PRYDEOH SURSHUW\ the source of the amounts derived from the
disposal will only be in South Africa if the asset is attributable to a permanent establishment of that
non-resident in South Africa (s 9(2)(k)(ii)).
In the case of amounts derived from the disposal of immovable or movable assets, the amounts will
be from a source outside South Africa if the source does not meet the above requirements (s 9(4)(d)).
The rules to determine the source of exchange differences on exchange items mirror the source rules
that apply in respect of movable property (ss 9(2)(l) and 9(4)(e)).
21.3.5 Source of amounts received from a retirement fund

The source of lump sum payments, pensions or annuities received from pension funds, pension
preservation funds, provident funds or provident preservation funds depends on where the services,
in respect of which the amounts are received, were rendered. These amounts will be from a South
African source if the services were rendered in South Africa (s 9(2)(i)). If the services were rendered
partly in South Africa and partly abroad, the source must be apportioned based on the period that
services were rendered in South Africa to determine the South African sourced amount (proviso to
s 9(2)(i)).
Remember
Lump sum payments, pensions or annuities received by or that accrue to a resident from a
source outside South Africa may be exempt. This exemption only applies if the amount is not
received from a pension fund, pension preservation fund, provident fund, provident preservation
fund or retirement annuity fund as defined in s 1 of the Act (s 10(1)(gC)(ii)). These definitions of
retirement funds refer to South African funds approved by SARS. This implies that foreign
sourced amounts from retirement funds will only be exempt in the hands of resident recipients if
the fund is not a South African retirement fund.
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21.3.6 Source of employment income

The statutory source rules only deal with remuneration earned by certain civil and public servants.
Income received by or accrued to a taxpayer for the holding of a public office, to which the person
has been appointed to in terms of an Act of Parliament, is from a South African source (s 9(2)(g)).
Amounts received by or accrued to any person who rendered services to any employer in the various
tiers of the South African government are from a South African source (s 9(2)(h)). This ensures that
remuneration paid by the South African government remains within the South African tax net irre-
spective of where the services are rendered.
The courts have consistently determined that the originating cause of income from employment and
other services rendered is the service itself, irrespective of the place where the contract is made or
the remuneration is paid. The source of the remuneration would therefore be located at the place
where the services are physically rendered. It was confirmed in SIR v Kirsch (1978 T) that the same
principle applies in respect of shares allotted to a taxpayer for services rendered. An apportionment
of the gain in respect of equity instruments awarded to a taxpayer by virtue of employment may be
required if the employment was exercised in South Africa and abroad while the award was earned.
Example 21.3. Source of employment income
Mr Gomez, a Brazilian tax resident, is a permanent employee of Grande Ltda, a large listed
Brazilian company. He has a permanent office at Grande Ltda’s head office in Brazil. Mr Gomez
is seconded to South Africa for four months for a consulting project undertaken in South Africa by
Grande Ltda. The consulting project is a two-year project undertaken at the premises of the client
in South Africa. You may assume that this project gives rise to a permanent establishment, as
contemplated in Article 5 of the tax treaty between South Africa and Brazil, for Grande Ltda in
South Africa.
Grande Ltda has given Mr Gomez the choice as to where he would like his salary to be paid to
during the time that he spends in South Africa. He provided Grande Ltda with the banking details
of a Cyprian bank account. Grande Ltda deposits the funds from Brazil into this account at the
end of each month while Mr Gomez is in South Africa. Mr Gomez is able to withdraw the funds
that he needs from the account at South African ATMs, while keeping the rest of the funds in
Cyprus.
What is the source of Mr Gomez’s remuneration?
SOLUTION
No source rule has been legislated for employment exercised in the private sector. Case law
should therefore be consulted to determine the source of Mr Gomez’s remuneration.
It was held in CIR v Lever Brothers & Unilever Ltd that the source of income is not the place
where the amount comes from (Brazil in this case). It is submitted that the source of the income is
similarly not determined by the place where the money is received or kept (Cyprus in this case).
Instead, it was held that the source is the originating cause and the work that the taxpayer does
to earn the income. In the context of employment, the source of the income is where the services
were performed to earn the remuneration.
The source of the remuneration earned by Mr Gomez while working in South Africa is located in
South Africa.
It has been held that a director’s services in his capacity as director are regarded as being rendered
at the head office of the company where the board of directors ordinarily transacts its business.
Consequently, if the head office is in South Africa, the fees are derived from a South African source,
irrespective of the place where the director resides and performs the services (ITC 77 (1927)). A
director who is a non-resident would therefore be liable for South African normal tax on his fees if the
board of directors meets in South Africa.
21.3.7 Source of rental income

No statutory source rule deals with the source of rental income. The originating cause of rental
income is usually the asset that is used to earn rental income. In COT v British United Shoe
Machinery (SA) (Pty) Ltd (1964 FC) the asset concerned was machinery and the leases were so long
in duration that it was held that the emphasis was on the property let and not on the business of the
lessor. The source of the rent derived from the use of the property was located where it was used,
that is, in Rhodesia. It follows from this decision that it is too wide a proposition to state that the
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source of rent is always the asset and that the place where the asset is used by the lessee
necessarily determines the situation of the source of the rent. Regard must be had to the nature of the
property let, the nature of the lessor’s business and the duration of the lease. When the emphasis is
on the property let and not on the business of the lessor, the source is located where the property is
used. However, where the emphasis is on the business and not the asset (for example with car
rentals), it is not important where the asset is used. The source of the rental will then be where the
business is situated, as discussed next.
21.3.8 Source of income from business activities

There is no decision of the courts that provides a single clear and authoritative test to determine the
source of income derived from business activities.
It is submitted that the inference that should be drawn from the various decisions of the courts is that
the source of income derived from trading or manufacturing operations is in South Africa if the trader
or manufacturer productively employs his capital and exercises his activities in South Africa.
In Overseas Trust Corporation Ltd v CIR (1926 AD) the taxpayer was a financial and investment
company, which carried on business in South Africa by buying and selling shares and securities
with a view of short-term profits. In the course of the year of assessment the company had sold,
amongst other assets, certain shares through brokers in Germany, the brokers being instructed from
Cape Town to find buyers at a certain price and the scrip being forwarded from Cape Town in
fulfilment of the sales effected. The court held that the profits were derived from a source in South
Africa. Innes CJ, in a separate judgment dismissing the taxpayer’s appeal (the judgment of the
majority of the Appellate Division of the Supreme Court also dismissed the appeal), said in relation to
the activities in Germany (at 454):
Now these were isolated transactions controlled throughout from the Cape Town office. There is no proof
that the Overseas Trust carried on business in Germany or employed any of its capital there. The brokers
were merely its agents executing its instructions and the profit was earned by the capital paid for the
shares. That capital was employed in the Union . . .
The Appellate Division of the Supreme Court applied the ‘activities’ test in CIR v Epstein (1954 AD).
The taxpayer, who was resident in Johannesburg, carried on a business as agent for foreign firms in
association with a partnership that carried on business in Argentina. The partnership solicited orders
from persons in Argentina for the sale of asbestos and then cabled the taxpayer, informing him of the
particular type of asbestos required and instructing him to approach a particular South African
producer and confirm the availability and price of asbestos. The partnership would then proceed to
conclude in its own name, in Argentina, a sale of the asbestos with the person who placed the order,
instructing the taxpayer to conclude, in his own name, a contract with the South African producer for
the purchase of the asbestos. The purchaser in Argentina would then open a letter of credit in favour of
the taxpayer, payable at a bank in South Africa, and the taxpayer would ship the asbestos directly to
the purchaser in Argentina. Out of these transactions, the taxpayer derived a half share of the profit.
The question for decision was whether or not the taxpayer’s share of the profits accrued from a
source within South Africa. The court held that it did. Centlivres CJ, who delivered the judgment of the
majority of the court (Schreiner JA dissenting), said (at 232):
All of the activities of the respondent were carried on in the Union and it was as a result of these activities
that he earned the profits which the Commissioner now seeks to tax. It therefore follows that those profits
were received from a source within the Union.
In Transvaal Associated Hide and Skin Merchants v Collector of Income Tax, Botswana (1967 Court
of Appeal Botswana) the company was incorporated in South Africa and had its head office in Johan-
nesburg, with a branch office in Pretoria. The management and control of the company were in
Johannesburg. The company bought hides at abattoirs in Botswana, which were processed at an
abattoir for the purpose of curing and transportation. The court of appeal held by a majority decision
that the processes carried out in Botswana in preparing the hides for sale and delivery were the dom-
inant factors in the accrual to the company of the income derived from the sales of the hides effected
in South Africa. The source of that income was, therefore, in Botswana.
In the case of the business activities that involve the rendering of services, the source or originating
cause of the income is the services rendered. In COT v Shein (1958 (FC)) the taxpayer undertook to
manage a store in the Bechuanaland Protectorate (now Botswana). Over time the taxpayer employed
a full-time storekeeper to manage the store while the taxpayer himself resided in Bulawayo in
Southern Rhodesia (now Zimbabwe). The tax authorities in Southern Rhodesia attempted to include a
portion of the management fee in his income from a source in that country on the basis that the
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taxpayer spent a portion of the time that he performed the work there. The taxpayer appealed this
decision on the basis that the work was done in the store in Bechuanaland and any functions
performed from Southern Rhodesia were trivial and incidental to the work done in Bechuanaland.
Tredgold CJ held the view that (at 15):
It may be accepted that, prima facie, the test of the source of a payment for services rendered is the place
where those services are rendered.
This judgment also left the door open for the source of income to be apportioned. It was, however,
held that in this particular case, the activities undertaken in Southern Rhodesia were casual and
incidental in nature. For this reason, apportionment was not appropriate in the circumstances. The
judgment in CIR v Nell (1961 AD) offers similar support for possible apportionment of the source of
income, but also highlighted that the dominating cause of the income must be distinguished from
ancillary or subsidiary activities. The dominant cause of the income determines its source. If the
source of income is apportioned, SARS confirms in Interpretation Note No 18 (at 4.2.2(c)) that the
appropriate apportionment basis will depend on the facts and circumstances of the case.
21.4 Tax treaties

Countries enter into tax treaties to avoid juridical double taxation, which arises when two countries
impose tax on the same taxpayer in respect of the same amount. Tax treaties also include provisions
that enable the contracting countries to exchange information and assist each other in the collection
of taxes.
A number of model conventions are available that countries can use to negotiate and draft treaties
that they enter into. This includes the OECD Model Tax Convention on Income and on Capital and the
United Nations Model Double Taxation Convention between Developed and Developing Countries. It
is important to note though that each treaty concluded is a negotiated agreement between the
countries involved. It would contain specific information that the model tax convention does not have
(for example date of entry into force) and may have provisions that differ from those of the model tax
conventions. The model tax conventions contain detailed commentary that aims to illustrate and
explain the interpretation of its provisions. This commentary is normally very useful when considering
the application of a provision of a specific treaty entered into between two countries.
This chapter uses the OECD Model Tax Convention on Income and on Capital
to explain certain concepts that are found in many of the tax treaties concluded
by South Africa. When considering the application of a treaty to a transaction,
the provisions of that specific relevant treaty must be considered rather than
those of a model tax convention.
Please note!
It should also be borne in mind that not all the tax treaties that South Africa is
party to were negotiated under the current versions of the model tax conven-
tions. Some of the older treaties, for example the treaties with Germany and
Zambia, look significantly different from the ones described in this section of the
chapter. In addition, many of the South African tax treaties contain articles of the
United Nations Model Tax Convention.
A tax treaty is generally concluded between two countries. In a South African context, s 108(1) makes
provision for the National Executive to enter into an agreement with the government of another
country with the view to prevent, mitigate or discontinue the levying of tax under the laws of the
countries on the same income, profits or gains. It also allows for South Africa to render reciprocal
assistance in the administration and collection of taxes under the laws of South Africa and the other
country. South Africa has entered into tax treaties with a number of countries on this basis.
Remember
All the tax treaties concluded by the South African Government are available on the SARS
website on the Legal Counsel page under the heading International Treaties & Agreements.
Some tax treaties have, however, been negotiated and agreed to between more than two countries,
for example the Nordic Multilateral Tax Treaty that applies to Denmark, the Faroe Islands, Finland,
Iceland, Norway and Sweden.
In recent times, following the BEPS project by the OECD and G20, the possibility of the conclusion of
more multilateral arrangements has become a reality. A number of countries are signatories to a
multilateral instrument that implements measures recommended in the BEPS project to reduce
opportunities for tax avoidance using treaty provisions. South Africa signed the multilateral instrument
762
during June 2017 and will take the necessary steps to ratify this instrument in terms of the domestic
laws. This instrument will have a significant effect on existing treaties as its provisions will be
incorporated into the existing treaties to close gaps identified as part of the BEPS project. The effect
of this instrument will be incorporated in this book once the multilateral instrument becomes effective
in South African treaties.
21.4.1 Integration with domestic law

A tax treaty is an instrument that, when it becomes effective, should be read with the domestic tax
legislation of a country. A country imposes tax on a transaction in terms of its domestic tax laws only.
A tax treaty cannot impose a tax liability onto a taxpayer that such taxpayer would not be liable for
under the domestic tax laws of a country. The role of a tax treaty is to allocate the rights to the con-
tracting states to impose taxes in terms of their respective domestic laws. In other words, the treaty
determines whether a country may impose the tax on a transaction in terms of its domestic tax legis-
lation law (see Scenario B in Example 21.9 where this is illustrated).
Remember
In practice, the starting point to determine the tax implications of a transaction is to consider
whether the transaction will be subject to tax in terms of the domestic tax laws of a country. If a
transaction is not subject to tax in South Africa in terms of the Income Tax Act, there is no need
to consider the provisions of a tax treaty from a South African tax perspective. If, on the other
hand, the transaction is subject to tax in South Africa, the provisions of the relevant tax treaty (if
any) must be considered to determine whether South Africa may impose the tax in terms of the
Income Tax Act.
This approach is illustrated in the diagram 21.1. as well as all the examples in this chapter.
In a South African context, a tax treaty has the effect as if it has been enacted by the Income Tax Act
once it has been published in the Government Gazette following its approval by Parliament
(s 108(2)). This means that where any provision of the Act, as discussed in the rest of this book, is
applied to a transaction to which the treaty also applies, the treaty provisions must be considered as
if they form part of that provision. The provision of the Act must therefore be read in conjunction with
the relevant treaty provision(s), irrespective of whether the provisions make explicit reference to a
treaty or not.
As an example, the New convention between the Government of the Republic of South Africa and the
Government of the United Kingdom of Great Britain and Northern Ireland for the avoidance of double
taxation and the prevention of fiscal evasion with respect to taxes on income and on capital gains
was signed by the representatives of both countries on 4 July 2002. It was published in Government
Gazette No 24335 on 31 January 2003. From a South African tax perspective, Article 27 determines
that the provisions of the treaty enter into force for amounts withheld at the source on or after 1
January 2003 or in respect of taxable years beginning on or after 1 January 2003 for other taxes. The
application of the domestic tax laws of South Africa or the United Kingdom to a transaction entered
into by a resident of either of the states must be read in conjunction with this treaty. If a South African
company pays interest to a resident of the United Kingdom, the South African tax implications of the
interest must be determined in terms of:
l the relevant provisions of the Act (i.e., exemption of interest in the hands of non-residents
(s 10(1)(h)) and the requirements relating to the withholding tax on interest (ss 50A to 50H)
l read in conjunction with Article 11 of the tax treaty between South Africa and the United Kingdom.
Where there is a conflict between the domestic tax laws and the treaty provisions, the tax treaty
provisions enjoy preference over the domestic tax laws. The integration of the tax treaties into
domestic law is illustrated in all the examples in the remainder of this chapter.
21.4.2 Application and scope

The first step to determine whether the provisions of a particular tax treaty apply to a transaction is to
establish whether the treaty has come into force. Most treaties contain a provisions towards the end
of the agreement that specifies how and when the treaty will enter into force (Art 30 of the OECD
Model Tax Convention). This process involves notification of the countries to each other as to when
the processes in each country, to bring the treaty into force, have been completed. Once it has been
determined that the treaty is in fact in force, it is also necessary to make sure that the parties have not
terminated it (Art 31 of the OECD Model Tax Convention).
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Tax treaties only apply in respect of taxes covered by the treaty and for the benefit of persons
covered by the treaty. These concepts are briefly discussed next.
Persons covered
A tax treaty applies to persons who are residents of one or both of the contracting states that entered
into the agreement. This means that a person will only be entitled to the benefits of the treaty if that
person is a resident of one of the countries that concluded the treaty. Article 1 of the OECD Model
Tax Convention, which deals with persons covered, states:
This Agreement shall apply to persons who are residents of one or both of the Contracting States.
The term ‘resident’ in the context of the treaty refers to a resident as defined in the treaty. If the tax
treaty is in line with the OECD Model Tax Convention, a resident is a person who is liable to tax in one
of the contracting states by reason of domicile, residence, place of effective management or any
other similar criterion (Art 4(1) of the OECD Model Tax Convention). Treaties normally include rules,
commonly referred to as tie-breaker rules, that are used to determine the residence of a person if that
person is resident in both of the contracting states from their domestic tax perspectives (Art 4(2) and
4(3) of the OECD Model Tax Convention).
Remember
The definition of resident in the Act specifically excludes a person who is deemed to be
exclusively a resident of another country for purposes of the application of any tax treaty entered
into between South Africa and the other country. For example, if a natural person is resident in
the Netherlands by reason of the fact that he ordinarily resides there but is also deemed to be a
resident in South Africa based on the physical presence test (see chapter 3), the tie-breaker
rules in Article 4(2) of the tax treaty between South Africa and the Netherlands will apply. If the
person only has a permanent home available to him in the Netherlands and stays at a guest
house when in South Africa, that person will be deemed to be a resident of the Netherlands in
terms of Article 4(2)(a) of the treaty. This person is excluded from being a resident of South
Africa, despite the fact that he meets the physical presence test.
Taxes covered
A treaty applies with regard to the taxes specified in the particular agreement. Treaties negotiated in
line with the OECD Model Tax Convention state that they apply to taxes on income and on capital
imposed on behalf of a Contracting State or of its political subdivisions or local authorities,
irrespective of the manner in which they are levied (Art 2(1) of the OECD Model Tax Convention).
Most treaties list the specific types of taxes that are considered to be taxes on income and on capital
in each of the contracting states (Art 2(2) and 2(3) of the OECD Model Tax Convention).
As treaties are not updated or amended every year for changes in the domestic tax legislation of the
two countries, the listing of taxes covered may become outdated. For this reason, treaties generally
make provision to also apply to any identical or substantially similar taxes imposed by a country after
the date of signature of the treaty (Art 2(4) of the OECD Model Tax Convention). As an example,
many of the South African treaties do not explicitly state that they apply to the withholding tax on
interest, which only came into effect on 1 March 2015 (see 21.2.5.2). This tax would, however, be a
tax on income and substantially similar to the taxes listed in the ‘Taxes covered’ provision of those
treaties.
SARS issued Binding General Ruling 9 (BGR009) to indicate which taxes in

Please note! South Africa they view as taxes on income or taxes substantially similar to those
listed for purposes of South Africa’s tax treaties. If in doubt, this ruling is a useful
resource in this regard.
Example 21.4. Entitlement to treaty benefits

Investeerder BV subscribed for all the equity shares of Danger (Pty) Ltd, a South African start-up
business, during 2017. Investeerder BV is a resident of the Netherlands in terms of Dutch tax
laws based on the fact that the company was incorporated in and is managed from the
Netherlands.
The dividends that Investeerder BV expect to receive in future from this investment are South
African sourced and will be subject to the dividends tax in South Africa at a rate of 20%.
Discuss whether Investeerder BV would be entitled to the relief afforded in respect of dividend
income in terms of the tax treaty (and subsequent protocol) concluded between South Africa and
the Netherlands.
764
SOLUTION
The Convention between the Republic of South Africa and the Kingdom of the Netherlands for
the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on
income and capital (treaty) came into force on 28 December 2008 and has effect for taxable
years beginning on or after 1 Janaury 2009. Neither of the states has given notice of termination.
As a result, the treaty will be in force for the period that Investeerder BV will earn dividends from
a South African source.
Article 1 of the treaty states that: ‘This Convention shall apply to persons who are residents of
one or both of the Contracting States.’ The term ‘resident’ is defined in Article 4(1)(a) of the treaty
as: ‘any person who, under the laws of that State, is liable to tax therein by reason of that
person’s domicile, residence, place of management or any other criterion of a similar nature, and
also includes that State and any political subdivision or local authority thereof. This term,
however, does not include any person who is liable to tax in that State in respect only of income
from sources in that State or capital situated therein.’ As Investeerder BV is a resident of the
Netherlands in terms of the Dutch tax laws based on its place of management, it is a resident of
the Netherlands as defined in Article 4(1)(a) of the treaty. The treaty therefore applies to Inves-
teerder BV.
Article 2(1) of the treaty states that it applies as follows: ‘This Convention shall apply to taxes on
income and on capital imposed on behalf of a Contracting State or of its political subdivisions or
local authorities, irrespective of the manner in which they are levied.’ Article 2(3)(b)(ii) lists as one
of the existing taxes to which the treaty applies in South Africa as secondary tax on companies.
Article 2(4) of the treaty, following amendment by the protocol, however, determines that: ‘The
Convention shall apply also to any identical or substantially similar taxes, including taxes on
dividends, that are imposed by either Contracting State after the date of signature of the Con-
vention in addition to, or in place of, the existing taxes. The competent authorities of the Contract-
ing States shall notify each other of any significant changes that have been made in their
respective taxation laws.’ Even though dividends tax is not listed in Article 2(3) of the treaty,
SARS states in BGR9 that dividends tax is a tax on income that should qualify for treaty relief. As
a result of the application of Article 2(4) of the treaty, it will apply in respect of the dividends tax
imposed in South Africa on the dividends received by Investeerder BV.
Investeerder BV should consider the provisions of Article 10 of the treaty, as amended by the
protocol, to determine whether, and to what extent, South Africa may impose dividends tax in
respect of the dividends it receives from Danger (Pty) Ltd.
Note
Article 10 of the treaty, as amended by the protocol, contains a relatively scarce type of
provision, namely a most favoured nation clause, in Article 10(10).
21.4.3 Allocation of taxing rights and elimination of double taxation

A tax treaty avoids double taxation on the same income or capital in the hands of the same person by
allocating the right to tax such amounts between the country of residence of the taxpayer and the
country of source where the income arises. Specific rights to tax income are specified in the treaty for
a number of different categories of income. The category of income is generally defined in the defini-
tions article of the treaty or in the relevant article that deals with the type of income.
Treaties generally allocate one of the following taxing rights to the country where the source of the
income or capital is situated:
l the country of source may not tax the income or capital at all
l the country of source may tax the income or capital subject to a certain limit
l the country of source may tax the income or capital without any limitation.
In the latter two scenarios, the same income or capital may still be subject to tax in both the country
of residence of the recipient and the country where the source of the income is situated. The tax
treaty does not therefore eliminate the juridical double taxation. In such cases, the treaty makes
provision for the country of residence of the recipient to allow relief where the country of source of the
income has imposed tax on the amount. This can be done by requiring that the country of residence
of the recipient allow a credit for the tax suffered in the country of source (Art 23B of the OECD Model
Tax Convention) or to exempt income that has been subject to tax in the country of source (Art 23A of
the OECD Model Tax Convention). The South African tax treaties normally require that South Africa
provide a credit for the foreign taxes suffered by its residents. Many of the treaty provisions in this
regard, require that the credit must be allowed in terms of the South African domestic law (i.e.
s 6quat – see 21.6.3).
765
The taxing rights that are generally allocated to categories of income or capital gains are briefly dis-
cussed next. The discussion commences with income that would generally be more passive in nature
and concludes with a discussion of taxing rights allocated in respect of income derived from effort of
persons and business activities.
All references to Articles in 21.4.3.1 to 21.4.3.12 below refer to an Article of the OECD Model Tax
Convention. Unless specifically indicated, the allocation of taxing rights according to the UN Model
Double Taxation Convention mirrors the OECD model. Most of the South African treaties contain
elements taken from these model tax conventions.
If a treaty allocates an exclusive taxing right to a particular state, the provision

will determine that income shall be taxable only in that particular state.
Please note! If, on the other hand, the treaty allows a state to tax income, but this taxing right
is not exclusive, it normally determines that the income may be taxed in the
particular state. This does not preclude the other country from also taxing this
income.
21.4.3.1 Income from immovable property

Income derived by a resident of one of the contracting states from immovable property situated in the
other contracting state (for example, rental income earned from a property situated in the other
country) may generally be taxed in both the country where the immovable property is situated
(source country) and the country of residence of the recipient (Art 6). The definition of immovable
property generally refers to the meaning of this term in the domestic law of the contracting states. The
meaning of the term for treaty purposes is wide and includes property that is accessory to the immov-
able property (for example livestock in agriculture).
The application of this allocation of taxing rights is illustrated in Example 21.14.
21.4.3.2 Dividends
Dividends paid by a company that is a resident of one of the contracting states (source country) to a
resident of the other contracting state (country of residence) may normally be taxed in both countries
(Art 10). If the recipient of the dividend is the beneficial owner of the dividends, a limitation of the rate
at which the source country may tax the dividend often applies. The limitations on the rates may vary
depending on the nature of the beneficial owner of the dividend and the size of the interest that the
person holds in the company. The result is that, in many cases, the relevant treaty would reduce the
South African dividends tax rate of 20% to a lower rate, for example 5% in terms of the treaty
concluded between South Africa and the United Kingdom treaty if the requirements for such relief are
met.
Most treaties do not prescribe the mechanism that a country should use to apply the treaty relief. In
the case of dividends, the treaty relief will only apply in South Africa if the domestic law requirements
to apply a reduced rate, as discussed in chapter 19, are complied with.
The allocation of taxing rights and requirements to be complied with to benefit from the treaty relief in
respect of dividends is illustrated in Example 19.8.
These provisions do not affect the right of the country of source to tax the profits from which the
dividends are distributed.
Treaties use the concept of beneficial ownership to ensure that treaty benefits
are not available to persons who receive income amounts as a conduit or agent
on behalf of another person who may not necessarily qualify for the benefit.
The commentary to the OECD Model Tax Convention does not define when a
person would be the beneficial owner of income. It states that the term should
Please note! not be interpreted in a narrow technical manner. The commentary suggests that
if the recipient’s right to use and enjoy income is constrained by a contractual or
legal obligation to pass the amount on to another person, the recipient will not
be the beneficial owner of the income.
An accepted view on the meaning of beneficial ownership in practice is that the
beneficial owner of income is the person whose ownership attributes outweigh
that of any other person.
Du Toit Beneficial Ownership of Royalties in Bilateral Tax Treaties 1999 20
766
If the shareholding in respect of which the dividends are received is effectively connected to a per-
manent establishment situated in the country of source, the business profit provisions take
preference over the dividend provision explained above (Art 10(4)).
21.4.3.3 Interest
Interest that arises in a contracting state (source country) and is paid to a resident of the other
contracting state (country of residence) may generally be taxed in both countries (Art 11). If the
recipient of the interest is the beneficial owner of the amount, the right of the source country may be
limited.
If the debt in respect of which the interest is received is effectively connected to a permanent
establishment situated in the country of source, the business profit provisions take preference over
the above limitations (Art 11(4)).
It is important to note that in the context of interest paid between related persons, the relief would
normally only apply to the extent that the interest amount does not exceed interest that would have
been agreed to between persons without any special relationship (Art 11(6)).
21.4.3.4 Royalties
Royalties that arise in a contracting state (source country) and are paid to a resident of the other con-
tracting state (country of residence) are exclusively taxable in the country of residence if the OECD
Model Tax Convention is followed (Art 12(1)). An exception exists only where the royalties are effect-
ively connected to a permanent establishment situated in the source country, in which case the busi-
ness profits provisions apply (Art 12(3)).
Under the UN Model Double Taxation Convention, these royalties may be taxed in both countries
(Art 12 of the UN Model Double Taxation Convention). This is an example where the UN model
affords greater taxing right to the source country, which is likely to be a developing country. The right
of the source country will generally be limited if it accrues to a beneficial owner that is a resident of
the other country. Again an exception would be where the royalties are effectively connected to a
permanent establishment situated in the source country, in which case the business profits provisions
apply (Art 12(4) of the UN Model Double Taxation Convention).
Both model tax conventions determine that where a special relationship exists between the payer and
the recipient of the royalties, the benefits of the relief only apply to the extent of the amount of
royalties that would have been agreed to in the absence of this relationship (Art 12(4)).
21.4.3.5 Employment-related income

Salaries, wages and other similar remuneration derived by a resident of a contracting state from exer-
cising employment in the other contracting state (source country) may be taxed in both countries
(Art 15). In circumstances where the payment of this remuneration is not paid or borne by a taxable
person in the source country and the person’s presence in the source country does not exceed a
specified number of days during a 12-month period (for example 183 days), the source country may,
however, not tax this income.
Article 19 determines that salaries, wages and similar remuneration paid by one of the governments
to an individual for services rendered to that government are only taxable in the country whose
government pays the amounts. Such payments are, however, only taxable in the other country if the
individual renders the services in the other country and is a resident and national of that country. This
exception is aimed at remuneration earned by personnel of foreign diplomatic missions and consular
posts.
Example 21.5. Allocating of taxing rights in respect of employment income
This example is based on the same facts as Example 21.3.
Mr Gomez spent four months from 1 October 2017 to 31 January 2018 in South Africa. During
this time, he earned $100 000 as remuneration. This is the only occasion that Mr Gomez has
been to South Africa.
Discuss whether South Africa may tax the remuneration earned by Mr Gomez while working in
South Africa.
767
SOLUTION
As the remuneration earned by Mr Gomez, a non-resident, is from a South African source, as
explained in Example 21.3, it will be included in his gross income and be subject to normal tax in
South Africa. The representative employer of Grande Ltda will be required to withhold and pay
employees’ tax in South Africa on this remuneration.
It should, however, be considered whether South Africa may tax the amounts paid to Mr Gomez
in terms of the tax treaty concluded between South Africa and Brazil. As Mr Gomez is a Brazilian
tax resident, he is a covered person for purposes of the treaty (Art 1 of the treaty). South African
normal tax is covered by the treaty (Art 2(3)(b)(i)).
Article 1 5(1) of the treaty states that:
Subject to the provisions of Articles 16, 18 and 19, salaries, wages and other similar remunera-
tion derived by a resident of a Contracting State in respect of an employment shall be taxable
only in that State unless the employment is exercised in the other Contracting State. If the
employment is so exercised, such remuneration as is derived therefrom may be taxed in that
other State.
The remuneration earned by Mr Gomez was not earned as a director, as pension or in respect of
government service. Article 15(1) therefore applies to it. As the employment was exercised by
Mr Gomez in South Africa, South Africa may impose tax in respect of remuneration derived from
the period during which he worked in South Africa.
The taxing right of the source country may, however, be limited by Article 15(2), which reads:
Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Con-
tracting State in respect of an employment exercised in the other Contracting State shall be
taxable only in the first-mentioned State if:
(a) the recipient is present in the other State for a period or periods not exceeding in the
aggregate 183 days in any twelve-month period commencing or ending in the fiscal year
concerned, and
(b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the
other State, and
(c) the remuneration is not borne by a permanent establishment or a fixed base which the
employer has in the other State.
Mr Gomez will spend less than 183 days in South Africa, as contemplated in par (a). In addition,
the remuneration is paid to Mr Gomez by Grande Ltda, a non-resident employer, as
contemplated in par (b). As Grande Ltda has a permanent establishment in South Africa and the
remuneration paid to Mr Gomez relates to the activities carried on through this permanent
establishment, it should be established whether the remuneration paid to Mr Gomez is borne by
this permanent establishment. In relation to the phrase ‘borne by a permanent establishment’ the
OECD, in par 7 of its commentary to Article 15, indicates that this requirement must be read in
light of its purpose. The requirements in paras (b) and (c) are contained in treaties to ensure that
the country of source is not required to give up its taxing right to the remuneration, while it has to
allow a deduction for the remuneration against its tax base in the hands of the payer (in this
case, Grande Ltda). As the cost of employment of Mr Gomez would have to be taken into
account to determine the profits attributable to the permanent establishment, the permanent
establishment bears this cost. As a result, the remuneration earned by Mr Gomez while working
in South Africa does not qualify for the exemption in Article 15(2) of the treaty and may be taxed
in South Africa.
The OECD Model Tax Convention allocates the exclusive taxing right to pensions and similar remu-
neration paid to a resident of a contracting state to the country of residence (Art 18). The UN Model
Double Taxation Convention has two alternatives that countries can follow. The first mirrors the OECD
approach, while the other allows the other country to also tax such amounts if paid by a taxable
person in that country (Art 18 of the UN Model Double Taxation Convention). The taxing rights in
respect of pensions paid by governments of either of the contracting states follow similar principles
as those in relation to government remuneration (Art 19(2)).
Example 21.6. Allocating taxing rights in respect of pensions
Mr John Smith, a tax resident of the United Kingdom (UK), worked in South Africa for six years
during his working career. During this period, his employer (not the South African government)
made contributions to a South African pension fund. The contributions to this fund were only
made for the period that Mr Smith worked in South Africa.
Mr Smith retired and now earns pension of R20 000 per month from this fund.
Discuss whether South Africa will impose tax on the pension earned by Mr Smith.
768
SOLUTION
The first step to determine whether the pension earned by Mr Smith would be subject to normal
tax in South Africa is to establish whether the source of the pension is in South Africa. A statutory
source rule exists in relation to pensions received from pension funds (s 9(2)(i)). In this context, a
pension fund refers to a pension fund as defined in s 1 (i.e. a South African pension fund). As
Mr Smith rendered the services that the pension relates to in South Africa, the pension will be
from a South African source (see 21.3.5) and be subject to normal tax in South Africa.
It should be considered whether South Africa may tax the amounts paid to Mr Smith in terms of
the tax treaty concluded between South Africa and United Kingdom. As Mr Smith is a tax
resident of the United Kingdom, he is a covered person for purposes of the treaty (Art 1 of the
treaty). South African normal tax is covered by the treaty (Art 2(3)(a)(i)).
Article 17(1)(a) of the treaty states that:
Subject to the provisions of paragraph 2 of Article 18 of this Convention:
(a) pensions and other similar remuneration paid in consideration of past employment, and
(b) any annuity paid,
to an individual who is a resident of a Contracting State shall be taxable only in that State.
The provisions of Article 18(2) are not applicable as Mr Smith was not employed by the South
African government. South Africa may therefore not tax the pensions earned by Mr Smith for
services rendered in South Africa. A non-resident whose pension may not be taxed should apply
for a directive for relief of the withholding of employees’ tax in respect of the pension (RST01
application form).
Directors’ fees and similar payments received by a resident of one of the contracting states (country
of residence) in the capacity as member of the board of directors of a company that is resident in the
other contracting state (source country), may be taxed in both countries (Art 16). The UN Model
Double Taxation Convention extends this treatment to salaries, wages and other similar remuneration
earned by a person in the capacity as top-level managerial position of a company in the source
country (Art 16(2) of the UN Model Double Taxation Convention).
21.4.3.6 Students
Students, business trainees or apprentices who are, or were, residents of a contracting state (country
of residence) may be present in the other state (source country) for purposes of education or training.
Payments received for purposes of maintenance, education or training of these persons may not be
taxed in the source country if such payments arise from sources outside the source country (Art 20).
This treatment does not extend to remuneration paid to the person for services rendered. This is
covered by the employment-related provisions discussed above.
21.4.3.7 Artists and sportsmen

Income earned by a resident of a contracting state (country of residence) from exercising his or her
personal activities as an entertainer or sportsman in the other contracting state (country of source),
may be taxed in both countries (Art 17(1)). This is the case, whether the person earns the income in
the form of remuneration or profits from business activities. This means that the provisions of
Article 17 generally override those of Article 7 (business profits), Article 14 (independent personal
services) and Article 15 (dependent personal services).
If such income accrues to a person other than the entertainer or sportsperson who exercises his or
her personal activities, that income may still be taxed in the contracting state where such activities
were exercised (Art 17(2)). This ensures that where an entertainer or sportsperson’s income is
diverted to legal entities, management companies or star company, the country of source retains its
right to tax such income.
Example 21.7. Allocating of taxing rights in respect of artistes and sportsmen
Jan Lied, a famous Dutch singer, will visit South Africa for a once-off performance. The event
organisers will pay a performance fee to Jan’s management company, Lied Beheer BV.
Jan Lied is a resident of the Netherlands for tax purposes.
Discuss whether South Africa may tax the fees paid to Lied Beheer BV. You may assume that the
South African domestic law imposes tax on this amount (see Example 21.11).
769
SOLUTION
Jan Lied is a Dutch tax resident and is therefore a person covered by the treaty concluded
between South Africa and the Netherlands (Art 1 of the treaty). The tax on foreign entertainers
and sportspersons imposed in South Africa is a tax on income, which falls within the scope of the
treaty (Art 2(4) of the treaty and BGR9).
Income earned by entertainers and sportspersons is covered in Article 16 of the treaty between
South Africa and the Netherlands. Article 16(1) of the treaty allocates the taxing rights as follows:
Notwithstanding the provisions of Articles 7 and 14, income derived by a resident of a Con-
tracting State as an entertainer, such as a theatre, motion picture, radio or television artiste, or
a musician, or as a sportsperson, from that person’s personal activities as such exercised in
the other Contracting State, may be taxed in that other State.
Article 16(2) states that where the income in respect of the personal activities exercised by an
entertainer in that person’s capacity as such accrues to a person other than the entertainer, the
income may still be taxed in the country in which the activities were exercised.
As Jan Lied will perform, and therefore exercise the personal activities as entertainer in South
Africa, South Africa will be allowed to impose tax on the income derived from those activities.
This is the case whether the fee accrues to Jan Lied or to another person, in this case, Lied
Beheer BV.
There is no indication that Jan Lied’s performance will be funded with public funds from the
Netherlands. The provisions of Article 16(3) of the treaty will accordingly not be applicable.
In practice the expected result is therefore that South Africa will tax the income (the application
of the relevant South African domestic law to the income is illustrated in Example 21.11). If the
Netherlands also imposes tax on this income in terms of its domestic tax legislation, it would be
required to provide relief in respect of the tax suffered in South Africa.
21.4.3.8 International traffic

The term ‘international traffic’ refers to any transport by means of a ship or aircraft operated by a
business that has its place of effective management in one of the contracting states to a treaty. It
excludes cases where that ship or aircraft is operated only between places in the other contracting
state. Income derived from international traffic may only be taxed in the country where the business
that operates this traffic has its place of effective management (Art 8). The UN Model Double
Taxation Convention proposes two alternatives. The first mirrors the OECD approach. The second
allows the other contracting state (source country) to tax profits from international shipping activities if
the operations in that country are more than casual (Art 8 of the UN Model Double Taxation Con-
vention).
21.4.3.9 Business profits

The profits of a business carried on by a resident of a contracting state are only taxable in the country
of residence, unless that business is carried out by the person in another contracting state through a
permanent establishment therein. Put differently, both model tax conventions determine that the
source country may only tax the business profits of a resident of another country if that resident
carries on business through a permanent establishment situated in the source country. If it carries on
business through a permanent establishment in the source country, the source country may only tax
profits attributable to that permanent establishment (Art 7). The taxing right allocated to the source
country is not an exclusive taxing right. The country of residence of the person carrying on the
business in this manner may still tax the profits, but would be required to provide relief for the tax
suffered in respect of the permanent establishment in the source country.
770
Various business activities carried on in another country can give rise to a per-
manent establishment. The detailed circumstances under which these activities
will give rise to the existence of a permanent establishment are discussed in
more detail below. In broad terms, the main forms of permanent establishments
found in practice are
l a physical permanent establishment
l a services permanent establishment, and
l a dependent agent permanent establishment.
Article 5 of both model tax conventions contains detailed definitions of the term
‘permanent establishment’.
A permanent establishment is defined as a fixed place of business through
which the business of an enterprise is wholly or partly carried on (Art 5(1)).
Specific examples that may constitute a permanent establishment if all the
criteria in the definition are met, include a place of management, branch, office,
factory, and workshop. In a mining context, this includes a mine, oil or gas well,
Please note! quarry or other place of extraction of natural resources (Art 5(2)) (a physical
permanent establishment).
In order to eliminate uncertainty regarding the duration of projects required to
constitute a permanent establishment, a deeming rule exists in relation to
building sites and construction or installation projects. The OECD model tax
convention proposed a 12-month threshold, while the UN Model Double Taxa-
tion Convention suggests a 6-month threshold (Art 5(3) of the respective model
conventions). In addition, the UN model proposes a similar deeming rule for
activities that involve the furnishing of services (service permanent establish-
ment).
Certain ancillary or incidental activities to which it would be difficult to attribute
any profits are excluded from giving rise to a permanent establishment
(Art 5(4)).
The presence of a dependent agent in the other contracting state may give rise
to a permanent establishment (Art 5(5) and 5(6)). The mere fact that a parent or
subsidiary company relationship exists does not in itself give rise to the
existence of a permanent establishment in the other contracting state (Art 5(7))
(a dependent agent permanent establishment).
The OECD Model Tax Convention requires that profits should be attributed to the permanent
establishment on the basis of the profits that it might be expected to make if it were a separate and
independent enterprise. This applies in particular to the permanent establishment’s dealings with the
rest of the enterprise (Art 7(2)). The OECD suggests that the same principles that are relevant to
determine the arm’s length pricing for purposes of transfer pricing should be applied to attribute
profits to a permanent establishment.
The UN Model Double Taxation Convention commences with a similar approach. It, however,
disallows the deduction of certain expenses that may pose a risk to the tax base of the source
country (for example head office management service charges, royalties or interest) (Art 7(2) to (4) of
the UN Model Double Taxation Convention).
The UN Model Double Taxation Convention contains a specific provision that deals with independent
personal services, which is aimed at professional services. This provision allows the country where
the services are rendered (source country) to tax the income derived from such services if the person
has a fixed base regularly available to him in that country to perform the services, or has spent a
specified period of time in the country for these purposes (Art 14 of the UN Model Double Taxation
Convention). The OECD eliminated its equivalent of this provision as it overlapped with the business
profits provision. It viewed the independent services provision as redundant.
771
Example 21.8. Allocating of taxing rights in respect of business profits

Scenario A
Tyres Plc, a company that is a tax resident of the United Kingdom (UK), manufactures truck tyres
at its plant in Portsmouth in the UK. It has recently set up a distribution business in South Africa.
Tyres Plc imports the tyres into South Africa, stores them at a warehouse close to the harbour
port and sells them on a wholesale basis from this distribution point.
Discuss whether the business profits of Tyres Plc will be subject to normal tax in South Africa.
Scenario B
Top Advice (Pty) Ltd is a South African tax resident that carries on an engineering consulting
business. It consults with customers in various countries and provides them with designs for
infrastructure that they intend to construct. The staff involved in each project would initially visit
the client at its premises in the country to discuss their needs. The design work is done from Top
Advice (Pty) Ltd’s offices in Johannesburg and a report is emailed to the client at the completion
of the work. Top Advice has recently completed two projects on this basis, each with a three-
month duration, for clients in Botswana and Mozambique respectively.
Discuss whether Botswana and Mozambique may tax the respective business profits of Top
Advice (Pty) Ltd, if you assume that their domestic tax laws allow them to impose a 20% with-
holding tax on any service fees paid to foreign persons.
SOLUTION
Scenario A
As a non-resident, Tyres Plc will be subject to normal tax in South Africa in respect of income
earned from a South African source. No statutory source rule deals with the source of business
income. It was held in CIR v Lever Brothers & Unilever Ltd that the source of income is the origin-
ating cause of receiving the income. This originating cause may take the form of business activity
carried on and the employment of capital. It is submitted that in this case the source of the
income is the distribution activities carried on in South Africa by Tyres Plc. This source is in South
Africa. As a result, the income produced by these activities will be included in Tyres Plc’s gross
income in South Africa.
The next step is to determine whether South Africa is allowed to tax this income. As Tyres Plc is a
resident of the UK it is a covered person for purposes of the treaty (Art 1). South African normal
tax is covered by the treaty (Art 3(1)(a)(i)). Article 7(1) determines that:
The profits of an enterprise of a Contracting State shall be taxable only in that State unless the
enterprise carries on business in the other Contracting State through a permanent establish-
ment situated therein. If the enterprise carries on business as aforesaid, the profits of the
enterprise may be taxed in the other State but only so much of them as is attributable to that
permanent establishment.
Article 5(1) of the treaty defines a permanent establishment as ‘a fixed place of business through
which the business of an enterprise is wholly or partly carried on’. The warehouse premises from
which Tyres Plc carries on its wholesale distribution business is a permanent establishment as
defined. South Africa may therefore tax so much of the profits of Tyres Plc as is attributable to the
business carried on through this permanent establishment. Articles 7(2) to 7(5) describe how this
profit attribution should be done.
Scenario B
It has been stated that the domestic laws of the respective countries allow them to impose a
withholding tax on service fees paid to foreign persons.
The question that remains to be answered is whether each of the countries is allowed to impose
this tax in terms of the tax treaties that they have concluded with South Africa. This is considered
below for each country. In each case, Top Advice (Pty) Ltd, as a South African tax resident, will
be a covered person for purposes of the relevant treaty. For purposes of this example, it can be
assumed that the taxes imposed by each of the countries will be taxes on income to which the
treaty applies.
Mozambique client
The treaty concluded between South Africa and Mozambique does not contain a specific
provision that deals with service income. The business income provision therefore applies. Article
7(1) of this treaty states that:
enterprise carries on business in the other Contracting State through a permanent
establishment situated therein. If the enterprise carries on business as aforesaid, the profits of
the enterprise may be taxed in the other State but only so much of them as is attributable to
that permanent establishment.
continued
772
A permanent establishment is defined in Article 5(1) of the treaty as ‘a fixed place of business
through which the business of an enterprise is wholly or partly carried on’. The definition
specifically includes, in Article 5(3)(b):
the furnishing of services, including consultancy services, by an enterprise through employees
or other personnel engaged by an enterprise for such purpose, but only where activities of that
nature continue (for the same or a connected project) within the Contracting State for a period
or periods exceeding in the aggregate 180 days in any twelve-month period commencing or
ending in the fiscal year concerned.
The presence of Top Advice staff in Mozambique for the initial meeting does not give rise to it
conducting business through a place in that country with any degree of permanency. With the
exception of the initial meeting, no activities are carried on by Top Advice in Mozambique. As a
result, Top Advice does not carry on business through a permanent establishment in Mozam-
bique. In these circumstances, Article 7(1) of the treaty prohibits Mozambique from taxing the
income that Top Advice derives from the Mozambican client.
Botswana client
Article 20 of the treaty concluded between South Africa and Botswana specifically deals with
technical fees. Technical fees are defined in Article 20(3) to include payments in consideration
for any services of a technical or consultancy nature. Article 20(5) deems these fees to arise in
the country where the payer is a resident (in this case, Botswana), unless the fees are effectively
connected to a permanent establishment in the other country. For reasons similar to those in the
Mozambican client’s case, Top Advice (Pty) Ltd does not carry on business through a permanent
establishment in Botswana. Article 20(4) is therefore not applicable.
Article 20(2) of the treaty allows the following taxing rights to the country of source where the fees
arise:
However, such technical fees may also be taxed in the Contracting State in which they arise,
and according to the laws of that State, but where such technical fees are derived by a
resident of the other Contracting State who is subject to tax in that State in respect thereof, the
tax charged in the Contracting State in which the technical fees arise shall not exceed 10 per
cent of the gross amount of such fees.
It follows from Article 20(2) that Botswana would be allowed to tax the fees, but only at a
maximum rate of 10%.
21.4.3.10 Capital gains

Capital gains realised by a resident of a contracting state (country of residence) may be taxed in the
other country (source country) if that gain arises from
l the alienation of immovable property situated in the source country or shares that derive more
than 50% of their value from immovable property situated in the source country, or
l the alienation of movable property that forms part of the business property of a permanent estab-
lishment situated in the source country.
Any other capital gains are taxable only in the country of residence (Art 13). This provision is often
particularly relevant in the context of a disposal of shares which are only taxable in the country of
residence. This applies irrespective of whether the country of residence imposes capital gains tax or
not.
Example 21.9. Allocating of taxing rights in respect of capital gains
The following assets are disposed of by persons who are tax residents of the United Kingdom:
Scenario A
Propco UK Plc owns a commercial building in Cape Town (South Africa). It disposes of the
building to SA Property (Pty) Ltd, a South African resident company.
Scenario B
Shareco UK Plc holds all the shares of ABC (Pty) Ltd, a South African registered company.
Approximately 55% of the value of the ABC (Pty) Ltd shares is derived from its office buildings,
while the remaining 45% of the value is derived from its operating assets and profit prospects.
Shareco UK Plc has no presence or operations in South Africa.
Discuss whether the respective sellers will be subject to tax in South Africa if they were to
dispose of the assets described above.
773
SOLUTION
As both sellers are residents of the United Kingdom (UK), they are covered persons for purposes
of the tax treaty concluded between South Africa and the UK (Art 1 of the treaty). Capital gains
tax forms part of normal tax (included in taxable income and subject to normal tax in terms of
s 26A. The treaty states that it applies in respect of normal tax in South Africa (Art 2(3)(a)(i) of the
treaty).
Article 13(1) of the treaty allocates the following taxing right in respect of capital gains arising on
the disposal of immovable property:
Gains derived by a resident of a Contracting State from the alienation of immovable property
referred to in Article 6 of this Convention and situated in the other Contracting State may be
taxed in that other State.
In relation to shares, Article 13(2) determines:
Gains derived by a resident of a Contracting State from the alienation of:
(a) shares, other than shares quoted on an approved Stock Exchange, deriving their value or
the greater part of their value directly or indirectly from immovable property situated in
the other Contracting State, … may be taxed in that other State.
Lastly, in respect of movable property (which includes shares), Article 13(3) states:
Gains from the alienation of movable property forming part of the business property of a per-
manent establishment which an enterprise of a Contracting State has in the other Contracting
State, including such gains from the alienation of such a permanent establishment (alone or
with the whole enterprise), may be taxed in that other State.
Any other gains on the disposal of assets are only taxable in the country of residence of the
alienator of the assets (Art 13(5)).
Scenario A
A non-resident, in this case Propco UK Plc, is subject to capital gains tax in respect of the
disposal of immovable property situated in South Africa (par 2(1)(b)(i) of the Eighth Schedule).
As the immovable property being disposed of is situated in South Africa, South Africa may tax
the capital gains arising on the disposal of the property (Art 13(1) of the treaty).
This tax is administered through amounts withheld by the purchaser from payments made to the
seller (Propco UK Plc) for the property. This withholding obligation is illustrated in Example 21.10.
Scenario B
A non-resident is only subject to capital gains tax in South Africa in respect of the following
shares:
l shares that constitute an interest in immovable property (paras 2(1)(b)(i) and 2(2) of the
Eighth Schedule), or
l shares that are effectively connected to a permanent establishment of the non-resident in
South Africa (par 2(1)(b)(ii) of the Eighth Schedule).
As the immovable property situated in South Africa only contributes 55%, as opposed to 80%, to
the value of the ABC (Pty) Ltd shares, these shares do not represent an interest in immovable
property (par 2(2)(a) of the Eighth Schedule). As Shareco UK Plc does not have any presence or
operations in South Africa, the shares are not connected to any permanent establishment in
South Africa. Shareco UK Plc, as a non-resident, will therefore not be subject to capital gains tax
in terms of the Eighth Schedule when it disposes of the shares.
The fact that Article 13(2) of the treaty allows South Africa to tax these gains does not impact on
the tax implications arising in the hands of Shareco UK Plc. A treaty does not impose additional
taxes to those imposed in terms of the domestic tax laws (in this case, the Eighth Schedule).
21.4.3.11 Other income

Income that does not fall within any of the above-mentioned categories, is only taxable in the country
where the recipient is resident. An exception exists if this income is effectively connected to a per-
manent establishment carried on in the other country, in which case the business profits provisions
apply (Art 21).
21.4.3.12 Capital
Tax treaties also deal with taxes on capital. These taxes exclude taxes on estates and inheritances (in
the South African context, estate duty) or taxes on gifts (in the South African context, donations).
South Africa does not currently impose a tax on capital, but in recent years there have been some
proposals for wealth taxes to be introduced.
The taxing rights to capital mirror those that apply to capital gains (Art 22).
774
21.4–21.5 Chapter 21: Cross-border transactions
21.4.4 Special provisions

In addition to dealing with the allocation of taxing rights, tax treaties also contain some special provi-
sions that govern certain aspects of the relationship between the contracting states (Chapter VI of the
OECD Model Tax Convention). These special provisions deal with
l the elimination of tax discrimination in certain circumstances, where differentiation between tax-
payers cannot legitimately be justified (Art 24)
l the institution of a mutual agreement procedure for resolving difficulties arising from the applica-
tion of the treaty (Art 25)
l the exchange of information and co-operation between the tax administrations of the contracting
states (Art 26)
l rendering assistance to each other in the collection of taxes (Art 27)
l specific matters relating to the treatment of members of diplomatic missions and consular posts
to ensure that they receive no less favourable treatment than that to which they are entitled to
under international law or special international agreements (Art 28)
l the extension of the territories to which the tax treaty applies and procedures to do this (Art 29).
21.5 South African taxation of income of non-residents
21.5.1 Tax liability and obligations

Persons who are not residents of South Africa for tax purposes are only subject to tax in South Africa
on income amounts received by or accrued to them from a source in South Africa (par (ii) of the
definition of ‘gross income’ in s 1). This means that non-residents could be subject to tax in South
Africa on inbound transactions. The rules to establish whether income is from a South African source
are discussed in detail in 21.3.
Remember
The non-resident who enters into an inbound transaction into South Africa may be subject to tax
in its country of residence. From the perspective of its country of residence, this transaction will
be an outbound transaction in terms of which a resident earns foreign sourced income. The
country of residence will generally provide some form of relief for the taxes suffered in the foreign
country (for example an exemption or rebate).
This South African tax may be imposed in the form of normal tax or as a withholding tax. If the income
is subject to a withholding tax, a corresponding exemption from normal tax would normally exist to
ensure that the amount is not taxed more than once in South Africa. The withholding taxes, and
related relief from normal tax, that specifically apply to amounts that are received by non-residents,
are discussed in more detail below in 21.5.2.
Non-residents are only liable to tax on capital gains that arise from the disposal of the following
assets (par 2(1)(b) of the Eighth Schedule):
l immovable property situated in South Africa
l an interest or right to or in immovable property situated in South Africa (refer to chapter 17)
l an asset that is effectively connected with a permanent establishment in South Africa.
Remember
All the taxes described above are taxes imposed in terms of the Income Tax Act, South Africa’s
domestic tax legislation, on persons who are not residents of South Africa. If a tax treaty has
been concluded between South Africa and the country where this person is a resident, the
provisions of the tax treaty must be considered to determine whether South Africa may tax the
income as required by the Act. Refer to 21.4 for a detailed discussion of the interpretation of tax
treaties.
A non-resident is required to register as a taxpayer for income tax purposes in South Africa if it
becomes liable for normal tax in South Africa or is liable to submit an income return in South Africa
(s 67(1)). In terms of the most recent notice issued by SARS to give notice to persons who should
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submit returns for normal tax, the following non-residents are required to submit income tax returns
(Notice 547 issued on 9 June 2017):
l every non-resident that is a company, trust or other juristic person which
– carried on a trade through a permanent establishment in South Africa
– derived income from a source in South Africa (see 21.3)
– derived any capital gain or capital loss from the disposal of assets to which the Eighth
Schedule applies, as indicated above
l every company incorporated, established or formed in South Africa, which is not a resident as a
result of the application of a tax treaty
l every natural person who is not a resident and who carried on a trade, other than solely as an
employee, in South Africa
l every natural person who is not a resident and who derived any capital gain or capital loss from
the disposal of assets to which the Eighth Schedule applies, as indicated above
l every non-resident whose gross income included interest from a South African source that was
not exempt in terms of s 10(1)(h).
Natural persons who were non-residents throughout the year of assessment and whose gross income
consisted solely of dividends are not required to submit returns.
Non-residents may also be parties to reportable arrangements (see chapter 33). This particularly
includes specific reportable transactions that involve foreign trusts, foreign insurers and foreign
service providers.
21.5.2 Withholding taxes

Withholding tax is a mechanism that is often used to ensure that tax is collected in circumstances
where it may otherwise be difficult to collect tax. In the context of income that accrues to foreign per-
sons, tax in the form of a withholding tax is commonly applied to amounts that are received by or
accrue to a person without a sufficient presence in the source country to be certain of efficient collec-
tion of the tax. Withholding taxes are generally imposed on passive income that does not require the
presence of the person in a country, for example interest or royalties that are earned from making
funds or intellectual property available for use in a country. Some countries, however, also impose
withholding tax on more actively earned income, for example service fees. These withholding taxes
can significantly impact on the profitability of transactions undertaken, as they are not based on the
profit margins of the transaction, but only on the gross amount received by the taxpayer.
South Africa imposes withholding taxes on the following income earned from a South African source
by a non-resident:
l proceeds paid to non-resident sellers in respect of immovable property disposed of (s 35A)
l fees earned as entertainers and sportspersons (Part IIIA of Chapter II of the Act: ss 47A to 49K)
l royalties (Part IVA of Chapter II of the Act: ss 49A to 49H)
l interest (Part IVB of Chapter II of the Act: ss 50A to 50H).
These withholding taxes share a number of common features. The features discussed in 21.5.2.1
apply to all taxes, while the unique requirements relating to each of the withholding taxes are
explained in 21.5.2.2 to 21.5.2.5
Remember
A withholding tax on some service fees paid to non-residents was inserted into the Act in 2015
but never came into effect. This withholding tax on service fees was replaced by an obligation to
report certain arrangements that involve the rendering of consultancy, construction, engineering,
installation, logistical, managerial, supervisory, technical or training services to a resident or a
non-resident’s permanent establishment in South Africa. These service arrangements must be
reported if
l a non-resident (or any employee, agent or representative of a non-resident) is or was, or is
anticipated to be, physically present in South Africa to render the service, and
l the expenditure incurred or to be incurred in respect of the services under the arrangement
exceeds or is anticipated to exceed R10 million in total.
The reporting obligation does not exist for expenditure that constitutes remuneration, which
should in principle be subject to employees’ tax.
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In addition, dividends paid by a South African resident company are subject to dividends tax. Divi-
dends tax in relation to dividends paid to a shareholder in cash is also a withholding tax. This with-
holding tax, however, applies to dividends paid to both residents and non-residents. Dividends tax is
discussed in detail in chapter 19.
Remuneration paid to any employee, whether a resident or non-resident, may be subject to
employees’ tax. Employees’ tax is another form of withholding tax that serves as an advance payment
of the employee’s tax normal liability. Employees’ tax is explained in detail in chapter 10.
21.5.2.1 Common features of withholding taxes imposed in respect of payments
to non-residents
Withholding tax applies to South African sourced amounts
As the withholding taxes are imposed in respect of non-residents, the scope of each of the
withholding taxes is limited to amounts that have a South African source. The table below indicates
how each of the regimes applies to amounts derived by non-residents from a source in South Africa.
Withholding tax regime Application
Immovable property Amounts paid to a non-resident in respect of the disposal of immovable property in
South Africa (s 35A(1)). Immovable property in this context includes interests or
rights to or in immovable property (see chapter 17) (definition of ‘immovable
property’ in s 35A(15))
Foreign entertainers Amounts received by or accrued to a non-resident regarding a personal activity
and sportspersons exercised in South Africa by the person as an entertainer or a sportsperson (s
47B(1) and definition of ‘specified activity’ in s 47A(b)). An entertainer or
sportsperson is a person who, for reward, exercises any of the following activities
(definition in s 47A(a)):
l performs as a theatre, motion picture, radio or television artiste or musician
l takes part in any sport
l takes part in any other activity usually regarded as of an entertainment
character.
Royalties Royalties paid to or for the benefit of a non-resident from a source in South Africa
(see 21.3.3) (s 49B(1)). Royalties in this context refer to amounts received by or
accrued for the use or right of use of intellectual property and know-how payments
(definition of ‘royalty’ in s 49A(1)).
Interest Interest paid to or for the benefit of a non-resident from a source in South Africa
(see 21.3.2) (s 50B(1)). Interest in this context refers to interest, other than interest
arising on certain sale and leaseback transactions, as defined in s 24J (see
16.2.1.2) (definition of ‘interest’ in s 50A(1)).
Withholding tax regime applies to payments made to non-residents with a limited presence in South
Africa
With the exception of the obligation to withhold amounts from payments made to non-resident sellers
of immovable property, all the withholding taxes are only imposed in respect of payments made to
non-residents who have a limited presence in South Africa. When a non-resident has a stronger
presence in South Africa, this reduces the risk of not being able to collect the taxes due by this
person. These non-residents are subject to normal tax, as opposed to the withholding tax, on the
amounts that they receive.
The table below shows the inter-relationship between the withholding tax and normal tax with regard
to amounts received by the non-resident:
Subject to withholding tax Subject to normal tax
Withholding tax regime
(exempt from normal tax) (exempt from the withholding tax)
Foreign entertainers Any amount received by or accrued to Amounts received by or accrued to a
and sportspersons the person who is subject to the with- person who is
holding tax (s 10(1)(lA)) l an employee of an employer who is
a resident, and
l is physically present in South Africa
for more than 183 days during any
12-month period beginning or
ending during the year of
assessment in which the specified
activity is exercised.
continued
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Subject to withholding tax Subject to normal tax

Withholding tax regime
(exempt from normal tax) (exempt from the withholding tax)
Royalties Royalties that are received by or accrue Royalties that are received by or accrue
to a non-resident (s 10(1)(l)) to a non-resident
l who is a natural person who was not l who is a natural person who was
physically present in South Africa for physically present in South Africa
more than 183 days in the 12-month for more than 183 days in the 12-
period before the accrual or receipt month period before the accrual or
of the royalties receipt of the royalties (s 49D(a))
l where the intellectual property or l where the intellectual property or
knowledge or information from knowledge or information from
which the royalty is paid is not which the royalty is paid is effect-
effectively connected to a per- ively connected to a permanent
manent establishment of the non- establishment of the non-resident in
resident in South Africa. South Africa provided that the non-
This exemption will be indicated on the resident is registered as a taxpayer
non-resident’s income tax return (if the in South Africa (s 49D(b)).
person is required to submit an income The person to whom the royalties are
tax return). paid must submit a declaration (WTRD)
to the person making the payment,
stating that he is exempt from the
withholding tax (s 49E(2)(b)). This
declaration has to be submitted to the
person making the payment by a date
specified or the date of the payment if
no date was specified.
Interest Interest that is received by or accrues Interest that is received by or accrues
to a non-resident (s 10(1)(h)) to a non-resident
l who is natural person who was not l who is natural person who was
physically present in South Africa for physically present in South Africa
more than 183 days in the 12-month for more than 183 days in the 12-
period before the accrual or receipt month period before the accrual or
of the interest receipt of the interest (s 50D(3)(a))
l where the debt from which the l where the debt from which the
interest arises is not effectively interest arises is effectively con-
connected to a permanent estab- nected to a permanent establish-
lishment of the non-resident in South ment of the non-resident in South
Africa. Africa provided that the non-
This exemption will be indicated on the resident is registered as a taxpayer
non-resident’s income tax return (if the in South Africa (s 50D(3)(b)).
person is required to submit an income The person to whom the interest is paid
tax return). in the first two instances must submit a
declaration (WTID) to the person
making the payment, stating that it is
exempt from the withholding tax
(s 50E(2)(b)). This declaration has to
be submitted to the person making the
payment by a date specified or the
date of the payment if no date was
specified.
Certain interest that accrues to or is received by non-residents is not subject to
normal tax (qualifies for the exemption in s 10(1)(h) as above) or the withholding
tax. The specific exemptions to exclude this interest from the withholding tax
regime are considered in 21.5.2.5.
With the exception of the obligation to withhold amounts from payments made to non-resident sellers
of immovable property, the withholding taxes are final taxes (ss 47B(2), 49B(3) and 50B(3)). The non-
resident is not subject to any further tax in South Africa in respect of the amount.
Amounts withheld on payments to non-resident sellers of immovable property are advance payments
on the normal tax on the gains realised by the seller on the disposal of the property (s 35A(3)(a)). This
means that, similarly to provisional tax payments made by a taxpayer in relation to its normal tax
liability, these amounts must be deducted to determine the normal tax still payable by the non-
resident when it is assessed for normal tax.
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Basic calculation of amount to be withheld

The amount of withholding tax is calculated as a withholding tax rate applied to the gross amount of
the relevant transaction. As no deductions are allowed from this amount, this tax is imposed on
income (or in the case of immovable property, proceeds), as opposed to the profit or gain realised on
the transaction.
The table below summarises the rates and amounts to which the rate should be applied:
Withholding tax regime Rate Amount to which the rate is applied
Immovable property Depends on the nature of the non- Amount payable in respect of the
resident seller of the immovable disposal of immovable property in
property (s 35A(1)): South Africa (s 35A(1))
l 5% if natural person
l 7,5% if company
l 10% if trust
As this is not a final tax, but rather an advance payment of normal tax, certain
exceptions to the above calculation exist in order to align the advance payment
with the normal tax in respect of the disposal. These are discussed in 21.5.2.2
below.
Foreign entertainers 15% (s 47B(2)) Amount received by or accrued in
and sportspersons respect of any specified activity
exercised in South Africa (s 47B(1))
Royalties 15% (s 49B(1)) Royalties paid from a South African
The rate may be reduced if the foreign source
person to whom, or for whose benefit,
the royalties are paid has submitted a
declaration (WTRD) to the person
making the payment stating that a
reduced rate should be applied as a
(s 49E(3)). This declaration has to be
submitted to the person making the
payment by a date specified or the date
of the payment if no date was specified.
Interest 15% (s 50B(1)) Interest paid from a South African
The rate may be reduced if the foreign source.
person to whom, or for whose benefit,
the interest is paid has submitted a
declaration (WTID) to the person
making the payment stating that a
reduced rate should be applied as a
(s 50E(3)). In addition, a written under-
taking to inform the payer if the cir-
cumstances affecting the application of
the treaty change should be submitted.
This declaration and undertaking have
to be submitted to the person making
the payment by a date specified or the
date of the payment if no date was
specified.
All the above-mentioned rates may be changed by announcement by the Minister of Finance in the
national annual budget. The change takes effect from a date mentioned in that announcement and
applies for a period of 12 months from the announcement. The change in the rate is subject to Parlia-
ment passing legislation within 12 months from the announcement to give effect to the announcement
(ss 35A(1)(d), 35A(1A), 47B(2)(a)(ii), 47B(2)(b), 49B(1)(a)(ii), 49B(1)(b), 50B(1)(a)(ii) and 50B(1)(b)).
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A declaration of the beneficial owner’s tax status (applicable to dividends tax as

well as interest and royalty withholding taxes) and a written undertaking to
inform the payer of changes in this tax status (applicable to dividends tax and
interest withholding tax) only need to be submitted once to the payer for the
treaty relief to apply. When the circumstances of the beneficial owner of the
Please note! income or the payer change in a manner that affects the treaty relief, a revised
declaration and undertaking may need to be submitted.
The declaration and undertaking are generally submitted by the beneficial
owner to the payer for record keeping. These documents are only provided to
the SARS on request or when seeking a refund from the SARS for withholding
tax incorrectly withheld and paid.
If, in all instances, except for amounts withheld when a non-resident disposes of immovable property
in South Africa, the amount withheld is denominated in a foreign currency, it has to be converted to
rand at the spot rate on the date on which the amount was deducted or withheld (ss 47J, 49H and
50H). In the case of an amount withheld from the payments made to a non-resident on the disposal of
immovable property in South Africa, the amount to be paid to SARS has to be converted to rand at
the spot rate on the date that the amount is paid to SARS (s 35A(5)).
Person responsible to withhold and pay the tax to SARS

The obligation to withhold the tax rests with the person who makes the relevant payment to the non-
resident. This person is a withholding agent, as contemplated in 156 of the Tax Administration Act.
The withholding agent is personally liable for any amounts of tax withheld and not paid to SARS or
amounts that should have been withheld that were not withheld by the person (s 157(1) of the Tax
Administration Act – see chapter 33).
The table below summarises who these persons liable to withhold the tax are:
Withholding tax regime Person responsible to withhold or pay tax to SARS
Immovable property Any person who pays an amount to a non-resident that disposes of immovable
property in South Africa, or who pays such amount to any other person for or on
behalf of this non-resident seller, is liable to withhold the tax and pay it to SARS
(s 35A(1)). This will generally be the purchaser of the immovable property. Both
resident and non-resident purchasers have to withhold tax and pay the amounts to
SARS. The purchaser is personally liable for the tax if it knew or should reasonably
have known that the seller is a non-resident (s 35A(7)).
An estate agent or conveyancer, who assists with the disposal of the property and
is entitled to remuneration in respect of the services rendered in connection with
the sale or transfer of the property, is required to inform the purchaser in writing of
the fact that the seller is not a resident and that an amount should be withheld
(s 35A(11)). An estate agent or conveyancer who knew or should reasonably be
expected to have known that the seller is a non-resident, and failed to notify the
purchaser, becomes jointly and severally liable for the tax. Their liability is limited to
the remuneration they earned from the services in respect of the transaction
(s 35A(12)). If the estate agent or conveyancer assisted with the transaction and
failed to notify the purchaser of the fact that the seller is not a resident, the
purchaser is not personally liable for the tax (s 35A(8)).
Foreign entertainers Any resident who is liable to pay amounts subject to this withholding tax must
and sportspersons withhold the tax from the payment it makes to the person (s 47D(1)). This resident is
personally liable for the payment of the tax if it fails to withhold the tax, unless the
taxpayer to whom the amount accrued to or was received by paid the tax, as
indicated below (s 47G). The person making the payment is not required to
withhold an amount if such person is not a resident.
If the tax was not withheld by the person making the payment of the amounts (for
example, paid by a non-resident) and was not recovered by SARS from the person
who should have withheld it, the taxpayer who received the amount subject to the
tax must pay the tax, as a final tax, to SARS (s 47C).
Royalties The person making the payment of the royalties subject to the withholding tax must
withhold the tax from the payment of the royalties (s 49E(1)). If the tax was not
withheld by the person making the payment of the amounts and paid to SARS, the
person to whom the royalties were paid is liable for the withholding tax (s 49C).
continued
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Withholding tax regime Person responsible to withhold or pay tax to SARS

Interest The person making the payment of the interest subject to the withholding tax must
withhold the tax from the payment of the interest (s 50E(1)). This person can be a
resident or, in certain instances, a non-resident (see 21.2.7.5 for the circumstances
when a non-resident would be required to withhold the tax). If the tax was not
withheld by the person making the payment of the amounts and paid to SARS, the
person to whom the interest was paid is liable for the withholding tax (s 50C).
Timing of the payment and return to SARS

As the tax payable to SARS has to be withheld from a payment made to the recipient, the withholding
tax regimes generally require that the tax must only be paid to SARS when an amount is paid, as
opposed to when it accrues, to the counterparty from which this tax can be withheld. The return in
respect of the tax must accompany the payment.
It is important to note that in the context of the withholding tax on royalties and
interest, the amount is deemed to be paid at the earlier of the date when it is
Please note! actually paid or when it becomes due and payable (ss 49B(2) and 50B(2)). It
may therefore happen that the withholding tax is payable to SARS even though
the actual payment of the royalty or interest has not been made.
The tax withheld by the purchaser from amounts paid to non-residents on the disposal of their immov-
able properties in South Africa, must be paid to SARS within 14 days from the date when the amount
was withheld if the purchaser is a resident. If the purchaser is not a resident of South Africa, the
amount must be paid to SARS within 28 days from the date that it is withheld (s 35A(4)). The pur-
chaser must submit a return (NR02 return) at the time of the payment to SARS (s 35A(6)). Failure to
pay the tax to SARS on time attracts a 10% penalty (s 35A(9)(b)). Interest accrues at the prescribed
rate on the outstanding amount from the day following the date when payment had to be made until
the date when the tax is paid to SARS (s 35A(9)(a)).
The purchaser of immovable property is not required to withhold an amount

when it has only paid a deposit for purposes of securing the disposal to the
Please note! seller. The withholding obligation only arises when the agreement for the
disposal becomes unconditional. Once this happens, the amount to be withheld
from the deposit should be withheld from the first following payments made to
the seller (s 35A(14)(b)).
The tax to be withheld from amounts paid in respect of specified activities exercised by non-resident
entertainers and sportspersons must be paid to SARS before the end of the month following the
month during which the amount was withheld (s 47E). If the person who received the amount has to
pay the tax to SARS (as opposed to a withholding agent), that person must pay the tax to SARS
within 30 days after an amount subject to the tax has accrued to or been received by that person
(s 47C(1)). These payments, whether made by the resident withholding agent or the taxpayer itself,
must be accompanied by a return (NR01) (s 47F).
The withholding tax on royalties must be paid to SARS by the person who pays the royalties to the
foreign person, or by the foreign person, by the last day of the month following the month during
which the royalty is paid (s 49F). The payment must be accompanied by a return (WTR01) (s 49F(2)).
If the withholding tax on royalties is withheld and paid to SARS in respect of royalties, due to the fact
that the recipient did not submit a declaration confirming its entitlement to an exemption or reduced
rate to the withholding agent, this tax can be refunded if the declaration is obtained within three years
after the royalties have been paid (s 49G).
The withholding tax on interest must be paid to SARS by the person who pays the interest to the
foreign person, or by the foreign person, by the last day of the month following the month during
which the interest is paid or becomes due and payable (s 50F). The payment must be accompanied
by a return (WT002) (s 50F(2)). If the withholding tax on interest is withheld and paid to SARS due to
the fact that the recipient did not submit a declaration confirming its entitlement to an exemption, or
confirming its entitlement to a reduced rate to the withholding agent, as well as an undertaking to
inform the payer of changes in the recipient’s tax status in the case of a reduced withholding rate,
this tax can be refunded if the declaration and/or written undertaking is obtained within three years
after the interest has been paid (s 50G(1)). A refund is also available for withholding tax on interest
due and payable, which subsequently becomes irrecoverable (s 50G(2)).
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The person who has to withhold tax from interest paid to a non-resident is
required to submit a third-party return in terms of s 26 of the Tax Administration
Please note! Act. This return will be in the form of a IT3(b) return. It must indicate the amount
of interest paid or that becomes due and payable as well as the tax withheld in
respect of it (Notice 1 of 2016).
21.5.2.2 Withholding from amounts paid to non-resident sellers of immovable property (s 35A)
As indicated above, the amounts that purchasers pay to non-residents who dispose of their
immovable properties in South Africa differ from the other withholding taxes in the sense that they are
not a final tax. As this tax is an advance payment in respect of the normal tax that arises on the
disposal of the property, a number of exceptions exist to align the withholding tax with the actual tax
that is payable in respect of the disposal.
The seller may apply to SARS for a directive that no amount should be withheld or that the amount to
be withheld should be reduced (s 35A(2)). This request must be based solely on the following factors
that, firstly, consider the actual tax liability in respect of which the amount will be an advanced
payment and, secondly, the risk that SARS may not be able to collect the tax on the disposal:
l security that the seller can furnish for the payment of any taxes due on the disposal of the
property
l the extent to which the seller has assets in South Africa
l whether the seller will be subject to tax on the disposal of the immovable property
l whether the actual tax liability of the seller regarding the disposal is less than the amount to be
withheld.
This directive can be requested on a NR03 application form.
The purchaser is not required to withhold tax if the amounts payable to the seller for the acquisition of
the property do not exceed R2 million (s 35A(14)(a)). No directive is required in these circumstances.
As the tax withheld is not a final tax, this leaves SARS in a position where it may owe an amount to the
non-resident on assessment if the amount that was withheld exceeds the actual tax. In the past, a
number of non-residents did not submit their income tax returns in South Africa on a timely basis.
Where a non-resident does not submit a return for the year of assessment in which the disposal took
place within 12 months after the end of that year, the payment is deemed to be sufficient basis for
SARS to issue an estimated assessment (s 95 of the Tax Administration Act). If the taxpayer does not
request SARS to issue a reduced assessment by submitting a complete and correct return, the
estimated assessment becomes final (s 100 of the Tax Administration Act).
Example 21.10. Tax withheld from amounts paid to a non-resident for immovable property
in South Africa
Propco UK Plc has a June financial year-end. Propco UK Plc acquired the property in 2005 for
an amount of R3 500 000.
On 1 February 2018 SA Property (Pty) Ltd agreed to buy the commercial property in Cape Town
from Propco UK Plc for R5 000 000. The purchase price is payable as follows in terms of the
contract:
l on 1 February 2018, a deposit of R1 million to secure the transaction until financing could be
arranged for the remaining portion of the purchase price
l on 30 April 2018, the date of transfer of the property to SA Property (Pty) Ltd, the remaining
R4 million.
Discuss the responsibilities of SA Property (Pty) Ltd in respect of the purchase of the immovable
property. Discuss the South African tax implications of the disposal of the property for Propco
UK Plc.
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SOLUTION
SA Property (Pty) Ltd obligations
SA Property (Pty) Ltd will pay amounts to Propco UK Plc, a non-resident, for the disposal of
immovable property in South Africa. SA Property (Pty) Ltd, as the purchaser of the property, must
withhold 7,5% of the amounts paid to Propco UK Plc. This amounts to R375 000 (R5 million ×
7,5%) (s 35A(1)). Propco UK Plc can apply for a directive to reduce this amount (as discussed
below). It must pay the amounts withheld over to the SARS within 14 days after payment was
made and the tax was withheld (s 35A(4)). The payment of this tax must be accompanied by a
NR02 return (s 35A(6)).
SA Property (Pty) Ltd will not be required to withhold any tax from the deposit paid to secure the
transaction (s 35A(14)(b)). It will, however, be required to withhold the tax on the full purchase
price of R5 million from the payment of R4 million that it makes on 30 April 2018.
Propco UK Plc
The amounts withheld by SA Property (Pty) Ltd and paid to SARS are not final taxes, but rather
advance payments towards Propco UK Plc’s normal tax liability arising from the disposal of the
commercial property in South Africa. In this case, Propco UK Plc’s actual capital gain on the dis-
posal will be R1 500 000 (R5 million – R3 500 000), which will be included in its taxable income at
a rate of 80%. This amount will be subject to tax at 28%. As explained in Example 21.9, South
Africa may impose this tax in terms of the treaty between South Africa and the UK. The total
normal tax in respect of the transaction will be R336 000. Propco UK Plc will be able to apply the
tax withheld against its normal tax liability for the 2018 year of assessment.
In light of the fact that the actual tax is less than the amount to be withheld by SA Property
(Pty) Ltd, Propco UK Plc could consider to apply for a directive for a reduced withholding
obligation on SA Property (Pty) Ltd (s 35A(2)).
If Propco UK Plc fails to submit the return for its 2018 year of assessment by 30 June 2019, the
tax withheld and paid over to SARS by SA Property (Pty) Ltd may become a final tax based on an
estimated assessment (ss 95 and 100 of the Tax Administration Act).
21.5.2.3 Tax on foreign entertainers and sportspersons (ss 47A to 47K)

The scope of the tax on foreign entertainers and sportspersons is wider than just amounts that accrue
directly to or are received directly by the entertainer or sportsperson who exercises the specified
activity in South Africa. It extends to payments made to any other person who is not a resident, for
example a management company or a team that the person is involved with (s 47B(1)).
The short period for which many sportspersons or entertainers are often in South Africa makes this
tax difficult to administer. For this reason, SARS has to be notified of the presence of such a person.
Any resident who is primarily responsible for founding, organising or facilitating a specified event by
a sportsperson or entertainer in South Africa and who will be rewarded for this function, must notify
SARS of the event within 14 days of the agreement relating to its function having been concluded
(s 47K). This notification should be done on the NR01 form.
Example 21.11. Tax on foreign entertainers and sportspersons

The South African organisers of the event are required to pay Jan’s management company, Lied
Beheer BV, a performance fee of $500 000 on 1 June 2018 in order to secure his performance.
Lied Beheer BV is a company incorporated and tax resident in the Netherlands. Jan Lied will
arrive in South Africa on 14 June 2018 and perform on 15 June 2018. Following this, he will
spend two weeks in the Kruger National Park, after which he will continue his world tour. This is
his first and only visit to South Africa.
Discuss whether the performance fee will be subject to tax in South Africa and calculate the tax
(if any). Discuss the obligations of the South African organisers for this tax.
783
SOLUTION
The performance fee is paid to Lied Beheer BV, a non-resident, in respect of the activity of Jan
Lied to perform as a musician in South Africa for reward. Jan Lied is a foreign entertainer
(definition of ‘entertainer or sportsperson’ in s 47A). The personal activity of performing in South
Africa is a specified activity (definition of ‘specified activity’ in s 47A) in respect of which the tax
on foreign entertainers and sportspersons should be imposed (s 47B(1)).
Jan Lied is not employed by a resident and will only be in South Africa for approximately two
weeks. He does not qualify for the exemptions from the tax on foreign entertainers or sports-
persons in s 47B(3).
The tax is calculated at 15% on the amount received for Jan Lied’s performance in South Africa.
For these purposes, the amount must be converted to rand at the spot rate on 1 June 2018,
when the payment is made and the tax is withheld.
The organisers of the event, who are liable to pay the performance fee to Lied Beheer BV, must
withhold the tax (s 47D(1)). This tax must be paid over to SARS before the end of July 2018. The
event organisers should submit the NR01 notification to SARS 14 days after the agreement with
Lied Beheer BV was concluded. The tax withheld and paid over to SARS must correspond with
the amounts indicated on the NR01 (s 47F).
The tax withheld by the event organisers is a final tax (s 47B(2)). As indicated in Example 21.7,
this tax may be imposed by South Africa in terms of the allocation of taxing rights in the treaty
between South Africa and the Netherlands.
The performance fees are exempt from normal tax as the fees have been subject to the with-
holding tax (s 10(1)(lA)).
21.5.2.4 Withholding tax on royalties (ss 49A to 49H)

All the requirements of the withholding tax on royalties were discussed in 21.5.2.1.
Example 21.12. Withholding tax on royalties

Inventeur Ltd does not have any operations or presence in South Africa.
The royalties are payable by Production (Pty) Ltd to Inventeur Ltd at the end of each quarter,
based on the preliminary sales for the quarter. The royalties for the first quarter of 2018 amounted
to R3 million and became payable to Inventeur Ltd on 30 April 2018.
Discuss whether the royalties paid to Inventeur Ltd by Production (Pty) Ltd will be subject to tax
in South Africa and calculate the amount of the tax (if any). Discuss the obligations of Production
(Pty) Ltd with regard to the tax.
SOLUTION
The royalties are exempt from normal tax in terms of s 10(1)(l) as the royalties accrue to a non-
resident and the intellectual property in respect of which the royalties accrue is not connected to
a permanent establishment in South Africa.
The royalties are subject to the withholding tax on royalties in terms of s 49B for the following
reasons:
l The patent registered in Mauritius constitutes intellectual property as it is a patent defined in
the Mauritian equivalent of the South African Patents Act (par (e) of the definition of
‘intellectual property’ in s 23I(1)). The amounts payable by Production (Pty) Ltd constitute
royalties as they are paid in respect of the use of this intellectual property (definition of
‘royalty’ in s 49A(1)).
l As indicated in Example 21.2, the royalties accrue to Inventeur Ltd from a South African
source.
l The royalties are paid to Inventeur Ltd, a person who is not a resident.
As Inventeur Ltd does not have a presence in South Africa, the exemptions from the withholding
tax on royalties in s 49D do not apply.
The withholding tax will be R450 000 (15% × R3 million) unless the rate is reduced in terms of the
tax treaty concluded between South Africa and Mauritius.
As Inventeur Ltd is a resident of Mauritius, the treaty applies to it (Art 1 of the treaty). The with-
holding tax on royalties is specifically listed as a tax covered by the treaty (Art 2(3)(b)(iii) of the
treaty) Inventeur Ltd therefore qualifies for treaty relief on the royalties.
The payment for the use of a patent is a royalty for treaty purposes (Art 12(3) of the treaty). The
royalties are deemed to arise in South Africa where the payer (Production (Pty) Ltd) is a resident
(Art 12(5) of the treaty).
continued
784
Article 12(2) of the treaty allocates the following taxing rights to the state in which the royalties
arise:
However, such royalties may also be taxed in the Contracting State in which they arise, and
according to the laws of that State, but if the beneficial owner of the royalties is a resident of
the other Contracting State, the tax so charged shall not exceed 5 per cent of the gross
amount of the royalties.
The competent authorities of the Contracting States shall by mutual agreement settle the mode
of application of this limitation. (see note below)
As owner of the patent, Inventeur Ltd should be the beneficial owner of the royalties. If this is the
case, the royalties qualify for the relief in terms of Article 12(2) of the treaty.
South Africa’s taxing right is not affected by Article 12(4) of the treaty because Inventeur Ltd
does not have a permanent establishment in South Africa to which the patent in respect of which
the royalties are paid is connected. In addition, there is no indication that any special relationship
exists between Inventeur Ltd and Production (Pty) Ltd. The extent of the relief will not be limited
in terms of Article 12(6) of the treaty.
It is therefore concluded that South Africa may impose the withholding tax on royalties on this
amount, but only at a reduced rate of 5%. The amount of the withholding tax will be R150 000
(5% × R3 million). Inventeur Ltd has to submit a WTRD declaration to Production (Pty) Ltd in
order for Production (Pty) Ltd to withhold tax at the reduced rate (s 49E(3)).
Production (Pty) Ltd is responsible to withhold this tax from the payment of the royalties to Inven-
teur Ltd (s 49E(1)). Production (Pty) Ltd must submit a WTR01 return and pay the tax to SARS by
31 May 2018.
Note
The taxing rights allocated in respect of royalties in terms of the treaty reflect a typical allocation
of taxing rights where a developing country is involved and the UN Model Double Taxation
Convention was used as a basis to negotiate the treaty. This can be compared to Article 12 of
the treaty between South Africa and the Netherlands, which only allows the country of residence
to tax the royalties earned by its residents. If Inventeur Ltd was a Dutch tax resident, South Africa
would not have been allowed to impose a withholding tax on the royalties paid to it, provided that
Inventeur Ltd submitted the WTRD declaration to Production (Pty) Ltd.
21.5.2.5 Withholding tax on interest (ss 50A to 50H)

Certain amounts of interest paid to foreign persons are exempt from both the withholding tax and
normal tax. These exemptions are not based on the presence of the person in South Africa or
whether the debt claim is effectively linked to a permanent establishment in South Africa, but rather
on the nature of the lender or specific type of interest. Many of these exemptions are aimed at
ensuring that a full exemption from tax exists for portfolio debt investors into South Africa. The
amounts that are exempt from the withholding tax on interest on this basis are
l interest paid to a foreign person by (s 50D(1)(a)(i))
– the South African government in the national, provincial and local sphere
– any bank, the South African Reserve Bank, the Development Bank of Southern Africa (DBSA)
or the Industrial development corporation
The exemption in respect of interest paid by a bank does not apply to interest
paid by a bank to a foreign person, where the bank on-lent the amount
Please note! advanced to it by the foreign person to another person (s 50D(2)). This
provision is aimed at preventing schemes that use local banks as intermediaries
for foreign funding to avoid the withholding tax on interest.
l interest paid to the following foreign persons (s 50D(1)(d)):

– the African Development Bank
– the World Bank
– the International Monetary Fund (IMF)
– the African Import and Export Bank
– the European Investment Bank
– the New Development Bank
l interest paid to a foreign person on listed debt instruments (s 50D(1)(a)(ii))
785
l interest paid to a foreign person in respect of funds in a trust account in terms of s 21(6) of the
Financial Markets Act (s 50D(1)(b))
l interest paid to a foreign person by another foreign person, unless (s 50D(1)(c))
– the payer is a natural person who has been present in South Africa for more than 183 days in
the 12-month period before the interest was paid, or
– the interest arises from a debt claim that is effectively connected to the foreign person’s per-
manent establishment in South Africa if that person is registered as a taxpayer in South Africa.
Example 21.13. Withholding tax on interest

Investisseur Ltd’s operations are all based in Mauritius. The directors of Shishini (Pty) Ltd
travelled to Mauritius to conclude the loan agreement.
The loan agreement between Shishini (Pty) Ltd and Investisseur Ltd states that interest for the
year becomes payable at the end of every calender year. Shishini (Pty) Ltd paid the interest for
the 2018 calender year to Investisseur Ltd on 31 December 2018.
Discuss whether the interest paid to Investisseur Ltd by Shishini (Pty) Ltd will be subject to tax in
South Africa and calculate the amount of the tax (if any). Discuss the obligations of Shishini (Pty)
Ltd for the tax.
SOLUTION
As Investisseur Ltd, a non-resident, does not have a permanent establishment in South Africa,
the interest is not effectively connected to such a permanent establishment. The interest is
exempt from normal tax in South Africa in terms of s 10(1)(h).
The interest is subject to the withholding tax on interest in terms of s 50B as:
l The interest paid by Shishini (Pty) Ltd to Investisseur Ltd represents interest in respect of an
interest-bearing arrangement between the parties. The interest constitutes interest as
defined in s 24J (see 16.1.2) and is therefore interest to which the withholding tax on
interest applies.
l As indicated in Example 21.1, the interest accrues to Investisseur Ltd from a South African
source. The fact that the loan agreement was concluded in Mauritius does not change this.
l The interest is paid to Investisseur Ltd, a person who is not a resident.
None of the exemptions from the withholding tax on interest in s 50D apply in this case.
The withholding tax will be R165 000 (15% × (R10 million × 11% per annum)) unless the rate is
reduced in terms of the tax treaty concluded between South Africa and Mauritius.
As Investisseur Ltd is a resident of Mauritius, the treaty applies to it (Art 1 of the treaty). The
withholding tax on interest is a tax on income, which is covered by Article 2 of the treaty (BGR9).
Investisseur Ltd therefore qualifies for treaty relief on the interest.
As the interest arises from a debt claim that Investisseur Ltd has against Shishini (Pty) Ltd, it is
interest as defined in Article 11(5) of the treaty. The interest is deemed to arise in South Africa
where the payer (Shishini (Pty) Ltd) is a resident (Art 11(7) of the treaty).
Article 11(2) of the treaty allocates the following taxing rights to the state in which the interest
arises:
However, such interest may also be taxed in the Contracting State in which it arises and
according to the laws of that State, but if the beneficial owner of the interest is a resident of the
other Contracting State, the tax so charged shall not exceed 10 per cent of the gross amount
of the interest.
The competent authorities of the Contracting States shall by mutual agreement settle the mode
of application of this limitation.
The information available does not suggest that Investisseur Ltd is not the beneficial owner of the
interest. It must, however, be considered whether it can use and enjoy the income without any
constraints to pass it on to another person. In the absence of such a constraint or restriction,
Investisseur Ltd should qualify for the relief in terms of Article 11(2) of the treaty.
The interest does not qualify for any exemption in the state in which it arises in terms of
Article 11(3) of the treaty. South Africa’s taxing right is not affected by Article 11(6) of the treaty
because Investisseur Ltd does not have a permanent establishment in South Africa to which the
debt claim is connected. There is no indication that any special relationship exists between
Investisseur Ltd and Shishini (Pty) Ltd. The extent of the relief will not be limited in terms of
Article 11(8) of the treaty.
continued
786
It is therefore concluded that South Africa may impose the withholding tax on interest in respect
of this amount, but only at a reduced rate of 10%. The amount of the withholding tax will be
R110 000 (10% × (R10 million × 11% per annum)). Investisseur Ltd has to submit a WTID
declaration and a written undertaking to Shishini (Pty) Ltd in order for Shishini (Pty) Ltd to with-
hold tax at the reduced rate (s 50E(3)).
Shishini (Pty) Ltd is responsible to withhold this tax from the payment of the interest to Investis-
seur Ltd (s 50E(1)). Shishini (Pty) Ltd must submit a WT002 return and pay the tax to SARS by
31 January 2019.
21.5.3 Comprehensive example: Taxation of cross-border transactions by non-residents

The next example illustrates how to determine the South African tax implications of cross-border
transactions for non-residents, taking into account the principles explained in 21.5.1 and 21.5.2. The
approach suggested in 21.2 is applied in this example.
Example 21.14. South African income tax implications of inbound cross-border

transactions by a non-resident
Mr Klaus Friedrich, a 45-year-old natural person who is a German tax resident, received and incur-
red the following amounts relating to activities in South Africa during the 2018 year of assessment:
Rental income from house in Cape Town .................................................................... R300 000
Levies, repairs and maintenance with regard to the house ......................................... (R25 000)
Dividend income from shares in South African companies ......................................... R500 000
Interest earned in respect of bonds listed on the JSE that were issued by South
African companies ....................................................................................................... R150 000
You may assume that Mr Friedrich has not been in South Africa at any stage during the year and
does not have a permanent establishment in the country. Mr Friedrich is taxable on his worldwide
income in Germany as tax resident in that country.
Determine Mr Friedrich’s tax liabilities in South Africa 2018 year of assessment.
SOLUTION
Each of the transactions entered into by Mr Friedrich should be analysed in terms of the
provisions of the Act to determine his tax liabilities in South Africa. South Africa entered into a tax
treaty with Germany in 1973. As Mr Friedrich is a German resident, he is a covered person for
purposes of this treaty (Art 1). The effect of this treaty on South Africa’s right to impose the
respective taxes in terms of the Act should be considered.
Transaction 1: Rental income from house in Cape Town
Step 1: The rental derived from the property situated in South Africa is derived from a South
African source. The rental income of R300 000 must be included in his gross income (par (ii) of
the definition of ‘gross income’ in s 1). He should be able to deduct the expenditure incurred in
respect of levies, repairs and maintenance from this income with reference to s 11(a).
Step 2: No withholding tax applies to rental income from a South African source.
Step 3: No exemption applies to South African sourced rental income that accrues to a non-
resident. The rental income (less related expenditure) remains included in Mr Friedrich’s taxable
income.
Step 4: Because the income is subject to tax in South Africa, it must be established whether
South Africa may impose this tax in terms of the treaty. Normal tax is covered by the treaty
(Art 2(3)(a)). Article 10(1) of the treaty states that
Income from immovable property may be taxed in the Contracting State in which such
property is situated.
South Africa, as the country where the property is situated, may therefore impose the normal tax
as indicated in Steps 1–3.
Transaction 2: Dividend income from shares in South African companies
Step 1: The dividends are derived from a South African source as the companies that paid the
dividends are South African companies (s 9(2)(a)). The amount of R500 000 should be included
in his gross income (par (k) of the definition of ‘gross income’ in s 1).
Step 2: The dividends are subject to dividends tax at a rate of 20% (s 64E(1)).
Step 3: The dividends are exempt from normal tax (s 10(1)(k)).
continued
787
Step 4: As the dividend income is subject to tax in terms of the Act (dividends tax), it must be
established whether South Africa may impose this tax in terms of the treaty. Dividends tax is a tax
on income, which is covered by the treaty (Art 2(2) and BGR009). Article 7(1) of the treaty states
that
Dividends paid by a company which is a resident of a Contracting State, to a resident of the
other Contracting State, may be taxed in that other State.
South Africa may therefore impose tax on the dividends earned by Mr Friedrich from South
African companies. Article 7(2) of the treaty, however, limits the right to impose this tax:
However, such dividends may be taxed in the Contracting State of which the company paying
the dividends is a resident, and according to the law of that State, but the tax so charged shall
not exceed:
(a) 7,5 per cent of the gross amount of the dividends if the recipient is a company (excluding
partnerships) which owns directly at least 25 per cent of the voting shares of the com-
pany paying the dividends;
(b) 15 per cent of the gross amount of the dividends in cases not dealt with in subparagraph
(a) if such dividends are subject to tax in the other Contracting State.
As Mr Friedrich is not a company, par (a) does not apply. South Africa may therefore only tax the
dividends at a rate of 15% (par (b)). Mr Friedrich has to submit a declaration to the companies to
notify them that he qualifies for a reduced rate with reference to the treaty as well as an under-
taking to inform them if this tax status changes (s 64G(3)).
Transaction 3: Interest earned in respect of bonds listed on the JSE that were issued by South
African companies
Step 1: The interest incurred by South African resident companies is from a South African source
(s 9(2)(b)). There is no indication that the interest relates to debt used in a permanent
establishment outside South Africa. The interest income of R150 000 must be included in his
gross income (par (ii) of the definition of ‘gross income’ in s 1).
Step 2: The withholding tax on interest applies to the interest paid to Mr Friedrich (s 50B(1)). The
interest is, however, exempt from the withholding tax on interest as it is paid in respect of listed
debt (s 50D(1)(a)(ii)). The South African companies paying this interest are not required to with-
hold any tax from these amounts (s 50E(2)(a)).
Step 3: The interest received from a South African source by Mr Friedrich (non-resident) is
exempt from normal tax as he has not been present in South Africa at any time during the year
and does not have a permanent establishment in South Africa to which the interest is connected
(s 10(1)(h))
Step 4: As the interest is not subject to tax in South Africa, it is not necessary to consider the
provisions of the treaty.
Mr Friedrich’s tax liabilities in South Africa can be summarised as follows:
Normal tax
Gross income ............................................................................................................ R950 000
Rental income from a South African source (transaction 1) ...................................... R300 000
Dividends from a South African source (transaction 2) ............................................ R500 000
Interest from a South African source (transaction 3) ................................................. R150 000
Less: Exempt income................................................................................................ (R650 000)
Dividends received from a South African company (transaction 2).......................... (R500 000)
Interest received by a non-resident from a South African source (transaction 3) ..... (R150 000)
Less: Deductions allowed in terms of s 11(a) ........................................................... (R25 000)
Taxable income ......................................................................................................... R275 000
Normal tax on this (after taking into account primary rebate) .................................... R42 674
Withholding tax on interest (transaction 3) ................................................................ –
Dividends tax (transaction 2) (R500 000 × 15%) ...................................................... R75 000
21.6 South African taxation of income of residents
21.6.1 Normal tax liability

Persons who are South African residents for tax purposes are subject to income tax on all amounts
that accrue to or are received by them, irrespective of the source of the amount (par (i) of the
definition of ‘gross income’ in s 1). This means that South African residents are taxable on their
worldwide income and aggregate capital gains. The principles discussed in the rest of this book
788
apply to the transactions entered into by South African tax residents, including cross-border trans-
actions.
Two specific exceptions to the normal principles covered in the rest of the book exist in relation to
foreign sourced taxable income of residents:
l The resident will generally be subject to income tax on the amounts at the earlier of accrual or
receipt of the amount (see chapter 3). In the context of amounts that arose in another country but
may not be remitted to South Africa during the year of assessment due to currency or other
restrictions or limitation imposed by the laws of that country (blocked foreign funds), the resident
can defer the inclusion of this amount in its taxable income until it may be remitted to South Africa
(ss 9A(1) and (2)). The mechanism to achieve this is a deduction from income in the year in which
the blocked foreign funds may not be remitted, with an inclusion in income in the subsequent
year. This treatment continues until the funds may be remitted.
l Taxpayers are normally allowed to set off an assessed loss arising from a trade against taxable
income from other trades that they carry on (see chapter 12). Assessed losses or balances of
assessed losses from trades carried on outside South Africa may, however, not be set off against
any amounts derived from a source within South Africa (proviso (b) to s 20(1)). These foreign
sourced assessed losses are ring-fenced and may only be set off against other foreign sourced
amounts.
If residents derive amounts from sources outside South Africa, the other country (source country)
may also impose tax on the transaction. This will result in the same transaction being subject to tax in
both South Africa and the source country. This double taxation can be eliminated in a number of
ways, including the following:
l Specific unilateral relief in South Africa, which generally entails that the amount will not be taxed
or only be partially taxed in South Africa. The exemptions available to residents in respect of
foreign sourced income are discussed briefly in 21.6.2.
l A rebate or deduction for the foreign taxes paid when determining the South African normal tax
liability. This is discussed in 21.6.3 below.
l Tax treaties, as discussed in 21.4 may reduce the double taxation. Tax treaties generally limit the
right of the source country to tax the income. Exceptions exist for government remuneration and
pensions (see 21.4.3.5). Some of South Africa’s older treaties, for example, the Zambian treaty,
limit the right of the country of residence of the recipient to tax certain amounts.
21.6.2 Specific exemptions available to residents in respect of foreign sourced amounts

South Africa provides exemption for certain amounts that are earned abroad. Many of these exemp-
tions were introduced around 2000 when South Africa changed from a source-based tax system to a
residence-based system.
Each of these exemptions is briefly considered below. The detailed requirements of the relevant
provisions are discussed in other chapters, as indicated.
21.6.2.1 Exemption of certain foreign dividends and capital gains (s 10B and par 64B of the
Eighth Schedule)
Dividends derived from an active stake in a foreign company qualify for the participation exemption
(s 10B(2)(a) – see chapter 5). This exemption is aimed at ensuring that South African investors are
not discouraged from bringing foreign dividend income back to South Africa, where they have suffi-
cient influence in the affairs of the foreign company to do so. Over the years, the threshold for this
exemption has decreased from a 25% interest in the foreign company to the current requirement of
10% equity shareholding and voting rights in the foreign company. This exemption is mirrored to
some extent by an exemption of capital gains on certain disposals of the shares in foreign companies
(par 64B of the Eighth Schedule – see chapter 17).
Further exemptions exist for foreign dividends that have already been subject to tax in South Africa,
whether through the controlled foreign company rules (see 21.7) or dividends tax (see chapter 19).
All other foreign dividends are subject to income tax in South Africa at a reduced rate. The reduced
rate aims to align the tax implications of these foreign dividends with those of domestic dividends that
are subject to dividends tax (s 10B(3) – see chapter 5).
789
21.6.2.2 Exemption for foreign employment income (s 10(1)(o))

Remuneration earned by officers and crew members on board ships engaged in international
transport of passengers or goods for reward or in certain maritime mining activities will be exempt
from income tax if the person was outside South Africa for more than 183 days during the year of
assessment (s 10(1)(o)(i)). A similar exemption is available for remuneration earned by a person as
an officer or crew member of a ship that is registered as a South African ship that is engaged in
international shipping of passengers or goods (see s 12Q – see chapter 5) or fishing outside South
Africa. If the person is employed on a domestically flagged ship, the remuneration earned is exempt
irrespective of the number of days spent outside South Africa (s 10(1)(o)(iA)).
Persons earning foreign sourced employment income, other than as officers or crew members
aboard ships, may also enjoy an exemption on the period spent outside South African in rendering
the service (s 10(1)(o)(ii)). To a large extent, the periods in this provision correspond to those in tax
treaties (see 21.4.3.5). For years of assessment commencing on or after 1 March 2020, this exemp-
tion will only apply to the first R1 million of income earned from services rendered outside South
Africa. The exemption does not apply to persons working abroad while deriving income from the
South African government. This exemption is discussed in more detail in chapter 5.
21.6.2.3 Exemption for foreign pensions and welfare payments (s 10(1)(gC))

Any amount that is received by or that accrues to a resident under the social security system of
another country will be exempt from income tax in South Africa (s 10(1)(gC)(i)). Lump sums, pensions
and annuities from sources outside South Africa as consideration for services rendered outside South
Africa will be exempt (s 10(1)(gC)(ii)). This exemption does not apply to amounts received from a
pension fund, pension preservation fund, provident fund, provident preservation fund or retirement
annuity fund as defined in s 1. These definitions refer to domestic retirement funds. An exception
exists for amounts transferred to these domestic retirement funds from a source outside South Africa.
This exception is aimed at persons who transfer their retirement funds to a South African retirement
fund when retiring in South Africa. Amounts received from domestic funds by these persons may be
exempt.
21.6.2.4 Exemption for international shipping activities by domestically flagged ships (s 12Q)
International shipping income derived from the conveyancing of passengers or goods by a South
African ship is exempt from income tax (s 12Q(2)(a)). Capital gains or capital losses of international
shipping companies on South African ships engaged in international shipping are also exempt
(s 12Q(2)(b)). Resident companies that operate one or more South African ships used for inter-
national shipping are not required to pay dividends tax on dividends derived from the international
shipping income (s 12Q(3)). An exemption from the withholding tax on interest (see 21.5.2.5) also
exists in relation to interest on debts used to fund the acquisition, construction or improvement of a
South African ship used for international shipping (s 12Q(4)). These exemptions were introduced in
2013 in order to ensure that tax does not hinder South Africa from attracting ships to its flag.
21.6.3 Rebates and deductions for foreign tax (s 6quat)

South African tax residents, who suffer foreign taxes on their income, are entitled to some form of
relief from those taxes. The relief is provided in one of the following ways:
l A rebate (often also called a credit) for the foreign taxes on the income. This rebate or credit is
deducted from the normal tax otherwise payable by the resident. As such, the normal tax is
reduced by the full amount of the rebate. The rebate for foreign tax is discussed in 21.6.3.1
below.
l A deduction for the foreign taxes on the income. Unlike the rebate, the deduction for foreign taxes
is allowed in the calculation of the resident’s taxable income. The foreign tax is treated similarly to
any other deductible expenditure. The deduction for foreign taxes is discussed in 21.6.3.2 below.
Remember
A rebate or deduction for foreign tax is only available to residents. If a non-resident is taxed in
South Africa, this tax is imposed on the basis that the source of the income is in South Africa. As
the source country, South Africa may tax the income (if allowed to do so in terms of the relevant
tax treaty) without having to provide acknowledgement for the fact that the non-resident could
also suffer tax in its own country of residence. A non-resident may be entitled to relief in respect
of the South African tax in its own country of residence.
790
Interpretation Note No 18 deals extensively with the rebate and deduction for foreign taxes. This inter-
pretation note is a useful resource to consult together with the discussion below.
21.6.3.1 Rebate for foreign tax

Amounts that qualify for the rebate
A resident may deduct a rebate when determining its normal tax payable where that resident’s
taxable income for the year of assessment includes certain foreign sourced amounts that are subject
to tax in South Africa (s 6quat (1)). These foreign sourced amounts, which may potentially also have
been subject to foreign tax, are
l income received by or accrued to the resident from a source outside South Africa (see 21.3)
l taxable capital gain from the disposal of an asset that has a source outside South Africa (see
21.3.4)
l any of the following amounts that are deemed to have accrued to or been received by the
resident:
– a foreign sourced amount attributed to the resident as a result of a donation, settlement or
other disposition by the resident (s 7 – see chapter 24)
– a foreign sourced capital gain attributed to the resident as a result of a donation, settlement or
other disposition by the resident or from a distribution by a trust (paras 68 to 72 and 80 of the
Eighth Schedule – see chapter 24)
– a distribution of foreign sourced income or capital gain by a non-resident trust to the resident in
any year following the year during which the amount accrued to the foreign trust (s 25BA and
par 80(3) of the Eighth Schedule – see chapter 24)
l a proportional amount of net income of a controlled foreign company in relation to the resident
(see 21.7)
Remember
The source of income, as explained in 21.3, is important from the perspective of a resident as
this determines whether the resident is entitled to a rebate in respect of foreign taxes. The con-
cept of source is therefore not only relevant when determining the South African tax implication of
cross-border transactions for non-residents.
Calculation of the rebate

The rebate available to the resident is equal to the sum of all taxes on income proved to be payable
to any sphere of a foreign government (foreign taxes) on the above amounts included in the
resident’s taxable income. This tax should have been paid by (s 6quat (1A))
l the resident, in the case of foreign sourced income or capital gains
If the resident is a partner in a partnership or beneficiary of a trust, where the

partnership or trust is taxed as a separate entity in another country, the
Please note! proportionate amount of the tax payable by the partnership or trust (as a
separate taxpayer) is deemed to have been payable by the resident for pur-
poses of determining the foreign tax that qualifies for a rebate.
l by the person who actually received amounts attributed or vested in the resident, in relation to
amounts deemed to have accrued to the resident, or
l the controlled foreign company, in the case of proportional amounts of net income.
Tax is payable to a foreign government if that the tax is levied in terms of the domestic laws of the
other country and the country is allowed to impose the tax in terms of the tax treaty between it and
South Africa. If a foreign government imposes tax that is contrary to the tax treaty, this tax cannot be
said to be proved as payable and would as a result not be eligible for a rebate. The mere fact that a
person paid tax is therefore not sufficient to argue that the tax was payable.
The rebate is not available in respect of foreign taxes where any person has a right of recovery (for
example, a right to claim a refund of the tax paid or withheld). Taxes where a person has a right of
recovery due to legislation that allows it to carry back losses to a previous year of assessment are
eligible for a rebate.
791
The rebate is calculated as the aggregate of all foreign taxes that meet the above requirements. For
these purposes, the foreign tax is converted to rand by applying the average exchange rate for the
year of assessment (s 6quat (4)).
The total rebate amount is subject to a number of limitations (s 6quat (1B)). All foreign taxes are
mixed for purposes of the rebate, as opposed to being tested for the limitation on a country-by-
country or income-by-income basis. The limitations, in the order that it has to be determined and
applied, are the following:
l The foreign tax payable by a controlled foreign company in relation to proportionate amount of
net income that is included in the resident’s taxable income as a result of the application of the
diversionary rules (see 21.7.3.1) must be limited to the normal tax attributable to those propor-
tional amounts (proviso (iA) of s 6quat (1B)(a)). Any excess foreign tax cannot be carried forward.
l Capital gains are only partially subject to tax in South Africa due to the inclusion rate applied to
the net capital gain for inclusion into a taxpayer’s taxable income (see chapter 17). The gain may
be subject to tax to a greater extent in the other country (for example 100% of the gain could be
taxable). If the foreign country imposes foreign tax on a greater percentage of the capital gain
than the inclusion rate in South Africa, only the foreign tax on the portion of the capital gain
actually included in the resident’s taxable income (i.e. the inclusion rate) qualifies for a rebate.
SARS refers to this step as the comparative capital gains tax inclusion limitation in Interpretation
Note No 18.
After having performed the comparative capital gains tax inclusion limitation, a further capital
gains tax limitation applies. The foreign tax payable (after application of the above limit) in
respect of foreign sourced capital gains must in aggregate be limited to the total normal tax
attributable to the taxable capital gains (proviso (I B) of s 6quat (1B)(a)). This limitation does not
apply to gains on assets attributable to any permanent establishment of the resident outside
South Africa.
Any excess foreign tax in terms of either of the capital gains tax limitations cannot be carried
forward.
l After the above two limitations have been applied, an overall limitation must be applied. The total
rebate to be tested against the overall limit is equal to the total of
– the foreign tax on capital gains after application of the above limitation
– the foreign tax in respect of proportional amounts of net income included in the resident’s
taxable income after application of the above limitation, and
– all other qualifying foreign taxes.
This total rebate is limited to the South African normal tax payable in respect of the amounts
included in the resident’s taxable income that qualifies for a rebate (see s 6quat (1) above). This
limitation is calculated as:
X = A × (B/C)
Where:
X = Limitation of the rebate
A = Normal tax payable by the resident
B = Amounts included in the resident’s taxable income that qualified for a foreign tax rebate
(s 6quat (1))
C = Resident’s total taxable income
Example 21.15. Rebate for foreign taxes on income and basic application of the overall
limitation
Six Ltd received the following amounts during the current year of assessment:
Gross foreign royalties (foreign tax of R1 000 paid) .................................................... R10 000
Foreign interest (foreign tax of R5 600 paid) ............................................................... R14 000
Other foreign income (foreign tax of R12 000 paid)..................................................... R30 000
South African receipts .................................................................................................. R114 000
All foreign taxes paid are not recoverable.
Calculate the foreign tax credit in terms of s 6quat and the normal tax payable of Six Ltd for its
2018 year of assessment ended 28 February 2018.
792
SOLUTION
Foreign royalties............................................................................................................ R10 000
Foreign interest ............................................................................................................. R14 000
Other foreign income .................................................................................................... R30 000
South African receipts ................................................................................................... R114 000
Taxable income............................................................................................................. R168 000
Tax payable
Normal tax before rebates (28% of R168 000).............................................................. R47 040
Less: Section 6quat rebate (see calculation below)..................................................... (R15 120)
Normal tax payable R31 920
Calculation of the s 6quat rebate

Foreign taxable income (B)
× Normal tax payable before rebates (A)
Taxable income ©
R54 000 (note 1)
= × R47 040
R168 000
= R15 120
Even though the actual foreign tax of R18 600 (R1 000 + R5 600 + R12 000) exceeds the
calculated R15 120, the s 6quat rebate is limited to R15 120 in terms of s 6quat (1B)(a).
The excess of the foreign tax which was not allowed as s 6quat rebate (the ‘excess amount’), i.e.
R3 480 (R18 600 less R15 120), may be carried forward for a maximum period of seven years to
be set off against normal tax (proviso (iii) to s 6quat (1B)(a).
Note 1
The R54 000 is calculated as (R10 000 + R14 000 + R30 000)
When determining the amount of B in the above formula, any deductible donations (s 18A), which are
limited to an amount based on the resident’s total taxable income, must be deemed to be incurred
proportionately between amounts sourced in South Africa and amounts from sources outside of
South Africa. This apportionment is based on the relative income derived from each (proviso (i) to
s 6quat (1B)). This is illustrated in the next example.
Example 21.16. Limitation of rebate and the apportionment of certain allowable deductions
Mr Rebate is a South African resident under 65 years of age. During the current year of assess-
ment, he had taxable income (all from South African sources) of R100 000. Mr Rebate donated
R15 000 to an approved PBO and received a s 18A receipt. The deduction allowed in terms of
s 18A has not yet been taken into account against the R100 000. Mr Rebate also received
R160 000 income from India on which he paid foreign taxes amounting to R30 000, which had not
yet been taken into account in his taxable income of R100 000.
Calculate the foreign tax rebate in terms of s 6quat and the normal tax liability of Mr Rebate for
his 2018 year of assessment ended 28 February 2018.
793
SOLUTION
South African taxable income ....................................................................................... R100 000
Income from India ......................................................................................................... R160 000
R260 000
Less: Section 18A deduction (not exceeding 10% of R260 000) (R15 000)
Taxable income R245 000
In calculation the s 6quat rebate, proviso (i) to s 6quat (1B)(a) determines that the
s 18A deduction of R15 000 has to be apportioned between the income from South
Africa and the income from India:
South African income (R100 000/R260 000 × R15 000) ................................ R5 769
India income (R160 000/R260 000 × R15 000) .............................................. R9 231
This means that of the total taxable income of R245 000, R94 231 (R100 000 less
R5 769) is attributable to income from South Africa and R150 769 (R160 000 less
R9 231) is attributable to the income from India.
Normal tax
Normal tax payable on R245 000 before rebates (R34 178 + R14 331) ....................... R48 509
Less: Primary rebate ..................................................................................................... (R13 635)
R34 874
Less: Section 6quat rebate (see calculation below) ..................................................... (R29 851)
Normal tax payable ....................................................................................................... R5 023
Taxable foreign income

× Normal tax before rebates
Taxable income
R150 769
= × R48 509
R245 000
= R29 851
Because the actual foreign tax amount exceeds the calculated foreign tax rebate limit, the
rebate is limited to the calculated limit of R29 851.
Any excess foreign taxes from the application of the overall limitation (i.e. where foreign taxes exceed
the limitation amount) can be carried forward to the next year of assessment (s 6quat (1B)(a)(ii)(aa)).
This excess is deemed to be a foreign tax on income in that year of assessment. It may be set off
against normal tax payable by the resident from amounts that qualify for the rebate in that year of
assessment after all foreign tax relating to amounts in the resident’s taxable income that qualify for a
rebate have been taken into account (s 6quat (1B)(a)(ii)(bb)). In other words, the current year’s
qualifying foreign taxes must be claimed as a rebate first, following which any excess amounts
carried forward may be claimed as a rebate if the limitations allow this. The excess can be carried
forward for seven years from the year of assessment when it was carried forward for the first time (s
6quat (1B)(a)(iii)).
Example 21.17. Rebate for foreign taxes on income: Carry-forward of excess foreign tax
Rough Ltd is a South African resident. During the year of assessment ended 28 February 2017,
the company received foreign income to the equivalent of R200 000 on which foreign tax of
R80 000 was paid. The company’s South African taxable income amounted to R1 100 000. For
the 2018 year of assessment the company received R1 600 000 from South African sources as
well as foreign income of R800 000 on which R160 000 worth of foreign tax was paid.
Calculate the foreign tax credit in terms of s 6quat and the normal tax liability of Rough Ltd for the
2017 and 2018 years of assessment respectively. You may assume that the tax legislation for the
2017 and 2018 years of assessment are the same.
794
SOLUTION
South African income ................................................................................................ R1 100 000
Foreign income ......................................................................................................... R 200 000
Taxable income......................................................................................................... R1 300 000
Normal tax before rebates (28% of R1 300 000)....................................................... R364 000
Less: Section 6quat rebate of R80 000 limited to
(R200 000 (B) /R1 300 000 (C) × R364 000(A)) i.e. R56 000 (X) .................... (R56 000)
Normal tax payable ................................................................................................... R308 000
Although the actual foreign tax of R80 000 exceeds the calculated limit of R56 000, the s 6quat
rebate is limited to the R56 000.
The excess amount of the foreign tax that did not qualify as a s 6quat rebate (the excess amount)
i.e. R24 000 (R80 000 less R56 000), may be carried forward for a maximum period of seven
years to set off as a rebate against normal tax.
South African income ................................................................................................ R1 600 000
Foreign income ......................................................................................................... R 800 000
Taxable income......................................................................................................... R2 400 000
Normal tax before rebates (28% of R2 400 000)....................................................... R672 000
Less: Section 6quat rebate (Actual of R160 000 (2018) limited to
(R800 000/R2 400 000 × R672 000) i.e. R224 000 ......................................... (R160 000)
Less: Section 6quat rebate(R24 000 (carried forward from 2017) limited to
(R800 000/R2 400 000 × R672 000) i.e. R224 000 – R160 000 = R64 000..... (R24 000)
Foreign dividends that are partially taxable in South Africa (s 10B(3) – see chapter 5) may result in
the foreign tax rebate not being available in respect of the full amount of foreign tax imposed on
these dividends, but only on the part of the dividend that is included in the recipient’s taxable
income. A resident may find itself in a position where the foreign taxes do not exceed the effective
rate at which the dividends are taxed in South Africa, yet it may not be able to claim a rebate for the
full amount of the foreign tax. This problem arises as a result of the partial exemption method used to
align the tax rate applicable to the foreign dividends with the rate applicable to local dividends. In
order to prevent this unjust outcome, it is deemed that the full dividend was subject to tax in South
Africa for purposes of determining the foreign tax rebate (proviso (ii) to s 6quat (1A)). As a result, the
full foreign tax payable regarding such dividends can be included in the rebate amount to which the
overall limitation is applied despite the fact that the foreign dividend was only partially taxed in South
Africa.
Example 21.18. Interaction between ss 6quat and 10B(3)
ABC Ltd is a South African resident company that has the following information available for its
current year of assessment:
Rental income from a South African source ................................................................. R200 000
Rental expenditure (assume deductible in terms of s 11(a)) ....................................... (R50 000)
Gross interest received from a foreign source (foreign tax of R15 000 paid) .............. R50 000
Gross foreign dividends received from DEF Plc, a foreign company
(not a CFC) (foreign tax of R10 000 paid) .................................................................... R100 000
Rental income from a foreign source (no foreign taxes paid) ...................................... R 50 000
All foreign taxes paid are not recoverable.
Determine the s 6quat rebate in each of the following instances:
(a) ABC Ltd owns 15% of the equity shares and voting rights in DEF Plc.
(b) ABC Ltd owns 8% of the equity shares and voting rights in DEF Plc.
795
SOLUTION
(a) If ABC Ltd owns 15% of the equity shares and voting rights in DEF Plc, the s 6quat rebate
is determined as follows:
SA rental income ....................................................................................................... R200 000
SA rental expenses ................................................................................................... (R50 000)
Foreign interest (no exemption available) ................................................................. R50 000
Foreign dividends ..................................................................................................... R100 000
Section 10B(2)(a) participation exemption (owns > 10% of equity shares) .............. (R100 000)
Foreign rental income ............................................................................................... R50 000
Taxable income......................................................................................................... R250 000
Tax payable
Normal tax before rebates (28% of R250 000).......................................................... R70 000
Less: s 6quat rebate (see calculation below) ........................................................... (R15 000)
Foreign taxable income
× Normal tax payable before rebates
Taxable income
R100 000 (note 1)
= × R70 000
R250 000
= R28 000
The actual foreign tax of R15 000 (on the foreign interest) does not exceed the calculated
R28 000 and can therefore be deducted in full against the company’s normal tax payable.
The R10 000 foreign tax paid on the foreign dividends does not qualify for the s 6quat rebate, as
the full foreign dividends were exempt from foreign tax in terms of s 10B(2)(a).
Note 1
The R100 000 is calculated as (R50 000 foreign interest + R50 000 foreign rental).
(b) If ABC Ltd owns 8% of the equity shares and voting rights in DEF Plc, the s 6quat rebate is
determined as follows:
SA rental income .......................................................................................................... R200 000
SA rental expenses ...................................................................................................... (R50 000)
Foreign interest (no exemption available) .................................................................... R50 000
Foreign dividends ........................................................................................................ R100 000
Section 10B(3) partial exemption (R100 000 × 13/28) ................................................. (R46 429)
Foreign rental income .................................................................................................. R50 000
Taxable income............................................................................................................ R303 571
Tax payable
Normal tax before rebates (28% of R303 571)............................................................. R85 000
Less: s 6quat rebate (see calculation below) .............................................................. (R25 000)
Normal tax payable ...................................................................................................... R60 000
Foreign taxable income
× Normal tax before rebates
Taxable income
R153 571 (note 2)
= × R85 000
R303 571
= R43 000
The actual foreign tax of R25 000 (R15 000 in respect of the foreign interest and R10 000 in
respect of the foreign dividend) does not exceed the calculated R43 000 and can therefore be
deducted in full against the company’s normal tax payable.
The R10 000 foreign tax paid on the foreign dividends qualifies for the s 6quat rebate even
though the taxpayer qualified for a s 10B(3) partial exemption. The reason for this is that proviso
(ii) to s 6quat (1A) provides that for purposes of determining the taxable amount that qualifies for
the s 6quat rebate, the partial exemption in s 10B(3) must be ignored.
Note 2
The R153 571 is calculated as:
R50 000 foreign interest + R50 000 foreign rental + R53 571 foreign dividend included in income.
796
The rebate in terms of s 6quat is not granted in addition to relief that a resident
is entitled to in terms of a tax treaty (s 6quat (2)). A resident should choose
between the relief in terms of the rebate allowed by s 6quat and the treaty relief
for double taxation (see 21.4.3). Many of the tax treaties concluded by South
Please note! Africa require that relief be provided in accordance with the domestic laws, i.e.
the rebate in terms of s 6quat. The differences between the rebate available in
s 6quat and the credit in tax treaties include, amongst others, that tax treaties
do not allow carrying forward of excess foreign taxes and require limitations to
be applied on a country-by-country basis.
Administrative matters relating to the rebate

The timing of the calculation of the rebate pose a challenge for taxpayers if the foreign taxes only
become payable at a date after the year of assessment in which the foreign sourced income is
included in the resident’s taxable income. The rebate is available in the year of assessment in which
the foreign income is included in the resident’s taxable income, rather than in the year in which the
foreign tax becomes payable. If such a timing mismatch arises, an adjustment must be made to the
rebate deducted for the year of assessment in which the foreign sourced income was included in the
resident’s taxable income. In order to facilitate this adjustment, an additional assessment or reduced
assessment to give effect to the rebate that the resident is entitled to may be made within a period of
six years from the date of the original assessment (s 6quat (5)). This rule overrides the provisions of
the Tax Administration Act relating to prescription and finality of assessments.
21.6.3.2 Deduction for foreign tax

Amounts that qualify for the deduction
A resident may elect to deduct the sum of any taxes on income paid or proved to be payable to
foreign governments from its income when calculating the taxable income derived from carrying on
any trade (s 6quat (1C)(a)). This deduction is, however, only available in respect of foreign taxes that
do not qualify for a rebate. A rebate, as discussed in 21.6.3.1 above, will not be available for the
following foreign taxes (put differently, the deduction will be available for the following foreign tax):
l Foreign tax was imposed on South African sourced income. This will be the case if there is a con-
flict between the source rules applied in South Africa and the source rules applied in the another
country. In these circumstances, the other country may tax the income as it views it as being from
a source in that country. The resident would, however, not be allowed a rebate for South African
tax purposes as the income is viewed as being from a South African source. These source-
source conflicts would generally be resolved if a treaty has been entered into between the two
countries. This remains a problem where a resident transacts in a country with which no treaty
has been concluded.
l The foreign tax is imposed in another country contrary to the tax treaty entered into between
South Africa and the country. In these circumstances the tax would not be payable, as required
for purposes of the rebate. The deduction provisions apply if the tax is proved to be payable, as
discussed in 21.6.3.1 above, or was paid despite the fact that it should not have been imposed
by the foreign tax authorities. The latter scenario often arises when tax is withheld at the source in
terms of the domestic tax laws of the country, but contrary to the relevant tax treaty.
Remember
The scenario where taxes are withheld in other countries contrary to tax treaties, often arise in the
context of fees paid for services rendered from South Africa. Unless the relevant tax treaty
contains a deemed source rule, the source of such services will be South Africa. In the absence
of a specific rule dealing with service fees, these service fees will be subject to the business
profits provision of a tax treaty. As indicated in 21.4.3.9 the other country can only tax these
profits if they are attributable to a permanent establishment in that country. Services physically
rendered from South Africa would generally not be attributable to a permanent establishment in
the other country and may accordingly not be taxed in that country. Many countries, especially
African countries, however withhold tax on service fees despite not being allowed to do so in
terms of the tax treaty.
In order to accommodate resident service providers, a rebate for certain foreign taxes on service
income earned from a South African source was inserted into the Act (s 6quin). This provision
has, however, been deleted with effect from 1 January 2016 in respect of all years of assessment
commencing on or after 1 January 2016. A South African resident will therefore only qualify for a
possible s 6quat deduction in respect of foreign taxes paid on South African source income in
future, provided that all the requirements of the s 6quat deduction are met.
797
Like the rebate, the deduction is only available in respect of foreign tax where no right of recovery
exists. A right of recovery due to legislation that allows it to carry back losses to a previous year of
assessment are not treated as a right of recovery. The deduction may still be claimed for taxes where
the resident has this right. In addition, a right of recovery in terms of a mutual agreement procedure
(MAP) provided for in a tax treaty (see 21.4.5) does not prevent the resident from claiming the
deduction (s 6quat (1C)(a)). This exception makes provision for a resident to claim the deduction for
taxes imposed contrary to a treaty. In these circumstances, the MAP must be followed to recover the
tax. If the resident is successful in recovering the tax paid through the MAP or is discharged of the
liability for the tax in a subsequent year of assessment, the amount of the tax refunded or reduction of
the liability must be included in its taxable income (s 6quat (1C)(a)). This inclusion is effectively a
recoupment of the previously claimed deduction.
Calculation of the deduction

For purposes of calculating the amount of the deduction, the foreign tax is converted to rand at the
average exchange rate for the year of assessment (s 6quat (4)).
The deduction is also subject to a limitation. The deduction may not exceed the taxable income
attributable to the income that was subject to the foreign tax. Any deduction allowable in terms of
deductible donations must be apportioned relative to the income when determining the taxable
income attributable to the specific income (s 6quat (1D)). The excess foreign tax that does not qualify
for deduction cannot be carried forward.
Example 21.19. Deduction of foreign taxes on South African source income

Deduct Ltd is a South African resident. The company renders consulting services to a Zambian
customer from South Africa. The government of Zambia deems the services and the resultant
income to be from a Zambian source. They require that the client withhold tax at a rate of 25% on
the income. During the current year of assessment, Deduct Ltd received R800 000 for the
services and had to pay withholding tax of 25% thereon to the government of Zambia. Other
South African income of the company amounted to R1 000 000.
Calculate the foreign tax deduction in terms of s 6quat and the normal tax liability of Deduct Ltd
for its 2017 year of assessment, if you assume that SARS views the income to be from a South
African source and that the tax was withheld in Zambia contrary to the treaty with South Africa.
SOLUTION
Deduct Ltd carries on a trade in South Africa
Income from consulting services .............................................................................. R800 000
Other South African income ...................................................................................... R1 000 000
R1 800 000
Less: Section 6quat deduction (25% × R800 000) ................................................... (R200 000)
(This amount does not exceed the total taxable income attributable
to the consulting income included in Deduct Ltd’s taxable income.)
Taxable income......................................................................................................... R1 600 000
Normal tax payable (28% of R1 600 000) ................................................................. R448 000
Like the rebate, the deduction is not allowed in addition to tax treaty relief. The
Please note! taxpayer must elect to either use the deduction or the relief in terms of a tax
treaty (s 6quat(2)).
21.6.4 Comprehensive example: Taxation of cross-border transactions by residents

The next example illustrates how to determine the South African tax implications of cross-border
transactions for residents, taking into account the principles set out in 21.6.1 to 21.6.3. The approach
suggested in 21.2 is applied in this example.
798
Example 21.20. South African income tax implications of outbound cross-border

transactions by a resident
Mr Thabo Gumede, a 60-year-old natural person and South African tax resident, has worked as an
engineer for the past 40 years. His taxable income for the 2018 year of assessment derived from
South African sources, before taking into account any of the items below, is R1 400 000.
He received the following amounts from abroad during the 2018 year of assessment:
Salary from employment in Singapore (note 1) ............................................................ S$100 000
Service fee for project undertaken in the United Kingdom (UK) (note 2) .................... £50 000
Rental income from property in the UK (note 3)........................................................... £28 000
Royalties received from a Zambian company in respect of use of a design
in Zambia (note 4) ........................................................................................................ $10 000
Note 1
Mr Gumede spent 7 months (211 days) of the year of assessment in Singapore. He was
employed by a Singaporean employer for this period. The amounts paid to him were subject to
personal income tax of S$14 000 in Singapore. This tax was withheld when the payments were
made to him.
Note 2
Following his time in Singapore, Mr Gumede was involved as a design engineer for a construc-
tion project in the UK. He was involved in the capacity as an independent contractor. He drew
up designs from his home in Johannesburg and sent these to the client using the postal service.
The client was unsure whether they should withhold tax on the payments made to him or not.
They withheld tax of £10 000 to be safe. Mr Gumede established that he should be able to claim
a refund of this tax upon submitting his tax return in the UK if it should not have been withheld.
Note 3
The rental income was earned from a property that Mr Gumede bought in the UK when he
worked there between 1985 and 1998. The rent will be subject to income tax amounting to
£7 000 in the UK. Mr Gumede will be assessed for this tax when he submits his tax return in the
UK. He has not yet paid the tax.
Note 4
In his younger days, Mr Gumede designed a spring used in water pumps. He makes this design
available to a company in Zambia that manufactures the springs. The client withheld tax
amounting to $2 000, as required by the Zambian tax laws, on the payments made to him.
Mr Gumede, as a natural person, has elected, to use average exchange rates to convert foreign
currency amounts to rand as allowed in terms of s 25D(3). The average exchange rates for the
2018 year of assessment were R18:£1, R14:$1 and R11:S$.
Determine Mr Gumede’s normal tax liability in South Africa 2018 year of assessment.
SOLUTION
The amounts earned from abroad are all included in Mr Gumede’s gross income, irrespective of
the source, as he is a resident (par (i) of the definition of ‘gross income’ in s 1) (step 1).
Transaction 1: Remuneration from Singapore
Step 2: As this remuneration was derived by Mr Gumede for services rendered outside South
Africa to an employer for a period of more than 183 days during a 12-month period (211 days),
including a continuous 60-day period (full 211 days continuous), the income is exempt from tax
in South Africa (s 10(1)(o)(ii)).
Step 3: It is not necessary to consider whether a treaty applies in respect of the income from a
South African tax perspective as the income is not subject to tax in South Africa.
Mr Gumede may still want to consider the treaty to establish whether Singapore was allowed to
impose the tax of S$14 000 on this income. As explained in the next point, this is however of no
importance for purposes of his South African tax calculations.
Step 4: As no amount is included in Mr Gumede’s taxable income for this income, he is not
entitled to a rebate or deduction in South Africa for the foreign tax of S$14 000 paid in Singapore.
Transaction 2: UK project fee
Step 2: Mr Gumede did not earn this fee for services rendered to an employer (he acted as an
independent contractor) or while working abroad (he worked from his home in Johannesburg).
The income does not qualify for any exemption in South Africa.
continued
799
Step 3: As a South African tax resident, Mr Gumede is a covered person for purposes of the tax
treaty between South Africa and the UK (Art 1). South African normal tax is covered by the treaty
(Art 2(3)(a)(i)). Article 7(1) of the treaty states the following in relation to business profits:
enterprise carries on business in the other Contracting State through a permanent estab-
lishment situated therein. If the enterprise carries on business as aforesaid, the profits of the
enterprise may be taxed in the other State but only so much of them as is attributable to that
permanent establishment.
As to be expected, the treaty does not limit South Africa’s right to tax the business profits derived
from the UK. It is questionable whether Mr Gumede even carried on business in the UK, as
contemplated in Article 7(1).
Step 4: Once it has been established that the amount is taxable in South Africa, it should be
considered whether Mr Gumede is entitled to any relief in South Africa for the £10 000 tax paid in
the UK.
The source of the business income earned by Mr Gumede is where he exercised the activities
that gave rise to the income (CIR v Epstein). In this case, the activities consisted of the personal
exertion to perform the work and draw up the designs, which was done in South Africa. The
source of the fees is in South Africa.
As indicated above, Article 7(1) of the treaty only allows the UK to impose tax on the business
profits of a South African resident (Mr Gumede) if he carried on business in the UK through a
permanent establishment situated there. Because he performed the work from his home in
Johannesburg, he did not derive the income from a permanent establishment in the UK. Even
though the tax was collected (i.e. paid by Mr Gumede), he has a right to claim a refund of this tax
when he submits his tax return in the UK.
In light of the fact that the income is not foreign sourced, Mr Gumede is not entitled to a rebate in
respect of the foreign tax (s 6quat (1)). As Mr Gumede is entitled to a refund of the tax when
submitting his tax return, he has a right of recovery, other than through a mutual agreement
procedure in terms of the tax treaty, available to him. He is therefore also not entitled to a deduc-
tion in respect of the foreign tax paid in the UK (s 6quat (1C)). Mr Gumede will not enjoy any relief
in South Africa for the refundable UK tax withheld on the payments.
Transaction 3: UK rental income
Step 2: No exemption exists in South Africa for foreign rental income earned by residents.
Step 3: As a South African tax resident, Mr Gumede is a covered person for purposes of the tax
treaty between South Africa and the UK (Art 1). South African normal tax is covered by the treaty
(Art 2(3)(a)(i)). Article 6(1) of the treaty states the following regarding income derived from
immovable property, including letting thereof (Art 6(3)):
Income derived by a resident of a Contracting State from immovable property (including
income from agriculture or forestry) situated in the other Contracting State may be taxed in that
other State.
As expected, the treaty does not limit South Africa’s right to tax the rental income derived from
the UK.
Step 4: Once it has been established that the income is taxable in South Africa, it should be con-
sidered whether Mr Gumede is entitled to any relief in South Africa for the £7 000 tax payable in
the UK.
The source of the business income earned by Mr Gumede is where the originating cause of the
income is located (CIR v Lever Brothers & Unilever Ltd). The originating cause of the income is
the property, which is situated in the UK (COT v British United Shoe Machinery (SA) (Pty) Ltd).
The amount of £28 000 derived from rental income is therefore foreign sourced income included
in Mr Gumede’s taxable income.
As indicated above, Article 6(1) of the treaty allows the UK to tax income derived by a South
African resident from immovable property situated in the UK. If required by the UK domestic
laws, the treaty allows this tax to be imposed. The tax of £7 000 can therefore be proved to be
payable, even if it has not yet been paid.
Mr Gumede qualifies for a rebate for the foreign tax proved to be payable to the UK (£7 000) in
respect of the foreign sourced income (£28 000).
Transaction 4: Zambian royalties
Step 2: No exemption exists in South Africa for foreign rental income earned by residents.
Step 3: South African normal tax is covered by the treaty (Art I). Article VI of the treaty states the
following in relation to royalties:
Any royalty, rent (including rent or royalties of cinematograph films) or other consideration
received by or accrued to a resident of one of the territories by virtue of the use in the other
territory of, or the grant of permission to use in that other territory any patent, design, trade
mark, copyright, secret process, formula or other property of a similar nature shall be exempt
from tax in that first-mentioned territory if such royalty, rent or other consideration is subject to
tax in the other territory.
continued
800
The royalties that accrue to Mr Gumede, a resident of South Africa, for the use of his design in
Zambia, are exempt from tax in South Africa as the royalties were subject to tax in Zambia (tax of
$2 000 imposed in Zambia).
Step 4: Mr Gumede’s taxable income does not include any amount in respect of the royalties as
a result of the treaty exemption. He would therefore not qualify for any relief in South Africa for the
foreign tax paid on the royalties.
Mr Gumede’s normal tax liability in South Africa is calculated as follows:
Taxable income before transactions 1 to 4 (given) ................................................ R1 400 000
Gross income from transactions 1 to 4 .................................................................. R2 644 000
Remuneration from Singapore (transaction 1) (S$100 000 × 11) .......................... R1 100 000
UK project fee (transaction 2)(£50 000 × 18) ........................................................ R900 000
UK rental from property (transaction 3)(£28 000 × 18) .......................................... R504 000
Zambian royalties (transaction 4) ($10 000 × 14) .................................................. R140 000
Less: Exempt income ............................................................................................. (R1 240 000)
Singaporean remuneration (transaction 1) (s 10(1)(o)(ii)) ...................................... (R1 100 000)
Zambian royalties (transaction 4) (exempt in terms of Art VI of the treaty) ............ (R140 000)
Taxable income ...................................................................................................... R 2 804 000
Normal tax (before taking into account primary rebate) ......................................... R 1 120 425
Rebate for foreign tax (transaction 3) (s 6quat (1))
(lesser of foreign tax or limit, as calculated below) ................................................ (R126 000)
Foreign tax that qualifies for the rebate (£7 000 × 18) ........................................... R126 000
Foreign source taxable income (only transaction 3, all other foreign source
income was exempt and transaction 2 did not give rise to foreign sourced
income) .................................................................................................................. R504 000
Limitation of foreign tax rebate: R1 120 425 × (R504 000/R2 804 000) ................. R201 388
Normal tax payable after foreign tax rebate .......................................................... R994 425
Primary rebate........................................................................................................ (R13 635)
Normal tax payable by Mr Gumede ....................................................................... R980 790
21.7 Controlled foreign companies (CFCs)

Since residents are subject to tax in South Africa on all amounts that they receive or that accrue to
them, they may attempt to avoid, or at least defer, this tax in South Africa by setting up offshore
structures in which their income can accrue. The controlled foreign company regime is an anti-
avoidance mechanism inserted into the legislation to ensure that income diverted into offshore
structures does not escape tax in the hands of the residents who control that structure. Currently, the
controlled foreign company (hereafter CFC) regime only applies to companies. The National Treasury
has, however, hinted on a number of occasions that structures involving trusts may be included in
this regime at some point.
21.7.1 Overview of the effect of the CFC regime

Before the detailed provisions of the CFC regime are discussed, this section of the discussion
provides an overview of the effect of these rules. Given the technical and complex nature of the rules,
it is useful to understand the aim and working of the system in light of which the detailed provisions
can be considered.
If residents control a foreign company (non-resident), they may have the ability to divert income that
would otherwise have accrued directly to them to this company. To ensure that this income does not
escape the tax net in South Africa, a resident’s proportional share of the profits of the CFC will be
included in the resident’s taxable income. This has the effect that the resident taxpayer is left in the
same position that it would have been had this profit accrued directly to it. It is important to realise
that the CFC rules affect the resident shareholders of the foreign company, as opposed to imposing
additional South African tax on the foreign company itself. The foreign company remains taxable in
South Africa only on its South African sourced income, as any other non-resident would be.
As the CFC regime is aimed at avoidance structures, the net profit included into the taxable income
of a resident excludes certain amounts that do not pose an avoidance threat. This is necessary
to ensure that the CFC rules do not obstruct valid commercial structures, which could result in
South African businesses finding themselves in an uncompetitive position in the global market. It is
801
imperative that the scope of the CFC rules is sufficient to counter avoidance schemes, but not curb
legitimate cross-border activity.
The CFC rules mainly target mobile income that accrues to a foreign company passively or without
much fungible business activities being required. In addition, it also targets schemes that involve
income being diverted offshore from South African entities. The anti-avoidance rules of the CFC
regime do not apply to, amongst others, the following income which does not pose much of an
avoidance threat:
l amounts that are subject to levels of tax that are comparable to those that it would have been
subject to had it accrued to the resident, as there is little tax at stake for South Africa and it is
likely that the structure is not motivated by tax benefits
l amounts that have already been subject to tax in South Africa
l amounts attributable to bona fide business activities with evidence of substance outside South
Africa.
The CFC rules require that a resident includes a portion of the net income of a CFC in which it has an
interest in its taxable income (this amount is referred to as the proportional amount) (s 9D(2)). The
provisions that describe how the net income of the CFC must be calculated contain certain
exclusions aimed at ensuring that the CFC rules ultimately only apply to the targeted income
(ss 9D(2A) and 9D(9)).
As indicated in 21.6.3.1, a resident that included a proportional amount in its taxable income in terms
of the CFC rules (s 9D) can deduct a rebate for the foreign taxes payable by the foreign company in
respect of those profits (s 6quat (1)(b)). This ensures that the no double taxation arises as a result of
the application of these anti-avoidance rules.
Example 21.21. Basic principles of CFC rules
Clever Ltd is a South African resident company. It incorporated a company, Sand LLC, in Dubai.
Clever Ltd subscribed for all the shares of Sand LLC for an amount of R10 000. Sand LLC is not
a South African tax resident. Sand LLC is a CFC in relation to Clever Ltd.
Clever Ltd has structured its affairs in such a manner that some of its offshore income accrues to
Sand LLC, which is not subject to any corporate income tax in Dubai.
The net profits of Sand LLC consist of the following amounts:
Year 1
Profits of a passive/mobile nature before tax ............................................................... R7 000 000
Withholding taxes suffered in respect of above income in foreign countries .............. (R500 000)
Rental income from building in South Africa ................................................................ R400 000
Year 2
Profits of a passive/mobile nature before tax ............................................................... R8 000 000
Withholding taxes suffered in respect of above income in foreign countries .............. (R800 000)
Rental income from building in South Africa ................................................................ R450 000
Calculate the impact of the investment in Sand LLC on Clever Ltd’s normal tax liability.
SOLUTION
For purposes of simplicity it is assumed that the profits of Sand LLC will represent its taxable
income determined in accordance with the Act. The CFC rules target passive mobile income
that a resident could have shifted to a foreign company. The CFC rules would require that the
resident’s interest in these amounts that accrued to the CFC to be included in the resident’s
taxable income.
Year 1:
Total profits (before tax) ............................................................................................ R7 400 000
Less: Amounts that do not pose a risk to the South African tax base
(rental from South African property already taxed in South Africa) ................ (R400 000)
Taxable income that accumulated in the CFC that may have been shifted
from the South African tax base (net income of the CFC) ......................................... R7 000 000
Proportional amount included in resident (Clever Ltd) taxable income
(100 % × R7 000 000) (s 9D(2)) ................................................................................ R7 000 000
Normal tax liability of Clever Ltd on the above (R7 000 000 × 28%) ........................ R1 960 000
Rebate for foreign tax payable by the CFC in respect net income
(s 6quat (1)(b)) .......................................................................................................... (R500 000)
Impact on normal tax liability of Clever Ltd ................................................................ R1 460 000
continued
802
Year 2:
Total profits (before tax) ............................................................................................ R8 450 000
Less: Amounts that do not pose a risk to the South African tax base (rental from
South African property already taxed in South Africa) .................................... (R450 000)
Taxable income that accumulated in the CFC that may have been shifted
from the South African tax base (net income of the CFC) ......................................... R8 000 000
Proportional amount included in resident (Clever Ltd) taxable income
(100 % × R8 000 000) (s 9D(2)) ................................................................................ R8 000 000
Normal tax liability of Clever Ltd in respect of the above (R8 000 000 × 28%)......... R2 240 000
Rebate for foreign tax payable by the CFC in respect net income (s 6quat (1)(b)) .. (R800 000)
Impact on normal tax liability of Clever Ltd ................................................................ R1 440 000
Note
The above calculation shows that the CFC rules include all the profits, with the exception of
certain amounts that do not pose a risk to the South African tax base, that would have been
taxable in the hands of the resident into its taxable income. This places the resident, Clever Ltd,
back in the position as if these amounts accrued to it directly.
The participation exemption will generally ensure that the distribution of profits that have been subject
to the CFC rules does not attract tax when distributed to the resident (s 10B(2)(a) – see chapter 5). In
exceptional circumstances, the CFC rules may have imputed profits into the hands of a resident while
the participation exemption did not apply. In these circumstances, the foreign dividends received by
the resident are exempt to the extent that the profits have already been taxed in South Africa under
the CFC rules (s 10B(2)(c) – see chapter 5).
When profit accrues in a company (including a foreign company, such as a CFC) and is not distrib-
uted, this reflects in an increased value of the shares of that company. As an alternative to receiving
a dividend from the company, the shareholder may unlock this value by disposing of the shares. This
disposal will be subject to capital gains tax (see chapter 17). In the context of CFCs, this capital
gains tax is likely to arise in the hands of the resident who holds the participation rights and may
already have been taxed on the profits of the company (in terms of the CFC rules), which now reflect
in the value of the shares. Depending on the disposal transaction, the full capital gain may be exempt
under the participation exemption (par 64B of the Eighth Schedule – see chapter 17). If the partici-
pation exemption does not apply, a mechanism is required to ensure that the resident is not taxed
again on the value of the shares that reflect the profits that have already been subjected to the CFC
rules. This mechanism is provided in the form of an increase in the base cost of the shares of the
CFC in the hands of the resident. The base cost is increased by the proportional amounts that were
included in the taxable income, which remain undistributed at the time of the disposal
(par 20(1)(h)(iii) of the Eighth Schedule – see chapter 17).
Example 21.22. Basic principles of CFC rules – distribution of profits to South Africa or
realisation of value accumulated offshore
This example is based on the same facts as in Example 21.21.
Discuss what the South African tax implications would be in either of the following cases:
l Sand LLC distributes R14 million of the profits that it accumulated over the past two years to
Clever Ltd at the end of Year 2, or
l Clever Ltd sells the shares in Sand LLC to another South African resident taxpayer for an
amount of R20 million at the end of Year 2.
803
SOLUTION
The value accumulated in Sand LLC can be realised by Clever Ltd through a distribution of the
profits to it or by disposing of the shares and in this manner receiving the accumulated value in
cash.
If Sand LLC distributed a dividend of R14 million to Clever Ltd
Amount included in gross income (par (k) of the definition of ‘gross income’) ..... R14 000 000
Less: Foreign dividend exempt in terms the participation exemption
(s 10B(2)(a)) .......................................................................................................... (R14 000 000)
Impact on taxable income .................................................................................... –
If Clever Ltd were to dispose of the Sand LLC shares to another resident
The disposal of the shares will be subject to capital gains tax in the hands of
Clever Ltd. The participation exemption from capital gains tax does not apply
if the shares of a foreign company are disposed of to another resident (par
64B(1)(b) of the Eighth Schedule). The capital gain on the transaction must be
Proceeds on the disposal of the Sand LLC shares ............................................. R20 000 000
Base cost of the shares ........................................................................................ (R15 010 000)
Cost to acquire the shares ................................................................................... (R10 000)
Amounts included in the taxable income of Clever Ltd in terms of CFC rules
(par 20(1)(h)(iii) of the Eighth Schedule (R7 000 000 (Year 1) + R8 000 000
(Year 2)) (note) ...................................................................................................... (R15 000 000)
Capital gain on the disposal ................................................................................ R4 990 000
Taxable capital gain included in Clever Ltd taxable income
(R4 990 000 × 80%) .............................................................................................. R3 992 000
Impact on normal tax liability of Clever Ltd (R3 992 000 × 28%) .......................... R1 117 760
Note
The adjustment to base cost ensures that the amount that has already been subjected to the
CFC rules is not taxed as a capital gain again when the taxpayer realises this amount. The
normal tax payable in respect of the disposal is only imposed on the portion of the value of the
shares that have not yet been taxed in South Africa.
21.7.2 Application of CFC rules (s 9D definitions and s 9D(2))

The requirement that a resident who holds any participation rights in a CFC should include in its
taxable income its share of the net income of the CFC in its taxable income is central to the
application of the CFC rules (s 9D(2)). In order to apply this requirement, it is necessary to firstly
determine when a company that a resident holds an interest will be a CFC.
21.7.2.1 Definition of a CFC and related concepts

A CFC is a foreign company where
l more than 50% of the total participation rights in that company are directly or indirectly held by
residents (one or more residents),
l more than 50% of the total voting rights in that company are directly or indirectly exercisable by
residents (one or more residents) (definition of ‘controlled foreign company’ in s 9D(1)), or
l with effect from years of assessment commencing on or after 1 January 2018, the financial results
of that foreign company are reflected in the consolidated financial statements (prepared in terms
of IFRS 10) of a resident company.
A foreign company is a company that is not a resident. For purposes of the CFC
rules, a ring-fenced cell in a protected cell company or the residual portion of a
Please note! protect cell company that is not ring-fenced or allocated to specific cells would
also be viewed as a foreign company (definition of ‘foreign company’ in s
9D(1)). These cells are commonly used in the insurance industry.
A person has SDUWLFLSDWLRQULJKWV in a foreign company to the extent that the person has the right to
participate in all or part of the benefits of the rights, excluding voting rights, that attach to a share in a
company (par (a) of the definition of ‘participation rights’ in s 9D(1)). These rights generally consist of
804
the right to participate in distributions (dividends or capital) made by the company. The rights may
attach to ordinary shares, but also other shares, for example preference shares. In the absence of
any such rights attaching to shares or where no such rights can be determined for any person, the
right to exercise voting rights represent the participation rights in the company (par (b) of the
definition of ‘participation rights’ in s 9D(1)).
Example 21.23. Classification of a company as a CFC
Discuss whether each of the following foreign companies will be a CFC:

1. Rooibos (Pty) Ltd, a South African resident, holds all the issued shares of Sand LLC, a
company incorporated and effectively managed in Dubai.
2. Rooibos (Pty) Ltd, a South African resident, holds all the issued shares of Sand LLC, a
company incorporated and effectively managed in Dubai. Sand LLC in turn holds all the
issued shares of Clover Ltd, an Irish company.
3. Rooibos (Pty) Ltd, a South African resident, entered into a joint venture with Clover Ltd, an
Irish company. Sand LLC was incorporated in Dubai to house the operations of the joint
venture. Sand LLC will be effectively managed from Dubai. Rooibos (Pty) Ltd and Clover Ltd
will each hold 50% of the issued shares and voting rights of Sand LLC.
4. Rooibos (Pty) Ltd, a South African resident, holds 30% of the shares of Sand LLC, a company
incorporated and effectively managed in Dubai. Springbok Ltd, another South African
resident, holds 25% of the shares of Sand LLC. The remaining 45% shareholding in LLC is
held by a wealthy and influential individual who is resident in Dubai.
5. The Paradise Trust, a trust formed and managed by trustees in the Bahamas, holds all the
issued shares of Sand LLC, a company incorporated and effectively managed in Dubai. The
Paradise Trust is a discretionary trust. Some of its beneficiaries are natural persons who are
South African residents.
6. Island Ltd is a company that is effectively managed and controlled in Singapore. Rooibos
(Pty) Ltd, a South African resident, holds 45% of its issued shares, but concluded that it has
the power to direct the relevant activities of Island Ltd based on the size of its voting rights
and dispersion of other voting rights between a number of small shareholders, as contem-
plated in IFRS 10.B42(a). Rooibos (Pty) Ltd therefore consolidates the financial results of
Island Ltd into its consolidated financial statements.
SOLUTION
1. A resident (Rooibos (Pty) Ltd) holds all the shares, and therefore directly holds all the
participation rights and voting rights in Sand LLC, a foreign company. Sand LLC is a CFC
in relation to Rooibos (Pty) Ltd.
2. Similarly to 1 above, Sand LLC will be a CFC. A resident (Rooibos (Pty) Ltd) indirectly,
through its shareholding in Sand LLC, holds all the participation rights and voting rights in
Clover Ltd, a foreign company. As a result, Clover Ltd is also a CFC in relation to Rooibos
(Pty) Ltd (see note 1).
3. Rooibos (Pty) Ltd, a resident, will only hold 50% of the participation rights and voting rights
of Sand LLC. A resident(s) is required to hold more than 50% of the participation rights or
voting rights of a foreign company in order for that company to be a CFC. Sand LLC is not
a CFC.
4. As South African residents (Rooibos (Pty) Ltd and Springbok Ltd) hold more than 50% of
the participation rights and voting rights of Sand LLC, a foreign company, Sand LLC will be
a CFC in relation to these two residents. (see note 2).
5. The voting rights and participation rights of Sand LLC are held directly by the Paradise
Trust, a non-resident entity. This will not result in Sand LLC being classified as a CFC. The
trust deed and rights of the beneficiaries to the Paradise Trust must, however, be con-
sidered to determine whether residents indirectly hold more than 50% of the participation
rights or voting rights of Sand LLC.
6. Despite the fact that Rooibos (Pty) Ltd does not hold 50% of the participation rights or
voting rights of Island Ltd, Island Ltd will be a CFC because its financial results are consoli-
dated into the consolidated financial statements of Rooibos (Pty) Ltd.
Note 1
Rooibos (Pty) Ltd would be required to include its proportional amount of the net income of Sand
LLC in its taxable income. In addition, Rooibos (Pty) Ltd will also be required to include its
proportional amount of the net income of Clover Ltd in its taxable income. The results of Clover
Ltd are not incorporated into Rooibos (Pty) Ltd’s taxable income via the proportional amount of
Sand LLC.
continued
805
Note 2
There is no requirement that the residents who hold participation rights in a CFC must be related
or aware of each other in any manner. The mere fact that a foreign person holds a greater
interest and possibly controls the foreign company on a de facto basis does not preclude a
foreign company from being a CFC. If this de facto control, however, results in the consolidation
of the financial results of the foreign company into the consolidated financial statements of a
resident company, this may result in the foreign company being classified as a CFC.
The indirect voting or participation rights of a person are normally calculated as the effective
participation right or voting rights that the person holds or can exercise in a company. For example, if
a resident holds 80% the ordinary shares of a foreign company, which in turn holds 80% of the
ordinary shares of another foreign company, the resident will hold 64% (80% × 80%) of the
participation rights of the second foreign company. In order to prevent a situation where a resident
effectively controls a foreign company but has an effective interest of less than 50% in this foreign
company, a specific rule exists for indirect voting rights. If any voting rights in a foreign company can
be exercised directly by any other CFC in which the resident (and its connected persons) can
directly or indirectly exercise more than 50% of its voting rights, such voting rights held by the CFC
are deemed to be directly exercisable by the resident. If, for example, a resident holds 60% the
ordinary shares of a foreign company, which in turn holds 60% of the ordinary shares of another
foreign company, the resident will hold 36% (60% × 60%) of the participation rights and voting rights
of the second foreign company in the absence of the deemed voting rights rule. In these circum-
stances the second company would not be a CFC. The effect of the deemed voting right rule is that
the resident is deemed to be able to directly exercise the 60% voting rights held in the second
foreign company by the first one. As the resident is now deemed to be able to exercise 60% of the
voting rights of the second foreign company, this company is classified as a CFC. It is important to
note that the resident still only effectively holds 36% of the participation rights in this company. This is
relevant for purposes of determining the proportional amount for inclusion in the taxable income of
the resident.
A number of further exceptions apply in respect of foreign companies that are widely held. In the
context of the CFC rules, this would be listed foreign companies.
Where the foreign company is a listed company, no regard must be had to voting rights in this
company when determining whether it is a CFC (proviso (a)(i) of the definition of ‘controlled foreign
company’ in s 9D(1)). No regard must similarly be had to voting rights held by residents indirectly via
listed foreign entities (proviso (a)(i) of the definition of ‘controlled foreign company’ in s 9D(1)).
A further exception exists for small shareholdings in listed foreign entities. A resident that holds less
than 5% of the participation rights in a foreign listed company is deemed not to be a resident when
applying the definition of CFC. This exemption also applies to voting rights or participation rights in a
foreign company, where a resident holds these rights indirectly through a listed foreign company (par
(ii) of proviso (c) to the definition of ‘controlled foreign company’ in s 9D(1)). This exception is also
extended to residents that hold less than 5% of the participation rights in foreign portfolios of
collective investment schemes. It similarly applies to participation rights or voting rights in foreign
companies indirectly held through these small interests in the schemes (par (ii) of proviso (c) to the
definition of ‘controlled foreign company’ in s 9D(1)). These exceptions are aimed at excluding de
minimis shareholdings in listed foreign companies that could make it difficult to track ownership
through various layers of widely held entities. The exceptions are specifically intended to assist
smaller shareholders who may not be able to access the information necessary to trace effective
ownership of these companies. The exceptions do not apply if persons who are connected in relation
to each other hold more than 50% of the voting rights or participation rights of that foreign company,
as this would create opportunities for artificial structuring to misuse the de minimis exception.
21.7.2.2 Inclusion of amount in resident’s taxable income (s 9D(2))

Once it has been established that a foreign company is a CFC, residents who directly or indirectly
hold participation rights in this company would be required to include a portion of the CFC’s net
income in their taxable income.
The portion of the net income that the resident is required to include is based on the percentage of
the participation rights in the CFC that are held by the resident. This portion of the net income is
referred to as the proportional amount that a resident includes in its taxable income in respect of a
CFC.
806
A foreign company may in some cases only be a CFC due to the fact that it is treated as a subsidiary
of a resident company (holding company) in terms of IFRS 10. In these cases, the percentage of the
participation rights, for purposes of determining the proportional amount, is equal to the net per-
centage of the financial results of the foreign company that is included in the consolidated financial
statements of the holding company.
Where a resident holds participation rights in a foreign company that is a CFC

indirectly through a resident company, this resident is not required to include a
portion of the net income of the CFC in its taxable income (proviso (B) of
s 9D(2)). The resident company through which the participation rights are held
Please note! will be required to apply the CFC rules and would already have included the
same portion of the net income in its taxable income. If the resident was
required to also include a portion of this net income, the same net income of the
CFC would have been subject to the CFC rules twice (or more, depending in
the group structure that the resident company that holds the direct interest
forms part of).
The resident is required to include a portion of the net income of the CFC for the foreign tax year that
ends during the resident’s year of assessment. The foreign tax year refers to the year or period that
the foreign company (CFC) has to report for foreign income tax purposes or any annual period if the
company is not subject to foreign income tax.
This can be depicted as follows:
1 March Year 1 28 February Year 2
Resident year
of assessment:
1 January Year 1 31 December Year 1
CFC foreign tax year: Resident’s portion of CFC net income
The participation ratio and net income amount that must be used to determine the proportional
amount depend on whether the CFC was a CFC for the full foreign tax year or not. The following
permutations exist in this regard:
Scenario:
Participation ratio used for
CFC status during the Net income
inclusion in resident’s taxable income
foreign tax year
CFC for full foreign tax Resident’s participation rights relative to Net income for the full foreign tax year
year (s 9D(2)(a)(i)) total participation rights on the last day
of the foreign tax year
Became a CFC during Resident’s participation rights relative to At the option of the resident:
the foreign tax year total participation rights on the last day l net income for the full foreign tax
(s 9D(2)(a)(ii)) of the foreign tax year year × (number of days that the
company was a CFC/total number
of days in the foreign tax year), or
l net income for the period from the
date that the company commenced
being a CFC until the end of the
foreign tax year
Ceased to be a CFC Resident’s participation rights relative to At the option of the resident:
during the foreign tax total participation rights on the last day l net income for the full foreign tax
year (s 9D(2)(b)) that the foreign company was a CFC year × (number of days that the
company was a CFC/total number
of days in the foreign tax year), or
l net income for the period from the
first day of the foreign tax year until
the day that the foreign company
ceased to be a CFC
807
A de minimis exemption from having to include a proportional amount for a CFC in its taxable income
exists for residents that hold less than 10% of the participation rights of the CFC and cannot exercise
more than 10% of the voting rights in the CFC (proviso (A) to s 9D(2)). This test is applied on the last
day of the foreign tax year, or the last day that the foreign company was a CFC if it ceased to be a
CFC during the year. The voting and participation rights of the resident together with its connected
persons must be considered for purposes of this exemption. It may therefore happen that a resident
who holds less than 10% of the voting rights or participation rights on its own, but more than 10% of
the voting rights or participation rights together with connected persons, would still be required to
include an amount in its taxable income in respect its participation rights in a CFC.
Every resident who, together with its connected persons, holds at least 10% of
the participation rights of a CFC on the last day of the foreign tax year or
Please note!
immediately before a foreign company ceased to be a CFC during the year
must submit a CFC return to SARS (IT10B) (s 72A(1)).
Two further exemptions from having to include proportional amounts in respect of participation rights
held in a CFC exist for interests in CFCs held collectively by entities for the benefit of other persons
who are likely to qualify for the de minimis exemption in their own capacities. The first of these
exemptions applies to certain participation rights in a foreign company held by a long-term insurer in
a policyholder fund that is attributable to certain long-term insurance policies (proviso (C) to s 9D(2)).
A similar exemption exists to the extent that participation rights are held by a portfolio of a collective
investment scheme in securities or participation bonds that are a resident in a portfolio of a foreign
collective investment scheme (proviso (D) to s 9D(2)).
21.7.2.3 Net income of a CFC (ss 9D(2A) and 9D(6))

Once it has been established that a resident must include a proportional amount in its taxable income
because it holds participation rights in a CFC, the next step is to determine the net income of that
CFC. Residents that hold participation rights in a CFC are not required to include any amount in their
taxable income for the CFC if either of the two exemptions applies. If an exemption applies, the net
income of the CFC is deemed to be nil. The two exemptions that may result in the net income being
deemed to be nil are
l the high-tax exemption, and
l the foreign business establishment exemption.
In practice, it would normally first be established whether a CFC qualifies for either of these exemp-
tions, before the net income is calculated in the manner described below. It is up to the resident to
determine which of the exemptions they must use if both apply. The simplified FBE exemption is likely
be less time consuming and less onerous to apply than the high-tax exemption.
Each of the exemptions is considered next, followed by the method in which net income must be
determined if none of the exemptions apply.
High-tax exemption (par (aa) of proviso (i) of s 9D(2A)

This exemption removes the burden on investors of having to apply the CFC rules if there is little
South African tax at stake. The high-tax exemption is premised on the fact that the rebate for the
foreign tax paid by the CFC (see s 6quat (1)(b)) could result in the South African tax that is eventually
payable regarding a CFC’s net income included in the taxable income of a resident being very low or
even nil. This will be the case if the foreign tax paid by the CFC approximates the South African tax.
The high-tax exemption applies if the total tax payable by the CFC to foreign governments is equal to
75% or more of the normal tax that would have been payable by the CFC had it been a South African
tax resident for that foreign tax year. If the high-tax exemption applies, the net income of the CFC is
deemed to be nil, resulting in no inclusion in the taxable income of the resident.
808
When determining the aggregate foreign taxes payable by the CFC any relief
available in terms of tax treaties, credits, rebates or other rights to recover the
taxes from a foreign government must be taken into account (par (aa) of proviso
(ii) to s 9D(2A)). This means that the foreign tax liabilities considered must be
the actual and final tax liabilities of the CFC.
For purposes of applying the 75% test to a CFC’s taxable income, had it been a
resident, any amounts that the CFC, as resident, would have had to include in
respect of participation rights that it holds in other CFCs must not be taken into
account (par (bb) of proviso (ii) to s 9D(2A)). This implies that the taxable
income calculated for this purpose must not include the effects of s 9D. If the
75% threshold was applied to a group of CFCs, the average rate may exceed
Please note! 75% while the group included certain low taxed CFC which should be subject to
the CFC anti-avoidance rules.
Lastly, losses that arose in foreign tax years after the foreign company became
a CFC must be disregarded (par (cc) of proviso (ii) to s 9D(2A)). The foreign tax
payable by the CFC must therefore be a notional tax calculated on its taxable
profits, before reducing this tax amount with prior year tax losses carried
forward. If such tax losses had to be taken into account, the foreign tax actually
paid would be lower and could result in the 75% threshold not being met. The
effect of group losses (i.e. losses of other group entities) must, however, be
taken into account in calculating the foreign tax liability. If a CFC does not pay
foreign tax as a result of losses of other entities in a group (where group
taxation applies), the fact that the CFC did not actually pay foreign tax should
be reflected in the 75% test.
Example 21.24. High-tax exemption
Rooibos Ltd (a South African resident) holds all the participation rights in Clover Ltd, an Irish
company and CFC in relation to Rooibos Ltd.
Clover Ltd had net income before tax to the equivalent of R100 million. The corporate tax rate in
Ireland is 12,5%. Corporate tax amounting to the equivalent of R10 million is payable in Ireland in
respect of this income. This corporate tax liability reflects the effect of deductions for the acquisi-
tion of intellectual property that qualifies for tax incentives in Ireland by Clover Ltd. In addition to
the Irish corporate tax, Clover suffered non-refundable withholding taxes of R5 million on pay-
ments made to it from other jurisdictions than Ireland.
If Clover Ltd had been a South African resident, it would have paid normal tax of R28 million on
its net income, before the deduction of any rebates for foreign taxes.
Determine whether Clover Ltd can be regarded as a high-taxed CFC.
SOLUTION
Clover Ltd’s total tax payable to foreign governments amounts to R15 million (R10 million +
R5 million). This tax liability, expressed as a percentage of its South African normal tax liability if
it were a resident, is 53,57% (R15 million/R28 million). Clover Ltd is therefore not a high-taxed
CFC as contemplated in par (aa) of proviso (i) to s 9D(2A).
It is important to note that the high-tax exemption requires the actual tax liabilities of the CFC to
be established and compared to the South African normal tax. It is not sufficient to compare the
corporate tax rate of the jurisdiction where the CFC is a resident (in this case, Ireland’s 12,5%
corporate tax rate) to the South African company tax rate of 28%. This example illustrates that
there are other factors, such as incentives and foreign taxes, payable other than those payable
to the jurisdiction of residence that may affect the ratio.
Simplified foreign business establishment exemption (par (bb) of proviso (i) of s 9D(2A))
This exemption is closely linked to the fact that the CFC rules do not target income from business
activities with substance carried on outside South Africa. If all receipts and accruals of the CFC are
attributable to a foreign business establishment (see 21.7.3.1 below) and none of the diversionary
rules (also see 21.7.3.1) apply, the net income of the CFC is deemed to be nil (par (bb) of proviso (i)
of s 9D(2A)). This exemption is commonly referred to as the simplified foreign business establishment
(FBE) exemption. This exemption was inserted into the legislation to reduce the burden on residents,
who hold participation rights in foreign companies with foreign business establishments, of having to
prepare the detailed calculations required for the high-tax exemption to be excluded from the CFC
regime.
809
Calculation of net income in the absence of the two exemptions

If neither of the above exemptions apply, it is necessary to calculate the proportional amount of the
net income of the CFC for inclusion in the taxable income of residents that hold participation rights in
the CFC. The net income of the CFC is a hypothetical amount which is based on the taxable income
of the CFC, calculated as if it was a taxpayer and resident for the following purposes (s 9D(2A)):
l The determination of its gross income as if it were a resident, which would mean that all receipts
and accruals not of a capital nature must be taken into account, irrespective of the source (defin-
ition of ‘gross income’ in s1 – see chapter 3). The hypothetical taxable income of the CFC must
also include capital gains or losses on the disposal of any asset, irrespective of its source
(par 2(1)(a) of the Eighth Schedule). In determining the base cost of such assets, the CFC must
be treated as having commenced to be a resident when it became as CFC (par 24 of the Eighth
Schedule – see chapter 17).
l Any South African sourced interest received by the CFC cannot be exempt on the grounds that
the CFC is a non-resident (s 10(1)(h) – see chapter 5).
l The CFC is treated as a resident for purposes of any distributions by trusts (s 25B and par 80 of
the Eighth Schedule – see chapters 17 and 24).
l The attribution rules applicable to income and capital gains that accrue to non-residents as result
of a donation, settlement or other disposition by a resident (s 7(8) and par 72 of the Eighth
Schedule) or conditional or revocable vesting of capital gains as result of a donation, settlement
or other disposition (paras 70 and 71 of the Eighth Schedule) apply as if the CFC is a resident.
Remember
In practice it may be challenging to calculate what the CFC’s taxable income would have been
had it been a resident due to a lack of information. This could either be that the person does not
have access to the detailed information or that the specific information required to determine tax-
able income in terms of the Act is not prepared by foreign accounting systems. The financial
statements of the foreign company are often used for purposes of calculating this hypothetical
taxable income.
A resident must have a copy of the financial statements of a CFC available in case SARS
requests this (s 72A(2)). If the resident does not have these financial statements available,
without reasonable grounds that the failure was beyond its control or it believed it was not
subject to the requirement to obtain the financial statements, this has adverse implications for
the resident. The resident will be required to include a proportional amount of the CFC’s receipts
and accruals, as opposed to its net income, in its taxable income (s 72A(3)(b)(i)). In addition, it is
not entitled to a rebate in respect of the taxes paid by the CFC on these amounts
(s 72A(3)(b)(ii)).
The following prescriptions must be applied when calculating the net income of a CFC:
l The net income of the CFC must be calculated in its functional currency (s 9D(6)). The functional
currency of a CFC is currency of the primary economic environment in which its business
operations are conducted (definition of ‘functional currency’ in s 1). Once the total taxable income
has been determined in the functional currency, taking into account all the prescriptions below,
this amount is converted to rand at the average exchange rate for the foreign tax year.
l When calculating the hypothetical taxable income of the CFC, any deductions or allowances from
the income must be limited to the income of the foreign company (s 9D(2A)(a)). This means that
resident cannot impute a proportional amount of a loss of a CFC into its taxable income. If the
deductions or allowances were to exceed the income of the CFC, the excess deductions or
allowances can be carried forward to the succeeding foreign tax year. This excess is deemed to
be a balance of an assessed loss in terms of s 20 when the taxable income of the CFC is
determined in the next year of assessment (s 9D(2A)(b)).
l No deductions are allowed for certain passive transactions between CFCs that form part of the
same group of companies (group CFC) (s 9D(2A)(c)). This disallowance of the deduction by the
paying CFC corresponds with the exclusion from the net income of the recipient CFC (s 9D(9)(fA)
– see 21.7.3.4). The intra-group rules ensure that companies that performed centralised functions
can be used in an offshore structure without being disadvantaged by the CFC rules. The intra-
group rules apply to
– interest, royalties, rental, insurance premiums or income of a similar nature (including transfer
pricing adjustments) paid or payable by the foreign company to a group CFC
810
– exchange differences arising on exchange items to which the foreign company and a group
CFC are parties to and forward exchange contracts or foreign currency option contracts
entered into to hedge these items
– any reduction or discharge of a debt owed to the foreign company by a group CFC for less
consideration than the face value of the debt.
The deduction will, however, be available if the corresponding amount must be taken into
account by the group CFC that receives it.
l A number of prescriptions relate to the determination of the capital gains or losses of the CFC on
the disposal of assets:
– For purposes of determining the base cost of the assets disposed of by the CFC, the valuation
date is deemed to be the date before the CFC commenced being a CFC (s 9D(2A)(e)). The
effect of this is that the capital gains or losses reflected in the net income of the CFC are only
those that represent the gains or losses that arose since the date when the foreign company
became a CFC, as opposed to the absolute gain or loss in respect of the asset since the
foreign company actually acquired it.
– The functional currency of a CFC must be deemed to be its local currency for purposes of
determining the capital gain or loss on assets acquired or disposed of in foreign currencies
(see par 43 of the Eighth Schedule) (s 9D(2A)(k)). Specific provisions apply to determine the
base cost of assets when a hyperinflationary currency of a CFC has been abandoned
(s 9D(2A)(l)).
– The inclusion rate for purposes of capital gains tax depends on the nature of the resident that
holds the participation rights in the CFC who has to include its proportional amount of the
CFC’s net income in its taxable income. If this resident is a natural person, special trust or an
insurer in respect of its individual policyholder fund, the inclusion rate is 40% (s 9D(2A)(f)). In
all other cases, an inclusion rate of 80% applies.
l Exchange items of the CFC that are denominated in a hyperinflationary currency, which is not the
functional currency of the CFC, must be deemed not to be attributable to any permanent estab-
lishment of the CFC (proviso to s 9D(6)). This is the equivalent from a CFC perspective of the pro-
visions of s 25D(2A) that would apply in the hands of a resident with a permanent establishment
outside South Africa. These provisions aim to prevent adverse tax implications on non-hyper-
inflationary items held by permanent establishments situated in hyper-inflationary environments.
l Foreign dividends that accrue to a CFC may be exempt in terms of the participation exemption
(s 10B(2)(a) – see chapter 5). If this is not the case, the exemptions that apply to foreign divi-
dends distributed from profits that have already been subject to the CFC rules (s 10B(2)(c) – see
chapter 5) or the exemption of dividends received by a foreign company (CFC) from another
foreign company that is resident in the same country (s 10B(2)(b) – see chapter 5) may be par-
ticularly relevant in the context of determining the net income of a CFC.
Example 21.25. Calculation of net income of a CFC

Rooibos Ltd, a South African resident company, holds 80% of the equity share capital of Clover
Ltd, an Irish tax resident company.
Rooibos Ltd’s year of assessment ends on 28 February 2019. Clover Ltd has a 30 June financial
year-end.
Clover Ltd’s operations are all conducted in Euro (Μ as its primary currency.
Clover Ltd’s income statement for the year ended 30 June 2018 is as follows:
Net profit before tax (excluding research and development) generated
from activities in Ireland and the United Kingdom ................................................. Μ20 000 000
Research and development expenditure in developing patent in Ireland ............. Μ3 000 000)
Net profit before tax ............................................................................................... Μ17 000 000
The net profit before tax, with the exception of the research and development cost, reflect the
same amount that would have been taken into account in the calculation of Clover Ltd’s taxable
income had it been a resident of South Africa for tax purposes.
The average exchange rate for the year ended 28 February 2019 is Μ1 = R17. The average
exchange rate for the foreign tax year ended 30 June 2018 is Μ1 = R14.
Assuming that no further amounts can be excluded from the net income of Clover Ltd, determine
the net income of Clover Ltd that must be used to determine the proportional amount to be
included in the taxable income of Rooibos Ltd for the 2019 year of assessment.
811
SOLUTION
The starting point for the calculation of the net income of Clover Ltd to be included in the taxable
income of Rooibos Ltd is to determine what Clover Ltd’s taxable income would have been had it
been a South African resident. This net income will be determined in Clover Ltd’s functional
currency, which is the euro, that it uses in its primary operations.
Rooibos Ltd will include its proportional amount of the net income for Clover Ltd’s foreign tax
year that ends during Rooibos Ltd’s 2019 year in its taxable income for the 2019 year of
assessment. Clover Ltd’s taxable income for its foreign tax year that ends on 30 June 2018, if it
were a resident, would have been:
Taxable income includes amounts irrespective of source (Clover Ltd deemed
to be a resident for purposes of the definition of ‘gross income’ in s 1) ............. Μ20 000 000
No adjustment made for expenditure to develop capital asset (patent) as
s 11D allowances are only available in respect of research and development
in South Africa that is approved Department of Science and Technology ......... –
Net income determined as if Clover Ltd was a resident ...................................... Μ20 000 000
Net income converted to rand at the average exchange rate for Clover Ltd’s
foreign tax year (Μ20 000 000 × 14) .................................................................... R280 000 000
Inclusion in Rooibos Ltd’s taxable income (R280 million × 80%) ....................... R224 000 000
21.7.3 Income not subject to CFC rules (ss 9D(9) and 9D(9A))
The net income of a CFC, as calculated in the manner discussed in 21.7.2.3, will include all its profits,
which will consist of profits that should be within the scope of the anti-avoidance rules but also profits
that are not targeted by these rules. The last step in determining the net income to be used to deter-
mine the proportional amount included in the taxable income of a resident that holds participation
rights in a CFC is to exclude amounts that are not within the scope of the anti-avoidance rules from
the net income (s 9D(9)). Each of the exclusions from net income is discussed in more detail below.
21.7.3.1 Foreign business establishment exclusion (ss 9D(9)(b), 9D(9)(f B) and 9D(9A))
The net income of a CFC should exclude profits generated by offshore business activities that pose
no real threat to the South African tax base. If such profits were subject to the CFC rules, it could
result in South African-based groups being left in an uncompetitive position globally. The net income
attributable to a foreign business establishment (FBE) of the CFC must therefore be excluded from
the amount used to determine the proportional amount included in the taxable income of a resident
(s 9D(9)(b)). This exclusion applies to both the operating profits realised by this FBE as well as the
amounts derived from the disposal of its assets.
The above exclusion for capital gains or losses relating to assets attributable to
a FBE applies to the capital gains or losses arising on the disposal of assets
owned by the CFC and used in its own FBE. The exclusion is extended to the
Please note!
disposal of assets owned by a CFC that were attributable to the FBE of another
CFC that forms part of the same group of companies as the CFC that owns the
asset (s 9D(9)(fB)).
Definition of foreign business establishment

The first step in applying this exclusion is to establish whether a CFC carries on business through a
FBE. The definition of a FBE has a broad provision (par (a) of the definition of ‘foreign business estab-
lishment’ in s 9D(1)) and then lists very specific circumstances that give rise to a FBE (paras (b) to (g)
of the definition of ‘foreign business establishment’ in s 9D(1)).
In a broad sense, a CFC will have a FBE if it carries on business through a fixed place of business
located outside South Africa. The requirement for a fixed place of business implies that the business
activities must be carried on with a degree of permanency from a specific location. The business
must have been or should continue to be carried on at this place for a period of at least one year.
This place of business must meet all the following operational criteria, which are aimed at ensuring
that the business in question is not just a paper transaction and has substance: (subpar (i) to (iv) of
par (a) of the definition of ‘foreign business establishment’ in s 9D(1)):
l The business must be conducted through a physical structure in the form of offices, shops,
factories, warehouses or other structures. There is no requirement that the CFC must own the
structure. The requirement that the business has to be conducted through the structure implies
that the mere availability of a structure is not sufficient to meet this requirement.
l The fixed place of business must be suitably staffed with on-site managerial and operational
employees of the CFC that conduct the primary activities of the business.
812
l The fixed place of business must be suitably equipped to conduct the primary activities of the
business.
l The fixed place of business must have suitable facilities to conduct the primary activities of the
business.
The last three criteria require a thorough understanding of the primary activities of the business. The
assessment as to whether these criteria are met depends on the fact and circumstances of each
business, including identification and understanding of the core business model.
The last requirement that must be met for a FBE to exist relates to the business purpose, as opposed
to the operational infrastructure used. In order to constitute a FBE, the fixed place of business must
be located outside South Africa solely or mainly for a business purpose, rather than to postpone or
reduce any tax imposed in South Africa (par (v) of the definition of ‘foreign business establishment’ in
s 9D(1)). This requires a similar type of assessment of the reason for carrying on the business outside
South Africa in light of any tax benefit as the assessment when considering the general anti-
avoidance rules (see chapter 32).
Multinational groups often set up business structures in a manner to avoid

duplication of functions. For purposes of considering whether a CFC carries on
business through a FBE, the use of structures, employees, equipment and
facilities of other CFCs that form part of the same group of companies as the
CFC may be taken into account. The other group CFC must, however, be sub-
Please note! ject to tax in the country by reason of residence, place of effective management
or similar criteria where the fixed place of business is located. In addition, this
concession only applies to the extent that the structures, employees, equipment
and facilities are located in the country where the fixed place exists from which
the CFC carries on its business (proviso to par (a) of the definition of ‘foreign
business establishment’).
The specific locations from which business activities are carried on outside South Africa that give rise
to the existence of a FBE are the following (paras (b) to (g) of the definition of ‘foreign business
establishment’ in s 9D(1)):
l any place outside South Africa where the CFC carries on operations for prospecting or explora-
tion for natural resources or mining or production operations of natural resources
l a site outside South Africa where the CFC carries on activities for the construction or installation
of buildings, bridges, roads, pipelines, heavy machinery or other projects of a comparable mag-
nitude, which lasts for a period of not less than six months
l agricultural land in a foreign country used by the CFC to carry on bona fide farming activities
l a vessel, vehicle, rolling stock or aircraft used solely outside South Africa by the CFC, or by a
group CFC that has its place of effective management in the same country as the CFC, for pur-
poses of transportation, fishing, prospecting or exploration for natural resources or mining or pro-
duction of natural resources
l a South African registered ship involved in international shipping, as contemplated in s 12Q, or a
ship engaged in international traffic used mainly outside South Africa.
Example 21.26. Determining whether the operations of a CFC qualify as a foreign
business establishment
Rooibos Ltd, a South African tax resident, is the parent company of a South African-based multi-
national group of companies involved in the pharmaceutical industry. Rooibos Ltd holds all the
shares in Clover Ltd, an Irish tax resident company. Clover Ltd is a CFC in relation to Rooi-
bos Ltd.
Rooibos Ltd is a distributor of medicine to various hospitals all over the world. Clover Ltd was
incorporated five years ago to serve as a procurement hub. It is located outside Dublin, close to
a number of pharmaceutical companies that develop and produce new medicine. Clover Ltd
buys medicine from Irish but also from other foreign pharmaceutical companies. Clover Ltd owns
an office building and storage warehouse. The warehouse is equipped to comply with inter-
national standards for storage of medicine. All medicine that is ordered is shipped to the ware-
house, where it is packaged into Rooibos-group branded packaging. From here, the medicine is
sold to the group’s distribution subsidiaries in the countries where the group operates, including
a subsidiary in South Africa. This subsidiary is Six Roses (Pty) Ltd, a South African resident
company. It is wholly-owned by Rooibos Ltd. The distribution subsidiaries then on-sell the
products to the customers (hospitals) in each country.
Clover Ltd employs administrative staff as well as managerial and operational staff who carry out
the storage and distribution activities.
Discuss if Clover Ltd’s distribution activities outside Dublin will qualify as a FBE.
813
SOLUTION
The activities carried on by Clover Ltd do not fall into any of the specific items that will constitute
a FBE, as listed in paras (b) to (g) of the definition of ‘foreign business establishment’ in s 9D(1). It
should therefore be considered whether the activities fall within par (a) of this definition.
The activities may meet the requirements to constitute a FBE as
l The activities are carried on at a fixed place consisting of an office and warehouse outside
Dublin.
l The activities have been carried on from this location for five years (therefore more than one
year).
l It depends on the detailed procurement and distribution business model followed by Clover
Ltd, but on face value it appears as if the place of business may be suitably equipped and
has the necessary facilities to operate a procurement and distribution business. It employs
managerial and operational staff to carry out its activities at the premises.
l From the facts provided, a reason for the choice of location is its close proximity to suppliers.
This reason for establishing the procurement hub in Ireland must, however, be weighed up
against the tax benefits available in Ireland to establish whether the sole, or at least main,
reason for establishing the distribution hub in Ireland was a business reason, rather than a
tax reason. This is a factual question which requires more information than the information
provided to be considered.
Attribution of profits to the FBE

For purposes of determining the amount of net income to be attributed to the FBE, the FBE must be
viewed as a distinct and separate enterprise that deals wholly independent from the rest of the CFC
(s 9D(9)(b)(i)). The attribution of profits to the FBE must be done as if the amounts arose in transac-
tions entered into on terms and conditions that would have existed between persons dealing at arm’s
length (s 9D(9)(b)(ii)). Similar principles as those applicable to the attribution of profits to permanent
establishments (see 21.4.3.9), and therefore by implication transfer pricing principles (as discussed
in 21.8), should apply.
Anti-diversionary rules
If a CFC carries on business through a FBE, the net income derived in this manner will generally be
excluded from the CFC rules. This FBE, however, creates a tax-free pocket into which amounts could
be diverted from South Africa, and therefore an avoidance opportunity. In principle, misuse of the
FBE should be prevented by transfer pricing rules (see 21.8) that are aimed at preventing profit
shifting using artificial pricing of transactions. The transfer pricing rules are applied on a case-by-
case basis on the facts and circumstances of a transaction, which makes it intensive to enforce. As a
second measure aimed at transactions that artificially divert profits from South Africa into a FBE of a
CFC, a number of anti-diversionary rules have been included in the CFC legislation to complement
the transfer pricing rules.
The anti-diversionary rules are structured to identify the potential type of transaction or activities that
would pose a risk of abuse of the FBE exemption. The net income attributable to such transactions or
activities would then remain included in the net income of the CFC, unless it meets prescribed
criteria, in which case the risk of abuse should not exist. Each of the anti-diversionary rules, therefore,
start by describing transactions or activities from which the net income cannot merely be excluded
from the net income of a CFC on the basis that it is attributable to a FBE. This is then followed by a
number of circumstances, often very narrowly defined, where it would be appropriate to exclude the
amounts from the net income of the CFC.
These rules target to two categories of FBE activities:
l firstly, transactions entered into between connected resident taxpayers and the FBE, as a tax-free
pocket from a South African tax net perspective
l secondly, activities of FBEs that may still represent activities aimed at earning passive income,
even though the structure through which it is earned meets the definition of a FBE.
814
The first category anti-diversionary rules aimed at preventing the diversion of amounts from South
African residents to FBEs of CFCs that are connected to the residents are:
Net income from the following
transactions must be taken into
account by the resident under the
CFC rules despite being Amounts that may properly be excluded from the CFC rules, despite
attributable to FBE due to the risk being a risk transaction (Acceptable transactions)
of amounts artificially diverted from
connected South African tax
residents (Risk transactions)
Amounts derived by the CFC from Amounts derived in the following circumstances (paras (aa) to (dd) of
the sale of goods to a South V' $)(a)(L
African resident that is a l the CFC purchased the goods in the country where the CFC has its
connected person in relation to place of effective management from a person, or
the CFC (s9D(9A)(a)(i)) l the CFC has undertaken activities that entail the creation, extraction,
production, assembly, repair or improvement of these goods. These
activities must comprise more than minor assembly or adjustment,
packaging and labelling activities, or
l the CFC sells a significant quantity of goods of the same or similar
nature to unconnected persons at comparable prices. The compar-
ability assessment should take into account market levels, volume
discounts and delivery costs, or
l the CFC purchases the same or similar goods mainly within the
country where the CFC has its place of effective management from
unconnected persons.
Amounts derived by the CFC from Amounts derived in the following circumstances (paras (aa) to (dd) of
the sale of goods to any person, s 9' $)(a)(iA
where the CFC purchased the l the goods or tangible inputs purchased from the residents who are
goods or tangible inputs from a connected persons amount to an insignificant portion of the total
South African resident(s) that is a goods or intermediary inputs into the goods, or
connected person in relation to l the CFC has undertaken activities that entail the creation, extraction,
the CFC (s 9D(9A)(a)(iA)) production, assembly, repair or improvement of these goods. These
activities must comprise more than minor assembly or adjustment,
packaging and labelling activities, or
l the CFC sells the products to unconnected persons for physical
delivery at the customer’s premises in the country where the CFC
has its place of effective management, or
l the CFC sells products of the same or similar goods mainly to
unconnected persons for physical delivery to the customer’s
premises within the country where the CFC has its place of effective
management.
Amounts derived by the CFC from Amounts derived from performing the service outside South Africa in
any service performed to a South the following circumstances (paras (aa) to (dd) of s 9D(9A)(a)(ii)):
African resident that is a l the service related directly to the creation, extraction, production,
connected person in relation to assembly, repair or improvement of goods used outside South
the CFC (s 9D(9A)(a)(ii)) Africa, or
l the service relates directly to the sale or marketing of goods of a
South African resident that is connected to the CFC, where those
goods are sold to unconnected persons for physical delivery to the
customer’s premises within the country where the CFC has its place
of effective management, or
l the service is rendered mainly in the country where the CFC has its
place of effective management for the benefit or customers that
have premises in that country, or
l to the extent that no deduction is allowed for any amount paid by
the connected person for the service.
815
Example 21.27. Application of the diversionary rules to FBE income

This example is based on the same facts as Example 21.26. Assuming that the activities of
Clover Ltd at the office and warehouse outside Dublin constitute a FBE, discuss the impact of the
diversionary rules to the FBE exclusion.
SOLUTION
Six Roses (Pty) Ltd, a resident company, is a connected person in relation to Clover Ltd as it
forms part of the same group of companies. Income derived by the FBE from selling goods to Six
Roses (Pty) Ltd pose a risk of profits being diverted to Clover Ltd’s FBE from Six Roses (Pty) Ltd
(s 9D(9A)(a)(i)). As a result, this income will have to be included in the Clover Ltd’s net income
that is included in Rooibos Ltd’s taxable income.
The following exceptions may result in these amounts being excluded from this net income:
l Clover Ltd (CFC) purchases some, but not all of the goods sold to Six Roses (Pty) Ltd, within
Ireland from unconnected persons. As it also purchases some goods from outside Ireland,
the exception in s 9D(9A)(a)(i)(aa) will therefore not apply.
l The only activity that takes place at the premises outside Dublin is packaging of the products.
The exception in s 9D(9A)(a)(i)(bb) will therefore not apply.
l From the information provided, it appears as if Clover Ltd only sells the products to connected
person (group subsidiaries that distribute the product in their respective countries). The
exception in s 9D(9A)(a)(i)(cc) will therefore not apply.
l Clover Ltd (CFC) purchases the same or similar goods (except for the packaging) to those
sold to Six Roses (Pty) Ltd from unconnected suppliers in Ireland. If it can be demonstrated
that it mainly purchases (presumably more than 50% of its purchases) these goods within
Ireland, it may qualify for the exception in s 9D(9A)(a)(i)(dd).
If Clover Ltd complies with the requirement in s 9D(9A)(a)(i)(dd), the effect will be that the net
income used to determine Rooibos Ltd’s proportional amount to be included in its taxable income
in South Africa will not include the net income from sales of products to Six Roses (Pty) Ltd.
If, however, Clover Ltd does not comply with the requirements of that provision, the net income
from sales of products to Six Roses (Pty) Ltd must be included in the net income used as a basis
for Rooibos Ltd’s proportional amount included in its taxable income. This will effectively neu-
tralise any deduction that Six Roses (Pty) Ltd would have been able to make in respect of the
purchase of these products from Clover Ltd.
The second category of anti-diversionary rules aimed at passive income being generated through a
business structure that meets the definition of a FBE are:
Amounts that may properly be excluded from the CFC rules, despite
CFC rules despite being
being a risk transaction (Acceptable transactions)
attributable to FBE due to the risk
of being passive income generated
within a FBE (Risk transactions)
Amounts arising in respect of Amounts derived from financial instruments in the following circum-
financial instruments stances (paras (aa) to (cc) of s 9D(9A)(a)(iii)):
(s 9D(9A)(a)(iii)) l The financial instrument is attributable to the principal trading
activities of a bank, financial service provider or insurer carried on
by the FBE. This exception does not apply if the principal trading
activities are those of a treasury operation or captive insurer, as
described in ss 9D(9A)(b)(iii) and (iv)), as these may be disguised
as banking, financial services or insurance businesses.
l Amounts that are attributable to exchange differences in respect of
financial instruments arising in the ordinary course of the principal
trading activities of a bank, financial service provider or insurer
carried on by the FBE. This exception does not apply if the principal
trading activities are those of a treasury operation or captive
insurer, as described in ss 9D(9A)(b)(iii) and (iv)).
continued
816

Amounts that may properly be excluded from the CFC rules, despite
CFC rules despite being
being a risk transaction (Acceptable transactions)
attributable to FBE due to the risk
of being passive income generated
within a FBE (Risk transactions)
l To the extent that the amounts or exchange gains arise in respect of
financial instruments that are attributable to the activities of the FBE
(as opposed to being unrelated instruments conveniently housed in
the FBE) exceed 5% of the total receipts or accruals of the FBE.
Any amounts that qualify for other exclusions from net income, as
discussed in 21.7.3.2 to 21.7.3.5, and amounts derived from
treasury operations or captive insurers must be excluded for pur-
poses of this calculation.
Note: Amounts that may be excluded from the net income of a CFC
solely as a result of any of the above items, must be taken into account
in the net income of the CFC to the extent that it is attributable to
deductible amounts incurred by residents who are connected persons
in relation to the CFC.
Amounts derived from the rental of Amounts derived from the rental of movable property in the form of an
movable property (s 9D(9A)(a)(iv)) operating lease or financial instrument (i.e. finance lease) (paras (aa)
and (bb) of s 9D(9A)(a)(iv)). In the case of a lease in the form of a
financial instrument, the diversionary rules that apply to amounts
arising from financial instruments will govern whether the amount is
included in net income or not.
In this context of this item an operating lease refers to a lease of
movable property concluded by a lessor in the ordinary course of a
letting business, where (s 9D(9A)(b)(v))
l this property can be hired by members of the general public for a
period of no longer than five years, and
l the lessor bears the cost or performs the activities to maintain and
repair the asset in consequence of normal wear and tear, and
l the lessor bears the risk of loss or destruction of the asset, except
when it has a claim against the lessee for failure to take proper care
of the asset.
Amounts derived from the use, Amounts derived from the use of intellectual property, which is not
right or use or permission to use tainted intellectual property (see chapter 13), where the CFC directly
intellectual property, as described and regularly creates, develops or substantially upgrades the intellec-
in 21.3.3 (s 9D(9A)(a)(v)). This tual property that gave rise to the amount (paras (aa) and (bb) of
also extends to capital gain in s 9D(9A)(a)(v)). Capital gains on the disposal of intellectual property
respect of the disposal of such may similarly be excluded from net income if the capital gain arose
intellectual property from the disposal of intellectual property that the CFC directly and
(s 9D(9A)(a)(vi)). regularly creates, develops or substantially upgrades (s 9D(9A)(a)(vi)).
Amounts derived in the form of Amounts derived from insurance premiums that are attributable to the
insurance premiums principal trading activities of an insurer carried on by the FBE (par (aa)
(s 9D(9A)(a)(vi)) of s 9D(9A)(a)(vi)). This does not apply to an insurer whose principal
trading activities constitute the activities of a captive insurer, as defined
in s 9D(9A)(b)(iv), which may be disguised as an insurance business.
21.7.3.2 Amounts that have already been subject to tax in South Africa (ss 9D(9)(d)
and 9D(9)(e))
If an amount received by or accrued to a CFC has already been subject to tax in South Africa in the
hands of the CFC, there is no need for an anti-avoidance regime, such as the CFC rules, to apply to
this amount. In fact, if the CFC regime applied to these amounts, this would result in double taxation.
For this reason, the net income of a CFC should exclude
l interest received by the CFC that is subject to the withholding tax on interest (see 21.5.2.5), after
taking into account any treaty relief available (s 9D(9)(d)(i))
l royalties received by the CFC that are subject to the withholding tax on royalties (see 21.5.2.4),
after taking into account any treaty relief available (s 9D(9)(d)(ii))
817
l amounts that have been included in the taxable income of the CFC, on the basis that the amounts
were received by or accrued to the CFC, as a non-resident, from a South African source (see
21.5) (s 9D(9)(e)).
Example 21.28. Exclusion for amounts already taxed in South Africa
A resident holds all the shares of a foreign company. The foreign company is a CFC in relation to
the resident. The foreign company owns fixed property in South Africa. The fixed property gener-
ates rental income that accrues to the foreign company.
The rental income of the foreign company will already be subject to tax in South Africa. This is
because the foreign company is a non-resident that is taxed in South Africa on a source basis.
The rental income is from a South African source. The rental income would have been included
in the CFC’s taxable income as a taxpayer in South Africa.
As this amount has already been subject to tax in South Africa and would therefore not pose a
risk to the South African tax base, it will be excluded from the net income of the CFC (s 9D(9)(e)).
21.7.3.3 Amounts that have already been subject to the CFC rules (s 9D(9)(f))
If the participation rights of a CFC (CFC2) are held indirectly through another CFC (CFC1) by a
resident, each of the CFCs will be a CFC in relation to that resident. The resident is required to
include its proportional amount of the net income of each of the CFCs in relation to its participation
rights (whether held directly or indirectly) in its taxable income. As a result, the profits of CFC2 may
be subject to tax in the hands of the resident as and when these profits accrue in CFC2. At some
point, CFC2 could distribute the profits, in which case the profits will be received by CFC1 as foreign
dividends. In certain circumstances, the dividends may not be exempt in the calculation of the
hypothetical taxable income of CFC1. If these profits were to be included in the net income of CFC1,
of which a portion has to be included in the taxable income of the same resident that already had an
inclusion of CFC2’s net income, this will result in double taxation in terms of the CFC anti-avoidance
rules. To prevent this double taxation from occurring, the net income of CFC1 must exclude the
foreign dividends received from CFC2 to the extent that those dividends have been declared from
profits that have already been subject to tax in the hands of the resident (s 9D(9)(f)).
21.7.3.4 Intra-group passive income (s 9D(9)(fA))

South African-based groups should be able to structure their offshore affairs in a manner that cen-
tralises financing, licensing and leasing functions for offshore activities without being penalised by
the CFC rules. For purposes of the CFC rules, the income that accrues to the offshore group entity
where these functions are centralised from other CFCs should be considered from the perspective of
the group entity where it arises, rather than the entity that performs this centralised group function.
For this reason, the net income of a CFC excludes certain types of passive income accruing from
other CFCs that form part of the same group of companies (group CFC) as the recipient. From the
perspective of the group CFC that makes the payment, these payments cannot be deducted when
determining its net income (see discussion of intra-group rules in 21.7.2.3). This ensures that the
profits from which the payments are made are considered in the hands of the group company where
it arose for purposes of the CFC rules. The income of a CFC that is attributable to the following items
must be excluded from its net income:
l interest, royalties, rental, insurance premiums or income of a similar nature (including transfer
pricing adjustments) paid or payable to the foreign company by a group CFC
l exchange differences arising on exchange items to which the foreign company and a group CFC
are parties to and forward exchange contracts or foreign currency option contracts entered into
to hedge these items
l any reduction or discharge of a debt owed by the foreign company to a group CFC for less
consideration than the face value of the debt.
21.7.3.5 Amounts attributable to certain policyholders (s 9D(9)(c))

The net income attributable to any foreign person or CFC in relation to a resident from policies issued
by a company licensed to issue long-term policies in its own country of residence, must be excluded
from the net income of that CFC. This ensures that amounts that accrue to CFCs of South African
insurance companies, which will ultimately be paid to policyholders who are not subject to tax in
South Africa, do not become subject to tax in South Africa in terms of the CFC rules.
818
21.7.4 Practical approach to applying CFC rules

The CFC rules, as explained in 21.7.1 to 21.7.3, are complex and taxpayers often find it difficult to
apply. The following diagram provides a stepped approach that can be followed to apply these rules:
No
Step 1: Is or was the foreign company a CFC during the foreign tax year that
ends during the resident’s year of assessment? (21.7.2.1)
Yes
No
Step 2: Does the resident in question directly or indirectly hold participation
rights in this CFC at the end of the year tax year that ends in the
resident’s year of assessment? (21.7.2.2)
Yes
Does one of the exemptions from having to include any amount in Yes
Step 3:
taxable income apply to this resident? (21.7.2.2)
Yes
Step 4: Does the high-tax exemption apply to the CFC? (21.7.2.3) or Yes to either
Does the CFC derive all its receipts and accruals from a FBE without any
of the diversionary rules applying? (21.7.2.3 and 21.7.3.1)
Neither
Step 5a: Calculate net income for inclusion in accordance with guidelines in 21.7.2.3.
Step 5b: Exclude amounts attributable to FBE, after adjusting for diversionary rules (21.7.3.1).
Exclude amounts already taxed in South Africa (21.7.3.2) or already subject to CFC
Step 5c:
rules (21.7.3.3)
Step 5d: Exclude passive income derived from group CFCs (21.7.3.4)
= Net income of the CFC to be used for inclusion in resident’s taxable income
Step 5e: Multiply: Resident’s participation rights at the relevant date (21.7.2.3)
Amount to be included in the hands of resident No inclusion in the hands of resident that
that holds participation rights in a CFC holds participation rights in a CFC
819
The following example illustrates how this process, and therefore all aspects of the CFC rules, should
be applied to a CFC.
Example 21.29. Comprehensive example: Controlled Foreign Companies
Rooibos Ltd is a South African resident with a 28 February financial year-end. Rooibos Ltd pur-
chased 15% of the equity shares in ABC Plc, a foreign company, on 1 October 2014 for
$100 000. ABC Plc does not have a foreign business establishment and its shares are not listed
on a recognised stock exchange. ABC Plc’s foreign tax year ends on 30 September each year.
Rooibos Ltd’s intention with this acquisition was to hold the shares for investment purposes (i.e.
capital in nature). The other shareholders in ABC Plc are: Jane Roberts, a South African resident
who owns 49% of the equity shares; and Offshore Plc, a foreign company that owns the
remaining equity shares in ABC Plc. None of the shareholders are connected persons to each
other. ABC Plc’s participation rights are equal to the voting rights in the company.
The following information is relevant for ABC Plc’s foreign tax year ended 30 September 2015:
l Rooibos Ltd received a foreign dividend of $285 000 on 30 September 2015 from ABC Plc.
l The net income of ABC Plc (calculated correctly in terms of s 9D(2A)) amounted to
$2 850 000. The net income does not include any capital gain or loss.
l Foreign corporate tax payable by ABC Plc amounted to $513 000 for the foreign company’s
foreign tax year ended 30 September 2015. Had ABC Plc been a South African resident for
its foreign tax year, then normal tax payable on its taxable income in South Africa would have
been the equivalent of R 8 656 875.
l The average exchange rate for ABC Plc’s foreign tax year ended on 30 September 2015 was
$1 = R10,80 and the spot rate on 30 September 2015 was $1 = R11,45. The average
exchange rate for the year of assessment ended 29 February 2016 was $1 = R11,75.
Due to cash flow problems, Rooibos Ltd had to sell its 15% shareholding in ABC Plc on
1 May 2016 to Offshore Plc (a foreign company that is not a connected person to Rooibos Ltd)
for $500 000 (considered to be the market value of the investment).
The following information is relevant for ABC Plc’s foreign tax year ended 30 September 2016:
l Rooibos Ltd did not receive any further foreign dividends from ABC Plc.
l The net income of ABC Plc (calculated correctly in terms of s 9D(2A)) amounted to
$1 350 000 for the period 1 October 2015 to 30 September 2016. The net income does not
include any capital gain or loss.
l Foreign corporate tax payable by ABC Plc amounted to $243 000 for the foreign company’s
foreign tax year ended 30 September 2016. Had ABC Plc been a South African resident for
its foreign tax year, then the normal tax payable on its taxable income in South Africa for its
foreign tax year ending 30 September 2016 would have been the equivalent of R3 499 200.
l The average exchange rate for ABC Plc’s foreign tax year ended on 30 September 2015 was
$1 = R14 and the spot rate on 30 September 2016 was $1 = R13,40. The average exchange
rate for the year of assessment ended 28 February 2017 was $1 = R14,80.
Determine the normal tax consequences of the above transactions for Rooibos Ltd’s 2016 and
2017 years of assessment.
SOLUTION
Rooibos Ltd has an interest in a foreign company. The provisions of s 9D should be considered.
Steps 1 – 3: ABC Plc is a CFC as South African residents (Rooibos Ltd and Jane Roberts) hold
more than 50% (15% + 49% = 64%) of the foreign company’s participation rights.
Rooibos Ltd holds more than 10% of the participation rights and voting rights. It
would therefore be required to its proportional amount of the CFC’s net income in its
taxable income.
Step 4: The net income of the CFC is $2 850 000 according to the provisions of s 9D(2A).
The CFC is not high-taxed as the amount of foreign taxes paid (i.e. R5 540 400
($513 000 × R10,80)) in relation to the taxes that would have been paid had ABC
Plc been a South African resident (i.e. R8 656 875) is 64%, which does not meet the
75% requirement of further proviso (i)(aa) and (ii) of s 9D(2A). ABC Plc also does
not have a foreign business establishment and the CFC’s net income is therefore
not deemed to be Rnil.
Step 5: The amount to be included in Rooibos Ltd’s income is based on his participation
rights, i.e. 15%. The net income of $2 850 000 needs to be translated to rand using
the average exchange rate for ABC Plc’s foreign tax year ended 30 September
2015 of R10,80.
continued
820
Effect on Rooibos Ltd’s taxable income for the year of assessment ended 29 February 2016:
Foreign dividend (s 25D) ($285 000 x 11,45). ....................................................... R3 263 250
Less: s 10B(2)(a) exemption (owns more than 10% of the equity shares) ............. (R3 263 250)
Section 9D inclusion ($2 850 000 × 15% × R10,80) (note 1) ................................. R4 617 000
Taxable income (note 2) ........................................................................................ R4 4 617 000
Effect on Rooibos Ltd’s taxable income for the year of assessment ended 28 February 2017:
Rooibos Ltd has an interest in a foreign company. The provisions of s 9D should be considered.
Steps 1 – 3: ABC Plc is a CFC until 30 April 2016, as South African residents (Rooibos Ltd and
Jane Roberts) hold more than 50% (15% + 49% = 64%) of the foreign company’s
participation rights. Up to 1 May 2016, Rooibos Ltd held more than 10% of the
participation rights and voting rights. It would therefore be required to its propor-
tional amount of the CFC’s net income in its taxable income.
However, on 1 May 2016, ABC Plc ceases to be a CFC as Rooibos Ltd sold its 15%
participation rights to a non-resident. South African residents (i.e. Jane Roberts)
only hold 49% of the participation rights in ABC Plc from 1 May 2016.
Step 4: The net income of the CFC is $784 110 for the period 1 October 2015 to
30 April 2016 ($1 350 000 × 212/365 days (the number of days during which the
foreign company was a CFC in its foreign tax year)). The CFC is not high-taxed as
the amount of foreign taxes paid (i.e. R1 975 956 ($243 000 × 212/365 × R14)) in
relation to the taxes that would have been paid had ABC Plc been a South African
resident (i.e. R3 499 200) is 56%, which does not meet the 75% requirement of
further proviso (i)(aa) and (ii) of s 9D(2A). ABC Plc also does not have a foreign
business establishment and the CFC’s net income is therefore not deemed to be
Rnil.
Step 5: The amount to be included in Rooibos Ltd’s income is based on its participation
rights, i.e. 15%. The net income of $784 110 needs to be translated to rand using the
average exchange rate for ABC Plc’s foreign tax year ended 30 September 2016 of
R14.
The effect on Rooibos Ltd’s taxable income for the year of assessment ended 28 February 2017:
Section 9D inclusion ($784 110 × 15% × R14) (note 1) / (note 2) ......................... R1 646 631
Rooibos Ltd disposes of its interest in ABC Plc on 1 May 2016. The shares were purchased with
a capital intention and will be subject to the capital gains tax provisions of the Eighth Schedule.
As Rooibos Ltd had an interest of at least 10% in ABC Plc (it held 15%), its interest was held for a
period of at least 18 months (it acquired the interest in 2014 and disposed of it 19 months later)
and it disposed of it to a non-resident that is not a connected person (Offshore Plc) for an amount
equal to the market value of the investment, par 64B(1) of the Eighth Schedule provides that any
capital gain or loss that may arise should be disregarded in Rooibos Ltd’s normal tax calculation.
Notes
(1) Section 9D(6) determines that the net income of a CFC (as calculated in terms of s 9D(2A))
must be translated to rand using the average exchange rate for the CFC’s foreign tax year,
i.e. R10,80 for the 2016 year of assessment and R14 for the 2017 year of assessment.
(2) As Rooibos Ltd has a s 9D(2) inclusion in its taxable income, it will qualify for a s 6quat
rebate in respect of the portion of the foreign taxes paid by the CFC on the proportional
amount of the net income as contemplated in s 9D.
Implications for Jane Roberts when ABC Plc ceases to be a CFC
Please note that ABC Plc ceases to be a CFC upon the disposal of the shares by Rooibos Ltd as
South African residents do not hold more than 50% of its participation or voting rights (Jane
Roberts only holds 49%). Section 9H deems a CFC that ceases to be a CFC to have disposed of
all of its assets (with certain exclusions) for purposes of s 9D. However, because par 64B(1)
applies, there is no deemed disposal by ABC Plc and Rooibos Ltd will not have additional s 9D
consequences because of the sale of the shares (s 9H(5)).
21.8 Transfer pricing (s 31)

Transfer pricing refers to the process through which connected persons set the prices at which they
transfer goods or services between them. Taxpayers may use artificial pricing of transactions
between related persons to achieve certain tax benefits. These tax benefits would normally entail that
taxable profits are shifted from high tax jurisdictions to low tax jurisdictions by pricing transactions
differently to how they would have been priced between independent persons. Transfer pricing rules
aim to ensure that the tax implications of international transactions are based on arm’s length
principles in order to avoid opportunities to shift profits through artificial pricing.
821
Example 21.30. Basic principles of transfer pricing
SACo Ltd is a South African tax resident and is subject to normal tax in South Africa at 28%.
Sand LLC is a company incorporated and effectively managed in Dubai. SACo Ltd’s parent
company owns all the shares of Sand LLC. Sand LLC is not subject to corporate tax in Dubai.
The concept of transfer pricing can be illustrated by the following simple transactions between
SACo Ltd and Sand LLC:
l As the parent company owns the shares of SACo Ltd and Sand LLC, it may be indifferent in
which entity its profits ultimately accumulate. It will be beneficial from a tax perspective if
profits accumulate in Sand LLC, where it will not be subject to corporate tax, rather than in
SACo Ltd, where it will be subject to normal tax at 28%. In order to achieve this, the following
transactions can be undertaken between SACo Ltd and Sand LLC.
l Depending on the market and nature of SACo Ltd’s business activities, SACo Ltd could
supply its products to Sand LLC at a lower price than it would be able to sell the products
into the market. This will result in a lower taxable income in SACo Ltd’s hands. The profits on
the sale of the products will now realise in the hands of Sand LLC’s as Sand LLC purchased
the goods at an artificially low price and is able to sell it at the normal market price to
customers.
l Alternatively, Sand LLC may charge SACo Ltd excessive fees, for example management
fees. These fees would be deductible and thereby reduce SACo Ltd’s taxable income, which
will ultimately be taxed at 28%. The fees are included in the income of Sand LLC where it will
not be subject to corporate tax. A similar outcome can be achieved if SACo Ltd were to pay
Sand LLC excessive interest, royalties or prices for goods purchased from Sand LLC.
Transfer pricing rules aim to prevent taxpayers from determining their taxable income based on
the transactions, such as the ones above, that are artificially priced in an attempt to move profits
between related persons.
The South African transfer pricing provisions are contained in s 31. This provision was overhauled in
2012. The previous version of South Africa’s transfer pricing rules focused only on pricing of trans-
actions as opposed to the overall economic substance and commercial objectives of an arrange-
ment. Section 31 in its previous form was replaced in order to modernise the South African transfer
pricing rules in line with those of the OECD. The wording of the current transfer pricing rules is closely
aligned with the wording of Article 9 of the OECD and United Nations model tax conventions and, as
a result, also in line with South African tax treaties.
21.8.1 Basic principles
21.8.1.1 Transactions that are subject to transfer pricing in South Africa

The application of the transfer pricing rules should be considered for any transaction, operation,
scheme, agreement or understanding (collectively referred to as transactions in the remainder of this
discussion) that is an affected transaction.
A transaction will be an affected transaction if it has directly or indirectly been entered into between,
or for the benefit of, either or both of any one of the following sets of persons, where one person is
within the South African tax net and the other not (definition of ‘affected transaction’ in s 31(1)):
l a resident and a non-resident
l a non-resident and another non-resident’s permanent establishment in South Africa to which the
transaction relates
l a resident and another resident’s permanent establishment outside South Africa to which the
transaction relates
l a non-resident and any CFC in relation to any resident
who are connected persons (see chapter 13) in relation to each other. The connected person
requirement stems from the fact that it is unlikely that persons, who are not related parties, would be
willing to enter into transactions at artificial terms or conditions to obtain a tax benefit. It is clear from
these requirements that both transactions by resident and certain non-residents may be affected
transactions and therefore be subject to the transfer pricing provisions.
822
When determining whether two persons are connected in relation to each other
for purposes of applying the transfer pricing provisions to transactions involving
the granting of financial assistance or intellectual property, a lower threshold
Please note! must be used. A company will be treated as a connected person in relation to
another company in which it holds at least 20% of the equity shares and voting
rights, irrespective of whether any other person holds the majority of the voting
rights in the company or not (s 31(4)).
Such a transaction between these persons will be an affected transaction if any term or condition of
that transaction is different from any term or condition that would have existed had those persons
been independent persons dealing at arm’s length. The Act does not prescribe the methodology that
should be used to assess whether the terms or conditions of a transaction reflect those that would
have been agreed to between persons dealing at arm’s length. SARS and the National Treasury have
indicated that the OECD guidelines should be followed to make this determination.
The OECD published transfer pricing guidelines in 2010. According to these

guidelines, there are five methods which taxpayers can use to determine an
arm’s length price. These methods are:
l the comparable uncontrolled price method (CUP method)
l the resale price method
Please note! l the cost plus method
l the transactional net margin method (TNM method), or
l the transactional profit split method.
For further information on these methods, please consult the OECD Transfer
Pricing Guidelines for Multinational Enterprises and Tax Administrations, which
can be found on the OECD’s website.
The transfer pricing provisions only apply to an affected transaction as described above, if the term
or condition that is not at arm’s length and that caused the transaction to be an affected transaction,
results in a tax benefit for a party to the transaction. A tax benefit exists where any liability for tax
imposed in terms of the Act (normal tax and withholding taxes referred to in 21.5.2) has been
avoided, postponed or reduced. It is important to note that the determination as to whether a tax
benefit has been obtained by a person is limited to an assessment from a South African tax perspec-
tive. It is not an assessment that requires to global tax liability of the taxpayer to all governments to be
considered. A tax benefit will generally arise as a result of non-arm’s length terms or conditions, if
l these terms and conditions enabled a taxpayer to deduct a greater amount from its taxable
income than it would have been able to do had the transaction taken place at arm’s length terms
and conditions, or
l these terms and conditions resulted in a lesser amount accruing to or being received by the
taxpayer than would have been the case had the transaction taken place at arm’s length terms
and conditions.
21.8.1.2 Transfer pricing adjustments (ss 31(2) and 31(3))

A taxpayer who entered into an affected transaction and derived a tax benefit is required to make
certain adjustments when determining its tax liabilities.
Primary transfer pricing adjustment (s 31(2))

The first adjustment that a taxpayer, who derives a tax benefit from any term or condition of an
affected transaction that is not at arm’s length, must make is to its taxable income or the tax payable.
The taxable income or tax payable must be calculated as if that transaction had been entered into on
the terms and conditions that would have existed between independent person’s dealing at arm’s
length.
Secondary transfer pricing adjustment (s 31(3))

In addition to the direct tax effect, which is addressed by the primary transfer pricing adjustment, a
transaction that does not take place at arm’s length results in value being shifted between the
persons involved. If this value was shifted in a more conventional manner, this would have attracted
tax consequences. These tax consequences would not necessarily arise if the value shift is disguised
in the form of an artificially priced transaction. The secondary transfer pricing adjustments are aimed
at ensuring that these tax consequences arise on affected transactions.
823
The amount of the secondary adjustment is equal to the primary adjustment made for a transaction
between a resident, who derives a tax benefit, and any other person, who is either not a resident or
another resident’s permanent establishment outside South Africa. This amount must be deemed to be
l a dividend in the form of a distribution of an asset in specie declared and paid by the resident, if
the resident is a company, or
l a donation for purposes of donations tax, if the resident is not a company.
Example 21.31. Transfer pricing and adjustments

Transfer Ltd, a South African resident, sells goods to its French subsidiary for R200 000 on
15 January 2018. These goods cost the South African company R150 000 and had a market
value of R400 000 (considered to be an arm’s length price) at the time of the sale. Transfer Ltd’s
taxable income before taking the above transaction into account was R1 500 000. Transfer Ltd’s
year of assessment ends on 31 March 2018. Ignore the provisions of any double tax agreement.
Calculate the tax implications of this transaction for Transfer Ltd.
SOLUTION
Taxable income – given ............................................................................................ R1 500 000
Proceeds from sale ................................................................................................... R200 000
Section 31(2) adjustment (R400 000 – R200 000) .................................................... R200 000
R1 900 000
Less: Cost of sales .................................................................................................... (R150 000)
R1 750 000
The transaction is between Transfer Ltd (a resident) and its French subsidiary (a
non-resident). In terms of s 31(3), the primary adjustment of R200 000 in terms of
s 31(2) is deemed to be a dividend in specie declared and paid by Transfer Ltd.
Transfer Ltd will have to account for dividends tax on the deemed dividend in
specie.
Dividends tax on deemed dividend in specie of R200 000 at 20%. ......................... R40 000
The dividend in specie is deemed to have been paid and declared at the end of
six months after the year of assessment in respect of which the adjustment was
made. As the adjustment was made for the year of assessment ended
31 March 2018, the dividend in specie will be deemed to have been paid on
30 September 2018. In terms of the dividends tax provisions, Transfer Ltd will
have to pay the amount of R40 000 over to SARS by 31 October 2018. As this is
a deemed dividend in specie, the liability for the dividends tax is that of Transfer
Ltd. SARS states in the Comprehensive Guide to Dividends Tax that this deemed
dividend in specie does not qualify for treaty relief.
21.8.2 Thin capitalisation

Thin capitalisation, which is regarded as a type of transfer pricing, relates to the funding of a busi-
ness with a disproportionate degree of debt in relation to equity. This provides the foreign investor
with interest income, which may be exempt from tax (s 10(1)(h)), while at the same time conferring
upon the company incurring the interest a deduction of the interest payments on that debt (instead of
the non-deductible dividends paid on equity capital). Thin capitalisation provisions are applied to
limit the deductibility of interest on the excessive debt funds, thereby protecting the South African
economy against the distortions resulting from heavily geared foreign investments. The rules relating
to thin capitalisation from the past have been merged into the transfer pricing rules. The amount of
debt obtained by a South African resident from a foreign lender that is a connected person in relation
to the resident is viewed as one of the terms or conditions of the transaction that needs to be
assessed to establish whether the loan is an affected transaction.
The tax practice in the past of determining an allowable capital loan amount and interest rate on
inbound loans for thin capitalisation purposes, by using the 3:1 debt to equity safe harbour rule, is no
longer acceptable. More specifically, SARS issued a Draft Interpretation Note during 2013 where it
was suggested that inbound financial assistance must be considered in terms of a proper transfer
pricing analysis. The proposal is that inbound loans should be arm's length, from the perspective of
both the amount of the loan amount and the interest incurred by the borrower, in order to be accept-
able for South African income tax purposes. It was further suggested that the old safe harbour rules
can merely be used as a risk identification indicator. Unfortunately, SARS has not yet provided further
824
detailed guidance following this Interpretation Note to date (at the time that this publication was
printed).
Due to the fact that National Treasury regards the current methods that limit excessive interest
deductions as incomplete (including s 31), s 23M, which provides a formula that limits the amount of
interest that can be deducted in certain circumstances, was introduced. This section, however, is not
only limited to transactions between residents and non-residents. For a detailed discussion of s 23M,
refer to chapter 16.
Example 21.32. Thin capitalisation and adjustments

Thin Ltd, a South African resident, borrowed R1 500 000 from Foreign Plc (its foreign parent
company) on 1 March 2018. Interest is payable at 6% per year and Thin Ltd has a 31 December
year-end. You can assume that the interest complies with the requirements of s 24J and will be
deductible, where applicable.
Thin Ltd has determined that an arm’s length amount of debt is R1 000 000 and an arm’s length
rate of interest is 6% per year.
Determine the income tax implications of this transaction for Thin Ltd for its year of assessment
ended 31 December 2018.
SOLUTION
Interest paid by Thin Ltd (R1 500 000 × 6% × 306/366) ............................................ R75 245
Interest that should have been paid (R1 000 000 × 6% × 306/366) (note 1) ............ (R50 163)
Primary adjustment in terms of s 31(2) (note 2) ........................................................ R25 082
Secondary adjustment (note 3) ................................................................................. R5 016
Notes
(1) An arm’s length amount of debt is R1 0000 000 and not R1 500 000.
(2) Thin Ltd must effect a primary adjustment by not claiming a tax deduction for the interest of
R25 082 on the ‘disallowed’ portion of the debt (R500 000 × 6% × 306/366). This will
increase the company’s taxable income.
(3) Thin Ltd is a resident company that has made an adjustment of R25 082 to its taxable
income in terms of s 31(2). The R25 082 will be a deemed dividend in specie and Thin Ltd
will be liable for dividends tax of R5 016 thereon (R25 082 × 20%). This dividend in specie
will be deemed to have been declared and paid on 30 June 2019.
(4) The provisions of s 23M relating to the limitation of interest deductions in respect of debts
owed to persons not subject to tax (see chapter 23) should also be considered in these
circumstances.
21.8.3 Exceptions where transfer pricing rules do not apply
21.8.3.1 High-taxed CFC exemption (s 31(6))

An affected transaction between a South African resident and a controlled foreign company (CFC) in
which that South African resident has an interest will be subject to the transfer pricing provisions.
South African-based multinationals often provide assistance to offshore operations, especially during
the start-up phase of these operations. This assistance takes the form of soft-loans that function as
capital. It could also entail sharing of knowledge and intellectual property without compensation. This
assistance is not motivated by tax reasons. In order to facilitate the rendering of this assistance
without the hindrance of transfer pricing adjustments for the South African company, an exemption
from the transfer pricing provisions is available. This exemption applies where a resident grants the
right to use intellectual property or financial assistance to CFCs where all the following requirements
are met (s 31(6)):
l The CFC should be a CFC in relation to the South African resident or a company that forms part
of the same group of companies as the resident.
l The CFC should have a foreign business establishment (as defined for CFC purposes) (see
21.7.3.1).
l The CFC should be high-taxed in a similar manner as contemplated in the CFC exemption for
high-taxed entities (see 21.7.2.3).
As this exemption only applies to the granting of the right of use of intellectual property and financial
assistance, it only exempts interest and royalties that the resident charged (or should have charged)
825
to the high-taxed CFC from the transfer pricing provisions. Financial assistance also includes the
provision of security or guarantees (see definition of ‘financial assistance’ in s 31(1)). Guarantee fees
and similar charges should also qualify for the exemption.
It is not a complete exemption from transfer pricing for all transactions between the resident and the
high-taxed CFC. Other services and transactions involving goods between the South African com-
pany and its CFC are still subject to the transfer pricing provisions.
Example 21.33. Transfer pricing and high-taxed CFCs
Capital Ltd, a South African resident, owns 25% of the equity shares in Thin Plc, a CFC located in
the UK. Thin Plc has a foreign business establishment.
During the year ended 31 December 2018, Capital Ltd had advanced a loan of R2 000 000 to
Thin Plc to assist the CFC in its business operations. The loan is interest-free and no amount has
yet been repaid by Thin Plc. The Commissioner has indicated that 6% is considered to be a
market-related interest rate.
Thin Plc had paid foreign taxes of R22 000 on its income in the UK. If Thin Plc had been a South
African resident, it would have paid taxes of R28 000 on its income.
Determine whether the transfer pricing provisions in s 31 are applicable to this transaction.
SOLUTION
The loan from Capital Ltd to Thin Plc constitutes financial assistance. It is also an affected trans-
action for purposes of s 31 as the following requirements are met:
l the transaction is between a South African resident and a non-resident
l the parties are connected persons to each other (Capital Ltd holds 25% of the equity shares
in Thin Plc, which exceeds 20%)
l the transaction is not at an arm’s length as no interest is levied on the loan.
However, the transaction is between Capital Ltd and Thin Plc, who is a CFC in relation to the SA
resident, the transaction comprises the granting of financial assistance, Thin Plc has a foreign
business establishment in the UK and Thin Plc is high taxed (R22 000/R28 000 = 78,6%, which
exceeds the required 75%).
Therefore, the transfer pricing provisions will not apply to this transaction and Capital Ltd will not
have to adjust its taxable income to reflect a market-related interest rate (s 31(6)).
21.8.3.2 Equity loan exemption (s 31(7))

South African companies may wish to fund foreign subsidiaries, other than high-taxed CFCs, as
discussed above, without charging interest. A company will provide this funding in the form of an
equity loan (also known as quasi equity). This type of loan is generally more similar to equity than
debt in the sense that it may be deeply subordinated, could have flexible repayment terms (if any) or
would often be unsecured. The reasons for advancing this type of funding are normally not tax
related. If this form of financial arrangement exists between a South African resident and a foreign
connected person of the resident, the transfer pricing provisions will apply. The effect is that the
South African resident would be required to include the interest income that it would have charged
had these funds been advanced to an independent person, which is unlikely to have happened in the
first place, in its taxable income. In order to prevent transfer pricing considerations from obstructing
South African residents to advance this form of capital, an exemption from the transfer pricing
provisions exist.
This exemption applies where all the following requirements are met (s 31(7)):
l A transaction has been entered into between
– a resident company or any company that forms part of the same group of companies as that
resident company, and
– a foreign company in which the resident company (alone or together with any company that
forms part of the same group of companies) directly or indirectly holds at least 10% of the
equity shares and voting rights.
l The transaction constitutes a debt owed by that foreign company to the resident company (or any
company that forms part of the same group of companies as that resident company).
l The foreign company is not obligated to redeem that debt in full within 30 years from the date on
which the debt was incurred.
826
l The redemption of the debt in full is conditional upon the market value of the assets of the foreign
company not being less than its liabilities.
l No interest accrued in respect of the debt during the year of assessment.
21.8.4 Compliance and reporting requirements

A taxpayer who entered into an affected transaction is required to make the adjustments referred to
in 21.8.1.2 without any intervention by SARS. The Tax Administration Act places the burden on a
taxpayer to prove that an amount is deductible or that a valuation is correct (ss 102(1)(b) and (e) of
the Tax Administration Act). This is of particular importance in the context of transfer pricing where
the taxpayer should be able to demonstrate that no adjustment was required or that the adjustment
made by it was correct.
Until recently South Africa did not have prescribed transfer pricing documentation requirements. The
requirement to keep documents was only governed by the general requirements of the Tax Adminis-
tration Act (s 29(1) of the Tax Administration Act). A taxpayer is required to keep records, books of
account and documentation to enable it to observe the requirements of any tax Act and enable SARS
to be satisfied that these requirements have been observed. In the context of transfer pricing, this
would be documentation to enable it to comply with s 31 and satisfy SARS of this compliance.
Towards the end of 2016, SARS issued a public notice (Public Notice No 1334 in Government
Gazette 40375) that applies to taxpayers who enter into transactions that may potentially be affected
transactions. In determining whether transactions are potentially affected transactions, the taxpayer
must disregard the requirement relating to the arm’s length terms and conditions of the transaction in
the definition of affected transaction (see 21.8.1.1). A potentially affected transaction is therefore one
that is entered into between two persons listed in the definition of ‘affected transaction’ who are
connected persons in relation to each other. The notice prescribes specific documentation that must
be kept by persons whose aggregate of potentially affected transactions for a year of assessment
exceeds, or is reasonably expected to exceed, R100 million. These persons are required to keep
specified information about their group structures and business operations. They are furthermore
required to keep prescribed documentation detailing the terms and conditions of potentially affected
transactions that exceed or can reasonably be expected to exceed R5 million in value. Persons not
within the scope of these requirements must keep records, books of account or documents to enable
it to ensure and satisfy SARS that its potentially affected transactions are conducted at arm’s length.
One of the OECD/G20 BEPS Project proposals relates to requirements for multinational taxpayers to
report certain information on a country-by-country basis to tax authorities. This is commonly referred
to as country-by-country reporting (CbC reporting). This information is intended to enhance trans-
parency and enable tax authorities to assess transfer pricing and other BEPS risks at a high level.
SARS published a public notice (Public Notice No 1117 in GG41186) that requires the submission of
country-by-country information, master files and local files for financial years commencing on or after
1 January 2016.
21.9 Special cross-border tax regimes in South Africa

Many countries have implemented tax concessions or incentives to attract investment to their shores.
The mechanisms used include allowing tax holidays in certain industries or for new investors (for
example, not imposing tax on farming operations in which foreign investors have invested funds for a
specified number of years), taxing profits at lower rates or allowing accelerated tax allowances (for
example, patent box regimes aimed at attracting research and development activities). This section
of the chapter considers the special cross-border tax regimes available in South Africa to attract
foreign investment. At present, the only such special regime in South Africa is the headquarter
company regime.
21.9.1 Headquarter company regime

During 2010 the South African government identified the fact that South Africa may be a natural
holding company gateway for investment into Africa due to its location, sizable economy, political
stability at the time and overall strength in financial services as well as its extensive treaty network.
The headquarter company tax incentive was introduced to ensure that the tax system did not act as a
barrier to the country’s attractiveness as a regional headquarter location.
827
Remember
Interpretation Note No 87 deals with the headquarter company regime extensively. This is a
useful resource to consult for any persons interested in using the concession or who are other-
wise affected by it.
The headquarter company regime is an elective regime that relaxes the requirements of the tax laws
in respect of certain South African companies used by foreign investors as investment vehicles into
other countries (ss 9I(1) and s 9I(3)). In addition to the tax concession, foreign exchange control
regulations are also relaxed for headquarter companies.
In brief terms, a headquarter company is one that meets all the following requirements:
l The company must be tax resident in South Africa (see chapter 3) (s 9I(1)(a)).
l For the duration of a year of assessment, each shareholder in the company (alone or with com-
panies that form part of the same group of companies) held at least 10% of the equity shares and
voting rights in that company (s 9I(2)(a)).
l At the end of a year of assessment and all previous years of assessment, at least 80% of the cost
of the total assets of the company was attributable to equity shares in, debts owed by or
intellectual property licensed to any foreign company in which that company held at least 10% of
the equity shares and voting rights (s 9I(2)(b)).
l If the gross income of the company for the year of assessment exceeded R5 million, at least 50%
of that gross income consisted of
– rental, dividend, interest, royalty or service fees paid or payable by a foreign company in which
that company held at least 10% of the equity shares and voting rights
– proceeds from the disposal of any interest in the equity shares of the foreign company in which
it held at least 10% of the equity shares and voting rights or intellectual property licensed to
this company.
The following tax concessions have been made for headquarter companies:
l The CFC rules, as discussed in 21.7, do not apply to participation rights in CFCs held by head-
quarter companies (s 9D(2)).
l Certain concessions exist for interest and royalties in respect of financial assistance and licensing
of intellectual property to the headquarter company, if the headquarter company applies the
financial assistance or grants the right of use to foreign companies in which it held at least 10% of
the equity shares and voting rights (back-to-back transactions). No withholding taxes, as contem-
plated in 21.5.2.4 or 21.5.2.5, apply to the royalties or interest paid to a foreign person by a
headquarter company (ss 49D(c) and 50D(1)(a)(i)(cc)). These back-to-back transactions are also
not subject to transfer pricing in South Africa (s 31(5)). The deduction of interest and royalties
incurred by the headquarter company towards foreign shareholders is, however, limited to the
amounts that the headquarter company receives in terms of the pass-through transactions
(s 20C).
l Dividends paid by headquarter companies are not subject to dividends tax (s 64E(1)). These divi-
dends are taxed in the same way as foreign dividends in the hands of a resident who received it
(s 10B(1)).
l The requirements for the participation exemption are relaxed in respect of capital gains tax on the
disposal of the shares of foreign companies in which a headquarter company held at least 10%
of the equity shares and voting rights (par 64B(2) of the Eighth Schedule). Returns of capital
received from these companies must similarly be disregarded for purposes of capital gains tax
(par 64B(4) of the Eighth Schedule).
l The headquarter company is afforded some of flexibility when it comes to the translation of
foreign currency amounts to rand (ss 24I(3), 25D(4) and 25D(7) as well as par 43(7) of the Eighth
Schedule).
A headquarter company is, however, subject to normal tax in South Africa on any taxable income that
it may have left after the above concessions have been applied. The taxation of headquarter com-
panies is similar to any other resident company, as discussed in 21.6. A number of anti-avoidance
rules specifically apply in respect of headquarter companies. These include tax consequences when
a company becomes a headquarter company (s 9H(3)) and the fact that it does not qualify for relief
in terms of the corporate rules, as discussed in chapter 20.
It appears as if the regime has failed to get much uptake in practice to date.
828
22 Farming operations
Alta Koekemoer and Marese Lombard

l identify when a person is farming and what constitutes farming income
l calculate the taxable income of a farmer in accordance with s 26 of the Income Tax
Act and the provisions of the First Schedule
l apply the special provisions of the First Schedule relating to livestock of a farmer
l apply the special provisions of the First Schedule and the Income Tax Act relating
to the capital expenditure of a farmer
l calculate the taxable income of a farmer using the special drought provisions
available in par 13 of the First Schedule
l calculate the tax payable by a plantation farmer using par 15 of the First Schedule
l calculate the tax payable by a sugar cane farmer using par 17 of the First Schedule
l calculate the tax payable by a farmer using average rating formula of par 19 of the
First Schedule
l calculate the taxable income of a farmer in the event of his death or his other ces-
sation of farming activities.
Contents
Page
22.1 Overview ......................................................................................................................... 830
22.2 Framework for the calculation of taxable income of a farmer ........................................ 830
22.3 Meaning of ‘farming operations’ (s 26) ........................................................................... 832
22.4 Subsidies (par 12(1)) ...................................................................................................... 833
22.5 Livestock and produce (par 2 to 11) .............................................................................. 833
22.5.1 Valuation of livestock and produce (paras 5,6 and 9)..................................... 834
22.5.2 Livestock ring-fencing provision (par 8) .......................................................... 836
22.5.3 Recoupment (par 11) ....................................................................................... 837
22.6 Farming expenditure and allowances (s 11(a) and 17A, and par 12) ........................... 838
22.7 Development expenditure (par 12 of the First Schedule and par 20
of the Eighth Schedule) .................................................................................................. 839
22.7.1 Recoupment of development expenditure ...................................................... 841
22.7.2 Purchase and sale of a farm ............................................................................ 842
22.8 Section 12B: ‘50/30/20’ allowance ................................................................................. 842
22.9 Average rating formula (par 19) ..................................................................................... 844
22.9.1 Who may make the election? ........................................................................... 845
22.10 Cessation of farming (s 26) ............................................................................................ 846
22.11 Commencement or recommencement of farming ......................................................... 848
22.12 Death of a farmer ............................................................................................................ 848
22.13 Partnerships .................................................................................................................... 849
22.14 Cessation of farming on sale of land to the state (par 20) ............................................. 849
22.15 Drought, stock disease, damage to grazing by fire or plague,
and livestock-reduction schemes (paras 13 and 13A) .................................................. 851
829
Page
22.16 Plantation farmers (paras 14 to 16) ................................................................................ 851
22.16.1 Plantation farmers: Rating formula (par 15) ..................................................... 853
22.17 Sugar cane farmers: Disposal of sugar cane damaged by fire (par 17) ....................... 855
22.18 Game farmers ................................................................................................................. 855
22.19 Capital gains tax (Eighth Schedule) ............................................................................... 856
22.20 Detailed examples calculating taxation payable by farmers ......................................... 857
22.1 Overview
A person carrying on pastoral, agricultural or other farming operations will be regarded as carrying
on ‘farming operations’. Persons carrying on farming operations are taxed in accordance with the
ordinary provisions of the Act, but the calculation will be subject to the First Schedule (s 26(1)). The
First Schedule contains some provisions that are specifically aimed at persons carrying on farming
operations. The First Schedule is applicable even when a taxpayer discontinues farming operations
(s 26(2)).
Apart from these special provisions, farmers are subject to tax in the same way as other taxpayers.
Their taxable income from the carrying on of farming operations is then included with their income
from other sources to determine their taxable income for the year of assessment.
A loss arising from the operation of pastoral, agricultural or other farming operations may be taken
into account in the calculation of an assessed loss (s 20). All natural persons carrying on farming
operations are provisional taxpayers.
The interaction between s 26 of the Act and the First Schedule is illustrated in Figure 22.1.
Person deriving income from ‘farming operations’
Taxable income from ‘farming operations’ is calculated

in the same manner any other person’s taxable income
(in terms of the Income Tax Act) but it is subject to the
provisions of the First Schedule.
Income and expenditure not relating to ‘farming

operations’ are recorded in the same return, but have to
be shown separately.
Figure 22.1: The interaction between the main Act and the First Schedule
Except where otherwise stated, references to paragraphs in this chapter are references to para-
graphs of the First Schedule.
22.2 Framework for the calculation of the taxable income of a farmer

Income
Sales: Produce (see 22.5) ............................................................................................... Rxxx
Livestock (see 22.5) .............................................................................................. xxx
Forced sales: Drought (see 22.15)–
l Tax in year of sale – par 13
l Tax in Year 6 or on withdrawal – par 13A
Private consumption at cost (if not available, then market value) (see 22.5.3) ................................... xxx
Donations at market value (see 22.5.3) ............................................................................................... xxx
Employees’ rations at market value (see 22.5.3) ................................................................................. xxx
Subsidies (see 22.4) ............................................................................................................................ xxx
Recoupments: Only s 8(4) recoupments (see 22.8)
Claimed under ss 11(e) and 12B (50/30/20) (see 22.8) ........................................ xxx
Total farming income for par 8 purposes ............................................................................................. Rxxx
Closing stock: Produce at market value (excluding standing crops and wool on sheep)
(see 22.5.1) ........................................................................................................... xxx
Livestock at standard values (see 22.5.1) ............................................................ xxx
Note: No consumables and spares!
continued
830
22.2 Chapter 22: Farming operations
Total farming income after closing stock ............................................................................................. Rxxx

Less: Total farming expenses .............................................................................................................. (xxx)
Expenses
Opening stock: Produce at market value (excluding standing crops and wool on sheep)
(see 22.5.1) .......................................................................................................... (xxx)
Livestock at standard values (see 22.5.1) ............................................................ (xxx)
Inheritance/Donation at market value (see 22.5.3) ............................................... (xxx)
Purchases: Livestock (par 8): Tests 1 and 2 (see 22.5.2)........................................................ (xxx)
l Test 1: Total farming income – see 22.5.1 ........................................ Rxxx
Plus: Closing stock at standard value .................................. xxx
Less: Opening stock at value per par 4 ............................... (xx)
Deduction limited to .............................................................. Rxxx
Carry excess over to Test 2
l Test 2: Excess after Test 1 ............................................................... Rxxx
Plus: Opening stock at value per par 4 ................................ xx
Less: Closing stock at market value ..................................... (xx)
Further deduction .................................................................. Rxxx
Carry excess over to next year
(Purchases: Drought (Forced sale) – Include at par 8 test above) (see 22.15)
Year of sale
Choice:
Year of purchases
(see 22.15 for the detail of the above choice)
General farming expenses (see 22.6) ................................................................................................. (Rxxx)
l Feed purchased
l Seeds and fertiliser
l Veterinary expenses
l Wages
l Employer’s contributions to retirement funds and medical funds
l Salaries
l Employees’ rations at market value
Capital allowances (see 22.8):
Section 11(e): Wear-and-tear allowance ...................................................................................... (xxx)
Binding ruling 7: Rates
Vehicles used to transport people
Office equipment
Section 12B: 50/30/20 capital allowance ................................................................................... (xxx)
Machinery, implements, articles used by the farmer in the carrying
on of farming operations
Net farming income ............................................................................................................................. xxx
Plus: Capital gain on farming assets (see 22.19) ................................................................................ xxx
Less: Capital development expenses (see 22.7)
Par 12(1)(a) and (b): Soil erosion ................................................................................................ (xx)
Noxious .............................................................................................. Rxx (xx)
(Can create a loss)
Par 12(1)(c) to (i): Development expenditure:
Balance forward (previous year disallowed) ..................................... xx
Less: Par 12 – Recoupments in current year .................................. (xx)
Deduct: net balance carried forward/ add net recoupment .............. (xx)
Less: Current year expenditure
Fences ................................................................................... xx
Irrigation scheme................................................................... xx
Roads .................................................................................... xx
Dipping tanks ........................................................................ xx
Trees ...................................................................................... xx
Electric power........................................................................ xx
xx
Limited to net farming income before this deduction .................................................................. (xx) (xx)
Taxable farming income ......................................................................................................................... Rxxx
continued
831
Tax calculation
Taxable farming income ......................................................................................................................... Rxx
Other income: Salary ....................................................................................................................... xx
Pension .................................................................................................................... xx
Lump sums .............................................................................................................. xx
Interest ..................................................................................................................... xx
Rent .......................................................................................................................... xx
Rxx
Exemptions: Interest (s 10(1)(i)(xv) – natural persons) (see chapter 8) ....................................... (xx)
Rxx
Deductions: Pension, Provident & Retirement annuity funds contributions (see chapter 7) ........ (xx)
................................................................................................................................. (xx)
Plus: Capital gain on non-farming assets (see 22.19) ............................................................................ xxx
Deductions: Donations to Public Benefit Organisations (see chapter 7) .................................... (xx)
Total taxable income .............................................................................................................................. Rxxx
Note 1
Paragraph 12(3) is not clear whether any taxable capital gain from the disposal of farming assets
should be included in ‘net farming income’ for the purpose of the par 12 limitation.
22.3 Meaning of ‘farming operations’ (s 26)

The special provisions of the First Schedule only apply when the taxpayer is carrying on farming
operations (s 26(1)).
There is no definition of the expression ‘farming operations’ in the Act. The question whether a person
is carrying on farming operations is one of fact.
In ITC 1319, Smalberger J stated (at 264):
It seems . . . that before a person can be said to carry on farming operations there must be a genuine inten-
tion to farm, coupled with a reasonable prospect that an ultimate profit will be derived . . .
There must be a direct connection between the farming operations and the income under considera-
tion. If a farmer invests surplus funds, even funds derived from farming operations, the interest re-
ceived on the investment would not usually be regarded as income derived from farming operations.
If the interest received forms part of a purchase price (for example interest levied on the late payment
for the purchase of livestock), it will constitute farming income.
In ITC 586, a taxpayer acquired cattle and grazed them on a farm for periods varying between six
weeks and six months before selling them. The Special Court drew a distinction between this type of
farming operation and the business of a speculator in livestock. The taxpayer was carrying on farm-
ing operations and the taxpayer was not merely speculating with livestock.
In practice, grazing fees are regarded as having been derived from farming operations.
The letting of a farm for a cash rental is not the carrying on of a farming operation, because the rental
a lessor receives is not derived from farming operations but from the ownership of the land. If, how-
ever, the income derived from the rental is a percentage of farming income, this income would consti-
tute farming income for the lessor. A farmer engaged in the breeding of thoroughbred horses is
considered to be carrying on farming operations but the business of horse-racing is not a farming
operation.
The wording ‘farming operations’ includes only activities connected with what
a farmer derives from his land. He need not be the owner of the land, but he
Please note! must enjoy a right to it and its yield. Only then is he a farmer for the purposes
of the First Schedule.
Taxable income derived from ‘farming operations’

The phrase ‘taxable income derived from farming operations’ requires that the taxable income refer-
red to must arise or accrue directly from farming operations (s26(1)). There must be a direct connec-
tion between the income and the farming operations.
Taxable income derived from farming operations include:
l Livestock and produce taken into account in the determination of taxable income.
832
22.3–22.5 Chapter 22: Farming operations
l Deemed recoupments included in a farmer’s income in terms of par 12(1C).

l The amount of any excess development expenditure that is added back to farming income under
par 12(3).
l The income of a farmer who carries on a manufacturing process and uses mainly his own farming
produce as the raw materials in the manufacturing process.
l The value of livestock or produce that the farmer lets in terms of a sheep lease or similar agree-
ment. This will also include proceeds derived from the outright disposal by the farmer of livestock
or produce subject to such an agreement.
l A farmer who has discontinued farming operations but retained possession of livestock or pro-
duce and let it in return for a cash rental or under a sheep lease (s 26(2) and par 3(2),(3)). (The
livestock or produce must continue to be brought into account in terms of the First Schedule. The
rentals received would not form part of taxable income derived from farming operations.)
Items not included in taxable income derived from farming operations are:
l Rentals received from the letting of farming assets, because it is not received due to any farming
operation carried on but by virtue of the farmer’s ownership of the land or the farming assets.
l Rentals received from the letting of livestock, since the letting of animals is not ordinarily a farm-
ing operation.
l The manufacturing income of a farmer who is carrying on two distinct trades, namely farming and
manufacturing. Separate statements of comprehensive income for his farming operations and his
manufacturing business must be drawn up. The farming product is to be charged to the manu-
facturing department at a current market price as if the two departments were conducted by two
distinct taxpayers. In this way, the farmer may return a taxable income derived from farming opera-
tions and may therefore claim the allowances for expenditure on development and improvements.
22.4 Subsidies (par 12(1))

An amount received by or accrued to a farmer by way of a grant or subsidy in respect of
l soil-erosion works referred to in s 17A(1), or
l expenditure on farming development and improvements referred to in par 12(1)(a) to (i)
will be included in the farmer’s gross income by virtue of par (l ) of the definition of ‘gross income’ in
s 1. For example, a subsidy received by a farmer on the cost of the construction of a dam would be
included in his gross income.
If a subsidy in respect of interest is received or accrued by a farmer, it will form part of gross income
of the farmer.
Subsidies received for farming products produced or exported constitute taxable income derived
from farming operations. In practice, the SARS regards subsidies received for the construction of
capital works as constituting taxable income derived from farming operations. The subsidy is taxed in
the year of its receipt or accrual even though the capital expenditure to which it relates has not yet
been deducted.
22.5 Livestock and produce (par 2 to 11)

The value of all opening stock (livestock and produce) held and not disposed of at the beginning and
end of each year of assessment must be included in a farmer’s tax return (par 2).
The value of closing stock (livestock or produce) at the end of the year of assessment must be in-
cluded in income for that year of assessment. This amount is deemed to be the value of his opening
stock for the following year (par 4(1)(a)(i)). The value of opening stock (livestock and produce) at the
beginning of the year of assessment will be allowed as a deduction from income in that year
(par 3(1)).
All livestock and produce used by a farmer in his farming operations are regarded as non-capital in
nature, irrespective of the purpose for which they may have been acquired. All livestock acquired by
a farmer will therefore be regarded as non-capital in nature and will be included in livestock. This will
be the case even though livestock is acquired as a capital asset (such as cows for a dairy farmer)
that is not held for resale. The purchase of the livestock would therefore be deductible in terms of
s 11(a), subject, however, to the ‘livestock ring-fencing provisions’ (par 8 see 22.5.2). Any proceeds on
a subsequent disposal, even if realised on the abandonment of farming operations, would be taxable.
833
Livestock that is held by the farmer purely for private or domestic purposes, which does not form part
of his farming operations, will not be included in opening and closing stock.
Consumable stores on hand at the end of the year of assessment are not required to be included in
taxable income. Stocks of fuel, spare parts for equipment and machinery, spraying materials, fertil-
izers, packing materials and other stores that cannot be regarded as produce are not included in
closing stock.
The word ‘produce’ is not defined in the Act. Crops that have not reached the stage of being con-
verted into produce having a saleable or marketable value (growing crops) cannot be regarded as
‘produce held’. Only produce that has been harvested and is marketable needs to be included in the
return. Growing crops and wool on the sheep’s back need not be included in the value of closing
stock.
Both a farmer’s own produce and produce acquired from others for farming purposes are included in
‘produce’. In practice, a farmer is required to bring into account all produce on hand at the end of the
year of assessment. This can include produce grown or produced by him or acquired from other
farmers for the purpose of feeding his livestock or supplementing his own stocks of produce avail-
able for sale.
The lessor of a sheep lease or similar agreement must treat the livestock or produce as his stock for
as long as the agreement continues to be in force. This will be the case even though ownership is
effectively transferred to the lessee (par 3(3)).
Natural increases in livestock during a year of assessment are automatically brought to account,
since the proceeds are included in income if sold during the year of assessment. Or, if they are not
sold, their value is included in the closing stock on hand at the end of the year.
Livestock losses due to the death or theft of animals during a year of assessment are excluded from
closing stock and therefore excluded from the income of a farmer.
Section 22 (see chapter 14) applies to the trading stock of ordinary traders, but
Please note! does not apply to farmers. Farmers have only two types of stock: ‘livestock’ and
‘produce’.
22.5.1 Valuation of livestock and produce (paras 5,6 and 9)

Closing stock of livestock will be valued at standard values applicable to that livestock (par 5(1)).
Legislation requires the valuation to be included at standard values even though they are substantial-
ly lower than the market values of livestock. If no standard value is provided for a specific specie, it is
deemed that the closing value of the livestock is nil.
The standard value of any class of livestock of a farmer is either
l the standard value fixed for that class of livestock by regulation under the Act, or
l any other standard value adopted by the farmer when including a particular class of livestock in
his income for the first time (par 6(1)(b), (c) and (d)).
The standard value adopted by a farmer that is not fixed by regulation may not be more than 20%
higher or lower than the standard value fixed by regulation for livestock of the relevant class.
Once a farmer adopts a value for a particular class of livestock, he is prohibited from altering that
value at a later date.
The value to be placed upon closing stock of produce included in any return is a fair and reasonable
value of the produce (par 9). In practice, SARS requires that produce be valued at the lower of its
average cost of production or market value. The average cost of production is based on the farmer’s
actual costs, excluding the cost of purchases of livestock and expenditure on development and
improvements. This basis would also apply to produce purchased from outside sources.
When a farmer acquires livestock or produce during a year of assessment by way of donation or
inheritance, it will have the following effect on opening stock:
l The market value of that livestock or produce is added to his opening stock. This rule applies
whether the farmer carried on farming in the previous year of assessment or commenced or rec-
ommenced farming operations during the current year (par 4(1)(a) and (b)). In practice, SARS
applies this provision only when the livestock or produce received by way of donation or inher-
itance is used or held for the purpose of farming.
834
l The proceeds of the disposal of such livestock or produce will be of a capital nature if it is imme-
diately disposed of and not used for the purpose of farming. There would then also be no open-
ing stock. (There may be a CGT implication.)
l Should a farmer merge the livestock or produce so acquired into his general farming activities,
the proceeds arising on the sale of that livestock or produce will be included in his income. If it is
unsold at the end of the year, its standard value will be included in his closing stock.
The standard values fixed by regulation are as follows:
Standard
Classification Values
R
Cattle –
Bulls ................................................................................................................................................... 50
Oxen .................................................................................................................................................. 40
Cows .................................................................................................................................................. 40
Tollies and heifers –
Two to three years .............................................................................................................................. 30
One to two years ................................................................................................................................ 14
Calves ................................................................................................................................................ 4
Sheep –
Wethers .............................................................................................................................................. 6
Rams .................................................................................................................................................. 6
Ewes .................................................................................................................................................. 6
Weaned lambs ................................................................................................................................... 2
Goats –
Fully grown ......................................................................................................................................... 4
Weaned kids ...................................................................................................................................... 2
Horses –
Stallions, over four years .................................................................................................................... 40
Mares, over four years ....................................................................................................................... 30
Geldings, over three years ................................................................................................................. 30
Colts and fillies, three years ............................................................................................................... 10
Colts and fillies, two years.................................................................................................................. 8
Colts and fillies, one year ................................................................................................................... 6
Foals, under one year ........................................................................................................................ 2
Donkeys –
Jacks, over three years ...................................................................................................................... 4
Jacks, under three years ................................................................................................................... 2
Jennies, over three years ................................................................................................................... 4
Jennies, under three years................................................................................................................. 2
Mules –
Four years and over ........................................................................................................................... 30
Three years ........................................................................................................................................ 20
Two years ........................................................................................................................................... 14
One year ............................................................................................................................................ 6
Ostriches, fully grown ............................................................................................................................ 6
Pigs –
Over six months ................................................................................................................................. 12
Under six months (weaned) ............................................................................................................... 6
Poultry, over nine months ...................................................................................................................... 1
Chinchillas, all ages .............................................................................................................................. 1
Example 22.1. Livestock and produce

A cattle farmer has adopted the following standard values for the various classes of cattle on his
farm:
Bulls ........................................................................................................................ R60 each
Oxen ....................................................................................................................... R35 each
Cows ....................................................................................................................... R35 each
Tollies and heifers (over one year and under two years) ........................................ R12 each
Calves (under one year) ......................................................................................... R4 each
The number of livestock on hand on the last day of February Year 1 was as follows:
Year 1
Bulls ................................................................................... 7
Oxen .................................................................................. 8
Cows .................................................................................. 350
Tollies and heifers .............................................................. 380
Calves ................................................................................ 180
Calculate the value of livestock on hand at the end of Year 1.
835
SOLUTION
The value of livestock on hand at the end of Year 1 is calculated as:
7 bulls at standard value R60 .......................................................................................... R420
8 oxen at standard value R35 .......................................................................................... 280
350 cows at standard value R35 ..................................................................................... 12 250
380 tollies and heifers at standard value R12 .................................................................. 4 560
180 calves at standard value R4 ..................................................................................... 720
Value of livestock on hand at the end of Year 1............................................................... R18 230
This value must be included in income at the end of Year 1 and is deemed to be the value of
opening stock in Year 2.
22.5.2 Livestock ring-fencing provision (par 8)

A farmer’s cost of his purchases of livestock is deductible for tax purposes (s11(a)) but the deduction
might be limited. This prevents farmers from creating a large farming loss with the purchase of live-
stock. This is due to the fact that closing stock is included at standard values at year-end while the
deduction allowed for the purchase is at acquisition cost, which is generally much higher (s 11(a)).
The value of the closing stock included in taxable income is therefore substantially lower than the
deduction of the purchase costs (market values) and can potentially create a large farming loss.
The limit contained in par 8 consists of two parts and can be illustrated as follows:
Part 1: Limits the amount that is allowed as a deduction, to (par 8(1)):
Farming income for the year ................................................................................................... Rxxx
Add: Closing stock @ standard values ................................................................................... xxx
Less: Opening stock @ value per par 4 .................................................................................. (xxx)
Expenditure deductible – s 11(a) ............................................................................................ Rxxx
Part 2: Allows a further deduction (par 8(3)) if the market value of the closing stock ex-
ceeds the sum of the disallowed portion (of part 1) and the opening stock at standard
value.
Expenditure disallowed (purchase cost less part 1 limit) – s 11(a)......................................... Rxxx
Add: Opening stock @ value per par 4 ................................................................................... xxx
Less: Closing stock @ market value........................................................................................ (xxx)
Additional expenditure allowed............................................................................................... Rxxx
A further deduction in terms of part 2 is available only when there was a reduction in the market
value of closing stock
Opening stock of livestock is defined in par 4 and will therefore also include the market value of
livestock inherited or donated as well as the market value of livestock on hand when you commence
farming. See 22.5.1.
An amount that is disallowed under this provision is carried forward and deemed to be expenditure
incurred by the farmer on the acquisition of livestock during the next year of assessment (par 8(2)).
The limitation will not apply to the cost of livestock that is no longer held and not disposed of by him at
the end of the year of assessment (s 8(3)(a)). A farmer who disposed or lost his entire herd will therefore
be unaffected by the limitation.
This limitation on the deduction of the cost of livestock purchases is based upon a farmer’s income
derived from farming. The term ‘income’ represents
l the farmer’s gross income from all farming activities (which would exclude receipts and accruals
of a capital nature or from a foreign source)
l less any exempt income associated with farming, and
l before any expenses, whether allowable or not.
836
Example 22.2. Livestock and produce: Ring-fencing provision

A farmer had the following livestock on hand at the beginning of the year of assessment.
10 bulls at standard value R50 each ...................................................................... R500
25 oxen at standard value R40 each ...................................................................... 1 000
1 200 cows at standard value R40 each ..................................................................... 48 000
600 tollies and heifers at standard value R30 each ................................................. 18 000
140 calves at standard value R4 each ..................................................................... 560
R68 060
He bought a further 300 cows during the year at a cost of R220 000. He derived an income from
farming operations (before the deduction of any expenditure) of R55 000 during the year. He had
the following livestock on hand at the end of the year of assessment:
9 bulls at standard value R50 each ............................................................................... R450
23 oxen at standard value R40 each ............................................................................. 920
1 400 cows at standard value R40 each........................................................................ 56 000
500 tollies and heifers at standard value R30 each ....................................................... 15 000
220 calves at standard value R4 each........................................................................... 880
R73 250
All the livestock bought during the year was still on hand at the end of the year. The market value
of the livestock on hand at the end of the year of assessment was R1 million.
Calculate the deduction he will be allowed under s 11(a) for the cows bought during the year of
assessment.
SOLUTION
The deduction for cows bought is limited to an amount determined as follows in terms of par 8:
Farming income + standard value of closing stock of livestock – standard value of opening stock
of livestock
= R55 000 + R73 250 – R68 060
= R60 190
Consequently, the excess of R159 810 (R220 000 – R60 190) may not be deducted in the current
year. However, the ring-fencing provision does not apply to so much of the amount of R159 810
as, together with the standard value of livestock on hand at the beginning of the year of assess-
ment (R68 060), exceeds the market value of all the livestock on hand at the end of the year of
assessment (R1 million). Since there is no such excess, the limitation on the deduction applies,
and the amount of R159 810 must be carried forward and deemed to be expenditure incurred in
the next year of assessment.
22.5.3 Recoupment (par 11)

A recoupment arises if during a particular year of assessment livestock or produce has been
l applied by the farmer for his private or domestic use or consumption
l removed by the farmer from South Africa for purposes other than producing income from sources
within South Africa
l donated
l disposed of, other than in the ordinary course of his farming operations, for a consideration less
than market value
l distributed as a dividend in specie to a holder of a share in such a company, or
l applied for a purpose other than disposal in the ordinary course of his farming operations and
under circumstances other than those referred to above.
The cost price of livestock or produce applied for the farmer’s private or domestic use or consump-
tion must be included in his income for that year of assessment. If the cost price cannot be readily
determined, the market value of the livestock or produce must be included in his income (paras 11(a)
and (A)).
In the other abovementioned scenarios, the market value of livestock or produce must be included in
the farmer’s income for that year of assessment (paras 11(b), (c) and (B)). If livestock or produce is
disposed of for a consideration less than its market value, the market value less the consideration
received must be included in income (proviso (b) to par 11).
837
The value of livestock and produce used by the farmer as rations for his farm employees is effectively
not taxable. The market value of this livestock or produce must be included in income (par 11(c)(iv)),
as well as in deductible expenditure (proviso (a) to par 11). Since both transactions have exactly the
same value, the net effect is neutral.
The market value of livestock or produce donated by the farmer will also be subject to donations tax,
unless the donation is exempt (see chapter 26). Property disposed of for a consideration that is not
an adequate consideration will be deemed to have been disposed of as a donation for the purposes
of donations tax.
The recoupment can be illustrated as follows:

Livestock or produce applied for private or domestic use ............. Recoupment at cost
Livestock or produce applied as donation ..................................... Recoupment at market value
Livestock and produce given as rations to farm employees .......... Recoupment at market value
22.6 Farming expenditure and allowances (s 11(a) and 17A, and par 12)
While the First Schedule makes certain deductions available exclusively to farmers, the allowable ex-
penditure of a farmer is otherwise subject to the same rules that apply to all other taxpayers.
Examples of deductible farming expenditure in terms of s 11(a) are the
l purchase of livestock (whether acquired for resale or use in farming as permanent assets, for
example animals acquired for breeding)
l hire of farming land
l animal feed, fertilisers and manure
l wages of farm employees (wages paid to employees employed in the construction of the capital
works set out in par 12 cannot be claimed as revenue expenses but must be regarded as part of
the cost of the capital works and are deductible to the extent set out in terms of par 12)
l rations bought for employees
l seeds, plants and trees. In practice, the cost of seeds and plants is allowed as a deduction even
when annual cropping does not involve the destruction of the plant. The cost of plantations and
their establishment is deductible (par 15). Expenditure incurred on the planting of trees, shrubs or
recurrent plants is deductible (par 12(1)(g))
l expenses for clearing land, provided that income is derived from farming in the year in which the
expenditure is incurred. The cost of the eradication of noxious plants is deductible in terms of
par 12(1)(a)
l veterinary surgeon’s fees for services rendered to animals and medicine for animals
l rates and taxes
l packing materials (for example grain-bags, wool-packs, and binding wire)
l medical services for employees
l interest on loans or bank overdrafts used for farming purposes, and
l travelling and entertainment expenses in terms of s 11(a).
A farmer is entitled to claim the special deductions granted to all other taxpayers, such as the deduc-
tions for repairs (s 11(d)) and lease premiums (s 11(f)). The wear-and-tear (s 11(e)) and s 11(o)
allowances are available only on items excluded from the deduction for development expenditure but
used by the farmer for the purposes of his trade. If the farmer is also involved in manufacturing, all
the appropriate allowances for those activities are available to him in the same way as to any other
taxpayer (s 12C).
A farmer, like any other taxpayer, is prohibited from claiming a deduction for his personal or domestic
expenditure (s 23(a) and (b)), such as the cost of repairs to his private homestead or the wages and
rations of his domestic servants.
Lessors of land let for farming purposes are entitled to a deduction of expenditure incurred on ‘soil
erosion works’ in terms of s 17A, subject to the following conditions:
l Pastoral, agricultural or other farming operations must take place on the land during the year of
assessment by the lessee.
l Expenditure must be incurred by the lessor in the construction of soil erosion works, which must
be certified by an officer designated under the Conservation of Agricultural Resources Act.
838
l The deduction is limited to the taxable income derived from letting this type of land during the
year of assessment and any excess is carried forward to the following year of assessment.
The rental included in taxable income will not be farming income because it is not linked with the
lessor’s farming activities.
22.7 Development expenditure (par 12 of the First Schedule and par 20

of the Eighth Schedule)
The following development expenditure can be deducted in the determination of the taxable income
of a farmer in the year that the development expenditure was incurred (100% deduction subject to
limitation explained below):
(a) The eradication of noxious plants and alien invasive vegetation. Can create a loss
(b) The prevention of soil erosion. (always deductible)
(c) Dipping tanks.

(d) Dams, irrigation schemes, boreholes and pumping-plants. (‘Irrigation
schemes’ includes expenditure on water furrows and pipelines.)
(e) Fences.
(f) The erection of or extensions, additions or improvements (other than
repairs) to buildings used in connection with farming operations, but oth-
er than those used for domestic purposes.
(g) The planting of trees, shrubs or recurrent plants and the establishment
of any area used for the planting of such trees, shrubs or plants. The Cannot create a loss
purchase of a farm, with existing trees or shrubs on it, would not qualify (limited to taxable
for a par 12(g) deduction. See 22.7.3. See 22.16 for detail on plantation farming income
farmers. available)
(h) The building of roads and bridges used in connection with farming oper-
ations.
(i) The carrying of electric power from the main transmission lines to the
farm apparatus or under an agreement concluded with Eskom. The
farmer must agree to bear a portion of the cost incurred by Eskom in
connection with the supply of electric power consumed by the farmer
wholly or mainly for farming purposes.
The deductible development expenditure as set out in par 12 must be incurred

l by the farmer personally, and
l in connection with his own farming operations.
The farmer need not be the owner of the farming property in order for him to be entitled to the deduc-
tion in respect of the development expenditure. No deduction is allowed on expenditure incurred on
buildings used for domestic purposes (par 12(f))
There must be a direct relationship between the development expenditure and the capital works
listed in par 12(1). The expenditure will include the cost of labour and materials, but the cost of ma-
chinery or other assets used to carry out the work would not qualify for deduction under par 12(1).
These assets may qualify for deduction under ss 12B or 11(e).
The total amount to be allowed as a deduction in any year of assessment under par 12(1)(c) to (i) is
limited to taxable income derived from farming operations (par 12(3)). The amount of the develop-
ment expenditure exceeding the taxable income must be added back to farming income. The excess
will be deemed to be expenditure incurred on items (c) to (i) in the following year of assessment.
Expenditure on items (a) and (b) is not limited and will always be fully deductible.
The amount carried forward must first be reduced in the following year by recoupments on movable
assets arising in that year. Any balance will be taken into account as expenditure in the following year
(see 22.7.1) (par 12(3B)). The amount carried forward must be reduced by the amount of any expen-
diture in respect of which the taxpayer has made an election in terms of par 20A of the Eighth
Schedule (par 12(3C)).
When a farmer ceases farming operations and owns property on which development expenditure
was carried out, he will be allowed to add any undeducted amount of development expenditure to
the property’s base cost. This increase in the base cost of the asset is subject to certain limitations
(par 20A of the Eighth Schedule).
839
When a farmer ceases farming operations in any year of assessment, he is no longer entitled to carry
forward any excess development expenditure. If farming recommences in a subsequent year, it is
submitted that the carrying forward of the development expenditure to that year will not be allowed. If
the farmer continues to carry on farming operations on another farm, he is entitled to carry forward
any excess development expenditure. A full year of assessment during which the farmer does not
carry on farming operations must pass before the farmer will lose the right to carry the expenditure
forward.
Non-farm trade expenditure on land conservation and maintenance that falls within the par 12(1)(a),
(b), (d) or (e) development expenditure categories, could also qualify for a deduction if (par 12A):
l incurred in terms of a management agreement that will last for a minimum of five years
l in terms of the s 44 of the National Environmental Management: Biodiversity Act 10 of 2004, and
l the taxpayer will use the land or other land in the immediate proximity (for example adjacent,
across the road) for the carrying on of farming operations.
The deductions in terms of par 12(1A) will also be limited to income derived by the taxpayer from farm-
ing operations. A breach of the biodiversity management agreement by the taxpayer will result in a
recoupment of all par 12(1A) deductions within the last five years before the breach (par 12(1D).
Example 22.3. Development expenditure

The following information illustrates the treatment of surplus development expenditure:
Current farming income before any development expenditure ...................................... R40 000
Less: Current expenditure on items (a) and (b) ............................................................ (9 000)
Preliminary farming taxable income ........................................................................... R31 000
Less: Balance of expenditure on items (c) to (i) not deducted in the
past .................................................................................................. (R33 000)
Plus: Recoupment on movable assets (par 12(3B)) ........................ 5 000
Less: Current expenditure on items (c) to (i) ................................... (11 000)
(39 000)
Excess ........................................................................................................................ (R8 000)
Excess added back to farming income (note 1) ............................................................. 8 000
Final farming income....................................................................................................... Rnil
Non-farming income ....................................................................................................... 5 000
Taxable income .......................................................................................................... R5 000
Note
(1) The excess added back to farming income of R8 000 will be deemed to be development
expenditure incurred on items (c) to (i) in the following year of assessment.
(2) If, instead of preliminary farming income, there was a loss of R31 000, all the past and cur-
rent expenditure on items (c) to (i), totalling R39 000, would have been disallowed. The final
farming income would have been a loss of R31 000, and the assessed loss would have
been R26 000 (R31 000 – R5 000). The R39 000 would then have been deemed to be ex-
penditure incurred on items (c) to (i) in the following year of assessment.
When development expenditure is allowable under par 12(1) for any machinery, implements, utensils
or articles or for capital expenditure on scientific research, the farmer may not claim a wear-and-tear
allowance under s 11(e), an alienation, loss or destruction allowance under s 11(o) for those items
(par 12(2)).”
Paragraph 12 expenditure is deducted before taking into account any assessed

Please note! loss (in terms of s 20) brought forward from the previous year of assessment or
from any other trade carried on by the taxpayer (CIR v Zamoyski (1985 C)).
840
Example 22.4. Development expenditure

A farmer has incurred the following expenditure on development and improvements:
Year of assessment
1 2
New dam.................................................................................................... R82 000 –
Dipping tank .............................................................................................. – R5 000
Fences ....................................................................................................... 5 000 2 000
Eradication of noxious plants ..................................................................... 1 000 1 500
Prevention of soil erosion ........................................................................... 15 000 10 000
Electricity lines ........................................................................................... – 6 000
Road construction ...................................................................................... 5 000 30 000
R108 000 R54 500
The taxable income derived from farming operations before the deduction of any of the devel-
opment expenditure specified above was as follows:
Year of assessment 1..................................................................................................... R75 000
Year of assessment 2..................................................................................................... R160 000
Calculate the farmer’s taxable income from farming in each year of assessment.
SOLUTION
Year of assessment 1
Taxable income before development expenditure ......................................................... R75 000
Less: Expenditure falling under par 12(1)(a) and (b)
Eradication of noxious plants .......................................................... R1 000
Prevention of soil erosion................................................................. 15 000
(16 000)
Preliminary farming taxable income ............................................................... R59 000
Less: Expenditure falling under par 12(1)(c) to (i) ..................................................... (92 000)
Excess ......................................................................................................................... (R33 000)
Excess added back to farming income ....................................................................... 33 000
Taxable income from farming ...................................................................................... Rnil
Excess development expenditure to be carried forward to Year 2 ............................. R33 000
Year of assessment 2
Taxable income before development expenditure ...................................................... R160 000
Less: Expenditure falling under par 12(1)(a) and (b)
Eradication of noxious plants .......................................................... R1 500
Prevention of soil erosion................................................................. 10 000
(11 500)
Preliminary farming taxable income............................................................................. R148 500
Less: Expenditure falling under par 12(1)(c) to (i)
Excess development expenditure brought forward from Year 1 ..... R33 000
Current expenditure (54 500 – 11 500)............................................ 43 000
(76 000)
Taxable income from farming ...................................................................................... R72 500
22.7.1 Recoupment of development expenditure

The deductions allowed to a farmer under par 12 are not subject to taxation if recovered or recouped.
This is because the recoupment provision contained in s 8(4)(a) does not extend to expenditure
deducted in terms of the First Schedule.
When a farmer disposes of a movable asset for which a capital development expenditure deduction
has been allowed (par 12(1)), he must include the amount derived in his income. This recoupment
will be limited to the expenditure allowed on the movable asset (par 12(1B)(a)).
When a movable asset is disposed of by the farmer to any other person
l by way of donation, or
l for a consideration that is not an adequate consideration or is not readily capable of valuation,
841
the farmer is deemed to have received a consideration equal to the fair value of the asset, limited to
the cost to him of the asset. The same amount is deemed to have been paid by the person acquiring
the asset from the farmer (par 12(1C)).
If a farmer has a recoupment of development expenditure, the recoupment will first be set off against
any excess development expenditure carried forward from a previous year of assessment
(par 12(3B)). Any excess development expenditure that remains after the set-off of the recoupment
must be treated as development expenditure incurred during the current year (par 12(3)).
Example 22.5. Recoupment of development expenditure

A farmer’s current farming income is R36 000 and his current capital expenditure on items (c) to
(i) of par 12 is R7 000. The expenditure brought forward under par 12(3) to the current year of
assessment is R8 000. The recoupment under par 12(1B) is:
(a) R2 000 (in column A), or
(b) R11 000 (in column B).
Calculate the farming income.
SOLUTION
A B
Excess development expenditure brought forward ... (R8 000) (R8 000)
Recoupment referred to in par 12(1B) ....................... 2 000
Deemed expenditure on items (c) to (i) ................. (R6 000)
Recoupment referred to in par 12(1B) ....................... 11 000
Included in income ................................................ R3 000
Taxable income before development expenditure..... R36 000 36 000
R39 000
Current farming income including net recoupment
Less: Deemed expenditure on items (c) to (i) .......... (R6 000)
Current expenditure on items (c) to (i) ............ (7 000) (R7 000)
(13 000) (7 000)
Farming taxable income ........................................ R23 000 R32 000
22.7.2 Purchase and sale of a farm

A contract for the purchase and sale of a farm usually assigns separate values to the land, farming
buildings, orchards, vineyards or roads and bridges. No portion of the assigned amounts is deduct-
ible as capital development expenditure by the purchaser in terms of par 12(1)(f), (g) or (h). The
reason for this exclusion is that it is an express requirement of par 12(1) that the taxpayer must have
incurred the expenditure in respect of ‘the erection of buildings’, ‘the planting of trees’ and ‘the build-
ing of roads and bridges’. The seller, not the purchaser, incurred the expenditure (the purchaser
merely purchased the assets). A similar situation arises under par 12(1)(a), (b) and (i).
The requirements of par 12(1)(f), (g) or (h) that buildings be ‘erected’, trees and other items ‘planted’
and roads and bridges ‘built’ by the farmer are not found in par 12(1)(c), (d) or (e). However, in
practice SARS insists that the taxpayer shows that the dam, borehole or fencing was constructed by
him and not by someone else.
22.8 Section 12B: ‘50/30/20’ allowance

The s 12B allowance is currently available for
l machinery, implements, utensils or articles (but not livestock), including improvements to these
machinery, implements, utensils or articles, owned by the taxpayer or acquired by him as pur-
chaser under an instalment credit agreement per the definition in par (a) of s 1 of the VAT Act and
brought into use for the first time by him and used by him in the carrying on of his farming oper-
ations, except any motor vehicle whose sole or primary function is the conveyance of persons, a
caravan, an aircraft (other than an aircraft used solely or mainly for the purpose of crop-spraying)
or office furniture or equipment (s 12B(1)(f )), and
842
l machinery, plant, implements, utensils or articles including improvements to these machinery,

implements, utensils or articles, owned by the taxpayer or acquired by him as purchaser under
an instalment credit agreement per the definition in par (a) of s 1 of the VAT Act and used in his
trade for the production of bio-fuels, and brought into use for the first time by him (s 12B(1)(g)),
and
l machinery, plant, implements, utensils or articles including improvements to these machinery,
plant, implements utensils or articles owned by the taxpayer or acquired by him as purchaser
under an instalment credit agreement per the definition in par (a) of s 1 of the VAT Act and used
for the first time by him for the purposes of his trade to generate electricity from
– wind power
– from solar energy by way of:
• photovoltaic solar energy of more than 1 megawatt
• photovoltaic solar energy not exceeding 1 megawatt; or
• concentrated solar energy
– hydropower to produce electricity of not more than 30 megawatts, or
– biomass comprising organic waste, landfill gas or plant material.
l any foundation or supporting structure regarded as integrated with the machinery, plant, imple-
ments, utensils or articles including improvements to these machinery, plant, implements, utensils
or articles. The useful life of the foundation or supporting structure is or will be limited to the useful
life of the machinery, plant, implement, utensil, article or improvement mounted thereon or affixed
thereto.
This deduction will be allowed in the year of assessment during which a qualifying asset is brought
into use and in each of the two succeeding years of assessment.
The deduction is calculated on the cost of the asset to the taxpayer, and its rate is fixed as follows:
l in the year of assessment during which the asset is brought into use in the manner required, 50%
of its cost
l in the second year, 30% of its cost
l in the third year, 20% of its cost.
The deduction for a taxpayer who generates electricity for the purposes of his trade from photovoltaic
solar energy not exceeding 1 megawatt, will be 100% of its cost, for years of assessment commencing
on or after 1 January 2016.
The full allowance can be claimed, even if the asset is used for only part of the year of assessment.
The allowance is available only if the asset is brought into use for the first time by the taxpayer. This
requirement does not limit the deduction to new or unused assets, but does prevent a taxpayer from
claiming the allowance for a second time on an asset that was previously brought into use by him.
Cost of asset
The ‘cost’ of the asset for the purposes of s 12B(3) is the lesser of:
l the actual cost to the taxpayer, or
l the cost under a cash transaction concluded at arm’s length on the date on which the transaction
for its acquisition was in fact concluded, plus
l the direct cost of its installation or erection.
The deemed cost therefore excludes finance charges, which are deductible under s 11(bA).
Acquisition from connected person

No allowance in terms of s 12B will be deductible if (s12B(4)(c)):
l the asset was previously brought into use by any other company during that year, and
l both companies are managed, controlled or owned by substantially the same persons, and
l a deduction under s 12B or 12E, that was previously granted to that other company.
Recoupment
The taxpayer can elect that the provisions of par 65 or 66 of the Eighth Schedule should apply in
order for s 8(4)(e) to provide the delayed taxation of a recoupment of the allowance (see chapter 13).
843
General
The aggregate of the deductions that may be allowed under s 12B is limited to the deemed cost of
the asset referred to above (sec 12B(5)).
The allowance under s 12B is prohibited on the following assets (s 12B(4)):
l any asset that has been disposed of by the taxpayer during any previous year of assessment, or
l any asset on which a s 12E allowance has been granted, or
l any asset that has been disposed of in terms of an instalment credit agreement where the seller
retains ownership of an asset, or
l in the case of an asset that is let in terms of a lease that is not an operating lease, unless
– the lessee derives income from the carrying on of his trade, and
– the period for which the asset is let under the lease must be at least five years or the asset’s
useful life (if shorter than five years).
Deductions under s 12B are subject to inclusion in income if recovered or recouped (s 8(4)(a)) and
are taken into account in the calculation of any alienation, loss or destruction allowance (s 11(o)).
A farmer who uses machinery or plant in a manufacturing process such as the canning of fruit and
uses mainly his own farming produce will be able to claim a deduction under s 12B. If he acquires
the materials for his manufacturing process mainly from outside sources, however, SARS accepts
that he is carrying on two distinct trades. The machinery used in the canning process will then qualify
for the allowances available to manufacturers (s 12C).
If the capital expenditure of a farmer does not qualify for a deduction under either par 12 of the First
Schedule or s 12B, the capital expenditure may still qualify for a deduction in terms of s 11(e).
Remember
The s 12B allowance
l cannot be claimed on buildings, and
l can be claimed in full, even if the asset was used for only a few days in the production of
income.
22.9 Average rating formula (par 19)

A farmer may elect to be taxed in terms of the average rating formula within three months before the
end of any year of assessment. The average rating formula aims at a reduction in the rate of normal
tax owing to the abnormal accrual of income in the current year. It does not relieve a farmer from tax
on any portion of his taxable income (par 19(4)). The farmer will enjoy a lower effective rate of tax
than other taxpayers in every year that his actual taxable income from farming exceeds his average
taxable income from farming, yet will not suffer a higher effective rate when his actual taxable income
is less than the average.
A farmer (excluding companies and close corporations) may elect to apply the rating formula set out
in s 5(10) if, during the period of assessment:
l he or his spouse has carried on farming operations or derived income from farming operations,
and
l his taxable income derived during that period from farming exceeds his average taxable income
from farming as determined under par 19(2), and
l he has made an election under par 19(5) that is binding upon him for that period (par 19(1)).
The rating formula and detailed provisions of s 5(10) are discussed in chapter 11.
The rating formula is contained in s 5(10):
A
Y = × B
B+D–C
B = Taxable income for the year of assessment
C = Excess of current year of assessment over average (determined in terms of s 19(2)
D = That portion of the farmer’s current retirement annuity fund contributions deductible in terms of
s 11(n)(aa)(A) solely by reason of the inclusion in his taxable income of the irregular income qualifying
for the rating formula (‘C’)
A = Normal tax chargeable (before the deduction of rebates) on ‘B – C’
Y = Normal tax to be determined before rebates are taken into account
844
The amount by which the taxpayer’s actual taxable income from farming exceeds his average taxable
income from farming will be represented by the symbol ‘C’ in the rating formula in s 5(10). The bal-
ance of an assessed loss incurred in a previous year of assessment must not be deducted from the
taxable income derived from farming in the current year.
In a year in which the actual taxable income from farming is equal to or less than the average, the
rating formula will not apply.
The taxpayer’s average taxable income from farming is deemed to be one of the following amounts
(par 19(2)(a)):
l The average of the taxpayer’s aggregate taxable income from farming from the current year of
assessment plus the previous four years of assessment. If the farmer carried on farming oper-
ations for less than four years, the average is calculated by dividing the taxable income from
farming operations by the actual number of years (could be less than five). A part of a year is
considered to be a full year for the purposes of this calculation.
l If the farmer first commenced farming operations during the current year, his average taxable
income from farming is calculated as two-thirds of his taxable income from farming for that period.
If losses have been incurred during any of the relevant years, these must be set off against the tax-
able income from farming in order to arrive at the annual taxable income from farming.
If the determination of the taxpayer’s annual average taxable income from farming is a negative
amount as a result of an excess of losses over profits, the average is taken as being zero.
Any ‘excess farming profits’ derived by the taxpayer in any of the five relevant periods of assessment
must not be taken into account in the determination of his annual average taxable income (first provi-
so to par 19(2)(a)). ‘Excess farming profits’ are profits as determined under par 20(3)(a) on the sale of
his farming undertaking to the state (see 22.14).
When farming operations were carried on by an insolvent person prior to his insolvency, any income
and any deductions will be deemed respectively to be income and deductions of the estate
(par 9(2)(a)). The annual average taxable income derived by the estate will be determined, taking
into account the taxable income derived from farming by the insolvent person prior to his insolvency
(second proviso to par 19(2)(a)).
22.9.1 Who may make the election?

Only the following persons may elect to benefit from the provisions of par 19:
l A natural person (or spouse) whose taxable income for any period of assessment consists of or
includes taxable income derived from farming operations carried on by him for his own benefit.
l The executor of a deceased estate or the trustee of the insolvent estate of a natural person who
continued farming operations commenced by that person prior to his death or insolvency
(par 19(5)).
An election made in terms of par 19(5) is binding upon the person or estate and
cannot be revoked. Since the rating formula cannot operate to the disadvantage
Please note! of the farmer, his election can only benefit him (except if any of the provisions of
par 13 (see 22.15), 15(3) or 17 are available to the taxpayer).
The rating formula applies only to individuals (natural persons), executors of deceased estates and
trustees of insolvent estates.
Only a person who carries on farming may make an election under par 19(5), and the rating formula
may apply only to a year of assessment in which the taxpayer carries on farming (par 19(1)).
The rating formula is not available to the taxpayer if he has elected one of the following:
l special provision available in par 13 (par 13A election is, however, allowed), or
l rating formula in par 15(3) available to plantation farmers, or
l special provisions available in terms of par 17 to sugar cane farmers.
See 22.16.1 for the working of par 15(3) and 22.17 for the working of par 17.
845
Example 22.6. Rating formula
A farmer, who is under 65 and entitled to only the primary rebate, commenced farming in tax
Year 1. His results were as follows:
Special
Total Farming Other remuneration
taxable taxable taxable under s 5(9)
income income income (mine workers:
see chapter 12)
Year 1 ................................................... R33 000 R2 000 R31 000 –
Year 2 ................................................... 46 000 4 000 42 000 –
Year 3 ................................................... 46 000 3 000 43 000 –
Year 4 ................................................... 35 000 12 000 33 000 –
Year 5 ................................................... 81 500 17 000 64 500 R350
For Year 5 he made the election in terms of par 19(5).
Calculate the farmer’s normal tax liability for Year 5.
SOLUTION
A
Y = × B
B+D–C
B = Taxable income, that is, R81 500.
R38 000
C = Excess of current (R17 000) over average ( or R7 600) taxable income from
5
farming R9 400, plus special remuneration of R350; that is, R9 750.
D = That portion of the farmer’s current retirement annuity fund contributions deductible
in terms of s 11(n)(aa)(A) solely by reason of the inclusion in his taxable income of the
irregular income qualifying for the rating formula; that is, nil.
A = Normal tax chargeable (before the deduction of rebates) on ‘B – C’ (since D equals nil),
that is on R71 750 (i.e. R81 500 – R9 750) is R12 915.
R12 915
Y = × R81 500
R71 750
= R14 670
Normal tax payable .................................................................................................. R14 670
Less: Primary rebate ............................................................................................... (13 635)
Normal tax liability ......................................................................................... R1 035
Note
If the taxpayer commenced farming for the first time during Year 3, his average taxable income
from farming for tax Year 5 ( R323000 ) would have been R10 667, and excess farming taxable
income would have been R6 333 (R17 000 – R10 667).
If he commenced farming for the first time during Year 5, the average would have been two-
thirds of R17 000 = R11 333, and excess farming taxable income would have been R5 667
(R17 000 – R11 333).
If his actual taxable income from farming during Year 5 had not exceeded the average taxable
income, the rating formula in s 5(10) would not have applied.
22.10 Cessation of farming (s 26)

The First Schedule usually applies only when the taxpayer derives a taxable income (or an assessed
loss) from farming operations (s 26(1)). Under certain circumstances, this general rule must be mod-
ified in relation to livestock and produce.
In the year of assessment in which a farmer ceases to carry on farming operations and disposes of all
his livestock or produce, the proceeds will be taxable, regardless of the reason for the disposal. The
proceeds will form part of the farmer’s taxable income derived from farming operations (s26(1)).
If the farmer ceases farming operations and retains or lets his livestock, he must continue to account
for his livestock or produce in accordance with the First Schedule.
846
When a farmer disposes of his farm as a going concern

l the amount realised by him for standing crops is not taxable as long as no price is specifically
allocated to it
l the full proceeds received for the sale of the farm with the crops growing on it are of a capital
nature and are therefore not gross income. The proceeds will be subject to capital gains tax in
terms of the Eighth Schedule
l the purchaser of the farm is not entitled to claim the proportion of the purchase price that is
attributable to the standing crops as a deduction, and
l the acquisition of the growing crops cannot be separated from the acquisition of the land.
These principles do not apply to the sale or purchase of a farm on which a plantation is growing
(par 14(1)).
When the seller and purchaser agree on a price for the growing crops, the agreed price for the
growing crops is taxable in the hands of the seller and is allowable as a deduction to the purchaser.
A special rule comes into play for CGT purposes when a farmer who discontinues his farming oper-
ations has a balance of undeducted development expenditure (see 22.7).
Example 22.7. Cessation of farming and letting of livestock
Mr A ceased farming on 30 November 2014 and entered into a sheep lease with his son, in terms
of which he let all his livestock for a cash rental of R10 000 a year. The agreement provided that
upon termination of the lease or death of the lessor, the son would return to the lessor or his
executors animals of the same type, quality and quantity specified in the agreement.
Up to 30 November 2014, Mr A earned farming income of R60 000. The value of livestock on hand
at 28 February 2014 was R48 000 (based on elected standard values). The value of livestock on
hand at 28 February 2015 that was the subject of the sheep lease was R58 000 (based on elect-
ed standard values). At 30 November 2014, the market value of the livestock was R90 000. This
was also its market value at 28 February 2015. Allowable farming expenditure for the period
1 March 2014 to 30 November 2014 was R56 000.
The sheep lease continued until 31 August 2017, when Mr A died. He had not carried on farming
operations since his retirement, that is, from 1 December 2014 to 31 August 2017. His son ac-
quired the livestock from the executors at a price of R80 000, the fair market value at the date of
death. Mr A enjoyed no other income apart from the rental of R10 000 a year, which was payable
monthly. Calculate Mr A’s taxable income for the years in question.
SOLUTION
Year of assessment ended 28 February 2015:
Farming income .............................................................................................................. R60 000
Livestock on hand at 28 February 2015 (see par 3(2) and (3))
(at elected values, not market value) .............................................................................. 58 000
R118 000
Less: Farming expenditure ......................................................................... R56 000
Less: Livestock on hand at 28 February 2014 ............................................ 48 000
(104 000)
Taxable income from farming................................................................................... R14 000
Add: Rent from livestock (3/12 × R10 000) ...................................................................... 2 500
Taxable income ........................................................................................................ R16 500
Years of assessment ended 29 February 2016 and 28 February 2017:

Livestock on hand at end of year (s 26(2) read with par 3(2) and (3)) ......................... R58 000
Rent from livestock (full year)........................................................................................ 10 000
R68 000
Less: Livestock on hand at the beginning of year (s 26(2) read with par 3(1)) ............ (58 000)
Taxable income ........................................................................................................ R10 000
Period of assessment ended 31 August 2017:
Livestock on hand at 31 August 2017 (at elected standard values)............................. R58 000
Rent from livestock (6/12 × R10 000) .............................................................................. 5 000
R63 000
Less: Livestock on hand at beginning of year .............................................................. (58 000)
Taxable income ........................................................................................................ R5 000
continued
847
Note
Since the estate did not conduct farming operations, par 4(1)(b)(ii) (see 22.5.1 and 22.11) would
not apply. In practice, however, SARS would permit a deduction of the market value of the live-
stock, and therefore the estate would derive no taxable income on account of the disposal of the
livestock.
22.11 Commencement or recommencement of farming

Opening stock of livestock or produce of any person commencing or recommencing farming oper-
ations will be the value thereof on the day immediately preceding the date of commencement
(par 4(1)(b)(i)). The value of any livestock or produce held immediately prior to the date of com-
mencement or recommencement of farming operations will be allowed as a deduction.
SARS allows the fair market value of produce at the date of commencement or recommencement of
farming operations as a deduction, while livestock must be valued at the value SARS would allow.
The provisions of par 4(1)(b)(i) do not apply to the executors of the estate of a deceased person who
commence farming from the date of the farmer’s death. This is because the livestock or produce
would not have been held by them at the end of the day prior to the date of his death. Livestock or
produce acquired otherwise than by purchase or natural increase is deemed to have a value equal to
its market value (par 4(1)(b)(ii)(aa)). This implies that the livestock or produce held by the executors
at the commencement of farming must be valued at its market price on the date of the farmer’s death.
Livestock or produce held by the farmer for non-farming purposes will be valued at market value
in the year of assessment in which the farmer starts to use those assets for farming purposes
(par 4(1)(b)(ii)(bb)).
22.12 Death of a farmer

When a farmer dies during a year of assessment, it is necessary to determine his taxable income
from farming operations for the period from the beginning of the year of assessment to the date of his
death.
The value of livestock or produce held at the date of death must be included in income. The value of
livestock or produce held at the beginning of the year of assessment must be allowed as a deduction
from income (par 3 read with par 1).
A deceased farmer must be treated as having disposed of his assets to his deceased estate for
proceeds equal to their market value on the date of his death for income tax purposes (s 9HA). In
turn, his estate is treated as having acquired the assets for a cost equal to the same market value. It
is important to note that even though livestock might be regarded as a capital asset for a farmer,
there will be no capital gains tax applicable on the date of death. The market value is included as an
income amount in the deceased farmer’s taxable income.
Therefore, the market value of the livestock and the produce (harvested) of a deceased farmer will be
included in the taxable income of a farmer on death. Also, the market value of the capital assets of a
farmer, for example immovable farming property, will be treated as proceeds for capital gains tax
purposes upon death.
Example 22.8. Death of a farmer (sec 9HA)

Mr J, a farmer and South African resident, died on 27 November 2017. He was married out of
community of property to Mrs J. According to his last will and testament, he left all his assets to
the family trust. His assets at the date of his death are as follows:
l Farm (including land and buildings) at market value ........................................... R9 000 000
l Tractors and ploughs ........................................................................................... R1 000 000
l Farming livestock at market value ........................................................................ R2 000 000
Total assets at market value ........................................................................................ R12 000 000
Mr J’s farm was valued on 1 October 2001 and had a market value of R4 500 000. The market
value will be used as the farm’s base cost. The tax value of the tractors and ploughs were nil on
the date of death and had originally cost R2 900 000. The standard value of the livestock was
R2 300.
You may assume that Mr J had no other income during the year of assessment 2018.
848
SOLUTION
Mr J’s taxable income for the year of assessment ended 2018:
Gross income
Deemed accrual on disposal of livestock ................................................................. R2 000 000
Recoupment of tractors and ploughs (R1 000 000 – R0) .......................................... R1 000 000
Deductions
Opening stock of livestock ........................................................................................ (R2 300)
Taxable capital gain
Farm ((R9 000 000 – R4 500 000) x 40% .................................................................. R1 800 000
Taxable income R4 797 700
Important: Before section 9HA was implemented, there would have been no inclusion in income
for livestock on hand at the date of death or any recoupment in respect of the depreciable assets
(tractors and ploughs).
Notes
(1) The livestock of the estate must be valued at the elected standard values. Produce must be
valued at its cost of production.
(2) The estate may claim a deduction for capital development expenditure that it has incurred
but may not claim a deduction for the balance of the development expenditure on date of
death of the deceased.
(3) If the livestock and farm are transferred to heirs or legatees, then it will be deemed to be at
the same market value that was the proceeds for capital gains tax purposes in the hands of
the deceased. No capital gain or loss is therefore realised in the deceased estate.
22.13 Partnerships
Each partner’s share of the livestock that is an asset of the partnership must be determined in the
ratio in which the partners share profits or losses, unless the partnership agreement provides to the
contrary. If ownership in the livestock remains vested in one or more of the partners to the exclusion
of the other partners, only those partners who enjoy ownership are required to include details of the
livestock in their annual returns.
For example, one of the partners may bring his livestock into the firm on the clear understanding that
the animals belong to him and not to the firm, except that all progeny accrue for the benefit of the
partnership. The other partners are therefore obliged to bring into the computation of their taxable
incomes only their interest in the progeny on hand at the beginning and end of each year. With re-
gard to partnership assets generally, see chapter 18.
Each partner in a farming partnership must elect his own standard values,
which must be applied to his interest in the number of livestock on hand at the
Please note! beginning and end of the year of assessment and used in the partnership busi-
ness as well as to any livestock used in his private farming operations.
22.14 Cessation of farming on sale of land to the state (par 20)

A special concession is available to a taxpayer (other than a company) who derives income from
farming operations and whose farming land is acquired by the state, a local authority or a specified
juristic person if
l due to the acquisition of his land the farming undertaking on the land (referred to as ‘the under-
taking’) has been or is being wound up, and
l the taxpayer’s income for the year of assessment during which the land was acquired or the first
or second year of assessment succeeding that year includes any ‘abnormal farming receipts or
accruals’.
The normal tax payable (as determined before the deduction of any rebate) on his taxable income for
the relevant year of assessment, will then be determined at an amount equal to the sum of
l the taxpayer’s ‘excess farming profits’ for the year of assessment, multiplied by the lowest rate
according to the tables (currently 18%), and
849
l the normal tax (before the deduction of any rebate) payable by the taxpayer for the year of assess-
ment on the balance of his taxable income for the year (being his taxable income excluding the
‘excess farming profits’) (par 20(1)).
The concession is available in the year of assessment during which the farmer’s land is acquired and
in the following two years of assessment.
‘Excess farming profits’ are defined as the sum of the following items, and may
not exceed the taxpayer’s taxable income for the relevant year (proviso to
par 20(3)):
l The proceeds on the disposal of livestock in the course of winding-up the
undertaking on the acquired land. The amount is limited to the excess of the
Please note! current year’s gross profit on the disposal of livestock over the average
gross profit from the disposal of livestock in previous years.
l The proceeds realised on the sale of the plantation together with the acquired
land, or from the sale of the plantation in the course of winding-up the under-
taking on the acquired land. The amount is limited to the farmer’s excess
taxable income from plantation farming as determined under par 15(3) (see
22.16.1) (par 20(3)).
The par 20 relief is available at the option of the taxpayer, who must exercise his option by means of
a written application to the Commissioner (par 20(6)(a)).
Example 22.9. Cessation of farming on sale of land to the state
A livestock farmer aged under 65 sold his land to the state during the year ended 28 February
Year 2 and applied to the Commissioner to be subject to tax in accordance with par 20. He has
not elected to be subject to tax under par 19. His average livestock profit for the previous five
years was R8 000. He also earned other taxable income of R35 000 during the current year. The
following is his farming account for the year.
Livestock on hand: 1 March Livestock sold (of which R60 000
Year 1.......................................... R20 000 was sold in the course of
Livestock acquired during winding-up the undertaking) ........... R73 600
the year ....................................... 10 000 Livestock on hand:
Profit ............................................ 45 600 28 February Year 2 ......................... 2 000
R75 600 R75 600
Calculate his normal tax liability for Year 2.
SOLUTION
Total taxable income for the year (profit of R45 600 plus other taxable income
of R35 000) ..................................................................................................................... R80 600
Livestock profit for the year ............................................................................................ R45 600
Less: Average livestock profits for previous five years ................................................. 8 000
Abnormal livestock profit ............................................................................................ R37 600
Excess livestock profits = livestock sales in the course of winding-up the undertaking
(R60 000), limited to abnormal livestock profit for the year ............................................ R37 600
Balance of taxable income = total taxable income of R80 600 less excess livestock
profits of R37 600............................................................................................................ R43 000
Normal tax payable on balance of taxable income:
Schedule tax on R43 000 (@18%) .................................................................................. R7 740
Normal tax payable on excess livestock profits:
R37 600 × 18% ............................................................................................................... 6 768
Normal tax payable .................................................................................................... R14 508
Normal tax liability ...................................................................................................... R873
850
22.15 Drought, stock disease, damage to grazing by fire or plague,

and livestock-reduction schemes (paras 13 and 13A)
Paragraph 13 provides relief to farmers who are compelled to dispose of livestock under certain cir-
cumstances.
For paragraph 13 to apply, a farmer must have in any year of assessment sold livestock
(a) on account of drought, stock disease or damage to grazing by fire or plague and has within four
years after the close of that year of assessment purchased livestock to replace the livestock sold,
or
(b) by reason of his participation in a government livestock-reduction scheme and has within nine
years after the close of that year of assessment purchased livestock to replace the livestock sold.
If either (a) or (b) above applies, the farmer has the option to elect, when replacing the livestock sold
in (a) or (b), to deduct the cost of purchasing the replacement livestock from the income
l for the year in which he originally disposed of his livestock, or
l in the year when he replaces the livestock.
If the farmer wishes to deduct the cost in the year of disposal, he must initially notify the Commission-
er and obtain and retain full particulars in regard to the livestock so sold. The farmer must claim the
deduction within:
l five years after the close of the year in which he was compelled to dispose of the livestock when
item (a) above applies, or
l within ten years after the close of that year when item (b) applies.
A farmer is entitled to claim the benefit both of par 13 and 19 when he has dis-
posed of livestock owing to drought, disease or damage to grazing by fire or
Please note! plague. He, may not, however, claim the benefit of par 13 when he has dis-
posed of livestock owing to a government livestock-reduction scheme in a year
of assessment in which his normal tax chargeable is determined under par 19
(par 13(1)(a)(i) and (b)(i)).
The provisions of par 13 do not apply to the cost of any livestock bought to replace livestock sold if
the proceeds derived from the sale of the livestock have been dealt with under par 13A (par 13(5)).
Paragraph 13A is applicable:
l when a farmer has disposed of any livestock on account of drought, and
l the whole or any portion of the proceeds of the disposal has been deposited by him with the
Land and Agricultural Bank of South Africa (the ‘Land Bank’), and
l the proceeds were deposited within three months after its receipt by the farmer.
The amount deposited with the Land Bank will only be deemed to be gross income of the farmer
derived from the disposal of livestock on the following days:
l on the date of the disposal, if it is withdrawn from the account less than six months after the last
day of the year of assessment in which the disposal took place
l on the date of the withdrawal, if it is withdrawn from the account more than six months but less
than six years after the last day of the year of assessment in which the disposal took place
l on the day before his death or insolvency, in the event of either occurring before the expiry of the
period
l on the last day of the six-year period (in other words, six years after the last day of the year of
assessment in which the disposal took place), if it is not withdrawn before the expiry of the period
(par 13A(3)).
22.16 Plantation farmers (paras 14 to 16)

The growing of timber constitutes the carrying on of farming operations. Special provisions affecting
plantation farmers are to be found in paras 14, 15, 16 and 20 of the First Schedule. Apart from these
special provisions, plantation farmers are subject to tax in the same manner as all other farmers.
The term ‘plantation’ means any artificially established tree or any forest of such trees, including any
natural extension of such tree (par 16). It does not include the type of tree described in par 12(1)(g),
namely trees, shrubs or perennial plants planted for the production of grapes, fruit, nuts, tea, coffee,
hops, sugar vegetable oils, or fibres.
851
Pine trees, gum trees and wattle trees clearly fall within the definition, being ‘trees’, but pineapple,
sugar cane and nut trees, for example, are excluded since they fall within par 12(1)(g). ‘Plantation’
usually refers to trees which are grown in order to produce both the trees themselves and the by-
products which can be derived from the trees. This differs from an orchard, where the trees are
grown in order to produce fruit.
‘Forest produce’ means trees (other than those described in par 12(1)(g)) and anything derived from
those trees, including timber, wood, bark, leaves, seed, gum, resin and sap (par 16).
If a farmer disposes of a plantation, it will form part of his gross income (par 14(1)). There has to be a
distinction between the portion relating to the plantation and the portion relating to the land itself. The
portion relating to the plantation will be revenue in nature whilst the portion relating to the land will be
seen as capital in nature (par 14(2)). If no clear distinction is made between the two portions, the
Commissioner will determine the portion relating to the plantation.
It is important to take note of the fact that the First Schedule, including par 14, is only applicable to
taxpayers conducting farming operations. In the court case Kluh Investments (Pty) Ltd vs SARS it
was held by the court that the mere ownership of land with a plantation on it, with the obligation to
maintain the plantation and return it at the end of the arrangement with the same volume of timber on
it, was not sufficient to constitute farming operations.
Paragraph 15(1)(a) permits the deduction of any expenditure incurred by a farmer during a year of
assessment in respect of the establishment and maintenance of plantations, such as:
l the actual cost of the trees
l the cost of planting the trees
l all subsequent expenditure incurred in tending, cultivating and maintaining the trees, including
expenditure on thinning and weeding.
This expenditure is deductible even if no income has been derived during that year.
The construction of roads is regarded as expenditure incurred in respect of the establishment of the
plantation, as is expenditure incurred in preparing the land prior to the planting of the trees.
The cost of establishing and maintaining a plantation that is deductible under par 15(1)(a) may be set
off against any other taxable income that the farmer may derive (for example from another business).
The deduction allowed in respect of the cost of acquisition of a plantation purchased by a farmer in
any year of assessment is limited to the gross income derived from that plantation for that year
(par 15(1)(b)(i)). Any excess that cannot be deducted is carried forward to the next year and is allow-
able as a deduction in that year, again limited to the gross income derived in that year from that
plantation.
This is only the case if the farmer acquired the plantation. If a farmer established the plantation him-
self, the deduction allowed will not be limited to the gross income derived from that plantation for that
year (i.e. fully deductible).
Example 22.10. Plantation farmers
Mr X carries on mixed farming. For the current year of assessment, he has earned a taxable in-
come derived from vegetables and fruit of R15 600. He cultivates three plantations on three sep-
arate farms:
Plantation A: (Established during the current year of assessment): Gross income derived from the
disposal of plantation and forest produce: Nil. Expenditure incurred during the cur-
rent year of assessment in respect of the establishment of the plantation: R16 000.
Plantation B: Gross income derived from the disposal of plantation and forest produce: R32 000.
Expenditure incurred during current year of assessment for maintenance: R11 000.
Expenditure incurred in an earlier year when acquiring the plantation with the land
on which it is growing: R80 000, of which R60 000 represents the consideration
payable for the plantation. No portion of this amount has been deducted prior to
the current financial year.
Plantation C: (Disposed of during current year of assessment): Gross income derived from the
disposal of plantation and forest produce: R17 000. Expenditure incurred during
the current year in respect of maintenance: R8 000. Disposed of during the current
year of assessment with the land on which it grows for R210 000. It was agreed
between the parties that R160 000 represented the consideration payable for the
plantation without the land.
Calculate Mr X’s taxable income for the current year of assessment.
852
SOLUTION
Plantation A
Gross income ............................................................................................ Rnil
Less: Expenditure incurred in respect of establishment par 15(1)(a)) .... 16 000
(R16 000)
Plantation B
Gross income ............................................................................................ R32 000
Less: Expenditure incurred in respect of maintenance par 15(1)(a)) ..... (11 000)
R21 000
Less: Cost of acquisition R60 000, limited to gross income
(par 15(1)(b)) ................................................................................. (32 000)
(Note that the balance of the cost of acquisition, R28 000
(R60 000 – R32 000), may be carried forward to the next year.) (11 000)
Plantation C
Gross income (R17 000 + R160 000) ...................................................... R177 000
Less: Expenditure incurred in respect of maintenance (par 5(1)(a)) ..... (8 000)
Taxable income from plantations ............................................................................. 169 000
R142 000
Taxable income from vegetables and fruit.................................................................... 15 600
Taxable income ........................................................................................................ R157 600
22.16.1 Plantation farmers: Rating formula (par 15)

If the taxable income derived by a farmer (other than a company) from the disposal of plantations
and
l forest produce in any year of assessment exceeds the annual average taxable income derived by
him from the plantation over the three immediately preceding years of assessment, then
l the normal tax payable for the year of assessment must be determined in accordance with the
rating formula provisions of s 5(10) (par 15(3)).
‘C’ in the rating formula of s 5(10) is the amount by which the actual taxable income from the planta-
tion in a year of assessment exceeds the annual average taxable income. The annual average tax-
able income is determined over the three immediately preceding years of assessment (referred to as
excess plantation taxable income). If the farmer has been farming for less than three years, the aver-
age is still calculated by dividing the taxpayer’s income from plantation by three (not one or two).
If no taxable income was derived from plantations and forest produce during the three previous years
(i.e. a loss), the current year’s taxable income from this source becomes ‘C’ in the rating formula.
The par 15(3) rating formula cannot be used together with the rating formula of
Please note!
par 19(2) available to all farmers.
If the farmer has capital expenditure to be set off against the plantation income, then the taxable
income to be used in the formula will be taxable income after the capital expenditure has been set
off.
Paragraph 15(3) applies only if the disposal of plantations or forest produce in the current year forms
part of the normal farming operations of the farmer (par 15(3)(i)). In practice, SARS applies the aver-
aging provision under par 15(3) when a farmer sells his farm together with the standing plantation
and then discontinues his farming operations.
If a farmer has derived any ‘excess plantation farming profits’ in the current year or the three previous
years of assessment in terms of par 20(3):
l the excess plantation farming profits derived during the current year must be excluded from the
taxable income derived in that year from the disposal of plantations and forest produce, and
l the excess plantation farming profits derived during the three previous years of assessment must
not be taken into account in the determination of his average taxable income (par 15(3)(ii)).
Paragraph 15(3) cannot be used if par 13, 17 or 19 has been elected by the taxpayer. See 22.9.1.
853
Example 22.11. Plantation farmers: Rating formula

A farmer (who is under 65) derived the following income in the year of assessment ended
28 February 2018:
Taxable income from plantation ...................................................................................... R32 000
Taxable income from interest .......................................................................................... 8 000
Rentals ............................................................................................................................ 35 000
Taxable income .......................................................................................................... 75 000
Taxable income derived from plantation over three previous years:
2017 ............................................ R10 000
2016 ............................................ 25 000
2015 ............................................ 10 000
Calculate his normal tax for the year of assessment ended 28 February 2018 in terms of
par 15(3), assuming that he has not elected to be assessed under par 19.
SOLUTION
Taxable income from plantation ................................................................................... R32 000
(R10 000 + R25 000 + R10 000)
Less: Annual average ....................................... (15 000)
3
Excess...................................................................................................................... R17 000
A
Y = × B
B+D–C
B = Taxable income, that is, R75 000.
C = Excess plantation, that is, R17 000.
D = That portion of the farmer’s current retirement annuity fund contributions deductible in terms
of s 11(n)(aa)(A) solely by reason of the inclusion in his taxable income of the irregular
income qualifying for the rating formula, that is, nil.
A = Tax before rebates on ‘B – C’ (since D equals nil), that is, on R58 000 (R75 000 – R17 000)
= R10 440.
R10 440
Therefore Y = × R75 000
R75 000 – R17 000
Normal tax payable .................................................................................................... R13 500
Less: Primary rebate ........................................................................................................ (13 500)
Normal tax liability ...................................................................................................... R 0
Example 22.12. Plantation farmers: Rating formula

A farmer (who is under 65) derived the following income in the year of assessment ended
28 February 2018:
Taxable income from plantation ...................................................................................... R84 000
Assessed loss from other farming .................................................................................. (1 500)
Taxable income .......................................................................................................... R82 500
Taxable income derived from plantation over three previous years:
2017 ............................................ R500
2016 ............................................ 1 100
2015 ............................................ 2 000
Calculate his normal tax for the year of assessment ended 28 February 2018 in terms of
par 15(3), assuming that he has not elected to be assessed under par 19.
854
SOLUTION
Taxable income from plantation ..................................................................................... R84 000
(R500 + R1 100 + R2 000)
Less: Annual average ......................................................... (1 200)
3
Excess ....................................................................................................................... R82 800
A
Y = × B
B+D–C
B = Taxable income, that is, R82 500
C = Excess over annual average, that is, R82 800
D = That portion of the farmer’s current retirement annuity fund contributions deductible in
terms of s 11(n)(aa)(A) solely by reason of the inclusion in his taxable income of the irregu-
lar income qualifying for the rating formula, that is, nil.
A = Tax before rebates on ‘B – C’ (since D equals nil), that is, on R82 500 – R82 800, or –R300.
Since B – C = –R300, Y must be determined in terms of the proviso to s 5(10), that is, the tax will
be payable at the rate fixed in terms of s 5(2) for the first rand of taxable income, i.e. 18%. The
tax is therefore 18% of R82 500, or R14 850.
Normal tax liability = R14 850 – R13 500 (primary rebate)
= R1 350
22.17 Sugar cane farmers: Disposal of sugar cane damaged by fire (par 17)
When a farmer derives taxable income from the disposal of sugar cane as a result of a fire in his cane
fields the normal tax payable on that taxable income must be determined under s 5(10) (par 17).
‘C’ in the s 5(10) rating formula is the taxable income derived from the disposal of sugar cane as a
result of the fire in his cane fields that would not otherwise have been derived by him in that year.
The par 17 rating formula cannot be used together with the rating formula of
Please note! par 19(2) relating to all farmers. See 22.9.1
22.18 Game farmers

The same tests used to determine whether a person is carrying on normal farming operations are
applicable to game-farming. For example, the activities of a person who owns land and occasionally
allows hunters to cull the game on the land cannot on their own be accepted as constituting farming
with game. The taxpayer will have to convince the Commissioner that game is purchased, sold, bred
on a regular basis before his activities may be regarded as bona fide farming operations.
Income from the sale of game, game carcasses, skins and the like by a farmer is regarded as income
from farming operations, as is income derived from the granting of hunting rights on the farm. This
includes income derived from the supply of guides and trackers used in a hunting expedition.
Income from the following activities, however, is not regarded as farming income:
l accommodation and catering
l admission charged to persons for spending holidays on the farm, and
l fees paid for game drives (SARS Interpretation Note No 69)).
Livestock
Because of the practical difficulties encountered in establishing the actual number of game livestock
on hand at any given time, game livestock is in practice valued at Rnil for opening and closing stock.
The limitation imposed by par 8 on the deduction in respect of livestock purchases applies to game
livestock acquired (see 22.5.2).
855
Farming expenditure is expenditure on items such as

l equipment: vehicles, firearms, meat saws and two-way radios, and will be
depreciated in terms of s 12B
l facilities: slaughter rooms, meat rooms, cooling rooms, biltong rooms, skin
Please note! rooms and trophy rooms, and will be deducted in terms of par 12(1)
l services: butchers, trackers, professional hunters
l promotion and advertising: travelling expenditure (overseas), advertising
material, and
l other: ammunition and fuel.
Expenditure incurred by a game-farmer on dams, boreholes, pumping plants and fencing qualifies as
a deduction of capital development expenditure (par 12(1)). Improvements to buildings and the
construction of roads and bridges will be allowed as a deduction if these assets are being used in
connection with farming operations. Expenditure on facilities that are used to accommodate visitors
and hunters will not qualify for deduction.
22.19 Capital gains tax (Eighth Schedule)

A taxpayer carrying on farming operations is liable to account for capital gains tax on disposal of
assets in terms of the Eighth Schedule to the Income Tax Act. Therefore, the disposal of movable or
immovable farming property could result in a capital gain or loss. If a taxpayer has a primary resi-
dence on his farming property, the gain relating to the primary residence will be limited to two hec-
tares (paras 44 and 49 of the Eighth Schedule).
The portion of the capital gain relating to the land on which the primary residence is situated there-
fore needs to be apportioned. Also, see 22.12 for the proposed capital gains tax consequences of
livestock held upon the death of a farmer.
Paragraph 12(1)(c) to (i) of the First Schedule provides that capital development expenditure may
only be deducted from taxable income derived by a farmer from farming operations. Any portion of
taxable income that is comprised of capital gains that are unconnected to farming operations, will not
be available for set-off against capital development expenditure.
Example 22.13. Disposal of farm with primary residence
Mr X, a South African resident, owns a farm in the Free State that he purchased on 1 October 1991
for R500 000. He has farmed on this farm since that date. In 2017 Mr X decided to retire and dis-
posed of the farm on 1 October 2017 for R10 000 000. No commission was payable on the sales
proceeds. The farm was valued for capital gains tax purposes on 1 October 2001 at R2 000 000
and Mr X has elected this as the 1 October 2001 valuation for purposes of establishing the base
cost of the farm.
The farm is 40 hectares in size and Mr X’s primary residence is situated on the farm. The resi-
dence was erected on 1 October 1992 at a cost of R900 000.
Discuss the income tax consequences (including capital gains tax) on the disposal of the farm,
with supporting calculations.
SOLUTION
From the facts, it is obvious that Mr X acquired the farm with capital intent and farmed there until
the time of disposal. The proceeds from the disposal of the farm therefore appear to be capital
in nature and are to be excluded from gross income. Capital gains tax will thus apply and the
capital gain is calculated as follows:
Proceeds from disposal ........................................................................................... R10 000 000
Less: Base cost – market value 1 October 2001 ..................................................... (2 000 000)
Capital gain.............................................................................................................. R8 000 000
But, 5% of the capital gain is subject to the primary residency exclusion
(2 hectares/ 40 hectares = 5%)
Therefore. Less 5% × R8 000 000 (less than R2m therefore excluded in full) = (400 000)
R7 600 000
Less: Annual exclusion ............................................................................................ (40 000)
R7 560 000
Include 40% in taxable income ............................................................................... R3 024 000
856
22.20 Detailed examples calculating taxation payable by farmers
Example 22.14. Calculation: Taxable income of a farmer

The following is the statement of comprehensive income of a farmer for the year of assessment ended
28 February 2018:
Statement of comprehensive income
Livestock on hand: Livestock on hand:
1 March 2017 .............................. R11 270 28 February 2018 ........................... R10 810
Administration and general Sales:
expenses (all allowable) ............. 31 340 Bean crop .................................... 15 000
Depreciation of motor car and Livestock ..................................... 78 040
office furniture ............................. 1 250 Maize ........................................... 168 000
Donations .................................... 100 Meat ............................................ 19 755
Fertilizer ...................................... 4 850
Foodstuffs for livestock ............... 4 200
Grain bags .................................. 3 000
Maintenance and repairs:
Farm buildings ......................... 6 710
Implements .............................. 650
Lorries and tractor ................... 1 100
Maize and potato seed ............... 11 750
Petrol, oil and grease .................. 1 300
Livestock purchases ................... 48 000
Railage and transport ................. 815
Rations for workers ..................... 2 450
Seed spray.................................. 3 500
Veterinary surgeon’s fees ........... 400
Wages – domestic servants ........ 2 400
Wages – farm labourers .............. 13 500
Net surplus .................................. 143 020
R291 605 R291 605
(a) Details of livestock regulation (standard values elected by the taxpayer)

Opening stock Closing stock
Purchases Sales
(1 March 2017) (28 February 2018)
Bulls 3 @ R50 = R150 1 @ R1 140 = R1 140 2 @ R50 = R100
Cows
(3 years
and over) 140 @ R40 = 5 600 10 @ R1 100 = 11 000 50 @ R1 090 = 54 500 120 @ R40 = 4 800
Oxen 30 @ R40 = 1 200 10 @ R1 050 = 10 500 55 @ R40 = 2 200
Tollies and
heifers
(1–2 years) 100 @ R30 = 3 000 50 @ R530 = 26 500 40 @ R560 = 22 400 90 @ R30 = 2 700
(2–3 years) 80 @ R14 = 1 120 55 @ R14 = 770
Calves
(under 1 year) 50 @ R4 = 200 60 @ R4 = 240
403 R11 270 70 R48 000 91 R78 040 382 R10 810
(b) During the year the farmer and his wife and family consumed produce and livestock to an
estimated cost of R3 600.
(c) The following capital expenditure was incurred during the year:
New implements for farm ........................... R7 100
New tractor for farm ................................... 18 200
New irrigation equipment ........................... 6 000
New borehole ............................................. 3 500
(d) The depreciation shown in the account exceeds the wear-and-tear allowed by the Commis-
sioner by R100.
(e) At 28 February 2018 there was a crop of maize growing on the land. It is estimated that the
expenditure laid out on this crop and claimed in the statement of comprehensive income is
R850.
(f) There was no produce on hand at the beginning or end of the year of assessment.
(g) Expenditure on petrol, oil and grease includes R650 for private motor-car expenses.
Calculate the taxable income of the farmer for the year of assessment ending 28 February 2018.
857
SOLUTION
Net surplus shown in account ...................................................................................... R143 020
Add: Donations ............................................................................................ R100
Private motor-car expenses ................................................................ 650
Produce and livestock privately consumed (cost) (note 1) ................ 3 600
Wages of domestic servants............................................................... 2 400
Depreciation disallowed ..................................................................... 100
6 850
R149 870
Less: s 12B allowance on implements and tractor (50% of R25 300)......................... (12 650)
R137 220
Less: New irrigation equipment ................................................................ R6 000
New borehole.................................................................................. 3 500
(9 500)
Taxable income ....................................................................................................... R127 720
Notes
(1) The estimated cost of the livestock and produce consumed by the farmer and his family is
taxable.
(2) The value of livestock on hand at the end of a year of assessment becomes the opening
stock for the next year. Therefore, R10 810 will be allowed as a deduction for that year.
(3) Growing crops cannot be regarded as produce on hand; therefore the cost of the standing
maize crop is not included in income.
(4) The deduction for purchases of livestock is limited in terms of par 8 to an amount deter-
mined as follows: (farming (gross) income of R280 795 (R15 000 + R78 040 + R168 000 +
R19 755) plus the standard value of the closing stock of livestock of R10 810 less the
standard value of the opening stock of R11 270). This amount is R280 335. The cost of the
livestock, R48 000, is therefore deductible in full in the current year.
Example 22.15. Detail calculation of taxable income of a farmer
The following is the statement of comprehensive income of a farmer who commenced farming on
25 August 2017.
Statement of comprehensive income
Development expenditure: Dividends received from South
New irrigation equipment .............. R25 000 African companies ........................... R6 000
Dams and boreholes..................... 12 360 Fee for letting of machine ................. 9 600
Establishment of orchards ............ 13 600 Grazing fees ..................................... 21 000
New fencing .................................. 3 420 Interest received .............................. 1 920
Road-making ................................ 15 340 Livestock sales ............................... 831 000
Soil-erosion works ......................... 7 500 Produce sales (wool and fruit)........ 114 220
Fertilizers and manures................. 5 250
Food for livestock .......................... 9 360
General farming expenses (all
allowable) ...................................... 13 960
Interest payable .......................... 6 340
Livestock purchases ................... 34 200
Repair of damaged fencing ........ 3 900
Seeds .......................................... 2 980
Wages and rations ...................... 21 556
Wear-and-tear and s 12B
allowance (all allowable) ............. 14 800
Net profit ..................................... 794 174
R983 740 R983 740
(1) When he commenced farming, the executors of the estate of his late father handed over to
him 1 800 ewes, 200 rams and 400 lambs. The current market value of these animals at the
date of his father’s death was R650 000, and this was the fair market price on 25 Au-
gust 2017. The standard value of this livestock would have been R12 800.
continued
858
(2) On 26 November 2017 he also received by way of donation from his uncle 600 ewes and
100 rams. At the date of donation, the fair market value of these animals was R200 000. The
standard value would have been R4 200.
(3) He has elected the standard values fixed by regulation.
(4) During the year he, his wife and his family consumed produce at an estimated cost of
R3 500.
(5) 24 ewes and 12 rams were donated to charitable institutions during the year. These animals
were acquired at a cost of R6 700, but at the date of donation their fair market value was
R10 800.
(6) At 28 February 2018 the numbers of livestock on hand were as follows:
Ewes ........................................... 1 500
Rams ........................................... 250
Lambs ......................................... 400
(7) The estimated cost of production of wool and fruit on hand at 28 February 2018 was R9 100.
Calculate the taxable income of the farmer for the year of assessment ended 28 February 2018.
SOLUTION
Grazing fees............................................................................................................... R21 000
Livestock sales........................................................................................................... 831 000
Livestock donated to charity (36 sheep at market price) ........................................... 10 800
Produce privately consumed ..................................................................................... 3 500
Produce sales ............................................................................................................ 114 220
Livestock on hand at 28 February 2018 (at standard values fixed by regulation)
1 500 ewes @ R6 ............................................................................... R9 000
250 rams @ R6 .................................................................................. 1 500
400 lambs @ R2................................................................................. 800
11 300
Produce on hand (at lower of cost or market value) .................................................. 9 100
R1 000 920
Less: Livestock on hand at commencement (25 August 2017)
(1 800 ewes, 200 rams, 400 lambs at current market value) ..... R650 000
Livestock received by donation (26 November 2017)
(current market price) ................................................................ 200 000
Fertilizers and manures ............................................................. 5 250
Food for livestock....................................................................... 9 360
General farming expenses ........................................................ 13 960
Interest payable ......................................................................... 6 340
Livestock purchases .................................................................. 34 200
Repair of damaged fencing ....................................................... 3 900
Seeds ......................................................................................... 2 980
Soil-erosion works ...................................................................... 7 500
Wages and rations ..................................................................... 21 556
Wear-and-tear and s 12B allowance ......................................... 14 800
(969 846)
Taxable income from farming (before deduction of development
expenditure) ................................................................................................ R31 074
Less: Development expenditure falling under par 12(1)(c) to (i):
New irrigation equipment ........................................................... R25 000

Dams and boreholes ................................................................. 12 360
Establishment of orchards ......................................................... 13 600
New fencing ............................................................................... 3 420
Road-making ............................................................................. 15 340
(69 720)
Excess ........................................................................................................ (R38 646)
Excess development expenditure added back to farming income ........................... 38 646
Taxable income from farming..................................................................... Rnil
Excess development expenditure to be carried forward to the following year .......... R38 646
continued
859
Taxable income
Fee for letting of machine .......................................................................................... R9 600
Interest received ........................................................................................................ 1 920
Farming ...................................................................................................................... nil
Dividends received .................................................................................................... 6 000
R17 520
Less: Exempt income
Limited interest exemption (s 10(1)(i)) ............................................................ (1 920)
Dividends (s 10(1)(k)) ..................................................................................... (6 000)
Taxable income .......................................................................................... R9 600
Notes
(1) In terms of the practice of SARS, grazing fees constitute taxable income derived from farm-
ing operations.
(2) The estimated cost of produce privately consumed forms part of taxable income derived
from farming operations.
(3) Livestock or produce donated to charity is included in income at its market value and forms
part of taxable income derived from farming operations.
(4) Livestock on hand at the date of commencement of farming must be valued at its current
market value and is allowed as a deduction.
(5) Livestock received by way of donation must be valued at its current market value and is
allowed as a deduction.
(6) Development expenditure on soil-erosion works is deductible in full.
(7) Fees received for the letting of machinery and interest received do not constitute taxable
income derived from farming operations.
(8) The deduction for livestock is limited in terms of par 8 to an amount determined as follows:
(farming (gross) income of R980 520 (R21 000 + R831 000 + R10 800 + R3 500 +
R114 220) plus the standard value of the closing stock of livestock of R11 300 less the live-
stock held and not disposed of by the farmer at the beginning of the year (as defined in
par 4) of R850 000. This amount is R141 820. The cost of the livestock bought during the
year, i.e. R34 200, is therefore deductible in full in the current year.
860
23 Turnover tax system
Madeleine Stiglingh

After studying this chapter you should be able to explain
l what the turnover tax regime is
l when and at what rate the turnover tax will be levied
l when a person can register as a micro business
l when a person must or can deregister as a micro business.
Contents
Page
23.1 Overview (s 48 to 48C) ....................................................................................................... 861
23.2 Qualifying turnover (definition of ‘qualifying turnover’ in paras 1, 2 and 13) ..................... 862
23.3 Micro business (par 1 – definition of ‘micro business’ and ‘registered micro business’
– and paras 2, 3 and 4) ...................................................................................................... 862
23.3.1 Persons specifically included as qualifying micro businesses (par 2) .............. 862
23.3.2 Persons specifically excluded as qualifying micro businesses
(paras 3 and 4) ................................................................................................... 862
23.4 Registered micro business (definition of ‘registered micro business’ in paras 1 and 8) .. 862
23.4.1 Registration ......................................................................................................... 862
23.4.2 Deregistration...................................................................................................... 863
23.5 Taxable turnover (definition of ‘taxable turnover’ in paras 1, 5, 6 and 7) .......................... 863
23.6 Levying of turnover tax (ss 48A and 48B) ........................................................................... 865
23.7 Administration of turnover tax (par 11) ................................................................................ 865
23.8 Record-keeping (par 14) ..................................................................................................... 865
23.9 Interaction of the Sixth Schedule with other taxes (ss 10(1)(zJ), 10(1)(zK),
64F and 64FA) ..................................................................................................................... 865
23.10 Transitional rules (ss 20 and 48C, par 7 and ss 78A and 18(4) of the VAT Act) ................ 866
23.11 Comprehensive examples ................................................................................................... 866
23.1 Overview (s 48 to 48C)

An elective turnover tax system is available for micro businesses with a turnover of up to R1 million
per annum. Although this turnover tax is incorporated in the Sixth Schedule to the Income Tax Act, it
is a stand-alone tax that is totally separate from the normal tax, donations tax or dividends tax calcu-
lations. The turnover tax applies to years of assessments commencing on or after 1 March 2009.
Part IV of the Act, headed ‘Turnover tax payable by micro businesses’, which consists of s 48 to 48C,
has been included in the Income Tax Act and links the Sixth Schedule with the Income Tax Act. (Any
paragraph reference in this chapter, unless stated otherwise, is a reference to the Sixth Schedule to
the Act.)
Put simply, the turnover tax is a tax calculated on the turnover (total receipts) of a micro business,
and not on its profit or its net income. This method eliminates the need for keeping detailed records
of expenses.
Where the qualifying turnover of a micro business does not exceed the amount of R1 million in a
given year of assessment, the business is able to choose to be taxed in terms of this regime.
The turnover tax effectively replaces the normal tax regime (also including normal tax on capital
gains). Every business should assess its individual situation to determine which tax regime will suit it
best.
861
Micro businesses that choose the turnover tax regime are still required to comply with the payroll
levies, such as PAYE, SDL and UIF contributions, as these are taxes generally borne by employees
and collected by employers (in this case, the registered micro business) on behalf of SARS.
Vendors registered under the VAT system may freely register under the turnover tax system if these
taxpayers believe that it is in their best interest to do so and vice versa.
23.2 Qualifying turnover (definition of ‘qualifying turnover’ in paras 1, 2 and 13)

The qualifying turnover refers to the amount that is used to evaluate whether a person could qualify
as a micro business, whereas the taxable turnover (see 23.5) is the tax base for the micro business
on which the actual amount of turnover tax due is calculated.
Qualifying turnover means the total receipts from carrying on business activities, but excluding any
amounts received of a capital nature (par 1 – definition of ‘qualifying turnover’).
Where the qualifying turnover of a micro business does not exceed the amount of R1 million in any
year of assessment, it is able to elect to be taxed in terms of this regime (par 2(1)).
23.3 Micro business (par 1 – definition of ‘micro business’ and ‘registered micro
business’ – and paras 2, 3 and 4)
The definition of a micro business specifically includes (see 23.3.1) and specifically excludes (see
23.3.2) certain persons.
23.3.1 Persons specifically included as qualifying micro businesses (par 2)

The following persons with a qualifying turnover that does not exceed R1 million qualify as micro
businesses:
l companies, and
l natural persons (that is, natural persons who trade as sole proprietors or partners in a partner-
ship).
A trust is not included in the definition of a micro business and can therefore not elect to pay turnover
tax.
23.3.2 Persons specifically excluded as qualifying micro businesses (paras 3 and 4)

For the sake of simplicity and delivering on the mandate to assist true micro (start-up) types of busi-
ness, some businesses are specifically excluded from qualifying as a micro business. The following
persons are specifically excluded:
l persons with certain interests in other companies
l persons mainly earning income from investments or professional services
l personal service providers and labour brokers
l persons with excessive capital receipts from disposing business assets (more than R1,5 million
over a period of three years)
l certain company exclusions, for example where a shareholder is not a natural person
l certain partnership exclusions, for example if a partner is not a natural person or if a partner is a
partner in more than one partnership.
23.4 Registered micro business (definition of ‘registered micro business’

in paras 1 and 8)
23.4.1 Registration
A micro business as defined should register with SARS if it elects to apply the turnover tax regime.
Registration is always voluntary and no person is obliged to register, even if the person falls within the
definition of a micro business and the person’s qualifying turnover is below the R1 million threshold.
The registration as a micro business always applies with effect from the beginning of a year of as-
sessment.
862
23.10 Chapter 23: Turnover tax system
23.4.2 Deregistration
There are two circumstances when a registered micro business can deregister from the turnover tax
regime, namely voluntary deregistration and compulsory deregistration. If a micro business is dereg-
istered from turnover tax, that micro business may never re-enter the turnover tax system.
Voluntary deregistration (par 9)

A micro business could elect to deregister. Voluntary deregistration is always effective from the
beginning of a year of assessment.
Compulsory deregistration (par 10)

Compulsory deregistration occurs where a business no longer qualifies as a micro business in terms
of the provisions of the Sixth Schedule. In the event of a compulsory deregistration of the micro
business, that micro business moves back into the normal tax regime with immediate effect (that is,
from the first day of the month during which the business is deregistered from the turnover tax). It is
therefore assessed for two periods in the year of assessment – one in the turnover tax system and the
other in the normal income tax system.
Remember
The year of assessment of a micro business always runs from 1 March to 28/29 February of the
next year.
23.5 Taxable turnover (definition of ‘taxable turnover’ in paras 1, 5, 6 and 7)

The tax base for the turnover tax is the taxable turnover of a registered micro business. It is on this
taxable turnover that the actual amount of tax due is calculated. The turnover tax regime does not
provide for the deduction of any business-related expenditure. As no deductions or allowances are
provided for, the principles of recoupments are also not relevant to a micro business’s turnover tax.
The following two tables summarise the calculation of taxable turnover for natural persons (first table)
and companies (second table):
863
Taxable turnover – natural person
l Amounts received
General l Not of a capital nature
inclusion
l During that year of assessment
(par 5)
l From carrying on business activities in the Republic
Specific 50% of receipts from the sale of any capital asset used
inclusions mainly for business purposes (other than any financial
(par 6) instrument) (par 6(a)).
Investment income (par 7(a))

Specific
exclusions
(paras 5 Amounts refunded from suppliers (par 7(d))
and 7)
Amounts refunded to customers (par 5)
Taxable turnover – companies
l Amounts received
General
l Not of a capital nature
inclusion
(par 5) l During that year of assessment
l From carrying on business activities in the Republic
50% of receipts from the sale of any capital asset used

Specific mainly for business purposes (other than any financial
inclusions instrument) (par 6(a)).
(par 6)
Investment income (excluding dividends) (par 6(b))
Specific Amounts refunded from suppliers (par 7(d))

exclusions
(paras 5
and 7) Amounts refunded to customers (par 5)
864
23.6–23.9 Chapter 23: Turnover tax system
23.6 Levying of turnover tax (ss 48A and 48B)

Turnover tax is payable by a person that is a registered micro business in respect of its taxable turn-
over during a year of assessment (s 48). The following rates are applicable for the 2018 year of
assessment:
Taxable Turnover Tax Liability
On the first R335 000 0%
R335 001 to R500 000 1% of each R1 above R335 000
R500 001 to R750 000 R1 650 + 2% of the amount above R500 000
R750 001 and above R6 650 + 3% of the amount above R750 000
23.7 Administration of turnover tax (par 11)

The Sixth Schedule specifically provides for the rules for interim payments of the turnover tax
(par 11). This is similar to the provisional tax payments for normal tax, but these payments are re-
ferred to as interim payments (probably to distinguish these payments from the provisional tax pay-
ments for normal tax). The interim payments must be accompanied by two different tax returns.
A micro-business also has the option of making all payments for employees’ tax, skills development
levies and unemployment insurance fund contributions biannually.
The Sixth Schedule to the Act does not specifically provide for rules governing the submission of the
tax return for a specific year of assessment. Nor does it prescribe the rules for the payment of the
final tax liability. It is therefore submitted that the normal rules applicable to the submission of tax
returns and the payment of taxes due should be followed (see chapter 33).
23.8 Record-keeping (par 14)

One of the main reasons for introducing the turnover tax is to simplify the administrative burden of a
micro business to ensure that it complies with tax legislation. The record-keeping requirements for a
micro business are reduced. Such businesses only need to keep the following records:
l Records should be kept of the details of all amounts received during a year of assessment
(par 14(a)).
l The micro business should record the dividends declared during a year of assessment
(par 14(b)).
l A list should be kept containing details of
– each asset on hand at the end of the year of assessment with a cost price of more than
R10 000 (par 14(c)), and
– all the individual liabilities of the micro business that exceed R10 000 at the end of the year of
assessment (par 14(d)).
23.9 Interaction of the Sixth Schedule with other taxes (ss 10(1)(zJ), 10(1)(zK),
64F and 64FA)
A person is not subject to both normal tax and the turnover tax in respect of the same receipt. All
income received by or accrued to a registered micro business conducting business in the Republic
is specifically exempt from normal tax.
The income of natural persons that are registered micro businesses representing
l investment income, and
l remuneration received from employment
are not exempt and are still subject to normal tax (ss 10(1)(zJ)(i) and (ii)).
A natural person that is a registered micro business could thus be liable for tax under two systems
(but should not be liable for tax under both systems on the same receipt).
A shareholder in a registered micro business is only partially exempt from the dividends tax, namely
to the extent that the total dividend paid by the micro business for a specific year of assessment does
not exceed R200 000 (s 64F(h)).
865
The capital gain or loss on the disposal of capital assets used mainly for business purposes by a
registered micro business is disregarded for CGT (par 57A of the Eight Schedule).
23.10 Transitional rules (ss 20 and 48C, par 7 and ss 78A and 18(4) of the VAT Act)
For a person who was registered for normal tax and who elected to register as a micro business for
the turnover tax regime, transitional rules apply with regard to:
l amounts already taxed for normal tax purposes (par 7(c)), and
l a balance of an assessed loss brought forward (s 20).
For a person who was registered as a micro business for the turnover tax regime and who deregis-
ters as such, transitional rules apply with regard to:
l amounts received by a micro business (but not accrued to) (s 48C(1))
l amounts accrued to a micro business (but not received by) (s 48C(2))
l the deduction of opening stock (s 48C(3))
l output tax on certain deemed supplies (s 78A(2) of the VAT Act),
l the prohibition of input tax on certain expenses (s 78A(3) of the VAT Act), and
l input VAT adjustments on assets (s 18(4) of the VAT Act).
Example 23.1. Turnover tax and a natural person

On 1 March 2013 Mohammed Ahmed, who is 25 years old, started a new business (sole proprie-
tor) of producing and selling candles. Mohammed Ahmed was never obliged to register as a VAT
vendor and also did not choose to do so. He qualified as a micro business and registered his
business as a micro business with effect from 1 March 2017, thus from the beginning of the 2018
year of assessment.
The following information is relevant to his 2017 year of assessment:
Doubtful debt allowance deducted in 2017 ................................................................ R7 500
Mohammed Ahmed’s assessed loss for 2017 ........................................................... 2 345
The following information is relevant to his 2018 year of assessment:
Cash receipts (note 1) ................................................................................................ 395 000
Outstanding debtor (note 2) ....................................................................................... 10 000
Interest received on bank account ............................................................................. 25 000
Dividends received on listed shares........................................................................... 250
Expenses incurred in the conversion of garage (note 3) ............................................ 50 000
Proceeds with the sale of mixer (note 4) ..................................................................... 20 000
Expenses incurred with the purchase of new mixer .................................................. 35 000
Normal trading expenses incurred ............................................................................. 105 000
Notes
(1) Included in the cash receipts for 2018 is R20 000 received from outstanding debtors as on
28 February 2017 and amounts refunded from suppliers on damaged goods purchased of
R12 000. On 20 June 2017, R3 000 of the R395 000 received was also refunded to a cus-
tomer who bought candles that did not want to light.
(2) Party Hire (Pty) Ltd still owed him R10 000 for candles delivered by him on 20 Febru-
ary 2018.
(3) On 1 March 2017 he converted his garage into business premises at a cost of R50 000. The
garage made up 20% of the total area of his primary residence. He acquired the primary res-
idence in 2006 for R800 000.
(4) He needed a larger mixer to mix the wax for the candles and purchased a new mixer. He
sold the old mixer and received R20 000. The mixer was wholly used for business purposes.
Calculate Mohammed Ahmed’s turnover tax liability for the 2018 year of assessment.
866
23.11 Chapter 24: Turnover tax system
SOLUTION
Doubtful debt allowance (note 1) ................................................................................... nil
Cash receipts (note 2) – (R395 000 – R20 000 – R12 000 – R3 000) ............................. 360 000
Outstanding debtor (note 3) .......................................................................................... nil
Interest received (note 4) ............................................................................................... nil
Dividends received (note 5) ........................................................................................... nil
Expenses incurred (note 6) ............................................................................................ nil
Proceeds with the sale of mixer (R20 000 × 50%) ......................................................... 10 000
Taxable turnover ............................................................................................................ 370 000
Turnover tax liability:
On R335 000 .................................................................................................................. Rnil
On R35 000 (R370 000 – R335 000) (R35 000 × 1%) .................................................... 350
Turnover tax liability for 2018 ......................................................................................... 350
Notes
(1) Recoupments, assessed losses and previous allowances are not carried into the turnover tax
system.
(2) The cash receipts from carrying on a business in the Republic are included in taxable turno-
ver (general inclusion – par 5). The R20 000 received from the debtors outstanding on
28 February 2017 was already subject to normal tax in 2017 and should therefore not again
be included in taxable turnover (specific exclusion – par 7(c)). The R12 000 refunded from a
supplier is just a refund of an expense and not a cash receipt from carrying on a business.
The intention of the turnover tax is to only tax the micro business on the net cash receipts
and the R3 000 refunded to the customer should therefore also be deducted.
(3) The turnover tax is only calculated on amounts received during a specific year of assess-
ment (general inclusion – par 5). The outstanding debtors do not constitute amounts re-
ceived in 2018 and are therefore excluded.
(4) Investment income for natural persons is specifically excluded from the taxable turnover
(specific exclusion – par 7(a)). The interest will be subject to normal tax and Mohammed can
also utilise the s 10(1)(i) interest exemption against it.
(5) Dividends received also constitute investment income and are excluded. To receive divi-
dends, it would imply shareholding in other companies. It is stated that the dividends were
received on listed shares and shareholdings in listed companies are not prohibited
(par 4(a)). The dividends would be subject to normal tax, but are exempt in terms of
s 10(1)(k).
(6) All the expenses incurred, the converted garage, the purchase of the new mixer as well as the
normal trading expenses are irrelevant for the calculation of the taxable turnover. The turnover
tax system only includes receipts and does not allow for the deduction of any expenses.
Example 23.2. Turnover tax and a company
On 1 March 2013 Mohammed Ahmed, who is 25 years of age, started a new business, Candle
Light (Pty) Ltd, of producing and selling candles. Candle Light (Pty) Ltd was never obliged to
register as a VAT vendor and also did not choose to do so. Candle Light (Pty) Ltd qualified as a
micro business and was registered as a micro business with effect from 1 March 2017.
The following information is relevant to Candle Light (Pty) Ltd’s 2017 year of assessment:
Doubtful debt allowance deducted in 2017 ................................................................. R7 500
Candle Light (Pty) Ltd’s assessed loss for 2017 was .................................................. 2 345
The following information is relevant to Candle Light (Pty) Ltd’s 2018 year of
assessment:
Cash receipts (note 1) ................................................................................................. 395 000
Outstanding debtor (note 2) ........................................................................................ 10 000
Interest received on bank account .............................................................................. 25 000
Dividends received on listed shares............................................................................ 250
Rent paid for business premises ................................................................................ 50 000
Proceeds with the sale of mixer (note 3) ...................................................................... 20 000
Expenses incurred with the purchase of new mixer ................................................... 35 000
Normal trading expenses incurred .............................................................................. 105 000
continued
867
Notes
(1) Included in the cash receipts for 2018 is R20 000 received from outstanding debtors as on
28 February 2017 and amounts refunded from suppliers on damaged goods purchased of
R12 000. On 20 June 2017, R3 000 of the R395 000 received was also refunded to a cus-
tomer who bought candles that did not want to light.
(2) Party Hire (Pty) Ltd still owed Candle Light (Pty) Ltd R10 000 for candles delivered on
20 February 2018.
(3) Candle Light (Pty) Ltd needed a larger mixer to mix the wax for the candles and purchased a
new mixer. Candle Light (Pty) Ltd sold the old mixer and received R20 000. The mixer was
wholly used for business purposes.
Calculate Candle Light (Pty) Ltd’s turnover tax liability for the 2018 year of assessment.
SOLUTION
Doubtful debt allowance (note 1) ................................................................................... nil
Cash receipts (note 2) – (R395 000 – R20 000 – R12 000 – R3 000) ............................. 360 000
Outstanding debtor (note 3) .......................................................................................... nil
Interest received (note 4) ............................................................................................... 25 000
Dividends received (note 5) ........................................................................................... nil
Expenses incurred (note 6) ............................................................................................ nil
Proceeds with the sale of mixer (R20 000 × 50%) ......................................................... 10 000
Taxable turnover ............................................................................................................ 395 000
Turnover tax liability:
On R335 000 .................................................................................................................. Rnil
On R60 000 (R395 000 – R335 000) (R60 000 × 1%) .................................................... 600
Turnover tax liability for 2018: ........................................................................................ 600
Notes
(1) Recoupments, assessed losses and previous allowances are not carried into the turnover tax
system.
(2) The cash receipts from carrying on a business in the Republic are included in taxable turn-
over (general inclusion – par 5). The R20 000 received from the debtors outstanding on
28 February 2017 was already subject to normal tax in 2017 and should therefore not again
be included in taxable turnover (specific exclusion – par 7(c)). The R12 000 refunded from a
supplier is just a refund of an expense and not a cash receipt from carrying on a business.
The intention of the turnover tax is to only tax the micro business on the net cash receipts
and the R3 000 refunded to the customer should therefore also be deducted.
(3) The turnover tax is only calculated on amounts received during a specific year of assess-
ment (general inclusion – par 5). The outstanding debtors do not constitute amounts re-
ceived in 2018 and are therefore excluded.
(4) Investment income for companies is specifically included in the taxable turnover (specific
inclusion – par 6(b)).
(5) Dividends received also constitute investment income, but investment income (excluding
dividends and foreign dividends) is included in taxable turnover of companies. Dividends
are not included in the taxable turnover. To receive dividends, it would imply shareholding in
other companies. It is stated that the dividends were received on listed shares and share-
holdings in listed companies are not prohibited (par 4(a)).
(6) All the expenses incurred, the rentals paid, the purchase of the new mixer as well as the
normal trading expenses are irrelevant for the calculation of the taxable turnover. The turn-
over tax system only includes receipts and does allow for the deduction of any expenses.
868
24 Trusts
Karen Stark and Madeleine Stiglingh

l calculate the taxable income of all related parties to a trust in respect of amounts
earned by a trust during a year of assessment;
l calculate the taxable capital gain of all related parties to a trust resulting from a
disposal of an asset by a trust; and
l apply the provisions relating to a non-resident trust when amounts are distributed
during the current year as well as in a subsequent year of assessment.
Contents
Page
24.1 Overview ........................................................................................................................... 869
24.2 Creation of the trust .......................................................................................................... 870
24.3 Different types of trusts .................................................................................................... 870
24.3.1 Ordinary trust ..................................................................................................... 870
24.3.2 Special trust ....................................................................................................... 871
24.4 The nature of the income received and distributed by trusts .......................................... 871
24.5 Person(s) liable for tax on the income earned by trusts (ss 25B and 7).......................... 873
24.6 Liability of the donor for tax on income ............................................................................ 874
24.6.1 Donation, settlement or other disposition (s 7(9) and 7(10)) ........................... 875
24.6.2 Deemed inclusion in spouse’s income (s 7(2)) ................................................. 875
24.6.3 Deemed inclusion in parent’s income (s 7(3) and 7(4)) ................................... 875
24.6.4 Retained income not vested due to stipulation or condition (s 7(5)) ................ 875
24.6.5 Amount vested that could have been revoked (s 7(6)) .................................... 877
24.6.6 Donation of the right to income (s 7(7)) ............................................................ 878
24.6.7 Resident benefiting a non-resident (s 7(8)) ...................................................... 878
24.6.8 Recovery of tax .................................................................................................. 879
24.6.9 Interest-free and low-interest loans ................................................................... 879
24.6.9.1 Normal tax consequences .................................................................. 879
24.6.9.2 Donations tax consequences .............................................................. 881
24.7 Deductions and allowances (s 25B(3)) ............................................................................ 881
24.8 Limitation of losses (s 25B(4), (5) and (6)) ....................................................................... 882
24.9 Capital gains tax: Disposal by a trust for capital gains tax purposes ............................. 884
24.9.1 Disposal to a third party .................................................................................... 884
24.9.2 Vesting of an interest in a trust asset in a beneficiary ...................................... 884
24.10 Capital gains tax: Treatment of capital gains in respect of a disposal by a trust............ 885
24.11 Capital gains tax: Treatment of capital losses in respect of a disposal by a trust .......... 886
24.12 Capital gains tax: Base cost of a discretionary interest ................................................... 886
24.13 Comprehensive example ................................................................................................. 886
24.14 Non-resident trusts (s 25B(2A) and par 80(3)) ............................................................... 890
24.1 Overview
A trust is defined as the legal relationship created by a person (the founder) who places assets under
the control of another (the trustee) for the benefit of specified persons (beneficiaries) or for a speci-
fied purpose. Even though a trust is regarded as a relationship, it is specifically included in the defini-
tion of a ‘person’ to put it beyond doubt that a trust could be subject to normal tax (s 1). The founder
869
appoints the trustee(s) who acts on behalf of the beneficiaries. It is the trustee’s function to administer
and distribute the income and capital of the trust until termination of the trust. Any distribution to the
beneficiaries of the trust must be made in accordance with the provisions of the trust deed, which is
a document containing all the rules of the trust.
Trusts can be used to provide for dependants in the case of death, to manage financial risk exposure
by protecting assets from creditors or to reduce estate duty on death. In a business context, trusts
are used in Black Economic Empowerment (BEE) deals and share incentive schemes.
The following diagram illustrates the layout of the chapter:
Different types of income

(see 24.4)
Third party
(see 24.9.1
and 24.10)
Creation of the trust TRUST Disposal of assets
(see 24.2) by the trust to:
Beneficiary
(see 24.9.2
and 24.10)
Distribu-
tion/retention of
income will result
in tax
consequences
of one of three
parties:
Donor Beneficiary Trust

(see 24.6) (see 24.5) (see 24.3 and 24.5)
24.2 Creation of the trust

Depending on how a trust is created, it can be classified as either mortis causa and inter vivos. A
mortis causa trust is created in terms of a person’s will and is also known as a testamentary trust. It is
regularly used to provide for minor children and/or the spouse after a person’s death. The trustees
will manage the assets that were bequeathed to the trust on behalf of the spouse and children to
ensure a steady inflow of cash to provide for their needs and living expenses.
An inter vivos trust is created during the lifetime of the founder and is also known as a living trust. The
founder normally sells or donates assets to the trust.
This classification does not determine the tax consequences of the trust, but merely indicates how it
was created.
24.3 Different types of trusts

For tax purposes, we have two types of trusts, namely an ordinary trust and a special trust. The tax
rate of these trusts differ, but neither of them qualify for the primary, secondary or tertiary rebates
(s 6) or for the limited interest exemption (s 10(1)(i)) since a trust is not a natural person. Even though
a trust is not a natural person, its year of assessment always ends on the last day of February.
24.3.1 Ordinary trust

An ‘ordinary trust’ is a trust which is not a ‘special trust’ as defined. The tax rate of an ordinary trust is
fixed at 45%. If the trust has, for example, taxable income of R45 000 the tax liability of the trust will
be R20 250 (45% × R45 000).
870
24.3–24.4 Chapter 24: Trusts
24.3.2 Special trust

For normal tax purposes the rate of a special trust is not fixed at 45%, but the sliding scale applicable
to natural persons that varies from 18% to 45% applies to special trusts.
The definition of ‘special trust’ provides for two types (s 1). The first type of special trust is a trust that
is created solely for the benefit of a person with a disability. The second type of special trust is a trust
created in terms of the will of a deceased person solely for the benefit of beneficiaries who are his
relatives.
For a trust created solely for the benefit of a person with a disability, the following requirements
should be met to qualify as a ‘special trust’:
l If there is more than one beneficiary, both must be disabled and relatives in relation to each
other.
l The disability must prevent the beneficiaries from earning sufficient income for their maintenance
or from managing their own financial affairs.
When all disabled beneficiaries die, the trust will no longer be deemed to be a special trust for the
purposes of years of assessment ending on or after the date of the last person’s death. For example,
if the only disabled beneficiary of a special trust died during the 2018 year of assessment, then the
trust will be regarded as an ordinary trust (and not a special trust) for the entire 2018 year of assess-
ment and taxed accordingly (namely at the fixed rate of 45%).
The second type of special trust is a trust created in terms of the will of a deceased person solely for
the benefit of beneficiaries who are his relatives. These beneficiaries
l must all be alive or have been conceived (not yet born) on the date of his death; and
l the youngest beneficiary must be under the age of 18 years on the last day of the year of as-
sessment of the trust.
The trust will cease to be a special trust in the year of assessment when the youngest beneficiary
attains the age of 18. For example, if the youngest beneficiary turns 18 on 1 December 2017, then
the trust will be an ordinary trust for the entire 2018 year of assessment and taxed accordingly (name-
ly at the fixed rate of 45%).
24.4 The nature of the income received and distributed by trusts

The following diagram shows different types of income that a trust (with three beneficiaries) may earn:
Dividends Interest Rental Trade income
Assets in the
Asset sold, bequeathed TRUST
or donated to trust that produce
above income
Trustees may
distribute some or
all of income to
beneficiaries in
terms of trust deed
Beneficiary 1 Beneficiary 2 Beneficiary 3
871
Before a person can decide who should be subject to tax on any income received by a trust or
distributed by a trustee, it is important to determine the nature of the amounts received.
A trust is a mere conduit pipe through which income flows, and the income retains its identity in the
hands of the beneficiaries. If a trust, for example, receives dividend income and the trustee distrib-
utes some of this income to a beneficiary, the nature of the income received by the beneficiary will
also constitute dividend income. A further result of the conduit pipe principle is that all distributions
by a trust are deemed to consist pro rata of the different types of income earned by the trust. A trust
deed may, however, provide that a certain distribution must be made from a certain type of income
only, or that the decision may be left up to the discretion of the trustees.
After a person has determined the nature of all amounts received by beneficiaries, it is important to
note that any exemption from tax provided in the Act applying to that type of income will be available
to that beneficiary.
The dividend or interest portion of an annuity that is received by or accrues to any person will not
qualify for the local dividend exemption (s 10(1)(k)) or the exemption for interest available to non-
residents (s 10(1)(h)) since it is prohibited (s 10(2)(b)). The foreign dividend exemption (s 10B) is also
prohibited in respect of any portion of an annuity (s 10B(5)). It is submitted that the interest exemption
available to natural persons (s 10(1)(i)) may still be used against the relevant portion of an annuity
since it is not specifically prohibited.
Example 24.1. Income retains its identity
Samuel is 19 years old and is one of three beneficiaries of a testamentary resident trust. In terms
of the trust deed, Samuel must receive an annuity of R18 000 payable pro rata out of the receipts
and accruals of the trust. The trustees may make any further discretionary distributions to Samuel
and his two brothers, David and Carl, after payment of the annuity. No beneficiary has a vested
right to the retained amounts of the trust.
The following income accrued during the 2018 year of assessment to the trust:
Local dividends ............................................................................................................. R35 000
Foreign dividends (not exempt in terms of s 10B(2)) ..................................................... 30 000
Interest from South African investments (not exempt in terms of s 12T) ........................ 25 000
Interest from sources outside South Africa .................................................................... 10 000
R100 000
Apart from the R18 000 annuity paid to Samuel, the trustees made discretionary distributions of
R2 000 to each of the beneficiaries. Assume that the trust incurred no expenses and Samuel
earns no other income.
The distributions can be summarised as follows:
Local Foreign Local Foreign
Total
dividends dividends interest interest
R100 000 R35 000 R30 000 R25 000 R10 000
100% 35% 30% 25% 10%
35 000 30 000 25 000 10 000
100 000 100 000 100 000 100 000
Annuity: Samuel (note) ............ (18 000) (6 300) (5 400) (4 500) (1 800)
Distribution: Samuel ................ (2 000) (700) (600) (500) (200)
Distribution: David................... (2 000) (700) (600) (500) (200)
Distribution: Carl ..................... (2 000) (700) (600) (500) (200)
R76 000 R26 600 R22 800 R19 000 R7 600
Note
Samuel received R18 000 that consists pro rata of each type of income received by the trust.
R6 300 (35% × R18 000) is the local dividend portion, R5 400 (30% × R18 000) is the taxable
foreign dividend portion, R4 500 (25% × R18 000) is the local interest portion and R1 800 (10% ×
R18 000) is the foreign interest portion. The amounts that relate to the other distributions are ap-
portioned accordingly.
Calculate the taxable income of Samuel for the 2018 year of assessment.
872
SOLUTION
Taxable income of Samuel
Annuity received consisting of the different types of income as indicated
in the distribution table (‘gross income’ as defined in s 1 par (a)).............. R18 000
Local dividends ..................................................................................... R6 300
Foreign dividends .................................................................................. R5 400
Local interest ......................................................................................... R4 500
Foreign interest ...................................................................................... R1 800
Less: Exemptions (note)............................................................................ (R4 500)
Local interest exemption of R4 500 (less than R23 800) (s 10(1)(i)) ......... (R4 500)
Distribution received consisting of the different types of income
as indicated in the distribution table (‘gross income’ as defined in s 1) .... R2 000
Local dividends .................................................................................... R700
Foreign dividends ................................................................................. R600
Local interest ........................................................................................ R500
Foreign interest ..................................................................................... R200
Less: Exemptions ...................................................................................... (R1 533)
Local dividend exemption (s 10(1)(k)) against R700 since payment
is not an annuity ........................................................................................ (R700)
Foreign dividend exemption (s 10B(3)) is 25/45 × R600 since payment
is not an annuity and Samuel is a natural person ..................................... (R333)
Local interest exemption (s 10(1)(i)) of R500, max R23 800 and only
R4 500 already used ................................................................................. (R500)
Taxable income ......................................................................................... R13 967
Note
Samuel may not use the local and foreign dividend exemptions (ss 10(1)(k) and 10B(3)) because
the payment is made as an annuity (ss 10(2)(b) and 10B(5)), but the local interest exemption
(s 10(1)(i)) is not specifically prohibited if paid in the form of an annuity. No exemption is availa-
ble against foreign interest.
Any income retained in a trust would normally already have been taxed during the year that the
income arose (s 25B(1)). A subsequent distribution of retained amounts is not again taxed in the
hands of the beneficiary unless it is paid in the form of an annuity (which is specifically included in
par (a) of the gross income definition).
24.5 Person(s) liable for tax on the income earned by trusts (ss 25B and 7)
An income tax assessment may be raised on the trustee, the founder (if considered a donor) and/or
on the beneficiaries. The following specific order of persons who may be taxed on an amount earned
by the trust applies:
l Firstly, the donor
The founder will be considered a donor if a donation is involved in the formation of the trust or if
interest-free (or low-interest) credit is granted to the trust in respect of assets sold to the trust.
The donor will not only be subject to tax on amounts actually received from the trust, but also on
amounts deemed to accrue to the donor (s 7(2) to 7(8)) (since s 25B(1) is made subject to the
donor provisions (s 7) – see 24.6).
l Secondly, a beneficiary with a vested right
The beneficiary will only be subject to tax on amounts that vest in the beneficiary, but only to the
extent that it is not deemed to accrue to the donor (s 25B(1) and 25B(2) read together with s 7(1)).
l Lastly, the trust
The trust will only have taxable income if no beneficiary has a vested right to the income and the
income is not deemed to accrue to the donor (s 25B(1)).
The trustee is the representative taxpayer in respect of any income earned by the trust (par (c) of
the definition of a ‘representative taxpayer’ in s 1).
Careful consideration must therefore be given to the provisions of the trust deed, the relevant sec-
tions of the Act and the legal principles relating to the vesting of rights when determining the liability
for tax in respect of the income of a trust.
873
A vested right to income means that the beneficiary will definitely receive it or it will fall into the estate
of the beneficiary should the beneficiary die before payment and it includes
l income due and payable to a beneficiary
l income credited to an account for the benefit of the beneficiary
l income reinvested, accumulated or capitalised in the name of the beneficiary, or
l income that has been dealt with for the benefit of a beneficiary.
If a person has a vested right to income, it means that the person is entitled thereto, even though
enjoyment and/or payment may be postponed until a future date.
A vested right may also be obtained by way of the exercise of the discretion of the trustees
(s 25B(2)). This means that if a person did not have a vested right in terms of the trust deed, vesting
will occur when the trustees decide to make a discretionary distribution to a specific beneficiary.
Where vesting occurs at the discretion of the trustees, the trust is often referred to as a discretionary
trust.
In contrast to a vested right, a contingent right is merely an expectation or hope that may never realise.
Example 24.2. Section 25B
In whose hands will the annual income be subject to tax in each of the following scenarios?
(1) In terms of a will, the assets of a deceased are vested in a resident trust to be administered
for and on behalf of the deceased’s six minor children. The trustees must use their discre-
tion to disburse the income of the trust necessary for the maintenance and education of the
children. The balance of the income is to be accumulated for the benefit of the children and
to be paid over to them if and when they reach the age of 25. In terms of the trust deed, a
child is not entitled to his share of the accumulated income in the event of his death prior to
reaching the age of 25.
During the year of assessment, the trust derived a net income of R40 000. In terms of the
discretionary powers of the trustees, they spent R18 000 in total for the maintenance and
education of the children whereby each child benefited equally.
(2) In terms of her late father’s will, Thandi was entitled to the balance of his estate. The will
provided that this balance should be placed in a resident trust, to be administered by trus-
tees. The trustees have full discretion to determine how much of the trust income should be
made available to Thandi and how much should be reinvested. It was clear from the terms
of the will that Thandi had a vested right to both capital and income. Upon Thandi’s reach-
ing the age of 30, the trust would terminate and she would receive all the assets of the trust.
If she died before reaching the age of 30, the assets would form part of her estate.
During the year of assessment, R6 000 was awarded to Thandi by the trustees out of the net
income of R30 000, while the balance of R24 000 was reinvested.
SOLUTION
(1) Of the R18 000 expended by the trustees for maintenance and education of the children,
R3 000 is taxed in the hands of each minor child because the children acquired vested
rights in consequence of the exercise by the trustees of their discretion (s 25B(1) and (2)).
Although the balance of R22 000 (R40 000 – R18 000) is being accumulated for the benefit
of the minor children, a child will only become entitled to the accumulated income if he or
she is alive at the age of 25. The children only have contingent rights to the accumulated in-
come. Since no beneficiary is presently entitled to this income, the R22 000 is taxed in the
hands of the trust, with the trustees being the representative taxpayers of the trust
(s 25B(1)).
(2) The balance of Thandi’s father’s estate vested in her. The R24 000 not distributed to her was
reinvested by the trustees for her benefit and is therefore deemed to have accrued to her
(s 25B(1)). The retained R24 000 as well as the amount of R6 000 awarded to her are taxed
in her hands.
24.6 Liability of the donor for tax on income

Anti-avoidance provisions deem a different person to be taxed on that income than the person to
whom the income accrues (s 7(2) to 7(8)). To know exactly in whose hands the income of a trust is
taxable, a thorough knowledge of these provisions is vital.
874
24.6 Chapter 24: Trusts
24.6.1 Donation, settlement or other disposition (s 7(9) and 7(10))

The anti-avoidance provisions (s 7(2) to 7(8)) may only be invoked if a ‘donation, settlement or other
[similar] disposition’ has taken place. A detailed discussion of its meaning can be found in chapter 7.
These anti-avoidance provisions are not only applicable when a donation is made to a trust; they may
also be invoked on other direct donations between persons.
‘Donation, settlement or other disposition’ in summary refers to any gratuitous disposal. For the re-
mainder of this chapter, any reference to a ‘donation’ will include a settlement or similar disposition.
It is important to note that the non-charging of market-related interest on a loan is considered to be a
gratuitous disposal and therefore a continuous donation for purposes of s 7.
The non-charging of market-related interest is not normally a donation for the application of donations
tax, but from 1 March 2017, the non-charging of market-related interest on certain loans to a trust has
donations tax consequences (s 7C discussed in 24.6.9.2).
Where an asset has been disposed of for a consideration that is less than the market value of the
asset, the amount by which the market value exceeds the consideration is also deemed to be a
donation for the purposes of s 7 (s 7(9)) and donations tax (s 58).
A resident who, during any year of assessment, makes a donation for purposes of s 7 is required to
disclose this fact to the Commissioner when submitting his return of income for that year (s 7(10)).
24.6.2 Deemed inclusion in spouse’s income (s 7(2))

To prevent spouses from reducing their liabilities for normal tax by arranging for taxable income to be
split between them, the anti-avoidance provision may apply (s 7(2)). If excessive amounts are paid
out of the trade income of one spouse to the other spouse or where one spouse donates income-
producing assets to the other spouse with the sole or main purpose of reducing his tax liability, the
first-mentioned spouse will be taxed on the excessive amount or the income generated from the
donated asset (see chapter 7 for a detailed discussion of s 7(2)).
In the context of a trust, s 7(2) will only apply if one spouse donates income-producing assets to a
trust with the other spouse as the beneficiary of the trust and the sole or main purpose of the dona-
tion was the reduction of the donor spouse’s tax liability.
24.6.3 Deemed inclusion in parent’s income (s 7(3) and 7(4))

To prevent a parent from diverting his income to a minor child who will normally be taxed at a lower
rate, anti-avoidance provisions were introduced (s 7(3) and 7(4)). These anti-avoidance provisions
are applicable to direct and indirect donations from parents to their minor children (which include
adopted children) or stepchildren. A person is a minor if he or she is unmarried and has not attained
the age of 18 years. The determination of whether the child is a minor is done at the time of ‘vesting’.
The parent is liable for tax on the income produced by reason of or in consequence of the donated
assets, irrespective of whether the income had been received by or had accrued to the child or had
been expended or accumulated for the child’s benefit (see chapter 7 for a detailed discussion of
s 7(3) and 7(4)).
24.6.4 Retained income not vested due to stipulation or condition (s 7(5))

A specific donor provision applies to retained income in a trust that has not vested in a beneficiary as
a result of a condition (s 7(5)). The condition may have been imposed by the donor or another per-
son. The condition may be that a certain age must be reached, or the beneficiary must marry, or that
the trustees must exercise a discretionary power to pay income to beneficiaries. The latter is implied
in all discretionary trusts and an amount retained in a discretionary trust, which arose from a donated
asset, will therefore be taxed in the donor’s hands since it has not vested in a beneficiary. The donor
is subject only to tax on the retained income that relates to his donation and only until the fulfilment of
the condition or his death, whichever happens first.
If payment is merely delayed but the beneficiary has a vested right to retained income, then s 7(5)
will not apply, and the beneficiary will be liable for tax on the income.
If a beneficiary has a vested right to the income, the application of the vested right principle (s 7(1))
takes preference over the donor provision applicable to retained income (s 7(5)), but it must be kept
in mind that another donor provision may still lead to the liability of tax in the donor’s hands. For
example, if the retained amount vests in a minor child, the retained amount is taxed in the donor
parent’s hands (s 7(3)).
875
Remember
The following specific order of persons who may be taxed on an amount earned by the trust
applies:
l firstly, the donor (s 7(2) to 7(8)) (since s 25B(1) is made subject to the donor provisions (s 7)),
l secondly, a beneficiary with a vested right (s 25B(1) and 25B(2) read together with s 7(1)),
and
l lastly, the trust (s 25B(1)).
Example 24.3. Section 25B(1) subject to s 7

Joseph donated a rent-producing asset to a trust. His two children (Mary and Margaret) are the
beneficiaries of the trust. Mary is a minor and Margaret is a 22-year-old full-time student. During
the 2018 year of assessment the trust earned R50 000 net rental income. The trustees exercised
their discretion and distributed R10 000 to each beneficiary. No beneficiary has a vested right to
the retained amount of R30 000 (R50 000 – (R10 000 × 2)).
Determine who will be liable for income tax on the rentals earned by the trust.
SOLUTION
Firstly: Apply the relevant donor provisions. The donor (Joseph) will be taxed on the income that
accrues to his minor child (Mary) by reason of his donation (s 7(3)), as well as the retained in-
come of the trust (s 7(5)). Joseph is therefore taxed on R40 000 (R10 000 + R30 000).
Secondly: Include the income in the tax calculation of the beneficiary who has a vested right to it
(s 25B(1)). Margaret will thus be taxed on her R10 000.
Lastly, tax the trust on any retained amount that was not subject to s 7(5) and to which no benefi-
ciary has a vested right. There is thus no amount to be included in the taxable income of the
trust.
In summary:
Amount received or accrued to the trustees................................................................. 50 000
Deemed to accrue to:
Joseph (s 7(3)) .......................................................................................................... (10 000)
Joseph (s 7(5)) .......................................................................................................... (30 000)
Margaret (s 25B(1)) ................................................................................................... (10 000)
Taxable income of the trust........................................................................................... Rnil
Example 24.4. Section 7(5)

Edward created a trust for the benefit of his minor grandson, Adam, his major grandson, Brian,
and his married granddaughter, Caroline. He donated assets to the trust to be administered by
the trustees for the benefit of his grandchildren. The trust deed provides that the trustees have
discretionary powers with regard to distributing income to the beneficiaries as they deem neces-
sary. The deed provides further that the remaining annual income is to be accumulated for the
beneficiaries, who will be entitled to receive it on Edward’s death or when the beneficiaries reach
the age of 30, whichever happens first. If a beneficiary should die before attaining the age of 30,
the other beneficiaries will proportionally be entitled to that amount.
During the year of assessment, the trust received ‘taxable’ income of R6 000 from the assets. The
trustees distributed R500 to each beneficiary and accumulated the balance of R4 500.
Determine who is liable for tax on the R6 000 taxable income.
SOLUTION
There is clearly a stipulation in the trust deed that prevents the beneficiaries from acquiring a
vested right to the retained income until the happening of an event that results in the application
of the donor provision (s 7(5)). The events contemplated by the trust deed are the death of the
donor or the attainment of the age of 30 by the beneficiaries, whichever takes place first, or the
exercise by the trustees of their discretionary power whether to distribute any income. The R500
distributed to each beneficiary will be taxable in their hands due to the exercise of the discretion
of the trustees (s 25B(1) and (2)). The retained amount of R4 500 is deemed to have accrued to
Edward (s 7(5)), as the condition prohibits the beneficiaries from receiving the money or attaining
a vested right to it.
Section 7(3) does not apply to a donor-grandparent who benefits his minor grandchildren.
876
Remember
l The person making the donation, settlement or other disposition must still be alive for the
application of s 7(5). The person who imposed the condition may already be dead, but s 7(5)
will still apply with regard to the other living donors.
l If there is more than one donor, then s 7(5) will apply to the pro rata retained income of each
donor resulting from his specific donation that is subject to the condition imposed.
l Section 7(5) applies until the date of the event or stipulation, or the date of death of the donor,
whichever occurs first. It is, however, submitted that s 7(5) can only apply to amounts re-
tained in the trust at the end of the year of assessment and not to amounts not yet vested on
date of donor’s death in the middle of a year of assessment.
24.6.5 Amount vested that could have been revoked (s 7(6))

A specific anti-avoidance provision aims to prevent a donor from leaving a backdoor open in order to
revoke a beneficiary’s right to receive any income (s 7(6)). This provision leads to a donor being
taxed on income that has already vested in a beneficiary and does not apply where a beneficiary
only has a contingent right to income.
Example 24.5. Section 7(5) and (6)

Edward created a trust for the benefit of his minor grandson, Adam, his major grandson, Brian,
and his married granddaughter, Caroline. He donated assets to the trust to be administered by
the trustees for the benefit of his grandchildren. The trust deed provides that the trustees have
discretionary powers with regard to distributing income to the beneficiaries as they deem neces-
sary. The deed provides further that the remaining annual income is to be accumulated for the
beneficiaries, who will be entitled to receive it on Edward’s death or when the beneficiaries reach
the age of 30, whichever happens first. If a beneficiary should die before attaining the age of 30,
the other beneficiaries will proportionally be entitled to that amount.
Edward has, however, also reserved for himself in the trust deed the right to confer Caroline’s
right to receive the income on Adam and Brian in equal shares at any time. So far he has not
exercised this right.
During the year of assessment, the trust received ‘taxable’ income of R6 000 from the assets. The
trustees distributed R500 to each beneficiary and accumulated the balance of R4 500.
Determine who is liable for tax on the R6 000 taxable income.
SOLUTION
The donor has clearly reserved for himself the right to revoke Caroline’s right to receive income
at any time and to confer it on Adam and Brian. Thus the income of R500 accruing to Caroline is
deemed to be the income of Edward (s 7(6)).
There is clearly a stipulation in the trust deed which prevents the beneficiaries from acquiring a
vested right until the happening of an event (s 7(5)). The events contemplated by the trust deed
are the death of the donor or the attainment of the age of 30 by the beneficiaries, whichever
takes place first, or the exercise by the trustees of their discretionary power whether to distribute
any income. The R500 distributed to each beneficiary would normally be taxable in the hands of
the beneficiaries (s 25B(1)), but s 7(6) overrides this provision as discussed above. The retained
amount of R4 500 is deemed to be Edward’s since the condition prohibits the beneficiaries from
receiving the money or acquiring a vested right to it (s 7(5)).
To sum up, Adam and Brian are each liable for tax on the R500 that they receive from the trust-
ees (s 25B(1)), while Edward is liable for tax on R5 000 (R4 500 (s 7(5)) and R500 paid to Caro-
line (s 7(6)). Caroline is not liable for tax on the R500 paid to her.
Remember
Differences between s 7(5) and 7(6):
l For s 7(5) to be applicable, no beneficiary may have a vested right to the retained amount,
whereas in s 7(6) a beneficiary acquires a vested right, but due to the power to revoke the
beneficiary’s right to benefit, the donor is taxed.
l For the application of s 7(5), any person could have imposed the condition and then s 7(5)
applies to all relevant donors. Section 7(6) applies only to the donor who has the right to
transfer the right to receive the income to someone else. If A makes a donation to a trust for
example, but in terms of the trust deed, B has the power to revoke a beneficiary’s right to re-
ceive any income, the provisions of s 7(6) will not apply to the income as a result of A’s dona-
tion. The reason for this is because the donor and the person who has the right to transfer the
income to another are not the same person.
877
24.6.6 Donation of the right to income (s 7(7))

To prevent schemes where a taxpayer cedes the right to receive income generated by his asset, a
specific anti-avoidance provision was introduced (s 7(7)). This section is applicable if a taxpayer
cedes the right to receive income to another person, while the taxpayer retains the ownership of the
asset (or retains the right to regain the ownership at a future date). If the taxpayer cedes the right to
the income before its accrual, his taxable income is decreased by the amount that he ceded.
Any rent, dividends, interest, royalties (and other similar income) in respect of movable or immovable
property received by or accrued to another person as a result of a donation, while the donor remains
the owner of the property, is deemed to be that of the donor. The donor provision is also applicable if
the donor is entitled to regain ownership of the property. Examples of property for purposes of this
donor provision include fixed property, shares, marketable securities, deposits, loans, copyrights,
designs and a trade mark.
The donor will be taxed even if the income would have been exempt from tax in the hands of the
actual recipient (for example a church or welfare organisation).
Nsizwa created an inter vivos trust and donated a residential property to the trust. The trust deed
stipulates that the rental income produced by the property must be paid to a specified charitable
organisation. Ownership of the property must, however, be transferred back to Nsizwa if he so
notifies the trust in writing.
Who will be liable for income tax on the rental earned by the trust and paid to the charitable
organisation during the year of assessment?
SOLUTION
Nsizwa is entitled to regain ownership of the property, and the rental income produced by the
property is therefore taxed in the hands of Nsizwa, even though the charitable organisation
receives all the rental income (s 7(7)).
Note: The application of s 7(7) may also result in the application of a specific anti-avoidance provi-
sion in the Estate Duty Act, which deems property of the deceased to include any property that he
was competent to dispose of for his own benefit (s 3(3)(d)). For example, where the donor is the only
trustee and also a capital beneficiary of the trust, the property will be included in the amount on
which estate duty is payable.
Remember
l Section 7(7) relates only to income generated by property and does not apply to income from
services rendered. This is because income as a result of services rendered is taxable in the
hands of the person who rendered the services, irrespective of who received the income
(par (c) of the definition of ‘gross income’).
l Section 7(7) is applicable to all the income resulting from the specific property, not only to the
distributed income.
24.6.7 Resident benefiting a non-resident (s 7(8))

South Africa applies a residence-based (or worldwide) system of taxation to its ‘residents’ (as defined
in s 1) and a source-based system of taxation to non-residents. It is therefore possible that South
African ‘residents’ could attempt to reduce their South African tax obligation by shifting income that is
not from a South African source to non-residents. In order to prevent foreign source income of a
resident from being donated to a non-resident, another specific anti-avoidance donor provision exists
(s 7(8)).
An amount that accrues to a person who is not a resident by reason of a donation made by a resident
can be included in the income of the resident donor. This will be the case if the amount would have
constituted income had that non-resident benefiting from the donation been a resident (s 7(8)(a)).
The amount is included in the gross income of the resident (refer to par (n) of the gross income
definition). It is, however, uncertain whether ‘income’ in the phrase ‘would have constituted income
had that non-resident been a resident’ should be given its commercial meaning or the meaning as
defined, i.e. gross income less exempt income. It is submitted that if the non-resident would have had
878
any income as defined, then the full amount that is received by or accrued to the non-resident must
be included in the gross income of the resident (subject to relevant exemptions available to the
resident).
The resident is allowed to deduct any expenditure, allowance or loss incurred by the non-resident
that would have been allowable as a deduction in the determination of taxable income (s 7(8)(b)).
The deduction is limited to the amount included in the income of the resident. It seems as if the same
provision is not necessary in s 7(2) to (7) because the term ‘income’ used in those sections refers to
profits according to the judgment in CIR v Simpson (1949 (4) SA 678 (A)). Deductions are taken into
account to calculate profits.
Donations made by a resident to a non-resident public benefit organisation and amounts that accrue
to a controlled foreign company in relation to the resident donor (s 9D) fall outside this specific anti-
avoidance donor provision (s 7(8)).
24.6.8 Recovery of tax

Any tax payable by a donor due to the inclusion of income deemed to have been received by him in
his taxable income may be recovered from the person entitled to the actual receipt of the income so
included (first proviso to s 90). The tax on the income may be recovered from the assets that gener-
ated the income (s 91(4)).
24.6.9 Interest-free and low-interest loans

A person could sell an asset to a trust at market value, but leave the selling price outstanding on an
interest-free (or low interest) loan. In this situation one will have to separate the sale of the asset and
the failure to charge sufficient interest on the outstanding loan. The non-charging of market-related
interest on a loan is considered to be a continuous donation for purposes of attributing income to a
‘donor’ (s 7) (see 24.6.9.1).
As a result of the introduction of s 7C from 1 March 2017, the non-charging of market-related interest
on certain loans may also result in donations tax consequences (see 24.6.9.2).
24.6.9.1 Normal tax consequences

For normal tax purposes, the causal relationship between the failure to charge interest and any
income accruing to the trust (or beneficiaries) affects the application of s 7 (CIR v Berold 1962 (3) SA
748 (A), confirmed in CSARS v Woulidge (2000 (1) SA 600 (C))). The deemed interest is calculated
annually, based on the difference between a market-related interest and the actual interest charged.
This amount indicates the maximum amount of income that may be attributed to the donor. Should
there be no income to attribute to the donor during that year of assessment, the maximum amount
that may be attributed in the following year includes the unused amount from previous years. The
limitation is thus applied cumulatively.
In CSARS v Woulidge (2002 (2) SA 199 (A)) it was also established that the in duplum rule that pro-
hibits interest due to exceed capital outstanding, does not apply to the donor provisions. The amount
of interest must always be determined without regard to the in duplum rule (s 7D). The deemed
interest for purposes of attributing income to the donor (s 7) is therefore not limited to the capital
outstanding.
Example 24.7. Interest-free loans
Mark created an inter vivos discretionary trust on 28 February 2017 by selling a rent-producing
property to the trust at its market value of R10 000 000. The purchase price was not paid by the
trust but credited to an interest-free loan account. Assume SARS considers that a market-related
interest of 5% should have been charged. The trust earned gross rentals of R950 000 and in-
curred tax deductible expenditure of R250 000. Mark’s minor stepdaughter and major son are
the beneficiaries of the trust, but neither of them obtained a vested right to any amount during the
Calculate the taxable income of the relevant parties.
879
SOLUTION
The retained net rental of R700 000 (R950 000 – R250 000) is taxable in Mark’s hands (s 7(5)),
but limited to the interest that Mark should have charged. Based on the information that Mark
should have levied R500 000 interest (5% × R10 000 000), only R500 000 of the net rental will be
taxed in Mark’s hands (s 7(5)) and the excess rental of R200 000 (R700 000 less R500 000) will
be taxed in the trust.
Where interest is levied, for example, at 4% instead of an assumed market-related rate of 12%, then a
partial donation for purposes of s 7 arises. The Act does not prescribe an apportionment method and
different views exist. One view is that income earned may be attributed pro rata to an element of
gratuitousness. The element of gratuitousness is then based on the portion that doesn’t carry interest
of 8% (12% – 4% in the example) versus the total interest that should have been charged (12%).
Section 7 will thus be applied to two-thirds (8%/12%) of the income earned. Another view is to use a
ratio of the amount of the forfeited interest divided by the amount of the net income to determine how
much of each payment is by reason of or in consequence of a donation. The example below ad-
dresses both interpretations.
Example 24.8. Low-interest loans
Mark created an inter vivos discretionary trust on 28 February 2017 by selling a rent-producing
property to the trust at its market value of R10 000 000. The purchase price was not paid by the
trust but credited to a 2% interest-bearing loan account. Assume SARS considers that a market-
related rate of 5% should have been charged. The trust earned gross rentals of R950 000 and
incurred tax-deductible expenditure of R250 000. The tax-deductible expenditure of R250 000
includes the 2% interest payments. Mark’s minor stepdaughter and major son are the benefi-
ciaries of the trust and each beneficiary received R10 000 of the net rental income during the
2018 year of assessment. No beneficiary has a vested right to the retained income of the trust.
Calculate the taxable income of the related parties.
SOLUTION
The retained net rental of R680 000 (R950 000 – R250 000 – R10 000 – R10 000) can be taxable
in Mark’s hands if it is attributable to or arose in consequence of a donation (s 7(5)).
The R10 000 distributed to the minor stepchild can be taxable in Mark’s hands if it accrues by
reason of or in consequence of a donation (s 7(3)).
The Act does not provide an apportionment method and different views exist. One view is that
60% of the income (being 3% (5% market-related rate – 2% actual interest) divided by 5%) ac-
crues by reason of or in consequence of a donation and is thus subject to the application of s 7.
The rest of the example is based on this view, but the alternative view is provided in the note. The
amount to be attributed to the donor is limited to R300 000, being the extra interest of 3% on the
R10 000 000 that should have been charged.
The following amounts are subject to the donor provisions (s 7):
Rentals of minor stepchild as a result of parent’s donation (s 7(3)) (60% × R10 000). R6 000
Retained rentals as a result of a donation and not vested (s 7(5)) (60% × R680 000) R408 000
R414 000
But the total application of the donor provisions (s 7) cannot exceed R300 000
(calculated above). Mark will thus only be taxed on R300 000. .................................. R300 000
The difference of R114 000 (R414 000 – R300 000) will be taxed pro rata in his
minor stepdaughter’s and the trust’s hands. Mark’s minor stepdaughter’s pro rata
share is R1 652 (R114 000 × (R6 000/R414 000)) and the trust’s share is R112 348
(R114 000 × R408 000/R414 000)).
Mark’s minor stepdaughter will therefore be liable for normal tax on the excess of
R1 652 (calculated above) and .................................................................................. R1 652
the non-donation portion of the distribution of R4 000 (40% × R10 000) ..................... R4 000
R5 652
Mark’s major son will be liable for normal tax on the full amount that accrued
to him (s 7 is not applicable; apply s 25B(1)) .............................................................. R10 000
The trust will be taxed on
the excess of R112 348 (calculated above) and the non-donation portion of the R112 348
retained amount of R272 000 (40% × R680 000) ........................................................ R272 000
R384 348
continued
880
Note
Another view is that R300 000/R700 000 of each amount is by reason of or in con-
sequence of a donation. The R300 000 is the forfeited interest of (5% – 2%) ×
R10 000 000 and the R700 000 is the net income of R950 000 – R250 000.
If we follow this view, the amount to be included in Mark’s gross income is:
Rentals of minor stepdaughter as a result of parent’s donation (s 7(3))
(300 000/700 000 × R10 000) ...................................................................................... R4 286
Retained rentals as a result of a donation and not vested (s 7(5)) (300 000/700 000
× R680 000) ................................................................................................................ R291 429
R295 715
Mark’s minor stepdaughter will be taxed on the remaining 400 000/700 000 ×
R10 000 (portion not considered to be by reason of on in consequence of
donation) ...................................................................................................................... R5 714
The trust will be taxed on 400 000/700 000 x R680 000 (portion not considered to
be by reason of or in consequence of a donation) ...................................................... R388 571
Mark’s major son will still be taxed on the full distribution made to him....................... R10 000
Remember
The amount that is subject to donor provisions (s 7) is limited to the aggregate of the interest
forfeited. In other words, this calculation is cumulative. For example, let us assume that the total
interest forfeited (during previous and current years of assessment) is R15 000 and that the do-
nor has already been taxed on R14 500 during previous years of assessment due to the applica-
tion of s 7. The total amount that may then be attributed to the donor in the current year of
assessment may not exceed R500 (R15 000 – R14 500).
Although an interest-free loan is regarded as a continuous donation for the purpose of attributing
income to a ‘donor’, the actual interest-free loan granted to a trust does not usually lead to a taxable
benefit for the trust. When the lender, however, receives something in exchange for the granting of
the loan, an amount may be included in the trust’s gross income. The judgment in CSARS v Brum-
meria Renaissance (Pty) Ltd (2007 SCA 99 (RSA)) whereby a developer had to include the value of
an interest-free loan received in his gross income was based on the quid pro quo principle (i.e. the
developer granted a ‘life right’ in return for the receipt of the loan). The value of the benefit of the
interest-free loans to the developer was determined by applying the weighted prime overdraft rate for
banks to the average amount of the interest-free loans.
24.6.9.2 Donations tax consequences (see chapter 26)

From 1 March 2017, an anti-avoidance provision resulting in donations tax applies to amounts owed
by certain trusts (s 7C). See chapter 26 for more detail.
24.7 Deductions and allowances (s 25B(3))

Either a gross or net amount may vest in a beneficiary, depending on the wording in the trust deed
and/or discretionary powers exercised by the trustee. If a gross amount vests in a beneficiary, allow-
able deductions and allowances (in terms of the Act) follow the amount to which they relate
(s 25B(3)). To the extent to which an amount is deemed to be a beneficiary’s or the trust’s, the
deduction or allowance will be deemed to be a deduction or allowance that may be made in the
determination of the taxable income derived by the beneficiary or trust. One must keep basic princi-
ples in mind; for example, if local dividends are exempt (s 10(1)(k)), no expense may be deducted
from the dividends, as the expense is not incurred in the production of income (ss 11(a) and 23(f)).
Example 24.9. Section 25B(3)
Bill created a trust in terms of his will and bequeathed a rent-producing property to it. Rental
earned during the current year of assessment amounted to R150 000, while the tax-deductible
expenses relating to the property amounted to R60 000. Each of the two beneficiaries has a
vested right to half of the gross rental income.
Who will be taxed on the rental earned by the trust?
881
SOLUTION
Because it is a testamentary trust and there are no living donors, the donor provisions (s 7) are
not applicable. The gross rental amount of R150 000 accrues in the ratio 50:50 (R75 000 each) to
the two beneficiaries because they have a vested right to it (s 25B(1)). The deduction of R60 000
may also be used by the two beneficiaries in the same ratio of R30 000 each (s 25B(3)). The
taxable income of each beneficiary is therefore R45 000 (being R75 000 less R30 000).
24.8 Limitation of losses (s 25B(4), (5) and (6))

Deductions may not exceed the total income accruing to the beneficiary from the trust (s 25B(1) and
25B(4)). If the beneficiary cannot use the full amount of the deduction against trust income, the trust
(if the trust is subject to tax in South Africa) may use it during that year of assessment. If the trust
cannot use the deductions, it will once again be available to the beneficiary in a subsequent year of
assessment. The trust may, for example, not have sufficient taxable income available to use the
deductions or it may not be subject to tax in South Africa and is therefore prohibited from using the
deductions.
The provisions detailing this carry-forward process will further be explained by way of an example.
Example 24.10. Trusts, beneficiaries and losses
A trust’s receipts and accruals comprise rentals of R100 000 and royalties of R50 000. Its deduc-
tions and allowances amount to R165 000, of which R160 000 relates to its rentals and R5 000 to
its royalties. The beneficiary has a vested right to the rentals but not to the royalties. No royalty
income was distributed to the beneficiary.
Determine the taxable income of the beneficiary and the trust for the current year of assessment.
SOLUTION
Beneficiary:
Gross income (rentals) – vested in beneficiary (s 25B(1)) .................... R100 000
Allowances and deductions – follow vested income but limited
(s 25B(3) and (4)) ................................................................................. (100 000)
Taxable income .......................................................................................................... Rnil
Allowances and deductions – total ....................................................... R160 000
Deductions allowed (see above) .......................................................... (100 000)
Carried forward to the trust (s 25B(5)) .................................................. R60 000
Trust:
Gross income (royalties) – accrual to the trust (s 25B(1))..................... R50 000
Allowance and deductions
Actual deduction relating to the royalty accrued to the trust (s 25B(3)) (5 000)
Taxable income before deemed deduction ............................................. R45 000
Deemed deduction available to trust (s 25B(5)): R60 000 from benefi-
ciary but limited to taxable income of the trust (s 25B(5)) ........................ (45 000)
Taxable income .................................................................................... Rnil
Beneficiary – Year 2
Available expenditure (R60 000 – R45 000) (s 25B(6))......................... R15 000
Example 24.11. Section 25B(4), (5) and (6)

Daisy created a trust in terms of her will for the benefit of her two children, Bobby (30 years) and
Rob (34 years). She bequeathed two rent-producing properties as well as an interest-bearing
investment to the trust. Interest of R44 000 was earned by the trust during the year, and the rental
and expenditure relating to the two properties for the 2018 year of assessment were as follows:
Property 1: Rental R50 000; Expenditure R80 000
Each of the two beneficiaries also has a vested right to half of the gross rental income of Proper-
ty 1. A distribution of R20 000 was made to each of the beneficiaries from the interest earned by
the trust. No beneficiary has a vested right to any income of Property 2 or the interest, and no
further amount was distributed during the year of assessment.
Calculate the taxable income of the beneficiaries and the trust for the 2018 year of assessment.
Assume each beneficiary earns a salary of R100 000 and has no other income for the year.
882
SOLUTION
Bobby and Rob’s taxable income is the same:
Salary ......................................................................................................... R100 000
Vested income from the trust (s 25B(1)) (50% × R50 000) + R20 000 ...... R45 000
Interest exemption (s 10(1)(i)) (R23 800 limited to actual) ......................... (20 000)
25 000
Allowable deductions (s 25B(3)) ................................................................ (25 000)
50% × R80 000 = R40 000, but limited to R25 000 (s 25B(4)).
The excess of R15 000 (R40 000 – R25 000) is available to the trust
for the 2018 year of assessment.
Taxable income from trust ......................................................................... nil
Taxable income of Bobby and Rob ........................................................... R100 000
Taxable income of the trust
Accrual to the trust (s 25B(1))
Property rental of Property 2................................................................. R118 000
Interest (R44 000 – R20 000 – R20 000)
No exemption is available to the trust to be used against the interest
because the trust is not a natural person ............................................. 4 000
Deductions available to the trust (s 25B(3))
Expenditure in relation to Property 2 .................................................... (105 000)
17 000
Deemed deductions available to the trust (s 25B(5))
Excess deductions to be used by the trust = R30 000
(R15 000 of Bobby + R15 000 of Rob), but limited to taxable income
of trust. The excess of R13 000 (R30 000 – R17 000) is available
to the beneficiaries (R6 500 each) during the 2019 year (17 000)
of assessment. .....................................................................................
Taxable income ......................................................................................... Rnil
The limitation provisions (s 25B(4), (5) and (6)) do not apply to income that is deemed to accrue to a
beneficiary (s 25B(1)) where the beneficiary is not subject to tax in South Africa on that income
(s 25B(7)).
Example 24.12. Section 25B(7)
Julie created a trust in terms of her will for the benefit of her two children, Brad and Marty. Brad
is 30 years old and not a resident of the Republic. He earned no other income from the Republic
and did not visit the Republic during the current or previous year of assessment and does not
carry on a business through a permanent establishment in the Republic. Marty is 34 years old
and is a resident of the Republic. Apart from earning a salary of R100 000, he has no other in-
come for the 2018 year of assessment.
Julie bequeathed two rent-producing properties (not situated in the Republic) as well as a South
African interest-bearing account at a local bank, to the trust. Interest of R44 000 was earned by
the trust during the year, and the rental and expenditure relating to the two properties for the
2018 year of assessment were as follows:
Property 2: Rental R118 000; Expenditure R105 000.
Each of the two beneficiaries has a vested right to half of the gross rental income of Property 1.
A distribution of R20 000 was made to each of the beneficiaries from the interest earned by the
trust. No beneficiary has a vested right to any income of Property 2 or the interest, and no further
amount was distributed during the year of assessment.
Calculate the taxable income of the beneficiaries and the trust for the 2018 year of assessment.
Ignore the application of any double taxation agreement.
883
SOLUTION
Marty’s taxable income:
Salary ......................................................................................................... R100 000
Vested income from the trust (s 25B(1)) (50% × R50 000) + R20 000 ...... R45 000
Interest exemption (s 10(1)(i)) (R23 800 limited to actual) ......................... (20 000)
25 000
Allowable deductions (s 25B(3)) ................................................................ (25 000)
50% × R80 000 = R40 000, but limited to R25 000 (s 25B(4)). The
excess of R15 000 (R40 000 – R25 000) is available to the trust for
the 2018 year of assessment
Taxable income from trust ......................................................................... nil
Taxable income of Marty ............................................................................ R100 000
Brad’s taxable income:
Rental of R25 000 (50% × R50 000) is deemed to have accrued to Brad,
but it is not from a source in the Republic and is thus not his gross in-
come. The R20 000 interest vested in him is gross income (s 25B(1)) ...... R20 000
Interest exemption available to non-residents (s 10(1)(h)) ........................ (20 000)
Allowable deductions are R40 000 (50% × R80 000) (s 25B(3)), but
since the rental was not included in Brad’s gross income, Brad is not
able to deduct the expenses incurred in generating the rental income.
The deduction amount is, however, not limited and also not available to
the trust because Brad is not subject to tax in South Africa on that in-
come (s 25B(7)). The deduction of the R40 000 is effectively ‘lost’
forever ........................................................................................................ nil
Rnil
Taxable income of the trust
Accrual to the trust (s 25B(1))
Property rental of Property 2 ...................................................................... R118 000
Interest (R44 000 – R20 000 – R20 000)
No exemption is available to the trust to be used against the interest
because the trust is not a natural person ................................................... 4 000
Deductions available to the trust (s 25B(3))
Expenditure in relation to Property 2 .......................................................... (105 000)
17 000
Deemed deduction available to the trust (s 25B(5))
Only Marty’s excess deductions to be used by the trust .......................... (15 000)
Taxable income of the trust ........................................................................ R2 000
Apart from income vesting and attribution rules (ss 7 and 25B), transactions involving a trust might
also have CGT effects.
24.9 Capital gains tax: Disposal by a trust for capital gains tax purposes
A trust will have a disposal for capital gains tax (CGT) purposes in one of two ways:
l either by the disposal of an asset to a third party (for example the sale of a trust asset to a third
party), or
l by vesting a trust asset in a beneficiary (par 11(1)(d) of the Eighth Schedule).
All paragraph references in the rest of this chapter are to the Eighth Schedule of the Act.
24.9.1 Disposal to a third party

A disposal of an asset to a third party at arm’s length will result in a normal capital gain calculation.
The selling price will be the proceeds, and the base cost for the trust will mostly be the market value
when the trust acquired the asset, either by way of a bequest, donation or purchase.
24.9.2 Vesting of an interest in a trust asset in a beneficiary

Vesting means that the beneficiary is unconditionally entitled to the asset, even though the date of
enjoyment (delivery or registration) might be postponed. Vesting can occur before or at distribution.
When an asset vests in a beneficiary, the proceeds will be deemed to be the market value, as the
884
trust and the beneficiary are connected persons (par 38). The base cost for the trust will usually be
the value when the trust acquired the asset, either by way of a bequest, donation or purchase.
To the extent that the beneficiary has a vested interest in an asset, the time of disposal of that asset is
the date on which the interest vested in the beneficiary (par 13(1)(a)(iiA)).
Vesting might arise in terms of the trust deed or in consequence of the exercise of a trustee’s discre-
tion. However, even though a beneficiary might be entitled to 50% of the capital of the trust, for
example, it doesn’t mean that an interest in an asset vests in that beneficiary. The trustee may decide
to sell the asset to a third party and distribute an amount of cash to the beneficiary or even jointly
distribute some assets between the beneficiaries. For the application of CGT, it specifically requires
the vesting of an interest in an asset (par 11(1)(d)). The question to ask is whether or not the benefi-
ciary may insist upon a distribution of a specific asset.
24.10 Capital gains tax: Treatment of capital gains in respect of a disposal by a trust
When the trust disposes of an asset, the trust is liable for CGT unless a special rule applies to divert
the CGT liability to another person. The special rules only allow for a capital gain (not a capital loss)
to be shifted to a resident beneficiary either when the resident beneficiary acquires an interest in an
asset (par 80(1)) or when the resident beneficiary acquires a vested interest in the gain and not the
asset (par 80(2)). The gain must then be disregarded by the trust and included in the resident bene-
ficiary’s calculation of his aggregate capital gain or loss. The special rules are subject to the donor
provisions (attribution rules in paras 68, 69 and 71) that will effectively shift the liability for CGT to a
person who made a ‘donation, settlement or disposition’, i.e. a spouse, parent of a minor child or a
person retaining the power of revocation. Any capital gain retained in the trust due to a contingent
event could not vest in a beneficiary and can therefore not be subject to the special rules (paras
80(1) and 80(2)). The donor provision (par 70) may apply in such a scenario.
If the beneficiary is a public benefit organisation or an exempt person (as listed in par 62(a) to (e)),
these special provisions are not applicable.
The total amount of the income that is deemed to accrue to a donor in terms of the donor provisions
in the main Act (s 7) and the capital gain attributed to him in terms of the Eighth Schedule (paras 68
to 72) may not exceed ‘the amount of the benefit derived from the donation, settlement or other
disposition’ (par 73). This limitation provision has the effect of applying the Woulidge principle of the
limitation of the amount that could be diverted to the donor to the amount of the benefit actually
received by the trust.
Remember
Deemed donation event Section in the Act Paragraph in the Eighth Schedule
Spouse 7(2) 68
Minor children 7(3) and 7(4) 69
Retained income not vested 7(5) 70
Revocable vesting 7(6) 71
Resident benefiting a non-resident 7(8) 72
There is no provision equal to s 7(7) in the Eighth Schedule because the donor has a right to
regain or keep ownership of the asset and the asset may therefore not be disposed of.
If a gain is distributed to a non-resident beneficiary and par 72 is not applicable (for example the
donor is deceased), then the trust will be subject to tax on the capital gain.
Paragraph 69 has not been amended (similar to s 7(3) and (4)) to also include minor step-
children.
Example 24.13. Attribution rules
After 1 October 2001 George donated a fixed property valued at R800 000 to the Zorba Trust (a
discretionary trust). George’s aged mother and his 12 year-old daughter, Angela, were the bene-
ficiaries of the trust.
In the current year of assessment, the trustees sold the property for R2 000 000. The trustees
distributed 60% of the proceeds to Angela and 40% of the proceeds to George’s mother, after
which the trust dissolved.
Determine who will be taxed on the capital gain made by the trust.
885
SOLUTION
Firstly, the capital gain on the disposal by the trust needs to be calculated. The proceeds are
R2 000 000 and the base cost R800 000. The trust therefore made a capital gain of R1 200 000
(R2 000 000 – R800 000).
Secondly, the attribution rules need to be applied, and in this scenario par 69 is applicable be-
cause a minor child benefits in consequence of the parent’s donation. The capital gain to be
taken into account in George’s calculation of his aggregate capital gain or aggregate capital loss
is 60% of R1 200 000, i.e. R720 000.
The distribution to George’s mother will result in R480 000 (40% of R1 200 000) being taken into
account in the calculation of her aggregate capital gain or aggregate capital loss (par 80(2)). No
attribution rule is applicable.
The full gain of R1 200 000 is taxed (R720 000 in George’s hands and R480 000 in George’s
mother’s hands), thus no portion of the gain is taxable in the trust.
Notes for different scenarios:
(1) If the gain had been retained in the discretionary trust, George would have been liable for
tax on the full capital gain (par 70).
(2) If the gain had been distributed to Angela, but George had the right to revoke Angela’s right
to benefit, the gain would also have been attributed to George (par 71).
(3) If George’s mother had been a non-resident, her portion of the gain would have been attri-
buted to George (par 72).
24.11 Capital gains tax: Treatment of capital losses in respect of a disposal

by a trust
The special rules (paras 80(1) and (2)) allow for only a gain to be shifted to a resident beneficiary. It
is therefore clear that a loss is trapped in the trust. If there is no ‘donor’ and the attribution rules
(paras 68 to 72) are not applicable, there are two possible ways whereby a gain can be kept in the
trust for purposes of using any ‘trapped’ losses, namely
l distribute a gain to a non-resident (exchange control provisions need to be considered as the
funds might be blocked in South Africa), or
l delay vesting of a gain in a beneficiary until a subsequent year.
A loss that arises from a transaction between connected parties is ring-fenced (par 39). The trust and
its beneficiaries are connected persons (definition of ‘connected person’ in s 1). The planning
aspects mentioned above are thus relevant only if the loss is not ring-fenced.
24.12 Capital gains tax: Base cost of a discretionary interest

A person’s interest in a discretionary trust has a base cost of Rnil (par 81). It is submitted that this
implies that the beneficiary’s spes or hope to receive something from the trust is Rnil, but once an
asset vests in a beneficiary, the market value of that asset may be used as the base cost of the
beneficiary when the asset is disposed of at a future date.

Example 24.14. Different trust scenarios
The Starteri Trust (a resident trust) was created when Mr Frank Starteri passed away in 2005 and
bequeathed R5 000 000 in cash to it. The cash was deposited in a South African bank to earn
interest and pay any expenses of the trust. The trust also owns two properties:
Property 1 is situated in South Africa (SA property) and Property 2 is situated in a foreign country
(foreign property – assume that approval was obtained from the SA Reserve Bank).
These properties were owned by Mrs Barbara Starteri (48-year-old surviving spouse of Mr Frank
Starteri) until 1 March 2007. The values of these properties were as follows:
Market value on 1 March 2007 Market value on 1 October 2001
SA property R3 000 000 R2 000 000
Foreign property R2 800 000 R1 500 000
continued
886
Barbara and Frank’s three children are the beneficiaries of the trust. They are:
l Megan, 15-year-old daughter (resident)
l Joe, 22-year-old son (resident), and
l Keith, 24-year-old son (not a resident in South Africa with no business venture in South Africa).
Keith never spends more than 30 days in South Africa during any 12-month period.
(The ages of the beneficiaries are given as at 28 February 2018.)
Three independent trustees manage the trust on behalf of the beneficiaries. The trust deed
specifies that any distribution should be pro rata out of all the receipts and accruals of the trust.
The following information (in respect of the 2018 year of assessment) relates to the trust, and the
foreign income has correctly been converted to rand:
Taxable rental income: SA property.......................................................................... R350 000
Taxable rental income: Foreign property .................................................................. 250 000
Interest earned from a bank in South Africa (only because of Frank’s bequest) ...... 400 000
R1 000 000
Less: Trustees’ remuneration paid from R1 000 000 net income.............................. (60 000)
Distributed to Megan ................................................................................................ (100 000)
Distributed to Joe ...................................................................................................... (160 000)
Distributed to Keith ................................................................................................... (200 000)
Retained (current year) ............................................................................................. R480 000
Required
(a) Indicate for each of the following scenarios the taxable income in South Africa of each party to
the trust regarding the distributions and retained amount during the 2018 year of assessment:
Scenarios 1 2 3 4
Right of each beneficiary to ¹/3 of the
Vested Contingent Vested Contingent
R480 000 retained (and not distributed)
Barbara sold the properties to the trust at
market value. The trust paid the purchase
price in full 9 9
Barbara donated the properties to the trust 9 9
SOLUTION
Starteri Trust: 2018 year of assessment
Rental Rental income: Interest
income: Foreign from Total
SA Property Property SA Bank
Accrued – 2018 year of assessment 350 000 250 000 400 000 1 000 000
Less: 35% 25% 40%
Trustees' remuneration....................... (21 000) (15 000) (24 000) (60 000)
Less: Distributions
Distributed to Megan (minor child) .... (35 000) (25 000) (40 000) (100 000)
Distributed to Joe (major resident) ..... (56 000) (40 000) (64 000) (160 000)
Distributed to Keith (non-resident) ..... (70 000) (50 000) (80 000) (200 000)
Retained in current year 168 000 120 000 192 000 480 000
If ¹/3 vested right to retained amount
(with reference to different
scenarios above)
Megan (minor) .................................... 56 000 40 000 64 000 160 000
Joe (major) ......................................... 56 000 40 000 64 000 160 000
Keith (non-resident)............................ 56 000 40 000 64 000 160 000
continued
887
(a) 2018 year of assessment – Taxable income in South Africa of each party to the trust in
respect of the distributions and retained amount:
Scenario 1 2 3 4
Barbara Rnil Rnil Taxable income = R372 000 Taxable income = R468 000
S 7(3) = R156 000 S 7(3) = R60 000
(R35 000 + R25 000 + R56 000 (R35 000 + R25 000)
+ R40 000) S 7(8) = R120 000
S 7(8) = R216 000 (R70 000 + R50 000)
(R70 000 + R50 000 + R56 000
S 7(5) = R288 000
+ R40 000)
(R168 000 + R120 000)
Only rental income from the two
properties is attributable to Only rental income from the two
Barbara’s donation, thus rental properties is attributable to
income distributed to Megan or Barbara’s donation. Retained
in which Megan has a vested rental is subject to the condition
right is taxed in Barbara’s hands that trustees must exercise their
(s 7(3)). Rental income discretion and therefore taxable in
distributed to Keith Barbara’s hands (s 7(5)).
(non-resident) or in which he has
a vested right is taxed in
Barbara’s hands (s 7(8)).
Scenario 1 2 3 4
Megan Taxable income = Taxable income = Taxable income = Taxable income =
(minor) R236 200 R76 200 R80 200 R16 200
R260 000 R100 000 distributed Rental income is Rental income is
(R100 000 less R23 800 interest taxed in Barbara’s taxed in Barbara’s
distributed + exemption. hands (s 7(3)). Frank hands (s 7(3)).
R160 000 is deceased and Frank is deceased
(R480 000/3 Megan will be taxed and Megan will be
retained)) on the interest taxed on the
distributed interest distributed
less R23 800
(R40 000) and (R40 000) less
interest exemption.
retained (R64 000) R23 800 interest
less R23 800 interest exemption.
exemption.
Joe Taxable income = Taxable income = Taxable income = Taxable income =
(major) R296 200 R136 200 R296 200 R136 200
R320 000 R160 000 distributed R320 000 R160 000
(R160 000 less R23 800 interest (160 000 distributed distributed less
distributed + exemption. + R160 000 R23 800 interest
R160 000 (R480 000/3 exemption.
(R480 000/3 retained))
retained)) less R23 800
less R23 800 interest exemption.
interest exemption.
Keith Taxable income = Taxable income = Taxable income = Taxable income =
(non-resident) R126 000 R70 000 Rnil Rnil
Even though Even though Amounts relating to Amounts relating to
R360 000 R200 000 accrued to the properties are the properties are
(R200 000 + Keith, only amounts subject to s 7(8) subject to s 7(8)
R160 000) accrues from a source in and the interest of and the distributed
to Keith, as a non- South Africa are R80 000 (distribut- interest of R80 000
resident only South taxable. The interest ed) + R64 000 is exempt
African source is exempt (s 10(1)(h)), (retained) is exempt (s 10(1)(h)).
income is taxable. thus only R70 000 (s 10(1)(h)).
Only rental from the (rental distributed
SA property and the from SA property) is
interest are from a taxable.
source in South
Africa. The interest
is exempt
(s 10(1)(h)), thus
only R126 000
relating to the rental
from the SA proper-
ty (R70 000 distrib-
uted + R56 000
retained) is taxable.
continued
888
Scenario 1 2 3 4
Trust Taxable income = Taxable income = Taxable income = Taxable income =
Rnil R480 000 Rnil R192 000
Beneficiaries have Beneficiaries have no Beneficiaries have Amounts relating to
vested rights to vested rights to vested rights to the properties are
retained amounts retained amounts, retained amounts taxed in Barbara’s
(s 25B(1)). and the trust is thus (s 25B(1)). hands (s 7(5)). The
taxed. The trust is not trust will be taxed
a natural person and on the retained
therefore not entitled interest of R192 000
to the interest because no
exemption (s 10(1)(i)). beneficiary has a
vested right to
retained income.
Required
(b) What would the tax consequences be if the trust sold the SA property and the foreign prop-
erty for R4,2m and R3,5m respectively to independent third parties on 1 March 2018 and
distributed the proceeds equally between the three beneficiaries in the following scenarios?
Scenarios 1 2
Barbara sold the properties to the trust at market value.
The trust paid the purchase price in full. 9
Barbara donated the properties to the trust and paid
the donations tax. 9
SOLUTION
(b) Liability for CGT on SA property:
Proceeds (R4,2 million) less base cost (R3 million) = R1 200 000, of which each beneficiary
receives R400 000. Even though each beneficiary receives a third of the proceeds, only the
capital gain as calculated in terms of the Eighth Schedule is subject to tax. An amount of a
capital nature is excluded from the gross income definition in s 1. The amount shown in the
table must be taken into account in calculating the aggregate capital gain or loss of that
person.
Scenarios 1 2
Barbara Rnil R400 000 (par 69)
+
R400 000 (par 72)
Megan (minor) R400 000 Rnil
(par 80(2))
Joe (major) R400 000 R400 000
(par 80(2)) (par 80(2))
Keith (non-resident) Rnil Rnil
Trust R400 000 Rnil
Par 80(2) is not applicable because the
beneficiary is not a resident of South
Africa. The portion of the gain distribut-
ed to the non-resident is still taxable in
the hands of the trust.
889
(b) Liability for CGT on foreign property

Proceeds (R3,5 million) less base cost (R2,8 million) = R700 000, of which each beneficiary
receives R233 333.
Even though each beneficiary receives a third of the proceeds, only the capital gain as cal-
culated in terms of the Eighth Schedule is subject to tax. An amount of a capital nature is ex-
cluded from the gross income definition in s 1. The amount shown in the table must be taken
into account in calculating the aggregate capital gain or loss of that person.
Scenarios 1 2
Barbara Rnil R233 333 (par 69)
+
R233 333 (par 72)
Megan (minor) R233 333 (par 80(2)) Rnil
Joe (major) R233 333 (par 80(2)) R233 333 (par 80(2))
Keith (non-resident) Rnil Rnil
Trust R233 333 Rnil
Par 80(2) is not applicable because
the beneficiary is not a resident of
South Africa. The portion of the gain
distributed to the non-resident,
however, is still taxable in the hands
of the trust.
24.14 Non-resident trusts (s 25B(2A) and par 80(3))

A trust is a conduit pipe, as discussed earlier, and the residency of the trust does not influence the
source of the income that flows through it and is received by a beneficiary. The income retains its
nature and will, in most cases, be taxed in a donor or beneficiary’s hands. Only when the trust is
liable for tax (s 7 is not applicable and no beneficiary has a vested right to the income) is the resi-
dency of the trust important, as a non-resident trust is liable for tax in South Africa only on South
African source income or income that is deemed to be from a source in South Africa.
An obiter statement was made in SIR v Rosen (1971 A) that income retains its nature only if it accrues
to the beneficiaries in the same year of assessment as it accrued to the trust. Any accumulated
income in the trust thus effectively ‘loses’ its identity. Accumulated income distributed in subsequent
years is usually tax free. A special anti-avoidance measure was enacted when residence-based
taxation was introduced in 2001 to avoid, for example, non-South African source income being retained
by a non-resident trust (i.e. not subject to tax) and only distributed during a subsequent year to a resi-
dent who would have been taxed on worldwide income had it been distributed during Year 1 (s
25B(2A)). A resident who acquires a vested right to any capital (retained or accumulated income) of a
non-resident trust during a year of assessment is required to include that amount in his income for that
year. The inclusion applies in respect of
l capital that arose from receipts or accruals that would have constituted income of the trust if it
had been a resident during any previous year of assessment in which the resident had a contin-
gent right to that amount; and
l the amounts have not already been subject to tax in South Africa.
Example 24.15. Section 25B(2A)
Porto Trust is a discretionary non-resident trust with two beneficiaries, Ricco (a resident of South
Africa) and Natasha (a non-resident). The testamentary trust was created by their grandmother,
who bequeathed South African shares and a foreign property to the trust. During the 2017 year
of assessment, dividends of R10 000 and rental with a rand-equivalent of R40 000 accrued to the
trust. The trustees did not distribute any amount during the 2017 year of assessment, but distrib-
uted R5 000 to each of the beneficiaries during the 2018 year of assessment from the retained
R50 000 (R10 000 + R40 000).
Determine the tax implications of the distribution of the R5 000 to each of the beneficiaries.
890
SOLUTION
During the 2017 year of assessment, the trust is liable for tax on the retained amounts, because
the provisions of s 7 are not applicable and the beneficiaries do not have vested rights to the
retained amounts. The trust is a non-resident and will only include amounts from a source in
South Africa in gross income. Therefore, the gross income of the trust will include only the divi-
dends of R10 000. The dividend exemption (s 10(1)(k)(i)) may also be used by the non-resident
trust, and the tax liability for the trust for the 2017 year of assessment is Rnil.
When a distribution is made in a subsequent year, it is taxable only if s 25B(2A) is applicable.
The requirements for its application are as follows:
l A resident acquires a vested right.
l The right is to the capital (accumulated income) of a non-resident trust.
l The capital arose from amounts that would have constituted income of the trust if it had been
a resident.
l The amount has not already been subject to tax in South Africa.
Consequently, the payment to Natasha is not taxable as she is a non-resident beneficiary.
Ricco is a resident and will be taxed if the requirements as set out above are met (s 25B(2A)).
The R5 000 payment consists of R1 000 (R10 000/R50 000 × R5 000) dividends and R4 000
(R40 000/R50 000 × R5 000) rental.
The dividend would still not have constituted income had the trust been a resident, because the
resident trust would also have used the dividend exemption (s 10(1)(k)(i)). The amount of R1 000
is therefore not taxable (s 25B(2A)).
The rental would have constituted income if the trust had been a resident and the amount had
not been subject to tax in South Africa yet. Ricco is therefore subject to tax on R4 000.
The anti-avoidance provision (s 25B(2A)) can also be triggered when an asset of a non-resident trust
vests in a resident beneficiary. This will be the case if the asset was financed with foreign income that
has not yet been subject to tax in South Africa. The capital gain relating to the vesting of the asset will
be dealt with in terms of the Eighth Schedule (par 80).
The Eighth Schedule applies only to non-residents in respect of the disposal of permanent establish-
ment assets and immovable property or an ‘interest’ in immovable property in South Africa (par 2).
Therefore, if a non-resident trust sells an asset that is not subject to the Eighth Schedule but would
have been subject to CGT had the trust been a resident, the gain will be taxed in South Africa when a
resident beneficiary receives an interest in that capital gain in a succeeding (not current) year of
assessment (par 80(3)). This is the CGT equivalent of the anti-avoidance provision in the main Act
(s 25B(2A)) and will also only be applicable if the capital gain was not yet subject to tax in South
Africa.
Example 24.16. Section 25B(2A) and par 80(3)
Foreign Trust is a discretionary non-resident trust with two resident beneficiaries, Luke and Dean.
The testamentary trust was created in 2002 by a non-resident who bequeathed a foreign rent-
producing property (worth R1 200 000) to the trust. The trust has never distributed any portion of
the foreign rental income to the beneficiaries but instead accumulated the rental return and pur-
chased another foreign property at a cost of R700 000 (rand-equivalent) during 2008. During the
current year of assessment Luke acquired a vested right to this second property (worth
R1 100 000 at date of vesting).
Determine the tax implications of the vesting of the property in Luke.
SOLUTION
The rental income was not from a source in South Africa and the trust (a non-resident) was thus
not subject to tax thereon in the Republic during any year of assessment. The fact that the in-
come was accumulated and capitalised by way of purchasing an asset will not affect the appli-
cation of the special anti-avoidance provision (s 25B(2A)). Luke will have to include R700 000 in
his income during the 2018 year of assessment because this amount represents receipts and
accruals that would have been income had the trust been a resident (s 25B(2A)). Whether the
accumulated profits not previously taxed in the Republic are distributed to the beneficiary in
cash or as an asset should not influence the tax implications.
If the capital arose from an amount which ‘would have constituted a capital gain had that trust
been a resident, determined in any previous year of assessment during which the resident had a
contingent right to that capital’, the resident beneficiary can be taxed (par 80(3)). If the trust had
been a resident, a capital gain of R400 000 (i.e. R1 100 000 less R700 000) would have arisen,
but because it was not determined in a previous year of assessment, it is submitted that the gain
is not taxable in Luke’s hands in terms of par 80(3). (Luke can also not be taxed under the nor-
mal CGT provision (par 80(1)) since the foreign trust did not dispose of an asset listed for non-
residents (par 2) and therefore does not have a capital gain.)
891
Remember
(1) If we assume the following: Trust = Non-resident and Donor = Resident
Beneficiaries: A = Resident (major) and B = Non-resident (major)
Trust distributes income to beneficiary A
Taxable income from SA source Tax beneficiary (s 25B(1) and (2))
Income from foreign source Tax beneficiary (s 25B(1) and (2))
Trust distributes income to beneficiary B
Taxable income from SA source Tax donor (s 7(8))
Income from foreign source Tax donor (s 7(8))
Trust retains income and no beneficiary
has a vested right
Taxable income from SA source Tax donor (s 7(5) or (8))
Income from foreign source Tax donor (s 7(5) or (8))
Trust distributes the retained income No tax consequences (all amounts were already
in subsequent year to beneficiaries. subject to tax)
(2) If we assume the following: Trust = Non-resident and No donor
Beneficiaries: A = Resident (major) and B = Non-resident (major)
Trust distributes income to beneficiary A
Income from foreign source Tax beneficiary (s 25B(1) and (2))
Trust distributes income to beneficiary B
Income from foreign source No tax consequences
Trust retains income and no beneficiary
has a vested right
Taxable income from SA source Tax trust (s 25B(1))
Income from foreign source No tax consequences
Trust distributes the retained income
in subsequent year to:
Beneficiary A Tax beneficiary on income from foreign source
(as not yet subject to tax in SA) (s 25B(2A))
Beneficiary B No tax consequences
892
25 Insolvent and deceased estates
Rudi Oosthuizen and Madeleine Stiglingh

l explain the difference in the tax treatment of an insolvent natural person before
and after sequestration
l explain the tax treatment of amounts of income earned after the date of death of a
deceased
l explain the tax treatment of amounts of income earned by the deceased before
the date of death, but only received after death by the executor of the estate
l explain how being married in community of property changes the situation in a
deceased estate
l understand the tax consequences for the beneficiaries of a deceased when they
receive benefits from a deceased estate, including the situation where annuities
are payable out of benefits received by the beneficiaries
l understand the effect of capital gains tax (CGT) on a deceased estate.
Contents
Page
25.1 Overview ............................................................................................................................. 893
25.2 Insolvent natural persons ................................................................................................... 894
25.2.1 The insolvent person before sequestration (taxpayer one) (ss 6(4), 8A(1),
8B, 8C, 10(1)(i), 20(1)(a), 24A(5), 25C and 66(13)(a)(b)(i)) (s 25 of the Tax
Administration Act) .......................................................................................... 895
25.2.2 The insolvent estate (taxpayer two) (ss 1, 10(1)(i), 11(a), 12T, 19, 20 and
25C) (ss 153(1), 154 and 155 of the Tax Administration Act) ............................ 896
25.2.3 The insolvent person after sequestration (taxpayer three) (ss 6(4), 20(1)(a)
and 66(13)(a)(b)(ii)) (s 25 of the Tax Administration Act) ................................... 897
25.2.4 The effect of the setting aside of an order of sequestration (ss 20(1)(a) and
s 98 of the Tax Administration Act) ..................................................................... 897
25.2.5 Other tax consequences (VAT Act s 53) ............................................................ 897
25.3 Deceased taxpayers (ss 1, 6(2)(b), 6(2)(c), 6(4), 6A(3), 8(4)(a) and 9HA) (ss 153(1)
and 154 of the Tax Administration Act) .............................................................................. 898
25.3.1 Amounts received or accrued after death (ss 1, 8A(1), 8B, 8C, 24A and 25) .. 900
25.3.2 Capital gains tax (Eighth Schedule to the Income Tax Act, paras 5(2),
31, 54, 55 and 57) ............................................................................................... 901
25.4 Deceased estates (ss 1, 6, 6A, 6B, 10(1)(i), 12T and 25) (s 153(1) of the
Tax Administration Act) ...................................................................................................... 901
25.4.1 Amounts received by or accrued to the executor .............................................. 902
25.4.2 Amounts which would have been income of the deceased ............................... 902
25.4.3 Community-of-property marriages (ss 25(1) and 25A) ....................................... 902
25.4.4 Distribution or disposal of assets by the deceased estate (s 1) ........................ 903
25.4.5 Capital gains tax (ss 6, 6A, 6B, 9HA and 25) (Eighth Schedule to the
Income Tax Act, par 5(1)) ................................................................................... 903
25.1 Overview
This chapter deals with the normal and other tax consequences of the death or insolvency of a natu-
ral person. In both these cases a taxpayer (the deceased or insolvent) ceases to be a taxpayer at a
specific point in time. However, there will be various normal tax issues that need to be addressed in
893
respect of that person, for example the normal tax liability from the beginning of the person’s tax year
until the date of insolvency or death. Income could accrue or be received after insolvency or death
and it should be established who is liable for tax on that income. There could also be other tax con-
sequences, for example if the deceased or insolvent was a VAT vendor at the date of death or insol-
vency (sequestration).
The executor of a deceased estate or the trustee of an insolvent estate has the responsibility,
amongst others, to address all outstanding tax issues of the deceased or insolvent.
All references in this chapter to ‘the Act’ refer to the Income Tax Act and its sections, unless other-
wise stated.
25.2 Insolvent natural persons

When a natural person becomes insolvent, three taxpayers have to be dealt with:
l the insolvent person for the period before sequestration (taxpayer one)
l the insolvent estate (taxpayer two)
l the insolvent person for the period after sequestration (taxpayer three).
When a natural person (taxpayer one) becomes insolvent, his current tax status is terminated on the
day before the date of sequestration of his estate. At the date of sequestration, a new taxpayer,
namely the insolvent estate (taxpayer two), comes into existence. The insolvent himself is regarded
as a new taxpayer (taxpayer three) from the date of sequestration. He will be taxed on any income
that he derives in his personal capacity from that date. For ease of reference, the rest of this chapter
will generally refer to ‘taxpayer one’, ‘taxpayer two’, and ‘taxpayer three’.
The Insolvency Act (24 of 1936) provides for two possible routes to follow to sequestrate the estate of
a natural person. The person can apply to the courts to have his own estate voluntarily sequestrated
(voluntary surrender). Provided that certain requirements are met the court can grant such an order.
The other route is where a person’s creditors approach the court to request the sequestration of a
person’s estate (compulsory sequestration). Once again, certain requirements have to be met before
the court will grant such an order. It is also possible that, once the court has granted a sequestration
order, the person’s circumstances could change, resulting in him being able to settle his outstanding
debts. In such a case the court is able to set the sequestration order aside, so that the person can
carry on as before, as if the sequestration order was never granted.
In the case of voluntary surrender, the date of sequestration is the date on which the surrender of the
estate is accepted by the court. In the case of compulsory sequestration, the date of sequestration is
the date of the provisional sequestration order, if such order is later made final (i.e. it is not set aside
by the court).
The insolvency of a partner brings about the dissolution of the partnership. For income tax purposes
the estate of each insolvent partner constitutes a separate ‘person’.
Schematically the sequence of events in an insolvent estate can be illustrated as follows:
Natural person before

sequestration (see 25.2.1)
Insolvent estate
(see 25.2.2)
Natural person after

sequestration (see 25.2.3)
894
25.2 Chapter 25: Insolvent and deceased estates
25.2.1 The insolvent person before sequestration (taxpayer one) (ss 6(4), 8A(1), 8B, 8C,
10(1)(i), 20(1)(a), 24A(5), 25C and 66(13)(a)(b)(i)) (s 25 of the Tax Administration
Act)
The trustee of the insolvent estate is responsible for the tax affairs of the insolvent person for the
period prior to the date of sequestration. Any tax payable by the insolvent on income earned prior to
the date of sequestration, even if it has become payable only after that date, is a debt due to SARS
by the insolvent estate. The trustee must admit the claim and accord it the preference to which it is
entitled in terms of the Insolvency Act.
A final income tax return has to be completed for the insolvent for the period from the first day of the
year of assessment to the day before the date of sequestration (s 66(13)(a)(b)(i) of the Act read with
s 25 of the Tax Administration Act).
Although certain amounts might actually be received or accrued only after the date of sequestration,
they are deemed still to accrue to the insolvent. The following are examples of such deemed accruals:
l A gain made from exercising a right (acquired before 26 October 2004) to acquire marketable
securities by a director of a company or an employee (s 8A(1)(a)). If the taxpayer is not allowed
to sell the marketable securities so acquired until after the current year of assessment, he can
elect to have the gain included in his income only when he becomes entitled to sell the securities.
If the taxpayer makes this election and becomes insolvent before the date on which he can sell
the securities, the gain must be included in his income on the day before his sequestration
(s 8A(1)(b)).
l An employee must include in income any amounts received or accrued from the sale of qualifying
equity shares derived from broad-based employee share plans if the shares are sold within five
years of receiving the shares (s 8B). Since no mention is made in the Act of the sequestration of
an employee within five years of receiving the equity shares, it is assumed that the amounts re-
ceived by the trustee upon the sale of these shares will only be subject to capital gains tax.
l Equity instruments acquired by directors and employees of a company on or after
26 October 2004 are taxed when they vest in the director or employee (s 8C). The vesting date
depends on the type of equity instrument. If a director or employee dies before a restricted-equity
instrument vests, vesting is deemed to occur immediately before the date of death, if all the re-
strictions are or may be lifted on or after death. In the case of sequestration, it is submitted that
vesting also takes place immediately before the date of sequestration. The Act is not clear on
this, however.
l Shares received under certain circumstances before 1 October 2001 in exchange for fixed prop-
erty or other shares are deemed to have been disposed of by the taxpayer on the day before the
date of sequestration (s 24A). This disposal is deemed to be for a consideration equal to the
lesser of the market value on that day and the market value on the date of the original exchange
(s 24A(5)).
The primary and secondary rebates available to the insolvent will be apportioned proportionately
between the periods before and after sequestration. According to SARS Interpretation Note No 8
‘rebates’ will only be allowed on a proportional basis for taxpayers one and three. It is unclear whether
the limited local interest exemption (s 10(1)(i)) will also be apportioned between taxpayers one and
three.
Remember
The Act stipulates in s 6(4) that the apportionment of rebates should be calculated on the ratio
where the completed months included in the assessment represents the numerator and 12 the
denominator (completed months assessed/12). It is, however, the practise of SARS to apportion
the rebates on a daily basis (days included in assessment/(365 or 366)).
An assessed loss of taxpayer one can be set off against the income of taxpayer two from the carrying
on of any trade in South Africa (s 20(1)(a)). This is because taxpayer one and taxpayer two are
deemed to be one and the same person for the purposes of determining any deduction or set-off to
which the insolvent estate may be entitled (s 25C – see 25.2.2). An assessed loss of taxpayer one
cannot be carried forward to taxpayer three, unless the order of sequestration has been set aside. If
the order is set aside, the amount to be carried forward will be reduced by the amount that was
allowed to be set off against the income of taxpayer two from the carrying on of a trade (proviso to
s 20(1)(a)).
Please note that there is no deemed disposal of assets by taxpayer one at sequestration. The assets
will only be realised when they are sold by the trustee of the insolvent estate.
895
25.2.2 The insolvent estate (taxpayer two) (ss 1, 10(1)(i), 11(a), 12T, 19, 20 and 25C)
(ss 153(1), 154 and 155 of the Tax Administration Act)
The term ‘insolvent estate’ means an insolvent estate as defined in s 2 of the Insolvency Act 24 of
1936 (s 1). The definition of a ‘person’ specifically includes an insolvent estate (s 1). The insolvent
estate (taxpayer two) is registered as a separate tax entity and a new income tax reference number is
allocated to it. Its first period of assessment will commence on the date of sequestration and end on
the last day of February that follows thereafter. The second and subsequent years of assessment will
commence on 1 March of that year and end on the last day of February that follows thereafter. The
period of assessment during which the estate is wound up will commence on 1 March of that year
and end on the date when the estate is finally wound up.
Taxpayers one and two are deemed to be one and the same person for the purposes of determining
the following:
l The amount of any allowance, deduction or set-off to which taxpayer two may be entitled
(s 25C(a)). For example, assume that taxpayer two disposes of depreciable assets in respect of
which taxpayer one previously claimed capital allowances. In determining the possible deduction
of a s 11(o) allowance, the cost and tax value of the assets to taxpayer two will be taken as the
cost and the tax value to taxpayer one. Any assessed loss (s 20) from taxpayer one’s final tax
calculation may be carried forward to taxpayer two.
l Any amount which is recovered or recouped by or otherwise required to be included in the in-
come of taxpayer two (s 25C(b)). For example, assume that taxpayer one has previously written
off a debtor and claimed a deduction in terms of s 11(i). If the debt is later collected by taxpayer
two, the recoupment (s 8(4)(a)) of the previously allowed deduction must be included in the in-
come of taxpayer two.
l Any taxable capital gain or assessed capital loss of taxpayer two (s 25C(c) and par 83(1) of the
Eighth Schedule). The base cost of an asset for taxpayer two will therefore be the same as tax-
payer one’s base cost, while taxpayer two is entitled to the same exemptions and exclusions that
taxpayer one would have been entitled to. Taxpayers one, two and three share the annual exclu-
sion and the primary residence exclusion (SARS Interpretation Note No 8). In subsequent years,
taxpayers two and three will each be entitled to a full annual exemption.
l The annual and lifetime contributions in respect of tax-free investments (s 12T(1)(b)). Any amount
received by or accrued to taxpayer two in respect of a tax-free investment of taxpayer one will be
exempt from normal tax (s 12T(2)).
Remember
l Any assessed capital loss from taxpayer one’s final tax return may also be carried forward to
taxpayer two.
l The 40% inclusion rate applicable to an individual is also applicable to taxpayer two.
The trustee or administrator of an insolvent estate is the representative taxpayer in respect of the
income received by or accrued to taxpayer two (par (f) of the definition of a ‘representative taxpayer’
in s 1, read with s 153(1) of the Tax Administration Act).
The trustee is responsible for the administration and liquidation of an insolvent estate. He must com-
plete a return of the income derived by the estate and submit the resulting claim for tax against the
assets of the estate. He must generally represent the estate in all matters relating to taxation (s 154 of
the Tax Administration Act).
The trustee could be held personally liable for any tax payable in his capacity as representative tax-
payer, if he disposes of any property with which outstanding taxes could have been paid (s 155 of
the Tax Administration Act).
Taxpayer two pays normal tax at the rates applicable to natural persons. It does not, however, qualify
for any of the personal rebates, or for the local interest exemption (s 10(1)(i)). The insolvent estate
can claim any deductions for which it qualifies, for example administration charges, such as the
trustee’s remuneration (s 11(a)).
The reduction or cancellation of debt provisions must be kept in mind if a debt is reduced by more
than the amount of consideration received, for example in terms of a compromise with a creditor
(s 19 – see chapters 13 and 17).
896
25.2.3 The insolvent person after sequestration (taxpayer three) (ss 6(4), 20(1)(a) and
66(13)(a)(b)(ii)) (s 25 of the Tax Administration Act)
An insolvent who enters into employment or carries on a profession or business after his sequestra-
tion, is liable for tax on that income in his own right.
The primary and secondary rebates are apportioned proportionately between the periods before and
after sequestration. It is unclear whether the limited local interest exemption (s 10(1)(i)) will also be
apportioned between taxpayers one and three.
The first tax period for taxpayer three runs from the date of sequestration to the last day of that year of
assessment (s 66(13)(a)(b)(ii) read with s 25 of the Tax Administration Act).
An assessed loss of taxpayer one cannot be carried forward to taxpayer three, unless the order of
sequestration has been set aside. If the order has been set aside, the amount to be carried forward is
reduced by the amount which was set off against the income of taxpayer two from the carrying on of
a trade (proviso to s 20(1)(a)). Any assessed loss of taxpayer two may not be carried forward to
taxpayer three since they are not deemed to be the same person for tax purposes.
25.2.4 The effect of the setting aside of an order of sequestration (ss 20(1)(a) and s 98 of
the Tax Administration Act)
When an order of sequestration is set aside, the existence of taxpayer two is terminated from the
start. Any transactions that took place in the insolvent estate while it existed must be accounted for in
the hands of the person who has been released from sequestration. This means that the Commis-
sioner must withdraw the final assessment issued in respect of taxpayer one as well as all assess-
ments issued to taxpayer two (s 98(1) of the Tax Administration Act). The tax position of the person
that would have been sequestrated therefore continues as if his/her estate had not been sequestrat-
ed (par 3.6 of Interpretation Note No 8).
New returns have to be submitted for taxpayer one as if taxpayer two never existed, and taxpayer
one will be re-assessed accordingly. Taxpayer one will combine all the tax consequences of both
taxpayers one and two, until the date when the order was set aside, in his/her newly rendered re-
turn(s). If a taxpayer three was registered, that taxpayer will continue to exist and will be the one
which relates to the individual in future. Taxpayer one will cease to exist from the date of setting aside
of the sequestration order. The balance of any assessed loss of taxpayer one (after reducing that
assessed loss by the amount which was set off against trade income of taxpayer two) may be carried
forward to taxpayer three (proviso to s 20(1)(a)). The effect of this is that any assessments raised on
taxpayer three will also have to be withdrawn and re-issued, taking into account any assessed losses
and assessed capital losses from taxpayer one.
These provisions will only be applicable where the provisional order of sequestration has been set
aside and will not be applicable where an insolvent person has become rehabilitated.
25.2.5 Other tax consequences (VAT Act s 53)

If a vendor’s estate is sequestrated and the trustee of the insolvent estate continues carrying on the
vendor’s existing enterprise, the insolvent estate will be regarded as the vendor of that enterprise (s 53
of the VAT Act). Taxpayers one and two will therefore be deemed to be one and the same person for
VAT purposes. This means that the insolvent estate does not have to be registered as a vendor under
a new registration number.
If the insolvent’s enterprise is being continued, taxpayers one and two are also deemed to be the
same employer for the purposes of employees’ tax, skills development levies and unemployment fund
contributions. This means that taxpayer two does not have to register as an employer under a new
registration number.
897
Example 25.1. Insolvency
The estate of Kabelo, a married man, was sequestrated on 1 June 2017. The trustee carried on
his business for the benefit of creditors, and the following is the income statement for the nine
months from 1 June 2017 to 28 February 2018:
Income statement
Commission paid ............................ R400 Gross profit on trading ..................... R11 700
Office expenses .............................. 200 Rent received .................................. 200
Salaries and wages ......................... 9 600
Net profit ......................................... 1 700
R11 900 R11 900
The trustee employed Kabelo in the business. Included in ‘Salaries and wages’ is R9 000 paid to
Kabelo. Kabelo incurred an assessed loss of R1 750 for the previous tax year. The trustee drew
up accounts at 31 May 2017 that disclosed a net profit of R550.
The trustee ceased trading on 28 February 2018. Equipment, being the only asset owned by
Kabelo, was sold for R42 000. The accounting profit on the sale is not included in the income
statement above. The base cost of the equipment to Kabelo for the purposes of CGT was
R1 800.
A wear-and-tear allowance of R1 800 has previously been allowed in respect of this equipment,
which had a tax value of Rnil on the first day of the current year of assessment.
What are the income tax effects for Kabelo and his insolvent estate for the 2018 year of assess-
ment?
SOLUTION
Taxpayer one – assessment of Kabelo for period 1 March 2017 to day before sequestration
(31 May 2017)
Net profit ....................................................................................................................... R550
Less: Assessed loss from previous year ...................................................................... (1 750)
Assessed loss at 31 May 2017 (note 1) ........................................................................ (R1 200)
Taxpayer two – the insolvent estate for the period 1 June 2017 to 28 February 2018
Net profit ....................................................................................................................... R1 700
Add:
Recoupment: equipment (s 25C) ................................................................................. 1 800
Add:
Taxable capital gain: equipment (s 25C)
R200 (R42 000 – R1 800 – R40 000 exclusion) × 40% ................................................. 80
Less:
Assessed loss at date of sequestration (s 25C) (note 1) .............................................. (1 200)
Taxable income ............................................................................................................ R2 380
Taxpayer three – Assessment of Kabelo for period 1 June 2017 to 28 February 2018
Taxable income (salary) (note 2) .................................................................................. R9 000
Notes
(1) Kabelo’s assessed loss of R1 200 incurred before sequestration cannot be set off against
his salary of R9 000 (proviso to s 20(1)(a)). It will be set off against the trading income of the
insolvent estate (s 25C).
(2) Kabelo receives the salary in his own right and is personally liable for any tax thereon.
(3) The appropriate rebates in the assessment must be reduced, since the period of assess-
ment is less than 12 months. (This only applies to taxpayers one and three.)
25.3 Deceased taxpayers (ss 1, 6(2)(b), 6(2)(c), 6(4), 6A(3), 8(4)(a) and 9HA)
(ss 153(1) and 154 of the Tax Administration Act)
A person ceases to be a taxpayer on the date of his death but the normal tax payable on the income
derived by the deceased before death is a debt due by his estate.
The executor of the estate of a deceased person is the representative taxpayer in respect of the
income received by or accrued to the deceased during his lifetime (par (e) of the definition of a
‘representative taxpayer’ in s 1 read with s 153(1) of the Tax Administration Act).
898
The executor must complete the return of income of the deceased to the date of death and submit
the resulting claim for normal tax against the assets of the estate. He must generally represent the
deceased taxpayer in all matters relating to taxation (s 154 of the Tax Administration Act).
If the deceased’s period of assessment is less than a full year, the rebates to which he is entitled are
proportionately reduced (s 6(4)). When a taxpayer dies during the year of assessment, the date used
to determine the ages of children for the purposes of the possible s 6B additional medical tax credit
is the date of the taxpayer’s death, not the last day of February.
Any fees paid to a medical scheme by the estate of a deceased taxpayer are deemed to have been
paid by the taxpayer on the day before his or her death (s 6A(3)).
A deceased person is deemed to have disposed of his or her assets (subject to certain exclusions
and roll-overs – see 25.3.2) at the date of death at the market value of those assets at that date
(s 9HA(1)). The effect is that recoupments may be included in the gross income of the deceased in
terms of s 8(4)(a). For example, assume Lutendo has been claiming s 11(e) allowances on an asset
used in his trade as a sole proprietor. The cost of the asset was R10 000 when originally purchased,
while the tax value and market value of the asset at the date of his death were R7 000 and R9 000
respectively. At death there is a deemed disposal of the asset, resulting in a recoupment of R2 000
(R9 000 less R7 000) being included in Lutendo’s final income tax return.
A deceased is deemed to have disposed of assets to a surviving spouse (who is a resident) if those
assets are acquired by the surviving spouse in terms of the will of the deceased, intestate succes-
sion, a redistribution agreement or as part of an accrual claim in terms of the Matrimonial Property
Act, 1984 (s 9HA(2)). The deemed disposal to the surviving spouse is for an amount equal to, in the
case of
l trading stock, or livestock or produce contemplated in the First Schedule, the amount that was
allowed as a deduction in respect of that asset for the year of assessment ending on the date of
death of the deceased, or
l any other asset, the base cost of the asset as determined in terms of the Eighth Schedule, as at
the date of that person’s death.
As a result, there will be no recoupment in the hands of the deceased in respect of trading stock or
other business assets transferred to a surviving spouse.
Schematically, the sequence of events in a deceased estate can be illustrated as follows:
Natural person
(see 25.3.1 and 25.3.2)
Deceased estate
(see 25.4)
Beneficiaries
(see 25.4.4)
If the deceased would have been 65 years old or older at the end of
the year of assessment during which he/she died, he/she will also be
entitled to the secondary rebate in their final income tax period
(s 6(2)(b)), reduced proportionally for the period during which he/she
Please note! was alive. In addition, if the deceased would have been 75 years old
or older at the end of the year of assessment during which he/she
died, he/she will also be entitled to the tertiary rebate in their final in-
come tax period (s 6(2)(c)), reduced proportionally.
899
Example 25.2. Death of a taxpayer during year of assessment

Priya died on 1 August 2017 at the age of 55 years. Her income from a business to the date of
her death was R131 500, while her interest income received from a source within South Africa
until date of death was R24 300.
Calculate the taxes payable by Priya for the 2018 year of assessment.
SOLUTION
Taxes payable by Priya
Period of assessment 1 March 2017 to 1 August 2017 (154 days)
Business income ...................................................................................................... R131 500
Interest ........................................................................................................ R24 300
Less: Limited interest exemption (note 1) ................................................... (23 800)
500
Taxable income ........................................................................................................ R132 000
Schedule tax on R132 000:
On R132 000 (18% of R132 000) ................................................................................. R23 760
Less: Primary rebate (13 635 × 154/365) (note) .......................................................... (5 752)
Normal tax ................................................................................................................ R18 008
Note
The primary rebate is apportioned but the limited interest exemption is not. The first R23 800
interest is exempt.
25.3.1 Amounts received or accrued after death (ss 1, 8A(1), 8B, 8C, 24A and 25)
Although certain amounts might actually be received or accrued only after the date of death, they are
deemed to accrue to the deceased taxpayer immediately prior to his death. The following are exam-
ples of such deemed accruals:
l A gain made from exercising a right (acquired before 26 October 2004) to acquire marketable
securities by a director of a company or an employee (s 8A(1)(a)). If the taxpayer is not allowed
to sell the marketable securities until after the current year of assessment, he can elect to have
the gain included in his income only in the year when he becomes entitled to sell them. If the tax-
payer makes this election and dies before the date on which he can sell the securities, the gain
must be included in his income on the day before his death (s 8A(1)(b)).
l An employee must include, in income, any amounts received or accrued from the sale of qualify-
ing equity shares derived from broad-based employee share plans if the shares are sold within
five years of receiving the shares (s 8B). If the employee dies within five years of receiving such
shares, there is no income tax liability on the value of the shares (s 8B(4)). Furthermore, s 25 does
not apply in respect of the amounts received or accrued from the sale. The effect is that the
amount will only be subject to capital gains tax in the hands of the deceased.
l Equity instruments acquired by directors and employees of a company on or after 26 Octo-
ber 2004 are taxed when they vest in the director or employee (s 8C). The vesting date depends
on the type of equity instrument. If a director or employee dies before a restricted-equity instru-
ment vests, vesting is deemed to occur immediately before the date of death, if all the restrictions
are or may be lifted on or after death (s 8C(3)(b)).
l Shares received under certain circumstances before 1 October 2001, in exchange for fixed
property or other shares are deemed to have been disposed of by the taxpayer on the day before
his death (s 24A). This disposal is deemed to be for an amount equal to the lesser of the market
value on that day and the market value on the date of the original exchange (s 24A(5)).
l Lump sum awards from pension, pension preservation, provident, provident reservation and
retirement annuity funds payable to the member or any other person on the death of the member
of the fund are deemed to accrue to the member immediately before his death (paras 3, 3A and 4
of the Second Schedule). A lump sum payable in consequence of a person’s death in respect of
compensation for the loss of office or employment is also deemed to have accrued to the person
immediately before his death (proviso (ii) to par (d) of the definition of ‘gross income’ in s 1). This
also applies to any lump sum received as a severance benefit from an employer (proviso to the
definition of ‘severance benefit’ in s 1).
900
25.3–25.4 Chapter 25: Insolvent and deceased estates
25.3.2 Capital gains tax (s 9HA and the Eighth Schedule to the Income Tax Act, paras 5(2),
31, 54, 55 and 57)
A deceased person is deemed to have disposed of his or her assets (other than assets that accrue to
a surviving spouse) at the date of death at their market value, as contemplated in par 31 of the Eighth
Schedule (s 9HA(1)). If any asset, which is deemed to be so disposed of, is transferred directly to an
heir or legatee of the deceased, that heir or legatee is deemed to have acquired the asset at the
market value as contemplated in par 31 of the Eighth Schedule (s 9HA(3)). The following assets are
not deemed to have been disposed of:
l a long-term insurance policy in respect of which the capital gain or loss would have been disre-
garded in terms of par 55 of the Eighth Schedule (s 9HA(1)(b)), and
l an interest of the deceased in a pension, pension preservation, provident, provident preservation
or retirement annuity fund in the Republic or an interest in a similar fund situated outside the Re-
public. This applies if the capital gains or losses in respect of those fund interests would have
been disregarded in terms of par 54 of the Eighth Schedule (s 9HA(1)(c)).
Assets deemed to have been disposed of to a surviving spouse (who is a resident) are deemed to be
disposed of at either the amount of the current year’s deduction (trading stock, livestock or produce)
or the base cost of the assets (see 25.3) (s 9HA(2)). As a result, the capital gain or capital loss in
respect of capital assets is rolled over to the surviving spouse.
An annual exclusion of R300 000 applies to the net capital gain or net capital loss for the period
before death (par 5(2) of the Eighth Schedule). The deceased may qualify for the small business
asset relief (par 57) as well as the primary residence and personal use asset exclusions. SARS takes
the view that the deceased estate may qualify for the same exclusions as the deceased (Interpreta-
tion Note No 12).
The CGT consequences for the deceased person are fully discussed in chapter 17.
25.4 Deceased estates (ss 1, 6, 6A, 6B, 10(1)(i), 12T and 25) (s 153(1) of the Tax
Administration Act)
A person ceases to be a taxpayer on the date of his death. After that date a new taxpayer, the de-
ceased estate, is created.
Assets transferred to the estate could be producing income in the estate before the assets are dis-
tributed to the heirs or legatees. The following amounts will be treated as income of the deceased
estate of the deceased person:
l any income received by or accrued to the executor of the estate, and
l any amount received by or accrued to the executor that would have been income in the hands of
the deceased person had that amount been received by or accrued to or in favour of that de-
ceased person during his or her lifetime (s 25(1)).
Expenditure incurred in the production of income in the estate, such as administration charges,
commission payable to the executor and the premium on a fidelity bond, could be deductible. Execu-
tor’s fees relating to the liquidation of the assets of the deceased are not deductible in terms of
s 11(a).
An assessed loss incurred by the deceased up to the date of his death cannot be set off against the
income of the estate; it merely falls away.
The estate of a deceased person is a separate person for income tax purposes (definition of a ‘per-
son’ in s 1 of the Act). The executor or administrator of the estate is a representative taxpayer in
respect of the income received by or accrued to the estate (par (e) of the definition of a ‘representa-
tive taxpayer’ in s 1 read with s 153(1) of the Tax Administration Act).
The executor must complete the return of income derived by the estate and submit the resulting
claim for normal tax against the assets of the estate. He generally represents the estate in all matters
relating to taxation.
For the purposes of determining the annual and lifetime contributions in respect of tax-free invest-
ments, the deceased and his deceased estate must be deemed to be one and the same person
(s 12T(1)(b)). Any amount received by or accrued to the deceased estate in respect of a tax-free
investment of the deceased, will be exempt from normal tax (s 12T(2)). Any amount in a tax-free
investment which was owned by a deceased at the date of death and transferred to a beneficiary out
of the deceased estate cannot be transferred to the beneficiary’s tax-free investments. Any transfer of
901
tax-free investments from one individual (or his estate) to another will be deemed to be a contribution
and subject to the annual and lifetime contribution limits of the recipient.
The deceased estate must be treated as a natural person (s 25(5)), except that it will not qualify for
the personal rebates of s 6, or the medical tax credits provided by ss 6A and 6B. As the interest
exemption of s 10(1)(i) is not expressly excluded by s 25(5), it is submitted that the deceased estate
would qualify for this exemption, which is available to natural persons.
25.4.1 Amounts received by or accrued to the executor

The provisions of s 25(1) apply to income received by or accrued to the executor of a deceased
estate in his capacity as executor, that is, to income received or accrued from the deceased’s death
to the date on which the executor ceases to function as such.
The provisions of s 25(1) do not apply to allowances granted to the deceased in the final assessment
up to the date of his death (for example, the allowances for doubtful debts (s 11(j)) or for credit
agreements (s 24)). These allowances are usually included in the income of the taxpayer in the year
of assessment after the year they were granted. The estate and the deceased are two separate
taxpayers, and an allowance granted to one taxpayer may not be included in the income of another
in a subsequent year.
Once the executor has handed over or transferred an asset to, or permitted the use of an asset by,
an heir or legatee and that person has an enforceable right to claim the income flowing from the
asset, the income is taxable in that person’s hands. The income would no longer be received by or
accrue to the executor.
25.4.2 Amounts which would have been income of the deceased
An example of this type of receipt or accrual is where a person rendered services in return for an
undertaking that the remuneration due will only be payable to his executors on his death.
This does not apply to amounts received by the executor that the deceased had a right to claim
during his lifetime. Leave pay due to a deceased in terms of his service contract that he had the right
to claim is taxable in his hands in the final period of assessment before his death. This is the case
even though the amount is received by the executor after the date of death.
25.4.3 Community-of-property marriages (ss 25(1) and 25A)

Under the South African system of administration of estates, the executor of the estate of the prede-
ceased of two spouses married in community of property administers the assets of the joint estate.
He pays the liabilities of the joint estate, collects the income derived from the joint assets and ulti-
mately distributes the deceased’s half of the net estate to the legatees, heirs or beneficiaries in terms
of the couple’s joint will. The remaining half accrues to the surviving spouse by virtue of his or her
equal share in the joint estate.
It follows that, when one of the spouses married in community of property dies, the surviving spouse
is liable for normal tax on one-half of the income accruing from the joint assets. This half of the in-
come, even though received by or accrued to the executor in the joint estate, is received on behalf of
the surviving spouse and is not taxed in the estate. The income accruing from the remaining half of
the joint assets is clearly subject to the provisions of s 25(1), and will be taxable in the hands of the
estate.
If the deceased was married in community of property, but was permanently separated from his or
her spouse, the taxable income of the deceased could be calculated as if the marriage were out of
community of property (s 25A).
Example 25.3. Deceased estates

Wally died on 30 November. He was married out of community of property. He owned the follow-
ing assets at the time of his death:
l A general dealer’s business. The executors carried on the business, and for the period
1 December to the end of February the gross income amounted to R8 000 and the deducti-
ble expenditure was R4 500.
l A mortgage loan of R60 000 (the loan is owing to Wally). The interest is due and payable at
the end of each month. From 1 December up to the end of February the executors received
interest totalling R2 200 and paid a collection commission of R50.
continued
902
l A farm. The executors carried on farming, and for the period 1 December to the end of
February derived gross income of R2 000 and incurred deductible expenditure amounting to
R4 000.
l Shares in companies. The dividends accruing for the period 1 December to the end of
February amounted to R12 000. These dividends are those that qualify for the exemption
from normal tax in terms of s 10(1)(k)(i).
l Cash at bank.
Wally’s will contained the following provisions:
l The assets should not be realised, but the liabilities should be met out of the cash at bank.
Any surplus cash is bequeathed to his widow, Cathy.
l His sister, Ann, should receive the mortgage loan.
l 50% of the remaining assets were bequeathed in equal shares to his son, Bart (unmarried
with no children), and his widow, Cathy.
l The remaining 50% of the assets were bequeathed to the future children of Bart and should
be placed in trust.
The estate was finally wound up on 31 December of the year after Wally died.
Calculate the taxable income of the deceased estate of Wally for the current year of assessment.
SOLUTION
Deceased estate of Wally:
Gross income
General dealer’s business (s 25(1)) ............................................................................. R8 000
Interest accrued on mortgage bond (s 25(1)) ............................................................. 2 200
Farming income (s 25(1))............................................................................................. 2 000
Dividends received (s 25(1)) ....................................................................................... 12 000
R24 200
Less: Exempt income
Interest exemption (s 10(1)(i)) ...................................................................................... (2 200)
Dividend exemption (s 10(1)(k)(i)) ............................................................................... (12 000)
R10 000
Less: Expenses
General dealer’s expenses (s 11) ................................................................................ (4 500)
Mortgage collection commission (s 23(f) – not in production of income) .................... –
Farming expenses (s 11) ............................................................................................. (4 000)
Taxable income of estate ............................................................................................. R1 500
Note
Although income of the estate will ultimately be paid to the beneficiaries entitled thereto, it is the
estate and not the beneficiaries, who is taxed on the income of the estate until the date that the
estate’s assets are transferred to the beneficiaries.
25.4.4 Distribution or disposal of assets by the deceased estate (s 1)

Inheritances or legacies from the estate represent receipts of a capital nature in the hands of the
beneficiaries. A legacy in the form of an annuity, however, is taxable in the hands of the beneficiary in
terms of par (a) of the definition of ‘gross income’ in s 1.
If the annuity which is received is paid out of dividends which may be exempt in terms of s 10(1)(k),
the dividend exemption will not be available (s 10(2)(b)).
25.4.5 Capital gains tax (ss 6, 6A, 6B, 9HA and 25) (Eighth Schedule to the Income Tax Act,
par 5(1))
The deceased estate is deemed to acquire assets from the deceased person at the following
amounts:
l assets not transferred to a surviving spouse – the market value of those assets as at the date of
death (s 25(2)(a)), and
l assets transferred to a surviving spouse – the amount contemplated in s 9HA(2)(b) (see 25.3.2)
(s 25(2)(b)).
903
When the deceased estate disposes of an asset to an heir or legatee of the deceased person
l the deceased estate is treated as having disposed of that asset for an amount equal to the
amount of expenditure incurred by the deceased estate in respect of that asset (s 25(3)(a)), and
l the heir or legatee is treated as having acquired that asset for an amount of expenditure incurred
equal to the expenditure incurred by the deceased estate (s 25(3)(b)).
The effect is that there will be no income or capital gain or loss on assets transferred from the de-
ceased estate to an heir or legatee of the deceased.
When the deceased estate disposes of an asset for the benefit of the surviving spouse of the de-
ceased
l the surviving spouse is treated as having acquired that asset on the date that the deceased
person acquired the asset (s 25(4)(a))
l the surviving spouse is treated as having incurred expenditure in respect of that asset of an
amount equal to the expenditure incurred by the deceased person (as contemplated in
s 9HA(2)(b)) as well as any expenditure incurred in respect of that asset by the deceased estate
(s 25(4)(b)). The expenditure is deemed to have been incurred by the surviving spouse on the
same date and in the same currency in which it was incurred by the deceased person or the de-
ceased estate, as the case may be, and
l the surviving spouse is treated as having used that asset in the same manner as the manner in
which that asset had been used by the deceased person and the deceased estate (s 25(4)(c)).
The effect is that an asset which is transferred to a surviving spouse, is merely ‘rolled over’ to the
surviving spouse from the deceased, through the deceased estate.
As a deceased estate is treated as a natural person (s 25(5)), the estate is entitled to the same ex-
emptions and relief provisions as would have been available to the deceased before his death.
Exclusions on the sale of the deceased’s primary residence and personal use assets will also be
available to the deceased estate. The estate will be taxed at the same rate and enjoy the same inclu-
sion rate (40%) that the deceased would have enjoyed had he disposed of the assets himself. An
annual exclusion of R40 000 applies to the net capital gain or assessed capital loss within the estate
(par 5(1)). The annual exclusion is available in the year of death and each year thereafter. This annual
exclusion is not subject to apportionment in the year of death.
An heir or legatee who would have received an asset out of a deceased estate which now has to be
sold in order for the estate to pay capital gains tax as a result of the deemed disposal rules, can elect
to receive that asset if certain requirements are met (s 25(6)). This will apply where
l the capital gains tax as a result of the deemed disposals exceeds 50% of the net value of the
estate of the deceased, as determined in terms of s 4 of the Estate Duty Act, before taking into
account the amount of the tax so determined, and
l the executor of the estate is required to dispose of any asset of the estate for purposes of paying
the amount of the capital gains tax as determined above.
Any heir or legatee of the deceased who would have been entitled to that asset may elect that the
asset be distributed to that heir or legatee if the amount of tax which exceeds 50% of that net value is
paid by that heir or legatee within three years after the date that the estate has become distributable
in terms of s 35(12) of the Administration of Estates Act, 1965.
Any amount of tax payable by an heir or legatee as a result of such an election becomes a debt due
to the state and must be treated as an amount of tax chargeable in terms of the Income Tax Act due
by that person (s 25(7)).
The CGT consequences for the deceased estate are fully discussed in chapter 17.
Remember
Any assessed capital loss from the deceased taxpayer’s final tax return may not be carried for-
ward to the deceased estate.
904
26 Donations tax

l identify when a disposal of property is a donation
l identify situations where certain transactions could be deemed donations
l explain which donations are specifically exempt from donations tax
l calculate the amount of the general annual exemption from donations tax available
to a taxpayer, if any
l calculate the donations tax payable on any donation at the applicable tax rate
l identify the person liable for the payment of donations tax
l indicate the time period in which donations tax must be paid.
Contents
Page
26.1 Overview (ss 54 to 64) ......................................................................................................... 906
26.2 Levying of donations tax (ss 54 and 64).............................................................................. 906
26.3 Definitions (s 55(1)) .............................................................................................................. 907
26.3.1 Property .................................................................................................................. 907
26.3.2 Donation .................................................................................................................. 907
26.3.3 Donee ..................................................................................................................... 908
26.4 When a donation takes effect (s 55(3))................................................................................ 908
26.5 Deemed donations (ss 8C and 58) ...................................................................................... 908
26.6 Interest-free or low-interest loans to trusts or companies (ss 7C and 7D) .......................... 908
26.7 Exemptions .......................................................................................................................... 910
26.7.1 Specific exemptions (ss 56(1) and 56(2)(c)) .......................................................... 910
26.7.2 General exemption for a donor other than a natural person (s 56(2)(a)) ............... 912
26.7.3 General exemption for a natural person (s 56(2)(b)) ............................................. 912
26.8 Donations by spouses married in community of property (s 57A) ...................................... 913
26.9 Donations by companies (s 57) ........................................................................................... 913
26.10 Valuation: Property (ss 55(1) and 62) .................................................................................. 913
26.10.1 Valuation: Property other than limited interests ..................................................... 913
26.10.2 Valuation of limited interests: Fiduciary, usufructuary or other like interests ........ 914
26.10.3 Valuation: Annuity .................................................................................................. 916
26.10.4 Valuation: Bare dominium...................................................................................... 917
26.11 Payment and assessment of tax (ss 59 and 60) ................................................................. 918
26.12 Comprehensive donations tax example .............................................................................. 919
905
26.1 Overview (ss 54 to 64)

Donations tax is payable on certain transfers of assets from one person to another. The donations tax
provisions are contained in ss 54 to 64 of the Income Tax Act 58 of 1962. Donations tax is not an
income tax; it is a separate tax on the transfer of wealth. Donations tax can be illustrated schematical-
ly as follows:
Donation of property by a
resident
(see 26.3 and 26.4)
Calculate value of
property donated
(see 26.10)
Deemed donation by a resident

(see 26.5)
Interest-free or low-interest
loans to trusts
(see 26.6)
Specific exemptions
(see 26.7.1)
General exemption
(see 26.7.2 and 26.7.3)
Tax @ 20%
The tax fulfils two functions: it imposes a tax on persons who may want to donate their assets in order
to avoid
l normal income tax on the income derived from those assets, and/or
l estate duty when those assets are excluded from their estates.
Remember
Donations made to certain public benefit organisations can be deducted in the normal tax calcu-
lation. This deduction is regulated by s 18A of the Income Tax Act (see chapter 8). This deduc-
tion must not be confused with the donations tax regulations.
26.2 Levying of donations tax (ss 54 and 64)

Donations tax is payable on the value of any property disposed of by a South African resident in
terms of a donation, whether directly or indirectly (s 54). The tax is levied at a rate of 20% of the value
of the property donated (s 64). This rate can be changed by the Minister of Finance by announcing
the changed rate in his annual budget speech. The new rate will then apply for a period of 12 months
906
26.2–26.3 Chapter 26: Donations tax
from the date announced by the Minister, provided it is legislated by Parliament within that 12-month
period. The rate is currently 20% and this rate is used for the purposes of this chapter. Non-residents
are not liable for donations tax.
The following steps are followed in the calculation of donations tax:
1 Identify the disposal of property (see 26.3.1) by a resident. Disposals have to be identified in
chronological order.
2 Determine whether the disposal constitutes a ‘donation’ as defined (see 26.3.2) or if it is deemed
to be a donation (see 26.5).
3 Determine whether an interest-free or low-interest loan made to a trust or company is treated as a
donation to a trust (see 26.6).
4 If the disposal is a donation or is deemed a donation, or if a loan to a trust or company is treated
as a donation, determine whether it is specifically exempt from donations tax (see 26.7.1).
5 If it is not specifically exempt, determine the value of the donation (see 26.10). If the donee paid
any consideration for the property, the consideration paid must be deducted from the value of the
donation.
6 Deduct the balance of the general exemption available to the taxpayer from the value of the
taxable donation (see 26.7.2 and 26.7.3).
7 Multiply the value of the taxable donation by 20% to determine the donations tax payable.
26.3 Definitions (s 55(1))
26.3.1 Property
The term ‘property’ is defined as
l any right in or to property
l whether it is movable or immovable
l whether it is corporeal or incorporeal
l wherever it is situated (s 55(1)).
Donations tax is therefore levied on donations of property situated inside or outside South Africa.
Examples of corporeal (tangible) property are land, buildings, and machinery. Examples of incorpo-
real (intangible) property are items such as copyrights, patents and trademarks.
Please note!
The rendering of services for free is not subject to donations tax, as
there is no ‘property’ that is disposed of.
26.3.2 Donation
The term ‘donation’ is defined as ‘any gratuitous disposal of property, including any gratuitous waiver
or renunciation of a right’ (s 55(1)). For a disposal to be gratuitous, it needs to be for no consideration
or free. The following are examples of donations:
l Masego gives a holiday apartment in Greece to his brother for no consideration.
l Kagisho (creditor) is owed R150 000 by Lerato (debtor). If Kagisho releases Lerato from her
obligation to pay the amount, Kagisho makes a donation of that amount.
The courts have held that a donation will only exist if it were motivated by ‘pure liberality’ or ‘disinter-
ested benevolence’. If a creditor writes off a loan owed to him/her because the debtor cannot repay
due to being insolvent, the creditor is not motivated by ‘pure liberality’.
An important question is whether the granting of an interest-free loan by a lender to a borrower may
constitute a donation. As the definition of ‘property’ includes any right in or to property, it has to be
established whether the lender had any ‘right’ to interest, which is then waived. In this regard it will be
important to look at the loan agreement. If the lender is entitled to charge interest in terms of that
agreement but decides not to charge interest, there will be a gratuitous waiver of his right to the
interest. If no provision is made for interest in the agreement, however, no inherent right to interest
arises. In such a case there can be no waiver of any right to interest and no donation will arise.
907
It may, however, be possible to argue that the granting of an interest-free loan may lead to a deemed
donation (see 26.5). When the lender disposes of his money to the borrower and agrees to receive it
back some time in the future at its face value, it could mean that he will receive inadequate consider-
ation for the property he disposed of. This is due to the effect of the time value of money. It is submit-
ted that this could be a problem if the loan is made for a specified term, in which case it is possible to
determine the ‘lost’ value of the funds lent. However, if the loan is re-payable on demand, it will be
practically impossible to calculate such a value. In order to avoid possible donations tax conse-
quences on such loans, it is therefore advisable that the loans be made payable on demand.
It is not SARS’ practice to treat interest-free loans as donations for donations tax purposes. However,
certain interest-free and low-interest loans made to trusts will be treated as donations to the trusts
and subject to donations tax (see 26.6).
26.3.3 Donee
The term ‘donee’ is defined as ‘any beneficiary under a donation’. It includes the trustee of a trust that
receives property under a donation for the benefit of beneficiaries. Donations tax payable by a trus-
tee in his capacity as such, may, however, be recovered by him from the assets of the trust (s 55(1)).
26.4 When a donation takes effect (s 55(3))

A donation takes effect on the date on which all the legal formalities for a valid donation have been
complied with (s 55(3)).
An oral donation takes effect on the date of delivery of the property donated. A promise to donate
takes effect when the donor commits the promise to writing and signs the relevant document.
There must also be acceptance by the donee for a valid donation to be constituted.
26.5 Deemed donations (ss 8C and 58)

Property disposed of for a consideration that is not adequate (enough) in the opinion of the Commis-
sioner is deemed to have been disposed of under a donation. The amount of the deemed donation will
be the value of the property less the consideration payable by the person acquiring it (s 58(1)).
For example, if Arthur disposes of an asset worth R200 000 to Zonke for R20 000, there will be a
deemed donation by Arthur of R180 000 (R200 000 – R20 000).
There could possibly be a deemed donation of restricted equity instruments (see chapter 8) in certain
circumstances (s 58(2)). The taxation of restricted equity instruments is usually deferred until a later
date so that the full gain on the instrument is properly taxed at ordinary rates (s 8C). Taxpayers could
try to avoid tax by selling such instruments at an earlier date before the instruments have fully in-
creased in value. They could do this by selling restricted equity instruments at an earlier date, either
in a non-arm's-length transaction or to connected persons (s 8C(5)). These avoidance schemes are
prevented by deeming the restricted instrument to be donated at the time that it is deemed to vest if a
person disposes of the instrument under certain circumstances (ss 8C(5)(a) or (b) read with s 58(2)).
The value of the donation is the fair market value of the instrument at that time, reduced by any amount
of consideration in respect of that donation.
26.6 Interest-free or low-interest loans to trusts or companies (ss 7C and 7D)

From 1 March 2017 certain loans or credit advanced to a trust by a connected person to the trust, may
result in the application of the donations tax provisions to such loans or credit (s 7C). The provision is
not retrospective as it does not change the tax liabilities for previous years of assessment, but it does
change the tax treatment of loans already in existence on 1 March 2017 going forward.
In order for this provision to apply, the lender must be a connected person in relation to the trust.
Furthermore, the lender must be either a natural person, or a company who granted the loan at the
instance of a natural person (who is a connected person in relation to the company) (s 7C(1)). From
19 July 2017 this provision also applies to loans from the lender to a company in which the trust (as
referred to above) or a beneficiary of the trust holds at least 20% of the equity shares or voting rights.
The foregone interest (the difference between the amount of interest incurred by the trust or company
and the interest that would have been incurred at the official rate of interest) is deemed to be a con-
tinuing, annual donation for purposes of donations tax (s 7C(3)). This donation is deemed to be made
by the lender on the last day of the year of assessment of the trust. If the loan is granted by a company
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26.6 Chapter 26: Donations tax
at the instance of a natural person, the natural person is deemed to have made the loan. The lender
may use the annual donations tax exemption of R100 000 (or remaining portion if applicable) (see
26.7.2) against this deemed donation.
Example 26.1. Low-interest loan advanced to a trust

Cynthia created an inter vivos discretionary trust on 28 February 2017 by selling a rent-
producing property to the trust at its market value of R10 000 000. The purchase price was not
paid by the trust but credited to a 2% interest-bearing loan account. Cynthia’s daughter and son
are the beneficiaries of the trust. Cynthia has not used any portion of her annual R100 000 dona-
tions tax exemption. Assume that the official rate of interest remained unchanged at 9% during
the 2018 year of assessment.
Calculate the donations tax consequences for Cynthia that arise during her 2018 year of as-
sessment as a result of the loan granted to the trust.
SOLUTION
Cynthia is deemed to have made a donation to the trust on 28 February 2018. The donation is
calculated as the foregone interest during the year. Since the loan was outstanding for the full
year of assessment and it is assumed that the official rate of interest remained unchanged for the
year of assessment, the deemed donation is R10 000 000 × (9% – 2%) = R700 000. After using
her annual donations tax exemption, Cynthia is liable for donations tax of R120 000, calculated
as 20% × (R700 000 – R100 000). The donations tax is due to SARS by 31 March 2018.
Notes
(1) Cynthia is a connected person to the trust (par (b)(ii) of the definition of ‘connected person’ in
s 1).
(2) The normal tax consequences are determined by the application of s 7 (see chapter 24). It is
important to note that both s 7 and s 7C can therefore apply to the same scenario.
If a person acquires a claim to an amount owing by a trust or company as outlined in s 7C(1), that
person is deemed to have made a loan to that trust or company (s 7C(1A)). The person acquiring
such a claim must be a connected person to the trust or to the person who made the loan to the trust
or company. The deemed loan will be for an amount equal to the person’s claim to the amount owed.
This deeming provision comes into effect on 19 July 2017.
Example 26.2. Low-interest loan acquired

Penelope created an inter vivos discretionary trust on 31 August 2017 by advancing a cash
amount of R1 000 000 to the trust. The amount constituted a loan to be re-paid by the trust. The
loan carries no interest. Penelope’s father and mother are the beneficiaries of the trust. On
30 September 2017 Penelope sold 50% of the loan account to her brother, Isaac, for which he
paid her R500 000 on that date. Assume that the official rate of interest remained unchanged at
9% during the 2018 year of assessment.
What are the donations tax consequences of these transactions for Penelope and Isaac in re-
spect of the 2018 year of assessment?
SOLUTION
Penelope is deemed to have made a donation to the trust on 28 February 2018. The donation is
calculated as the foregone interest during the year. The donation made by her is therefore
((R1 000 000 × 9%) × 1/12 plus (R500 000 × 9%) × 5/12) = R26 250.
Isaac is also deemed to have made a donation to the trust on 28 February 2018. The donation is
calculated as (R500 000 × 9% × 5/12) = R18 750. This is because Isaac is deemed to have ad-
vanced 50% of the loan to the trust at the date on which he acquired it from Penelope.
Furthermore, no deduction, loss, allowance or capital loss may be claimed in respect of a loan on
which no interest is charged or where interest is charged at a rate that is less than the official rate of
interest (s 7C(2)). The reduction, waiver or other disposal of such a loan, advance or credit will thus
result in no tax benefit for the lender.
If the loan by a company (the advancing company) to the trust (or another company as outlined
above) is at the instance of more than one connected person in relation to the advancing company,
the deemed donation must be apportioned based on the ratio of equity shares or voting rights in the
advancing company (s 7C(4)).
909
Example 26.3. Low-interest loan at the instance of connected persons

Fanie and Shivani hold 60% and 40% respectively of the equity shares of XYZ (Pty) Ltd. The
company grants an interest-free loan of R1 000 000 to a trust (the company is a connected per-
son to the trust) at the instance of the shareholders. The loan is granted on 31 August 2017.
Assume that the official rate of interest remained unchanged at 9% during the 2018 year of
assessment.
Calculate the donations tax consequences for Fanie and Chivani during the 2018 year of assess-
ment as a result of the loan granted to the trust. Assume that both Fanie and Shivani have
already used up their R100 000 annual donations tax exemption.
SOLUTION
At the official rate of interest, the trust would have paid interest on the loan at 9%, amounting to
R45 000 (R1 000 000 × 9% × 6/12). However, as the trust pays no interest, there is a deemed
donation of R45 000 (R45 000 – Rnil). Fanie is deemed to have made a donation of R45 000 ×
60% = R27 000 to the trust on 28 February 2018. Shivani is deemed to have made a donation of
R45 000 × 40% = R18 000 on the same date. As they have used their annual general exemption,
Fanie will be liable for donations tax of R5 400 (R27 000 × 20%) and Shivani will be liable for
donations tax of R3 600 (R18 000 × 20%), both amounts to be paid by the end of March 2018.
As stated by National Treasury, the policy rationale behind this provision was to move towards pre-
venting the avoidance of donations tax and estate duty through schemes involving trusts and inter-
est-free or low-interest loans.
The following will be specifically excluded from the application of the donations tax provisions
(s 7C(5)):
l special trusts that are created solely for the benefit of minors with a disability
l trusts or companies that fall under public benefit organisations or small business-funding entities
l vesting trusts (in respect of which the vesting rights and contributions of the beneficiaries are
clearly established)
l loans used by a trust or company to fund the acquisition of a primary residence
l loans that constitute affected transactions and are subject to transfer pricing provisions (see s 31
in chapter 21)
l loans provided to a trust or company in terms of sharia-compliant financing arrangement
l loans that are subject to dividends tax (see s 64E(4) in chapter 19.3), or
l loans by a company to a trust that was created solely to set up a share incentive scheme. The
loans may be for the trust to acquire shares in that company or any other company in the same
group of companies. This exemption applies if equity instruments (as defined in s 8C) are offered
by the trust to full-time employees and directors of the company. However, the scheme must not
be available to connected persons of the company (natural persons holding 20% or more of the
equity or voting rights of the company).
When the amount of interest that would have been charged on a loan is calculated for the purposes
of the Act, any common law principles or provisions in any other Acts that limit the amount of interest
that can be charged, are disregarded (s 7D). This provision applies from 1 January 2018.
26.7 Exemptions
26.7.1 Specific exemptions (ss 56(1) and 56(2)(c))

Donations tax is not payable on the following types of donations:
l Donations made to or for the benefit of the donor’s spouse under a registered antenuptial or
postnuptial contract. This also applies to donations made as a result of couples changing their
matrimonial property system (s 56(1)(a)). The term ‘spouse’ is defined in s 1.
Donations to a trust in which a spouse has a vested interest will also be exempt. Donations of this
kind are included in this exemption by virtue of the words ‘or for the benefit of’ in s 56(1)(a).
l Donations made to or for the benefit of the donor’s spouse, provided that the parties are not
separated under a judicial order or notarial deed of separation (s 56(1)(b)). Donations to a vested
910
trust are included by virtue of the words ‘or for the benefit of’. For example, if an asset is donated
to a trust in which a spouse has a 60% vested right, it means that 60% of the value of the property
is donated ‘for the benefit of’ the spouse. As a result, 60% of the value of the property donated
will be exempt from donations tax.
l A donation made in contemplation of death (as a donatio mortis causa) (s 56(1)(c)). For estate
duty purposes, the assets that are the subject of this type of donation are included in the de-
ceased person’s estate on his death. The deciding factor for this exemption is that the donor an-
ticipates death and therefore gives away a specific asset. For example, Pablo is about to attempt
a dangerous stunt and promises his gold watch to his friend should he die while performing the
stunt. If Pablo indeed dies while performing the stunt, the watch goes to his friend. This is not re-
garded as a donation because the property is transferred as a result of death. There are no dona-
tions tax consequences, but the asset is included in Pablo’s deceased estate and is subject to
estate duty.
l A donation in terms of which the donee will not obtain any benefit under the donation until the
death of the donor (s 56(1)(d)). The deciding factor here is not the anticipation of death. The do-
nor merely undertakes to donate an asset to the donee upon the donor’s death. For example,
Mpho agrees to donate his farm to Jayden on his (Mpho’s) death. Thus, when Mpho dies, the
farm is given to Jayden. This is not seen as a donation, but the farm is included in Mpho’s estate
for estate duty purposes and then transferred to Jayden as the heir.
l A donation that is cancelled within six months of the date upon which it took effect (s 56(1)(e)).
l A donation made by or to any traditional council or traditional community or any tribe as referred to
in s 10(1)(t)(vii) (s 56(1)(f)).
l A donation of any property (such as shares, debts, land and movable assets) situated outside
South Africa if that property was acquired by the donor
1 before he became a resident of South Africa for the first time, or
2 by inheritance from a person who at the date of his death was not ordinarily resident in South
Africa, or
3 by a donation if at the date of the donation the original donor was a person (other than a com-
pany) not ordinarily resident in South Africa, or
4 out of funds derived by him from the disposal of any property referred to in the first three items
listed above, or
5 out of funds derived by him from the disposal of or from revenue from replacement properties,
where the donor disposed of the property referred to in the first three items above and replaced
it successively with other properties (all situated outside South Africa and acquired by him out
of funds derived by him from the disposal of any of the properties referred to in the first three
items above).
(Section 56(1)(g).)
l Donations made by or to any person referred to in the following income tax exemptions:
– the Government of the Republic in the national, provincial or local sphere (s 10(1)(a)), or
– certain persons conducting scientific, technical or industrial research (s 10(1)(cA)), or
– any political party (s 10(1)(cE)), or
– public benefit organisations (s 10(1)(cN)), or
– recreational clubs (s 10(1)(cO)), or
– small business funding entities (s 10(1)(cQ)), or
– funds, including pension funds, pension preservation funds, provident funds, provident preserva-
tion funds, retirement annuity funds and benefit funds (s 10(1)(d)), or
– share block companies or institutions s 10(1)(e).
(Section 56(1)(h).)
l A voluntary award which is included in the gross income of the recipient in terms of one of the
following specific inclusions in ‘gross income’ in s 1:
– certain amounts derived for services rendered (par (c)), or
– certain amounts derived on, amongst others, the termination of services (par (d)), or
– taxable fringe benefits (par (i)).
(Section 56(1)(k)(i).)
911
l A voluntary award the gain in respect of which is required to be included in the income of the
donee in respect of share options (s 56(1)(k)(ii)).
l Trust distributions to beneficiaries of the trust (s 56(1)(l)). Donations to a trust are, however,
subject to donations tax.
l A donation of a right (other than a fiduciary or usufructuary interest) to the use or occupation of
farming property to the donor’s child (see 26.10.2) (s 56(1)(m)).
l A donation made by a public company (s 56(1)(n)).
l A donation of the full ownership in immovable property to a beneficiary in terms of the Land
Reform Programme or the National Development Plan: Vision 2030 (s 56(1)(o)).
l Donations between companies where the donor and the donee form part of the same group of
companies (see chapter 19) and the donee company is a resident (s 56(1)(r)).
l Any bona fide contribution to the maintenance of any person, provided that the Commissioner
considers it reasonable (s 56(2)(c)). For example, payments made by a parent for the education
and accommodation of a child studying at university would be bona fide maintenance payments.
26.7.2 General exemption for a donor other than a natural person (s 56(2)(a))
Once it has been determined that a donation is not specifically exempt from donations tax, the value
of the donation after deducting the general exemption will be subject to tax. If the donor is not a
natural person, the general exemption is R10 000 of the sum of all casual gifts made during any year
of assessment (s 56(2)(a)).
SARS regards gifts such as wedding gifts, birthday gifts and Christmas gifts as casual gifts. It does
not necessarily regard the first R10 000 of a larger gift as a casual gift qualifying for the exemption.
When the period concerned exceeds or is less than 12 months – for example, when a company
changes its financial year-end – the amount of R10 000 must be adjusted proportionately.
Example 26.4. General exemption for casual gifts: Donor not a natural person
The year of assessment of a company is from 1 March 2016 until 28 February 2017. It then
changed its financial year-end to 31 December. What are the maximum amounts of its casual
gifts that would be exempt from donations tax in the year ending 28 February 2017, the period
ending on 31 December 2017, and the year ending 31 December 2018?
SOLUTION
Year of assessment Maximum amount exempt
365
1 March 2016 to 28 February 2017.............. × R10 000 = R10 000
365
306
1 March 2017 to 31 December 2017 ........... × R10 000 = R8 384
365
365
1 January 2018 to 31 December 2018 ........ × R10 000 = R10 000
365
26.7.3 General exemption for a natural person (s 56(2)(b))

If the donor is a natural person, the general exemption is R100 000 of the sum of all property donated
during any year of assessment (s 56(2)(b)). This exemption is not decreased proportionately where
the period of assessment is less than a full year.
Example 26.5. General exemption for natural persons
Samuel made the following donations during the year of assessment ended 28 February:
(1) an amount of R18 000 to his brother on 25 March
(2) an amount of R71 000 to his mother on 10 July
(3) an amount of R15 000 to his son on 6 February.
What amounts will be subject to donations tax during the year?
912
SOLUTION
The donations to Samuel’s brother and mother are both exempt, since they total less than
R100 000 – the amount that is allowed as a general exemption during a year of assessment. The
donation to his son, however, is only partly exempt. Since the first two donations absorbed only
R89 000 (R18 000 plus R71 000) of the general exemption, a further amount of R11 000
(R100 000 – R89 000) could still be donated free of donations tax immediately before the dona-
tion was made to the son.
Therefore, R11 000 of the donation to the son is exempt, and the balance of R4 000 (R15 000 –
R11 000) is subject to donations tax. The amount to be exempted when there is more than one
donation during the year is required to be calculated according to the order in which the dona-
tions take effect. This solution assumes that none of the above donations were made for the bona
fide maintenance of the persons concerned.
26.8 Donations by spouses married in community of property (s 57A)

Section 57A covers donations made by spouses married in community of property.
When a spouse makes a donation out of the joint estate, each spouse is deemed to have made 50%
of the donation. Thus, when a wife makes a R150 000 donation out of the joint estate, she and her
husband are each deemed to have donated R75 000 (R150 000 × 50%).
When a spouse makes a donation out of property that is excluded from the joint estate, it will be
regarded as having been made solely by that spouse.
The basic exemption of R100 000 per year for natural persons is available to each of the two spous-
es. In other words, a couple married in community of property will together be able to donate up to
R200 000 annually without incurring any liability for donations tax.
26.9 Donations by companies (s 57)

Section 57 deals with donations made by companies at the instance of another person. It stipulates
that such donations are deemed to be made by the person (usually a shareholder) who instructed the
company to make the donation. This section is an anti-avoidance section that levies donations tax if
value is extracted from a company as a donation to a third party. The value extracted from the com-
pany is also regarded as a dividend from the company to the person at whose instance the donation
was made.
Section 57 levies donations tax on the donation part of the transaction and dividends tax (see chap-
ter 19) will be levied on the dividend part of the transaction.
Example 26.6. Donation by a company
Safeera owns 60% of the shares in ABC (Pty) Ltd. Safeera instructs the company to make a cash
donation of R80 000 to her son. What are the tax consequences of this transaction?
SOLUTION
The donation is deemed to be made by Safeera since it is made at her instance and she will
therefore be liable for donations tax on the donation. The R80 000 cash is being applied to
Safeera’s son by virtue of Safeera’s shares in ABC (Pty) Ltd. It should accordingly be viewed as
a dividend to Safeera (see chapter 19).
26.10 Valuation: Property (ss 55(1) and 62)

The various types of property donated are valued according to specific valuation methods (s 62).
26.10.1 Valuation: Property other than limited interests

The value of property donated, other than limited interests, is the price that a willing buyer and willing
seller in an open market would agree upon in an arm’s-length transaction. This value is known as the
913
‘fair market value’ at the date on which the donation takes effect. In the case of immovable property
on which bona fide farming activities are carried on in South Africa, the ‘fair market value’ is the price
that a willing buyer and willing seller in an open market would agree upon in an arm’s-length transac-
tion, reduced by 30% (s 55(1)).
If an unlisted company owns immovable property on which bona fide farming activities take place in
South Africa, the 30% reduction will similarly be applied when the value of the shares of the company
is determined (s 62(1A)).
Any conditions imposed by or at the instruction of the donor which reduce the value of the property
donated must be ignored (s 62(1)(d)).
If, in the opinion of the Commissioner, the amount shown in a return as the fair market value of any
property is too low, he is entitled to determine the fair market value (s 62(4)).
26.10.2 Valuation of limited interests: Fiduciary, usufructuary or other like interests

A fiduciary interest is a limited interest in property. It implies that a person (the fiduciary) does not
have full ownership of the property. The property is owned by the fiduciary, usually in terms of a will
or trust deed, on the condition that ownership of the property must pass to another specified person
(the fideicommissary) upon the death of the fiduciary. The fiduciary is entitled to the fruits of the
property during his lifetime, but usually may not dispose of the property. If the fideicommissary dies
before the fiduciary, the fiduciary normally becomes the outright owner of the property. For example,
Dillon donates a house to his brother, Nigel, on the condition that Nigel must leave it to his (Nigel’s)
daughter, Stefanie. A fiduciary interest has been donated by Dillon. It must be valued and donations
tax calculated on the value.
A usufructuary interest (usufruct) in property is also a limited interest. Full ownership of property
consists of two parts:
l Usufruct. This is the use of the fruit or income from the property. The holder of this limited interest
cannot dispose of the property.
l Bare dominium. This is ownership of property, without the benefit of the use of the fruit or income
from that property. The holder of this limited interest can only sell the property subject to the usu-
fruct, which belongs to someone else.
For example, Matthew donates a holiday home to Ivana, subject to a lifelong usufruct in favour of
Catherine. Ownership of the property is therefore split. Catherine is known as the usufructuary, while
Ivana is known as the bare dominium holder. In this case, two donations have been made and must
be calculated separately:
l the bare dominium donated to Ivana
l the usufruct donated to Catherine.
The following steps are followed to determine the value of a donation of a fiduciary, usufructuary or
other like interest in property:
1. Determine the fair market value of the property over which the interest is held.
2. Calculate the annual value of the right of enjoyment of the property. The ‘annual value’ is an
amount equivalent to 12% of the value of the full ownership of the property that is subject to the
fiduciary, usufructuary or other like interest (s 62(2)). If the Commissioner is satisfied that the
property cannot reasonably be expected to produce an annual yield of 12%, he may fix whatever
sum may seem reasonable to him as representing the annual yield (s 62(2)).
The annual value of books, pictures, statuary or other objects of art is the average net receipts
derived from the property during the three years preceding the date of the donation (s 62(2)(b).)
3. Determine the life expectancy of the donor as well as that of the donee. (The life expectancies of
males and females at different ages can be obtained from Table A (Appendix D).) To determine a
person’s life expectancy, look at his age on his next birthday. Also determine whether the right
will be enjoyed for a specific fixed period.
4. Determine the shortest of the above three periods.
5. Capitalise the annual value (answer to step 2) over the above shortest period, by using the pre-
sent value factors contained in Table A (when a life expectancy is the shortest period) or Table B
(when a fixed period is the shortest period).
(Section 62(1)(a).)
914
The calculation must be made over 50 years if the person concerned is not a natural person, for
example a company (s 62(3)). In such a case, the present value factors contained in Table B (Ap-
pendix D) should be used.
Example 26.7. Valuation: Usufructuary interest
Omar (male) donates to Sabelo (male) a usufructuary interest for life in property with a fair market
value of R1 000 000. Omar’s age next birthday is 56 and Sabelo’s age next birthday is 33.
What is the value of the donation for the purposes of donations tax?
SOLUTION
Annual value of property (12% × R1 000 000) ............................................................. R120 000
This amount is capitalised over the life expectancy of either the donor or the donee, whichever is
the shorter period. Omar has the shorter life expectancy in this case.
Present value factor of R1 a year capitalised at 12% over Omar’s life expectancy
(age 56 next birthday) (see Table A) ........................................................................... 7,144 14
Capitalised value of usufructuary interest (R120 000 × 7,144 14) ............................... 857 297
Value of donation for donations tax purposes...................................................... R857 297
If Sabelo’s age was 67 on his next birthday, the annual value would have to be capitalised as
follows over Sabelo’s life expectancy, which would be shorter than that of Omar:
Present value factor of R1 a year capitalised at 12% ....................................................... 5,871 65
Capitalised value of usufructuary interest (R120 000 × 5,871 65) ............................... 704 598
Value of donation for donations tax purposes...................................................... R704 598
Example 26.8. Valuation: Usufructuary interest donated by person married in community

of property
Fadziso (male, married in community of property to Lebohang (female)) donates a usufructuary

interest in property valued at R2 000 000 to Tshepo (male) for life. This property is not excluded
from the joint estate of Fadziso and Lebohang. Fadziso’s age next birthday is 46, Lebohang’s
age next birthday is 45, and Tshepo’s age next birthday is 35.
What is the value of the donation for the purposes of donations tax?
SOLUTION
Annual value of property (12% of R2 000 000) .......................................................... R240 000
50% of this donation is made by Fadziso and 50% by Lebohang. Therefore, the value of two
separate donations must be calculated:
Donation made by Fadziso:
Fadziso (donor) has a shorter life expectancy than Tshepo (donee). ....................... 24.58 years
Present value factor of R1 a year capitalised at 12% over Fadziso’s life expectancy
(see Table A) ............................................................................................................. 7,819 24
Capitalised value of usufructuary interest
(R240 000 × 50% × 7,819 24) ................................................................................... 938 309
Value of donation by Fadziso for donations tax purposes ................................. R938 309
Donation made by Lebohang:
Lebohang (donor) has a shorter life expectancy than Tshepo (donee) .................... 31.01 years
Present value factor of R1 a year capitalised at 12% over Lebohang’s life
expectancy (see Table A) .......................................................................................... 8,085 27
Capitalised value of usufructuary interest
(R240 000 × 50% × 8,085 27) ................................................................................... 970 232
Value of donation by Lebohang for donations tax purposes ............................. R970 232
Note
Both spouses will be entitled to the general exemption of R100 000 each.
915
Example 26.9. Valuation: Fiduciary interest
Whitney (female) grants a fiduciary interest in property valued at R2 000 000 to Mariska (female)
for 12 years or for life, whichever is the shorter period. Whitney’s age next birthday is 60 and
Mariska’s is 50.
Determine the value of the donation for purposes of donations tax.
SOLUTION
Annual value of property (12% of R2 000 000) ............................................................... R240 000
This amount must be capitalised over the life expectancy of Whitney or Mariska or over the fixed
period, whichever is the shortest.
From Table A, Whitney’s life expectancy (age 60 next birthday) is 18,78 and Mariska’s (age 50
next birthday) is 26,71. The fixed period is 12 years. The annual value must therefore be capital-
ised over the fixed period of 12 years.
Present value factor of R1 a year capitalised at 12% over 12 years
(see Table B) .................................................................................................................. 6,194 4
Capitalised value of fiduciary interest (R240 000 × 6,194 4) .......................................... 1 486 656
Value of donation for donations tax purposes ........................................................ R1 486 656
If the fiduciary interest were donated for a term of 20 years, the annual value would be capital-
ised over Whitney’s life expectancy, which would be the shortest period.
26.10.3 Valuation: Annuity

The value of an annuity donated is determined by capitalising the amount of the annuity at the rate of
12% over the shorter of the donor’s or the donee’s life expectancy or, if it is to be held for a lesser
period, over this lesser period (s 62(1)(b)). For example, Shakeela donates a right to an annuity of
R50 000 per year for life to George. Shakeela’s life expectancy is 29 years and George’s is 19 years.
No fixed period is applicable; therefore, the calculation will be done over 19 years. The amount of
R50 000 is not multiplied by 12% (as with usufructs and fiduciary assets) before the capitalisation is
done, as an annuity is already expressed as an annual amount.
If the terms of the donation in the above example stipulated that the donation will be for a period of
25 years, the shorter period is, similarly, 19 years. However, if the terms stipulated that, should
George die, he could transfer the annuity to someone else in his will, the fixed period of 25 years
(which is shorter than the life expectancy of 29 years of the donor) would be used. If no information to
the contrary is provided, it can be assumed that the annuity will cease at the date of death or the end
of the fixed period, whichever happens first.
Example 26.10. Valuation: Annuity
Renesh (male) grants an annuity of R200 000 to Marco (male) for life. Renesh’s age next birthday
is 55 and Marco’s age next birthday is 60.
Determine the value of the donation for purposes of donations tax.
SOLUTION
The annuity must be capitalised over the life expectancy of the donor or the donee, whichever is
the shorter period.
Present value factor of R1 a year capitalised at 12% over Marco’s life expectancy
(age 60 next birthday) (see Table A) ............................................................................ 6,74206
Capitalised value of annuity (R200 000 × 6,742 06) ..................................................... 1 348 412
Value of donation for donations tax purposes....................................................... R1 348 412
continued
916
If the annuity were granted for a fixed term of, say, ten years or for the life of the donee, whichev-
er is the shortest period, it would be capitalised over the life expectancy of the donee or of the
donor or over ten years, whichever is the shortest period. Marco’s life expectancy (age 60 next
birthday) is 14,61 (see Table A) and Renesh’s (age 55 next birthday) is 17,86. Thus, ten years is
the shortest period.
Present value factor of R1 a year capitalised at 12% over ten years
(see Table B) ................................................................................................................ 5,6502
Capitalised value of annuity (R200 000 × 5,650 2) ....................................................... 1 130 040
Value of donation for donations tax purposes....................................................... R1 130 040
26.10.4 Valuation: Bare dominium

The following steps are followed to determine the value of a bare dominium that is donated:
1 Determine the fair market value of the property in which the bare dominium is held.
2 Calculate the annual value of the right of enjoyment of the property by the holder of the usufruct.
3 Determine the life expectancy of the holder of the usufruct (therefore, do not look at the life expec-
tancy of the donor). Also determine whether the usufruct is enjoyed by the holder thereof for a cer-
tain fixed period.
4 Determine the shorter of the two above periods.
5 Calculate the value of the usufruct by capitalising the annual value (step 2) over the above period.
6 The bare dominium value is equal to the difference between the full fair market value of the prop-
erty and the value of the usufruct as above, i.e. the value determined in step 1, less the value de-
termined in step 5 (s 62(1)(c)(i)).
Example 26.11. Valuation: Bare dominium
Ricky (male) donates a farm (on which bona fide farming activities are carried on in South Africa)
that is subject to the life usufruct of Ben (male), to Aidan (male). The price which can be obtained
between a willing buyer and seller for the full ownership of the farm is R2 000 000. Ben’s age
next birthday is 58.
Determine the value of Ricky’s donation to Aidan for purposes of donations tax.
SOLUTION
Price for full ownership of farm .................................................................................... R2 000 000
Fair market value (price less 30% (see 26.11.1) (R2 000 000 – 30%) ......................... 1 400 000
Annual value of property (12% of R1 400 000) ............................................................ 168 000
Present value factor of R1 a year capitalised at 12% over Ben’s life expectancy
(age 58 next birthday) (see Table A) ........................................................................... 6,952 25
Capitalised value of usufructuary interest (R168 000 × 6,952 25) ............................... 1 167 978
Value of full ownership of farm ..................................................................................... 1 400 000
Less: Value of Ben’s usufructuary interest ................................................................. (1 167 978)
Value of donation for donations tax purposes .......................................................... R232 022
If the farm were subject to the usufruct of Ben not for life but only for a fixed period, the annual
value would be capitalised over Ben’s life expectancy or the balance of the term of the usufruct,
whichever is the shorter period. For example, if at the date of the donation to Aidan the term of
the usufruct is seven years and four months, the annual value would be capitalised over this
period (Ben’s life expectancy being 15,86 years) and the value of the donation to Aidan would
be determined as follows:
Present value factor of R1 a year capitalised at 12% over seven years (see Table B) . 4,5638
Capitalised value of Ben’s usufructuary interest (R168 000 × 4,563 8) ........................ 766 718
Value of full ownership of farm ...................................................................................... 1 400 000
Less: Value of Ben’s usufructuary interest .................................................................... (766 718)
Value of donation for donations tax purposes....................................................... R633 282
The same principles will apply if property is subject to the payment of an annuity. This means that the
owner of a property is obliged to pay an annuity to someone else from the income derived by that
property (s 62(1)(c)(ii)).
917
The following steps are followed to determine the value of property subject to an annuity:
1 Determine the life expectancy of the person entitled to the annuity. Also determine whether the
right will be enjoyed for a specific fixed period.
2 Determine the shortest of the above two periods.
3 Capitalise the annual value over the above shortest period, by using the relevant present value
factors contained in Table A or Table B.
4 Deduct the value of the annuity as determined in step 3 from the fair market value of the property
at the date of the donation.
Example 26.12. Valuation: Property subject to annuity
Anzelle (female) donates a property with a fair market value of R3 000 000 to Euliza (female). The
property is charged with an annuity of R60 000 in favour of Anastasia (female) for a period of
twenty years. So far, Anastasia has enjoyed the annuity for 12,5 years. Anastasia’s age next
birthday is 69.
Determine the value of Anzelle’s donation to Euliza for purposes of donations tax.
SOLUTION
The first step is to capitalise the annuity over the life expectancy of Anastasia or the balance of
the term over which the annuity is still to run, whichever is the shorter period. Anastasia’s life ex-
pectancy (aged 69 next birthday) is 12,57 years (Table A), while the balance of the term over
which the annuity is still to run is seven-and-a-half years.
The annuity must be capitalised over seven years, as the remaining expected period during which
the annuity will be paid (similar to the age ‘next birthday’ when calculating life expectancies).
Present value factor of R1 a year capitalised at 12% over seven years
(see Table B) ................................................................................................................ 4,563 8
Capitalised value of annuity (R60 000 × 4,563 8) ......................................................... 273 828
Value of full ownership of property ............................................................................... 3 000 000
Less: Capitalised value of Anastasia’s annuity ............................................................. (273 828)
Value of donation to Euliza for donations tax purposes ........................................ R2 726 172
26.11 Payment and assessment of tax (ss 59 and 60)

Donations tax is payable by the end of the month following the month during which a donation takes
effect. The Commissioner can allow for a longer period (s 60(1)).
The donor is the person who is liable for the payment of donations tax. If he fails to pay it within the
prescribed period, both he and the donee will be liable jointly and severally (s 59).
The Commissioner may at any time assess either the donor or the donee, or both the donor and the
donee, for any donations tax payable. He may also assess them for any shortfall in the tax paid when
he is satisfied that the tax has not been paid in full (s 60(5)).
When a donor makes more than one donation during a year of assessment, the amount of the general
exemption must be determined according to the order in which the donations took effect (s 60(2)).
Should payment of the tax be demanded from a donee, he will be liable to pay the tax only if the
donor’s general exemption has been exhausted at the time of the donation.
When a donor has made more than one donation on the same date and the donees are called upon
to pay the tax, the donor may choose the order in which the donations are deemed to have been
made. If he fails to make a choice within 14 days of being informed by the Commissioner to make
such a choice, the Commissioner may determine the order (s 60(3)).
Example 26.13. Donees held liable for donations tax
Nick donated R95 000 each to Garth and Selina on 30 September. He therefore donated
R190 000 on that date. Nick fails to pay the donations tax and the Commissioner now holds
Garth and Selina liable for the donations tax. What amount will be subject to donations tax in
Garth and Selina’s hands respectively? Assume that Nick made no other donations during that
year of assessment.
918
SOLUTION
On one donation there will be no tax payable due to the exemption, which will be used to the
extent of R95 000. Since the balance of the exemption of R5 000 (R100 000 less R95 000) will be
available on the second donation, R90 000 (R95 000 – R5 000) will be subject to donations tax,
which will amount to R18 000 (20% of R90 000). Nick has to choose the order in which he deems
the donations to have been made in order to establish which of the donees would be liable for
the donations tax.
The Tax Administration Act, 28 of 2011 was introduced to align the administra-
tion of tax Acts. It deals with issues such as the rendering of returns, penalties
Please note! and interest, and the dispute resolution process. As far as the administrative
aspects with regards to donations tax are concerned, the provisions of this Act
have to be adhered to.
26.12 Comprehensive donations tax example
Example 26.14. Comprehensive example: donations tax
On 1 May 2017 Amogelang Wawa (married out of community of property) celebrated his
60th birthday with a lavish party to which all of his friends and family and even a few of his em-
ployees were invited. Amogelang is very wealthy and loves playing board games and video
games. He decided that, instead of guests having to bring birthday presents for him, he would be
hosting several games at the party and award substantial prizes to the winners of these games.
During the course of the party Amogelang awarded the following prizes:
l To Adam (male), the winner of a competitive game of “FIFA” on an Xbox One, he awarded 10
trucks which Amogelang has used in one of his manufacturing businesses. Amogelang had
purchased these trucks at R150 000 each during 2012 and had claimed their full cost in terms
of wear and tear allowances for normal tax purposes against the income from the business.
The market value of these trucks at 1 May 2017 amounted to R90 000 each.
l To Bernie (the (male) accountant at one of his businesses), who was the winner of a game of
“Scrabble”, Amogelang awarded ten iTunes gift vouchers to the value of R500 each.
l To Elske (female aged 55), the winner of a game of "Monopoly", Amogelang awarded a holiday
house with a fair market value of R900 000. Elske will receive the house subject to the lifelong
usufruct therein awarded to Fergie (see note below).
l To Fergie (female aged 51), the winner of a game of tennis on a WiiU console, the lifelong use
of the property awarded to Elske.
Amogelang also made the following other donations during the 2018 year of assessment:
l On 1 August 2017, R70 000 to his son to be used by him for a holiday. His son returned the
R70 000 five months later.
l Ken Owens (a friend of Amogelang’s) owed Amogelang R57 500 but on 1 November 2017
Amogelang accepted R20 000 as the final and full payment on this debt.
l He donated R300 000 cash to his wife on 25 December 2017. His wife will be 65 years old on
her next birthday.
Calculate the donations tax consequences for Amogelang of the abovementioned transactions.
919
SOLUTION
Donations tax payable by Amogelang on donations made during the 2018 year of assessment:
R
1 May 2017:
Adam: 10 trucks at R90 000 each ..................................................................................... 900 000
Bernie: 10 iTunes vouchers at R500 each ......................................................................... 5 000
Elske: Bare dominium (based on the life of the usufructuary, Fergie):
Annual value 12% × R900 000 = R108 000
Usufructuary (Fergie) age next birthday, 52 years old
Factor female is 7,84646
Usufruct value R108 000 × 7,84646 = R847 418
Full market value of property = R900 000
Bare dominium donated valued at R900 000 – R847 418 ................................................ 52 582
Fergie: Value of usufruct based on the donor’s life, donee’s life or a shorter period:
Annual value 12% × R900 000 = R108 000
Age next birthday: Amogelang is 61 years old
Life expectancy is 14,01 years
Age next birthday of Fergie is 52 years
Life expectancy is 25,06 years
Use factor for Amogelang: 6,63010
Usufruct value donated = R108 000 × 6,63010 ................................................................ 716 051
1 673 633
Less: s 56(2)(b) exemption – basic annual exemption ..................................................... (100 000)
1 573 633
Donations tax @ 20% ......................................................................................................... 314 727
1 August 2017
Donation cancelled (returned within 6 months) ................................................................ –
(exempt in terms of s 56(1)(e)) (note)
1 November 2017
Debt written off: R37 500 (R57 500 – R20 000) @ 20%..................................................... 7 500
25 December 2017
Donation to his wife
(exempt in terms of s 56(1)(b)) .......................................................................................... –
Note
Amogelang had to pay the donations tax liability (R70 000 @ 20% = R14 000) by the end of
September 2017. Amogelang will therefore have to claim this amount already paid back from
SARS.
920
27 Estate duty

l apply the framework for calculating the estate duty liability of a deceased estate
l identify the items of ‘property’ contained in the deceased estate of a resident that
will be subject to estate duty in South Africa
l identify the items of ‘property’ contained in the deceased estate of a non-resident
that will be subject to estate duty in South Africa
l identify the items that did not exist in a deceased estate at the date of death, but
that are still ‘deemed’ to be property in the estate
l value the different property items included in a deceased estate, including any
limited interests in assets
l list and apply all the available deductions that can be taken into account when
calculating the dutiable amount of a deceased estate
l list and apply all the relevant tax rebates that can be deducted from the estate duty
amount, in order to arrive at the net estate duty payable by a deceased estate
l apportion the calculated net amount of estate duty between the parties, namely the
estate and certain beneficiaries, responsible for its payment
l explain how the estate duty rules are applied and differ when the deceased was
married in community of property
l explain the various administrative provisions, and objection and appeal procedures
that are applicable to estate duty.
Contents
Page
27.1 Overview .......................................................................................................................... 922
27.2 Calculation of the dutiable amount and the estate duty payable
(ss 2(2), 3, 4, 4A, 11, 13, 16 and First Schedule to the Act) ........................................... 923
27.3 Property (s 3(2))............................................................................................................... 923
27.4 Property deemed to be property (s 3(3)) ........................................................................ 923
27.4.1 Domestic policies of insurance on the life of the deceased (s 3(3)(a),
definitions of ‘child’, ‘domestic policy’, ‘relative’ and ‘family company’) ............ 924
27.4.2 Property donated under a donatio mortis causa (s 3(3)(b))............................... 926
27.4.3 A claim against the surviving spouse in terms of s 3 of the Matrimonial
Property Act 88 of 1984 (s 3(3)(cA))................................................................... 926
27.4.4 Property that the deceased was competent to dispose of for his own benefit
(s 3(3)(d)) ............................................................................................................ 927
27.5 Valuation of property (s 5) ............................................................................................... 927
27.5.1 Property sold (s 5(1)(a)) ................................................................................... 927
27.5.2 Property not sold (ss 5(1)(e), 5(1)(g) and 9(1)) ............................................... 927
27.5.3 Unlisted shares (s 5(1)(f)bis) ........................................................................... 927
27.5.4 Immovable property on which bona fide farming operations take place
(s 5(1A)) ........................................................................................................... 928
27.5.5 Fiduciary, usufructuary and other like interests in property (ss 5(1)(b)
and 5(2)) ........................................................................................................... 928
27.5.6 Right to an annuity (s 5(1)) ............................................................................... 930
921
Page
27.5.7
Bare dominium (s 5(1)(f)) ................................................................................. 932
27.5.8
Property that the deceased was competent to dispose of for his own
benefit (s 5(1)(f )ter) .......................................................................................... 932
27.5.9 Life expectancy of persons other than natural persons (s 5(3)) ..................... 932
27.6 Allowable deductions (s 4) .............................................................................................. 933
27.6.1 Funeral and death-bed expenses (s 4(a)) ....................................................... 933
27.6.2 Debts due within South Africa (s 4(b)) ............................................................. 933
27.6.3 Costs of administration and liquidation (s 4 (c)) .............................................. 933
27.6.4 Costs of carrying out the requirements of the Master or the Commissioner
(s 4(d)) .............................................................................................................. 933
27.6.5 Foreign property (s 4(e)) .................................................................................. 933
27.6.6 Debts due to creditors outside South Africa (s 4(f)) ........................................ 933
27.6.7 Limited interests reverting to donor (s 4(g)) .................................................... 934
27.6.8 Bequests to certain charitable bodies (s 4(h)) ................................................ 934
27.6.9 Improvements made to inherited property by heir or legatee (s 4(i)) ............. 934
27.6.10 Enhancement in the value of fiduciary, usufructuary or other like interest
in property through improvements by beneficiary (s 4(j)) ............................... 935
27.6.11 Accrual claims under s 3 of the Matrimonial Property Act 88 of 1984
(s 4(lA)) ............................................................................................................. 935
27.6.12 Usufructuary or other like interest created by predeceased spouse
(ss 3(2)(a), 4(q) and 4(m))................................................................................ 935
27.6.13 Books, pictures, statuary and other works of art (s 4(o))................................. 935
27.6.14 Policy proceeds taken into account in the valuation of shares (s 4(p)) .......... 936
27.6.15 Amounts accruing to the surviving spouse (s 4(q), definition of ‘spouse’) ..... 936
27.6.16 Abatement (s 4A) ............................................................................................. 937
27.7 Other rebates................................................................................................................... 939
27.7.1 Transfer duty (s 16(a))...................................................................................... 939
27.7.2 Foreign death duties and double tax agreements (s 16(c)) ............................ 940
27.7.3 Rapid succession rebate (s 2(2) and the First Schedule to the Act) .............. 940
27.8 Apportionment of estate duty (ss 11, 13, 15 and 20) ...................................................... 942
27.9 Marriage in community of property ................................................................................. 943
27.10 Assessment and payment of estate duty (ss 7, 9, 9C, 10, 12, 14, 17 and 18)
(ss 187(2) and 187(3)(c) of the Tax Administration Act) ................................................. 944
27.11 Administrative provisions (ss 6, 26, 28 and 29) .............................................................. 944
27.1 Overview
In this chapter, references to the Act and to sections of the Act are references to the Estate Duty Act
45 of 1955 and its sections, unless otherwise specified.
When a person dies, his net estate (assets less liabilities) is distributed to other people (benefi-
ciaries). In other words, wealth is transferred from the deceased to beneficiaries. The distribution is
usually made in terms of the deceased’s will; however, if he had no will, the net estate is distributed
according to the laws of intestate succession.
In South Africa, a tax called ‘estate duty’ is levied on the estate of a deceased person, in terms of the
Act. The purpose of the Act is to tax the transfer of wealth from the deceased estate (referred to here
simply as the ‘estate’) to the beneficiaries. In this respect, estate duty is similar to donations tax (see
chapter 26).
Estate duty is currently payable at 20% of the dutiable amount of the estate. The Minister of Finance
may announce a different rate in his annual budget speech, which would be applicable from a date
mentioned in that announcement. Should the Minister announce such a change in the rate, that rate
will apply for a period of 12 months from that date, subject to Parliament passing legislation giving
922
27.1–27.3 Chapter 27: Estate duty
effect to that announcement within that period of 12 months. Estate duty is payable only if the net
value of an estate exceeds R3 500 000, as an abatement of R3 500 000 may be deducted from the
net value when determining the dutiable amount. Under certain circumstances, a surviving spouse of
a deceased may be entitled to a further R3 500 000 abatement (or portion thereof) when that surviv-
ing spouse later dies (see 27.6.16).
27.2 Calculation of the dutiable amount and the estate duty payable
(ss 2(2), 3, 4, 4A, 11, 13, 16 and First Schedule to the Act)
The steps to be followed in calculating the estate duty liability of a deceased estate are as follows:
Property in the estate (s 3(2)) (see 27.3) ................................................................... Rxxx

Property deemed to be property in the estate (s 3(3)) (see 27.4) ............................. xxx
Gross value of the estate (s 3(1))............................................................................... xxx
Less: Allowable deductions (s 4) (see 27.6) .......................................................... (xxx)
Net value of the estate (s 4) ....................................................................................... xxx
Less: Abatement (s 4A) (see 27.6.16) .................................................................... (xxx)
Dutiable amount (s 4A) .............................................................................................. xxx
Estate duty calculated at 20% of the dutiable amount (s 2(2) and the First xxx
Schedule to the Act) ..................................................................................................
Less: Applicable tax rebates (s 16 and the First Schedule to the Act) (see 27.7) (xxx)
Less: Amount of estate duty to be recovered from beneficiaries (s 13) (see 27.8) (xxx)
Estate duty payable by the estate ............................................................................. xxx
27.3 Property (s 3(2))

If the deceased was ordinarily resident in South Africa at the date of his death, the value of all his
property, wherever situated, is included as property in his estate. We have to refer to case law to
determine whether a person was ordinarily resident in South Africa. To be ordinarily resident, South
Africa must be the country where the deceased had his most regular place of residence, and a
degree of permanence or continuity must be attached to the place of residence (see chapter 3).
A deceased who was not ordinarily resident in South Africa at the date of his death will be liable in
South Africa for estate duty on his South African property only (s 3(2)(c )–3(2)(h)). For example, if a
resident of the United Kingdom owned fixed property both in the United Kingdom and in South Africa
at the date of his death, only the fixed property in South Africa will attract estate duty in South Africa.
Property is very widely defined in the Act and includes the following:
l Actual property owned by the deceased at the date of his death, whether movable or immovable,
tangible or intangible, as well as any right in or to such property (s 3(2)); for example, fixed prop-
erty, shares, fixed deposits, goodwill and patents.
l Income earned by the deceased prior to death will form part of the property in the estate. For
example, interest earned on the deceased’s savings account up to the date of death will be in-
cluded in the balance of the account as property in the estate. Income earned by the estate after
the date of death is not included as property in the estate.
l Fiduciary interests owned by the deceased at the date of his death (s 3(2)(a)). This is a limited
interest in property, which implies that a person (the fiduciary) does not have full ownership of
that property. The property is owned by the fiduciary, usually in terms of a will or trust deed, on
the condition that ownership of the property must pass to another specified person (the fidei-
commissary) upon the death of the fiduciary. The fiduciary is entitled to the fruits of the property
during his lifetime, but may usually not dispose of the property. If the fideicommissary dies before
the fiduciary, the fiduciary normally becomes the outright owner of the property. For example, in
his will, Sam leaves his house to his son, Pete, on the condition that Pete must leave it to his
daughter, Ann. When Sam dies, the house is not a fiduciary asset in his estate. He had full own-
ership of the house, which will be included as such in his estate. When Pete later dies, the house
is a fiduciary asset in his estate. If Ann dies before Pete, Pete will obtain full ownership of the
house. Alternatively, upon the death of Pete, Ann will obtain full ownership.
923
A fiduciary interest will be valued using special rules and included in the deceased’s estate as
property.
l A usufructuary interest (usufruct) in property (s 3(2)(a)). Full ownership of property consists of two
parts:
– Usufruct: The use of the fruit or income from the property. The holder of this limited interest
cannot dispose of the property.
– Bare dominium: Ownership of property without the benefit of the use of the fruit or income from
that property. The holder of this limited interest can sell the property only subject to the usu-
fruct, which belongs to someone else.
For example, Arthur leaves his holiday home to Bea, subject to a lifelong usufruct in favour of
Chloe. Upon Arthur’s death, ownership of the property is split. Chloe is known as the usufructu-
ary, while Bea is known as the bare dominium holder.
If a deceased was the holder of a usufruct over property at the date of death, he had a limited
interest in that property. This limited interest will be valued (using special rules) and included in
his estate as property. The usufruct over the property then usually passes to the bare dominium
holder, who obtains full ownership of the property.
If a deceased was the holder of a bare dominium in property at the date of death, he also had a
limited interest in property. The value of the usufruct of the property is usually calculated first and
then deducted from the fair market value of the property to determine the value of the bare do-
minium. This value, (not the full market value) is included in the estate as property. The bare do-
minium is disposed of in terms of the will of the deceased, subject to the original usufruct.
l A right to an annuity charged upon property (s 3(2)(a)). If, for example, the deceased had the
right to an annual payment from the profits of a business owned by his brother, he was receiving
an annuity that was charged upon his brother’s property (the business).
l Any other right to an annuity enjoyed by the deceased immediately prior to his death that ac-
crued to another person on his death (s 3(2)(b)). For example, if the deceased was receiving an
annuity payable in terms of a contract of sale that becomes payable to another person on the
death of the original annuitant).
l So much of all the contributions made by the deceased in consequence of membership or past
membership of any pension fund, provident fund, or retirement annuity fund, as was not allowed
as a deduction in terms of s 11(k), 11(n), 11F, or par 2 of the Second Schedule to the Income Tax
Act or, as was not exempt in terms of s 10C (s 3(2)(bA)) (see Chapter 13). This applies to a per-
son who dies on or after 1 January 2016 and in respect of contributions made on or after
1 March 2015. This specific inclusion in the property of a deceased estate was introduced to limit
the practice of avoiding estate duty through retirement contributions, which are not deductible
and not subject to the retirement lump sum tax tables. These contributions would otherwise pass
on to beneficiaries free from estate duty.
Remember
It is specifically provided that no retirement benefit (lump sums or annuities) received as a result
of the death of a deceased, will be included in the property of the deceased’s estate (s 3(2)(i)).
27.4 Property deemed to be property (s 3(3))

The deceased’s property includes certain assets and rights owned or enjoyed by the deceased at
the date of his death. ‘Deemed property’ refers to certain property items that did not exist at the date
of death. Although these items did not exist at the date of death, they are included in the dutiable
estate of the deceased (s 3(3)).
27.4.1 Domestic policies of insurance on the life of the deceased (s 3(3)(a), definitions
of ‘child’, ‘domestic policy’, ‘relative’ and ‘family company’)
Any proceeds from a domestic insurance policy on the deceased’s life will be included as deemed
property in his estate. The deciding requirement here is that the policy must be on the deceased’s life
924
27.4 Chapter 27: Estate duty
(s 3(3)(a)), regardless of who the owner or the beneficiary of the policy is. The following are examples
of situations that can arise with regards to life insurance policies:
l If Gerhard owns a life insurance policy on Anton’s life, it will pay out to Gerhard if Anton dies.
Although the cash proceeds are not included in the estate’s bank account, the proceeds are
deemed to be property in Anton’s deceased estate.
l Annette takes out a life insurance policy on her own life. She nominates Tim as the beneficiary of
the policy. When Annette dies, the proceeds are paid out to Tim, but are included in Annette’s
deceased estate as deemed property.
l Zaheer takes out a life insurance policy on his own life. He does not specify any beneficiaries in
the policy. When Zaheer dies, the policy proceeds will be collected by the executor of the de-
ceased estate and paid into the estate’s bank account. The proceeds are not ‘property’ as de-
fined, as it has not been received yet at date of death. However, the proceeds are included in the
estate as deemed property.
l Divan takes out a life insurance policy on the life of Kayla. If Divan dies before Kayla, the policy
on Kayla’s life will have a cash (‘surrender’) value at the date of Divan’s death. This value is ob-
tained from the insurer and collected by the executor. The value of the policy is not included in
deemed property, as it was not on the life of the deceased. However, it is ‘property’ as defined,
as the right to receive the amount existed at the date of death.
A ‘domestic policy’ is one that pays out in South Africa upon the insured’s death.
The policy proceeds can be reduced by the amount of any premiums on the policy that were paid by
a beneficiary, plus interest on the premiums, calculated at 6% per annum from the date of payment
until the date of death. The Act does not specify whether simple or compound interest should be
used. It is current practice to make use of compound interest. Premiums paid by the deceased
cannot be deducted.
If the deceased was married in community of property and the couple took out a policy on the life of
the deceased, the premiums would have been paid out of the joint estate. If the surviving spouse is
the beneficiary of the policy, 50% of the premiums on the policy are deemed to have been paid by
the surviving spouse. Half the premiums paid plus interest at 6% can therefore be deducted from the
proceeds of the policy.
There are three situations in which the proceeds of a policy on the deceased’s life are not included in
his estate as deemed property, i.e.
l When the proceeds are payable to the surviving spouse or child of the deceased under a duly
registered ante-nuptial or post-nuptial contract (proviso (i) of s 3(3)(a)). Child is defined in the Act
to include any adopted person. If policy proceeds are paid out to a spouse, but not in terms of a
registered ante-nuptial or post-nuptial contract, the proceeds will be included in deemed proper-
ty but will qualify for a deduction in terms of s 4(q).
l When the proceeds are payable to a person who, at the date of the deceased’s death, was
– a partner of the deceased, or
– a co-shareholder in a company in which the deceased also held shares, or
– a co-member in a close corporation of which the deceased also was a member;
provided that
– the deceased paid no premium on the policy, and
– the policy was taken out for the purpose of enabling that person to acquire the deceased’s
share in the partnership, company or close corporation (proviso (iA) to s 3(3)(a)).
l Except for the above exemptions, where the Commissioner is satisfied that
– the policy was not taken out by or at the instruction of the deceased, and
– no premiums were borne or paid by the deceased, and
– no amount in terms of the policy is payable to the estate of the deceased, and
– no amount in terms of the policy is payable to or used for the benefit of any relative or depend-
ant of the deceased or any family company of the deceased (proviso (ii) of s 3(3)(a)).
A relative in relation to any person means the spouse of such person or anybody related to him or
his spouse within the third degree of consanguinity, or any spouse of anybody so related. An
adopted child shall be deemed to be related to his or her adoptive parent within the first degree
of consanguinity (s 1(1)).
925
A family company is defined in s 1(1) as any unlisted company that at any time was controlled or
capable of being controlled, directly or indirectly, by the deceased or by the deceased and one
or more of his relatives.
Example 27.1. Life insurance policies on the life of the deceased

After the death of Grace, certain domestic life insurance policies paid out benefits. Grace was
married out of community of property to Henry.
l Policy A paid out R100 000 to Henry. This policy was taken out after Grace married Henry.
Premiums amounting to R15 000 on the policy were all paid by Grace during her lifetime. In-
terest on the premiums at 6% per annum amounted to R1 100.
l Policy B paid out R500 000 to Zulu, a partner in Grace’s business, in order to enable him to
acquire Grace’s share in the partnership. All the premiums on the policy were paid by Zulu.
l Policy C paid out R60 000 to Tina, Grace’s sister. Tina paid all the premiums, amounting to
R10 000. Interest calculated on the premiums at 6% per annum amounted to R500.
l Policy D paid out R400 000 to DEF (Pty) Ltd, of which Grace was a director. The policy was
not taken out by Grace or on her instruction. Grace also paid no premiums on the policy.
Grace held no shares in the company. The company used R50 000 of the proceeds to grant
a bursary to Grace’s only daughter. Premiums on the policy paid by the company, including
interest at 6% per annum, amounted to R55 000.
Determine the amounts, if any, of the above policy proceeds that will be included as deemed
property in Grace’s estate.
SOLUTION
Policy A: included, as the policy was not ceded to the spouse in the ante-nuptial
contract (note 1) ......................................................................................................... R100 000
Policy B: taken out by partner – exempt (proviso (iA) of s 3(3)(a)) .............................. nil
Policy C: amount paid to Tina less premiums and interest (note 2)
(R60 000 – (R10 000 + R500)) ..................................................................................... R49 500
Policy D: not exempt (note 3). ..................................................................................... R345 000
Notes
(1) Premiums paid by the deceased are not deductible. The R100 000 will qualify for the s 4(q)
deduction.
(2) This policy is not exempt, as the proceeds are paid out to a relative of the deceased (her
sister).
(3) Proceeds used for the benefit of a relative of Grace – the proceeds less premiums and
interest paid by beneficiary (R400 000 – R55 000) will be included in deemed property.
27.4.2 Property donated under a donatio mortis causa (s 3(3)(b))

A donatio mortis causa is a donation in contemplation of death. The donation takes effect only if the
donor dies. No donations tax is payable on these donations if the donation is exempt in terms of
s 56(1)(c) of the Income Tax Act. The property so donated is then included in the deceased’s estate
as deemed property (s 3(3)(b)).
Property donated where no benefit is passed until the death of the deceased is also included as
deemed property, if the donation was exempt in terms of s 56(1)(d) of the Income Tax Act.
27.4.3 A claim against the surviving spouse in terms of s 3 of the Matrimonial Property
Act 88 of 1984 (s 3(3)(cA))
If the deceased was married out of community of property under the accrual system, the spouses
retain their respective estates at the beginning of the marriage. Upon the death of the deceased the
growth (accrual) in both of the spouses’ estates must be calculated. The spouse with the smaller
accrual has a claim against the spouse with the higher accrual for half the difference between their
accruals.
If the estate of the deceased has a claim against the surviving spouse (the surviving spouse’s accru-
al is higher), the accrual claim is deemed property in the estate of the deceased (s 3(3)(cA)). If the
deceased estate has a higher accrual, the surviving spouse has a claim against the deceased es-
tate. This claim will be deductible in the deceased estate (s 4(q) – see 27.6.15).
926
Example 27.2. Accrual claim
Malesedi was married out of community of property to Karabo, with the accrual system applic-
able to their marriage. After the death of Malesedi, the executor in his estate calculated the ac-
crual in his estate since the marriage at R500 000. The accrual in Karabo’s estate amounted to
R600 000.
Calculation of the accrual claim:
Accrual in Karabo’s estate ........................................................................................... R600 000
Accrual in Malesedi’s estate ........................................................................................ R500 000
Difference in the accruals ............................................................................................ R100 000
Half the difference ....................................................................................................... R50 000
As Malesedi (the deceased) had the smaller accrual, his estate has an accrual claim of R50 000
against Karabo (the surviving spouse). This claim is included in Malesedi’s estate as deemed
property.
27.4.4 Property that the deceased was competent to dispose of for his own benefit (s 3(3)(d))
Property that the deceased was competent to dispose of for his own benefit or for the benefit of his
estate immediately prior to his death, is deemed to be property in his estate (s 3(3)(d)).
For example, if the deceased was the sole trustee and a beneficiary of a trust, he could be consid-
ered to have had the power to dispose of the property of the trust for his own benefit. Because he
had the right to dispose of the property for his own benefit, the property of the trust would be deemed
property in his estate, even if he did not exercise that right.
27.5 Valuation of property (s 5)

Section 5 of the Act sets out valuation rules for the various types of property that can be included in
the estate of a deceased person.
27.5.1 Property sold (s 5(1)(a))

If property is sold through a bona fide purchase and sale in the course of the liquidation of the estate,
it will be included in the estate at the price realised by the sale (s 5(1)(a)).
27.5.2 Property not sold (ss 5(1)(e), 5(1)(g) and 9(1))

Property included in the estate as deemed property in terms of s 3(3)(b) (for example donatio mortis
causa) must be valued according to the valuation rules applicable to the valuation of donations
prescribed by s 62 (see 26.10) of the Income Tax Act (s 5(1)(e)).
Property not sold in the course of the liquidation of the estate must be valued at the fair market value
of the property at the deceased’s death (s 5(1)(g)). If the Commissioner is dissatisfied with the de-
termined value, he can adjust it (s 9(1)). If the value is reduced as a result of conditions imposed by
any person, the value must be determined as though the conditions had not been imposed (proviso
to s 5(1)(g)). For example, if the deceased owned fixed property and bequeathed the usufruct of the
property to a beneficiary in his will, the property will be included in his estate at the full market value,
as if the condition had not been imposed on the property.
27.5.3 Unlisted shares (s 5(1)(f)bis)

Shares in a company not listed on a stock exchange, as well as a member’s interest in a close corpo-
ration, must always be included in the estate at the value of the shares or interest at the date of death
(s 5(1)(f)bis). This value is included in property, even if the shares or member’s interest are sold by
the executor for a different amount.
The valuer must disregard any restrictions contained in the memorandum and articles of the com-
pany or founding statement and association agreement of a close corporation that may reduce the
value of the shares or interest. If the deceased had the power to confer upon himself certain benefits
in respect of the assets or profits of the company through his shareholding, these benefits must be
taken into account when the shares are valued.
927
27.5.4 Immovable property on which bona fide farming operations take place (s 5(1A))
In the case of immovable property on which bona fide farming operations take place in South Africa,
the fair market value of the property is obtained by reducing the price between a willing buyer and
seller in an open market by 30% (definition of ‘fair market value’ in s 1).
If an unlisted company owns immovable property on which bona fide farming operations are being
carried on in South Africa, the 30% reduction will also be applied for the purposes of determining the
value of the shares in the company (s 5(1A)).
If farming property is sold, the amount realised is included as property in the estate. The proceeds
are therefore not reduced by 30%.
27.5.5 Fiduciary, usufructuary and other like interests in property (ss 5(1)(b) and 5(2))
The following steps are followed to value fiduciary, usufructuary and other like interests in property
held by the deceased at date of death:
1. Calculate the annual value of the right of enjoyment of the property. This value is equal to 12% of
the fair market value of the property (s 5(2)). If the Commissioner is satisfied that the property
cannot yield an annual return of 12%, he may decide to use another percentage (first proviso to
s 5(2)).
The annual value of a fiduciary, usufructuary or other right to enjoyment of books, pictures, statu-
ary or other objects of art is the average net receipts (if any) derived from the items during the
three years immediately before the date of death of the deceased (instead of the 12% rule) (sec-
ond proviso to s 5(2)). If such items did not generate any income in the three years prior to the
death of the deceased, the annual value of the use thereof will be nil.
2. Identify the person to whom the limited interest is transferred upon the deceased’s death (the
beneficiary).
3. Determine the life expectancy of the beneficiary (Table A in Appendix D). When using Table A, the
person’s age at his next birthday must be used.
4. Determine whether this limited interest is transferred to the beneficiary for a fixed period only, in
other words, not for the rest of his life, but only for a certain period.
5. The shorter of the life expectancy of the beneficiary (step 3) and the fixed period (step 4) will be
taken as the period of enjoyment of the right.
6. Capitalise the annual value (step 1) per year over the period determined in step 5 (s 5(1)(b)).
Table A (Appendix D) can be used to determine the present value of R1 per year for the number
of years reflected by the beneficiary’s life expectancy. If a fixed period is used in the calculation,
Table B (Appendix D) can be used. Both tables use a discounting factor of 12%.
Example 27.3. Valuation of a fiduciary interest ceasing

Ditshego (the fiduciary) was the fiduciary owner of property that was valued at R200 000 on his
death. Upon the death of Ditshego, the property must be transferred to Tumelo (the fideicommis-
sary), who is a male aged 38 years and six months. Calculate the value of the fiduciary interest
ceasing on the death of Ditshego that must be included as property in his estate.
SOLUTION
Value of the property...................................................................................... R200 000
Annual value at 12% (R200 000 × 12%) ........................................................ R24 000
Identify person to whom limited interest is transferred .................................. Tumelo
Tumelo’s age next birthday ............................................................................ 39 years
Present value of R1 per year over 39 years per table A ................................ 8,06781
Capitalised value of annual value .................................................................. 8,06781 × R24 000
Value of fiduciary interest ............................................................................... R193 627
First proviso to s 5(1)(b)

When the holder of a usufruct over a property dies, the holder of the bare dominium usually acquires
full ownership of the property. If the bare dominium holder previously paid any consideration for the
bare dominium, the value of the usufruct must be reduced by the amount of the consideration,
928
together with interest thereon at 6% per year (compound interest). The interest is calculated from the
date of payment of the consideration to the date of the deceased’s death. This is because a smaller
amount of wealth effectively is passed on to the bare dominium holder, as he had to pay something
to obtain his rights.
Second proviso to s 5(1)(b)
There is a further limitation on the value of a usufructuary interest calculated using the above steps.
This proviso applies when the bare dominium holder becomes the full owner of the property upon the
death of the holder of the usufruct. The value of the usufruct passing to the bare dominium holder
cannot exceed the difference between
l the fair market value of that property as at the date of the deceased’s death, and
l the value of the bare dominium as at the date when it was obtained (the date on which the de-
ceased’s usufructuary interest was created).
This proviso applies only if the bare dominium was acquired under the same transaction that resulted
in the deceased holding the usufruct. For example, if Sbongile donates the bare dominium of her
farm to one of her sons (Kabelo) and the usufruct to another son (Kitso), the bare dominium is
created at the same time that the usufruct is created. The full ownership of the farm was therefore
split into the two components. When Kitso dies, the usufruct will automatically pass to Kabelo and the
second proviso will apply. However, if Sbongile donated the usufruct of the farm to Kabelo and kept
the bare dominium for herself, the situation is different: Sbongile always owned the bare dominium.
The bare dominium was always part of the full ownership that belonged to Sbongile; it was not
created when the usufruct was given to Kitso. If Kitso dies, the usufruct will pass back to Sbongile
(unless the deed of donation stipulates differently) and the second proviso will not apply.
Third proviso to s 5(1)(b)
If the person to whom a limited interest in property is transferred cannot be ascertained until some
future date (for example unborn heirs), a life expectancy of 50 years should be used for that person.
Example 27.4. Valuation of a usufructuary interest ceasing

Carlos (the bare dominium holder), who is a male aged 22, obtained the full ownership of a prop-
erty when Darius (the usufructuary) died. The property was valued at R750 000 on the date of
Darius’ death.
The property was originally left to Carlos, subject to the lifelong usufruct in favour of Darius (a
male, then aged 82 years), when Alex died two years earlier. A condition in Alex’s will stipulated
that Carlos had to pay a bequest price of R10 000 to Alex’s widow. Carlos accepted the condition
and paid the bequest price exactly two years ago. The value of the property at the date of Alex’s
death was R500 000.
Calculate the value of the usufruct ceasing in Darius’ estate.
SOLUTION
Value of the property ..................................................................................... R750 000
Carlos’ age next birthday............................................................................... 23 years
Present value of R1 per year over Carlos’ life expectancy (Table A) ............ 8,28117
Value of usufructuary interest as per general calculation rules ..................... R745 305
First proviso
Since Carlos, the bare dominium holder, had to pay a consideration (the bequest price) for his
right in the property, the first proviso applies:
Amount of consideration ................................................................................................. R10 000
Period from payment of consideration to date of death ................................................. 2 years
Value of consideration including interest (R10 000 × (1,06)²) ....................................... R11 236
The value of the usufruct is limited in terms of the first proviso (R745 305 – R11 236) R734 069
Second proviso
Since Carlos, the bare dominium holder, acquired full ownership in the property, the further limi-
tation on the value of the usufructuary interest applies.
Value of property on Darius’ death ................................................................................. R750 000
Less:
Value of bare dominium when first acquired by Carlos on Alex’s death (note):
Value of property ............................................................................................................ R500 000
continued
929
Less:
Value of Darius’ usufruct at the date of Alex’s death:
Annual value at 12% (R500 000 × 12%) ......................................................................... R60 000
Age next birthday of Darius ............................................................................................ 83
Present value of R1 per year over Darius’ life expectancy (Table A) ............................. 3,65276
Value of usufruct held by Darius (3,65276 × R60 000) ................................................... R219 166
Value of bare dominium (R500 000 – R219 166) ............................................................ 280 834
Usufructuary interest ceasing may not exceed (R750 000 – R280 834) ........................ R469 166
Therefore, the smaller of R734 069 or R469 166 must be used. .................................... R469 166
Note
The full market value of property consists of the usufruct and the bare dominium. To obtain the
bare dominium value, the value of the usufruct must be determined and deducted from the mar-
ket value of the property (see 27.5.7).
27.5.6 Right to an annuity (s 5(1))

An annuity is a fixed annual amount paid by one person to another. If the deceased was the recipient
of an annuity at the date of death, it must be determined whether any benefit is transferred to some-
one else in terms of the annuity after the deceased died.
Right to an annuity charged upon property

An annuity that someone has the obligation to pay out of the rent derived from a fixed property is an
example of an annuity charged upon property. If the deceased was the recipient of an annuity
charged upon property, the following rules apply:
l If the right to the annuity does not accrue to another person after death, the annuity must be
capitalised at 12% over the life expectancy of the owner of the property. The owner of the proper-
ty therefore receives a benefit, as the annuity no longer has to be paid.
l If the right to the annuity accrues to some other person on the deceased’s death, the annuity
must be capitalised over the expectation of life of the second annuitant at 12%. If it is to be held
for a period less than the life expectancy of the second annuitant, the annuity will be capitalised
over the lesser period (s 5(1)(c)).
Example 27.5. Right to an annuity charged upon property
Immediately prior to his death, Patrick held the right to an annuity of R10 000 per year payable
out of the rental derived from a fixed property owned by Tumiso. On the death of Patrick, the
annuity ceased. Tumiso’s age (a male) next birthday at the date of Patrick’s death was 56 years.
Calculate the value of the annuity ceasing that must be included as property in Patrick’s estate.
SOLUTION
Annuity ............................................................................................................. R10 000
Tumiso’s age next birthday .............................................................................. 56 years
Present value of R1 per year over Tumiso’s life expectancy (Table A) ............ 7,14414
Capitalised value of annual value .................................................................... 7,14414 × R10 000
Value of annuity included as property in Patrick’s estate ................................ R71 441
If, on the death of Patrick, the right to the annuity had accrued to Valerie (a female aged 64) for
the rest of her life, the value of the annuity would have been determined as follows:
Annuity ............................................................................................................. R10 000
Valerie’s age next birthday .............................................................................. 65 years
Present value of R1 per year over Valerie’s life expectancy (Table A) ............ 6,84161
Capitalised value of annual value .................................................................... 6,84161 × R10 000
Value of annuity included as property in Patrick’s estate ................................ R68 416
continued
930
If on the death of Patrick, the right to the annuity had accrued to Valerie (a female aged 64), for
the next ten years, the value of the annuity would have been determined as follows:
Annuity .............................................................................................................. R10 000
Valerie’s age next birthday ............................................................................... 65 years
Life expectancy of Valerie................................................................................. 15,18 years
Fixed period of payment of the annuity ............................................................ 10 years
Shorter of life expectancy of Valerie or the fixed period ................................... 10 years
Present value of R1 per year for 10 years as per Table B ................................ 5,6502 × R10 000
Value of annuity included as property in Patrick’s estate ................................. R56 502
Right to an annuity not charged upon property

If the deceased was the recipient of an annuity (other than an annuity charged upon property) imme-
diately prior to his death, and the annuity accrues to someone else upon his death, the value of the
right is the amount of the annuity capitalised at 12% over the life expectancy of the new recipient. If
the annuity is to be held for a period less than the life of the new recipient, the annuity must be capi-
talised over the shorter period (s 5(1)(d)).
If the deceased was the recipient of an annuity (other than an annuity charged upon property) imme-
diately prior to his death, and the annuity ceases upon his death, the right to the annuity has no value
for estate duty purposes. No wealth was transferred to anyone else.
Example 27.6. Right to an annuity not charged upon property
Immediately prior to his death, Franco held the right to an annuity of R10 000 per year. On the
death of Franco, the annuity accrued to Gino (a male). Gino’s age next birthday at the date of
Franco’s death was 56 years.
Calculate the value of the annuity that must be included as property in the estate of Franco.
SOLUTION
Annuity ........................................................................................................... R10 000
Gino’s age next birthday................................................................................ 56 years
Present value of R1 per year over Gino’s life expectancy (Table A).............. 7,14414
Value of annuity included as property in the estate of Franco....................... R71 441
If on the death of Franco the annuity ceased, there would be no property to be included in
Franco’s estate.
If on the death of Franco the right to the annuity had accrued to Hilda (a female aged 64) for a
period of only five years, the value of the annuity would have been:
Annuity ........................................................................................................... R10 000
Hilda’s age next birthday ............................................................................... 65 years
Expectation of life of Hilda ............................................................................. 15,18 years
Remaining period of the annuity .................................................................... 5 years
Present value of R1 per year over five years as per Table B ......................... 3,6048
Value of annuity included as property in the estate of Franco....................... R36 048
Right to an annuity from a policy of insurance on the life of the deceased

The value of a right to an annuity payable under a domestic insurance policy on the life of the de-
ceased is the amount of the annuity capitalised at 12% over the life of the annuitant (person receiving
the annuity). If the annuity is payable for a period shorter than the life of the annuitant, then the annu-
ity must be capitalised over the shorter period (s 5(1)(d)bis).
The proviso to s 5(1)(d)bis provides a limitation on the value of the annuity if it ceases to be payable
within five years after the deceased’s death. This proviso will apply if the annuity ceases due to
l the death of the annuitant within the five-year period, or
l the remarriage of the annuitant (if the annuitant was the deceased’s widow) within the five-year
period (this applies only if the annuitant was a female, i.e. the deceased’s widow).
931
The value of the annuity in the deceased’s estate is then deemed to be the lesser of
l the total of the amounts that accrued to the annuitant in respect of the annuity and any amounts that
accrued to him or to his estate as a result of the termination of the annuity, or
l the original capitalised value of the annuity in the deceased’s estate.
27.5.7 Bare dominium (s 5(1)(f))

If the deceased was the holder of a bare dominium in property, the full market value of the property
will not be included in his estate. The value of the bare dominium will be the difference between the
fair market value of the property at the date of his death and the value of the usufructuary interest as
calculated over the life expectancy of the usufruct holder.
If the usufructuary interest in the property is to be held for a period shorter than the life expectancy of
the person entitled to the usufruct, the usufructuary interest is valued over the shorter period
(s 5(1)(f)).
Example 27.7. Valuation of a bare dominium
At the date of his death, Martin was the holder of the bare dominium in a property that had a fair
market value of R500 000. The usufruct over the property was held by Yonela, a female aged 64
at the date of Martin’s death.
Calculate the value of the bare dominium at the date of Martin’s death.
SOLUTION
Fair market value of the property ................................................................... R500 000
Value of the usufructuary interest:
Yonela’s age next birthday ............................................................................ 65 years
Present value of R1 per year over the life expectancy of Yonela (Table A) ... 6,84161
Value of the usufruct ...................................................................................... R410 497
Value of bare dominium (R500 000 – R410 497) ........................................... R89 503
27.5.8 Property that the deceased was competent to dispose of for his own benefit
(s 5(1)(f)ter)
This class of deemed property is included in the deceased’s estate at the fair market value of the
property at the date of death. The expenses or liabilities that the deceased would have had to incur if
he had disposed of that property at the date of death must be deducted from the market value of the
property. For example, Alisha (the deceased) was the sole trustee of a trust at the date of her death.
The only asset in the trust was a block of flats. In terms of the trust deed, the trustee of the trust could
dispose of the asset as she saw fit. If Alisha was also a beneficiary of the trust, it means that she
could dispose of the asset for her own benefit. The asset would then be included in Alisha’s estate at
its fair market value at the date of death. If Alisha could have sold the block of flats at the date of
death, she probably would have had to incur expenses, for example auctioneers’ commission, in
order to sell the asset. This cost must be deducted from the market value to be included in the estate.
If the property consists only of profits, the value is calculated by capitalising the annual value of the
profits at 12% over the life expectancy of the deceased immediately prior to his death. In the above
example, if the rent from the flats could be applied for Alisha’s benefit, but the asset would ultimately
be transferred to her son, it means that the rental income must be valued over Alisha’s life expectan-
cy and included in her estate (s 5(1)(f )ter).
27.5.9 Life expectancy of persons other than natural persons (s 5(3))

If a calculation of the value of property needs to be done over the life expectancy of a person who is
not a natural person, for example a company or trust, the calculation must be made over a period of
50 years (s 5(3)).
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27.6 Allowable deductions (s 4)

The total value of all the property and deemed property of the deceased will constitute the gross
estate. The net value of the estate is determined by subtracting the allowable deductions from the
gross estate (s 4). The deductions are as follows:
27.6.1 Funeral and death-bed expenses (s 4(a))

The amount of the funeral, tombstone and death-bed expenses of the deceased that may be deduct-
ed is that which the Commissioner considers to be fair and reasonable (s 4(a)).
27.6.2 Debts due within South Africa (s 4(b))

All debts due by the deceased to persons ordinarily resident within South Africa are deductible.
However, for these debts to be allowed as a deduction, they have to be settled out of property that
has been included in the estate (s 4(b)).
27.6.3 Costs of administration and liquidation (s 4 (c))

All costs that have been allowed by the Master in the administration and liquidation of the estate, for
example executor’s fees, Master’s fees and valuation fees are deductible. As income earned by the
estate after the date of death is not included as property in the estate, expenses incurred in the
management and control of such income are not allowed as a deduction (s 4(c)).
27.6.4 Costs of carrying out the requirements of the Master or the Commissioner (s 4(d))
Expenditure incurred in carrying out the requirements of the Master or the Commissioner in order to
comply with the Act (s 4(d)); an example is the cost of obtaining additional valuations when required
by the Commissioner.
27.6.5 Foreign property (s 4(e))

If the deceased was ordinarily resident in South Africa, all his property, including foreign property, will
be included in his estate. The value of certain foreign property will, however, be allowed as a deduc-
tion from the gross estate. This deduction will be the value of all the deceased’s property situated
outside South Africa that
l the deceased acquired before he became ordinarily resident in South Africa for the first time, or
l the deceased acquired after he became ordinarily resident in South Africa for the first time
– by way of a donation, if at the date of the donation the donor was a person (other than a com-
pany) not ordinarily resident in South Africa, or
– by way of an inheritance from a person who, at the date of his death, was not ordinarily resi-
dent in South Africa, or
l has been acquired out of the profits and proceeds of this deductible property. For example, if a
deductible foreign property is sold and the proceeds used to buy another foreign property, this
second foreign property will also be deductible (s 4(e)).
27.6.6 Debts due to creditors outside South Africa (s 4(f))

Any debts due by the deceased to persons ordinarily resident outside South Africa that have been
paid out of property included in the estate are deductible. The amount of the foreign debt that is
deductible is
l the total amount of the foreign debts less
l the value of any of the deceased’s assets outside South Africa that are not included in the estate
(s 4(f)).
Please note that this requirement is similar to the requirement that local debts have to be settled out
of property included in the estate (s 4(b ) – see 27.6.2). If local debts are settled with the proceeds
from foreign assets that are deductible (and therefore not taxable), the local debts will not be deduct-
ible.
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Example 27.8. Deduction of foreign debts
The following information relates to the deceased estate of Imaan:

Property situated in South Africa ................................................................................ R500 000
Foreign property included in Imaan’s estate .............................................................. R100 000
Value of foreign property (included in the above foreign property) that is
deductible (s 4(e)) ...................................................................................................... R60 000
Calculate the amount of foreign debt that can be deducted if the total foreign debt is:
(a) R50 000
(b) R80 000
SOLUTION
(a) The full amount of R50 000 is deemed to be settled out of the proceeds of non-taxed for-
eign property (total value R60 000). Therefore, no amount of foreign debt will be deductible.
(b) R60 000 of the foreign debts will be settled out of non-taxed foreign property. Therefore,
R20 000 (R80 000 less R60 000) can be deducted. This R20 000 has been settled out of
proceeds on property that have been included in the estate.
27.6.7 Limited interests reverting to donor (s 4(g))

The value of any fiduciary, usufructuary or other like interest in property that was donated to the
deceased previously and that goes back to the donor upon the death of the deceased is deductible.
This applies to annuities charged upon property as well, if the right to the annuity accrues to the
donor of the property upon the deceased’s death (s 4(g)).
For example, Abram donates the usufruct of a farm to Ben, but keeps the bare dominium in the farm
for himself. Upon the death of Ben, the usufruct goes back to the donor, Abram. The usufruct will be
valued in the estate of Ben over the life expectancy of Abram. A deduction will be allowed of the
value of the usufruct in terms of s 4(g).
27.6.8 Bequests to certain charitable bodies (s 4(h))

The value of any property included in the estate that has not been allowed as a deduction under any
other provision of s 4 and that accrues or accrued to
l any public benefit organisation that is exempt from tax in terms of s 10(1)(cN) of the Income Tax
Act, or
l any institution, board or body that is exempt from tax in terms of s 10(1)(cA)(i) of the Income Tax
Act and that has as its sole or principal object the carrying on of any public benefit activity con-
templated in s 30 of that Act, or
l the State or a municipality as defined in s 1 of the Income Tax Act
constitutes a further deductible amount (s 4(h)).
27.6.9 Improvements made to inherited property by heir or legatee (s 4(i))

The amount by which the value of any property included in the estate has been enhanced by any
improvements made to the property
l by the beneficiary who receives the property on the death of the deceased,
l during the lifetime of the deceased, and
l with the deceased’s consent, may also be deducted (s 4(i)).
Example 27.9. Improvements made by beneficiary

The following information relates to the deceased estate of Elias:
Market value of fixed property on date of death ......................................................... R950 000
Cost of improvements made to the above property by Jacob .................................... R80 000
The property is bequeathed to Jacob in the will of Elias. The improvements made by Jacob,
during the lifetime of Elias and with Elias’ consent, increased the value of the fixed property by
R150 000.
What is the deduction in terms of s 4(i)?
934
SOLUTION
An amount of R150 000 can be deducted in the estate. This represents the increase in value of
the property and not the cost of the improvements.
27.6.10 Enhancement in the value of fiduciary, usufructuary or other like interest in property
through improvements by beneficiary (s 4(j))
The amount by which the value of any fiduciary, usufructuary or other like interest has been en-
hanced by any improvements made to the property
l at the expense of the person to whom the interest accrues upon the deceased’s death
l during the lifetime of the deceased, and
l with his consent, is deductible (s 4(j)).
Example 27.10. Calculating deduction for enhancement in value of usufructuary interest
Wisani was the holder of a usufruct over a property until the date of his death. The bare domi-
nium of the property belongs to Simphiwe. During the lifetime of Wisani and with Wisani’s con-
sent, Simphiwe effected improvements on the property, that increased the value of the property
by R200 000. At the date of death of Wisani, the fair market value of the property was R900 000
and Simphiwe (a male person) was 32 years old.
What is the deduction in terms of s 4(j)?
SOLUTION
Fair market value of fixed property on date of death ..................................... R900 000
Age next birthday of Simphiwe ...................................................................... 33 years
Value of the usufruct included in the estate of Wisani ................................... R884 343
Market value excluding the value of improvements (R900 000 – R200 000) . R700 000
Value of usufruct (R700 000 × 12% = R84 000; R84 000 × 8,18836) ........... R687 822
Enhancement in value of usufruct due to improvements ............................... R884 343 – R687 22
Section 4(j) deduction in the estate of Wisani ............................................... R196 521
27.6.11 Accrual claims under s 3 of the Matrimonial Property Act 88 of 1984 (s 4(lA))
The amount of any accrual claim against the estate by the surviving spouse of the deceased or by
the estate of his deceased spouse may also be deducted (s 4(lA)) (see 27.4.3).
27.6.12 Usufructuary or other like interest created by predeceased spouse

(ss 3(2)(a), 4(q) and 4(m))
The value of a usufructuary or other similar interest in property, which was created by a predeceased
spouse of the deceased, could be deductible. This applies if the property formed part of the estate of
the predeceased spouse and no s 4(q) deduction was available in respect of the property in the
estate of the predeceased spouse (s 4(m)). This also applies to a right to an annuity charged upon
property included as property of the deceased.
This deduction is very seldom encountered in practice, as a deduction under s 4(q) is usually al-
lowed in the estate of the predeceased spouse.
27.6.13 Books, pictures, statuary and other works of art (s 4(o))

An amount included in the estate with regard to books, pictures, statuary or other objects of art lent to
the national, provincial or local government of the Republic under a notarial deed can be deducted.
The deduction is only available if the lending period is at least 30 years and the deceased died
during the lending period (s 4(o)). The deduction is also available in respect of the value of the
shares of a corporate body attributable to such items of art.
935
27.6.14 Policy proceeds taken into account in the valuation of shares (s 4(p))
If a company owns a policy (which is not an exempt policy – see 27.4.1) on the life of the deceased,
the proceeds will be deemed property upon the death of the deceased. If the deceased owned any
shares in that company, the value of the shares (property in the deceased’s estate) will also be
increased due to the proceeds having been paid into the company’s bank account. A deduction can
therefore be claimed for the amount of the policy proceeds included in the valuation of the shares
owned by the deceased (s 4(p)). This deduction aims to avoid the policy proceeds being included in
the estate twice.
Please note that the policy proceeds could be included in the gross income of the company for nor-
mal tax purposes in terms of par (m) of the gross income definition in s 1 of the Income Tax Act. This
will apply if the deceased was also an employee or director of the company. This means that the
company could be liable for tax on the proceeds of the policy, usually at 28%. The value of the com-
pany’s shares will therefore only increase by the after-tax amount of the policy proceeds.
Only that part of the value of the deemed property that has not already been deducted in terms of
other parts of s 4 can be deducted. For example, if the shares accrue to the spouse out of the estate,
a s 4(q) deduction can be claimed for the full value of the shares. No s 4(p) deduction will then be
claimed.
Example 27.11. Policy proceeds included in the valuation of shares
James owned 40% of the equity shares of MM (Pty) Ltd at the date of his death. He was also a
director of the company. MM (Pty) Ltd took out a policy on the life of James and paid 50% of the
premiums on that policy, amounting to R100 000 (including interest at 6%). James had paid the
other 50% of the premiums during his lifetime, also amounting to R100 000 including interest.
After James died, the policy paid out R950 000 to MM (Pty) Ltd. James’ shareholding is be-
queathed to his son in terms of his will. James’ shareholding was valued at R2 500 000 at the
date of his death. The valuation of the shares takes the policy proceeds into account, as the
company had a right to the payment at James’ death.
What is the deduction in terms of s 4(p)?
SOLUTION
Value of shares on date of death (property in the deceased estate) .......................... R2 500 000
Policy proceeds taken into account in the above valuation:
40% × (R950 000 × 72%) (after-tax proceeds) ........................................................... R273 600
Policy proceeds included as deemed property in the deceased estate: R950 000
less R100 000 (premiums paid by the company) ........................................................ R850 000
Deduction in terms of s 4(p) ........................................................................................ R273 600
Note
As the deceased paid some of the premiums on the policy, the policy proceeds will not be exempt
(s 3(3)(a) – see 27.4.1). As the policy had the effect of increasing property by R273 600 as well as
R850 000 being included as deemed property, a deduction is allowed to avoid double taxation.
27.6.15 Amounts accruing to the surviving spouse (s 4(q), definition of ‘spouse’)

Any property included in the estate that accrues to the surviving spouse of the deceased constitutes
a deduction (s 4(q)). This applies only to amounts that have not been deducted already in terms of
any other deduction allowed by s 4.
A ‘spouse’ is defined in s 1(1) in relation to a deceased person as including a person who at the time
of death of the deceased person was his partner
l in a marriage or customary union recognised in terms of the laws of South Africa, or
l in a union recognised as a marriage in accordance with the tenets of any religion, or
l in a same-sex or heterosexual union that the Commissioner is satisfied is intended to be permanent.
The marriages or unions contemplated in the last two items above are, in the absence of proof to the
contrary, deemed to be marriages or unions without community of property.
Examples of amounts that could accrue to the surviving spouse are
l bequests to the spouse in the deceased spouse’s will
936
l the amount due to the surviving spouse in terms of the laws of intestate succession if the de-
ceased had no will
l half of the joint estate accruing in terms of a marriage in community of property
l an accrual claim if the deceased’s accrual is higher
l policy proceeds that are paid out to the surviving spouse
l if a descendant of a deceased (for example the deceased’s child or grand-child) is entitled to a
benefit in terms of the deceased’s will and rejects that benefit, the benefit accrues to the de-
ceased’s spouse (s 2C(1) of the Wills Act 7 of 1953).
Beneficiaries in terms of a deceased’s will cannot enter into a re-distribution agreement to increase
the s 4(q) deduction by arranging that more goes to the spouse. As the agreement is entered into by
the beneficiaries amongst themselves after the death of the deceased, the only amount accruing to
the spouse is the amount awarded by the will or intestate succession laws.
If the deceased’s will stipulates that the surviving spouse must dispose of an amount to any other
person or trust, the s 4(q) deduction must be reduced by the amount that the surviving spouse must
dispose of (proviso (i) of s 4(q)).
If a deceased establishes a trust in his will for the benefit of the surviving spouse, certain assets
accrue to the trust. If the trustee of the trust can allocate the property or income of the trust for the
benefit of the surviving spouse only, property accruing to the trust will qualify for the s 4(q) deduction.
No deduction will be allowed under the provisions of s 4(q) if the trustee of the trust has a discretion
to allocate the property or any income of the trust to any person other than the surviving spouse
(proviso (ii) of s 4(q)). No deduction is allowed under the provisions of s 4(q) when property is be-
queathed to a discretionary trust, as the surviving spouse has no vested right to the income of the
trust (Practice Note No 35 issued by SARS).
27.6.16 Abatement (s 4A)

In addition to the deductions provided for in s 4, an amount of R3 500 000 must be deducted from
the net value of the estate in order to determine the dutiable value of the estate (s 4A(1)).
Remember
The abatement must be deducted from the net value of the estate, not from the estate duty payable.
If the deceased (D2) is a surviving spouse (in other words, the deceased had a predeceased spouse
(D1)), the estate of the surviving spouse (D2) could benefit from a double abatement at the time of
the surviving spouse’s (D2’s) death. The abatement will then be R7 000 000 less the amount of the
abatement used by the estate of the predeceased spouse (D1) (s 4A(2)).
The amount to be deducted from the additional R3 500 000 amount (thus the amount claimed as a
s 4A abatement by the predeceased spouse (D1)) cannot exceed R3 500 000 (s 4A(4)).
The executor of the estate of the surviving spouse (D2) has the responsibility to submit a copy of the
estate duty return of the predeceased spouse (D1) or other relevant material that the Commissioner
may regard as reasonable in order for the additional deduction to be claimed (s 4A(5)).
If a person and his or her spouse die simultaneously, the spouse with the smallest net estate is
deemed to have died immediately before the other spouse (s 4A(6)).
Example 27.12. Additional s4A abatement: Full additional abatement

Andries is married to Marli. Andries passes away. The net value of Andries’ estate is R4 000 000
(after all deductions except s 4(q)). The entire estate is transferred to Marli. Marli then passes
away. The net value of her estate is R10 000 000.
What are the s 4A abatements available to Andries and Marli?
937
SOLUTION
Andries
Since the entire estate is transferred to Marli, the dutiable value of Andries’ estate is nil, since the
s 4(q) deduction of R4 000 000 is claimed. This means that Andries’ estate does not use any
portion of the s 4A abatement.
Marli
Because Andries did not use any portion of the s 4A abatement, Marli’s estate is now entitled to a
total s 4A abatement of R7 000 000 (if a copy of Andries’ estate duty return or other relevant mate-
rial regarded as reasonable by the Commissioner, is properly submitted).
Example 27.13. Additional s4A abatement: Partial additional abatement

Zika is married to Pearl. Zika passes away. The net value of Zika’s estate is R500 000 (after de-
duction of s 4(q)). The entire net estate of R500 000 is transferred to Zika’s children. Pearl then
passes away. The net value of her estate is R10 000 000.
What are the s 4A abatements available to Zika and Pearl?
SOLUTION
Zika
Zika’s net estate is entitled to R500 000 of the R3 500 000 s 4A abatement. This means that
R3 000 000 of the abatement could be transferred to Pearl’s estate.
Pearl
Pearl’s estate is entitled to a total s 4A abatement of R6 500 000 (R7 000 000 less the R500 000
amount used by Zika’s estate). This is, once again, assuming a copy of Zika’s estate duty return
or other relevant material regarded as reasonable by the Commissioner, has been properly
submitted.
Example 27.14. Additional s4A abatement: Partial additional abatement, surviving

spouse got remarried and spouses dying simultaneously
Hamilton is married to Rebecca. Hamilton passes away. The net value of Hamilton’s estate is
R500 000 (after deduction of s 4(q)). The entire net estate of R500 000 is transferred to Hamil-
ton’s children. Rebecca subsequently marries Irvin. Irvin was not married previously. Rebecca
and Irvin then die simultaneously in a car accident. The net value of Rebecca’s estate is
R10 000 000 (after deduction of s 4(q)), while Irvin’s estate is valued at R15 000 000.
What are the s 4A abatements available to Hamilton, Rebecca and Irvin?
SOLUTION
Hamilton
Hamilton’s net estate is entitled to R500 000 of the R3 500 000 s 4A abatement. This means that
R3 000 000 of the abatement could be transferred to Rebecca’s estate.
Rebecca
Since Rebecca and Irvin died simultaneously and Rebecca’s estate is smaller than that of Irvin,
Rebecca is deemed to have died immediately before Irvin. Rebecca’s estate is entitled to a total
s 4A abatement of R6 500 000 (R7 000 000 less the R500 000 amount used by Hamilton’s es-
tate).
Irvin
Irvin is entitled to a total abatement of R7 000 000 less the amount used by Rebecca. However,
since Rebecca used a s 4A abatement of R6 500 000 (more than R3 500 000), the reduction of
Irvin’s abatement of R7 000 000 is limited to R3 500 000. Therefore, Irvin is entitled to a total
rebate of R3 500 000 (R7 000 000 less R3 500 000).
If a predeceased spouse (D1) has multiple spouses on date of death, the R3 500 000 additional
amount will be divided equally among the number of spouses (s 4A(3)). This additional abatement
should again be reduced with the proportional abatement used by the estate of the predeceased
spouse (D1). This reduction is the abatement used by the predeceased spouse equally divided
among the number of spouses.
938
Example 27.15. Additional s 4A abatement: More than one spouse at the date of death
Sakhile is the spouse of Koketso, Karabo, Maria and Mirenda in a customary marriage. Sakhile
dies. The net value of Sakhile’s estate (after s 4(q) deductions) is R500 000. Koketso subse-
quently dies (she never got remarried). The net value of her estate is R8 000 000.
What are the s 4A abatements available to Sakhile and Koketso?
SOLUTION
Sakhile
Sakhile’s net estate is entitled to R500 000 of the R3 500 000 s 4A abatement. This means that
R750 000 of the abatement could be transferred to each of Koketso, Karabo, Maria and Miren-
da’s estates (R3 500 000 – R500 000)/4).
Koketso
Koketso’s estate is entitled to a s 4A abatement of R4 250 000 (R3 500 000 plus R750 000 trans-
ferred from Sakhile’s estate).
It is important to note that, if the deceased is a surviving spouse of one or more marriages, the de-
duction is merely doubled as if the surviving spouse had survived only one marriage. Therefore, the
deceased does not get an additional R3 500 000 for each predeceased spouse. Amounts subtracted
for previously used s 4A deductions are limited to one predeceased spouse.
Example 27.16. Additional s4A abatement: More than one predeceased spouse
Renesh is married to Sasha. Renesh passes away. The net value of Renesh’s estate is R500 000
(after deduction of s 4(q)). The entire net estate of R500 000 is transferred to Renesh’s children.
Sasha then gets remarried to Tyrone. Tyrone later dies and transfers all of his assets to Sasha.
Sasha passes away shortly thereafter. The net value of her estate is R12 000 000.
What are the s 4A abatements available to Renesh, Tyrone and Sasha?
SOLUTION
Renesh
Renesh’s net estate is entitled to R500 000 of the R3 500 000 s 4A abatement. This means that
R3 000 000 of the abatement could be transferred to Sasha’s estate.
Tyrone
Tyrone did not use any portion of the abatement, as the s 4(q) deduction reduces the dutiable
estate to nil.
Sasha
If the executor submits a copy of the estate duty return of Renesh, Sasha will be entitled to an
abatement of only R6 500 000 (R7 000 000 less the R500 000 used by Renesh). If the executor
submits a copy of the estate duty return of Tyrone, Sasha will be entitled to the full R7 000 000
abatement. It therefore seems as if the executor should rather choose to use the copy of the
estate duty return of Tyrone.
27.7 Other rebates

A rate of 20% is applied to the dutiable amount of the estate to calculate the estate duty payable.
If the estate qualifies, the following rebates could be deducted from the amount of estate duty:
l transfer duty paid
l foreign death duties paid, and
l rapid succession rebate.
27.7.1 Transfer duty (s 16(a))

If a beneficiary receives property from an estate and is liable for both estate duty and transfer duty in
respect of that property, the transfer duty can be deducted from the estate duty as calculated
(s 16(a)).
939
As there is an exemption from transfer duty when an heir or legatee acquires property from an estate
(in terms of s 9(1)(e) of the Transfer Duty Act (Act 40 of 1949)), the deduction for transfer duty is
currently unlikely to be encountered.
27.7.2 Foreign death duties and double tax agreements (s 16(c))

Foreign property owned by a deceased who was ordinarily resident in South Africa at the date of
death could be included in his estate. If the foreign property is not deductible (see 27.6.5), the de-
ceased will be liable for estate duty on it. However, it is possible that the property has already at-
tracted death duties in the other foreign country. If this is the case, s 16(c) provides for a deduction of
the amount of foreign death duties paid in respect of that foreign property from estate duty payable in
South Africa. The deduction for foreign death duties may, however, not exceed the estate duty im-
posed on the property in South Africa. If, for example, foreign death duties on foreign property
amounted to R20 000, while the estate duty in South Africa relating to that property amounted to
R18 000, the deduction is limited to R18 000. If the estate duty in South Africa relating to that property
amounted to R22 000, the deduction would be limited to R20 000.
The rebate for foreign death duties may not modify or add to the rights of any person in terms of any
double tax agreement. If the deceased lived in South Africa and at the date of his death owned
foreign property in a country with which South Africa had a double tax agreement, relief must be
sought in terms of the double tax agreement. The rebate for foreign death duties will not be available
in this case.
27.7.3 Rapid succession rebate (s 2(2) and the First Schedule to the Act)
If a deceased owned property that he had inherited and estate duty had been paid on it when he
inherited it, that property will again be subject to estate duty in his estate. The rapid succession
rebate is a relief measure available when the same property is subject to estate duty more than once
within a period of ten years.
Section 2(2) of the Act provides that estate duty is payable at the rate prescribed in the First Sched-
ule to the Act. The First Schedule prescribes a rate of 20% (or a different rate announced by the
Minister of Finance in his annual budget speech), but also provides for the rapid succession rebate.
To qualify for the rebate
l the first person must have died not more than ten years before the death of the second person,
and
l the second person must have borne the estate duty attributable to the property in the estate of
the first person. If the second person was a residuary heir in the estate of the first, he is regarded
as having borne the estate duty attributable to the property he inherited.
The rebate is determined as a percentage of the estate duty attributable to the value of the property
in the estate of the second person. The percentage depends on the period of time between the
deaths of the first and second person. The percentages are as follows:
If the deceased dies within two years of the death of the first person ........................................ 100%
If the deceased dies more than two years, but not more than four years after the death of the
first person .................................................................................................................................. 80%
If the deceased dies more than four years, but not more than six years after the death of the
first person .................................................................................................................................. 60%
If the deceased dies more than six years, but not more than eight years after the death of the
first person .................................................................................................................................. 40%
If the deceased dies more than eight years, but not more than ten years after the death of the
first person .................................................................................................................................. 20%
The amount of the rebate is limited to the amount of the estate duty attributable to the value of the
property in the estate of the first deceased.
940
Example 27.17. Rapid succession rebate
John (unmarried) died five years after Tom. The net value of Tom’s estate amounted to
R2 100 000. John inherited one third of Tom’s assets, i.e. R700 000. Estate duty paid was
R120 000. Tom’s estate consisted entirely of fixed property and John paid the estate duty relat-
ing to his third of Tom’s estate, since there was not enough cash available in the estate.
The value of the property inherited from Tom in John’s estate (when John died) was R900 000.
Other assets in John’s estate amounted to R2 800 000. Liabilities and costs in John’s estate
amounted to R45 000, of which R20 000 could be ascribed to the fixed property, R10 000 to
other assets and R15 000 to both the fixed property and the other assets.
Calculate the estate duty payable in John’s estate.
SOLUTION
Step 1: Calculate the estate duty in John’s estate
Fixed property ............................................................................................................ R900 000
Other assets ............................................................................................................... 2 800 000
Total value of all property in the estate ...................................................................... R3 700 000
Less: Liabilities and costs ...................................................................................... 45 000
Net value of the estate ............................................................................................... R3 655 000
Less: Abatement (s 4A) .......................................................................................... 3 500 000
Dutiable amount ......................................................................................................... R155 000
Estate duty at 20% ..................................................................................................... R31 000
Step 2: Value of the property in John’s estate (note 1)

Value of the same property in John’s estate .............................................................. R900 000
Less: Liabilities and direct costs ............................................................................ 20 000
R880 000
Less: Pro rata share of indirect costs and liabilities
R900 000
× R15 000 .............................................................................................. 3 649
R3 700 000
Dutiable value of the property in John’s estate .......................................................... R876 351
Step 3: Value of property in Tom’s estate (1/3 × R2 100 000) (note 2) ..................... R700 000
Step 4: The dutiable value in John’s estate may not exceed the value of the
property in Tom’s estate, that is, a maximum of ........................................................ R700 000
Step 5: Determine the estate duty that can be attributed to the fixed property in
John’s estate
R700 000
× R31 000............................................................................................. R5 937
R3 655 000
Step 6: Calculation of rebate
John died five years after Tom therefore the rebate per the table is 60%
Rebate 60% × R5 937 = R3 562, with a maximum value of R40 000
(1/3 × R120 000), the applicable duty in Tom’s estate .............................................. R3 562
Step 7: Calculate the net duty payable in John’s estate
Total duty payable (step 1) ........................................................................................ R31 000
Less: Rebate .......................................................................................................... 3 562
Net duty payable ....................................................................................................... R27 438
Notes
(1) The value attributable to the rapidly succeeding property in the estate is calculated after
reducing the current value of the property with the liabilities attributable to that property.
Estate duty in the first dying person’s estate was effectively calculated on the value of the
property less liabilities which were attributable to that property.
(2) Since it is the ‘net’ estate of Tom which was worth R2 100 000, that implies that liabilities
have already been deducted.
941
27.8 Apportionment of estate duty (ss 11, 13, 15 and 20)

The executor of the estate is responsible for the calculation and payment of estate duty. The estate
duty on certain property must be borne by the person to whom the property accrues (s 11). The
executor can recover the estate duty in respect of such property from the person liable for the duty
(s 13).
The persons liable for the estate duty are as follows:
l In the case of a fiduciary, usufructuary or like interest: the person to whom that right accrues on
the deceased’s death (s 11(a)). If the deceased was the full owner of a property and he leaves the
usufruct and the bare dominium of the property to two different legatees, the legatees cannot be
held responsible for the estate duty on those bequests.
l In the case of an annuity (charged upon property) held by the deceased immediately before
death, it will be the owner of the property so charged (s 11(a)).
l In the case of a right to an annuity (other than a right to an annuity charged upon property) held
by the deceased immediately prior to his death, the person to whom the annuity accrues on the
deceased’s death (s 11(a)). This would be the succeeding annuitant.
l In the case of a domestic policy of insurance on the life of the deceased, the proceeds of which
are paid to a person other than the executor, the person entitled to the proceeds (s 11(b)(i)).
l In the case of a donatio mortis causa or a donation that does not take effect until the death of the
donor, the donee (s 11(b)(ii)). If it happens that the donee has disposed of the property that was
received in this manner for less than full consideration, the donee may recover the relevant estate
duty from the person to whom such property was disposed of (s 15).
The executor may also recover expenses incurred in respect of the property listed above (except for
property donated in terms of a donatio mortis causa or a donation that does not take effect until the
death of the donor) from the person who is liable for the estate duty in respect of that property (s 20).
The executor is liable for the estate duty on any other property in the estate even though it may have
been bequeathed to a specified beneficiary. The executor may not recover the estate duty attributa-
ble to specific property in the estate from the heir who inherited that property; for example, if an heir
inherits a motor vehicle, the executor may not recover from the beneficiary the portion of the estate
duty attributable to the vehicle.
Example 27.18. Apportionment of estate duty
The estate duty calculation for the deceased estate of Nolwazi follows:
Residence ................................................................................................................... R2 700 000
Unlisted shares ........................................................................................................... 250 000
Usufruct over farm (accrues to Bongani) .................................................................... 500 000
Cash in bank ............................................................................................................... 100 000
Policy proceeds (to estate) ......................................................................................... 300 000
Policy proceeds (payable directly to Sifundo) ............................................................ 120 000
Total value of all property in the estate ....................................................................... R3 970 000
Less: Liabilities (full amount relates to the residence) ................................................ 70 000
Net value of the estate ................................................................................................ R3 900 000
Less: Section 4A abatement ....................................................................................... 3 500 000
Dutiable amount .......................................................................................................... R400 000
Estate duty at 20% ...................................................................................................... R80 000
The usufruct over the farm, which was held by Nolwazi immediately prior to her death, passed to
Bongani. The proceeds of R120 000 from a policy on the life of Nolwazi were paid directly to
Sifundo.
The estate duty of R80 000 must be apportioned as follows:
Bongani: R500 000 / R3 900 000 × R80 000 .............................................................. R10 256
Sifundo: R120 000/R3 900 000 × R80 000.................................................................. 2 462
Estate: balance ........................................................................................................... 67 282
R80 000
The executor must recover R10 256 from Bongani and R2 462 from Sifundo.
942
27.9 Marriage in community of property

When a couple is married in community of property, the assets and liabilities of both spouses consti-
tute their joint estate. Certain assets could, however, be specifically excluded from the joint estate.
This could happen if, for example, one spouse owns property that was inherited from a parent who
stipulated that the property may not form part of any joint estate of their child.
When the marriage ends due to the death of one of the spouses, the surviving spouse and the estate
of the deceased spouse are each entitled to a half-share of the joint estate. The assets and liabilities
of both spouses are therefore combined and the surviving spouse’s half is deducted in terms of
s 4(q).
A fiduciary or usufructuary interest held by the deceased does not form part of the joint estate, as it is
a purely personal right. It will be added to the estate of the deceased only after his half of the joint
estate has been calculated. The same principle applies to insurance policy proceeds received by the
surviving spouse, which are not included in the joint estate. A right to an annuity held by the other
deceased, however, falls into the joint estate, unless it was expressly excluded from the joint estate
by the creator of the right.
In the calculation of the estate duty liability of a spouse who was married in community of property, it
is therefore important to identify which property or deemed property is included in the joint estate and
which property or deemed property is only added after half of the estate has been calculated.
Liabilities that arise only after the death of a spouse, for example funeral expenses, do not form part of
the spouses’ joint estate and are therefore deductible in full in the estate duty calculation of the
deceased spouse.
The estate duty arising on the estate of the deceased spouse is also not a liability of the joint estate
and is therefore payable in full by the estate of the deceased spouse.
Example 27.19. Estate of a person married in community of property

Mpho was married in community of property to Kholofelo. At the date of death of Mpho, the ex-
ecutor in the couple’s joint estate found the following:
Residence ................................................................................................................... R6 850 000
Furniture and household effects ................................................................................. 650 000
Fixed deposit .............................................................................................................. 400 000
Liabilities (including funeral costs of R10 000) ........................................................... 100 000
Mpho was also the holder of a usufruct over a farm that was valued at R150 000. The usufruct
now accrues to Ntokozo. Mpho was never married before.
Calculate the estate duty payable in Mpho’s estate.
SOLUTION
Residence ................................................................................................................. R6 850 000
Furniture and household effects ............................................................................... 650 000
Fixed deposit ............................................................................................................ 400 000
Total value of all property in the joint estate .............................................................. R7 900 000
Less: Liabilities (excluding funeral costs) (R100 000 – R10 000) ............................. 90 000
R7 810 000
Less: One half due to marriage in community of property (R7 810 000/2) (s 4(q)) .. 3 905 000
Value of Mpho’s half of the joint estate ..................................................................... R3 905 000
Add: Value of usufruct .............................................................................................. 150 000
R4 055 000
Less: Funeral costs ................................................................................................... 10 000
Net estate.................................................................................................................. R4 045 000
Less: Section 4A rebate ............................................................................................ 3 500 000
Dutiable amount ........................................................................................................ R545 000
Estate duty at 20% .................................................................................................... R109 000
943
27.10 Assessment and payment of estate duty (ss 7, 9, 9C, 10, 12, 14, 17 and 18)
(ss 187(2) and 187(3)(c) of the Tax Administration Act)
The executor of an estate has the responsibility for the submission of the estate duty return (s 7). After
the submission of the estate duty return, the Commissioner issues an estate duty notice of assess-
ment to the executor or to the person responsible for the payment of the duty (s 9). The duty is pay-
able on a date which may be prescribed in the notice of assessment (s 9C). If the Commissioner is
dissatisfied with any value at which property is reflected, the Commissioner should adjust that value
and raise the assessment accordingly (s 9(1)(1A)).
If additional property is found in an estate within five years of the date on which an assessment was
issued and a supplementary liquidation and distribution account is required in terms of s 35 of the
Administration of Estates Act, 1965, a notice of assessment shall be deemed to have been issued on
the date on which the supplementary liquidation and distribution account has become distributable
(s 9(4)(b)). This means that the estate will be re-assessed at that date as if it were the first assess-
ment, including the subsequently discovered property.
If additional property is found in an estate more than five years after the date on which the assess-
ment was issued and a liquidation and distribution account is required in terms of s 35 of the Admin-
istration of Estates Act, 1965, the additional property shall be subject to estate duty as if that property
were the sole property of the estate of the deceased and as if the death of the deceased occurred on
the date on which the additional property was reflected in the supplementary liquidation and distribu-
tion account (s 9(4)(c)).
Interest at the rate of 6% per annum will be levied on any unpaid estate duty liability. The interest will
be calculated from the earlier of
l 30 days after the date stated in the notice of assessment, or
l 12 months after the date of death of the deceased (s 10(1)).
From a date yet to be proclaimed in the Government Gazette, interest on unpaid estate duty will be
levied in terms of Chapter 12 of the Tax Administration Act (s 10(1)). This means that interest will be
levied at the prescribed rate from the earlier of the date of the assessment or 12 months after the
date of death (s 187(3)(c) of the Tax Administration Act). From a date yet to be proclaimed in the
Government Gazette the interest levied will be compounded monthly (as opposed to single interest)
(s 187(2) of the Tax Administration Act).
The Commissioner may allow an extension of time for the payment of estate duty without any interest
if he is convinced that a delay in the payment of the duty is not caused by the executor or some other
person liable for the duty. The extension of time can be granted provided a reasonable deposit is
paid to the Commissioner and written application is made for the extension (s 10(2)).
The executor is liable for the estate duty payable to the extent contemplated in Chapters 10 and 11 of
the Tax Administration Act (s 12). Under certain circumstances the executor may recover estate duty
paid from beneficiaries (see 27.8). With the consent of the Master of the High Court the person who is
liable for estate duty may mortgage property in respect of which the liability for the duty arises (s 14).
The Master of the High Court may only file an estate’s liquidation and distribution account and dis-
charge the executor from his duties once the estate duty has been paid or secured to the satisfaction
of the Commissioner (s 17). No property of the deceased may be delivered or transferred to any heir
or legatee until the executor has satisfied the Commissioner that due provision has been made for the
payment of estate duty (s 18).
27.11 Administrative provisions (ss 6, 26, 28 and 29)

The Commissioner is charged with the administration of the Act (s 6). To assist the Commissioner in
this regard, the Minister of Finance may make regulations for the better carrying out of the objects
and purposes of the Act (s 29). Any administrative requirements and procedures not provided for in
the Act will be regulated by the Tax Administration Act, 2011 (s 6).
The South African government may enter into agreements with the governments of other countries to
prevent double taxation of the same property in a deceased’s estate (s 26).
Any person who fails to comply with any reasonable requirement of the Master or Commissioner or
hinders the Commissioner or Master in carrying out any provision of the Act, shall be guilty of an
offence and liable on conviction to a fine or to imprisonment for a period not exceeding two years
(s 28).
944
Remember
The Tax Administration Act, 2011, was introduced to align the administration of tax Acts. It deals
with issues such as the rendering of returns, penalties and interest and the dispute resolution
process. As far as the administrative aspects of estate duty are concerned (except for the levy-
ing of interest), the provisions of this Act have to be adhered to (see chapter 33).
945
28 Transfer duty
Redge de Swardt

l calculate the amount of transfer duty that is payable on the acquisition of property
l identify which properties will be subject to transfer duty on acquisition thereof
l demonstrate the principles that apply in determining the value of property on
which transfer duty is payable
l identify the person that is liable for the payment of transfer duty in respect of the
acquisition of property
l determine whether a specific transaction qualify for an exemption from transfer
duty
l determine the date on which transfer duty is payable; and
l identify the consequences of failing to pay transfer duty on the due date.
Contents
Page
28.1 Introduction ....................................................................................................................... 947
28.2 Imposition of transfer duty (s 2(1)).................................................................................... 947
28.3 Acquisition of property...................................................................................................... 949
28.3.1 General (paras (a) and (c) of the definition of ‘property’, s 1) .......................... 949
28.3.2 Interest in a residential property company (paras (d) and (e) of the definition
of ‘property’, s 1) ............................................................................................... 949
28.3.3 Contingent right in residential property held by a trust (par (f) of the
definition of ‘property’, s 1) ............................................................................... 950
28.3.4 Share in a share block company (par (g) of the definition of ‘property’, s 1)... 950
28.3.5 Suspensive and resolutive conditions .............................................................. 950
28.3.6 Cancellations (s 5(2)) ........................................................................................ 951
28.4 Renunciation of a right ...................................................................................................... 951
28.5 Value on which transfer duty is payable (ss 5, 6, 7 and 8) .............................................. 951
28.6 Late and underpayment of transfer duty (s 4) .................................................................. 952
28.7 Exemptions from transfer duty (s 9) ................................................................................. 953
28.1 Introduction
Transfer duty is generally payable on the acquisition of immovable property. It is payable by the
purchaser and calculated as a percentage of the purchase price. The transfer duty rate ranges
between 0% and 13% of the value of property. Transfer duty is provided for in terms of the Transfer
Duty Act 40 of 1949. References to legislation in this chapter are references to the Transfer Duty Act
(TDA), unless stated otherwise.
28.2 Imposition of transfer duty (s 2(1))

Transfer duty is imposed on (s 2(1)(a))
l the value of any property acquired by any person by way of a transaction or any other manner
(see 28.3), and
l the amount by which the value of property is enhanced by the renunciation of an interest in or
restriction upon the use or disposal of the property (see 28.4).
947
28.2 Chapter 28: Transfer duty
The rate of transfer duty on properties acquired on or after 1 March 2017 is determined as (s 2(1)(b))
Value of property (Rand) Transfer duty rate

0–900 000 0%
900 001–1 250 000 3% of the value above R900 000
1 250 001–1 750 000 R10 500 + 6% of the value above R 1 250 000
1 750 001–2 250 000 R40 500 + 8% of the value above R 1 750 000
2 250 001–10 000 000 R80 500 +11% of the value above R2 250 000
10 000 001 and above R933 000 + 13% of the value above R10 000 000
The above transfer duty rates apply to all persons, including natural persons, companies, close
corporations and trusts (prior to February 2011, different rates applied to natural persons and
persons other than natural persons).
Example 28.1. Calculating the amount of transfer duty payable
Fundiswa acquired an apartment in Cape Town on 1 July 2017 for R2 400 000. Fundiswa will
have to pay transfer duty of R97 000 (R80 500 + 11% × (R2 400 000 – R2 250 000)) before the
property is registered in his name.
Note
In addition to transfer duty, Fundiswa will have to pay transfer costs, which is the fee charged by
a conveyancer, as well as bond registration fees if he finances the purchase with a home loan.
Where a person acquires an undivided share in property, for example where the person
acquires a property jointly with another person, the transfer duty payable is calculated in
accordance with the formula (s 2(5))
y = a/b × c
where
y represents the duty payable
a represents the value of the undivided share on which the duty is leviable
b represents the total value of the property, and
c represents the duty which would have been leviable on the total value of the property.
Example 28.2. Calculating the amount of transfer duty payable on an undivided share
in property
Refer to example 28.1. If Fundiswa sells a 50% interest in his apartment to Bongani on
31 January 2018 for R1 400 000 (the market value of the apartment is R2 800 000 at the time),
the transfer duty Bongani has to pay is calculated as follows:
Transfer duty on total value of property (R80 500 + 11% × (R2 800 000 –
R2 250 000)) (representing “c” in the formula) .................................................... R141 000
Value of Bongani’s undivided share in the property (representing ‘a’ in the
formula) ............................................................................................................... 1 400 000
Total value of the property (representing ‘b’ in the formula) ................................ 2 800 000
Transfer duty payable (y = a/b × c; 1 400 000/2 800 000 × 141 000) ................ R70 500
Where a person acquires an undivided share in common property which is in terms of the
Sectional Titles Act 59 of 1986 apportioned to a specific unit, the above provision relating to the
acquisition of an undivided share in property does not apply. The provision relating to the
acquisition of an undivided share in property will only apply to the acquisition of an undivided
share in such unit (s 2(6)).
948
28.3 Acquisition of property

28.3.1 General (paras (a) and (c) of the definition of ‘property’, s 1)
Transfer duty is in general imposed on one of two events: the acquisition of property or the
renunciation of a right in property. The most common forms of property that are subject to transfer
duty are (definition of ‘property’, s 1 of the TDA)
l land and any fixtures thereon
l real rights in land excluding any right under a mortgage bond or a lease of property (other than a
lease or sublease of rights to minerals mentioned below), and
l rights to minerals or rights to mine for minerals (including a lease or sublease of such a right).
Other forms of property that are subject to transfer duty involve shares or rights in companies or
trusts that hold immovable property (see 28.3.2).
The acquisition of the above properties is subject to transfer duty when acquired by way of a
transaction or in any other manner (s 2(1)). In relation to any real right in land and any right to
minerals, ‘transaction’ means an agreement whereby one person agrees to sell, grant, waive, donate,
cede, exchange, lease or otherwise dispose of property to another person (definition of ‘transaction’,
s 1).
Transfer duty is payable by the person who acquired the property and should be paid within six
months of the date of acquisition of the property (s 3(1)). If a property is acquired by way of a
transaction, the date of acquisition is the date on which the transaction was entered into. This is the
date that the last contracting party signed the agreement, irrespective of whether the agreement
stipulates a different effective date. The fact that the transaction might have been conditional is also
irrelevant, since the date of liability for transfer duty is the date on which the transaction was entered
into and not the date on which the transaction became binding on the parties (see 28.3.5). In the
case of the acquisition of property otherwise than by way of a transaction, the date of acquisition is
the date upon which the person who acquired the property became entitled thereto. Where property
is acquired by the exercise of an option to purchase or a right of pre-emption, the date of acquisition
is the date upon which the option or right of pre-emption was exercised (‘date of acquisition’, s 1).
If transfer duty is not paid within six months of the date of acquisition of the property, interest
becomes payable on the unpaid amount (see 28.6).
28.3.2 Interest in a residential property company (paras (d) and (e) of the definition
of ‘property’, s 1)
A share in a residential property company qualifies as ‘property’ for transfer duty purposes and the
acquisition thereof is subject to transfer duty (par (d) of the definition of ‘property’, s 1). A residential
property company is a company that holds residential property (or a contingent right to residential
property held by a trust – see 28.3.3) and where the fair value of the residential property (and the
contingent right) comprises more than 50% of the aggregate fair market value of all assets held by
the company on the date of acquisition of the interest in the company. A Real Estate Investment Trust
(REIT) is specifically excluded from the definition of residential property company. The transfer of
shares in a REIT is therefore not subject to transfer duty (definition of ‘residential property company’,
s 1).
Residential property is defined as any dwelling-house, holiday home, apartment or similar abode,
improved or unimproved land zoned for residential use in the Republic (including any real right
thereto), but specifically excludes
l an apartment complex, hotel, guesthouse or similar structure consisting of five or more units held
by a person that have been used for renting to five or more persons, who are not connected
persons in relation to that person, and
l any ‘fixed property’ of a ‘vendor’ forming part of an ‘enterprise’ all as defined in s 1 of the Value-
Added Tax Act 89 of 1991 (see chapter 31).
A share in a holding company if that company and all of its subsidiaries would be residential property
companies, if all such companies were regarded as a single entity, also qualifies as property for
transfer duty purposes and the acquisition of such share is subject to transfer duty (par (e) of the
definition of ‘property’, s 1).
The acquisition of a share in a residential property company is subject to transfer duty when acquired
by way of a transaction or in any other manner (s 2(1)). In this regard, ‘transaction’ means an
949
28.3 Chapter 28: Transfer duty
agreement whereby one person agrees to sell, grant, waive, donate, cede, exchange, issue, buy
back, convert, vary, cancel or otherwise dispose of any such shares to another person (par (b) of the
definition of ‘transaction’, s 1).
Transfer duty on the acquisition of a share in a residential property company is payable within six
months from the date of acquisition of the share (s 3(1)). The purchaser is generally liable for the
duty, but if the purchaser fails to pay the duty within the six-month period, the public officer of the
company and the person from whom the shares are acquired are jointly and severally liable for the
duty. The public officer or the person from whom the shares are acquired may recover the transfer
duty from the purchaser (s 3(1A)).
28.3.3 Contingent right in residential property held by a trust (par (f) of the definition
of ‘property’, s 1)
A contingent right to residential property held by a discretionary trust qualifies under certain circum-
stances as ‘property’ for transfer duty purposes and the transfer thereof may be subject to transfer
duty. The same applies to a contingent right to shares in a residential property company held by a
discretionary trust. The contingent right only qualifies as ‘property’ if the acquisition thereof is
l a consequence of or attendant upon the conclusion of any agreement for consideration with
regard to property held by that trust, or
l accompanied by the substitution or variation of that trust’s loan creditors, or by the substitution or
addition of any mortgage bond or mortgage bond creditor, or
l accompanied by the change of any trustee of that trust.
The acquisition of such contingent right is subject to transfer duty when acquired by way of a trans-
action or in any other manner (s 2(1)). In this regard, ‘transaction’ means the substitution or addition
of beneficiaries that have a contingent right to the above properties (par (c) of the definition of ‘trans-
action’, s 1).
The transfer duty on the acquisition of such contingent right in a discretionary trust is payable within
six months from the date of acquisition (s 3(1)). The person who acquires the contingent right is
generally liable for the duty, but if that person fails to pay the duty within the six-month period, the
trust and the representative taxpayer of the trust are jointly and severally liable for the duty. The trust
or the representative taxpayer of the trust may recover the transfer duty from the purchaser (s 3(1B)).
28.3.4 Share in a share block company (par (g) of the definition of ‘property’, s 1)
A share in a share block company, as defined in the Share Blocks Control Act of 1980, qualifies as
‘property’ for transfer duty purposes and the acquisition thereof may be subject to transfer duty
(par (g) of the definition of ‘property’, s 1).
The supply of shares in a share block company is usually subject to VAT (see chapter 31). Since
transactions that are subject to VAT are exempt from transfer duty (s 9(15), see 28.7), the acquisition
of shares in a share block company will only be subject to transfer duty if not subject to VAT.
No distinction is drawn between share block companies that hold residential properties and those
holding commercial properties. Share block transactions may be subject to transfer duty regardless
of the type of property it is holding.
28.3.5 Suspensive and resolutive conditions

Transfer duty is payable within six months of the date of acquisition of the property (s 3(1)). The date
of acquisition of property is the date on which the transaction was entered into, irrespective of
whether the transaction was conditional or not (definition of ‘date of acquisition’ in s 1). Property
transfer agreements are often subject to suspensive or resolutive conditions; however, the transfer
duty liability date is unaffected by such conditions.
A suspensive condition is a condition that suspends rights and obligations until an uncertain future
event occurs. Upon the occurrence of the event, the contract (or suspended part) is brought to life.
Examples of suspensive conditions are
l a clause in a property purchase contract that stipulates that the purchase and sale of a residen-
tial property is subject to the sale of the purchaser’s current residence, and
950
l a clause in a property purchase contract that stipulates that the purchase and sale of a
residential property is subject to the purchaser obtaining finance for the purchase of the property.
Regardless of whether a suspensive condition is fulfilled within six months of the date that a
transaction was entered into, transfer duty should be paid within that period. In order to avoid interest
being levied on unpaid transfer duty after the six-month period, a ‘deposit payment’ can be made
that will be refunded if the agreement falls away.
A resolutive condition is a condition that ends the existence of rights and obligations. In the case of a
resolutive condition, there is no suspension or postponement of terms in a contract. Rights and
obligations come into existence immediately upon agreement between the parties. If a resolutive
condition is fulfilled, the operation of the rights and obligations cease. If a resolutive condition is not
fulfilled, the effect is as if the contract had been unconditional from the time it was entered into. If a
resolutive condition is fulfilled, the agreement is cancelled. If this happens before the property is
registered in the deeds registry, transfer duty is only payable on the consideration retained by the
seller (s 5(2), see 28.3.6).
28.3.6 Cancellations (s 5(2))

If a transaction whereby property is acquired, is cancelled or dissolved by the operation of a resolu-
tive condition before the acquisition is registered in the deeds registry, transfer duty is only payable
l on the consideration that has been paid to and retained by the seller, and
l consideration payable by the buyer in respect of the cancellation.
This will only be the case if the property completely reverts to the seller and the buyer relinquishes all
rights and has not received nor will receive any consideration arising from such cancellation or
dissolution (s 5(2)(a)).
Where the seller subsequently disposes of such property, the seller must provide information to the
Commissioner relating to the circumstances of such previous transaction and the cancellation
thereof. The seller must also provide information relating to the payment of transfer duty in connection
with the cancellation. Any transfer duty that is still unpaid at that time must be paid by the seller, who
may recover the duty from the person who was obliged to pay the duty on cancellation of the
previous transaction (s 5(2)(b)).
28.4 Renunciation of a right

The liability for transfer duty arises mostly as a result of the acquisition of property. However, transfer
duty is also imposed on the amount by which the value of any property is enhanced by the renun-
ciation of an interest in or restriction upon the use or disposal of that property (s 2(1)). The definition
of ‘transaction’ in s 1 includes any act whereby any person renounces any right in or restriction in his
or her favour upon the use or disposal of property. Renunciation is the act or instance of relinquish-
ing, abandoning, repudiating, or sacrificing something such as a right. A person renounces a right if
the person voluntary does something whereby he gives up the right. If an interest or restriction in
property lapses or ends for any reason other than the act of renunciation, no liability for transfer duty
arises.
Where a usufructuary renounces his right to property in favour of the owner of the bare dominium, the
transaction will be subject to transfer duty. However, if a usufruct comes to an end due to the death
of the usufructuary, or the passing of time, the usufructuary does not renounce his right in the
property and no transfer duty will be payable.
Examples of rights that will be subject to transfer duty if the holder thereof renounces the right, are
personal servitudes, such as usufruct, usus, habitatio, fideicommissum and access rights. The
person in whose favour or for whose benefit the right is renounced, is liable for the transfer duty (s
3(1)).
28.5 Value on which transfer duty is payable (ss 5, 6, 7 and 8)

The value on which transfer duty on the acquisition of property is payable is where consideration is
payable by the person who acquired the property, i.e. the amount of the consideration. Where no
consideration is payable, the value is the declared value of the property (s 5(1)). Any commission or
fees payable by the person who acquired the property must be added to the consideration payable
for the acquisition of the property when determining the value on which transfer duty is payable
(s 6(1)(a)). Similarly, if the property is acquired by way of option or a right of pre-emption, any
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28.5–28.6 Chapter 28: Transfer duty
consideration paid for such option or right should be added to the consideration payable for the
acquisition of the property when determining the value on which transfer duty is payable (s 6(1)(b)). If
the person who acquires the property has agreed to pay any consideration to any person over and
above the consideration paid for the acquisition of the property, such consideration should be added
to the consideration payable for the acquisition of the property when determining the value on which
transfer duty is payable (s 6(1)(c)).
For purposes of determining the amount of transfer duty payable, the consideration payable for the
acquisition of the property should exclude any transfer duty or other duty or tax payable on the pur-
chase of the property, as well as the amount payable in respect of the registration of the acquisition
of the property (s 7).
Where the whole or a part of the consideration is in the form of rent, royalties, share of profits or any
other periodic payment and the actual amount of the periodic payments is fixed, the value is deter-
mined as the aggregate amount of all such amounts payable over the period for which the property is
acquired (including renewal periods). If the period is not fixed, or the property is acquired for an
indefinite period, or unlimited period, or for the natural life of any person, the value must be
determined by the Commissioner (ss 5(3) and 8(a)).
Where the whole or a part of the consideration is in the form of goods, services, rights or privileges,
the value is the market value of such goods, services, rights or privileges at the date of the trans-
action. If the market value is not ascertainable, the value must be determined by the Commissioner
(ss 5(3) and 8(b)).
Where the whole or a part of the consideration is in the form of listed shares or securities of a
company, or in the form of rights to acquire such listed shares or securities, the value is the middle
market price on the date of the transaction. In the case of any other shares or securities, the value
must be determined by the Commissioner (s 8(c)).
If the Commissioner is of the opinion that the consideration payable or the declared value is less than
the fair value of the property, he may determine the fair value of the property. The duty will then be
payable on the greater of the fair value determined by the Commissioner, the consideration payable,
or the declared value (s 5(6)). In determining the fair value of property, the Commissioner must
consider the following (s 5(7)):
l the nature of the real right in land and the period for which it has been acquired, or, where it has
been acquired for an indefinite period or for the natural life of any person, the period for which it
is likely to be enjoyed
l the municipal valuation of the property concerned
l any sworn valuation of the property concerned furnished by or on behalf of the person liable to
pay the duty, and
l any valuation made by the Director-General: Mineral Resources or by any other competent and
disinterested person appointed by the Commissioner.
28.6 Late and underpayment of transfer duty (s 4)

Transfer duty is payable within six months of the date of acquisition, which is the date on which the
transaction was entered into. If transfer duty remains unpaid after the six-month period, interest
becomes payable at a rate of 10% per annum of the amount unpaid. Interest is calculated for each
completed month in the period from the date that the duty should have been paid to the date of
payment (s 4(1A)).
A person may apply for an extension of the period in which transfer duty should be paid. The
extension will be granted if the Commissioner is satisfied that the delay in determining the value on
which transfer duty is payable cannot be ascribed to the person liable for the duty. The Commis-
sioner may allow a reasonable extension of the period in which the duty should be paid without
interest, but only if
l a deposit on account of the transfer duty is made within the six-month period from the date of
acquisition, which must be calculated on the amount of the consideration paid or payable, or on
the declared value, and
l an application for the extension is made in writing within the six-month period from the date of
acquisition (s 4(3)).
952
If the correct amount of transfer duty has not been paid in full, the Commissioner may recover the
unpaid amount in terms of the provisions of the Tax Administration Act 28 of 2011 (see chapter 33)
regardless of whether the purchase of the property has been registered in the deeds registry (s
13(1)). The Commissioner may not recover an amount of unpaid duty after five years from the date
when the duty became payable, if
l the failure to pay the amount of transfer duty was not due to an intent of the person liable for the
duty not to make the payment, and
l the person liable for the duty acted in good faith and on the assumption that the transaction was
not subject to transfer duty, which assumption must be based on reasonable grounds and not
due to the person’s negligence or that of any other person (s 13(3)).
The underpayment of transfer duty may be subject to an understatement penalty of between 5% and
200% of the amount underpaid. Understatement penalties are levied in terms of the Tax Administra-
tion Act (see chapter 33).
28.7 Exemptions from transfer duty (s 9)

Properties acquired by the following persons or under the following circumstances are exempt from
transfer duty (s 9(1)):
l the Government of South Africa and a provincial administration (s 9(1)(a))
l municipalities and water service providers (ss 9(1)(b) and (bB))
l public benefit organisations and other income tax exempt bodies or organisations (ss 9(1)(c) and
(d))
l property acquired by heirs or legatees by ab intestato or testamentary succession, or by way of a
redistribution of the assets of a deceased estate, or where the value of property is enhanced by
the renunciation of an interest or restriction on the use of the property acquired by an heir or
legatee (s 9(1)(e))
l surviving or divorced spouse who acquires property as a result of the death of a spouse or
dissolution of the marriage (s 9(1)(i))
l acquisition of an interest in property by virtue of a marriage in community of property (s 9(1)(k))
l the acquisition of property in terms of an asset-for-share, a substitutive share-for-share, amal-
gamation or intra-group transaction or liquidation distribution as contemplated in ss 42, 43, 44, 45
or 47 of the Income Tax Act, regardless of whether the property was acquired as a capital asset
or as trading stock (s 9(1)(l))
l land reform and land restitution transactions (s 9(1)(n) and (o))
l correction of an error in the deeds register (s 9(2))
l the transfer of property of a trust in pursuance of a will or other written instrument, the registration
of property in the name of a trustee, and the restoration of property by a trustee of an insolvent
estate to the insolvent (s 9(4))
l transfer of property as surety for the payment of consideration under a transaction (s 9(6))
l transactions declared void by a competent court (s 9(7)(a))
l transactions becoming void by insolvency (s 9(7)(b) and (c))
l acquisition of property by a South African subsidiary company from the foreign holding company
(s 9(8))
l acquisition of property by expropriation (s 9(9))
l property acquired under a transaction that qualifies as a taxable supply for VAT purposes that is
subject to VAT at the standard rate or at a zero rate (s 9(15)), and
l property acquired under an asset-for-share transaction contemplated in s 42 of the Income Tax
Act, where the supplier and recipient are deemed to be one and the same person in terms of
s 8(25) of the VAT Act (s 9(15A)).
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29 Securities transfer tax
Redge de Swardt

After studying this chapter, you should be able to
l calculate the amount of securities transfer tax (STT) that is payable on the transfer of
listed and unlisted securities
l identify the person who is liable for the payment of STT in respect of the transfer of
listed and unlisted securities
l determine whether a specific transfer of securities qualifies for an exemption from
STT
l determine the date on which STT is payable, and
l identify the consequences of failing to pay STT on the prescribed due date.
Contents
Page
29.1 Introduction ..................................................................................................................... 955
29.2 Imposition of STT ............................................................................................................ 955
29.3 Important definitions (s 1) ............................................................................................... 955
29.4 Transfer of listed securities (ss 3, 4, 5 and 7) ................................................................ 956
29.5 Transfer of unlisted securities (ss 6 and 7) .................................................................... 956
29.6 Exemptions from STT (s 8) ............................................................................................. 957
29.7 Payment of STT (s 3 of the Securities Transfer Tax Administration Act) ........................ 959
29.8 Interest and penalties on overdue payments (ss 5 and 6A of the Securities Transfer
Tax Administration Act) .................................................................................................. 959
29.1 Introduction
Securities transfer tax (STT) is a tax that is imposed on the transfer of shares. It is provided for in terms
of the Securities Transfer Tax Act, 25 of 2007 (STT Act) and is levied at a rate of 0,25% on the taxable
amount of a security that is transferred. (All references to legislation in this chapter are references to
the Securities Transfer Tax Act, unless stated otherwise.)
STT was introduced with effect from 1 July 2008 to replace two different tax types on security transfers
with a single tax. Prior to the introduction of STT, the transfer of unlisted securities was subject to Stamp
Duty and the transfer of listed securities was subject to Uncertified Securities Tax.
29.2 Imposition of STT

STT is levied at 0,25% of the taxable amount of a security that is transferred. The tax is levied on the
transfer of a security issued by a South African close corporation or company, as well as a foreign
company if that company is listed on a South African exchange.
STT is also levied on any reallocation of securities from a member’s bank-restricted stock account or a
member’s unrestricted and security-restricted stock account to a member’s general-restricted stock
account.
29.3 Important definitions (s 1)

For STT purposes, a ‘security’ is defined as any share or depository receipt in a company or a member’s
interest in a close corporation. It, however, excludes the debt portion in respect of a share linked to a
debenture.
955
‘Transfer’ is defined broadly and includes the transfer, sale, assignment or cession, or disposal in any
other manner, of a security, or the cancellation or redemption of that security. ‘Transfer’ does not
include
l any event that does not result in a change in beneficial ownership
l any issue of a security, or
l a cancellation or redemption of a security if the company that issued the security is being wound
up, liquidated or deregistered, or its corporate existence is being finally terminated.
29.4 Transfer of listed securities (ss 3, 4, 5 and 7)

Listed shares are traded on a stock exchange through authorised users, such as stock brokers. The
STT Act refers to an authorised user as a ‘member’ (definition of ‘member’, s 1). Where listed securities
are transferred as a result of a purchase through or from a member, the STT is determined as 0,25%
of the consideration for which the security is purchased (s 3(1)). The member is liable for the STT, but
may recover the tax from the person to whom the security is transferred or the person who cancels or
redeems the security (s 3(2) and 7(1)).
A person who is authorised to hold listed securities in custody and to administer listed securities is
referred to as a ‘participant’ (definition of ‘participant’, s 1). Where the transfer of a listed security is
affected by a participant and the STT is not payable by an authorised user, the STT is determined as
0,25% of the consideration declared by the person who acquired the security. If no consideration is
declared, or if the consideration is less than the lowest price of the security, the STT is determined on
the closing price of the security (s 4(1)). The participant is liable for the STT, but may recover the tax
from the person to whom the security is transferred or the person who cancels or redeems the security
(ss 4(2) and 7(1)).
l The ‘lowest price’ is the lowest price on the date of the transaction at which a
security was traded on the exchange on which it is listed, as determined by
that exchange on each day on which trade in that security occurs on that
exchange.
Please note!
l The ‘closing price’ is the closing price on the date of the transaction at which
the security was traded on the exchange on which it is listed, as determined
by that exchange on each day on which trade in that security occurs on that
exchange.
For any other transfer of a listed security, the person to whom the security is transferred is liable for the
STT (s 5(2)). The STT is determined as 0,25% of the consideration declared by the person who acquired
the security. If no consideration is declared, or if the consideration is less than the lowest price of the
security, the STT is determined on the closing price of the security (s 5(1)). The STT must be paid
through a member or a participant holding the security in custody. In the case where the security is not
held in custody by either a participant or a member, the STT must be paid through the company that
issued the listed security (s 5(3)).
Example 29.1. STT payable on the transfer of listed shares
Lungelo acquired 10 000 shares in OilCo Ltd on 15 April 2018 through his broker, Invest-Insure
(Pty) Ltd on the JSE. The shares in OilCo Ltd are listed shares and Lungelo paid R10,20 per share.
Invest-Insure (Pty) Ltd is liable for R255 (10 000 × R10,20 × 0.25%) STT on the transfer of OilCo
Ltd shares to Lungelo, but may recover this amount from him.
29.5 Transfer of unlisted securities (ss 6 and 7)

In the case of an unlisted security, the company that issued the unlisted security is liable for the tax
payable on the transfer of the security, but may recover the tax from the person to whom the security
is transferred (s 6(2)). The taxable amount in respect of an unlisted security is the market value of the
consideration given for the security. If no consideration is given, or if the consideration is less than the
market value of the security, the taxable amount is the market value of the security (s 6(1)(a)). Where
an unlisted security is redeemed or cancelled, the taxable amount is the market value of the security
immediately prior to the cancellation or redemption, which must be determined as if the security was
never cancelled or redeemed (s 6(1)(b)).
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29.5–29.6 Chapter 29: Securities transfer tax
Example 29.1. STT payable on the transfer of unlisted shares

On 18 June 2018 Jabulile acquired 50% of the shares in FoodCorp (Pty) Ltd from its previous
shareholder. FoodCorp (Pty) Ltd is an unlisted company. Jabulile paid R1 000 000 for the shares.
FoodCorp (Pty) Ltd is liable for R2 500 (R1 000 000 × 0,25%) STT on the transfer of the shares to
Jabulile, but may recover this amount from her.
29.6 Exemptions from STT (s 8)

The following transfers of securities are exempt from STT:
l Securities transferred to a person in terms of a corporate reorganisation transaction (see chap-
ter 20). A corporate reorganisation transaction refers to an asset-for-share transaction, a substitu-
tive share-for-share transaction, an amalgamation transaction, an intra-group transaction, an
unbundling transaction, or a liquidation distribution that complies with ss 42 to 47 of the Income
Tax Act. The exemption applies regardless of whether the person acquires the security as a capital
asset or trading stock. In respect of an asset-for-share transaction and an amalgamation trans-
action, the exemption applies regardless of the market value of the asset disposed of in exchange
for the security. The public officer of the relevant company must make a sworn affidavit or solemn
declaration that the acquisition of the security complies with these requirements (s 8(1)(a)).
l The transfer of a security from a lender to a borrower, or vice versa, in terms of a lending arrange-
ment: The person to whom the security is transferred must certify to the member or participant that
the change is in terms of a lending arrangement (s 8(1)(b)). Securities lending is the act of lending
a security to another person, the borrower. When a security is lent, title and ownership in the
security are transferred to the borrower. The borrower intends to profit by selling the security and
buying it back at a lower price, which is referred to as short selling. In order to qualify for the STT
exemption, the lending arrangement should comply with the following requirements (definition of
‘lending arrangement’, s 1 of the STT Act):
– The security loaned should be a listed security or a bond issued by the Government (in the
national or local sphere), or any sphere of government of any country other than South Africa, if
the bond is listed on a recognised exchange.
– The transferor should transfer the security to the transferee in order to enable the borrower to
effect delivery of that security or bond within 10 business days after the date of transfer of that
security from the lender to the borrower in terms of that arrangement.
– The borrower may not deliver the security to any lender in relation to that borrower, unless the
borrower can demonstrate that the arrangement was not entered into for the purposes of the
avoidance of tax and was not entered into for the purposes of keeping any position open for
more than 12 months.
– The borrower should contractually agree in writing to deliver an identical share or bond to the
lender within 12 months from the date of transfer.
– The borrower is contractually required to compensate the lender for any distributions in respect
of the listed share or bond, which that lender would have been entitled to receive during that
period had that arrangement not been entered into.
– The arrangement may not affect the lender’s benefits or risks arising from fluctuations in the
market value of that listed share or any bond.
– The arrangement does not qualify as a lending arrangement where the borrower has not on-
delivered the security or bond within the 10 business day period referred to above.
– The arrangement also does not qualify as a lending arrangement where the borrower fails to
return an identical share or bond to the lender within the 12-month period, unless its failure to
return the identical share or bond is due to an arrangement that is announced and released as
a corporate action as contemplated in the JSE Limited Listing Requirements in the Stock
Exchange News Service as defined in the JSE Limited Listing Requirements.
l The transfer of a security from a registered pension fund to another registered pension fund where
the transfer is made in pursuance of an amalgamation of funds or qualifying transfer between funds
(referred to in s 14(1) of the Pension Funds Act) (s 8(1)(c)).
957
l The security is transferred to a public benefit organisation that is exempt from income tax in terms
of s 10(1)(cN) of the Income Tax Act, if the tax thereon would be legally payable and borne by that
public benefit organisation (s 8(1)(d)).
l If that security is transferred to an institution, board or body that is exempt from income tax in terms
of s 10(1)(cA)(i) of the Income Tax Act, and that has as its sole or principal object the carrying on
of any public benefit activity referred to in s 30 of that Act, if the tax thereon would be legally payable
and borne by that institution, board or body (s 8(1)(e)).
l If the security is a participatory interest in a collective investment scheme regulated in terms of the
Collective Investment Schemes Control Act, 2002 (Act 45 of 2002) (s 8(1)(f)).
l If the security is transferred to a beneficiary entitled thereto under a trust created in accordance
with a will (s 8(1)(g)).
l If the person to whom that security is transferred is an heir or a legatee who has acquired that
security ab intestatio or by way of testamentary succession or as a result of a redistribution of the
assets of a deceased estate in the process of liquidation (s 8(1)(h)).
l If the person to whom that security is transferred is a spouse in a marriage in community of property
who acquires an undivided half-share in that security by operation of law by virtue of the contraction
of such marriage, if that security was acquired by the other spouse prior to the date of that marriage
(s 8(1)(i)).
l If the person to whom that security is transferred is a surviving or divorced spouse who acquires a
security from his or her deceased or divorced spouse where that security is transferred to that
surviving or divorced spouse as a result of the death of his or her spouse or dissolution of their
marriage or union (s 8(1)(j)).
l Securities transferred to any sphere of the Government of the Republic or to any sphere of the
government of any other country (s 8(1)(k)).
l Securities transferred to any ‘water services provider’ as defined in s 1 of the Income Tax Act
(s 8(1)(l))
l If the security is an unlisted security, which in terms of the Transfer Duty Act of 1949 constitutes a
transaction for the acquisition of property that is subject to transfer duty (see chapter 28) (s 8(1)(n)).
l If the security is a share in a share block company as defined in s 1 of the Share Block Control Act
of 1980, which confers a right to or an interest in the use of immovable property (s 8(1)(o)).
l Securities transferred to any traditional council as referred to in the Communal Land Rights Act of
2004 on or before a date that may be determined by the Minister by notice in the Gazette (s 8(1)(p)).
l If the person to whom the security is transferred is a member who acquires the security and
allocates it to that member’s bank-restricted stock account or that member’s unrestricted and
security-restricted stock account (s 8(1)(q)).
l If the security was transferred during a month in respect of which
– in the case of an unlisted security, the company that issued that security, or
– in the case of a listed security, the relevant member, relevant participant or the company that
issued that security where that security is not held in custody by either a member or a participant,
would have had to pay tax of less than R100 to the Commissioner (s 8(1)(r)).
l If that security constitutes a share in a headquarter company as defined in s 1 of the Income Tax
Act (s 8(1)(s)).
l If the security constitutes a share in a REIT as defined in s 1 of the Income Tax Act (s 8(1)(t)), or
l If the transfer is from a transferor to a transferee, or vice versa, in terms of a collateral arrangement
and the person to whom that security has been transferred has certified to the member or partici-
pant that the change is in terms of that collateral arrangement (s 8(1)(u)). A collateral arrangement
is an arrangement whereby one person transfers a security to another for the purpose of providing
security in respect of an amount owed to that person. In order to qualify for the STT exemption, the
collateral arrangement should comply with the following requirements (definition of ‘collateral
arrangement’, s 1 of the STT Act):
– The security transferred should be a listed security or a bond issued by the Government (in the
national or local sphere), or any sphere of government of any country other than South Africa, if
the bond is listed on a recognised exchange.
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29.6–29.8 Chapter 29: Securities transfer tax
– The transferor should transfer the security to the transferee for the purpose of providing security
in respect of an amount owed by the transferor to the transferee.
– The transferor should be able to demonstrate that the arrangement was not entered into for the
purposes of the avoidance of tax.
– The arrangement should not be entered into for the purposes of keeping any position open for
more than 24 months.
– The transferee should contractually agree in writing to deliver an identical share or bond to the
transferor within 24 months from the date of transfer.
– The transferee is contractually required to compensate the transferor for any distributions in
respect of the listed share or bond, which that transferor would have been entitled to receive
during that period had that arrangement not been entered into.
– The arrangement may not affect the transferor’s benefits or risks arising from fluctuations in the
market value of that listed share or any bond.
– The arrangement does not qualify as a collateral arrangement where the transferee has not
transferred the identical share or bond to the transferor within the 24-month period, unless its
failure to return the identical share or bond is due to an arrangement that is announced and
released as a corporate action as contemplated in the JSE Limited Listing Requirements in the
Stock Exchange News Service as defined in the JSE Limited Listing Requirements.
29.7 Payment of STT (s 3 of the Securities Transfer Tax Administration Act)

STT payable in respect of the transfer of listed securities must be paid by the 14th day of the month
following the month during which the transfer occurred. In the case of unlisted securities, the STT is
payable within two months from the end of the month in which the security was transferred (s 3(1)).
STT can only be paid by an electronic payment. This is done by using the SARSe-STT system (s 3(5)).
29.8 Interest and penalties on overdue payments (ss 5 and 6A of the Securities
Transfer Tax Administration Act)
If STT is not paid on the due date, SARS must impose a penalty of 10% of the unpaid STT. The full
penalty or a portion thereof may be remitted in accordance with the provisions of the Tax Administration
Act (see chapter 33) (s 6A).
If STT is not paid in full within the prescribed period, interest is payable at the prescribed rate on the
balance of STT outstanding, reckoned from the day following the last date for payment to the date of
payment (s 5).
959
30 Customs and excise duty
Redge de Swardt

l identify and explain the purpose of customs and excise duties
l explain the difference between customs and excise duties
l identify the different types of customs and excise duties.
Contents
Page
30.1 Introduction ..................................................................................................................... 961
30.2 Different types of customs and excise duties ................................................................ 963
30.3 Basic concepts of customs duty .................................................................................... 963
30.3.1 The value of the imported goods (customs valuation) ................................... 963
30.3.2 The classification of the imported goods (tariff classification) ....................... 963
30.3.3 The origin of the imported goods (originating country) .................................. 963
30.4 Customs duty calculations ............................................................................................. 964
30.5 Rebates, drawbacks and refunds .................................................................................. 964
30.6 Anti-dumping and countervailing duties ........................................................................ 965
30.1 Introduction
Customs duties are levied on the importation of goods. It is usually calculated as a percentage of the
value of goods (ad valorem) or as an amount per unit (specific) (such as an amount per kilogram or
metre). The imposition of customs duties serves a dual purpose. It is a mechanism to generate reve-
nue for the government, but it also serves to protect the market of locally manufactured goods
against imported goods. Imported goods are subject to customs duties, which increases their cost to
the consumer, rendering them less competitive against locally manufactured goods.
Excise duties and levies are imposed on locally manufactured and imported goods. High-volume
consumable products (such as petroleum, alcohol and tobacco products) as well as certain non-
essential or luxury items (such as electronic equipment and cosmetics) are examples of goods
subject to excise duty. Excise duty is imposed on locally manufactured goods at a duty as source
(DAS) basis immediately after production. It also serves more than one purpose. Similar to customs
duties, it is a mechanism to generate government revenue, but it is also a mechanism to discourag-
ing consumption of certain harmful products (for example, products that are harmful to human health
or to the environment) and to facilitate behavioural change. Due to the cost-raising effect of an excise
duty, it could result in the consumer preferring to purchase alternative goods, which are not subject
to excise duty.
Customs and excise duties are indirect taxes. This means that although the consumer of the goods
ultimately pays the duty, it is the importer or manufacturer of the goods who pays the duty to SARS
and who then recovers it from the consumer by increasing the selling price of the goods. Customs
and excise duties are also typically imposed in addition to other indirect taxes, such as VAT (see
chapter 31).
Customs and excise duties are levied in terms of the Customs and Excise Act 91 of 1964 (including
the schedules to the Act, which is also referred to as the Tariff Book), and the Rules to the Act. The
Act will be replaced by the Customs Duty Act 30 of 2014, the Customs Control Act 31 of 2014, and
the Customs and Excise Amendment Act 32 of 2014. These acts will come into operation on dates
still to be announced. The general principles of customs and excise duties are discussed in this
chapter, which will not necessarily be impacted by the new customs legislation when it becomes
effective.
961
30.2 Different types of customs and excise duties

The following types of customs and excise duties are levied in terms of the Customs and Excise Act:
Schedule
Part no Description
to the Act
1 Part 1 Ordinary customs duty imposed on all types of goods imported
1 Part 2A Specific Excise Duties on locally manufactured or on imported goods of the same
class or kind. These duties are referred to as ‘sin taxes’ and are imposed on items
such as liquors, tobaccos, chemicals and fuel.
1 Part 2B Ad Valorem Excise Duties on locally manufactured goods or on imported goods of
the same class or kind. These are duties on certain items such as motor vehicles,
electronic equipment, cosmetics, perfumeries and other products generally re-
garded as ‘luxury items’.
1 Part 3 Environmental Levy.
1 Part 3A Environmental Levy on Plastic Bags.
1 Part 3B Environmental Levy on Electricity Generated in the Republic.
1 Part 3C Environmental Levy on Electric Filament Lamps.
1 Part 3D Environmental Levy on Carbon Dioxide (CO2) Emissions of Motor Vehicles.
1 Part 3E Environmental Levy on Tyres.
1 Part 5A Fuel Levy, which is imposed on petroleum oils and oils, such as petrol, kerosene
and diesel.
1 Part 5B Road Accident Fund (RAF) Levy, which is imposed on petroleum oils and oils,
such as petrol.
2 Anti-dumping, Countervailing and Safeguard Duties on Imported Goods
30.3 Basic concepts of customs duty

The amount of customs duty payable on importation of goods is calculated by taking the following
into account:
l the value of imported goods (referred to as the customs value of the goods)
l the volume or quantity of goods
l the tariff classification of the goods (referred to as the tariff heading), and
l the origin of the goods.
30.3.1 The value of the imported goods (customs valuation)

The valuation of goods for customs duty purposes is set by the World Trade Organisation’s (WTO’s)
Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade (the GATT
Agreement). The GATT Agreement, which involves six valuation methods, has been accepted by all
major trading countries.
The GATT Agreement prescribes six valuations methods which are applied in hierarchical order:
l the transaction value of the goods, which refers to the price that was actually paid or is payable
for the goods
l the transaction value of identical goods
l the transaction value of similar goods
l the ‘deductive’ method whereby the customs value is derived from the selling price of the goods
in South Africa
l the ‘computed’ method whereby the customs value is derived from the build-up cost of the im-
ported goods, and
l the ‘fall back’ method whereby the customs duty is determined by one of the above methods
being applied more flexibly.
The majority of goods imported are valued by applying the first method, which is the price paid or
payable by the buyer of the goods. This price is the free-on-board (FOB) price of the goods, which is
the price of the goods including transport and insurance costs up to the point of departure from the
country from where the goods are being exported.
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30.3 Chapter 30: Customs and excise duty
30.3.2 The classification of the imported goods (tariff classification)

The World Customs Organisation (WCO) developed an identification code for products for customs
duty purposes, which is referred to as the Harmonized System code (HS code). The HS code con-
sists of between 4 and 10 digits and is used to identify specific goods for customs purposes. Refer to
the following extract from Schedule 1 Part 1 of the Customs and Excise Act which illustrates how the
HS code is used to identify different types of cocoa beans and chocolate:
Heading/ Statistical Rate of Duty

Article Description
Subheading Unit General EU EFTA SADC MERCOSUR
1801.00 Cocoa beans, whole kg free free free free free
or broken, raw or
roasted
1802.00 Cocoa shells, husks, kg free free free free free
skins and other
cocoa waste
18.03 Cocoa paste, whether or not defatted:
1803.10 – Not defatted kg free free free free free
1803.20 – Wholly or partly kg free free free free free
defatted
1804.00 Cocoa butter, fat kg free free free free free
and oil
1805.00 Cocoa powder, not kg free free free free free
containing added
sugar or other
sweetening matter
18.06 Chocolate and other food preparations containing cocoa:
1806.10 – Cocoa powder, kg 17% free 17% free 17%
containing added
sugar or other
sweetening matter
30.3.3 The origin of the imported goods (originating country)

The origin of goods refers to the country where a product was manufactured and impacts the amount
of duty paid on importation. Refer to the above extract from Schedule 1 Part 1 of the Customs and
Excise Act which illustrates how the origin of goods impact the amount of duty payable on importa-
tion of cocoa powder, containing added sugar or other sweetening matter. If imported from the EU
(European Union) or SADC countries (Southern Africa Customs Union countries), it is duty free, but if
imported from EFTA (European Free Trade Associations) members, Mercosur countries and all other
countries (general), 17% customs duty is payable.
Governments may enter into trade agreements that, amongst other, impact the rate of duty payable
on importing goods from the relevant countries. South Africa is currently a party to the following trade
agreements:
l Treaty of the Southern African Development Community and Protocols (SADC Treaty and Proto-
col)
l Agreement between the Government of the Republic of South Africa and the Government of the
United States of America regarding mutual assistance between their customs administrations
(AGOA)
l Southern African Customs Agreement between the Governments of the Republic of Botswana,
the Kingdom of Lesotho, the Republic of Namibia and the Republic of South Africa (SACU)
l Memorandum of Understanding between the Government of the Republic of South Africa and the
Government of the People’s Republic of China on promoting Bilateral Trade and Economic Co-
Operation (MOU with People’s Republic of China), and
l Free trade agreement between EFTA states and SACU states.
The origin of a product is also relevant in determining whether the product is subject to antidumping
or countervailing duties (see 30.6).
963
30.4 Customs duty calculations

If, for example, a golf cart, which is manufactured in Germany and sold for the rand equivalent of
R35 000, is imported into South Africa, the importer will be liable for customs duties calculated as
follows:
As per Schedule 1 Part 1 the Ordinary Duty payable on importation of a golf cart is:
Heading/ Statistical Rate of Duty

Article Description
Subheading Unit General EU EFTA SADC MERCOSUR
Golf carts,
8704.90.05 pedestrian type u free free free free free
The importation of a golf cart is therefore free from ordinary duty. However, the manufacture or impor-
tation of gold carts is subject to the following ad valorem excise duty (Schedule 1 Part 2B):
Tariff item Tariff Subheading Article description Rate of Excise Duty
126.04.55 8704.90.05 Golf carts, pedestrian type (See Note 2 to this Part)
Note 2 to Part 2B
For the purposes of items 126.02 to 126.05 the rate of excise duty on:
Vehicles imported into the Republic shall be
(i) ((0,00003 × B) – 0,75)% with a maximum of 25%, and
(ii) ‘B’ means the value for the ad valorem excise duty on imported goods as prescribed in
s 65(8)(a) of the Act.
In accordance with s 65(8)(a) of the Act, the value for ad valorem purposes is the
Please note! customs value of the imported goods plus 15% of such value plus any non-
rebated customs duty payable in terms of Part 1 and Part 2A of Schedule No 1 to
the Act.
The rate of ad valorem excise duty payable on importation of the golf cart is:
((0,00003 × (R35 000 × 115%)) – 0,75)%
= 45,75%
Which is then limited to the maximum rate of 25%.
The ad valorem excise duty payable on importation of the golf cart is:
(R35 000 × 115%) × 25%
= R10 062,50
30.5 Rebates, drawbacks and refunds

There are three customs provisions in terms of which importers can be relieved of the payment, or
claim back, the customs duty, namely rebate, drawback, and refund.
A rebate of the rate of customs duty provides for the suspension of customs duty on the importation
of product inputs (intermediate goods) used in the manufacturing of products for export and/or
domestic consumption, subject to compliance with the rebate item’s prescribed condition(s).
A drawback of the rate of customs duty may be applied in respect of imported product inputs (inter-
mediate goods) used in the manufacturing, processing and packaging of products that will subse-
quently be exported.
A refund is obtained in respect of the overpayment of customs duties or where products and product
inputs were exported in the same condition as they were imported.
There are two provisions in terms of which domestic manufacturers can be relieved of the payment of
excise duty, namely rebate and refund.
A rebate of the rate of excise duties can be applied for, for manufactured products and excisable
products used in the manufacturing of another excisable product. In such instance the rebate provi-
sion is used in order to ensure that the excise duty is only paid once.
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30.5–30.6 Chapter 30: Customs and excise duty
A refund is obtained in respect of the overpayment of excise duties or when excisable products are
exported to a country outside of the Southern African Customs Union (SACU) and not consumed in
the local market.
30.6 Anti-dumping and countervailing duties

Anti-dumping duties are tariffs imposed by a government to protect its local market when it is of the
view that specific goods imported from specific countries are priced below fair market value. Dump-
ing refers to the process where a company exports goods at a price lower than the price it normally
charges its local market.
Countervailing duties are tariffs that are levied on imported goods to offset subsidies made to pro-
ducers of the goods in a specific export country. Subsidised imports can have a negative impact on
a country’s local market. Countervailing duties are aimed at levelling the playing field between local
producers of a product and foreign producers of the product who can afford to sell the product at a
lower price due to the subsidy it receives.
Anti-dumping and countervailing duties are listed in Schedule 2 of the Act and payable on importa-
tion of specific goods from specific countries in addition to any other duties levied.
965
31 Value-added tax (VAT)
Madeleine Stiglingh

l explain how the VAT system works
l identify when and at what rate VAT is levied
l state when a person needs to register as a vendor
l list the requirements for the documents that are the driving force of the VAT system
l explain how zero-rating of supplies works
l state when a supply is an exempt supply
l identify in which other special circumstances output tax must be raised
l say when input tax will be denied
l list and explain the timing rules for supplies
l determine the value of a supply.
Contents
Page
31.1 Overview ........................................................................................................................... 970
31.2 Calculation of VAT ............................................................................................................ 970
32.2.1 Basics of output tax........................................................................................... 970
32.2.2 Basics of input tax ............................................................................................. 971
32.2.3 Calculation of VAT payable or VAT refundable ................................................ 972
31.3 The accounting basis (s 15) ............................................................................................. 973
32.3.1 Invoice basis ..................................................................................................... 973
32.3.2 Payments basis ................................................................................................. 974
31.4 Tax periods (s 27) ............................................................................................................ 974
31.5 Output tax: Supply of goods or services (s 7(1)) ............................................................. 975
31.5.1 Supply ............................................................................................................... 975
31.5.2 Goods ................................................................................................................ 975
31.5.3 Services ............................................................................................................. 976
31.6 Vendor (ss 23, 50, 50A, 51(2) and s 22 of the Tax Administration Act)........................... 976
31.6.1 Vendor: Compulsory registration (ss 23, 24, 26, 50 and 50A) ......................... 977
31.6.2 Vendor: Voluntary registration (ss 23(3), 24(5), (6) and (7))............................. 978
31.7 Output tax: In the course or furtherance of an enterprise (s 7(1)(a)) ............................... 979
31.7.1 Enterprise or activity carried on continuously or regularly ............................... 979
31.7.2 Goods or services are supplied for a consideration (definition of
consideration and s 3) ...................................................................................... 979
31.7.3 Specifically included in the definition of an ‘enterprise’ ................................... 980
31.7.4 Specifically excluded from the definition of an ‘enterprise’ .............................. 980
31.8 VAT levied: Importation of goods (ss 7(1)(b) and 13)...................................................... 981
31.8.1 Importation of goods from BLNS countries ...................................................... 981
31.8.2 Importation of goods from other countries ....................................................... 981
31.8.2.1 Time of importation (s 13(1)(i)) ........................................................ 982
31.8.2.2 Calculation of VAT on importation (s 13(2)(a))................................ 982
31.9 VAT levied: Imported services (ss 7(1)(c) and 14) .......................................................... 983
31.9.1 Imported services: Meaning of ‘supply’ ............................................................ 983
31.9.2 Imported services: Time of supply (s 14(2)) ..................................................... 985
31.9.3 Imported services: Value of the supply (s 14(3)).............................................. 985
967
Page
31.10 Output tax: Zero-rated supplies (s 11)............................................................................. 985
31.10.1 Zero-rated supply: Exported goods (definition of ‘exported’ – paras (a), (c)
and (d) and ss 11(1)(a)(i), (ii) and 11(3)) .......................................................... 985
31.10.1.1 Direct exports (that is, goods consigned or delivered to an
export country (definition of ‘exported’ – par (a)))........................ 985
31.10.1.2 Indirect exports (that is, goods delivered in South Africa to
non-residents (definition of ‘exported’ – par (d))) ........................ 986
31.10.2 Zero-rated supply: Exported services (s 11(2) and (3)) ................................... 986
31.10.2.1 Exported services: Transportation (s 11(2)(a), (b), (c), (d)
and (e)) ......................................................................................... 986
31.10.2.2 Exported services: Services rendered outside South Africa
(s 11(2)(k)) .................................................................................... 987
31.10.2.3 Exported services: Services to non-residents (s 11(2)(i) and (l)) 987
31.10.3 Zero-rated supply: The sale of a going concern (ss 8(7), 8(15), 11(1)(e),
18A and 23(3)) .................................................................................................. 988
31.10.3.1 General ......................................................................................... 988
31.10.3.2 Specific examples relating to going-concern sales ..................... 989
31.10.4 Zero-rated supply: Other (ss 11(1)(h), (i), (k), (l), (q) and 11(2)(f),
(r) and (w)) ........................................................................................................ 989
31.11 Output tax: Exempt supplies (s 12) .................................................................................. 991
31.11.1 Exempt supply: Financial services (ss 2 and 12(a))......................................... 991
31.11.2 Exempt supply: Residential accommodation (s 12(c))..................................... 992
31.11.3 Taxable supply: Commercial accommodation ................................................. 993
31.11.3.1 Meaning of ‘supply’: Commercial accommodation ...................... 993
31.11.3.2 Value of the supply: Commercial accommodation (s 10(10))...... 993
31.11.4 Exempt supplies: Other (s 12(g), (h), (i), (j), (m)) ............................................. 995
31.12 Output tax: Deemed supplies (ss 8 and 18(3)) ................................................................ 996
31.12.1 Deemed supply: Ceasing to be a vendor ......................................................... 996
31.12.1.1 Meaning of ‘supply’: Ceasing to be a vendor (s 8(2)) .................. 996
31.12.1.2 Value of the supply: Ceasing to be a vendor (s 10(5)) ................ 996
31.12.1.3 Time of supply: Ceasing to be a vendor (ss 8(2) and 9(5)) ......... 998
31.12.2 Deemed supply: Indemnity payments .............................................................. 998
31.12.2.1 Meaning of ‘supply’: Indemnity payments (s 8(8)) ....................... 998
31.12.2.2 Value of the supply: Indemnity payments (s 8(8)) ....................... 998
31.12.2.3 Time of supply: Indemnity payments (s 8(8)) ............................... 999
31.12.3 Deemed supply: Supplies to independent branches ....................................... 1000
31.12.3.1 Meaning of ‘supply’: Supplies to independent branches
(par (ii) of the proviso to the definition of ‘enterprise’, ss 8(9),
11(1)(i) and 11(2)(o)) .................................................................... 1000
31.12.3.2 Value of the supply: Supplies to independent branches
(s 10(5)) ........................................................................................ 1001
31.12.3.3 Time of supply: Supplies to independent branches (s 9(2)(e)) ... 1001
31.12.4 Deemed supply: Fringe benefits....................................................................... 1001
31.12.4.1 Meaning of ‘supply’: Fringe benefits (s 18(3)).............................. 1001
31.12.4.2 Value of the supply: Fringe benefits (s 10(13)) ............................ 1002
31.12.4.3 Time of supply: Fringe benefits (s 9(7)) ....................................... 1005
31.12.5 Deemed supply: Payments exceeding consideration ...................................... 1005
31.12.5.1 Meaning of supply: Payments exceeding consideration
(ss 8(27) and 16(3)(m)) ................................................................ 1005
31.12.5.2 Value of supply: Payments exceeding consideration
(s 10(26)) ...................................................................................... 1005
31.12.5.3 Time of supply: Payments exceeding consideration (s 8(27))..... 1005
31.12.6 Deemed supplies: Other (ss (8)(1), 8(10), 8(15), 8(21), 9(8) and 10(16)) ....... 1006
31.13 Output tax: Non-supplies (ss 8(3), (4), (14), (25), 9(2)(b) and (c) and 10(11)) ............... 1007
31.14 Output tax: No apportionment (s 8(16)) ........................................................................... 1008
31.15 Time of supply (s 9) .......................................................................................................... 1009
31.15.1 Time of supply (ss 9(1) and 9(2)(d)) ................................................................. 1009
31.15.2 Time of supply: Connected persons (s 9(2)(a)) ................................................ 1009
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Chapter 31: Value-added tax (VAT)
Page
31.15.3 Time of supply: Rental agreements (ss 8(11) and 9(3)(a))............................... 1010
31.15.4 Time of supply: Progressive supplies (s 9(3)(b)) .............................................. 1010
31.15.5 Time of supply: Undetermined consideration (s 9(4)) ...................................... 1010
31.16 Value of the supply (s 10(2)) ............................................................................................ 1011
31.16.1 Value of the supply: General rule (s 10(3)) ....................................................... 1011
31.16.2 Value of the supply: Connected persons (s 10(4)) ........................................... 1011
31.16.3 Value of the supply: Vouchers (ss 10(18) and (19)) ......................................... 1012
31.16.3.1 Voucher entitling bearer to specific monetary value (s 10(18)) ... 1012
31.16.3.2 Voucher entitling bearer to specific goods and services
(s 10(19)) ...................................................................................... 1012
31.16.4 Value of the supply: Discount vouchers (s 10(20))........................................... 1013
31.16.4.1 Discount vouchers issued and redeemed by the same
supplier ......................................................................................... 1013
31.16.4.2 Discount vouchers issued and redeemed by two different
suppliers ....................................................................................... 1013
31.16.5 Value of the supply: Entertainment (s 10(21)) .................................................. 1013
31.16.6 Value of the supply: Dual supplies (s 10(22)) ................................................... 1013
31.16.7 Value of the supply: Supply for no consideration (s 10(23)) ............................ 1014
31.17 Basics of input tax (ss 16 and 17) .................................................................................... 1014
31.18 Tax invoices (ss 16(2) and 20) ......................................................................................... 1014
31.19 Debit notes and credit notes (s 21) .................................................................................. 1016
31.19.1 Debit notes ........................................................................................................ 1016
31.19.2 Credit notes ....................................................................................................... 1016
31.20 The determination of input tax (s 17)................................................................................ 1018
31.20.1 Turnover-based method ................................................................................... 1018
31.20.2 Special apportionment method......................................................................... 1019
31.21 Input tax: Denial of input tax (s 17(2)) .............................................................................. 1020
31.21.1 Denial of input tax: Entertainment ..................................................................... 1020
31.21.2 Denial of input tax: Club membership fees and subscriptions......................... 1020
31.21.3 Denial of input tax: Motor car ............................................................................ 1020
31.22 Input tax: Deemed input tax on second-hand goods (ss 1, 18(8) and 20(8)) ................. 1022
31.22.1 Zero-rating of movable second-hand goods exported (proviso s 11(1)
and s 10(12)) ..................................................................................................... 1023
31.23 Special rules: Instalment credit agreements .................................................................... 1024
31.23.1 Meaning of ‘supply’: Instalment credit agreements.......................................... 1024
31.23.2 Value of the supply: Instalment credit agreements (s 10(6)) ........................... 1025
31.23.3 Time of supply: Instalment credit agreements (s 9(3)(c)) ................................ 1025
31.24 Special rules: Fixed property ........................................................................................... 1026
31.24.1 Meaning of ‘supply’: Fixed property ................................................................. 1026
31.24.2 Value of the supply: Fixed property .................................................................. 1026
31.24.3 Time of supply: Fixed property ......................................................................... 1027
31.24.3.1 Time of supply: Fixed property that is supplied in the course or
furtherance of an enterprise ......................................................... 1027
31.24.3.2 Time of supply: Fixed property not supplied in the course or
furtherance of an enterprise ......................................................... 1028
31.25 Adjustments: 100% non-taxable use (ss 9(6), 10(7), 16(3)(h), 18(1) and 18B)............... 1029
31.26 Adjustments: Subsequent taxable use (s 18(4)) .............................................................. 1031
31.27 Adjustments: Increase and decrease of taxable use (ss 9(5), 18(2), 18(5),
18(6) and 10(9))................................................................................................................ 1032
31.28 Adjustments: Game-viewing vehicles and hearses (ss 8(14)(b), 8(14A), 9(10),
10(24) and 18(9)).............................................................................................................. 1034
31.29 Adjustments: Supplies of going concerns (s 18A) ........................................................... 1035
31.29.1 100% taxable usage ......................................................................................... 1035
31.29.2 More than 50% taxable usage for the purposes of the going concern ............ 1035
31.29.3 Less than 50% of the selling price relates to the going concern ..................... 1037
31.30 Adjustments: Leasehold improvements (ss 8(29), 9(12), 10(28) and 18C)..................... 1037
969
Page
31.31 Adjustments: Irrecoverable debts (ss 16(2)(f) and 22) ................................................... 1038
31.32 Agents (ss 8(20), 16(2), 19 and 54) ................................................................................. 1040
31.32.1 Pre-incorporation expenses (s 19).................................................................... 1040
31.32.2 Agents (ss 8(20), 16(2) and 54) ........................................................................ 1040
31.33 The influence of VAT on income tax calculations ............................................................ 1042
31.34 Tax returns and payments (s 28 and s 25 of the Tax Administration Act) ....................... 1042
31.35 Penalties and interest (s 39 and Chapter 15 of the Tax Administration Act) ................... 1043
31.36 Refunds (s 44 and Chapter 13 of the Tax Administration Act) ........................................ 1043
31.37 Comprehensive examples ................................................................................................ 1043
31.1 Overview
Almost every time a consumer purchases goods or services from a business in South Africa, he has
to pay a price that includes value-added tax (VAT). VAT is a tax on the consumption of goods and
services in South Africa, and is levied in terms of the Value-Added Tax Act 89 of 1991. VAT is an
indirect tax, which means that the tax is not assessed directly by SARS, but indirectly through the
taxation of consumption of goods and services. VAT is currently levied at a rate of 14%.
Before a person continues with the technical details of the VAT system, an understanding of relevant
terminology is required. It is firstly important to note that a business that is registered for VAT and that
levies VAT on the selling price of its goods is referred to as a VAT vendor. For VAT purposes, the
business activities that are carried on by such VAT vendor are referred to as an enterprise. If a VAT
vendor, in the carrying on of an enterprise (business), sells goods to another person, the VAT vendor
selling the goods is also referred to as the supplier of the goods. The person buying the goods is
referred to as the recipient of the goods.
A VAT vendor carrying on an enterprise sells (supplies) goods to the buyer (the recipient) and levies
VAT on the selling price. The VAT that the supplier levies on the selling price is output tax. The VAT
vendor must pay the output tax, levied on the goods sold, over to SARS.
The buyer (recipient) of the goods is the one who paid the VAT when he bought the goods. VAT is a
direct cost to the buyer (recipient) if that person is a final consumer. A final consumer cannot claim
the amount of VAT paid back from SARS. However, in certain instances, if the buyer (recipient) is also
a business registered as a VAT vendor, that recipient may claim the VAT it has paid back from SARS.
Any VAT paid by a recipient that the recipient may claim back from SARS, is referred to as input tax.
VAT is essentially an inclusive tax, which means that any price charged by a vendor includes VAT.
This means that any price tag, advertisement, tender, quotation or other statement of a price must
include VAT, unless the price is clearly broken down into the different components, namely, value,
VAT and consideration (ss 64 and 65). The term ‘VAT inclusive’ is used where VAT is already
included in the price. ‘VAT exclusive’ is where VAT is not included in the price – the price, as stated,
excludes VAT.
31.2 Calculation of VAT

A simplified VAT calculation is the amount of output tax (see 31.2.1) less the amount of input tax
(see 31.2.2). Not all VAT calculations are simple and some require adjustments to be taken into
account (see 31.25 to 31.31).
31.2.1 Basics of output tax

Output tax is the tax charged by a vendor for the supply of goods or services by him (s 7(1)(a)). A
person registered as a vendor levies VAT on all business transactions in respect of taxable supplies.
This may also include the sale of capital assets and trading stock.
The VAT Act provides for two types of supplies, namely
l taxable supplies, consisting of
– supplies at the standard rate (presently 14%), or
– supplies at the zero rate (0%) (see 31.10), and
l exempt supplies (see 31.11).
Supplies or transactions are usually taxable at the rate of 14% (standard rate) unless they are taxed
at 0% (zero rate) or are specifically exempt. It is thus important to know exactly which supplies are
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31.2 Chapter 31: Value-added tax (VAT)
taxed at 0% (see 31.10) and which are exempt (see 31.11), as all the other supplies will be taxable at
the standard rate of 14%. The following diagram summarises the different types of supplies for VAT
purposes:
Taxable supply Exempt supply
Standard-rated supply Zero-rated supply
@ 14% @ 0% No VAT applicable
All other supplies Listed in VAT Act Listed in VAT Act

(not zero-rated or exempt) (s 11) (s 12)
In order to be able to calculate the VAT component of taxable supplies at the standard rate (14%), it
is necessary to apply the tax fraction (14/114) to the VAT inclusive price of such supplies.
Example 31.1. Calculation of output tax

Supplier Ltd’s sales (all standard-rated taxable supplies) for a specific tax period amounted to
R45 600 (including VAT).
You are required to calculate output tax in respect of the supplies.
SOLUTION
R
Tax fraction × taxable supplies ............................................................................................ 5 600
= (14/114) × R45 600
This output tax must be paid over to SARS.
If the zero rate was applied to Supplier Ltd’s supplies, the output tax would be:
Tax fraction × taxable supplies
= (0/100) × R45 600............................................................................................................. nil
Rnil output tax has been levied, and Rnil is payable to SARS.
31.2.2 Basics of input tax

Input tax is the VAT component of the payment for goods and services supplied to the vendor for the
purpose of making taxable supplies. A vendor who purchases, for example, stationery to be used in
the making of taxable supplies, can claim the VAT part of the expense as input tax. This input tax can
be deducted from the output tax in order to calculate the total VAT payable or refundable to SARS.
Not all input VAT paid can, however, be deducted. Some expenses, by their very nature, have a
private and business purpose embedded in them. Two such expenses are entertainment and motor
vehicles. A vendor is therefore usually not allowed to claim the input VAT on entertainment and motor
vehicles even if he argues that he uses the entertainment and motor vehicle for business purposes
only (see 31.21).
971
Example 31.2. Basics of input tax
Recipient Ltd, a vendor who only makes taxable supplies, acquired the following goods from
vendors during the tax period:
l computer: R12 280 (including VAT)
l stationery: R4 800 (including VAT)
l entertainment: R1 140 (including VAT), and
l motor vehicle: R250 000 (including VAT).
Calculate input tax for the goods acquired.
SOLUTION
R
Tax fraction × goods acquired
Computer: 14/114 × R12 280 ......................................................................................... 1 508,07
Stationery: 14/114 × R4 800 ........................................................................................... 589,47
Entertainment: input denied ........................................................................................... –
Motor vehicle: input denied ........................................................................................... –
The total amount of input tax for the period .................................................................... 2 097,54
To determine whether a VAT amount may be claimed as an input tax deduction, it is important to
determine the purpose for which the goods or services acquired will be used.
If a vendor uses the goods or services wholly in the course of making taxable supplies, the vendor
will be entitled to claim the full input tax. If he uses the goods or services partly for taxable purposes,
only a portion of the input VAT can be claimed.
31.2.3 Calculation of VAT payable or VAT refundable

A vendor collects VAT on behalf of SARS (output tax) and incurs VAT on expenses that the vendor
can claim back from SARS (input tax). If the output tax payable exceeds the input tax claimable, the
difference is payable by the vendor to SARS. If the input tax claimable exceeds the output tax
payable, the difference is refundable to the vendor by SARS. In calculating the VAT payable or
refundable, the following steps can be followed:
Step 1: Calculate output tax (see 31.5 to 31.14).
Step 2: Calculate input tax (see 31.17 and 31.20 to 31.22).
Step 3: Determine whether there are any VAT adjustments that must be taken into account (see
31.25 to 31.31).
Step 4: Total the results of Step 1 to Step 3 as illustrated below:
Tax payable/
Output tax Input tax Adjustments
Less Add/Less Equals (refundable)
(Step 1) (Step 2) (Step 3)
(Step 4)
Example 31.3. Calculation of VAT payable or refundable

A vendor carries on an enterprise and supplied goods and services for R114 000 (including VAT
of R14 000) during a tax period.
You are required to calculate the VAT payable by or refundable to the vendor if he paid the
following input tax on goods and services supplied to him during the tax period:
(a) R6 000
(b) R15 000
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31.2–31.3 Chapter 31: Value-added tax (VAT)
SOLUTION
R
(a) Output tax ............................................................................................................. 14 000
Less: Input tax ....................................................................................................... (6 000)
VAT payable ......................................................................................... 8 000
(b) Output tax ............................................................................................................. 14 000
Less: Input tax ....................................................................................................... (15 000)
VAT payable/(refundable) .................................................................... (1 000)
Remember
The VAT calculation is the amount of output tax less the amount of input tax. Input tax may, how-
ever, not be claimed for certain goods or services (s 17(2)). The input tax is denied although the
VAT was charged to the vendor when the goods or services were acquired and the vendor is
going to use the goods or services wholly for the making of taxable supplies. The input tax is
usually denied to the extent that such goods or services are acquired for the purposes of, for
example, entertainment or relate to the supply of a motor car (see 31.21).
31.3 The accounting basis (s 15)

The timing of the VAT payable or refundable depends on the specific VAT accounting basis of a
vendor as well as the tax period (see 31.4).
Two accounting bases may be applied by a vendor to account for VAT:
l the invoice basis, and
l the payments basis.
The accounting basis determines the time of supply for VAT purposes. The two accounting bases are
discussed in the following two paragraphs.
31.3.1 Invoice basis

In general, vendors are registered for VAT on the invoice basis (s 15(1)). VAT on the invoice basis is
generally accounted for when
l an invoice is issued, or
l any payment is received,
whichever occurs first.
(See 31.15 for the other time-of-supply rules.)
Example 31.4. The invoice basis
A vendor, registered on the invoice basis, supplied the following goods:

(a) On 2 February 2018 goods are delivered at one of the clients’ premises and the invoice for
the goods was issued on the same date. The payment for the goods was received on
31 March 2018.
(b) On 29 April 2018 a client paid R100 000 for goods delivered on the same date. The invoice
was issued on 14 May 2018.
Determine the time of the above supplies for VAT purposes.
SOLUTION
(a) As the invoice for the goods was issued before payment was made, the time of the supply is
the date on which the invoice was issued, which is 2 February 2018. The actual date of
payment of 31 March 2018 is irrelevant.
(b) As the payment for the goods was made before the issue of the invoice, the time of the
supply is the date of 29 April 2018 when the payment was made. The actual date of delivery
of the goods is irrelevant.
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31.3.2 Payments basis

VAT on the payments basis is generally accounted for when
l payments are made (purchases), and
l payments are received (sales).
Any vendor that is voluntarily registered for VAT purposes with the value of its taxable supplies not
exceeding R50 000, must register on the payments basis (s 15(2B)).
Specified vendors may account for VAT on the payments basis if the vendor applied to the Commis-
sioner in writing. An example of such vendors is specified natural persons or unincorporated bodies
of persons where all members are natural persons. These vendors can apply to be registered on the
payments basis if the total value of the taxable supplies in a 12-month period has not exceeded
R2,5 million (s 15(2)(b)).
Example 31.5. The payments basis

A vendor, registered on the payments basis, supplied the following goods:
(a) On 2 February 2018 goods were delivered at one of the clients’ premises and the invoice for
R15 000 for the goods was issued on the same date. The payment for the goods was
received on 31 March 2018.
(b) On 29 April 2018 a client paid R50 000 for goods delivered on the same date. The invoice for
the goods was issued on 14 May 2018.
You are required to determine the time of the above supplies for VAT purposes.
SOLUTION
(a) The time of the supply is the date the payment was received – that is, 31 March 2018.
(b) The time of the supply is the date the payment was received – that is, 29 April 2018.
31.4 Tax periods (s 27)

Income tax is calculated with reference to a year of assessment, which is usually a period of 12
months. VAT is calculated and paid for each tax period. Every vendor is registered for a specific tax
period or VAT assessment period.
Following are the different tax periods (s 27(1)):
Category A: Periods of two months ending on the last day of January, March, May, etc. (odd-num-
bered months).
Category B: Periods of two months ending on the last day of February, April, June, etc. (even-num-
bered months).
Category A and Category B are applicable to:
l vendors with taxable supplies that do not exceed R30 million over 12 months, or
l farmers with taxable supplies that exceed R1,5 million over 12 months.
Category C: Periods of one month ending on the last day of each month.
Category C vendors are mainly vendors whose taxable supplies exceed R30 million
over 12 months.
Category D: Periods of six months ending on the last day of February and August respectively.
Category D vendors only carry on farming activities with taxable supplies of less than
R1,5 million over 12 months.
Category E: Periods of 12 months ending on the last day of their year of assessment for normal tax
purposes.
Category E vendors include specific entities who solely earn rental and management
fees from connected persons.
The Commissioner may permit a vendor’s tax period to end within either 10 days before or after the day
the period was originally supposed to end. The future tax period, as approved by the Commissioner,
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must be used by the vendor for a minimum period of 12 months (s 27(6)(ii)). A vendor could use the
10-day rule if the cut-off date is:
l a fixed day of the week
l a fixed date in a calendar month, or
l a fixed day in accordance with ‘commercial accounting periods’ applied by the vendor (Interpre-
tation Note No 52).
31.5 Output tax: Supply of goods or services (s 7(1))

VAT is levied if any of the following three situations arise:
l supply of goods or services (s 7(1)(a))
l importation into South Africa of goods (s 7(1)(b) – see 31.8), or
l supply of imported services (s 7(1)(c) – see 31.9).
It is thus important to understand the different definitions to be able to decide whether or not a
specific transaction attracts VAT.
For a ‘supply of goods or services’ to attract VAT there should be
l a supply (see 31.5.1)
l of goods or services (see 31.5.2 and 31.5.3)
l by a vendor (see 31.6)
l in the course or furtherance of an enterprise (see 31.7).
31.5.1 Supply
The first requirement for a transaction to attract VAT is that the transaction should constitute a supply
for VAT purposes.
The definition of ‘supply’ includes a sale, rental agreement, an instalment credit agreement, whether
voluntary, compulsory or by operation of law, irrespective of where the supply is effected (s 1 of the
VAT Act). The definition of ‘supply’ would also include the expropriation of property, this being when
a person’s property is taken in order to use it for a public purpose. However, for a supply to occur, it
appears that there must be at least two persons involved, namely the supplier and the recipient of the
goods or services. The ‘recipient’ is the person to whom the supply is made.
It is clear from the definition of ‘supply’ that a supply also includes supplies under barter exchange
transactions. A barter transaction is when goods are supplied for a consideration that is not money.
In the case of South Atlantic Jazz Festival (Pty) Ltd v CSARS [2015] ZAWCHC 8, the taxpayer staged
annual jazz festivals in Cape Town and concluded sponsorship agreements. The sponsors (SAA, City
of Cape Town, SABC and Telkom) provided money, goods and services. In return, the taxpayer
provided goods and services to the sponsors in the form of branding and marketing. Therefore, a
barter transaction. The taxpayer and sponsors were registered VAT vendors; however, they levied no
VAT on transactions on the grounds that the sponsorship agreements stipulated that all amounts
were exclusive of VAT. The courts held that VAT had to be accounted for by the taxpayer and
sponsors in respect of taxable supplies, despite the fact that the sponsorship agreements stipulated
that the supplies excluded VAT. In this barter transaction, the values received by the taxpayer were
evident and determinable based on sponsorship agreements. Such agreements also afforded
sufficient records of the supplies to enable SARS to be satisfied that input tax claims were genuine
despite no tax invoices being issued.
Certain transactions are deemed to be a supply for VAT purposes, although they do not meet the
requirements of the general definition of ‘supply’ (ss 8 and 18(3) – see 31.12).
31.5.2 Goods
The second requirement for a transaction to attract VAT is that the supply should be either a supply
of goods or a supply of services.
‘Goods’ are defined as
l movable property
l fixed property
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l any real right in movable or fixed property, and

l electricity.
The supply of ‘electricity’ is specifically included as part of the definition of goods to clarify that
electricity falls within the ambit of goods and not services. VAT is calculated on the final price of the
electricity supplied, including the amount of the environmental levy.
The following are not included in the definition of ‘goods’:
l Money. Money is not ‘goods’ as defined. The supply of cash, for example through the granting of
a loan by a bank, will not attract VAT. Money includes bills of exchange, postal orders, promis-
sory notes, etc. Money excludes coins made from a precious metal (other than silver). Precious
metals are gold, platinum and iridium. Money is excluded when used as currency and not as a
collector’s piece or investment article. This implies that a person who collects coins will have to
pay VAT when the coins are acquired. Kruger Rands are coins made from gold. Kruger Rands
are thus goods and not money. If Kruger Rands are supplied, they could attract VAT, but their
sale is zero-rated (see 31.10.4).
l Revenue stamps. These are not included in the definition of ‘goods’, except when acquired by
stamp collectors. It is important to note that this does not include normal postage stamps, but
refers to a stamp issued by the State as proof of payment of any tax (revenue stamp). Normal
postage stamps will attract VAT under the normal rules, since they constitute proof of payment for
services rendered by the postal company. Stamps disposed of or imported as collectors’ items
will also attract VAT.
l Certain rights. These are rights arising from a mortgage bond or pledge of goods and are
excluded from the definition of ‘goods’.
31.5.3 Services
The second requirement for a transaction to attract VAT is that the supply should be either a supply
of goods or a supply of services.
The term ‘services’ is also defined very widely and includes the granting, cession or surrender of any
right or the making available of any facility or advantage.
If a supply is not a supply of goods and also not specifically excluded in the definition of ‘goods’, the
supply will constitute a service.
For example: A buys a business from B. He pays R100 000 for the fixed assets and R50 000 for the
goodwill in the business. The fixed assets are clearly property and are therefore ‘goods’. The goodwill
is not included in the definition of ‘goods’ and will therefore constitute the supply of services. The
supply of services will include, for example, trademarks, goodwill, patents and know-how.
It is important to note that certain transactions are deemed to be either a supply of goods or a supply
of services, even though they do not at first glance seem to be so (see 31.12).
31.6 Vendor (ss 23, 50, 50A, 51(2) and 22 of the Tax Administration Act)
The third requirement for a transaction in South Africa to attract VAT is that the transaction should
constitute a supply of goods or services by a vendor.
If a person is a vendor, he has to levy VAT on his taxable supplies (selling price), and input tax
credits may be claimed on certain purchases and expenses. If, on the other hand, a person is not a
vendor, VAT is not levied on his supplies (the selling price of goods and services does not include
VAT) and no input tax credit can be claimed on the purchases or expenses.
A ‘vendor’ is any person who is, or is required to be, registered under the VAT Act.
The definition of a ‘person’ includes a company, a close corporation, a body of persons (whether
vested with a legal persona or not, for example a partnership), a deceased or insolvent estate and a
trust fund.
Although a partnership is not a separate person for income tax purposes, it is a separate person for
VAT purposes, and the partnership, not the individual partners, should register as a VAT vendor.
When one partnership is dissolved as the result of a member leaving or a new partner joining, and a
new partnership is formed, the old and new partnerships are regarded as one and the same vendor
(s 51(2)). SARS regards spouses married in community of property as an unincorporated body of
persons just like a partnership for VAT purposes. It is clear from the above that not only registered
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persons are vendors, but also every person that should have been registered. It is thus important to
know the registration requirements.
31.6.1 Vendor: Compulsory registration (ss 23, 24, 26, 50 and 50A)
A person is required to register as a VAT vendor
l at the end of the month during which the total value of the taxable supplies for the preceding
12 months exceeded R1 million,
l at the beginning of the month if it is anticipated that the total value of the taxable supplies in terms
of a written contractual obligation for the following 12 months will exceed R1 million, or
l at the end of the month where the total value of the taxable supplies made by a foreign supplier
of electronic services has exceeded R50 000.
(Section 23(1).)
It is important to note that there is no reference to tax periods or financial years; therefore, SARS will
look at any consecutive period of 12 months.
The amount of R1 million refers to the value of the taxable supplies (thus excluding any exempt
supplies), and ‘value’ excludes VAT (s 23(6)). In determining whether the value (turnover) exceeds
R1 million, the following must be excluded:
l the supplies arising out of the cessation of an enterprise, or a substantial and permanent
reduction in the size or scale of an enterprise
l supplies resulting from the replacement of capital assets.
l supplies resulting from temporary abnormal circumstances, for example when the grasslands of
a sheep farmer that the sheep use for grazing, are destroyed in a fire and the farmer is therefore
forced to sell all his sheep.
Where a person carries on two separate businesses, he must register when the joint taxable supplies
of the two businesses exceed R1 million. It is the ‘person’ who conducts the enterprise, not the
‘enterprise’, that registers for VAT. If each business is conducted in a separate company (or other
legal person), each company is required to register only when the taxable supplies of that company
exceed R1 million.
Branches or divisions within an enterprise may register as separate vendors if each branch
l maintains its own independent accounting system, and
l can be separately identified by reference to the nature of the activities carried on or the location
of the branch or division.
All the taxable supplies of all the different branches or divisions should be added together to deter-
mine whether the R1 million threshold has been met (s 50).
Example 31.6. Registration
Mrs Monageng carries on three different enterprises that only make taxable supplies. All three
enterprises are carried on in her own name.
Enterprise 1: Turnover of R360 000 For 12 months (excluding VAT)
R1 020 000
Determine whether Mrs Monageng is obliged to register for VAT purposes if the above
information applies to the 12 months ending 31 December 2018.
SOLUTION
Mrs Monageng has to register as a vendor since the three enterprises together make taxable
supplies of R1 020 000, which is above the R1 million threshold. It is the person, Mrs Monageng,
who has to register, and therefore all her taxable supplies must be taken into account to
determine whether she meets the registration threshold.
Business activities are sometimes split between different persons to avoid the registration threshold
of R1 million. The Commissioner may then make a decision that such separate persons are deemed
to be a single person carrying on one enterprise. If such a decision is issued, the single person will be
required to register (s 50A). This decision of SARS is subject to objection and appeal (s 32(c)).
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Example 31.7. Registration: Separate persons carrying on the same enterprise

Amogelang is a plumber and carries on business as a sole trader. His turnover (excluding VAT)
for the last 12 months ending 31 December 2018 amounted to R550 000. He is also the sole
member of a close corporation called ‘Amogelang’s Plumbing Services’ with a turnover (excluding
VAT) of R580 000 for the past 12 months.
Determine whether Amogelang is obliged to register for VAT purposes.
SOLUTION
If the Commissioner makes a decision in this regard, Amogelang will have to register as a
vendor, since the combined value of taxable supplies is R1 130 000, which exceeds R1 million
(s 50A).
A group of companies cannot register as a vendor; each subsidiary (person) must register separ-
ately. Transactions within the group are therefore subject to VAT (unless s 8(25) applies – see 31.13).
The VAT Act provides for certain requirements that must be fulfilled before a person may register, for
example such as having a fixed place of residence, having a bank account, keeping proper
accounting records and appointing a representative vendor that is a natural person. The onus rests
on the person to register when it becomes necessary. This must be done within 21 days after a
person has become liable for registration (s 22 of the Tax Administration Act).
A person that is required to register must fully complete a VAT 101 form, which is obtainable from
SARS’s website (http://www.sars.gov.za). All required documentation should be attached to the
registration form for the application to be valid. The original form should be submitted in person to the
SARS branch nearest to the enterprise. A person who applies for registration and has not provided all
particulars and documents required by SARS, may be regarded not to have applied for registration
until all the particulars and documents have been provided to SARS. Where a person is obliged to
register and fails to do so, SARS may register that person (s 22 of the Tax Administration Act).
A vendor still carrying on an enterprise could choose to deregister voluntarily if the value of his tax-
able supplies falls below the tax threshold of R1 million (s 24(1)). If a vendor wishes to deregister
voluntarily, he should notify the Commissioner in writing. A vendor who ceases to carry on an enter-
prise, shall notify the Commissioner in writing within 21 days of such cessation of carrying on an
enterprise. The Commissioner would notify the vendor of the date on which the cancellation of his
registration takes effect (s 24(2) and (3)).
Take note that the refusal of the Commissioner to register or cancel the registration of a vendor is
subject to objection and appeal by the taxpayer (s 32(a)(i) and (ii)).
31.6.2 Vendor: Voluntary registration (ss 23(3), 24(5), (6) and (7))
Voluntary registration will also result in the levying of VAT on all taxable supplies. This will, however,
allow the vendor to also claim input tax credits in the case of goods or services that he has acquired
from vendors. It is not always beneficial for a person to register voluntarily. The nature of his clients
and the goods or services rendered will usually determine whether a specific person should register.
A person may wish to register if he is supplying mainly to vendors or if he supplies zero-rated goods
(for example farmers or exporters).
A person may register voluntarily if that person is conducting an enterprise and if
l the value of the taxable supplies of all his enterprises was more than R50 000 during the previous
12-months
l the value of taxable supplies of that person has not exceeded R50 000, but can reasonably be
expected to exceed that amount within 12 months from the date of registration as a vendor.
Please take note that where the value of the taxable supplies has not yet exceeded R50 000,
such vendor should be registered on the payments basis (see 31.3.2) until the value of its taxable
supplies exceeds R50 000. A regulation (R.447) sets out a number of objective tests that will be
applied in determining when a person will be ‘reasonably expected’ to make taxable supplies in
excess of the voluntary registration threshold of R50 000, or
l that person is continuously and regularly carrying on an activity. A regulation (R.446) sets out the
type of enterprise activities that the Commissioner may regard as qualifying for registration. The
978
consequences of the nature of that activity are that it is likely to make taxable supplies only after a
period of time.
(Section 23(3)(b) and (d).)
Persons supplying commercial accommodation with a value not exceeding R120 000 in any 12-
month period are not carrying on enterprises. Such persons will thus be eligible for voluntary registra-
tion only once the supplies exceed R120 000 in 12 months.
The Commissioner may cancel a vendor’s registration (s 24(5) and (6)). The Commissioner will
cancel a vendor’s registration where he is satisfied that the vendor no longer complies with the regis-
tration requirements. The Commissioner will also cancel a vendor’s registration if that vendor does
not adhere to the administrative or bookkeeping requirements (s 23(7)). The Commissioner should
give written notice of such deregistration and the date that such deregistration takes effect (s 24(7)).
Please note that the death of a vendor will not automatically trigger deregistration for VAT purposes.
The deceased vendor and his estate shall, for the purposes of VAT, be deemed to be one and the
same person (s 53).
31.7 Output tax: In the course or furtherance of an enterprise (s 7(1)(a))

The fourth requirement for a transaction to attract VAT is that the transaction should constitute a
supply of goods or services by a vendor in the course or furtherance of an enterprise.
An ‘enterprise’ is generally defined as
l any enterprise or activity carried on continuously or regularly in South Africa or partly in South
Africa by any person (see 31.7.1)
l in the course or furtherance of which goods or services are supplied for a consideration (see
31.7.2)
l whether for profit or not.
(Definition of ‘enterprise’ s 1, par (a).)
Certain activities are specifically included in the definition of ‘enterprise’ (see 31.7.3) and others,
although they comply with the requirements of the general definition, are specifically excluded (see
31.7.4).
31.7.1 Enterprise or activity carried on continuously or regularly

The above definition of an enterprise requires an ongoing activity. Once-off private sales should
usually not attract VAT, as they will not be deemed to be a supply in the course of an enterprise.
Even if a vendor is carrying on an enterprise, all transactions he enters into that are not in the course
of that enterprise will not attract VAT. If, for example, a plumber sold his private home, the supply of
his home would not be in the course of the plumbing enterprise and would therefore not attract VAT.
If the plumber (vendor) sold the offices from which he conducted his plumbing enterprise, the sale of
the offices would be in the course of the enterprise and should attract VAT. Thus, VAT should be
levied on all supplies that relate to the enterprise of the vendor, even if it is the supply of capital
goods.
31.7.2 Goods or services are supplied for a consideration (definition of consideration

and s 3)
Unless a charge (consideration) is required for goods or services supplied, the supply will not form
part of the carrying on of an enterprise as defined.
The term ‘consideration’ is defined as a payment in money or otherwise for the supply of goods or
services, whether voluntary or not, and whether by the person who received the goods or services or
not. A deposit on a returnable container is a consideration. Any other deposit, whether refundable or
not, is a consideration only if it is applied as such or if it is forfeited.
Consideration includes VAT, where applicable. The value of a supply excludes VAT, and value plus
VAT equals consideration for a supply.
Consideration = Value plus VAT
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If the consideration is not in money, but in the form of goods or services, the open market value of the
goods will be the consideration for the supply. Take note that the open market value of the goods shall
be the consideration in money the supply of the goods or services would generally fetch in the open
market between two not connected persons (s 3). Also take note that the open market value of a
supply also includes VAT, where applicable.
Open market value = Value plus VAT

(in open market supply between two not connected
persons)
31.7.3 Specifically included in the definition of an ‘enterprise’

The general definition of an ‘enterprise’ specifically includes the following:
l Anything done in connection with the commencement or termination of an enterprise (proviso (i)).
The activities in connection with the commencement and termination of a business cannot be
regarded to be executed in the course of an enterprise. This specific inclusion is required to
bring these activities within the ambit of the VAT Act. This ensures that the vendor can claim input
tax back on for example all its start-up business expenses.
l The supply of electronic services by a person from a place in an export country is specifically
included in the definition of an enterprise (par (b)(vi)).
Electronic services can include e-books, music, games and subscriptions to electronic communi-
cation. The suppliers of electronic services from a place in an export country are not included in
the general definition of an enterprise as they do not conduct their business in South Africa. This
specific inclusion is therefore required to ensure that the local and foreign suppliers of electronic
services are treated equitable. Activities of the foreign electronic service providers are included
in the definition of ‘enterprise’ where at least two of the following circumstances are present,
namely
– the electronic services are supplied to a South African resident, or
– any payment for such services is made from a South African Bank, or
– the electronic services are supplied to a person with a business address, residential address
or postal address in South Africa where a tax invoice will be delivered.
31.7.4 Specifically excluded from the definition of an ‘enterprise’

The following do not constitute the carrying on of an ‘enterprise’ and are specifically excluded from
the general definition:
l The supply of services by an employee to his employer. An employee (other than an independent
contractor) who receives remuneration cannot register for VAT purposes, as he is not carrying on
an enterprise (proviso (iii)). No VAT is thus levied on the salary of an employee. Any independent
contractor or labour broker without an exemption certificate is carrying on an enterprise even if
the employer deducts employees’ tax from the amount paid to him. The independent contractor is
liable to account for VAT if the VAT registration threshold is exceeded. Please take note that a
non-executive director also carries on an enterprise and that the non-executive director is liable
to register for VAT (BGR 40 and 41).
l A hobby (proviso (iv)).
l An exempt supply (proviso (v) – see 31.11).
l The supply of commercial accommodation, if the total value of such supplies does not exceed
R120 000 for a period of 12 months.
l Certain supplies made by branches or main businesses situated outside South Africa. In a
situation where a South African vendor is carrying on an enterprise in South Africa, but the
enterprise has a separate branch outside South Africa, the supplies made by the foreign branch
would not be treated as part of the supplies of the South African vendor. This will also be the case
if the main business is outside South Africa and there is a branch in South Africa. Let us assume
that we have a foreign bank with the head office in the Netherlands. This bank operates in South
Africa through a branch located in Sandton. All the supplies of the South African branch will be
980
part of an enterprise carried on in South Africa. However, the supplies of the head office outside
South Africa will be excluded from the definition of an ‘enterprise’. This will be the case only if
– the branch or main business can be separately identified, and
– an independent system of accounting is maintained for that branch or main business.
(Proviso (ii).)
31.8 VAT levied: Importation of goods (ss 7(1)(b) and 13)

VAT is levied if any of the following three situations arise:
l supply of goods or services (s 7(1)(a) – see 31.5-7)
l importation into South Africa of goods (s 7(1)(b)), or
l supply of imported services (s 7(1)(c) – see 31.9).
In the case of the importation of goods into South Africa, VAT is levied on the importation and the VAT
is then paid over to SARS. The importer of the goods must pay the VAT, even if he is not a vendor
(s 7(2)).
VAT is levied on the importation of goods as it would be to the disadvantage of local suppliers if
persons could buy the same merchandise overseas at a lower price. A lower price will be possible as
the suppliers overseas did not have to increase their prices with 14% VAT. To level the playing fields
to some extent, the VAT cost is borne by the importer of goods.
Please take note that VAT is aimed at taxing final consumption. An importing vendor is not the final
consumer for goods imported to be used or supplied in the course of making taxable supplies. The
VAT paid on importation would qualify as input tax and would indirectly be refunded to the vendor via
the VAT system. (For example, R11 400 VAT levied on the importation of goods (output VAT) would
be reduced with the R11 400 (input VAT) that the vendor incurred on the importation of the goods.)
The VAT paid on the importation of goods would only result in a ‘cost’ for a person who is the final
consumer. An importer is the final consumer to the extent that goods are imported by a non-vendor,
or by a VAT vendor to the extent that those goods are not going to be used in the course or further-
ance of an enterprise.
Smaller items are often imported through the mail. The Commissioner may then require the postal
company to collect the VAT and provide him with the necessary information with regard to such
imported goods.
Provision is made, however, for certain imported goods to be exempt from VAT upon importation
(Schedule 1 to the VAT Act (s 13(3)). The rules applied to imports from customs union member coun-
tries are slightly different to those applied to other countries. The customs union member countries
are Botswana, Lesotho, Namibia and Swaziland (BLNS countries).
31.8.1 Importation of goods from BLNS countries

The customs union member countries do not levy any customs duty on any imports from each other.
VAT may however be charged. There are designated commercial ports, i.e. the different border posts
through which imports are obliged to pass. VAT is collected at these designated commercial ports.
The ‘time of supply’ for goods imported from BLNS countries is the time when goods enter South
Africa. This is usually when goods physically enter South Africa via a designated commercial port
(s 13(1) proviso (iii)).
VAT payable on goods imported from BLNS countries is equal to 14% of the customs duty value
(s 13(2)(b)).
31.8.2 Importation of goods from other countries

If goods are imported from other countries to South Africa, they have to be cleared for home
consumption by Customs and Excise, which also collects the VAT. It might be that they are cleared
on the same date of actual importation. It also might be that there is a difference between the date of
actual importation and the date that the goods are cleared. The goods are usually entered into a
storage warehouse before they are cleared for home consumption.
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31.8.2.1 Time of importation (s 13(1)(i))

The time of importation is when the importation of goods is deemed to take place. ‘Importation’, in
relation to goods, means when goods
l enter South Africa, or
l are cleared for home use
in terms of the Customs Control Act.
31.8.2.2 Calculation of VAT on importation (s 13(2)(a))

VAT payable on goods imported from countries other than the BLNS countries is 14% of the total of
l customs duty value, plus
l 10% of customs duty value, plus
l non-rebated customs duty payable and any import surcharges.
(Section 13(2)(a).)
Example 31.8. VAT on importation of goods
Sedzani Siaga Construction (Pty) Ltd imported marble that has a cost price and a value for cus-
toms duty purposes of R120 000 from Zimbabwe. Import surcharges of R5 600 were levied.
Determine the amount of the VAT levied on importation.
SOLUTION
R
Customs duty value .................................................................................................... 120 000
Add: 10% of customs duty value ................................................................................ 12 000
Add: Importation surcharges ...................................................................................... 5 600
137 600
× 14%
VAT levied on importation ........................................................................................... 19 264
Note
Distinguish between the subsequent use of the imported item to make taxable or non-taxable
supplies. Consider the following:
(a) Sedzani Siage imported the marble for use in her own home. This is not a taxable supply so
she cannot claim the R19 264 VAT paid at the border post.
The journal entries for the purchase of the marble would have been as follows:
Transaction 1 R R
Improvements to home (R120 000 + R5 600) .................................. Dr 125 600
Bank (R120 000 + R5 600) .............................................................. Cr 125 600
Marble purchased to effect improvements to private residence.
Transaction 2
Improvements to home .................................................................... Dr 19 264
Bank................................................................................................. Cr 19 264
The non-refundable VAT paid on the importation of marble to improve private residence.
(b) Sedzani Siage imported the marble in order to use it in one of her clients’ homes in the
course of making taxable supplies. She charges the client R228 000 for the rendering of her
services. Sedzani would now be entitled to claim the input tax of R19 264 paid at the border
post, and would need to charge output tax of R28 000 (R228 000 × 14/114) on the supply made
to her client.
The journal entries for the purchase of the marble would have been as follows:
Transaction 1
Trading stock (R120 000 + R5 600)................................................. Dr 125 600
Bank (R120 000 + R5 600) .............................................................. Cr 125 600
Marble purchased as trading stock
Transaction 2
Input tax ........................................................................................... Dr 19 264
Bank................................................................................................. Cr 19 264
The input tax paid on the importation of marble as trading stock.
982
Remember
l VAT is usually levied on the supply of goods and services (thus the turnover) of an enterprise
and is usually received by the vendor on behalf of SARS. The VAT relating to the importation
of goods is a calculated amount of additional VAT that was not received on behalf of SARS.
This VAT is paid in addition to the purchase price.
l Where vendors paid VAT on goods imported, they are permitted to claim the VAT paid as
input tax, subject to the normal conditions pertaining to input tax deductions (see 31.17 and
31.20 to 31.22).
31.9 VAT levied: Imported services (ss 7(1)(c) and 14)

VAT is levied if any of the following three situations arises:
l supply of goods or services (s 7(1)(a) – see 31.5-7), or
l importation into South Africa of goods (s 7(1)(b) – see 31.8), or
l supply of imported services (s 7(1)(c)).
VAT must therefore also be paid to SARS under qualifying circumstances, if services are imported
into South Africa.
31.9.1 Imported services: Meaning of ‘supply’

‘Imported services’ are defined as the supply of services
l by a supplier who is a non-resident or carries on business outside South Africa
l to a recipient who is a resident of South Africa
l to the extent that the services are used in South Africa for the purposes of making a non-taxable
supply.
In respect of imported services, VAT is not payable if the services are imported and fully used for the
purposes of making taxable supplies. VAT is payable only if the service is imported by a non-vendor
or by a vendor for purposes other than the making of taxable supplies (s 7(1)(c)).
If the recipient of the imported services is not a vendor, the recipient is required to pay the VAT within
30 days from the time of supply (s 14(1)). Within 30 days of importing the service, the non-vendor is
required to submit a VAT 215 form together with the VAT payment.
If the recipient of the imported services is a vendor, the vendor is required to include the VAT in the
VAT 201 return corresponding to the tax period in which the supply was made (proviso to s 14(1)).
The case of CSARS v De Beers Consolidated Mines Ltd [2012] 3 All SA 367 (SCA) related to
imported services. In this case, the taxpayer, De Beers Consolidated Mines, engaged the services of
a London-based financial advisor in order to advise on a complex restructuring transaction. The
advice was on whether an offer received by De Beers to conclude the restructuring was fair and
reasonable. The London-based financial advisor was a non-resident and not a vendor. De Beers was
invoiced US$19,8 million for these services.
The question was whether such services were acquired for the purpose of making ‘taxable supplies’
in furthering the ‘enterprise’ of De Beers. The courts held that the restructuring transaction was not for
the purpose of enhancing the ‘enterprise’ of mining, therefore it was exclusively for non-taxable
supplies. The entire amount invoiced to De Beers consequently constituted an ‘imported service’ and
was subject to VAT.
Remember
l VAT is usually levied on the supply of goods and services (thus the turnover) of an enterprise
and is usually received by the vendor on behalf of SARS. The reversed charge VAT relating
to the imported services is an amount of VAT that was not received on behalf of SARS, but
an amount that is paid in addition to the charge for the service. Although thus referred to as
VAT, this is a reversed charge VAT that is paid by the vendor to SARS, although he never
received this amount as an agent on behalf of SARS.
l Where vendors have paid VAT on imported services, such vendors are NOT permitted to
claim the VAT paid as input tax, as it relates to only non-taxable supplies.
continued
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l The VAT paid on imported services is a non-refundable cost for the South African taxpayer
and could be deducted for income tax purposes if the expense it relates to is deductible for
income tax purposes.
l Output tax is only apportioned for taxable supplies for two exceptions (31.14). The fact that
the extent of non-taxable supplies is applied for ‘imported services’ is not the apportionment
of output tax. The extent of non-taxable supplies determines the proportional amount which
constituted an ‘imported service’ and that is subject to output tax.
Example 31.9. VAT on importation of services

A bank in South Africa received professional advice relating to their business as a whole from a
foreign company (not a resident of South Africa nor a VAT vendor). The bank’s business entails
the making of both taxable and exempt supplies in a ratio of 80:20. The non-resident company
charges the bank R60 000 for such services.
Determine the amount of the VAT that should be levied.
SOLUTION
Since the bank acquired the services partly for the purposes of making exempt supplies
(i.e. 20%), the bank will be required to account for VAT on 20% of the value of the services
(i.e. R60 000 × 20% × 14% = R1 680).
The journal entries for the transaction would be as follows:
R R
Journal entry 1
Professional services ........................................................................ Dr 60 000
Bank .................................................................................................. Cr 60 000
Professional services paid that are rendered to the bank.
Journal entry 2
Professional services ........................................................................ Dr 1 680
Bank .................................................................................................. Cr 1 680
The reversed charge VAT on the professional services that constitute imported services, to the
extent that the service is not applied in the course of making taxable supplies – in this case:
exempt supplies (i.e. R60 000 × 20% × 14% = R1 680).
However, a private individual who does not make taxable supplies and who seeks professional
advice overseas to be used in South Africa will have to account for VAT on the total value of that
advice.
The journal entries for the transaction would be as follows:
R R
Journal entry 1
Professional services ...................................................................... Dr 60 000
Bank ................................................................................................ Cr 60 000
Professional services paid that are rendered to the private individual.
Journal entry 2
Professional services ...................................................................... Dr 8 400
Bank ................................................................................................ Cr 8 400
The reversed charge VAT on the professional services that constitute imported services, to the
extent that the service is not applied in the course of making taxable supplies – in this case:
private purposes (i.e. R60 000 × 100% × 14% = R8 400).
The individual is then legally obliged to pay the reversed charge VAT to SARS, but this is not very
practical and very difficult for SARS to administer.
The rationale behind the levying of VAT on imported services is to prevent unfair competition. Private
individuals or businesses making exempt supplies might be tempted, if imported services are not
subject to VAT, to acquire them from non-resident suppliers rather than buy them locally and pay
irrecoverable VAT on the purchase price. The levying of VAT on the imported services would thus
partly prevent such persons from paying a lower price to non-residents.
The following imported services will not attract VAT (s 14(5)):
l a supply of services that was already subject to VAT at 14%
l a supply that, if made in South Africa, would be subject to VAT at 0% (see 31.10) or would have
been an exempt supply (see 31.11)
984
l the supply of educational services rendered by foreign educational institutions to South African
students
l the rendering of services by an employee to his employer or the rendering of services by a holder
of office in performing the duties of his office. This will thus result in excluding the supply of
certain services by a non-resident, for example a director, from falling within the ambit of
imported services, and
l for supplies of a service of which the value per invoice does not exceed R100.
31.9.2 Imported services: Time of supply (s 14(2))

A supply of imported services is deemed to take place on the earlier of the dates of
l the issue of an invoice, or
l the making of any payment by the recipient
in respect of that supply (s 14(2)).
31.9.3 Imported services: Value of the supply (s 14(3))

The value of the supply is the greater of
l the value of the consideration for the supply, or
l the open-market value of the supply (s 14(3)).
31.10 Output tax: Zero-rated supplies (s 11)

Supplies are all taxable at the rate of 14%, unless they are taxed at 0% or are specifically exempt. It
is thus important to know exactly which supplies are taxed at 0% and which are exempt (see 31.11).
All the other supplies will be taxable at the standard rate of 14%.
Supplies charged at the zero rate, often referred to as zero-rated supplies, are taxable supplies
although charged with VAT at 0%. These zero-rated taxable supplies enable the vendor to claim
back all input tax in connection with the zero-rated supply.
Exempt supplies are supplies that are not charged with VAT at all. These differ from zero-rated
supplies in that no input tax in connection with such supply may be claimed.
VAT aims to tax local consumption of goods and services. Goods exported are not usually consumed
in South Africa. Both goods (see 31.10.1) and services (see 31.10.2) exported are therefore zero-
rated.
31.10.1 Zero-rated supply: Exported goods (definition of ‘exported’ – paras (a), (c) and (d)
and s 11(1)(a)(i), (ii) and 11(3))
The export of movable goods by a vendor to an overseas country may be zero-rated in certain
circumstances.
The word ‘exported’ intends a transaction whereby ownership passes or is to pass from one person
to another. Goods are exported where such movable goods are supplied in any one of the following
ways:
l direct exports (par (a) of the definition of ‘exported’), or
l indirect exports (par (d) of the definition of ‘exported’), or
l goods delivered by the vendor to a foreign-going ship or aircraft for use in such ship or aircraft
(par (b) and (c) of the definition of ‘exported’).
31.10.1.1 Direct exports (that is, goods consigned or delivered to an export country
(definition of ‘exported’ – par (a)))
Goods exported are regarded as direct exports and would therefore qualify for the zero rate under
the following circumstances:
l It must be a supply of moveable goods under a sale or instalment credit agreement.
l The goods must be directly exported to an address in an export country.
l The goods must be exported through a designated commercial port (as set out in Interpretation
Note No 30).
985
l The supplier must obtain and retain all documentary proof (as set out in Interpretation Note No
30).
The above refers to a situation where the supplying vendor exports the movable goods
l in the supplying vendor’s baggage (luggage), or
l by means of the supplying vendor’s own transport, or
l the South African vendor uses a contractor to deliver the goods on the vendor’s behalf to the
recipient at an address in an export country, and
– the contractor is contractually liable to the South African vendor to effect delivery of the goods,
and
– the South African vendor is invoiced and liable for the full cost relating to such delivery (Inter-
pretation Note No 30).
In order for the supplying vendor to apply VAT at the zero rate for the supply of the movable goods
by means of direct exports, the supplying vendor must obtain and retain documentary proof that is
acceptable to the Commissioner (s 11(3) and Interpretation Note No 30).
The supplying vendor must obtain the required documentary proof within 90 days. These 90 days are
calculated from the date that the movable goods are required to be exported. Generally, 90 days
from the earlier of
l the time an invoice is issued, or
l the time any payment is received.
When the supplying vendor does not obtain the required documentation within 90 days, the supply
may be deemed to be at the standard rate. The time of such supply is in the tax period within which
the period of 90 days ends. An output tax adjustment may be deducted should the documentation be
obtained at a later stage. This will only be allowed if the documentation is obtained within five years.
The vendor should also provide the necessary proof to the Commissioner (see Interpretation Note
No 30).
As already pointed out, only movable goods can be ‘exported’. The supply of vouchers entitling the
purchaser to a service, for example a phone recharge voucher, a prepaid card, or a ticket to watch a
rugby match, cannot be regarded as a supply of movable goods, as it relates to the supply of a
service.
31.10.1.2 Indirect exports (that is goods delivered in South Africa to non-residents (definition of
‘exported’ – par (d)))
A special Regulation (R.316) deals with the indirect export of movable goods. Part 1 of the Regulation
deals with transactions where movable goods are supplied by a vendor to a qualifying purchaser and
the qualifying purchaser is responsible for exporting the goods from South Africa. An indirect export
is thus where B (a qualifying purchaser) buys goods from A (a vendor in South Africa) and the risk
associated with ownership is transferred from A to B in South Africa.
Part 2 of the Regulation provides for an exception to the rules in part 1 of the Regulation. This part
applies in respect of exports of movable goods, in which case the supplier (that is the South African
vendor) may at his own discretion and risk decide to apply the zero rate.
31.10.2 Zero-rated supply: Exported services (s 11(2) and (3))

In line with the objective to tax only local consumption, exported services will qualify for the zero rate.
The zero rate is only applicable if the documentary requirements are adhered to (Interpretation Note
No 31 (Table B) and s 11(3)).
31.10.2.1 Exported services: Transportation (s 11(2)(a), (b), (c),(d) and (e))

The rendering of a transport service to passengers or goods is zero-rated, if transported from
l a place outside South Africa to another place outside South Africa, or
l a place in South Africa to a place outside South Africa, or
l a place outside South Africa to a place in South Africa (s 11(2)(a)).
A typical example of this type of zero-rated service would be tickets bought from SAA for a flight from
Australia to Rome, Johannesburg to Rome, or Rome to Johannesburg. The zero rating is applicable
to both South African residents and non-residents.
986
If the flight from Australia to Rome has to land in Johannesburg and Cape Town as well, the Johan-
nesburg-Cape Town leg (a connecting flight) will also be zero-rated as it forms part of the Australia-
Rome ticket (s 11(2)(b)).
The same principle is also applicable to goods. Take for example goods exported to Australia from
Johannesburg. If the same supplier who transport the goods from Johannesburg to Australia also
transports the goods from Cape Town to Johannesburg, the transport of the goods from Cape Town
to Johannesburg will also be zero-rated (s 11(2)(c)).
Any services relating to the insuring or arranging of insurance or transport for any of the above
passengers or goods will also be zero-rated (s 11(2)(d)).
Where goods are exported and additional services are supplied, the additional services, such as the
transport of goods, will also be zero-rated. This zero rate is only applicable if the additional services
are supplied to a non-resident that is not a vendor (s 11(2)(e)).
31.10.2.2 Exported services: Services rendered outside South Africa (s 11(2)(k))

A service is zero-rated if it is physically rendered outside South Africa. It could thus be zero-rated
even if the service is rendered to a resident, as long as the service is physically rendered outside the
borders of the country. The place where the service is rendered is relevant for this zero-rate
provision. The residency of the person to whom the service is rendered is therefore not relevant.
31.10.2.3 Exported services: Services to non-residents (s 11(2)(i) and (l ))

Services rendered to non-residents can be zero-rated even if the services are rendered in South
Africa. The residency of the recipient as well as the location of the recipient are the relevant qualifiers
for this zero-rated provision. Both the residency as well as the location should be outside South
Africa. This zero-rated provision is therefore only applicable if the services are supplied directly to a
non-resident and both the non-resident and the other person are not in South Africa at the time the
services are rendered.
For example:
l If a South African tour operator sells a tour to a foreign tour operator, the services are supplied to
a non-resident, but if the actual tourists benefit from the services in South Africa, the supply
cannot be zero-rated (see Interpretation Note No 42, which also deals with VAT implications for
travel agents, tour operators and travel brokers).
l Accounting services rendered to a local branch of a non-resident company will not be zero-rated
as the non-resident has a presence (the branch) in South Africa while the services are rendered.
l The supply of a tax opinion by a South African resident to a foreign company will be zero-rated if
the services were rendered while the foreign company did not have any presence in South Africa.
The zero rating will not be applicable if the service is directly in connection with
l land, or improvements thereto, situated in South Africa, or
l movable property situated inside South Africa at the time the services are rendered,
– except when the movable property is exported to the non-resident subsequent to the supply of
such service, or
– forms part of a supply that the non-resident makes to a registered vendor.
In the case of Stellenbosch Farmers’ Winery Limited v CSARS [2012] ZASCA 72, the taxpayer,
Stellenbosch Farmers’ Winery, received compensation in the amount of R67 million from a United
Kingdom-based company, United Distillers plc (Distillers). The compensation was for the early
termination of the distribution agreement that was entered into between the parties. In terms of the
distribution agreement, Stellenbosch Farmers’ Winery had the exclusive right to distribute Bell’s
whisky in South Africa for a specified period. The question was whether the compensation amount of
R67 million received could be zero-rated (s 11(2)(l)). The courts confirmed that the surrendering of a
right constitutes the supply of a service. The service was, however, rendered to a non-resident
(Distillers) and not in connection with property situated in South Africa and therefore could be zero-
rated (s 11(2)(l)).
The Supreme Court of Appeal in Master Currency v CSARS (155/2012 [2013] ZASCA 17) has
confirmed that foreign exchange services supplied in the duty free area of an international airport are
subject to VAT at the standard rate. The zero-rating is not applicable if the non-resident is in the
Republic at the time the services are rendered. The duty free area of an international airport is
therefore not regarded to be outside the Republic. This judgment confirms a basic VAT principle that
987
goods or services consumed within the borders of the Republic are subject to VAT at the standard
rate unless the VAT Act specifically provides for an exemption or zero-rating.
Master Currency sought to rely on a ruling issued by the Commissioner (under s 72) which indicates
that supplies of goods in duty free areas were subject to VAT at the zero-rate. The court concluded
that Master Currency could not rely on the ruling because the ruling was limited in its application to
goods supplied by duty free shops in duty free areas and therefore did not apply to services. In
addition, the ruling was a special arrangement. It was intended to relieve a non-resident of the
burden of having to apply for a VAT refund. If the goods were not zero-rated VAT would otherwise
have been paid on goods purchased in the duty free area and subsequently refunded by the VAT
Refund Administrator. The non-resident would be able to qualify for the refund as the goods are to be
exported. The non-resident does not qualify for any refund in relation to the services, and the ruling
would thus not apply to services (see Interpretation Note No 85).
The services of arranging
l the supply of goods to foreign ships or aircraft (s 11(2)(i)(ii)), or
l transport of goods within South Africa for a person who is not a resident of South Africa and is not
a vendor (s 11(2)(i)(iii))
are zero-rated.
31.10.3 Zero-rated supply: The sale of a going concern (ss 8(7), 8(15), 11(1)(e), 18A
and 23(3))
31.10.3.1 General
To eliminate cash-flow difficulties with the sale of a business as a going concern, it is common
practice to zero rate the sale of a going concern (ss 11(1)(e) and 18A and Interpretation Note No 57).
The disposal of an enterprise as a going concern is a zero-rated supply if the parties agreed in
writing that the enterprise, or part thereof, is disposed of as a going concern. All the following criteria
should be met for the zero-rate to apply:
l At the time of conclusion of the contract the parties have agreed in writing that the enterprise will
be an income-earning activity on the date of its transfer. (The intention to transfer it as an income-
earning activity is sufficient. The purchaser should not necessarily continue with the same
income-earning activity after the date of transfer.)
l All the assets necessary for carrying on the enterprise are disposed of by the supplier to the
recipient. (It is not required that all the assets be disposed of; only those necessary for carrying
on the enterprise. The phrase ‘disposed of’ includes an outright sale as well as a lease or rental of
the assets necessary for carrying on of the enterprise.)
l At the time of the contract the parties have agreed in writing that the consideration for the supply
is inclusive of VAT at the rate of 0%.
l Both the parties (supplier and recipient) must be registered vendors for VAT purposes. The
supplier must obtain and retain a copy of the recipient’s Notice of Registration as proof (form VAT
103). The purchaser can register voluntarily based on the supplier’s history (s 23(3)(c)).
The sale of a business as a going concern is deemed to be a taxable supply of goods. The whole
business including any services (for example goodwill) is deemed to be goods (s 8(7)).
More than 50% taxable usage for the purposes of the going concern
If more than 50% of the assets of the going concern were used for the making of taxable supplies,
the seller levies output tax at the rate of 0% on the full transaction.
Less than 50% of the selling price relates to the going concern
If the goods or services of the enterprise were less than 50% applied by the seller for purposes of the
going concern, only the portion of the selling price that relates to the going concern may be zero-
rated. The seller must make the following apportionment (s 8(15)):
l The seller must charge VAT at the standard rate in respect of the non-going-concern portion.
l The seller must charge VAT at the zero rate in respect of the going-concern portion that was
applied for taxable purposes.
(For adjustments by both the seller and purchaser, see 31.29.)
988
31.10.3.2 Specific examples relating to going-concern sales

The following examples provide guidelines on what will constitute an income-earning activity (Inter-
pretation Note No 57). It is clear that the intention should be the selling of an income-earning activity,
not merely the sale of a business structure.
Farming activities
The mere sale of a farm property constitutes the supply of the capital asset structure of a business
and not the farming enterprise. In order to supply a farming enterprise as a going concern, the seller
and the purchaser must agree that an operative income-earning activity in the form of the farm, its
equipment, grazing, cropping, etc., will be transferred.
Leasing activities
Where the seller of fixed property conducts a taxable leasing activity, the contract must provide for
the leasing activity to be disposed of together with the fixed property in order to constitute an income-
earning activity. If the agreement does not provide for a tenanted property to be transferred, an asset
is merely sold. Take note that the sale of a residential leasing business can never be zero-rated, as it
does not constitute the carrying on of an enterprise.
Fixed property sold to tenant
An agreement to sell a tenanted property to the tenant does not constitute the disposal of a going
concern. The income-earning activity (being the leasing activity) is not sold to the purchaser. The
purchaser of the property obtains a capital asset without the capacity to continue the leasing activity.
He cannot lease it to himself.
Seller leases back building
There is no agreement to sell an income-earning activity where the agreement provides that the
seller-occupier of a commercial building will lease it back.
Usufruct and bare dominium
The bequest of the usufruct of an asset can qualify as the supply of an income-earning activity. This
is the case if the same enterprise that was carried on in respect of the asset can be carried on by the
usufructuary.
The supply of the bare dominium cannot be zero-rated. The person to whom the bare dominium of an
asset is bequeathed cannot proceed with the activities of the enterprise.
Business yet to commence or dormant business
Property that is merely capable of being operated as a business does not constitute an income-
earning activity. An actual or current operation is required. For this reason, the agreement to dispose
of a business yet to commence or a dormant business does not comply with the requirement.
The zero rate can apply where the supplier is obliged to get the business going and income-earning
in terms of the contract before transfer thereof.
Sale of shares in a company
There is no supply of a going concern where ownership of an enterprise changes through the sale of
shares of a company. The supply of shares is exempt from VAT (ss 2(1)(d) and 12(a), see 31.11).
31.10.4 Zero-rated supply: Other (ss 11(1)(h), (j), (k), (l), (q) and 11(2)(f), (r) and (w))
The following types of supplies are also classified as zero-rated (this list is not exhaustive and other
zero-rated supplies therefore exist):
l The supply of fuel levy goods is zero-rated. For example: petrol and diesel, including biofuels
(s 11(1)(h)).
l Certain basic foodstuffs are zero-rated. For example: brown bread, maize meal, samp, mealie
rice, rice, pilchards, milk and milk powder, fresh fruit and vegetables (including mealies, but
excluding popcorn), vegetable oil (excluding olive oil), eggs and lentils (s 11(1)(j)). Dehydrated,
dried, canned or bottled fruit and nuts would not qualify for the zero rating. Brown bread
classified as whole-wheat, high fibre, high-protein and health is also not zero-rated (effective from
the promulgation of the Taxation Laws Amendment Act, 2017).
l The supply of gold coins, such as Kruger Rands, which are issued by the Reserve Bank are zero-
rated (s 11(1)(k)).
989
l Paraffin for use as fuel for lighting or heating and not mixed or blended with another substance is
zero-rated (s 11(1)(l)).
l Goods supplied by a vendor (the supplier) on behalf of a foreign company to another vendor (the
final recipient) in South Africa can be zero-rated. The zero rate will only be applicable if the goods
are used by the recipient wholly for the purposes of making taxable supplies (s 11(1)(q)).
Example 31.10. Goods supplied to foreign company, but delivered in South Africa
A foreign company, ABC Plc, is contracted to supply goods to Recipient Ltd, a client in South
Africa. ABC Plc in turn contracts with Supplier Ltd, a local supplier, to supply certain goods
which are to be delivered on his behalf to Recipient Ltd in South Africa. Recipient Ltd is going to
use the goods wholly for taxable supplies.
Discuss the VAT implications of the above.
SOLUTION
The supply of the goods from Supplier Ltd (South African vendor) to ABC Plc (foreign company)
is a zero-rated supply. The supply of the goods from ABC Plc (foreign company) to Recipient Ltd
(South African vendor that is final recipient) does not carry any VAT, as ABC Plc is not a vendor.
The goods are also not imported goods. Recipient Ltd will not be entitled to input tax, as no VAT
has been paid on this transaction.
Since the goods were supplied by Supplier Ltd, they will have to obtain a declaration from
Recipient Ltd that states that the goods will be used wholly for the purposes of making taxable
supplies. Only then can Supplier Ltd make the supply at the zero rate. If at a later stage it is
discovered that a false declaration was made by Recipient Ltd, the VAT that should have been
charged at the standard rate on the supply by Supplier Ltd on behalf of ABC Plc will be
recovered from Recipient Ltd (s 61).
l Services supplied directly in connection with land or any improvements to land, where the land
are situated in an export country is zero-rated (ss 11(2)(f)).
l Services comprising job-related training of employees for the benefit of an employer who is not a
resident and is not a vendor is zero-rated. The recipient of the supply should also be a non-
resident that is not a vendor (s 11(2)(r)).
l The charging of municipal rates (property rates and taxes) by a municipality is zero-rated
(s 11(2)(w)).
The zero-rating of municipal rates is, however, not applicable where such rate is
– a flat rate charged to the owner of the rateable property for rates and other goods and services
(such as supplies of electricity, gas, water, drainage, disposal of sewage and garbage), or
– a flat rate charged to any person exclusively for the supply of the other goods and services as
mentioned above,
and such flat rate will be taxed at the standard VAT rate of 14%.
When zero-rated municipal rates are charged by the owner of the property to a tenant using the
property for commercial purposes, the owner should levy VAT at the standard rate on the
recovery of the rates and taxes (the British Airways case (see 31.12.6)). The owner incurs the
municipal rates as principal and not as the tenant’s agent. The municipal rates charged to the
tenant as a disbursement is just a method to calculate the total rental consideration which is
subject to VAT if the owner is a vendor.
*
Remember
l A zero-rated supply is a taxable supply and a vendor could claim back all input tax in
connection with such supply.
l The vendor has to obtain and retain the documentary proof listed in Interpretation Note No 31
in order to substantiate a zero rate (s 11(3)).
990
Example 31.11. Zero-rated supplies
Joyce Lubuma (a VAT vendor) carries on the business of a dairy, and for the VAT period under
review she received R300 000 (VAT inclusive) for the sale of milk. During the same period, she
incurred the following expenses (VAT inclusive):
R
Purchase of cows from vendors ....................................................................................... 114 000
Fuel ................................................................................................................................... 8 000
Purchase of packing materials ......................................................................................... 57 000
Calculate the VAT payable or refundable for the applicable VAT period.
SOLUTION
Output tax R
Sale of milk (zero-rated) ..................................................................................................... nil
Input tax
Purchase of cows (R114 000 × 14/114) ............................................................................. 14 000
Fuel (zero-rated) ................................................................................................................. nil
Purchase of packing materials (R57 000 × 14/114) ........................................................... 7 000
Total input tax ..................................................................................................................... 21 000
An amount of R21 000 is to be refunded by SARS (Rnil – R21 000) .................................. (21 000)
Note
It should be clear from the example that although Joyce Lubuma made zero-rated supplies,
these supplies are also regarded as taxable supplies and that she will still be able to claim the
input tax incurred in making these supplies.
31.11 Output tax: Exempt supplies (s 12)

An exempt supply is a supply on which no VAT is levied and no input tax relating to the expenditure
on these supplies may be claimed.
31.11.1 Exempt supply: Financial services (ss 2 and 12(a))

In South Africa, banks and insurance companies are the biggest providers of financial services and
some of these financial services are exempt (ss 2 and 12(a)). The reason why financial services are
exempt is because it is difficult to always determine the value of a supply for VAT purposes. The most
common financial services that are exempt include:
l The issue or transfer of a tradable liability or loan, for example a debenture or government bond
is exempt (s 2(1)(c)).
When A borrows R100 from B through the issue of a debenture, B in essence provides a loan to
A. This issue of the debenture does not attract VAT, as it constitutes an exempt supply.
l The provision of credit and paying of interest is exempt (s 2(1)(f)).
When A borrows R100 from B, B in essence provides a loan to A. This provision of the loan does
not attract VAT, as it constitutes an exempt supply. It is, however, not only the principal loan but
also the interest thereon that will be a financial service and therefore exempt.
l Issue or transfer of ownership of a share or member’s interest is exempt (s 2(1)(d)).
The most common example of this is shares in a company or member’s interests in a close cor-
poration. Thus, when A sells his shares in a Company to B, the sale of the shares will be an
exempt supply, and no VAT will be levied.
l The provision or transfer of ownership of a long-term insurance policy is exempt (s 2(1)(i)).
This will include, for example, life policies, endowment policies or funeral policies. The premiums
and proceeds on such policies are therefore exempt from VAT. The administration and manage-
ment fees in respect of a long-term insurance policy are also exempt.
l The contributions and proceeds relating to membership of a retirement or medical aid fund is
exempt (s 2(1)(j)). The management of these funds is, however, not an exempt supply (see
BGR34).
991
Any fee, commission or similar charge relating to an exempt financial service will attract VAT at the
standard rate. Similarly, where any fee is charged for the giving of advice on any of the exempt
financial services, this fee will be taxable. For example, the bank charges on the overdraft account
will attract VAT at the standard rate, whereas the interest, that is the consideration for providing the
overdraft facility, will be exempt.
Example 31.12. Financial services
The following items appeared on Soweto Spaza’s bank statements for September:
R
Internet banking fee ........................................................................................................... 73,92
Service fee (bank charges) ................................................................................................ 162,35
Transaction costs ............................................................................................................... 83,90
Administration costs........................................................................................................... 14,00
Interest charged on overdraft ............................................................................................ 116,40
Interest received on positive bank balance ....................................................................... 83,20
Indicate which of the above amounts include VAT and, if so, how much VAT is included.
SOLUTION
R
Internet banking fee (R73,92 × 14/114) ............................................................................. 9,08
Service fee (R162,35 × 14/114) ......................................................................................... 19,94
Transaction costs (R83,90 × 14/114) ................................................................................. 10,30
Administration costs (R14,00 × 14/114) ............................................................................. 1,72
Interest charged on overdraft (financial service – s 2(f) exemption) .................................. nil
Interest received on positive bank balance (note) ............................................................. nil
Note
Both interest paid and received represent the consideration for financial services as defined, and
are therefore consideration for exempt supplies.
Although the provision of financial services is an exempt supply, it will be zero-rated if physically ren-
dered outside South Africa. The zero-rating of financial services therefore takes priority over
exemption. It is important for vendors to determine whether the financial services they supply are
zero-rated or not, as their input tax claim could increase substantially when compared to the input tax
credit if the supply of the services was an exempt supply (see 31.20).
An example where a service can, on face-value, qualify to be both exempt and zero-rated is services
supplied to a non-resident (even if physically rendered in South Africa). This service may be zero-
rated only if the services are supplied directly to that non-resident or any other person, and both the
non-resident and the other person are not in South Africa at the time the services are supplied
(s 11(2)(l)). For example: B Bank (a resident of South Africa) provides a loan to a non-resident UK
company and charges the UK company 6% interest. The provision of the loan will be a zero-rated
supply (s 11(2)(l)) and the interest will be regarded as the consideration for the supply. The zero-
rating takes priority and the supply is not exempt from VAT.
31.11.2 Exempt supply: Residential accommodation (s 12(c))

The supply of a ‘dwelling’ under an agreement for the letting and hiring thereof is exempt from VAT.
A ‘dwelling’ is defined as
l any building, premises or structure
l that is intended for use mainly as a place of residence or home of any natural person
l including fixtures and fittings belonging thereto and enjoyed therewith
l except where it is used in the supply of commercial accommodation.
The above therefore implies that the letting of a house or flat to a person who, in terms of a rental
agreement, will use the house or flat mainly for residential (domestic) purposes, is exempt from VAT
(s 12(c)(i)). Usually hostels or hotels will not qualify for the residential accommodation exemption, as
they supply taxable commercial accommodation.
992
The exemption will, however, also apply where housing or meals and housing is supplied by an
employer to his employee where
l the employee is entitled to occupy the accommodation as a benefit of employment, or
l the employer operates a hostel or boarding establishment mainly for its employees rather than for
a profit (s 12(c)(ii)).
This exemption is applicable to the supply of a dwelling under an agreement for the letting thereof,
and not applicable to the supply by means of a sale. The normal rules apply regarding the sale of a
dwelling (see 31.24). If a non-vendor sells a dwelling, no VAT is levied. If a vendor sells a dwelling, it
will not attract VAT if it was previously used to earn exempt rental income. This is due to the fact that
any activity involving the making of exempt supplies is specifically excluded from the definition of an
‘enterprise’ and, therefore, the dwelling was not used in the course of an enterprise (see 31.7).
31.11.3 Taxable supply: Commercial accommodation
31.11.3.1 Meaning of ‘supply’: Commercial accommodation

It is clear from the above definition of a ‘dwelling’ that the supply of accommodation will not qualify for
the exempt status if it is the supply of commercial accommodation. Commercial accommodation is,
therefore, subject to VAT at the standard rate.
In order to understand the meaning of Commercial accommodation, it is important to first understand
a term referred to as ‘domestic goods and services’.
‘Domestic goods and services’ are defined as any goods and services provided in any enterprise
supplying commercial accommodation, including
l cleaning and maintenance
l electricity, gas, air conditioning or heating
l a telephone, television set, radio or other similar article
l furniture and other fittings
l meals
l laundry
l nursing services, or
l water.
The provision of domestic goods and services constitutes the provision of a room together with
certain of the services listed in the definition of ‘domestic goods and services’ (for example cleaning
services, meals, etc.) as well as any other goods and services (for example use of a safe) not listed in
that definition which are provided by an enterprise supplying commercial accommodation.
‘Commercial accommodation’ is defined but mainly includes all accommodation supplied that is not
intended for pure domestic purposes, for example a hotel or holiday apartment. Commercial
accommodation, can however, also include longer-stay type of accommodation – for example an old
age home. Another difference between residential accommodation and commercial accommodation
is that other ‘domestic goods and services’ (for example meals) are also sometimes included in the
price of the use of commercial accommodation.
Persons supplying commercial accommodation with a value not exceeding R120 000 in any 12-
month period are not carrying on enterprises. Such persons will thus be eligible for voluntary registra-
tion only once the supplies exceed R120 000 for a 12-month period (see 31.6.2).
31.11.3.2 Value of the supply: Commercial accommodation (s 10(10))

It is important to distinguish between short-term commercial accommodation (28 days or less) and
longer-term commercial accommodation (more than 28 days):
l Short-term commercial accommodation (28 days or less):
Output tax must be levied on the full value of the supply where accommodation and domestic
goods and services are supplied by a hotel, boarding house or similar establishment intended for
short-term stay (for a period of 28 days or less).
l Longer-term commercial accommodation (more than 28 days):
Output tax must only be levied on 60% of the all-inclusive charge levied on accommodation and
domestic goods and services intended for longer stays (more than 28 days) (s 10(10)). This 60%
will apply from day one if the period exceeds 28 days.
993
Short-term stays in commercial accommodation establishments are taxed at the full value of such
supplies. Only 60% is taxed where the accommodation constitutes the dwelling (including domestic
goods and services) of the occupant (thus longer-term stays). The reason for this is that persons
resident in their own or rented dwellings are not subject to VAT on the full cost thereof. Mortgage
interest and municipal rates, or, alternatively, residential rent do not result in a VAT cost. The South
African VAT base is roughly 60% of gross domestic product (GDP). Natural persons living in long-
term commercial accommodation establishments should be taxed at an equivalent rate.
Remember
l Despite the fact that an occupant may be taxed only on a portion of the value of the accom-
modation provided to him, the enterprise itself may deduct input tax as if the occupant is
taxed on the full value.
l The enterprise still bills the occupant for the full 100% of the value of the accommodation
and not for only 60%. If the supply of commercial accommodation is for a period exceeding
28 days, only the VAT is calculated on 60% of the value.
Example 31.13. Commercial accommodation
Abel is the owner of Rest-a-While, a bed-and-breakfast establishment situated in the Natal Mid-
lands. His total annual receipts from the bed-and-breakfast business amount to R750 000. Most
of the guests do not stay longer than three nights at a time. It does sometimes happen that a
guest stays for a month at a time. Abel charges R220 per night (excluding VAT) for bed and
breakfast.
Explain to Abel the VAT consequences of running his bed-and-breakfast business.
SOLUTION
The B & B business constitutes the provision of commercial accommodation. As the annual
receipts of the business exceed R120 000, Abel can register voluntarily for VAT (still below the
mandatory registration threshold of R1 million).
Should Abel decide to register, he will have to levy output tax on the supply of the domestic
goods and services (being a taxable supply) as follows:
l guests staying for 28 days and less: 100% of the charge is subject to VAT at 14% (for
example three nights at R220 × 100% × 14% = R92,40 output tax), and
l guests staying for more than 28 days at a time: only 60% of the charge is subject to VAT at
14% (for example 30 nights at R220 × 60% × 14% = R554,40 output tax).
Abel will be entitled to an input tax deduction for VAT paid on the acquisition of goods and
services for the purposes of the B & B business. This is because he is making taxable supplies.
Should Abel decide not to register for VAT purposes, he does not have to account for output tax,
but then he will not be entitled to any input tax deductions.
Example 31.14. Commercial and residential accommodation
Jo Ndlovu is a property magnate and a vendor. During the current tax period Jo earned the
following amounts:
R
l Letting of townhouses (purely for residential purposes) ............................................... 42 000
l Short-term stay (less than 28 days) in bed and breakfast hotels (including VAT) ....... 15 000
l Board and lodging in boarding houses (all periods longer than 28 days – excluding
VAT) .............................................................................................................................. 30 000
Calculate the output tax in respect of the income earned.
SOLUTION
Letting of townhouse, hiring of a dwelling, which is an exempt residential supply ...... Rnil
Bed and breakfast, commercial accommodation
l R15 000 × 14/114 .................................................................................................. R1 842,11
Board and lodging, long-term commercial accommodation
l R30 000 × 14% × 60% .......................................................................................... R2 520,00
994
Where separate prices are charged for accommodation in a room and any other services (for
example meals, cleaning services, maintenance, etc.), the charge must be apportioned between the
room provided (accommodation) and the other services where the occupant stays for an unbroken
period exceeding 28 days. (VAT will be levied at 100% on the other services and only at 60% on the
fee for the room.) The only exception will be where the services are supplied together with the room
(accommodation) at an all-inclusive price.
Example 31.15. Commercial accommodation: All-inclusive price
Assume the all-inclusive daily rate at a hotel is R500 per day (excluding VAT). Included in the
R500 daily rate is the use of a post box.
Calculate the VAT if
(a) the person stays in the hotel for four days, and
(b) the person stays in the hotel for 35 days.
SOLUTION R
(a) Full supply at standard rate (R500 × 4 × 14%) – output tax .................................... 280
(b) Supply of the post box that is included in the all-inclusive daily rate – output tax ... nil
Supply of commercial accommodation together with domestic goods and
services (R500 × 35 × 60% × 14%) – output tax ..................................................... 1 470
31.11.4 Exempt supplies: Other (ss 12(g), (h), (i), (j), (m))
There are various other exempt supplies of which the most important ones are listed below (s 12):
l The transport of fare-paying passengers and their personal effects by road or railway is exempt
(s 12(g)), for example transport in a bus or taxi. This transport is only exempt if the service is not
subject to VAT at the zero rate (see – 31.10). This transport is further also only exempt if
– the transport is only by road and railway, but excluding a funicular railway (thus it is not applic-
able to air tickets)
– the transport is not for the purpose of courier services, since the exemption applies to the
transport of passengers and their personal effects, and not to goods, or
– the transport is for fare-paying passengers (thus a supply of transport services by a hotel to
and from the airport will not be an exempt supply if the residents of the hotel are not charged
separately for such service).
Remember
l Travel by road or railway of fare-paying passengers within South Africa is an exempt supply.
l Travel by air when any leg of the ticket is outside South Africa, is a zero-rated supply.
l Travel by air in South Africa is a standard-rated supply.
l Education services supplied by a school, university, technicon or college, solely or mainly for the
benefit of its learners is exempt. This exemption applies to the supply of goods or services
(including domestic goods or services) for a consideration in the form of school fees, tuition fees
or payment for board and/or lodging (s 12(h)(i) and (ii)).
The exemption is not applicable to technical training provided by an employer to his employees
or employees of an employer who are connected persons in relation to that employer.
l Membership contributions to employee organisations, such as trade unions, are exempt (s 12(i)).
l The supply of childcare services by a crèche or an after-school care centre is also exempt
(s 12(j)).
l All supplies of goods or services by a political party to any of its members to the extent that the
consideration for such supply consists of membership contributions are exempt (s 12(m)).
995
Remember
The zero-rating of financial services and transport services takes priority over exempt supplies.
You will thus always first determine whether these supplies qualify as zero-rated supplies. This may,
for example, be the case if it relates to exports. Only if it is not zero-rated will it qualify as an exempt
supply.
31.12 Output tax: Deemed supplies (ss 8 and 18(3))

In order to avoid any confusion about whether a transaction is a supply or not, and whether certain
transactions are deemed to either be a supply of goods or a supply of services or not, deemed
provisions are contained in the VAT Act (ss 8 and 18(3)).
31.12.1 Deemed supply: Ceasing to be a vendor

31.12.1.1 Meaning of ‘supply’: Ceasing to be a vendor (s 8(2))
Although no actual supply of goods and services is made, the ceasing to be a vendor triggers a
deemed supply for VAT purposes. Output tax will become payable on all goods and rights still owned
by a person on the day he ceases to be a vendor. This deemed supply is not applicable to goods in
respect of which input tax was denied, for example motor cars and entertainment (see 31.21).
On date of ceasing to be a vendor, output tax will also become payable on outstanding balances,
owing to suppliers, not older than 12 months.
These provisions will not apply where a person ceased to be a vendor as a consequence of his death
or sequestration and the executor or trustee of that estate carries on that enterprise.
31.12.1.2 Value of the supply: Ceasing to be a vendor (s 10(5))

Value of the supply: Goods and rights owned
In the case of deemed supplies of goods and rights owned on date of ceasing to be a vendor, the
consideration is the lesser of:
l the cost of the goods or services (including VAT charged to the vendor) (if the goods or services
were acquired from a connected person, the open-market value on the date of acquisition to the
extent that it exceeds the consideration), and
l the open-market value on date of ceasing to be a vendor.
The goods and rights could only trigger output tax to the extent that it was paid for (provisos (v) and
(vi) to s 8(2)).
Value of the supply: Outstanding balances owing to suppliers

The outstanding balances owed to suppliers should be divided into the following:
l Outstanding balances not older than 12 months:
On the date of cessation of the enterprise an output tax liability arises on the outstanding
balances owing to suppliers not older than 12 months. The consideration is the amount that has
not been paid (s 22(3) proviso (ii)(BB)).
l For outstanding balances owing to suppliers older than 12 months:
The output tax liability for these outstanding balances would arise because of the non-payment
within 12 months and not because of the cessation of the enterprise. A vendor will be obliged to
account for an amount of output tax if he has not paid the full consideration for a supply within
12 months (s 22(3) – see 31.31). If the output tax liability had already been accounted for, no
additional output tax liability would arise on date of cessation of the enterprise.
Remember
The outstanding balances owing to suppliers could only trigger output tax to the extent that input
VAT was actually claimed on the supply that gave rise to the outstanding balance (s 22(3)(a)).
996
Example 31.16. Ceasing to be a vendor
Mr Filemon Balewa trades as a sole proprietor under the name Balewa Golf. Filemon is registered
on the invoice basis for VAT purposes and makes 100% taxable supplies. Filemon is a cat-
egory B VAT vendor. Filemon decided that he will deregister as a VAT vendor with effect from
1 May 2018 because his taxable supplies fell permanently below the compulsory registration
threshold of R1 000 000. You may assume that SARS deregistered Filemon on 1 May 2018.
On 1 May 2018, Filemon provided you with the following list of assets and liabilities of Balewa
Golf:
Cost Open market
(Including VAT) value
Assets
Delivery vehicle (note 1) ................................................................ R180 000 R110 000
Toyota Corolla– solely used for business purposes (note 1) ......... 120 000 70 000
Furniture – solely used for business purposes .............................. 15 000 35 000
Debtors (note 2) ............................................................................. 70 000 n.a.
Trading stock ................................................................................. 30 000 45 000
Liabilities
Creditors (note 3) ........................................................................... 40 000 n.a.
Notes
(1) The delivery vehicle is not a motor car as defined. The Toyota Corolla is a motor car as
defined.
(2) The following is the debtors age analysis on the local credit sales of trading stock:
30 days 60 days 90 days Total
Amount (R) 20 000 27 000 23 000 70 000
Filemon is of the opinion that the 90 days outstanding debtors amount of R23 000 will not be
recoverable and consequently wrote it off on 1 May 2018. Filemon does not charge any
interest on outstanding accounts.
(3) The following is the creditors age analysis:
60 days 370 days Total
Amount (R) 15 000 25 000 40 000
The creditors older than 370 days are already outstanding for more than 12 months, but no
VAT adjustment has yet been accounted for. The 60 days creditors of R15 000 relate to the
following goods and services purchased (cost prices including VAT and market values are
the same where applicable):
– R4 000 – trading stock, which is still on hand
– R2 000 – trading stock, which has already been sold
– R6 000 – services rendered to Balewa Golf
– R3 000 – amount still outstanding on the capital repayment of the delivery vehicle.
Calculate the VAT consequences arising out of Filemon’s decision to deregister Balewa Golf.
SOLUTION
Output tax
Delivery vehicle: (R110 000 – R3 000) x 14/114 (note 1) ............................................... 13 140
Motor car (note 2) .......................................................................................................... nil
Furniture: R15 000 × 14/114 .......................................................................................... 1 842
Debtors: (note 3) ............................................................................................................ nil
Trading stock: (R30 000 – R4 000) × 14/114 (note 1) .................................................... 3 193
Creditors – Older than 12 months: R25 000 × 14/114 (note 4) ................................ 3 070
– Balance of creditors: R15 000 × 14/114 (note 4) .................................. 1 842
Input tax
Irrecoverable debts: 23 000 × 14/114 (note 5) .............................................................. 2 825
VAT payable to SARS .................................................................................................... 20 262
Notes
(1) A deemed disposal for VAT purposes arises when a person ceases to be a VAT vendor
(s 8(2)). Output VAT is calculated by multiplying the lesser of the cost (including VAT) and
cotninued
997
the open market value by the tax fraction. However, this shall not apply to assets where
output tax has already been accounted for (ss 8(2)(v) and 22(3)). As output tax has already
been accounted for on an amount of R3 000 (the delivery vehicle) and R4 000 (the trading
stock on hand), no deemed disposal arises on these amounts.
(2) Input tax was denied with the initial purchase of the motor car (s 17(2)). No deemed supply
consequently arises with deregistration.
(3) The general time of supply is the earliest of the issue of the invoice in respect of that supply
or the time any payment of consideration is received by the supplier (s 9(1)). The output tax
had therefore already been accounted for by Filemon when the invoice for the supply of the
goods was issued.
(4) Consideration for the supply was not paid within 12 months from the supply. A deemed out-
put tax therefore needs to be levied on creditors older than 12 months (s 22(3)). The remain-
ing creditor’s balance is subject to the deemed output provisions as the vendor ceased to be
a vendor within 12 months after the supply (s 22(3) proviso (ii)(dd)).
(5) Deemed input tax available where a vendor has previously made a taxable supply for con-
sideration and the consideration subsequently becomes irrecoverable (s 22).
31.12.1.3 Time of supply: Ceasing to be a vendor (ss 8(2) and 9(5))

Where goods or rights are deemed to be supplied by a vendor who ceases to be a vendor, the time
of supply is immediately before the vendor ceases to be a vendor.
31.12.2 Deemed supply: Indemnity payments
31.12.2.1 Meaning of ‘supply’: Indemnity payments (s 8(8))

The reason for this deemed supply rule is as follows: if, for example, a vendor’s trading stock is stolen
and he receives cash from his insurance company, he is effectively in the same position as he would
have been if he sold the trading stock. SARS wants the VAT on that disposal.
Also, when a vendor pays the insurance premiums under a short-term insurance policy, the vendor
will mostly be entitled to claim the input tax on the premium. When the vendor receives a claim under
a short-term insurance policy, the vendor is obliged to account for output tax on the claim received in
certain circumstances. This will be the case where a vendor under a contract of insurance
l receives an indemnity payment (insurance claim), or
l is indemnified by the payment of an amount of money to another person.
The payment will be deemed to be consideration received for the supply of a service. It is only
consideration to the extent that it relates to a loss incurred in the course of carrying on an enterprise.
This relates to all taxable supplies (both zero-rated and standard-rated). It relates only to short-term
insurance and will not apply to payments received under a long-term insurance contract, for example
death benefits received. Premiums for long-term insurance policies do not attract VAT (exempt
supply of financial service). Any claim received under a long-term insurance contract will thus also
not give rise to any output tax.
The insured must also be a vendor, as this deemed supply is not applicable to non-vendors. There
will also be no deemed supplies where the payments are
l not related to taxable supplies made by the vendor (both zero-rated and standard-rated), or
l the payments relate to the total replacement of goods for which an input tax deduction was
denied (for example motor cars or goods used for entertainment – see 31.21). Total replacement
is usually required if such goods are stolen or damaged beyond economic repair.
31.12.2.2 Value of the supply: Indemnity payments (s 8(8))

The ‘value of the supply’ will be
A × B × C, where
A = the tax fraction
B = the consideration received
C = the percentage for which the loss was incurred by the vendor in the course of making tax-
able supplies.
998
31.12.2.3 Time of supply: Indemnity payments (s 8(8))

The time of supply is the date of receipt of that payment or the date of payment to another person, as
the case may be.
Remember
l If the insurer replaces the damaged or stolen goods, there can be no output tax conse-
quences for the vendor, as there was no indemnity payment.
l If the payment is made to a third party to indemnify the vendor, the vendor also has to pay
output tax, although the vendor himself did not receive any money.
Example 31.17. Indemnity payment

Manufacturers Ltd recently suffered a robbery at its premises. Their insurance company
reimbursed them in cash, as follows:
R
l For delivery vehicle stolen 132 000
l For passenger vehicle stolen (input tax was denied with purchase) 100 000
l For microwave oven in canteen stolen (input tax was denied with purchase) 2 500
Calculate the output tax for the insurance payment received.
SOLUTION
R
Delivery vehicle, not motor car as defined, could claim input tax in the past
R132 000 × 14/114 = .................................................................................................. 16 211
Passenger vehicle, motor car, total reinstatement of goods where input tax originally denied –
thus no output tax liability
Microwave oven, entertainment, total reinstatement of goods where input tax originally denied –
thus no output tax liability
Example 31.18. Indemnity payment: Comprehensive

Ohno recently experienced flooding of the ground floor at the premises rented from Agnee CC.
Ohno’s insurance company replaced the following items:
l Computers .............................................. R48 000
l Desks and chairs .................................... R80 000
l Cupboards .............................................. R12 500
Their insurance company also reimbursed Ohno in cash for other losses suffered as follows:
l Fittings ..................................................... R93 600
The insurance company also paid Agnee CC for damages suffered amounting to R36 000.
Calculate the output tax in respect of the insurance payments and replacements.
SOLUTION
Ohno is not required to account for output tax on the replacements by the insurance company,
since these replacements are not payments in money.
With regard to the fittings on which input tax could be claimed in the past, output tax of R11 495
(R93 600 × 14/114) must be accounted for.
Ohno is indemnified by the payment of an amount of money to a third party and must account for
output tax of R4 421 (R36 000 × 14/114).
Remember
Output tax is usually not apportioned, but levied on the value of the full supply, even if the supply
was previously used only partially for taxable purposes. There are two exceptions to the above
rule, namely fringe benefits (see 31.12.4) and indemnity payments. For both these types of
supply, the amount of output tax is payable only to the extent that it relates to taxable supplies
made in the course of the enterprise.
999
Example 31.19 Indemnity payment: Taxable and exempt use

BB Bank acquired insurance cover for a computer of which 40% was used for taxable purposes
and 60% for exempt supplies. The computer was stolen and the bank received an indemnity
payment of R14 230 from its insurer.
Calculate BB Bank’s output tax liability.
SOLUTION
R14 230 × 14/114 × 40% = R699,02 output tax payable to SARS
BB Bank’s output tax liability is apportioned according to 40% taxable supplies made. With the
initial purchase of the computer as well as with the monthly insurance premiums paid, BB Bank
was only entitled to 40% of the input tax.
31.12.3 Deemed supply: Supplies to independent branches
31.12.3.1 Meaning of ‘supply’: Supplies to independent branches (par (ii) of the proviso to the
definition of ‘enterprise’, ss 8(9), 11(1)(i) and 11(2)(o))
Some vendors make supplies to a foreign ‘independent branch’ or head office. Strictly speaking, the
vendor makes a supply to himself (being the same legal entity). As VAT attempts to only tax the con-
sumption of goods and services in South Africa, the supply of the vendor to a foreign ‘independent
branch’ or head office is treated as a taxable supply of goods or services the vendor is deemed to
make.
This will apply only if the branch or head office
l is permanently situated outside South Africa
l can be separately identified, and
l has a separate accounting system.
The foreign branch or head office also makes supplies. These supplies are technically made by a
non-resident and the intended consumption of the supplies is not in South Africa. When a supply is
made by the foreign branch or head office, the supply is NOT included with the supplies of the local
South African vendor. The supplies made by the foreign branch or head office will have no VAT
consequences (par (ii) of the proviso of the definition of ‘enterprise’ in s 1).
The effect is that the local South African vendor does not have to account for VAT on the supplies
made by the foreign branch or head office. The local South African vendor is regarded as a separate
person. This ensures that the normal rules relating to exports and imports will apply.
In line with the zero rate of exported goods and services, all supplies to the independent branch of
goods or services are zero-rated (ss 11(1)(i) and 11(2)(o)). However, the zero-rating provision of
services will not apply in the following scenarios:
l If the services are supplied to any person who is in South Africa at the time the services are ren-
dered, the service is probably consumed in South Africa and the zero-rating will not be
applicable.
l If the services are supplied directly in connection with land situated in South Africa, it is clear that
the consumption of the service is in South Africa. The services are therefore not zero-rated.
l If the services are supplied directly in connection with movable property situated inside South
Africa at the time the services are rendered, the consumption could either be inside or outside
South Africa. Where the consumption is in South Africa, the service is not zero-rated. If the con-
sumption is outside South Africa, the service is zero-rated. The following two situations qualify for
consumption outside South Africa and will be zero-rated:
– When the movable property is delivered to the non-resident at an address in an export country
after the supply of the service, the zero rate will apply.
– If the supply forms part of a supply that the non-resident makes to another registered vendor in
South Africa, the zero rate will apply. The foreign head office can, for example, have a contract
to repair the machinery of an unrelated South African business (Machine Ltd). The foreign
head office then subcontracts the work to its local branch in South Africa. If the local branch in
South Africa repairs the machinery of Machine Ltd, the local branch renders the service to the
foreign head office and the service can be zero-rated.
1000
31.12.3.2 Value of the supply: Supplies to independent branches (s 10(5))

The value of a supply to a foreign branch or head office is the lesser of
l the cost to the vendor of the goods or services, or
l the open-market value of the supply.
The cost for this purpose expressly includes
l any VAT charged in respect of the supply to the vendor of the goods or services, plus
l any costs (including VAT) incurred by the vendor in respect of the transportation or delivery of the
goods or the provision of the services, plus
l if the goods or services were acquired from a connected person who is a vendor, then the open-
market value on the date of acquisition to the extent that it exceeds the consideration on the date
of acquisition.
Remember
The open market value for a supply is inclusive of VAT.
31.12.3.3 Time of supply: Supplies to independent branches (s 9(2)(e))

In the case of delivery to a foreign branch or head office outside South Africa, the time of supply is
when the goods are delivered or the service is performed.
Example 31.20. Supplies to independent branches
ABC (Pty) Ltd has its head office in Johannesburg and is a vendor for VAT purposes.
ABC (Pty) Ltd also has a branch in America, which is separately identifiable and has a separate
accounting system. ABC (Pty) Ltd purchased goods for R114 000 (VAT inclusive) and then sold
them to the branch in America. The branch then sold the goods to a third party in America.
Calculate the VAT consequences of the above transactions.
SOLUTION
ABC (Pty) Ltd will be entitled to claim the input tax deduction of R14 000 (R114 000 × 14/114) as
the goods were purchased for the purpose of making taxable supplies. The sale to the branch in
America is a taxable supply at the rate of 0%. The sale by the branch of the goods to a third
party in America will not attract any VAT, as the supplies made by the branch in America will not
form part of the enterprise that ABC (Pty) Ltd carries on in South Africa.
31.12.4 Deemed supply: Fringe benefits

31.12.4.1 Meaning of ‘supply’: Fringe benefits (s 18(3))
The provision of certain fringe benefits to employees by a vendor is a deemed supply and is there-
fore subject to VAT. This applies only to fringe benefits as set out in the Seventh Schedule to the
Income Tax Act. Essentially, the output tax to be accounted for by the employer (vendor) is intended
to reverse that portion of the input tax that was previously claimed on those goods or services by that
vendor.
Certain other employment benefits are not fringe benefits in terms of the Seventh Schedule to the
Income Tax Act and no output tax is thus payable thereon, for example
l cash salaries
l all allowances (s 8(1) of the Income Tax Act), and
l broad-based employee share plans (ss 8B and 8C of the Income Tax Act).
If the fringe benefit relates to
l an exempt supply
l a zero-rated supply, or
l the supply of entertainment (for example meals, see 31.21),
there is also no deemed supply and thus no output tax is payable on that fringe benefit.
1001
The following fringe benefits are subject to VAT:

l Assets given to employees. (This refers only to assets given free of charge or at a low price. No
VAT is, however, applicable to assets supplied that were used for entertainment purposes, zero-
rated or exempt supplies, or certain motor vehicles.)
l The right of use of an asset given to an employee (for example, the use of a company car
provided to an employee).
l Services made available by the employer to the employee for private purposes.
The following employment benefits are not subject to VAT:
l cash allowances (for example entertainment, subsistence and travel allowances) as these allow-
ances are not fringe benefits in terms of the Seventh Schedule to the Income Tax Act
l subsidies (supply of money)
l long-service awards in cash (money and thus not goods or services)
l the supply of meals and refreshments (this is the supply of entertainment)
l free or cheap holiday accommodation (‘accommodation’ is defined as part of entertainment)
l residential housing (exempt supply)
l interest-free and low-interest loans (financial service – exempt supply)
l pension and medical aid fund contributions (financial service – exempt supply)
l bursary schemes (supply of money – exempt supply)
l international transport (zero-rated)
l the supply of a motor car at less than market value, if the employer was denied a deduction of
input tax on the acquisition of the motor vehicle (s 8(14))
l any fringe benefit to the extent that it is granted in the course of making exempt supplies. For
example, if a person that makes only exempt supplies gives an asset to one of his employees
free of charge, there is no output tax on the fringe benefit.
31.12.4.2 Value of the supply: Fringe benefits (s 10(13))

The consideration of the supply of a fringe benefit that is not related to the use of a motor vehicle
equals:
A × B, where
A = the cash equivalent of the benefit used for income tax purposes
B = the tax fraction
Remember
l The calculation of output tax on the fringe benefit does not apply to the supply of any such
benefit to the extent that it is granted by the vendor in the course of making non-taxable supplies.
This means that the output tax on the fringe benefit should be apportioned to the extent that it
relates to the making of taxable supplies. For example, where a bank making 20% taxable and
80% exempt supplies provides a fringe benefit to an employee, the bank will apportion the
output tax (that is, account for output tax on 20% of the cash equivalent of the fringe benefit).
l Although the employee is the recipient of the fringe benefit, the payment of the output tax is
the obligation of the employer and not the employee.
Example 31.21. Deemed supply: Fringe benefits
An employer purchases a watch for R1 140 (including VAT) to give to an employee as a fringe
benefit. The value (cash equivalent) of the fringe benefit is the cost to the employer exclusive of
VAT, being R1 000.
Calculate output tax in respect of the fringe benefit.
SOLUTION
Output tax: R
The tax fraction × the cash equivalent
14/114 × R1 000 = ............................................................................................................... 123
1002
Remember
l The determined value of the vehicle excludes VAT. The determined value for income tax pur-
poses is inclusive of VAT. The determined value for VAT purposes, however, still excludes
VAT (GN 2835 defines ‘determined value’ as exclusive of VAT).
l The rate of 0,3% is used if the employer was not entitled to claim an input tax credit in
respect of a motor car as defined.
l The rate of 0,6% is used in all other cases.
l The rates of 0,3% and 0,6% are per month. Therefore, if a vendor has a two-month VAT
period, the amount calculated should be multiplied by two.
l When the employee pays anything for the right of use, a portion of this amount could be
deducted in the calculation of the consideration for the right of use of a motor vehicle. Split this
amount paid by the employee to determine the different items it relates to.
l In the case where the employee bears the full cost of maintaining the motor vehicle, a
deduction of R85 per month is allowed to establish the consideration. (This is not applicable
to fuel.)
l Where there is a reduction in the determined value, the depreciation allowance is calculated
according to the reducing-balance method at the rate of 15% for each completed period of
12 months from the date on which the vendor first obtained such vehicle, to the date when
the relevant employee was first granted the right of use thereof.
The following three steps can be followed to calculate the output tax regarding the use of a motor
vehicle:
Step 1: Determine the value of the motor vehicle (excluding VAT and finance charges – as
calculated according to Regulation 2835). Take any reductions in the determined value into
account.
Step 2: Determine the consideration for the use of the motor vehicle (Value determined in step 1 ×
0,3% or 0,6%). If the input tax was denied when the vehicle was purchased, use 0,3% and
if not, use 0,6%.
Step 3: Deduct the following
l If the input tax on the vehicle was claimed, all amounts paid by the employee to the
employer, excluding finance charges and fuel. (Amounts paid by the employee should
be excluded as it relates to a separate supply for value [thus not free use of motor car]
on which VAT will also be levied. No VAT will be levied on the finance charges and fuel,
and this should thus not be deducted.)
l If the input tax on the motor car was denied, all amounts paid by the employee to the
employer, excluding finance charges, fuel and the portion of the amount that relates to
the fixed cost of the motor car. (The portion of the consideration that relates to the fixed
cost of the motor vehicle will not include any VAT as no input tax was claimed when the
vehicle was purchased (s 8(14).)
l R85 if the employee bears the full cost of repairs and maintenance.
Step 4: Multiply by the tax fraction to determine the output tax.
Step 5: Multiply by the percentage of taxable usage.
Example 31.22. Fringe benefit: Use of employer-owned vehicle
An employer grants an employee the right of use of a motor car. The employer was unable to
claim the input tax when the vehicle was purchased for R159 600 (including VAT). The employee
bears the full cost of maintaining the vehicle.
Calculate output tax for one month in respect of the fringe benefit.
SOLUTION
Output tax:
Step 1: R159 600 × 100/114 = R140 000
Step 2: R140 000 × 0,3% = R420
Step 3: R420 – R85 = R335
Step 4: R335 × 14/114 = R41,14
Step 5: R41,14 × 100% = R41,14 output tax payable
continued
1003
If the vehicle had not been a motor car but a delivery vehicle, the employer would have been
able to claim the VAT paid on the vehicle as an input tax credit (R159 600 × 14/114 = R19 600),
and output tax would have been calculated as follows:
Step 1: R159 600 × 100/114 = R140 000
Step 2: R140 000 × 0,6% = R840
Step 3: R840 – R85 = R755
Step 4: R755 × 14/114 = R92,72
Step 5: R92,72 × 100% = R92,72 output tax payable
Example 31.23. Fringe benefits: Consideration for use of employer vehicle
An employee is granted the use of a company-owned motor car (input tax denied) with a deter-
mined value of R160 000, that is fully used for taxable purposes. The employee pays R600 per
month that is allocated as follows:
Fuel .......................................................................................................................................... 112
Insurance ................................................................................................................................. 150
Maintenance ............................................................................................................................ 70
Interest ..................................................................................................................................... 168
Fixed costs of car .................................................................................................................... 100
Total ......................................................................................................................................... 600
Calculate the VAT consequences of the above.
SOLUTION
Employer has to account for output tax on two separate supplies:
(i) Output tax on deemed supply in respect of right of use granted to employee:
Step 1: R160 000 (determined value already excludes VAT)
Step 2: R160 000 × 0,3% = R480
Step 3: R480 – R150 (insurance) – R70 (maintenance) = R260
The fuel (zero-rated), interest (exempt), and fixed cost (input tax denied) are not deductible.
The R150 and R70 constitute a separate supply on which output tax is levied (refer (ii) below).
Step 4: R260 × 14/114 = R31,93
Step 5: R31,93 × 100% = R31,93 output tax per month payable by the employer on the fringe
benefit
(ii) Output tax on supply at value in respect of consideration received:
The employer must also account for output tax on the consideration paid by the employee to the
employer in respect of the insurance and maintenance. (The employer probably claimed the VAT
on these expenses paid by him.)
R150 + R70 = R220 × 14/114 = R27,02 output tax
Example 31.24. Fringe benefits: Taxable and exempt use of employer owned vehicle
The use of a delivery truck, with a determined value of R35 000, of which 60% was used for
taxable supplies and 40% for non-taxable supplies, is granted to an employee. The employee
pays R80 for fuel to the employer.
SOLUTION
Step 1: R35 000 (determined value already excludes VAT)
Step 2: R35 000 × 0,6% = R210
Step 3: R210 – Rnil = R210
No deduction for fuel – zero-rated (note)
Step 4: R210 × 14/114 = R25,79
Step 5: R25,79 × 60% = R15,47
Note
The fact that the employee also pays for the fuel does not give rise to another output tax,
because it is a zero-rated supply.
1004
Example 31.25. Supply of fringe benefits: Comprehensive

A vendor that makes both taxable (70%) and exempt (30%) supplies provides certain fringe
benefits to its managing director. The monthly cash equivalent of each benefit for employees’ tax
purposes is as follows:
Cash
Fringe benefit equivalent
R
Interest-free loan .............................................................................................................. 135
Residential accommodation ............................................................................................ 3 900
Free use of a company-owned motor car that cost the employer R228 000
(including VAT) ................................................................................................................ 5 000
In addition to the above benefits, the managing director was given a computer during the tax
period. The cash equivalent of this benefit is R7 000.
(a) Calculate the VAT payable by the vendor in respect of the fringe benefits granted to the
managing director for the two-month tax period.
(b) Provide the journal entry that should be passed in the accounting records of the employer.
SOLUTION
(a) Fringe benefit Consideration
R
Interest-free loan – exempt supply .............................................................................. nil
Residential accommodation – exempt supply ............................................................ nil
Free use of the company car (R228 000 × 100/114 × 0,3% × 2 months) ................... 1 200
Asset acquired for no consideration ........................................................................... 7 000
TOTAL ......................................................................................................................... R8 200
Extent used to make taxable supplies (R8 200 × 70%) .............................................. R5 740
VAT: R5 740 × 14/114 ................................................................................................. R705
(b) Journal entry

Dr Salaries ....................................................................................................... R705
Cr Output tax ........................................................................................................... R705
Output tax in respect of fringe benefits provided to managing director. The output tax thus results
in an additional salary cost that should now be deductible for income tax purposes.
31.12.4.3 Time of supply: Fringe benefits (s 9(7))

The time of supply is deemed to be the end of the month in which the cash equivalent of the fringe
benefit is granted to the employee (as determined under the Seventh Schedule to the Income Tax
Act). However, where the cash equivalent is not required to be included on a monthly basis, the
supply is taxable on the last day of the year of assessment of the employee.
31.12.5 Deemed supply: Payments exceeding consideration

31.12.5.1 Meaning of supply: Payments exceeding consideration (ss 8(27) and 16(3)(m))
It is possible that a vendor could receive an overpayment for a standard rated taxable supply of
goods or services. Output tax will be payable if this overpayment is not refunded within four months
(s 8(27)).
In the event that the overpayment is refunded on a date after the output tax has been accounted for,
the vendor will become entitled to claim an additional input tax credit (s 16(3)(m)).
31.12.5.2 Value of supply: Payments exceeding consideration (s 10(26))

The consideration for the supply equals the excess portion of the payment received.
31.12.5.3 Time of supply: Payments exceeding consideration (s 8(27))

The time of supply is deemed to be the last day of the tax period during which the four-month period
ends. It should, however, be borne in mind that this is only the case when the excess portion has not
been refunded within four months of receipt.
1005
Example 31.26. Payment exceeding consideration
STP CC issues a tax invoice to George Dlamini for R114 (invoice no. 1025 dated 1 March 2018).
Three weeks later, STP CC sends him a statement reflecting the purchase made as an
outstanding amount due. Upon receiving the statement on 28 April 2018, George’s wife decides
to pay STP CC R114. She does this as she is unaware that George already paid the amount two
days earlier.
STP CC has a two-monthly VAT period ending on the last day of January, March, May, etc.
Explain:
(a) the VAT treatment of the above, assuming STP CC retains both payments and does not
refund the overpayment received from George’s wife
(b) the VAT treatment assuming that STP CC refunds the overpayment received by George’s
wife on 25 October 2018.
SOLUTION
(a) The excess payment of R114 received by STP CC will be treated as a deemed supply and
output tax will be payable. STP CC will be liable to account for output tax amounting to R14
(R114 × 14/114). The time of supply is 30 September 2018, which is the last day of the VAT
period ending four months after the excess amount was received.
(b) Upon refunding the amount of R114 to George’s wife, STP CC will become entitled to claim
input tax amounting to R14 (R114 × 14/114). As the CC failed to refund the amount within
four months of receipt, they previously needed to account for output tax on the deemed
supply. They are now entitled to claim an additional amount of input tax in the VAT period
ending on 30 November 2018.
31.12.6 Deemed supplies: Other (ss 8(1), 8(10), 8(15), 8(21), 9(8) and 10(16))
The VAT Act also provides for more deeming provisions of which the more common provisions are
listed below:
l Sometimes a business owes debt it cannot re-pay. It might then happen that the creditors decide
that some of the assets of the business should be sold in order for the debt to be repaid. The
creditors will not necessarily know the VAT status of the business. They will have to treat the sale
as a taxable supply, unless the business supplies the creditors with a statement indicating that
the sale of the assets should not be a taxable supply (s 8(1)).
l When a vendor sells goods on credit to a customer, the vendor accounts for output tax on the
supply. If the customer defaults on the payments for the goods, it may result in the repossession
of the goods. In such a case the customer is deemed to make a supply of the goods to the
vendor (original supplier – s 8(10)). The supply is made for a consideration in money equal to the
balance of the outstanding debt of the goods (s 10(16)). The vendor is entitled to claim an input
tax deduction at such time when the deemed supply is made to it ((par (c) of ‘input tax’ definition
and ss 9(8)) and 16(3)(a)(i)).
l Where a single supply of goods or services would, if separate considerations had been payable,
have been charged partly at the standard rate and partly at the zero rate, each part of the supply
is deemed to be a separate supply (s 8(15)).
In Commissioner for SARS v British Airways (67 SATC 167) the fare charged by British Airways for
its international flight included a number of elements which were separately disclosed on the
passenger ticket. One such charge was the fees levied by the Airport Company Limited (a
separate independent vendor) to British Airways. This charge is levied to British Airways for the
general airport services (baggage handling facilities, waiting lounges, etc.) and was referred to
as the passenger service charge. British Airways separately reflects this charge on the pas-
senger ticket in order to recover it from its passengers. As the fare related to international travel
(see 31.10.2.1), British Airways zero-rated the total fare charged for the ticket. SARS argued that
the British Airways fare was a fare made up of different components (8(15)). SARS wanted to
apply the standard rate to the passenger service charge of the fare as this service is provided in
South Africa.
1006
The Supreme Court of Appeal agreed with British Airways that the total fare for the ticket should
be zero-rate and held that
– a single supply of service is only capable of separation into its component parts, when the
same vendor supplies more than one service (at 170)
– the passenger service charge that the Airport Company Limited charges to British Airways is
no more than a cost that British Airways has to bear in order to operate its business. This is
similar to the cost it pays to land and park its aircraft (at 168). The passenger service charge
therefore relates to a service that was supplied by another vendor (not British Airways). This
cost simply formed part of the cost of British Airways’ supply of international transportation.
This is not a separate service provided by British Airways to the passenger. If British Airways
was the owner of the airport and if the general airport services were in fact supplied by British
Airways, the judgment of the court might have been totally different.
Example 31.27. Recovering of costs
Mr Karabo is an attorney practising in Johannesburg. Mr. Karabo provided legal services to a

client in Pretoria and is uncertain about the VAT consequences of this supply.
The breakdown of the charge to the client is as follows:
R
Legal advice fee (standard rated supply)............................................................................ 8 000
Fuel costs incurred (zero-rated supply) ............................................................................... 50
Gautrain ticket cost incurred (exempt supply) ..................................................................... 120
Value of supply (excluding VAT) 8 170
Discuss the VAT consequences of the above supply.
SOLUTION
VAT will be levied at the standard rate on the total value of the supply (R8 170 × 14% =
R1 143,80). The fuel and Gautrain ticket costs incurred will form part of the expenses incurred
by Mr Karabo to perform the legal service, rather than a service supplied by Mr Karabo to the
client.
l Any fixed property used for the purposes of an enterprise can be expropriated. Such fixed
property expropriated is deemed to be a supply made in the course or furtherance of an
enterprise (s 8(21)).
31.13 Output tax: Non-supplies (ss 8(3), (4), (14), (25), 9(2)(b) and (c) and 10(11))
If a vendor supplies goods or services in the course or furtherance of his enterprise, he is obliged to
levy output tax on these supplies. There are, however, exceptions to this rule where supplies are
deemed not to be a supply for VAT purposes – the so-called non-supplies.
The following non-supplies are important:
l When a supply is made under a credit agreement, the buyer has the right to cancel that
agreement within a ‘cooling-off’ period of five days. If the buyer exercises such right to cancel,
that supply is deemed not to be a supply of goods or services (s 8(3)). If the buyer does not
cancel the transaction, a special time-of-supply rule applies. The time of supply is the day after
the ‘cooling-off’ period expired (s 9(2)(b)).
l In terms of a lay-by agreement, goods are reserved by deposit and only delivered to the buyer
when the full price or determined portion of the price is paid. For a lay-by agreement, where the
full price of goods to be delivered does not exceed R10 000, no supply occurs until the goods
are delivered (ss 8(4) and 9(2)(c)). Where the agreement is, however, cancelled and the seller
retains any amount, the seller is deemed to have supplied a service in respect of the lay-by
agreement (s 8(4)(b)). The consideration for the service is the amount retained (s 10(11)).
l If the input tax has been denied when the goods were originally bought by the vendor, no output
tax is levied on the later sale of those goods by the vendor (s 8(14)). Typical examples will be
where goods or services were acquired for entertainment purposes, or the supply of a motor car
(other than an employer granting the use of a motor car to an employee) (s 17(2) – see 31.21).
1007
Example 31.28. Non-supplies
Speedy purchased a motor car, a coffee machine for the canteen and a printer. He paid the
following for these items:
Motor car: R143 000 (including VAT – input tax denied)
Coffee machine: R457 (including VAT – input tax denied)
Printer: R6 900 (including VAT)
He then sells all three items.
Explain the VAT consequences relating to the purchase and sale of the motor car, coffee
machine and the printer.
SOLUTION
Provided Speedy acquired the printer for the purposes of making taxable supplies, he will be
able to claim an input tax deduction on the acquisition of the printer amounting to R847,37
(R6 900 × 14/114). No input tax will be claimable on the acquisition of the motor car and coffee
machine, as input tax deductions are specifically denied on the acquisition thereof.
Speedy will be required to levy output tax on the sale of only the printer, since the said supply
will be made in the course or the furtherance of his enterprise. Speedy will not be required to
account for any output tax on the sale of the coffee machine and motor car, since Speedy was
denied input tax deductions on the acquisition of these items.
l The supplying vendor and recipient vendor are in certain cases deemed to be one and the same
person in respect of certain company reorganisation transactions (s 8(25)). A reorganisation for
VAT purposes is deemed to be a non-event (no VAT is charged on the supply and no input VAT
adjustments are applicable). The transactions to which this is applicable are the following:
– going concern asset-for-share transactions: a person disposes of an asset to a company in
exchange for the company’s equity shares. These reorganisation transactions will only be a
non-event for VAT purposes if they meet the requirements of a going concern sale (see
31.10.3). If a single transfer of trading stock or a capital asset occurs, the normal VAT rules will
apply (s 42 of the Income Tax Act; see chapter 20)
– going concern intragroup transactions: one company disposes of an asset to another company
that forms part of the same group of companies. These reorganisation transactions will only be
a non-event for VAT purposes if they meet the requirements of a going concern sale
(see 31.10.3). If a single transfer of trading stock or a capital asset occurs, the normal VAT
rules will apply (s 45 of the Income Tax Act; see chapter 20)
– amalgamation transactions: a company’s existence is terminated after it disposes of all its
assets to another company (s 44 of the Income Tax Act; see chapter 20)
– transactions relating to liquidation and deregistration: a company distributes all its assets to
another company that forms part of the same group of companies in anticipation of its
liquidation, winding up or deregistration (s 47 of the Income Tax Act; see chapter 20).
A reorganisation transaction will be a non-event for VAT purposes. This will be the case even for
going concern transactions that qualify for the zero rate (see 31.10.3).
31.14 Output tax: No apportionment (s 8(16))

If a vendor acquires goods or services partly for the purposes of making taxable supplies and subse-
quently sells these goods, the vendor will be deemed to make a taxable supply of goods or services
in the course of his enterprise and the total consideration received for such supply will be subject to
VAT (s 8(16)).
There are two exceptions to this rule: the first relate to fringe benefits and the second to indemnity
payments. For both these types of supplies, the amount of output tax is payable only to the extent
that it relates to taxable supplies made in the course of the enterprise.
Example 31.29. No apportionment of output VAT

BBC Bank sells a computer to CNN Bank for R12 000. This computer was used 80% for the
making of taxable supplies and 20% for the making of exempt supplies.
Advise BBC Bank on the VAT consequences of the transaction.
1008
SOLUTION
BBC Bank will be required to account for VAT at the standard rate on the full selling price of
R12 000, that is R1 473,68 (R12 000 × 14/114). However, BBC will be entitled to make an
additional input tax adjustment for the 20% exempt portion (s 16(3)(h)- see 31.25).
31.15 Time of supply (s 9)

The time of supply is important for VAT purposes, as it determines when (i.e. during which VAT
period) a vendor must account for VAT. The time-of-supply rules are applicable to both output and
input tax.
31.15.1 Time of supply (ss 9(1) and 9(2)(d))

The general rule of the time of supply is the earlier of
l the date of the invoice, or
l the date the payment is received by the supplier.
An ‘invoice’ is defined as ‘a document notifying an obligation to make payment’ (s 1). This definition is
wide enough to embrace any document notifying the obligation to make payment, even though it may
not be called an invoice. For example, in certain circumstances a contract may constitute an invoice
as defined.
The date of delivery of the goods or of providing the services plays no role in determining the time of
supply. It will play a role only in special cases, such as if connected persons are involved.
Apart from the above general rule, there are also certain specific rules for special types of trans-
actions. Special rules also apply to vendors registered on the payments basis (see 31.3.2).
Take note that the general time of supply rule cannot be applied to supplies where the consideration
is received by the supplier through a coin-operated machine. Think, for example, of a coin-operated
machine in a hospital that sells soft drinks and chocolates. The time of supply for the supplier will be
at the time the money is taken from the machine. In the case of the person buying the soft drinks or
chocolates, the time of supply is the date the money is inserted into the machine (s 9(2)(d)).
31.15.2 Time of supply: Connected persons (s 9(2)(a))

To limit the risk of the manipulation of the cash flow relating to VAT, special time-of-supply rules are
applicable to connected persons (s 9(2)(a)).
A ‘connected person’ is
l any natural person (including his estate) and his relative or the estate of any relative
l any natural person and any trust fund of which any relative or estate of a relative may benefit
l a trust fund and any beneficiary
l any partnership or close corporation and any member thereof or any other person connected to
that member
l any company
– and any other person (other than a company) where the person, his spouse, minor child or trust
fund in which they may be beneficiaries, separately or in aggregate, holds at least 10% of the
paid-up capital, equity shares or voting rights of the company (whether directly or indirectly), or
– any connected person to the person, spouse, minor child or trust fund
l any company, and
– any other company that is substantially controlled by the same shareholders, or
– any connected person to such other company
l a vendor and a separate branch, or division separately registered, or
l any employer and the pension or provident fund of which most of his employees are members.
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The special time of supply rule will only apply if the application of the general time of supply rules
result in a date that is later than
l the date of removal of goods in the case of the supply of goods
l the date goods are made available to the recipient in the case of goods not to be removed, or
l the date when services are performed.
The general time-of-supply rule is also applicable to supplies to connected persons where the
consideration cannot be determined. This is only the case if the connected person receiving the
supply is entitled to deduct the full input tax credit.
If the general time-of-supply rules are later than the dates mentioned above, the time of supply where
the supplier and recipient are connected persons is
l the time of removal of goods in the case of the supply of goods
l the time goods are made available to the recipient in the case of goods that are not to be
removed, or
l when services are performed.
31.15.3 Time of supply: Rental agreements (ss 8(11) and 9(3)(a))

A ‘rental agreement’ is any agreement for the letting of goods, excluding a finance lease. Although
the actual supply is the supply of a ‘right’ to use the goods, the right to use goods under a rental
agreement is specifically regarded as the supply of goods (s 8(11)).
The rental agreement may state that the rental is payable on the first day of each calendar month.
Invoices are not necessarily issued monthly.
When goods are supplied in terms of a rental agreement, the time of supply is the earlier of the date
on which payment is due, or the date on which payment is received (s 9(3)(a)).
31.15.4 Time of supply: Progressive supplies (s 9(3)(b))

Special time-of-supply rules are required in, for example, the construction industry where the consid-
eration payable for the supply depends on the progress made. The time of supply is the earliest of
the date when payment is due or is received, or any invoice relating to the payment is issued
(s 9(3)(b)).
Example 31.30. Progressive supplies

Ubuntu Construction is registered for VAT under the Category C tax period (monthly) and enters
into a contract to build 50 residential units for a total contract price of R6 500 000 (VAT inclusive).
The agreement provides for monthly progress payments to be made over a period of 12 months.
At the end of January 2018 and February 2018, the work certified as completed by the appointed
Project Manager was 10% and 23% respectively. Ubuntu Construction issued two tax invoices
as follows:
Invoice 1357 – 31 January 2018 R650 000 (10% of R6 500 000)
Invoice 1358 – 28 February 2018 R845 000 (23% of R6 500 000 less R650 000 already invoiced)
Explain the time of supply of the above for Ubuntu Construction.
SOLUTION
As the goods are deemed to be supplied progressively, Ubuntu Construction will not account for
the full contract price at the time the agreement is entered into. Ubuntu Construction will account
for VAT of R79 824,56 (14 / 114 × R650 000) in the January 2018 return and R103 771,93
(14 / 114 × R845 000) in the February 2018 return.
31.15.5 Time of supply: Undetermined consideration (s 9(4))

A special time-of-supply rule exists for goods and services supplied if the consideration cannot be
determined upfront.
Typically, these supplies relate to goods in the mining, forestry, or agricultural industries. The prices
for those goods are dependent on the quality, international markets or the price is subject to
exchange rate fluctuations. For instance, in the forestry industry, the price of logs supplied to a wood
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mill depends on the quality and moisture content of the logs. The quality is determined by the
purchaser only after risk and ownership passes.
The time of supply of goods and services supplied if the consideration cannot be determined upfront
is the earlier of
l the date payment is due or received, or
l the date the invoice is issued (se 9(4)).
31.16 Value of the supply (s 10(2))

As pointed out, it is important to note whether a specific provision refers to the value, consideration or
open market value of a supply. If the provision refers to the value, the amount of VAT is calculated by
applying 14% to the value amount. If it refers to consideration or open market value, the amount of
VAT is calculated by applying the tax fraction (14/114) to the amount of the consideration or open
market value.
For the purposes of VAT, there is a general valuation rule with certain specific rules applying to the
value of certain supplies. Where no specific rule exists, the general rule will apply.
31.16.1 Value of the supply: General rule (s 10(3))

The value of the supply of goods or services is either:
l the amount of the money if the consideration is in money, or
l the open-market value of the consideration if the consideration is not in money
less
l the amount of VAT included in the consideration.
When the vendor does not account for the VAT separately, the tax fraction is applied to determine the
VAT included in the consideration.
Remember
l The value of a supply therefore refers to the amount excluding VAT.
l The consideration and market value of a supply refers to the amount including VAT.
Example 31.31. Value of supply
A vendor sells goods for R114 000 (including VAT). Calculate the VAT that is included in the
consideration.
SOLUTION
VAT is determined as: R114 000 × 14/114; that is....................................................... R14 000
31.16.2 Value of the supply: Connected persons (s 10(4))

When a vendor supplies goods to a connected person
l for no consideration, or
l for a consideration that is less than the open-market value, or
l the consideration cannot be determined at the time of the supply, and
l the connected person would not have been able to claim a full input tax credit,
the consideration of the supply is deemed to be its open-market value.
Remember
This special rule relating to connected persons is not applicable to the supply of fringe benefits.
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Example 31.32. Value of supply: Connected persons
A and B are connected persons. A sells trading stock valued at R10 000 to B, who only paid an
amount of R4 000 for this trading stock. B is not entitled to a full input tax deduction (only 60%).
Explain the VAT consequences of the above.
SOLUTION
A has to account for VAT on the open-market value of the supply: R10 000 × 14/114 =
R1 228,07. (The consideration received from B is ignored.)
B will only be able to claim an input tax on the actual consideration of R4 000: R4 000 × 14/114 ×
60% = R294,74. (B only has a VAT invoice showing the total consideration as R4 000 and could
therefore not claim input tax on R10 000. The definition of ‘input tax’ further specifically states
that it is the tax charged and payable. Unless the parties decide to adjust their purchase price to
R10 000, B will always only be able to claim the input tax on the actual consideration.)
Example 31.33. Value of supply to connected person
A vendor sells goods for R114 000 (including VAT) to its wholly-owned subsidiary, which is not
registered as a vendor for VAT purposes. The open-market value of the goods on the date of
sale is R171 000 (including VAT).
Calculate the VAT that is payable by the vendor.
SOLUTION
The deemed value (open-market value) of R171 000 must be used, since the recipient is not
entitled to an input tax credit.
VAT is determined as: R171 000 × 14/114; that is .......................................................... R21 000
Note
It is therefore clear from the above that the special value-of-supply rule for connected persons
(s 10(4)) will be applicable when the connected person could either claim only a portion of the
input tax or when the connected person could not claim any portion of the input tax.
Had the wholly-owned subsidiary in this example been a registered vendor that is entitled to the
full input tax, the consideration for the supply would have been R114 000 and the output tax
R14 000 (R114 000 × 14/114).
The reason for this special rule is that connected persons could try to limit the VAT cost and therefore
manipulate the prices so that the VAT cost is decreased. If the recipient is a vendor and allowed to
claim the input tax in full, no manipulation can take place. The VAT paid by the one vendor is claimed
back by the other vendor. No special value of supply rules is therefore required.
31.16.3 Value of the supply: Vouchers (ss 10(18) and (19))

Vouchers can either entitle the bearer to goods or services of a specific monetary amount, or it could
entitle the bearer to specific goods and services. The VAT treatment of these two types of vouchers
differ.
31.16.3.1 Voucher entitling bearer to specific monetary value (s 10(18))

Many people buy vouchers as gifts for others. The voucher entitles the bearer to the right to receive
goods or services for a specific monetary value. There is no VAT on the purchase of the voucher as
the transaction is disregarded for VAT purposes (s 10(18)). The subsequent surrender of the voucher
will attract VAT. The voucher will then form part of the consideration for the supply of the goods or
service.
31.16.3.2 Voucher entitling bearer to specific goods and services (s 10(19))

It might also be that some people buy vouchers that entitle the bearer to only specific goods or
services on the surrender of the voucher. The issue of the voucher then attracts VAT. The subsequent
surrender of the voucher attracts no further VAT (s 10(19)).
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31.16.4 Value of the supply: Discount vouchers (s 10(20))

We should distinguish between discount vouchers issued and redeemed by the same suppliers and
discount vouchers issued and redeemed by two different suppliers.
31.16.4.1 Discount vouchers issued and redeemed by the same supplier

When a dealer decides to issue discount vouchers to promote the sale of his own goods, the issue of
the discount vouchers does not have any VAT consequences. When the client redeems the discount
voucher at the dealer to reduce the price he pays for his goods, the discount reduces the
consideration for the supply and VAT is only accounted for on the reduced amount. If Shoprite, for
example, has a loyalty programme and customers could earn discount vouchers, the redemption of
the discount vouchers will only reduce the price the customer has to pay and Shoprite will only
account for VAT on the reduced amount.
31.16.4.2 Discount vouchers issued and redeemed by two different suppliers

When the discount voucher is issued by someone who is not the supplier of the goods, the
redemption of the discount voucher does not reduce the consideration for the supply. The supplier
has to account for the VAT on the discount voucher. The discount voucher does not reduce the
consideration, but, like gift vouchers, forms part of the consideration for the supply of the goods. An
example where this will apply is where Shoprite sells OMO washing powder. OMO would like to
increase the sale of their products and they offer a discount voucher of R10 on each OMO washing
powder purchased from Shoprite. The price before the discount for the OMO washing powder was
R100. The consideration for the supply will be the R90 cash (R100 – R10) and the R10 discount
voucher. Shoprite has to account for VAT on the full R100. The R100 is deemed to include VAT
(s 10(20)).
31.16.5 Value of the supply: Entertainment (s 10(21))

The input tax on the acquisition of entertainment is usually denied (s 17(2)). When a supplier then
makes a supply of entertainment, the value of the supply is nil. This will be the case even if the supply
was made to a connected person. The value will not be nil if the supplier is in the entertainment
business (see 31.21.1)
Example 31.34. Value of supply: Entertainment

Abraham bought coffee powder in bulk for his employees to consume at work. Abraham sold half
of the coffee powder to Magdalene (a connected person) at a discount of 30%. Magdalene also
obtained the coffee powder in order to provide it to her employees to consume whilst at work.
Explain the VAT consequences of the above
SOLUTION
Abraham cannot claim the input tax on the purchase of the coffee powder as this transaction is in
respect of the acquisition of goods for the purposes of entertainment. The value of the supply
between Abraham and Magdalene is Rnil: (s 10(21)), even though Magdalene and Abraham are
connected parties. Magdalene will therefore also not be entitled to claim any input tax on the
purchase of the coffee powder from Abraham.
31.16.6 Value of the supply: Dual supplies (s 10(22))

Sometimes a taxable supply is not the only matter to which a consideration relates. If this is the case,
the supply shall be deemed to be for such part of the consideration as is properly attributable to it.
For example, A sells his private house as well as his computer from his enterprise to B. B pays an
amount of R300 000 for both. This payment should now be allocated to the different items to
determine the VAT element, since the selling of the private house will not attract VAT, whereas the
selling of the computer will be subject to standard rate VAT. B could also pay by means of a motor
car, valued at R300 000, and then the consideration should be apportioned to each of the
components to which it relates.
The above should not be confused with the situation where a single supply was previously used
partly for taxable purposes. That supply will be a taxable supply without any apportionment. The
1013
above example refers to a situation where a single consideration (not supply) is received for more
than one supply.
31.16.7 Value of the supply: Supply for no consideration (s 10(23))

Where a supply is made for no consideration, the value of the supply is deemed to be nil (excluding
connected persons – see 31.16.2).
Promotional supplies, such as product samples made for no consideration in a business context, are
generally regarded as taxable supplies. That is if they are made in an effort to promote other taxable
supplies which are usually made for a consideration by the enterprise. The value of these taxable
supplies, as they are made for no consideration, is still deemed to be nil (Interpretation Note No 70).
31.17 Basics of input tax (ss 16 and 17)

Input tax is the VAT component of the payment for goods and services supplied to the vendor for the
purpose of making taxable supplies. A vendor who purchases, for example, stationery to be used in
the making of taxable supplies, can claim the VAT part of the expense as input tax. This input tax can
be deducted from the output tax in order to calculate the total VAT payable or refundable. Where
goods or services are, however, used partly for purposes of making taxable supplies, only the portion
of the input tax attributable to taxable supplies may be claimed as an input tax credit (s 17(1)).
However, if 95% or more of the purchased goods or services will be used in the making of taxable
supplies, the full input tax credit may be claimed. In this case no apportionment is necessary (the so-
called de minimis rule) (first proviso to s 17(1)).
Input tax may be claimed only if the vendor has documentary proof that substantiates the vendor’s
entitlement to the input tax. Such documentary proof includes
l a tax invoice
l a debit note or a credit note
l a document acceptable to the Commissioner if the consideration for the supply is less than R50
l a document where the Commissioner is satisfied that there will be sufficient records available to
establish the particulars required on an invoice for any supply
l a release notification or other document, together with a receipt of payment of the tax in the case
of imported goods
l an agent statement issued to a principal vendor (s 54(3)(a) – see 31.32), or
l any other documentary proof as is acceptable to the Commissioner (s 16(2) and Interpretation
Note No 92).
Input tax should usually be deducted in the VAT return in the period during which the time of supply
occurs. (For imported goods: the period during which the goods are released in terms of the
Customs and Excise Act.) Input tax may be deducted in a later period if the vendor is unable to
deduct input tax in the aforementioned period (for example, because documentary evidence is not
received in time). This later period may not be more than five years after the tax period during which
the input tax deduction should originally have been made (first proviso to s 16(3)). To be able to get
this deduction, the vendor should retain the necessary documents (proviso to s 16(2)).
Chapter 4 of the Tax Administration Act sets out the details of the form in which records must be kept
(including electronic form) and the period for which documents should be retained (see chapter 33).
The requirements to issue and retain documents are equally applicable to vendors that do ‘e-
invoicing’. Vendors do not need prior approval from the Commissioner to implement e-invoicing.
If goods or services are purchased from a person who is not a registered vendor, no input tax can
usually be claimed, as no VAT has been paid on the goods or services.
31.18 Tax invoices (ss 16(2) and 20)

Tax invoices are the driving force behind the VAT system. No input tax may be claimed unless a ven-
dor is in possession of a tax invoice or different documentary proof as approved by the Commis-
sioner.
A registered vendor is obliged to issue a tax invoice only if the total consideration of the supply
exceeds R50 (vendors who are not registered do not issue tax invoices) (s 20(6)). A document that is
acceptable to the Commissioner should be issued for supplies not exceeding R50.
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A supplier, or the agent of a supplier, must furnish a recipient with a tax invoice within 21 days of the
date of the supply. Copies of tax invoices must clearly indicate that they are only copies, since a
vendor may issue only one original tax invoice (s 20(1)).
Where the supply exceeds R5 000 a tax invoice must be issued in South African currency unless the
information relates to a zero-rated supply. Where applicable, a foreign currency, together with the
daily exchange rate at the time of supply should also be on the tax invoice (see BGR 11). The
following information must also appear on such a tax invoice (s 20(4)):
l the words ‘tax invoice’, ‘VAT invoice’ or ‘invoice’
l the name, address (either the physical or postal address) and VAT registration number of the
supplier (see BGR 21)
l the name, address (either the physical or postal address) and VAT registration number (if the
recipient is a vendor) of the recipient (see BGR 21)
l an individual serialised number and the date on which the tax invoice is issued
l a full and proper description of the goods or services supplied (including an indication that the
goods are second-hand, if that is the case)
l the quantity or volume of the goods or services supplied
l either
– the value of the supply, the amount of VAT charged and the consideration for the supply, or
– where the amount of VAT charged is calculated by applying the tax fraction to the consider-
ation, the consideration for the supply and either the VAT charged or a statement that it
includes a charge for VAT and the rate at which the VAT was charged.
Where the consideration for the supply does not exceed R5 000, an abridged tax invoice may be
issued. This abridged tax invoice should contain only the following particulars:
l the words ‘tax invoice’, ‘VAT invoice’ or ‘invoice’
l the name, address and VAT registration number of the supplier
l an individual serialised number and the date on which the tax invoice is issued
l a description of the goods or services supplied (including an indication that the goods are
second-hand, if that is the case)
l either
– the value of the supply, the amount of VAT levied and the consideration paid for the supply, or
– where the amount of VAT charged is calculated by applying the tax fraction to the consider-
ation, the consideration for the supply and the VAT charged or a statement that it includes a
charge for VAT and the rate at which the VAT was charged.
Remember
l The abridged tax invoice does not have to include the name, address or VAT registration
number of the recipient or the quantity or volume of the goods or services.
l An abridged tax invoice may not be issued for zero-rated supplies.
l The requirement that the VAT amount should be reflected in South African currency is not
applicable to zero-rated supplies.
l A vendor may reflect the foreign currency of a supply on an invoice as long as the South
African currency is also reflected on it. Vendors should use the applicable daily exchange
rate as published on the South African Reserve Bank website. This rate is the weighted
average of the bank’s daily rates at approximately 10:30 (BGR 11). These rates are
published on http://resbank.co.za.
For practical reasons, a foreign supplier of electronic services is required to issue a tax invoice that
contains slightly different information. The VAT registration number of the recipient is, for example,
not required (see BGR 28).
If the Commissioner is satisfied that a vendor’s records are sufficient and that it would be impractical
to require a full tax invoice to be issued, he may direct that certain particulars may be omitted or that
no tax invoice needs to be issued (s 20(7)) (see BGR 27 and Interpretation Note No 83). A short-term
insurer, for example, does not have to issue a tax invoice subject to the condition that the policy
documents contain prescribed information (see par 2.2 of BGR 14).
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Although the supplier usually issues VAT documentation, the recipients (not suppliers) could some-
times be required to issue tax invoices, credit and debit notes. This would be the case if the recipient
l determines the consideration for the supply, and
l is in control of determining the quantity or quality of the supply (see Interpretation Note No 56).
The Commissioner also is granted discretionary powers to prescribe (s 16(2)(f))) or accept
(s 16(2)(g)) different documentary proof that a vendor must be in possession of before making any
input tax deductions (see Interpretation Note No 92 for guidance on documentary proof for specific
transactions). In South Atlantic Jazz Festival (Pty) Ltd v CSARS [2015] ZAWCHC, sponsorship
agreements were accepted as sufficient proof to enable input tax to be claimed despite no tax
invoices being issued (see 31.5.1). The conditions under which the Commissioner will accept
different documentary proof have been refined.
31.19 Debit notes and credit notes (s 21)

The VAT Act also provides for the issuing of debit and credit notes if a tax invoice was issued in
relation to the original supply (s 21(1)). This is required
l if a supply is cancelled
l the nature of the supply has changed fundamentally
l the consideration has changed
l goods or services have been returned, or
l if a correction needs to be made on an issued tax invoice.
31.19.1 Debit notes

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

If the amount of VAT shown on the tax invoice is more than the actual VAT charged in respect of the
supply, a credit note must be issued. A credit note therefore reduces the output VAT of a specific
transaction.
The following information must appear on the credit note:
l the words ‘credit note’
l the name, address and VAT registration number of the recipient (if the recipient is a vendor)
(unless an abridged tax invoice was issued)
l the date on which the credit note was issued
l either
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– the amount by which the value of the supply shown on the tax invoice has been reduced, and
the amount of the reduced VAT, or
– where the VAT charged is calculated by applying the tax fraction to the consideration: the
amount by which the consideration has been reduced. Together with this the amount of the
excess (reduced) VAT or a statement that the reduction includes VAT and the rate of the VAT
included
l a brief explanation of the circumstances giving rise to the credit note
l sufficient information to identify the transaction to which the credit note refers.
A binding general ruling (BGR 6) clarifies the VAT treatment of discounts, rebates and incentives in
the production, distribution as well as marketing of the packaged consumer goods industry. The
discounts, rebates and incentives could be divided into two categories, namely variable allowances
and fixed allowances.
Two types of variable allowances are early settlement allowances and growth rebates. An early settle-
ment allowance is granted on the prompt payment for a supply. Growth rebates are allowances
linked to a volume target where a percentage discount will be provided when a certain growth
percentage has been achieved. Variable allowances are regarded as a reduction in the original
purchase prices and a credit note should be issued unless otherwise directed. If Vendor X supplies
goods to Vendor Z, Vendor X should issue a credit note to Vendor Z to facilitate the reduction of the
consideration payable by Vendor Z.
There are also two types of fixed allowances, namely new store allowances and major refurbishment
allowances. A new store allowance is an allowance for the promotion of products with the opening of
a new store. Major refurbishment allowances are payments to revamp a retailer’s store to meet the
required standard. The binding general ruling determines that fixed allowances are regarded as
consideration for the supply of a service and a tax invoice must be issued. If Vendor X supplies
goods to Vendor Z, Vendor Z should issue a tax invoice to Vendor X for the supply of the fixed
allowance.
Example 31.35. Variable allowance
OCS Wholesalers purchases trading stock from Kleentex (Pty) Ltd for R114 000. As OCS Whole-
salers exceeded the R75 000 purchase target for the month, they were entitled to a growth
rebate (variable allowance) of R20 000 and only paid the difference of R94 000 (R114 000 less
R20 000).
Discuss the VAT implications of the growth rebate.
SOLUTION
With the original purchase transaction, Kleentex (Pty) Ltd would have issued a tax invoice to OCT
Wholesalers stating a consideration due of R114 000 (R100 000 plus R14 000 VAT). Kleen-
tex (Pty) Ltd would now also have to issue a credit note for the R20 000 growth rebate. The credit
note should indicate the reduction in the consideration of the supply of R20 000 (R17 543,86 plus
VAT of R2 456,14). As Kleentex (Pty) Ltd has previously accounted for an excess amount of
output tax, it must either increase its input tax by R2 456,14 or reduce its output tax attributable
to the tax period by R2 456,14 (s 21(2)(b)). As OCS Wholesalers has previously deducted input
tax in relation to a supply and receives a credit note, it must make the necessary adjustment in
its VAT return (s 21(6)). The excess tax (R2 456,14) must be accounted for by OCS Wholesalers
by either increasing its output tax or reducing its input tax for the tax period in which the credit
note is issued.
Example 31.36. Fixed allowance
Let us assume that OCS Wholesalers again purchases trading stock from Kleentex (Pty) Ltd for
R114 000. As OCS Wholesalers has just opened its store, it is entitled to a promotion of new
products allowance (fixed allowance) of R20 000. OCS Wholesalers again only paid the net
amount of R94 000 (R114 000 less R20 000).
Discuss the VAT implications of the promotion of new products allowance.
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SOLUTION
With the original purchase transaction, Kleentex (Pty) Ltd would again issue a tax invoice to
OCT Wholesalers with a consideration due of R114 000 (R100 000 plus R14 000 VAT). For fixed
allowances, OCS Wholesalers is regarded to supply a service to Kleentex (Pty) Ltd (in this case
an advertising service of the product of Kleentex (Pty) Ltd with the opening of its store). To
correctly account for the fixed allowance, OCS Wholesalers should now issue a tax invoice to
Kleentex (Pty) Ltd for R20 000 (R17 543.86 plus VAT of R2 456.14). This deemed supply for
which the tax invoice is issued by OCS Wholesalers will result in it having an additional output tax
liability of R2 456,14 with Kleentex (Pty) Ltd having a corresponding increase in its input tax
deduction of R2 456,14.
31.20 The determination of input tax (s 17)

‘Input tax’ is defined as to include the tax payable by a vendor
l to a supplier on the supply of goods or services by the supplier to the vendor, or
l on the importation of goods by the vendor.
The ‘input tax’ as mentioned above relates to VAT that was paid by the vendor when acquiring goods
or services and importing goods. When goods or services are acquired from a vendor, VAT will be
paid and a tax invoice will be supplied. When goods are imported, VAT output is levied, and this
amount can sometimes be claimed, as input tax, by a vendor.
VAT can be claimed as an input tax deduction only if VAT was paid by the vendor at the standard
rate or, in certain circumstances, also on the purchase of second-hand goods (that is, a notional or
deemed input tax deduction). No VAT may be claimed if the vendor does not have a valid tax invoice
or the required documentation to claim a notional input tax deduction (see 31.22).
To determine whether a VAT amount may be claimed as an input tax deduction, it is important to
determine the purpose for which the goods or services acquired will be used.
If a vendor uses the goods or services wholly in the course of making taxable supplies, then the
vendor would be entitled to claim the full input tax.
If a vendor uses the goods or services only partly in the course of making taxable supplies, either of
the following input tax deductions may be made
l the full input tax deduction (so-called de minimis rule) if the taxable use is not less than 95% of
the total intended use, or
l the portion that relates to the taxable supplies if the taxable use is less than 95% (the input tax
being apportioned by the vendor).
Remember
Apportionment of input tax is thus compulsory where goods and services are acquired for both
taxable and exempt supplies, but output tax is not apportioned (except for fringe benefits and
indemnity payments).
The methods used to calculate the apportionment rate of input tax are discussed below.
31.20.1 Turnover-based method

For most vendors, only one standard method of apportionment, that is the turnover-based method, is
approved by SARS (BGR 16). Essentially, the turnover-based method entails the total taxable
supplies being expressed as a percentage of total supplies. The working thereof is illustrated in the
following formula:
A = B × C/D where
A = the deductible input tax,
B = total amount of input tax,
C = the value of all taxable supplies (including deemed taxable supplies) made during the period,
and
1018
D = the value of all supplies. This includes taxable and exempt supplies made during the period.
This also includes any other amount that were received or accrued during the period, whether in
respect of a supply or not (for example dividend income and statutory fines).
The amounts used in the above calculation should exclude VAT (‘value’ referring to an amount that
excludes VAT) and the percentage of taxable use should be rounded off to two decimal places.
The percentage of taxable usage (C/D in the above formula) is calculated only once a year, and the
same percentage is used for all the inputs of that specific year if the supply is not wholly applied for
taxable or non-taxable purposes.
SARS states that the following amounts must also be excluded from the calculation:
l supply of capital goods or services acquired for use in the enterprise (including any exempt
activity)
l supply of goods or services for which an input tax credit is denied (see 31.21).
Example 31.37. Apportionment of input tax
At the beginning of its current financial year, Ramaphosa CC registered as a VAT vendor. It did
so as it realised that its taxable supplies in the coming year would exceed the registration
threshold.
The CC owns several residential properties which it hires out to tenants. Additionally, it
manufactures and promotes ‘Flangals’, a new type of square potato chip. During the last year,
the CC earned R175 000 (excluding VAT) from its letting activities and R200 000 (excluding
VAT) from manufacturing and promoting ‘Flangals’.
Immediately after registering for VAT purposes, the managing director authorised the purchase
of the following assets:
l a new computer, costing R22 800 (including VAT), to be used for administering the
residential letting activities and the chip manufacturing process
l a new mixer, costing R15 960 (including VAT), to be used solely in the chip manufacturing
process.
The managing director now wishes to determine what input tax the CC can claim, bearing in
mind that it is registered for VAT purposes.
Calculate the apportionment ratio of input tax using the turnover-based method and apply this
ratio to determine the amount of input tax that Ramaphosa CC can claim in its first VAT period.
SOLUTION
The computer is going to be used in making both taxable supplies (the selling of potato chips)
and non-taxable supplies (the hiring out of residential accommodation). Therefore, the input tax
deduction that can be claimed must be apportioned.
The turnover-based method entails the total taxable supplies being expressed as a percentage
of total supplies and is an acceptable means of determining an input tax ratio. The following
formula is applied: A = B x C/D, where
A = the deductible input tax
B = total amount of input tax (R22 800 × 14/114)
C = the value of taxable supplies (R200 000), and
D = the value of all supplies (R375 000).
Thus:
A = R2 800 × R200 000/R375 000
A = R1 493
Ramaphosa CC will be entitled to claim R1 493 as an input tax deduction on the computer.
The CC will be entitled to claim the full input tax deduction on the mixer as this machine is used
wholly for the making of taxable supplies.
Ramaphosa CC will therefore be entitled to claim a further R1 960 (R15 960 × 14/114) as an
input tax deduction.
31.20.2 Special apportionment method

A vendor may use an alternative apportionment method only when prior approval is granted by
SARS. Approval should be sought if the turnover-based method does not yield a fair approximation
of the extent of taxable supplies. Other methods are, for example, the varied input-based method,
the floor-space method, the transaction-based method and the employee-time method.
1019
SARS’s refusal to approve an alternative apportionment method is subject to objection and appeal
(s 32(a)(iv)).
31.21 Input tax: Denial of input tax (s 17(2))

Input tax may not be claimed by a vendor for certain goods or services (s 17(2)). The input tax is
denied even if the vendor paid input tax when the goods or services were acquired and is going to
use the goods or services wholly for the making of taxable supplies.
31.21.1 Denial of input tax: Entertainment

The input tax is denied on goods or services acquired to the extent that such goods or services are
acquired for the purposes of entertainment.
Entertainment as defined (s 1), includes the provision of food, beverages, accommodation,
amusement, recreation or hospitality of any kind.
In respect of entertainment expenses, there are cases where the input tax will not be denied, these
being:
l Vendors in the business of supplying entertainment can claim input tax related to their enter-
tainment. They can only claim input VAT as long as a charge is made by the vendor for the
entertainment and
– the charge covers all direct and indirect costs, or
– the charge is equal to the open-market value of the entertainment supplied.
l Vendors in the business of supplying entertainment if the entertainment is supplied for bona fide
promotional purposes can claim their input VAT on entertainment back. They can only claim it
back if the supply for bona fide promotional purposes is to current customers or any excess food,
not consumed by the customers during a taxable supply, is subsequently given to
– any employee of the vendor, or
– any welfare organisation.
l A vendor supplying entertainment to an employee or connected person and a charge is made to
such person that covers all direct and indirect costs of such entertainment.
l Any meal, refreshment or accommodation of a vendor, his employee or any self-employed natural
person who is required to be away from his usual place of residence and usual place of business
for at least one night. A self-employed person is a person who is not an employee of the vendor
but who invoices the vendor for services rendered. A vendor may only claim the input tax on the
personal subsistence of a self-employed natural person where the self-employed natural person is
– by reason of his contractual obligations with the vendor
– obliged to spend any night away from his usual place of residence and usual place of
business.
l Vendors operating taxable (not exempt) passenger transport services.
l Vendors organising seminars or similar events for reward.
31.21.2 Denial of input tax: Club membership fees and subscriptions

The input tax deduction is denied for any fees or subscriptions paid by the vendor for the member-
ship of any club of a sporting, social or recreational nature, for example golf membership.
The input tax is not denied if the payment is for the professional membership of an employee, for
example membership of the CA(SA) accounting profession in South Africa.
31.21.3 Denial of input tax: Motor car

The input tax on the acquisition of a motor car is also denied. A ‘motor car’ includes the following five
categories (definition in s 1 and Interpretation Note No 82):
l motor car
l station wagon
l minibus
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l double-cab light-delivery vehicle, and

l any other motor vehicle that
– is normally used on public roads
– has three or more wheels and
– is constructed or converted wholly or mainly for the carriage of passengers.
Once it is established that a vehicle does not fall within one of the first four categories, a determina-
tion must be made in order to confirm whether the vehicle falls within the fifth category. In this regard,
the judgment in ITC 1596 stated that the term ‘mainly for the carriage of passengers’ implies an
objective test with a quantitative measurement of more than 50%. The objective test requires a one
dimensional measurement of the length of the area designed for the carriage of passengers in
relation to the dedicated loading space in the vehicle. This objective test was approved in the
subsequent case of ITC 1693. The importance of an objective test was again confirmed in the case of
RTCC v CSARS (VAT Case 1345 (28 July 2016)). The subjective use by the vendor of the vehicle
would therefore not be decisive but rather the objective facts including the purpose for which the
vehicle is constructed or converted.
A ‘motor car’ specifically excludes the following (definition in s 1 and Interpretation Note No 82):
l vehicles capable of transporting only one person or suitable for carrying more than sixteen persons;
l vehicles with an unladen mass of 3 500 kg or more
l caravans
l ambulances
l vehicles constructed for a purpose other than the transport of persons that do not have the ability
to transport passengers other than such as is incidental to that purpose
l game-viewing vehicles constructed or permanently converted for the carriage of seven or more
passengers for game-viewing. The game-viewing vehicle should be used in national parks, game
reserves, sanctuaries or safari areas and exclusively for the purpose of game-viewing, other than
use that is merely incidental and subordinate to that use (see Interpretation Note No 42), and
l vehicles constructed as, or permanently converted into hearses for the transport of deceased
persons and used exclusively for that purpose.
The denial of input tax does not apply in the case of a vendor who
l is a car-dealer
l runs a car-hire business at an economic rental, or
l regularly or continuously supplies motor cars as prizes to clients or customers (other than
employees, office-holders or any connected person in relation to that employee, office-holder or
vendor).
A vendor that acquires a ‘motor car’ for which an input tax deduction is denied upon acquisition, and
subsequently utilises such vehicle for purposes for which an input tax deduction would have been
allowed on acquisition, may deduct input tax after the subsequent change of use of the motor vehicle
(s 18(4) – see 31.26). There are also special rules for the conversion of vehicles into game-viewing
vehicles and hearses (s 18(9) – see 31.28).
Example 31.38. Denial of input tax on motor car

Mr Silindile bought a new motorcar valued at R228 000 from Van Oordt & Hills Motors Inc. in
terms of a cash sale with monthly payments of R4 500. As an additional option, Mr Silindile took
out a maintenance plan and insurance on the motor car resulting in an additional monthly
payment of R500 and R400 respectively. All amounts include VAT.
You are required to determine the input tax deduction claimable (if any) by Mr Silindile.
SOLUTION
Mr Silindile would not be able to claim an input tax deduction on the cost of the motor car, as this
deduction is denied (s 17(2)). Mr Silindile will, however, be allowed to claim an input tax
deduction in respect of the maintenance plan and insurance on the motor car as the input tax
deduction on these supplies is not denied (s 17(2)).
Note that if the maintenance plan and insurance payment were not separately indicated on the
VAT invoice, but formed part of the supply of the motor car, the input tax deduction on these
expenses would have been denied (s 17(2)).
1021
31.22 Input tax: Deemed input tax on second-hand goods (ss 1, 18(8) and 20(8))
The VAT Act provides that a deemed input tax on second hand goods may be claimed. This
deemed input tax can be claimed when second-hand goods are acquired from a resident of South
Africa and the goods are situated in South Africa.
‘Second-hand goods’ are defined as
l goods that were previously owned and used, and
l certain prospecting and mining rights.
Second-hand goods do not include
l animals
l gold coins issued by the Reserve Bank (s 11(1)(k))
l goods consisting solely of gold unless acquired for the sole purpose of supplying such goods in
the same state without any further processing, or
l any other goods containing gold unless those goods are acquired for the sole purpose of
supplying those goods in the same or substantially the same state to another person.
Fixed property usually also qualifies as second-hand goods if it was previously owned and used. All
supplies of fixed property as part of the land reform regime are, however, excluded from the defini-
tion of ‘second-hand goods’. The reason for the exclusion is to prevent claims for notional input tax on
such land. The supply of land as part of the land reform programme is usually either zero-rated or
exempt from transfer duty. No tax-related cost is therefore associated with the acquisition of the land
and the recipient of the supply is not entitled to any notional input VAT.
The input tax is calculated by the application of the tax fraction to the lesser of
l the purchase price, or
l open-market value
even though no VAT has been paid.
‘Open-market value’ is the consideration in money that the supply of goods and services will fetch if
freely offered and made between persons who are not connected. Open-market value includes VAT,
where applicable, in respect of taxable supplies.
This deemed VAT may be claimed as input tax to the extent that payment has been made for the
second-hand goods. If only a portion of the purchase price for the second-hand goods has been
paid, only the same relative portion of the deemed input tax may be claimed.
Remember
l This deemed input tax rule relates only to goods previously owned and used. The purchase
of trading stock from a non-vendor (except for antiques) would usually not qualify as
second-hand goods, as the trading stock was not previously used.
l The rule that the lesser of purchase price or open market value should be used in
calculating the deemed input VAT does not apply to the motor industry on the trade in of
second-hand vehicles. It is not the intention of the VAT Act to deny an input tax credit on an
arm’s-length transaction between parties that are not connected persons. A binding general
ruling (BGR 12) allows motor dealers to deduct the deemed input tax on the full consider-
ation (including any over-allowance amount) paid or credited to the supplier for a second-
hand vehicle traded-in under a non-taxable supply.
Example 31.39. Input tax on second-hand goods
Simuyne (Pty) Ltd, a vendor for VAT purposes, acquired a second-hand delivery bicycle from a
non-vendor for use in its business. The purchase price of the delivery bicycle was R630 and the
market value was R780. The purchase price was paid in full.
Determine whether any input tax may be claimed in respect of the purchase.
1022
SOLUTION
Because the vendor has purchased a second-hand bicycle from a person not registered for VAT
purposes, a deemed input tax credit can be claimed for the second-hand bicycle. The deemed
input tax credit is based on the lower of the consideration paid (R630) or open-market value
(R780).
The deemed input tax is calculated as follows:
Tax fraction × consideration paid
14/114 × R630 = .................................................................................................................. R77
If, after a deduction of input tax on second-hand goods, the sale is cancelled, the consideration is
reduced, or the second-hand goods are returned, and the input tax actually deducted exceeds the
input tax properly deductible, the difference should be accounted for as an output tax (s 18(8)).
The recipient of second-hand goods must obtain and maintain a declaration by the supplier stating
whether the supply is a taxable supply or not, and must further maintain sufficient records to enable
the following particulars to be ascertained (s 20 (8)):
l the name of the supplier, and
– where the supplier is a natural person, his identity number
– where the supplier is not a natural person, the name of the supplier and the name and identity
number of the natural person representing the supplier in respect of the supply, and any
legally allocated registration number.
• The recipient should verify the name and identity number of a natural person with reference
to the person’s identity document and the recipient should also retain a photocopy of such
identity document.
• The recipient should verify the name and registration number of any supplier, other than a
natural person, with reference to its business letterhead and should retain a photocopy of
such name and registration number appearing on such letterhead.
l the date upon which such second-hand goods were acquired
l a description of the goods
l the quantity or volume of the goods
l the consideration for the supply
l proof and date of payment.
No documentary proof is required if the total consideration for the supply of the second-hand goods
is in money and does not exceed R50.
31.22.1 Zero-rating of movable second-hand goods exported (proviso s 11(1) and s 10(12))
When second-hand goods are exported the zero-rating is in certain cases not applicable. This will be
the case where a deemed input tax has been claimed by that vendor or any other connected person
of that vendor.
When such second-hand goods are exported, the value of the supply shall be deemed to be equal to
the original purchase price of the goods. If the supplier bought the goods from a connected person
who was entitled to claim a deemed input tax on the second-hand goods, the value of the supply will
be the greater of the purchase price of those goods to the supplier and the purchase price of those
goods to the connected person. Effectively, the zero rate applies only to the mark-up.
Example 31.40. Second-hand goods exported
ABC’s CC buys scrap metal from a non-vendor for R6 000 and claims a deemed input tax
deduction of R737 (R6 000 × 14/114).
Explain the VAT consequences if:
(a) ABC’s CC exports the goods for R7 000, and
(b) ABC’s CC exports the goods for R4 000.
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SOLUTION
(a) ABC’s CC will be required to account for output tax equal to the notional input tax claimed
of R737. The output tax is based on the purchase price, irrespective of the selling price.
However, where ABC’s CC accounted for VAT at the standard rate of 14% in respect of the
total amount charged, the purchaser, if a qualifying purchaser, may claim the difference
between the VAT paid and the notional input tax deduction from the VAT Refund
Administrator (see Regulation R.316).
(b) ABC’s CC will again be required to account for output tax equal to R737, although the
selling price of the goods is less than the purchase price. The output tax is based on the
original purchase price, irrespective of the selling price.
Example 31.41. Second-hand goods exported if bought from connected person

A buys second-hand goods for R2 000 and claims a notional input tax deduction of R246, then
sells them to B, a connected person, for R1 800. B claims an input tax deduction of R221 based
on the tax invoice provided by A. B exports the goods for R1 980.
Explain the VAT consequences in respect of the export.
SOLUTION
B will be required to account for output tax of R246 (R2 000 × 14/114) which is based on the
greater of the price paid by the connected person (A) – R2 000; or the price paid by B – R1 800.
31.23 Special rules: Instalment credit agreements

31.23.1 Meaning of ‘supply’: Instalment credit agreements
An instalment credit agreement encompasses suspensive sales and, finance leases. The definitions
of a suspensive sale and finance lease can be summarised as follows:
Suspensive sale Finance lease

The goods are sold by a seller to a purchaser for The rent consists of a stated or determinable sum of
payment by the purchaser to the seller of a stated or money payable at a stated or determinable future
determinable sum of money, at a stated or determin- date or in instalments over a period in the future
able future date or in instalments over a period in the
future
Such sum of money includes finance charges stipu- Such sum of money includes finance charges and
lated in the agreement of sale mark-ups based on time-value of money principles
as stipulated in the lease
The aggregate of the amounts payable by the The aggregate of the amounts payable under such
purchaser to the seller under such agreement lease by the lessee to the lessor for the period of
exceeds the cash value of the supply, meaning that such lease and any residual value of the leased
the goods may not be supplied at a loss by the seller goods on termination of the lease, as stipulated in the
lease, exceeds the cash value of the supply,
meaning that the goods may not be supplied at a
loss by the lessor
The purchaser does not become the owner of those The lessee is entitled to the possession, use or
goods merely by virtue of the delivery to or the use, enjoyment of those goods for a period of at least
possession or enjoyment by him thereof 12 months
Or
The seller is entitled to the return of those goods if
the purchaser fails to comply with any term of that
agreement
continued
1024
Suspensive sale Finance lease

The definition of a finance lease also includes the
situation where
l the lessor accepts the full risk of destruction or
loss of, or other disadvantage to those goods and
assumes all obligations of whatever nature arising
in connection with the insurance of those goods,
and
l the lessee accepts the full risk of maintenance
and repair of those goods and reimburses the
lessor for the insurance of those goods
It should be noted that all the requirements listed above should be met for a supply to be in terms of
a suspensive sale or in terms of a finance lease.
Although the definitions summarised above are similar to a large extent, it seems that the major differ-
ence between a suspensive sale and finance lease lies in the person carrying the risk of ownership of
the goods supplied. In terms of a suspensive sale, the risk of ownership will pass to the purchaser on
the date that the suspensive sale condition is complied with, where, in terms of a finance lease, the
risk of ownership will pass to the lessee and the date that the lease agreement is concluded.
31.23.2 Value of the supply: Instalment credit agreements (s 10(6))

In the case of instalment credit agreements, the consideration in money for the supply is deemed to
be its cash sale value. The VAT based on the cash cost will be claimed in total as input tax at the
earlier of delivery or payment date by the purchaser or lessee, whilst the seller or lessor raises output
tax in total on the cash cost of the goods at that time. The cash cost excludes interest, as interest is
exempt from VAT because it constitutes consideration for the supply of a financial service.
31.23.3 Time of supply: Instalment credit agreements (s 9(3)(c))

In the case of instalment credit agreements, the time of supply is the earlier of the time of delivery of
the goods or the time any payment is received.
This rule does not apply when the supply is made under a credit agreement in terms of which the
buyer has a right to return the goods within a certain time. Thus, for a suspensive sale agreement, the
time of supply is when the ‘cooling-off’ period of five days has expired (s 9(2)(b)).
Example 31.42. Instalment credit agreement (finance lease)
A bank enters into a finance lease on 15 May of the current tax year for the lease of a ‘motor car’
to a clothing manufacturer, as follows:
R
Cost of motor car ............................................................................................................... 98 246
VAT .................................................................................................................................... 13 754
112 000
Finance charges ................................................................................................................ 39 200
151 200
The agreement states that 36 monthly instalments of R4 200 (including VAT) are payable. The
motor car was delivered on 1 June. The motor car is a ‘motor car’ (see 31.21) as defined for VAT
purposes.
Discuss the VAT implications of the above transaction if both parties have a one-month tax
period.
SOLUTION
The bank has to account for output tax of R13 754 (R112 000 × 14/114) on 1 June.
The manufacturer is not able to claim any input tax deduction, since the vehicle is a ‘motor car’
as defined (see 31.21).
Should the clothing manufacturer purchase the car at the end of the lease, VAT is also payable
on any consideration paid at that stage for the vehicle. Again the manufacturer would not be able
to claim any input tax deduction.
1025
Example 31.43. Instalment credit agreement (suspensive-sale agreement)
Assume the same information as in the above example, except that it is now a delivery vehicle
acquired in terms of a suspensive-sale agreement, which provides for a deposit of R14 000
payable on 15 May of the current tax year.
The monthly instalments are R3 675, and finance charges totalling R34 300 will be paid over the
36-month period.
Discuss the VAT implications of the above transaction.
SOLUTION
The only difference is that the bank now has to account for output tax of R13 754 (R112 000 ×
14/114) on 15 May. This is also the date on which the manufacturer can claim the input tax of
R13 754, assuming that the delivery vehicle will be used exclusively to make taxable supplies.
With regard to a suspensive-sale agreement, when a deposit is paid, it is immediately applied in
reducing the total consideration due.
Remember
l Where any amount of a supply of goods in terms of an instalment credit agreement has
become irrecoverable, there could be an additional amount of input tax for the supplier. The
adjustment of the amount of input tax should be restricted to the tax content of the amount
that has become irrecoverable in respect of the cash value of such supply. The total amount
due should be apportioned to determine the outstanding amount of the cash value (first
proviso (i) to s 22(1)).
l No amount of input tax could be claimed if there was an amount irrecoverable in terms of an
instalment credit agreement and the vendor repossessed the goods or is obliged to take
possession of the goods (second proviso (i) to s 22(1)). If, for example, a vendor sold a
lounge suite to a person in terms of an instalment credit agreement, the full output tax should
be accounted for on the date of the supply. If the person then fails to pay the outstanding
debt and the vendor repossesses the lounge suite (or where the debtor surrenders the
lounge suite), no input tax can be claimed as irrecoverable (s 22). This is on the basis that
where the goods are repossessed or surrendered, the debtor is deemed to make a supply to
the vendor (original supplier) for a consideration in money equal to the balance of the cash
value of the goods (ss 8(10) and 10(16)). The vendor is entitled to claim an input tax deduc-
tion at such time when the deemed supply is made to it ((par (c) of ‘input tax’ definition and
ss 9(8)) and 16(3)(a)(i)).
31.24 Special rules: Fixed property
31.24.1 Meaning of ‘supply’: Fixed property

The term ‘goods’, includes fixed property and real rights in fixed property. ‘Fixed property’, in turn, is
also defined and includes
l land and improvements to land
l sectional title units
l certain shares in a share block company
l time-sharing interests, and
l real rights in any of the above items.
Since all these forms of fixed property constitute ‘goods’ as defined, a vendor who supplies, or is
deemed to supply, fixed property in the course or furtherance of his enterprise is required to account
for VAT unless the supply is zero-rated or exempt from VAT.
SARS is of the opinion that transactions involving fractional ownership interests in fixed property
would mostly constitute the supply of fixed property and not the supply of shares. ‘Real rights’
include rights such as servitudes or usufructs.
31.24.2 Value of the supply: Fixed property

The rules pertaining to the general value of the supply will also apply to fixed property. No transfer
duty is payable in respect of the acquisition of any property that is a taxable supply of goods for VAT
purposes to the person selling the property. This exemption applies whether the supply is a taxable
1026
supply subject to the standard rate of VAT (14%) or is zero-rated (s 9(15) of the Transfer Duty Act 40
of 1949). Thus a supply of fixed property that is subject to VAT at any rate is exempt from transfer
duty.
If a supply of fixed property does not attract VAT at any rate, the supply will be subject to transfer
duty. Transfer duty is levied at a sliding scale for all persons. No distinction is made between natural
persons and legal persons. The current transfer duty rates are as follows:
On the first R900 000 of value 0%

On the value exceeding R900 000 but not exceeding R1,25 million 3%
On the value exceeding R1,25 million but not exceeding R1,75 million 6%
On the value exceeding R1,75 million but not exceeding R2,25 million 8%
On the value exceeding R2,25 million but not exceeding R10 million 11%
On the value exceeding R10 million 13%
Remember
There could never be both transfer duty and VAT on a single transaction. If a sale of property
attracts VAT, no transfer duty will be payable. If it does not attract VAT, transfer duty will be
payable. In all cases, the VAT provisions take precedence. One must first identify whether or not
the sale is subject to VAT (at either standard or zero rate); if so, transfer duty is not payable.
31.24.3 Time of supply: Fixed property

Where fixed property or any real right in fixed property is supplied by a vendor (therefore excluding
second-hand goods), the time of supply is the earlier of
l the date of registration (where registration of transfer is effected in a deeds registry), or
l the date on which any payment is made in respect of the consideration for such supply.
(Section 9(3)(d).)
The above time-of-supply rule is only applicable to sales of fixed property between connected
persons where the supply was deemed to take place at market value (if s 10(4) was applied – see
31.16.2). If this is the case, the input and output tax should be claimed and paid in full on the actual
date of the supply as determined by the above rule (s 16(3)(a)(iiA)).
We have different rules where the supply was not deemed to take place at market value (where
s 10(4) was not applied). Here we have to distinguish between fixed property that is supplied in the
course or furtherance of an enterprise (see 31.24.3.1) and fixed property that is not supplied in the
course or furtherance of an enterprise (see 31.24.3.2).
31.24.3.1 Time of supply: Fixed property that is supplied in the course or furtherance of an
enterprise
For fixed property transactions in the course of an enterprise
l between parties that are not connected persons, or
l where the parties are connected persons, but the supply was not deemed to take place at market
value (thus s 10(4) was not applied),
the special time-of-supply rule does not necessarily correlate with the actual entitlement to claim an
input tax or the liability to pay output tax.
The input tax may then only be claimed in proportion to the amount paid, irrespective of the date of
transfer. The output tax is also only accounted for to the extent that payment is received
(ss 16(3)(a)(iiA) and 16(4)(a)(ii)). For these transactions, the special time-of-supply rule is actually
ignored. We only have to focus on the payments, as this would trigger an output tax obligation or an
input tax entitlement. It does also not matter whether the applicable vendor is registered on the
invoice basis or payments basis. All input tax and output tax cash flows will arise only to the extent
that payment has been made or has been received.
1027
Remember
l The payment of transfer duty is not payment for a consideration, but payment of an
additional tax on the transaction.
l The payment of a deposit is not regarded as a payment until the deposit is applied as
part-payment or forfeited.
l Payment does not include seller financing or promissory notes.
There are, however, different rules pertaining to fixed property that is not supplied in the course or
furtherance of an enterprise (see 31.24.3.2).
31.24.3.2 Time of supply: Fixed property not supplied in the course or furtherance of an
enterprise
Fixed property that is not supplied in the course or furtherance of an enterprise could include fixed
property that is supplied by a vendor, but where the fixed property, for example, related to exempt
residential use. The fixed property, although supplied by a vendor, would thus be regarded not to be
supplied in the course or furtherance of an enterprise, as exempt supplies are specifically excluded
from the definition of an enterprise (see 31.7.4). Fixed property not supplied in the course or
furtherance of an enterprise would also include second-hand fixed property that is supplied by a non-
vendor.
In both these cases the vendor buying the fixed property would be entitled to a deemed input tax on
the ‘second-hand’ fixed property purchased from a South African resident if such a vendor is going to
use the fixed property in the course or furtherance of making taxable supplies. In this case we,
however, have to distinguish between vendors on the invoice basis and vendors on the payments
basis.
Payments basis (s 16(3)(b)(i))
When a vendor is registered on the payments basis (see 31.3.2), the deemed input tax is always
claimable only to the extent that the payment has been made.
Invoice basis (s 16(3)(a)(ii)(bb))
The deemed input tax for vendors registered on the invoice basis (see 31.3.1) can only be claimed
once the fixed property is registered in the name of the vendor. After registration in the name of the
vendor, the deemed input tax can further only be claimed to the extent that payment was made for the
supply.
Example 31.44. Supply of fixed property as second-hand goods
Venter and Naidoo CC purchased a house from a non-vendor (South African resident) for a con-
sideration equal to the open-market value of R350 000. Venter and Naidoo CC will use the house
to make taxable supplies. As the value of the fixed property is below R600 000, no transfer duty
is payable on the transfer of the fixed property. The registration of the property in the name of
Venter and Naidoo CC occurred on 15 April 2018. Venter and Naidoo CC borrowed money from
ABC Bank and paid the full R350 000 to the non-vendor on 20 March 2018.
Determine when and to what extent input tax may be claimed for the purchase of the house.
Take note that the CC is registered on the invoice basis (see 31.3.1).
SOLUTION
Because the vendor has purchased second-hand fixed property from a South African resident,
deemed input tax may be claimed for the house.
The deemed input tax credit is calculated as follows:
Tax fraction × lesser of consideration paid or market value
= 14/114 × R350 000 .......................................................................................................... 42 982
Although the full consideration for the supply was paid on 20 March 2018, the actual registration
of the house in the name of Venter and Naidoo CC only occurred on 15 April 2018 and the full
deemed input tax may be claimed only after registration – in the tax period covering April 2018.
If it is assumed that only 80% of the house will be used by Venter and Naidoo CC for taxable
purposes, the calculation for the allowable input VAT will be as follows:
R350 000 × 14/114 × 80% = R34 385,96
continued
1028
Whether Venter and Naidoo CC paid cash or used third-party financing to effect payment,
makes no difference to the timing of the deemed input VAT. If Venter and Naidoo CC, however,
used financing that it obtained from the seller, the deemed input tax is claimable to the extent
that Venter and Naidoo CC settles their debt to the seller.
If the house was purchased by a natural person who is registered on the payments basis, the
input tax will be claimable to the extent that payment has been made for the consideration. Let
us assume that the natural person is going to use 80% of the house for taxable purposes, and
that only R300 000 of the consideration has been paid on 20 March 2018. The input tax will then
be as follows:
14/114 × R350 000 × 80% × R300 000/R350 000
= R29 473,68
Thus, R29 473,68 may be claimed as a notional input tax deduction (note).
Note
The deemed input tax could be claimed to the extent that payment was made and to the extent
that the property will be used for taxable purposes. This deemed input tax could be claimed to
the extent of payment in the tax period covering March 2018. We do not need to wait for
registration if the vendor is registered on the payments basis.
31.25 Adjustments: 100% non-taxable use (ss 9(6), 10(7), 16(3)(h), 18(1) and 18B))
In the case of goods or services acquired wholly or partly for making taxable supplies that are then
applied wholly for private, exempt or other non-taxable purposes, a taxable supply will arise for which
output tax must be levied (s 18(1)).
100% taxable use Î 0% taxable use
The output tax is equal to the tax fraction multiplied by the open-market value (s 10(7)), as
determined in the following formula:
A×B
where A = the tax fraction and
B = the open-market value.
The time of supply is the date on which the goods are applied for non-taxable purposes (s 9(6)).
Where any vendor has made an adjustment to output tax in circumstances where partial input tax
was originally claimed, an additional input tax adjustment is provided for. The purpose of this adjust-
ment is to allow a deduction of the unclaimed portion of the input tax. The adjustment is required to
be made on the date on which the goods are supplied. For this purpose, the following formula is to
be used (s 16(3)(h)):
A×B×C
where A = the tax fraction
B = the lesser of:
– adjusted cost (including VAT) of the goods or services (an exception being that the
cost for connected persons will be the open-market value on the date of the original
transaction)
– ‘B’ in formula A × B × C × D in s 18(4) (see 31.26)
– the open-market value on the date that a previous increase or decrease was calcu-
lated if the open-market value was lower than the adjusted cost, or
– the open-market value of the goods or services at the time the change-of-use
adjustment is required.
C = the percentage use for non-taxable purposes for the period before the adjustment.
Remember
l The adjusted cost of an asset differs from the cost price of the asset. The ‘adjusted cost of
an asset’ refers to that part of the cost price of the asset where VAT has been charged or
would have been charged if VAT was applicable when the goods or services were supplied
to the vendor.
l Wages and finance charges are sometimes included in the cost price of an asset. These
costs would, however, not be included in the adjusted cost of the asset as no VAT is levied
on either the wages or the finance charges.
1029
Example 31.45. 100% non-taxable use

Gaisang Greenfinger purchased ten lawnmowers to be sold in his nursery. Each lawnmower cost
him R1 000 (including VAT). At the time of purchase, he intended to sell the lawnmowers in the
course of his business and claimed input tax of R122,81 (R1 000 × 14/114) per lawnmower.
Gaisang decided to take one of the lawnmowers for his own private use in his garden at home.
Gaisang usually sells the lawnmowers for R1 800 each (including VAT).
Calculate the output tax.
SOLUTION
R
Output tax adjustment is equal to the tax fraction multiplied by open-market value ........ 221,05
= 14/114 × R1 800
If Gaisang originally acquired the lawnmower for making only 55% taxable supplies, the
VAT consequences would have been as follows:
Output tax
= 14/114 × R1 800 (s 18(1)) ............................................................................................. 221,05
Input tax
= 14/114 × R1 000 × 45% (non-taxable use) (s 16(3)(h)) ................................................. 55,26
Repairs, maintenance or insurance in respect of a motor vehicle used by a vendor for making taxable
supplies can subsequently be deemed to be supplied by the vendor. This is if the vehicle is used for
a purpose other than taxable supplies (such as for private use). The value of the deemed supply will
be the cost (including tax) to the vendor of acquiring the repairs, maintenance or insurance.
Remember
l This change in use adjustment is not applicable if the input has been denied, for example
motor vehicles or entertainment assets (see 31.21).
l The open-market value is used in cases where the use for taxable purposes decreases to
0%, but if the goods are still used in the course of making taxable supplies and the extent
merely decreases, another provision will be applicable (s 18(2) – see 31.27).
l This change in use adjustment is made on the date of the change of use.
Property developers usually develop residential property (for example, townhouse complexes) with
the principal purpose of selling the completed residential units in the course of making taxable
supplies. This change in use adjustment would apply to property developers that are sometimes
forced to shift from a resale intention to a rental application due to weak selling market conditions. As
these properties are rented out as residential accommodation that constitutes an exempt supply, the
developer has a VAT change in use that usually results in an output tax adjustment (s 18(1)). This
change of use adjustment forces certain property developers into insolvency.
The VAT system provides temporary relief to developers that rent residential fixed properties before
intended sale (s 18B). Developers will be granted a 36-month grace period to rent residential
property before resale. If certain requirements are met, the developer does not have to make a
change in use output tax adjustment on the date of the rental application. If the vendor rents the
residential fixed property beyond the permissible 36-month period, an output tax adjustment will
apply (s 18B).
The relief is only applicable to developers as defined. A developer means a vendor that continuously
or regularly constructs, extends or substantially improves residential fixed property with the purpose
of selling that fixed property (s 18B(1) – definition of developer). A person merely buying and selling
residential fixed property would not qualify as a developer and any temporary renting by such a
person would immediately result in a change of use adjustment (s 18(1)). Even if a person qualifies
as a developer as defined, only fixed property developed by the developer with the purpose of
taxable resale would qualify for the temporary rent relief (s 18B(2)).
The time of supply for the change of use adjustment is the earlier of
l the date of the expiry of the 36-month period of residential rental, or
l the date that the fixed property is permanently applied for a purpose other than making taxable
supplies (s 18B(3)).
The value of the change of use adjustment is the open market value of the residential property on the
date of the deemed supply and not the market value on the date of rental application (s 10(7)).
1030
This relief is only applicable until 31 December 2017 (s 18B).
Example 31.46. Relief for property developers (s 18B).
Mr Chill is a residential property developer who recently completed a development in Mooikloof,

Pretoria. Due to the current market conditions Mr Chill is unable to sell the residential units.
Discuss the VAT consequences of the following scenarios:
(a) Mr Chill decides to temporarily rent out the property with the intention to sell the property.
After 18 months a buyer is found and the property is sold.
(b) Mr Chill decides to temporarily rent out the property with the intention to sell the property.
After 36 months he is still unable to sell the property.
(c) Mr Chill decides to temporarily rent out the property with the intention to sell the property.
After 12 months his intention changed and he decided to take the property off the market
and rent it out permanently.
SOLUTION
(a) No output VAT adjustment needs to be made on the date that the property is rented out. As
the property is sold within the 36-months relief period, output VAT will be levied on the date
of supply of the property (s 7(1)(a)).
(b) No output VAT adjustment needs to be made on the date that the property is rented out. As
Mr Chill was unable to sell the property within the 36-month relief period, an output VAT
adjustment will have to be made on the expiry of the 36 months (s 18B). The value of the
change-of-use adjustment is the open market value of the residential property at the end of
the 36-month period (s 18B).
(c) No output VAT adjustment needs to be made on the date that the property is rented out. On
the date that Mr Chill changed his intention in respect of the property, the relief provided will
no longer apply and he will have to make an output VAT adjustment. The value of the
change-of-use adjustment is the open market value at the end of the 12-month period
(s 18B).
31.26 Adjustments: Subsequent taxable use (s 18(4))

In the case of goods or services acquired wholly for the purposes of making non-taxable supplies
that are subsequently applied for making taxable supplies, an adjustment must be made to input tax.
0% taxable use Î 100% taxable use
This input tax is calculated by applying the following formula:

A×B×C×D
B = the lesser of:
– adjusted cost (including VAT) of the goods or services, or
– open-market value of the goods or services at the time the change-of-use adjust-
ment is required
C = the percentage by which the taxable use of goods or services has increased (an
increase to 95% or more is deemed to be 100%), and
D = if the goods are second-hand goods (see 31.22), the percentage of the consideration
that has been paid.
This adjustment is required to be made in the tax period when the goods are applied for taxable
purposes.
Remember
l This input tax adjustment is not applicable if the input has been denied, for example motor
vehicles or entertainment assets (see 31.21). For example, a vendor took a fridge from the
flat he rented for residential purposes to the kitchen of his taxable enterprise. Although the
fridge is now used for taxable purposes, it relates to the supply of entertainment, and no
input tax deduction can be made with the change in use.
continued
1031
l This input tax adjustment is also applicable if a motor car or entertainment asset was acquired
and, on purchase date, the input tax was denied, but subsequently the use of the asset
changed. For example, a warehouse purchased a fridge for the canteen. Originally input tax
was denied. Then the fridge was moved to the warehouse to be used for taxable purposes
and not the supply of entertainment. An input tax adjustment is permitted.
l This input tax adjustment is applicable if there is an increase of taxable use, but only if the
taxable use before the increase was 0%. (For other increases of taxable use, see 31.27.)
Example 31.47. Subsequent taxable use

Mr Knowhow, a VAT vendor on the invoice basis, did the following in March 2018:
l He started to use his personal motor vehicle 100% for business purposes. His business
entails only taxable supplies, and he is not a car dealer. The motor vehicle cost him R66 000
(VAT inclusive) and on the date when he started to use it for business purposes, it had a
market value of R37 500.
l He started to use his private computer 100% for business purposes. The computer cost him
R11 355 (VAT inclusive) and had a market value of R7 300 when he started to use it for
business purposes.
l He started to use his private printer 97% for business purposes. The printer was bought from
a non-vendor for R2 500 and had a market value of R1 500 on the date on which he started
to use it for business purposes. The full purchase price had been paid.
l He converted 80% of his private residence into offices. He bought his residence for
R500 000. He bought the residence on credit from the seller and has paid only R300 000 up
to date. At the date when he started to use 80% of the residence as offices, it had a market
value of R750 000.
SOLUTION
Motor vehicle
Cannot claim input tax, as input tax is denied (ss 17(2) and 18(4)).
Computer
A×B×C
14/114 × R7 300 × 100% = R896,49 input tax can be claimed (s 18(4)).
Printer
A×B×C×D
14/114 × R1 500 × 100% (note 1) × 100% = R184,21 input tax can be claimed.
Offices
A×B×C×D
14/114 × R500 000 (note 2) × 80% × R300 000/R500 000 = R29 473,68 input tax can be
claimed.
Notes
(1) Taxable use of 97% is deemed to be 100% (as it is more than 95%).
(2) The lesser of the original cost of R500 000 and the market value on the date of the change of
use – R750 000, should be used.
31.27 Adjustments: Increase and decrease of taxable use (ss 9(5), 18(2), 18(5),
18(6) and 10(9))
Where capital goods are used for taxable purposes, the extent of the taxable use could change. The
taxable use could increase or decrease. This is applicable only if the decrease results in a lesser
taxable percentage, but not to 0%, as s 18(1) is used for such adjustments (see 31.25). If the taxable
use increases from 0% to something else, an adjustment in terms of s 18(4) should be made (see
31.26). If, however, there is an increase, but not from 0%, or a decrease, but not to 0%, then the
vendor also has to make certain adjustments to the input or output tax. This will be the case when, for
example, the taxable usage was 35% in Year 1 and 60% in Year 2. The adjustment for the increase will
be calculated in terms of s 18(5). If, for example, in Year 3 the taxable usage decreases to 27%, the
adjustment for the decrease will be calculated in terms of s 18(2).
1032
Section 18(2)
100% taxable use Î lower % of taxable use (but not 0%)
Section 18(5)
< 100% taxable use Î higher % of taxable use
No adjustment needs to be made when

l the adjusted cost of such capital goods or services is less than R40 000 (excluding VAT)
l an adjustment in respect of s 18(4) had been made previously and the amount then represented
by ‘B’ in the formula A × B × C × D in s 18(4) was less than R40 000 (excluding VAT)
l the increase or decrease is equal to or less than 10%, or
l the input has been denied – for example motor vehicles or entertainment assets.
This adjustment is usually only made at the end of a year of assessment (ss 9(5) and 18(6)). If a
vendor ceases to be a vendor prior to the end of a year of assessment, the adjustment is required
immediately before that vendor ceases to be a vendor (proviso to s 18(6)).
The value of the adjustment is calculated as follows (ss 10(9) and 18(5)):
A×B×C
B = the lesser of:
– the adjusted cost (including VAT) of the goods or services (with the exception that
the cost for connected persons will be the open-market value on the date of the
original transaction), or
– ‘B’ in formula A × B × C × D in s 18(4) (see 31.26), or
– the open-market value on the date that a previous increase or decrease was calcu-
lated if the open-market value was lower than the adjusted cost price, or
– the open-market value of the goods or services at the time the change-of-use
adjustment is required, and
C = the percentage by which the taxable use of goods or services has decreased or
increased (that is, more than 10%).
In the case of a change of use relating to a decrease in the extent of taxable use or application of
capital goods or services, a deemed supply arises and the adjustment will then result in output tax.
In the case of a change of use relating to an increase in the extent of taxable use or application of
capital goods or services, additional input tax credits may then be claimed.
Example 31.48. Increase and decrease of taxable use
Jo Soap purchased a computer for his business for R48 000 (including VAT). 60% of the
business relates to taxable supplies. Input tax claimed was therefore R48 000 × 14/114 × 60% =
R3 537. At the end of Jo’s Year 1, Jo determined that 45% of his business would now relate to
taxable supplies. The market value of the computer on that date was R45 000. At the end of
Year 2, Jo determined that 80% of the business would now relate to taxable supplies and the
market value of the computer on that date amounted to R49 500.
SOLUTION
R
Year 1
14/114 × R45 000 × 15% (60% – 45%)............................................................................ 828,95
= Output tax payable by Jo.
Year 2
14/114 × R45 000 (note) × 35% (80% – 45%) ................................................................. 1 934,21
= Input tax claimable by Jo.
Note
Although the market value was R49 500, the lower of the cost, current market value or the value
of the previous adjustment should be used.
1033
Remember
l Decrease in taxable use to 0%: Output tax adjustment (s 18(1)) and additional input tax relief
(s 16(3)(h) – see 31.25).
l Increase in taxable use from 0%: Input tax adjustment (s 18(4) – see 31.26).
l Any other increases or decreases: Ss 18(2) (decrease) and 18(5) (increase). Only for capital
goods or services.
l These increases and decreases of taxable use adjustments (ss 18(2) and 18(5)) are only
made at year-end. The market value at year-end (and not at any other date) is relevant as
the ‘B’ value in the formula.
Example 31.49. Adjustments comprehensive

A vendor acquires capital goods or services partly (65%) for the purposes of making taxable
supplies for R86 700 (including VAT). The vendor claimed R6 921 as input tax (R86 700 × 14/114 ×
65%). The open-market value in all cases is R102 600.
Year 1: The taxable percentage increases to 80%
Year 2: The taxable percentage reduces to 58%
Year 3: The taxable percentage is 0%.
Calculate the adjustments to be made by the vendor.
SOLUTION
Year 1: A × B × C
= 14/114 × 86 700 × 15% (80% – 65%)
= R1 597 (input tax adjustment)
Year 2: A × B × C
= 14/114 × 86 700 × 22% (80% – 58%)
= R2 342 (output tax adjustment)
Year 3: A × B
= 14/114 × R102 600 (market value for s 18(1))
= R12 600 (output tax adjustment)
Additional input VAT relief – (s 16(3)(h))
= A×B×C
= 14/114 × 86 700 × 42% (100% – 58%)
= R4 472 (input tax adjustment)
31.28 Adjustments: Game-viewing vehicles and hearses (ss 8(14)(b), 8(14A), 9(10),
10(24) and 18(9))
Remember
Transport in a game-viewing vehicle or hearse is subject to VAT at the standard rate.
When an input tax deduction has been denied in respect of the acquisition of a motor vehicle, the
vendor could subsequently claim the input tax deduction if the motor vehicle was converted into a
game-viewing vehicle or hearse (ss 17(2) and 18(9)). This converted game-viewing vehicle or hearse
is deemed to be supplied to that vendor in that tax period. The vendor will be allowed to claim an
input tax equal to the tax fraction on the lesser of
l the adjusted cost, or
l the open-market value
of that vehicle on the day before the conversion. However, the deduction should exclude any amount
of input tax that qualified for a deduction under another provision of the VAT Act.
Should this be the situation and, upon conversion of a vehicle, a vendor managed to claim an input
tax deduction, the vendor would then be liable to declare output tax on the subsequent supply of the
vehicle. This is the case as it would be deemed to be a supply in the course or furtherance of the
vendor’s enterprise (s 8(14)(b)). The value of the supply would be deemed to be the open-market
value of that vehicle (s 10(24)).
1034
Should a game-viewing vehicle or hearse subsequently be applied for a purpose other than the
purpose for which the input tax deduction was initially allowed, a supply at the standard rate for these
continued assets is deemed to take place (s 8(14A)). The value of the supply is deemed to be the
open-market value of that vehicle (s 10(24)).
The time of supply is deemed to be the time that the game-viewing vehicle or hearse is supplied as
contemplated in ss 8(14)(b) and (14A) (s 9(10)).
Example 31.50. Conversion of motor vehicle (s 18(9) adjustment)
A station wagon is purchased for R114 000 (VAT included). An input tax deduction is denied, as
the station wagon falls within the ambit of the definition of ‘motor car’ (s 17(2)(c)). The station
wagon is subsequently converted into a hearse for R22 800 (VAT included). The market value on
the date of the conversion was R115 000.
Calculate the input tax claimable as a result of the conversion of the motor vehicle.
SOLUTION
Input tax of R2 800 (R22 800 × 14/114) is allowed on the conversion costs. An adjustment will be
allowed, which will result in an input tax claim of R14 000 (R114 000 × 14/114) in relation to the
acquisition of the station-wagon (s 18(9)).
Where the hearse is subsequently sold to another undertaker, the supply will be subject to VAT
at the standard rate (s 8(14)(b)). Alternatively, where the hearse is converted back into a station-
wagon or it is no longer used to transport deceased persons, a supply of the hearse is deemed
to be made (s 8(14A)).
31.29 Adjustments: Supplies of going concerns (s 18A)
31.29.1 100% taxable usage

When all (or at least 95%) of the assets of the going concern are used for the making of taxable
supplies, and the going concern is subsequently disposed of to a purchaser that will also use all (or
at least 95%) of the assets for taxable purposes, the effect is that
l the seller levies output tax at the rate of 0% on the full transaction, and
l the purchaser pays Rnil input tax and may not claim any input tax on the transaction.
31.29.2 More than 50% taxable usage for the purposes of the going concern
When the seller applies the assets of the going concern mainly (that is more than 50%) for the making
of taxable supplies, but also partly for other purposes, all the assets are deemed to form part of the
going concern disposed of and the full selling price is zero-rated.
The effect of this type of going-concern sale is as follows:
l The seller will be entitled to claim additional input tax credits for that part of the going concern for
which input tax credits were not granted in the past. Initially, when certain expenditure was
incurred, part of the input tax was denied as it was being used partly for non-taxable supplies.
These additional input tax credits relate to the change of use in respect of that part of the going-
concern goods acquired partly for non-taxable purposes that are subsequently wholly applied for
making taxable going concern supplies (s 16(3)(h)).
Where partial input tax was originally claimed, an additional input tax adjustment is provided for.
The purpose of this adjustment is to allow a deduction for the unclaimed portion of the input tax
(see 31.25). The adjustment is required to be made on the date on which the goods are supplied
(s 9(6)).
l The seller will levy output tax at the rate of 0% on the full selling price of the sale of the going
concern.
l The purchaser will pay Rnil input tax and may not claim any input tax on the transaction.
l The purchaser must raise output tax, based on the percentage of non-taxable use of the pur-
chaser (not that of the seller) (s 18A).
– The purchaser must account for output tax on that portion of the ‘full cost’ of acquiring an
enterprise that relates to its intended non-taxable use. If the taxable use is equal to or more
than 95%, the non-taxable use will be deemed to be zero.
1035
– For example, if a business is acquired as a going concern for R500 000 (including VAT at 0%)
and the intended taxable use is only 80%, the purchaser is required to account for output tax
on R100 000 (R500 000 × 20% (100% – 80%)). This output tax will amount to R14 000
(R100 000 × 14%).
– Should any of the assets acquired consist of items in respect of which an input tax deduction
was denied (for example, motor car or entertainment equipment – see 31.21), the cost of
acquiring the concern may be reduced by the cost of such assets. Assume in the above
example that R90 000 of the R500 000 relates to a motor car, R15 000 relates to entertainment
equipment and that the input tax on both items will be denied. Output tax should thus be raised
on R79 000 ((R500 000 – R90 000 – R15 000) × 20%). The adjustment will then amount to
R11 060 (R79 000 × 14%) (s 18A). This calculation could be summarised as follows:
Calculation of the going-concern VAT adjustment (s 18A)
Step 1: Determine the total value of the going concern.
Step 2: Reduce such value by the value of assets that specifically relate to 100% taxable
supplies.
Step 3: Reduce the value by all items for which input tax would have been denied.
Step 4: Multiply the answer by the non-taxable use.
Step 5: Multiply the answer by 14%.
Example 31.51. Going-concern VAT adjustment (s 18A)
Financinki, a vendor, acquires a business as a going concern from Itsover CC at the zero rate for
R500 000. Financinki determines that three office desks, six chairs and two laptops will be used
100% to make taxable supplies. The value of these assets amounts to R70 000. Included in the
R500 000 purchase price is a motor car to the value of R95 000 and a coffee machine to the
value of R10 000. Except for the assets specifically mentioned, Financinki estimates that the rest
of the assets will be used 65% for the making of taxable supplies.
Itsover CC used the chairs, desks and laptops 70% for the purposes of making non-taxable sup-
plies. The value of the above-mentioned items constitutes R70 000 of the R500 000 purchase
price. The original cost of these items for Itsover CC amounted to R114 000 (VAT inclusive). All
the other items relating to the acquired concern were used 100% by Itsover CC for the purposes
of making taxable supplies.
Calculate all the VAT implications of the above transaction.
SOLUTION
Itsover CC
Output tax
Selling of the enterprise as a going concern:
((R500 000 – R95 000 – R10 000) × 0%) .......................................................................... Rnil
Additional input tax relief (s 16(3)(h))
A×B×C
14/114 × R70 000 (lesser of cost or market value) × 70% (non-taxable use)
= R6 017,54 input tax
Financinki
Input tax
Buying of the enterprise as a going concern: (R500 000 × 0%) ...................................... Rnil
Output tax
Going concern VAT adjustment (s 18A)
Step 1: Total value of the concern .................................................................................. 500 000
Step 2: Less: Items applied 100% for taxable use ........................................................ (70 000)
Step 3: Less: Items on which input tax was denied
– Motor car ...................................................................................................... (95 000)
– Coffee machine ............................................................................................ (10 000)
325 000
Step 4: Multiply by the non-taxable use 35% (100% – 65% = 35%) (R325 000 × 35%) 113 750
Step 5: Multiply by 14% = R113 750 × 14%
Output tax to be paid to SARS .......................................................................................... 15 925
1036
31.29.3 Less than 50% of the selling price relates to the going concern
If the seller applied the goods or services of the enterprise partially for the purposes of the going
concern, but not mainly (thus less than 50%), only the portion of the selling price that relates to the
going concern may be zero-rated.
l The seller should charge VAT at the zero rate on the going-concern portion of the supply.
l The seller must charge VAT at the standard rate in respect of the non-going-concern portion.
l The seller can claim an input tax adjustment for the assets used for non-taxable purposes
(s 16(3)(h)).
l The purchaser may claim input tax credits where the assets acquired at the standard rate will be
applied for purposes of making taxable supplies. However, the purchaser will not be able to
claim an input tax deduction in connection with the portion he is going to use for non-taxable
purposes.
l The purchaser will be required to make an adjustment where he does not apply the going-
concern portion only for taxable purposes (s 18A).
Example 31.52. Less than 50% of selling price relates to going concern
A farm, together with crops and assets, that was used by B for taxable purposes (farming),
exempt purposes (provision of accommodation to labourers) and private purposes (the farm
house and game farm) is sold as a going concern to Z for R2 million (excluding VAT). Only 40%
of the selling price relates to the taxable supply of farming (going concern). The R2 million does
not include any assets in respect of which an input has been denied. Z estimates that he will also
use only 40% of the farm for taxable purposes (going concern). The cost price of the concern for
B amounted to R900 000 when he originally bought it from a vendor.
Explain and calculate the VAT consequences of the above.
SOLUTION
VAT consequences for B (seller):
Output tax
Two supplies are deemed to occur for VAT purposes. The supply relating to the
going concern is zero-rated and the second supply is a supply at the standard
rate.
Zero-rated portion: R2 000 000 × 40% = R800 000 × 0% = .......................... Rnil
Standard-rated portion: R2 000 000 × 60% × 14% = ............................................ R168 000
Input tax
Additional input VAT relief (s 16(3)(h))
A×B×C
14/114 × R900 000 (lesser of cost or market value) × 60% = .................................. R66 315,79
VAT consequences for Z (purchaser):
Input tax
Although he paid input tax of R168 000, he cannot claim it as a deduction, as it is not incurred for
the making of taxable supplies.
Output tax
The full supply of the going concern (40%) will be utilised for taxable purposes, thus no addi-
tional adjustment (s 18A) is required.
31.30 Adjustments: Leasehold improvements (ss 8(29), 9(12), 10(28) and 18C)
In common law, any improvements that become permanently attached to fixed property become the
property of the owner of the fixed property. When fixed property is rented out, any improvements
erected on the fixed property by the lessee (person renting the fixed property) become the property
of the lessor (owner of the fixed property).
If the lessee makes the leasehold improvements for a consideration, the VAT consequences follow
the normal VAT rules. The lessee will make a supply of the leasehold improvements to the lessor. The
lessee will pay input VAT on the expenses incurred in making the supply and the normal input VAT
rules will be followed to determine the deductibility of the input tax. The lessee will also make a
supply in the form of leasehold improvements to the lessor. The nature and use of the leasehold
1037
improvements will drive the output VAT consequences for the lessee and the deductibility of the input
VAT for the lessor.
From 1 April 2018 a special deemed supply rule clarifies the lessee’s entitlement to an input VAT
deduction for leasehold improvements erected for no consideration. The deemed supply rule
provides that the leasehold improvements are deemed to be a supply of goods in the course of the
enterprise of the lessee (s 8(20)). The time of supply is the time the leasehold improvements are
completed (s 9(12)). The value of the deemed supply is nil (s 10(28)). The extent consideration is
received and the use of the leasehold improvements determine the application of the deemed supply
rule:
l The deemed supply rule is applicable to the extent that the leasehold improvements are made for
no consideration.
l The deemed supply rule is only applicable if the improvements are not wholly erected to be used
in the making of exempt supplies (8(29)). This implies that it is applicable unless there is a 100%
non-taxable use. If the leasehold improvements are partly used for taxable purposes, the deemed
supply rule seems to fully apply to the improvements erected for no consideration.
To the extent that no consideration has been paid by the lessor, the lessor is required to make an
output tax adjustment (s 18C). The objective of the adjustment is to equalise the lessor’s VAT position
to one where he had effected the leasehold improvements himself. If the lessor effected the
leasehold improvements, the lessor would not have been entitled to input VAT:
l to the extent that the improvements are used for a purpose for which an input tax would usually
be denied (for example entertainment – see 31.21), or
l to the extent that the lessor uses it for making non-taxable supplies (for example residential
accommodation).
The output VAT adjustment is as follows:
A × B × C, where:
A = 14/114 (the tax fraction)
B = the amount stipulated in the leasehold agreement, or if no amount is stipulated, the
open market value of the improvements
C = the percentage of use for non-taxable purposes or application of goods where the input
tax would have been denied (see 31.21)
The lessor should make the adjustment when the leasehold improvements are completed. The VAT
treatment of leasehold improvements are the same irrespective if the lessee were obliged to erect the
improvements or not. It is, however, only leasehold improvements where the lessor does not pay the
lessee for the total value of the improvements that would trigger the deemed supply (lessee – s 8(29))
and adjustment (lessor – s 18C).
31.31 Adjustments: Irrecoverable debts (ss 16(2)(f) and 22)

When a vendor has accounted for output tax in respect of a taxable supply and all or part of the
consideration subsequently becomes irrecoverable, the vendor becomes entitled to an input tax
deduction. The amount of this input tax deduction relates to the full amount of VAT levied on the
original supply in the same proportion as the amount of the irrecoverable consideration written off
relates to the total consideration (s 22(1)).
In order to claim an input tax deduction for irrecoverable debt, the following documentary proof has
to be retained:
l accounting records reflecting the balance of the outstanding debt and amount of VAT written off
l proof that the VAT was charged and declared in a VAT return.
Example 31.53. Bad debts
For accounting purposes, Talita (Pty) Ltd wrote off R4 633 as bad debts. This amount comprises
an amount of R2 850 owing by a local debtor and an amount of R1 783 owing by an export sale
debtor.
Provide the journal entry for the above in the books of Talita (Pty) Ltd.
1038
SOLUTION
R R
Dr Bad debts (R4 633 – R350) ..................................................... 4 283
Dr Input tax (see note 2) .............................................................. 350 (R2 850 × 14/114)
Cr Local debtor ........................................................................ 2 850
Cr Export debtor ...................................................................... 1 783
Bad debts written off and corresponding VAT adjustment.
Note
(1) The sale to the export debtor was a zero-rated supply. No adjustment to the VAT is therefore
allowed when the debt is subsequently written off.
(2) One of the requirements to be able to deduct a bad debt for income tax purposes is that the
amount of the debt must have been included in the taxpayer’s income in either the current
or a previous year of assessment. As the output tax was never included in Talita (Pty) Ltd’s
income, only R4 283 (therefore excluding VAT) would quality as a bad debt deduction (see
chapter 12).
If the debt is wholly or partly recovered, the tax attributable to the amount recovered by the vendor is
deemed to be tax charged by him in relation to a taxable supply made during the tax period in which
the debt is recovered and must be accounted for as output tax (s 22(2)).
When a debt is irrecoverable, the vendor (seller) is entitled to an amount of input tax. However, if a
vendor does not pay his creditors, he will be obliged to account for an additional amount of output
tax. This is due to the fact that he claimed the input tax initially, when he incurred the expense. This
additional output tax arises when a vendor on the invoice basis has
l deducted input tax in respect of a taxable supply of goods or services made to him, and
l not paid the full consideration for the supply within 12 months from the end of the tax period in
which the deduction was claimed.
The tax fraction (as determined at the time of deduction) of the unpaid portion of the consideration
must be accounted for as output tax (s 22(3)).
If a written agreement provides for payment to be made after the tax period in which the deduction of
the input tax was made, the period of 12 months will be determined from the end of the month in
which the consideration is payable (proviso (i) to s 22(3)). For example, A and B might agree in
writing that A will pay B only three months after the date of the supply. If this is the case, the adjust-
ment of the output tax will arise only if A pays B after a period of 15 months (the original three months
as per the contract plus the additional period of 12 months).
This payment of additional output tax is also applicable to a vendor who
l has either voluntarily or compulsorily been sequestrated, or
l has been declared insolvent, or
l has entered into an arrangement, or
l has entered into any compromise with creditors (proviso (ii) to s 22(3)), or
l has ceased to be a vendor (s 8(2) - see 31.12.1) (proviso (ii) to s 22(3)).
The input tax may again be deducted if the vendor subsequently pays the consideration in respect of
the supply (s 22(4)).
Remember
l When a vendor transfers an account receivable at face value on a non-recourse basis to
another person, there will be no adjustment to the input tax. However, an adjustment is
required to the extent that the amount received is less than the face value (first pro-
viso (iv)(aa) to s 22(1)).
l If the person to whom the account receivable was transferred on a non-recourse basis, has
written off any amount as irrecoverable, he could make an adjustment to input tax even
though he did not originally account for the output tax on the supply (s 22(1A)). If any
irrecoverable amount is ceded back to the vendor who transferred the account receivable on
a recourse basis, such an adjustment to the input tax should be made by the vendor (first
proviso (iv)(bb) to s 22(1)).
l When the vendor is registered on the payments basis, the output tax will mostly arise only
when the recipient pays the outstanding debt. In such a case, no adjustment should be
made when there are any irrecoverable amounts (second proviso (ii) to s 22(1)).
1039
Group companies often do not have written agreements with one another for each VAT transaction
processed via loan account. Group companies also often operate internal loan accounts for commer-
cial reasons without clearing these accounts for many years. Therefore, the 12-month unpaid creditor
adjustment is unrealistic in a group context. Debts between inter-group companies are not subject to
the 12-month unpaid creditor adjustment (s 22(3A)). The creditor providing the supply to the
indebted group company can also not claim an input deduction for a bad debt written of (s 22(6)(a)).
For the purpose of applying this relief, a group of company is defined as in s 1 (see chapter 20) with
the exception that the 70% shareholding should be replaced with a 100% shareholding (s 22(6)(b)).
Example 31.54. Bad debts in group situation
Slow-Mo (Pty) Ltd owns 100% of the shares in Retro (Pty) Ltd. Retro (Pty) Ltd supplied goods to
the value of R750 000 to Slow-Mo (Pty) on a loan account. After 15 months the amount in respect
of the loan is still unpaid.
Discuss the VAT consequences of the following scenarios:
(a) Because Slow-Mo (Pty) Ltd had cash-flow problems, Retro (Pty) Ltd decided to write off the
debt owed as bad debt.
(b) 14 months after the date of the initial transaction Slow-Mo (Pty) Ltd sold 40% of its shares in
Retro (Pty) Ltd to an unconnected third party.
SOLUTION
(a) As Slow-Mo (Pty) Ltd and Retro (Pty) Ltd are a group of companies (for the purposes of
s 22(6)), the 12-month unpaid creditor adjustment will not apply to Slow-Mo (Pty) Ltd.
Consequently Retro (Pty) Ltd will not be entitled to an input tax deduction on the bad debt
write-off.
(b) As the two companies are no longer a group of companies (for the purposes of s 22(6)) the
12-month unpaid creditor adjustment will apply. Slow-Mo (Pty) Ltd would have to account
for output VAT for the supply of goods made to them. If Retro (Pty) Ltd were to write off the
loan as bad debt, Retro (Pty) Ltd would be entitled to an input tax deduction (as the
provisions of s 22(6) will no longer apply).
31.32 Agents (ss 8(20), 16(2), 19 and 54)

The general VAT rules assume that the vendor acquires all the required goods and services and
makes all the relevant supplies. The VAT Act, however, also provides for situations when a third party
can act on behalf of an entity still to be formed (pre-incorporation expenses – see 31.32.1) or as an
agent for a principle (see 31.32.2).
31.32.1 Pre-incorporation expenses (s 19)

VAT on expenses incurred by a person on behalf of a company or in connection with the incorpora-
tion of a company may, in certain instances, be deducted by the company (s 19). This will only be
allowed if the person
l incurred the expenses before the incorporation of the company
l was reimbursed by the company for the whole amount paid
l acquired the goods or services for the purpose of an enterprise to be carried on by the company,
and
l has not used the goods or services for any other purpose.
The company (being the vendor) can deduct that VAT as input tax in the tax period during which the
reimbursement is made.
Input tax may not be deducted by the company where
l the supply by the person who acted on behalf of the company is a supply of second-hand goods
or a taxable supply. (When it is a taxable supply, and not a mere reimbursement, the input tax
will be deducted through the normal rules. If it is a supply of second-hand goods, the normal
VAT rules will also provide for a notional input VAT.)
l the goods or services were acquired more than six months before the date of incorporation of the
company, or
l the company does not hold sufficient records.
1040
31.32.2 Agents (ss 8(20), 16(2) and 54)

A practical problem encountered is when goods or services are supplied to and by VAT vendors via
agents. An agent merely has authority to act on the principal vendor’s behalf and to facilitate a trans-
action. The agent is itself not legally a party to the transaction. The third party will often be unaware of
the principal vendor on whose behalf the agent is acting. This will result, for example, in VAT invoices
for supplies to be issued in the name of the agent, although the agent acts on behalf of a principal
vendor. The question then arises who is entitled to the input VAT deduction or liable for an output VAT
obligation on transactions where agents act on behalf of a principal vendor. The answer to the
question is that the agent is usually disregarded when we account for the VAT. Most transactions
between third parties and agents who act on behalf of a principal vendor, are for VAT purposes
deemed to be transactions between the principal vendor and the third party (ss 54(1) and 54(2)). The
VAT consequences of supplies to and by the agent will therefore be attributed to the principal
vendor. This is the case irrespective of whether any supporting documents are issued in the name of
the agent of the principal.
As stated, all documentary proof (invoices, debit and credit notes) can be issued by the agent or
principal and can be in the name of the agent or principal (provisos to ss 54(1) and 54(2)). If the
documentation is in the name of the agent, the principal should be informed in writing of such
supplies. The agent should inform the principal within 21 days from the end of the calendar month
during which the supplies were made (this is referred to as the agent statement). The agent shall also
maintain sufficient records to identify the name, address and VAT registration number of the principal
to whom the supply relates (s 54(3)). If documents are issued in the agent’s name, it is not a require-
ment that the information of the principal appears on the documents.
The principal will be entitled to claim input tax on supplies to an agent if in possession of the following
required documentary proof:
l a tax invoice issued in the name of the principal (s 16(2)(e)), or
l a statement from the agent (an agent statement) on which supplies made to the agent on behalf
of the principal are indicated (s 16(2)(e)).
Agents could act on behalf of principals who are not vendors. If the principals are South African
residents, the principal is the final consumer of the goods and no input VAT can be claimed on pur-
chases and no output tax is levied on supplies on behalf of the non-vendor principal.
The situation becomes more complicated when the principal is not a vendor, but also not a South
African resident (foreign non-vendor). Cross-border transactions attempt to zero-rate all exports and
to levy VAT on the importation of goods. To facilitate this process, the agent should only account for
VAT in capacity as agent in the following two exceptional instances:
l International transport on behalf of a non-vendor principal (s 54(6))
An agent could arrange international transport of goods on behalf of a foreign non-vendor
principal. As part of the international transport, VAT is levied in respect of local transport in South
Africa (taxable supply). The agent is entitled to claim input tax for the local transport of goods to
ensure that the foreign non-vendor principal does not incur non-refundable VAT.
l Goods imported on behalf of a foreign non-vendor principal (s 54(2A)(b))
An agent sometimes imports goods on behalf of a foreign non-vendor principal. If the goods
imported are intended for a supply to a person in South Africa, the agent usually pays VAT on the
importation of the goods (s 13). The agent and principal could then agree in writing that the VAT
paid by the agent on importation, is not reimbursed by the principal to the agent. The agent is
then deemed to have imported the goods and is entitled to claim input tax (as output tax was
levied on importation). The agent will then, however, also be liable to levy output tax on the
supply of the goods on behalf of the principal to a person in South Africa (s 8(20)).
Example 31.55. Agents’ example
An exporter approaches a ship’s agent to transport goods from Johannesburg to Liverpool (Eng-
land). The ship’s agent contracts with the exporter as agent on behalf of his principal, a ship-
owner. The shipowner is registered as a vendor in South Africa. The shipowner will ship the
goods from Durban to Liverpool and required another service provider to move the goods from
Johannesburg to Durban.
continued
1041
The ship’s agent, acting in his capacity as agent for the shipowner, contracts with Transnet to
move the goods from Johannesburg to Durban. Transnet levies output tax at 14% in respect of
the local transport service of the goods (taxable supply) and issued a tax invoice, in the name of
the ship’s agent, to the ship’s agent. The ship’s agent in turn issued an agent statement reflecting
the Transnet invoice to the shipowner after receipt of the invoice.
Determine the input and output VAT consequences for the shipowner.
SOLUTION
The shipowner as principal will be entitled to claim a deduction of input tax for the local transport
service as the supply by Transnet is deemed to be made to the shipowner (s 54(2)). The agent
statement would also serve as documentary proof to substantiate the input claim of the ship-
owner, despite the Transnet invoice being in the name of the ship’s agent.
The shipowner is also deemed to have provided the service to the exporter (s 54(1)). The ship-
owner will therefore charge output tax at zero per cent in arranging the international transport of
goods from Johannesburg to Liverpool (s 11(2)(e)). The shipowner will also be obliged to issue a
tax invoice to the exporter, however, the ship’s agent may also issue such tax invoice on behalf
of the shipowner.
Source: The example is adjusted from SARS Practice Note No 10 (01/10/1991)
An agent is usually reimbursed by the principal for expenditure incurred on behalf of the principal.
There will be no VAT consequences for the agent on receipt of reimbursements as costs are merely
recovered in respect of a supply on behalf of another person (principal). The agent will only have to
account for VAT on commission or fees charged as such consideration will not be earned on behalf
of the principal but in the capacity of the agent himself.
31.33 The influence of VAT on income tax calculations

VAT cannot be studied in isolation, because it influences the calculations involved in income tax. For
example, capital allowances are calculated on the cost price of an asset. In certain cases, the cost
price will include VAT, if the VAT was not claimed as an input tax credit. In other cases, the cost will
exclude VAT, if VAT was claimed as an input tax credit.
The calculation of the taxable income of an enterprise that is registered for VAT purposes must,
where applicable, exclude VAT. It will include VAT where the input tax was denied, for example in the
case of certain entertainment expenses. Furthermore, the output tax on fringe benefits (see 31.12.4)
is deductible for income tax purposes.
31.34 Tax returns and payments (s 28 and s 25 of the Tax Administration Act)
A VAT return in the form prescribed by the Commissioner must be submitted within 25 days after the
end of the tax period (s 28 of the VAT Act, read together with s 25 of the Tax Administration Act).
The VAT payable or refundable must be calculated and any amount owing paid over to SARS on the
same day that the VAT return is submitted. The Commissioner has prescribed that any payment
made using a SARS drop box on a business day must be received by no later than 15:00.
An exception applies where the vendor is registered to submit its VAT returns and payments via
SARS’s e-filing system. Such vendors will only be required to submit its VAT returns and make
payments via e-filing on the last business day of the month. The following table summarises the
different payment methods and prescribed dates:
Payment method Returns Payment

th
Cheque 25 25th
Payment at any of the four major banks 25th 25th
th th
Debit order (return submitted via e-filing) 25 25
E-filing of return and payment via SARS’s e-filing system Last business day Last business day
th
Electronic transfers (including Internet banking) – return 25 25 th
submitted via e-filing
1042
The Commissioner for SARS has determined that no payment by cheque of VAT in excess of
R100 000 may be made at a SARS branch or per post (GG 36921). If multiple check payments are
received, the total amounts received may not exceed R100 000, irrespective of the number of tax
periods being paid. It is also important to take note that all cheques must be made out to the ‘South
African Revenue Service’ (written out in full) and be crossed ‘not negotiable/transferable’. It is also
further prescribed that all Category C vendors (monthly period vendors – see 31.4) must submit VAT
returns in electronic format and make VAT payments electronically.
31.35 Penalties and interest (s 39 and Chapter 15 of the Tax Administration Act)
If any person who is liable for the payment of VAT fails to make the payment within the prescribed
period, the Commissioner, in accordance with Chapter 15 of the Tax Administration Act, may impose
l a penalty of 10% of the tax (s 213 of the Tax Administration Act), and
l interest at the prescribed rate (s 39(1)(a)(ii)) becomes payable.
The interest is calculated from the first day of the month following the month in which payment is due,
for each month or portion of a month for which it remains unpaid.
A person who is aggrieved by a ‘penalty assessment’ notice may, on or before the date for the
payment in the ‘penalty assessment’, in the prescribed form and manner, request SARS to remit the
penalty (s 215 of the Tax Administration Act). Such penalty may be remitted (Part E of the Tax
Administration Act – see chapter 33) in a case where
l the vendor has failed to register for VAT and disclosed this voluntarily to SARS, or
l the non-compliance was nominal or it was the vendor’s first incidence of non-compliance, or
l the non-compliance was due to exceptional circumstances, or
l the penalty was incorrectly assessed.
Interest may be waived if the late payment was beyond the control of the vendor (s 39(7)(a) and
Interpretation Note No 61).
31.36 Refunds (s 44 and Chapter 13 of the Tax Administration Act)

If the input tax of a vendor exceeds his output tax or if an amount of output tax is erroneously paid in
respect of an assessment in excess of the amount payable in terms of the assessment, a vendor is
entitled to a refund (including interest thereon).
The vendor would not be entitled to a refund, if the refund is not claimed by the vendor within five
years from the date of the assessment (s 44(4)). Any refund not claimed within the prescribed five
years will be forfeited by the vendor and regarded as a payment to the National Revenue Fund
(s 44(4)(b)).
An amount is not refundable if the amount is less than R100, but the amount must be carried forward
in the vendor’s account (s 191 of the Tax Administration Act). The Commissioner must refund the VAT
within 21 business days after receipt of the vendor’s VAT return. The 21-day interest-free period will
only commence from the date the vendor submits relevant material requested by SARS (Chapter 5 of
the Tax Administration Act). Interest will be paid on the prescribed rate if the Commissioner fails to
pay in time (s 45).
If the refund and interest are due to a vendor who has an outstanding tax debt, the refund must be
treated as a payment by the taxpayer that is recorded in the taxpayer’s account (s 191 of the Tax
Administration Act). (For a detailed discussion on refunds and refunds subject to set-off and deferral,
refer to chapter 33.)
Example 31.56. Apportionment of input tax

You are the financial manager of Emperors (Pty) Ltd, a property company earning its income from
both commercial rentals (office blocks and factories) and residential rentals (town houses). The
company has a December year-end. Your responsibilities include the completion of its two-
monthly VAT return.
continued
1043
As Emperors (Pty) Ltd makes both taxable and exempt supplies for VAT purposes, it has applied
the turnover-based method of apportionment to arrive at an acceptable input tax ratio of 74%.
The accounting system operated by Emperors (Pty) Ltd has provided the following analysis of its
income and expenditure for its two-month tax period ending 31 January. All amounts are
inclusive of VAT, where applicable.
Income R
Commercial rentals ...................................................................................................... 849 300
Residential rentals ....................................................................................................... 159 600
Interest levied on overdue rentals................................................................................ 7 410
Insurance settlement (note 1) ...................................................................................... 136 800
Expenditure
Purchase of new factory building, to be let (paid in cash) .......................................... 769 000
Purchase of two residential flats, to be let (paid in cash) ............................................ 468 500
Bank charges............................................................................................................... 1 254
Audit fees ..................................................................................................................... 14 250
Salaries and wages ..................................................................................................... 66 120
Bakkie (note 2) ............................................................................................................. 150 600
Depreciation (note 2) ................................................................................................... 5 105
Maintenance (note 3) ................................................................................................... 16 416
Insurance premiums (note 4) ....................................................................................... 15 048
Interest incurred on mortgage bonds .......................................................................... 85 500
Office equipment rentals (note 5) ................................................................................ 5 244
Employees’ expenses (note 6)..................................................................................... 741
Petrol ............................................................................................................................ 2 830
Bad debts (note 7) ....................................................................................................... 16 188
Travelling expenses (note 8) ....................................................................................... 12 312
Notes
(1) The insurance settlement of R136 800 was for a single-cab light-delivery vehicle (‘bakkie’)
that was stolen from Emperors (Pty) Ltd’s premises in the previous month. This bakkie was
used for both the residential and commercial properties. At the time it was stolen, the book
value of this single-cab bakkie was R160 200. In January, on receipt of the insurance
settlement, a new single-cab bakkie was purchased by Emperors (Pty) Ltd (see note 2).
(2) A new single-cab bakkie was purchased in January at a cost of R150 600 (including VAT of
R18 495) to replace the single-cab bakkie that was stolen (see note 1 above). Depreciation
was provided for on the bakkie purchased by Emperors (Pty) Ltd. This bakkie is used to
transport its maintenance teams between its various buildings.
(3) Maintenance costs of R16 416 include paint, paint brushes and other hardware items pur-
chased to effect repair work to all its buildings.
(4) Insurance premiums, in terms of an all-comprehensive business insurance policy, to the
amount of R15 048 were incurred in respect of all the assets of the company.
(5) Office equipment rentals of R5 244 were incurred on the following assets:
Facsimile machine ........................................................................................................ 2 736
Printer ............................................................................................................................ 1 482
Coffee machine ............................................................................................................. 1 026
Total .............................................................................................................................. 5 244
(6) Employees’ expenses of R741 were incurred in respect of tea and coffee provided to
employees while they were working in their offices.
(7) Bad debts of R16 188 are made up of debts written off for commercial-rental debtors of
R9 804 and for residential-rental debtors of R6 384.
(8) Travel expenses are made up of R2 508 for hotel accommodation and meals incurred by an
employee of Emperors (Pty) Ltd during an out-of-town business trip to investigate potential
new commercial property to let, and two overseas air tickets costing R9 804 purchased by
Emperors (Pty) Ltd. These overseas air tickets were given to an employee and his wife as
part of the employee’s salary package.
Calculate the net amount of VAT refundable by or payable to SARS in respect of Emperors (Pty)
Ltd’s two-month tax period ended 31 January, assuming all the necessary documentation has
been obtained by the company. Should no VAT be raised or claimed, provide brief reasons.
1044
SOLUTION
Calculation of amount of VAT payable or refundable
Output tax
Commercial rentals (R849 300 × 14/114) ...................................................................... 104 300
Residential rentals (exempt supply) –
Interest (financial service – exempt supply) –
Insurance settlement (R136 800 × 14/114 × 74%) (note 1) ........................................... 12 432
Total output tax .............................................................................................................. 116 732
Input tax
Calculation of input tax deduction
New factory building (R769 000 × 14/114) (note 2) ....................................................... 94 439
Two residential flats (residential accommodation – an exempt supply) –
Bank charges (R1 254 × 14/114 × 74%) ....................................................................... 114
Audit fees (R14 250 × 14/114 × 74%) ........................................................................... 1 295
Salaries and wages (excluded from definition of an enterprise) .................................... –
Purchase of single-cab ‘bakkie’ (R150 600 × 14/114 × 74%) (note 3) .......................... 13 686
Depreciation (not a supply) ........................................................................................... –
Maintenance (R16 416 × 14/114 × 74%) ....................................................................... 1 492
Insurance premiums (R15 048 × 14/114 × 74%) ........................................................... 1 368
Interest on mortgage bonds (financial service – an exempt supply) ............................. –
Office equipment rentals ((R5 244 – R1 026) × 14/114 × 74%) (note 4) ....................... 383
Employees’ expenses (supply of ‘entertainment’).......................................................... –
Petrol (zero-rated supply) .............................................................................................. –
Bad debts ((R9 804) × 14/114) (note 5) ......................................................................... 1 204
Hotel accommodation and meals (R2 508 × 14/114 × 100%) (note 6) ......................... 308
Overseas air tickets (R9 804 × 0% (zero-rated)) (note 7) .............................................. –
Total input tax ................................................................................................................ 114 289
VAT payable/(refund due) (R116 732 – R114 289) ........................................................ 2 443
Notes
(1) The insurance award is a deemed supply, as Emperors (Pty) Ltd was entitled to an input tax
credit for the bakkie since it is not a ‘motor car’ as defined. As only 74% of the input tax
credit was claimed for the insurance premiums, the output tax is also apportioned to the
extent of 74%.
(2) No apportionment is necessary because the factory building is used wholly to make taxable
supplies.
(3) The bakkie is not a ‘motor car’ as defined; therefore an input tax credit is available.
(4) The coffee machine is the supply of ‘entertainment’; therefore no input tax credit is available
(s 17(2)(a)).
(5) The input tax credit is not apportioned as the output tax charged on the commercial rentals
was subject to output tax in full.
(6) An input tax credit is available as the entertainment expenditure has been incurred for the
personal subsistence of an employee of Emperors (Pty) Ltd. It was incurred while he was
obliged to be away from his usual place of residence and from his workplace by reason of
the duties of his office. No apportionment necessary as he incurred it solely for taxable
supplies (commercial accommodation) (see 31.11.3).
(7) Also no deemed supply arises out of this fringe benefit because it is a zero-rated supply.
Example 31.57. Journal entries of VAT transactions
On 1 March, Mr Green Fingers commenced a garden service business. He is trading through the
means of a private company named Tidy Gardens (Pty) Ltd. Mr Green Fingers is the sole share-
holder of Tidy Gardens (Pty) Ltd and is its sole director.
Tidy Gardens (Pty) Ltd is a registered vendor for VAT purposes. The first tax period is from
1 March to 30 April.
Mr Fingers’ wife, Sue, is the bookkeeper employed by Tidy Gardens (Pty) Ltd and is responsible
for all its accounting records. Sue is also required to complete the two-monthly VAT returns.
Sue has requested your help in processing the following four transactions through the account-
ing records of Tidy Gardens (Pty) Ltd. She has not recorded any entries in the accounting
records for the following transactions, as she is unsure of the VAT implications. All four trans-
actions relate to its first tax period (1 March to 30 April).
continued
1045
Transaction 1
On 1 March, Tidy Gardens (Pty) Ltd purchased a second-hand truck from a used-car dealer (a
registered VAT vendor) for R61 560 (R54 000 plus VAT of R7 560). The used-car dealer agreed
to allow Tidy Gardens (Pty) Ltd to settle the purchase price in three equal instalments of R20 520
payable on 1 April, 1 May and 1 June. By 30 April, Tidy Gardens (Pty) Ltd had settled one of the
three instalments in compliance with the agreement entered into with the used-car dealer.
Transaction 2
Tidy Gardens (Pty) Ltd purchased, for cash, a second-hand computer from Mr Green Fingers’
brother (a non-vendor) for R8 500. The market value of the computer was R6 500, but because
Mr Green Fingers owed his brother R2 000 for a gambling debt, the purchase price was agreed
upon as being R8 500. (This was done so that Sue would not find out about her husband’s
gambling debts.) Unfortunately for Mr Green Fingers, Sue queried his brother about the amount
Tidy Gardens (Pty) Ltd had paid him for the computer. He then revealed the details of the
purchase price to her.
Transaction 3
Instead of giving its employees cash to cover their transport expenses to and from work, Tidy
Gardens (Pty) Ltd purchased bus coupons that it distributes to them weekly. During the period
under review, Tidy Gardens (Pty) Ltd incurred R1 026 on purchasing bus coupons.
Transaction 4
On 1 March, Tidy Gardens (Pty) Ltd employed a landscape gardener (a person who plans the
layout of gardens) to provide a landscape gardening service to its clients. To enable the
landscape gardener to visit existing and potential clients, Tidy Gardens (Pty) Ltd purchased a
new double-cab light-delivery vehicle for R136 800 (R120 000 plus VAT of R16 800). The
landscape gardener has the sole use of this double-cab light-delivery vehicle but is required to
pay for all its petrol and maintenance expenses. He may also use the vehicle for private
purposes.
Provide the journal entries (and supporting notes) for the above four transactions. Support your
answer with brief explanations.
SOLUTION
Transaction 1
R R
Motor vehicles ............................................................................................ Dr 54 000
Input tax ........................................................................................................... Dr 7 560
To creditor (used-car dealer) 61 560
Purchase of a second-hand truck from a used-car dealer on 1 March
Creditor ............................................................................................................ Dr 20 520
Bank 20 520
Settlement of the first instalment on 1 April
Note
Because Tidy Gardens (Pty) Ltd has purchased a ‘truck’, not being a ‘motor car’ as defined, an
input tax credit is available. The full input tax credit is claimable on 1 March (provided Tidy
Gardens (Pty) Ltd obtains a valid tax invoice). The settlement of the purchase price by means of
instalments does not affect the timing of the input tax credit as the ‘bakkie’ was not purchased
from a non-registered vendor, and therefore it is not a ‘notional’ input tax that is being claimed.
Transaction 2
Computer (R6 500 – R798) ......................................................................... Dr 5 702
Loan account – Mr Green Fingers ................................................................. Dr 2 000
Input tax ........................................................................................................... Dr 798
Bank 8 500
Payment for a second-hand computer purchased for R6 500 from Mr Green Fingers’ brother (a
non-vendor) for use in the business
Note
A ‘notional’ input tax deduction of R798 (R6 500 × 14/114) is available. The gambling debt of
R2 000 is a private transaction and no input tax or ‘notional’ input tax is claimable on it.
Transaction 3
Salaries and wages ......................................................................................... Dr 1 026
Bank 1 026
Bus coupons purchased and supplied to employees to cover their transport expenses.
continued
1046
Note
Local transport of fare paying passengers by bus is an exempt supply (s 12(g)), thus no VAT
arises. The supply of a non-cash amount to an employee constitutes a fringe benefit. A deemed
supply arises on certain fringe benefits. Because transport of fare-paying passengers by bus is
an exempt supply no deemed supply on this fringe benefit arises (the first proviso to s 18(3)).
Transaction 4
Motor vehicles.................................................................................................. Dr 136 800
Input tax .......................................................................................................... Dr –
Bank 136 800
Purchase of a new double-cab light-delivery vehicle
Salaries and wages ......................................................................................... Dr 68
Output tax 68
Output tax on the deemed supply arising from the use of a ‘company car’ by the employee
Note
Because the double-cab light-delivery vehicle is a ‘motor car’ as defined, an input tax deduction
may not be claimed.
The use of the double-cab light-delivery vehicle by the employee is a Seventh Schedule fringe
benefit, giving rise to a deemed supply (s 18(3)). The output tax on the deemed supply is
((R136 800 × 100/114 × 0,3%) – R85) × 14/114 × 2 months = R68.
1047
32 Tax avoidance
Linda van Heerden

l explain the difference between tax evasion and tax avoidance
l demonstrate an in-depth knowledge of the anti-avoidance provisions contained in
this chapter in practical case studies.
Contents
Page
32.1 Distinction between tax evasion and tax avoidance ...................................................... 1049
32.2 Impermissible tax avoidance arrangements (ss 80A–80L) and s 73 of the VAT Act .... 1050
32.3 Reportable arrangements (ss 34- 39 of the Tax Administration Act)............................. 1056
32.4 Section 103(2): Assessed losses .................................................................................. 1058
32.5 Case law on s 103(2)...................................................................................................... 1059
32.5.1 ITC 1388 (1983) .............................................................................................. 1059
32.5.2 ITC 983 (1961) and ITC 989 (1961) ................................................................ 1059
32.5.3 SA Bazaars (Pty) Ltd v CIR (1952 A) and New Urban Properties Ltd v SIR
(1966 A)........................................................................................................... 1060
32.5.4 ITC 1123 (1968) .............................................................................................. 1060
32.5.5 Glen Anil Development Corporation Ltd v SIR (1975 A) ................................ 1060
32.5.6 ITC 1347 (1981) .............................................................................................. 1060
32.5.7 Conshu (Pty) Ltd v CIR (1994 A) .................................................................... 1060
32.6 Section 103(5): Cession ................................................................................................. 1061
32.7 Substance over form and simulated transactions.......................................................... 1061
32.1 Distinction between tax evasion and tax avoidance

There is an important distinction between tax evasion and tax avoidance. Tax evasion refers to illegal
activities deliberately undertaken by a taxpayer to free himself from a tax burden. An example of tax
evasion is where a taxpayer omits income from his annual tax return. Non-compliance with tax Acts
as well as tax evasion are criminal offences and are subject to severe penalties in terms of ss 234
and 235 of the Tax Administration Act (see chapter 33).
Tax avoidance, by contrast, usually denotes a situation in which the taxpayer has arranged his affairs
in a perfectly legal manner, with the result that he has either reduced his income or has no income on
which tax is payable. A taxpayer can, for example, donate an interest-bearing investment of
R100 000 to his major child without being affected by the provisions of donations tax or s 7(3). No
obligation rests upon a taxpayer to pay a greater tax than is legally due under the taxing Act. A
taxpayer cannot be stopped from entering into a bona fide transaction which, when carried out, has
the effect of avoiding or reducing a tax liability, provided that there is no provision in the law de-
signed to prevent that avoidance or reduction of tax. This principle is clearly brought out by the
following extract from the judgment of Lord Tomlin in Duke of Westminister v IRC (1953) (at 520):
Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less
than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however un-
appreciative the Commissioners of Inland Revenue or his fellow-taxpayers may be of his ingenuity, he can-
not be compelled to pay an increased tax.
The Act contains various provisions that are designed to prevent or counter specific schemes or
operations aimed at the avoidance of tax. Specific anti-avoidance provisions are encountered through-
out the Act, for example:
l Paragraph (c) of the definition of gross income in s 1 deals with the receipt or accrual by a per-
son of amounts for services rendered or to be rendered by another person.
1049
l Sections 7(2) to (10) deals with income derived by a person in consequence of certain donations
by another person.
l Section 8E deems certain dividends to be interest.
l Section 8F deals with interest paid on hybrid debt instruments.
l Section 9D deals with certain income from controlled foreign companies.
l Section 22(8) deals with the donation or private consumption of trading stock.
l Sections 54 to 64 deal with donations tax.
The provisions on impermissible tax avoidance arrangements set out in s 80A–80L act as the safety
net in respect of certain transactions which are not dealt with by the specific anti-avoidance pro-
visions.
Remember
If a specific anti-avoidance provision cannot be applied in order to deal with a transaction that
avoids tax, SARS may as a last resort attempt to apply the provisions on impermissible tax
avoidance arrangements to prevent the avoidance of tax.
32.2 Impermissible tax avoidance arrangements (ss 80A–80L) and s 73

of the VAT Act
Introduction
Section 103(1) contained a general anti-avoidance rule for a number of years. In SARS’s view, this
provision did contain certain inherent weaknesses and this resulted in new provisions on impermis-
sible tax avoidance arrangements that were incorporated within the Act in Part IIA, ss 80A to 80L.
These provisions apply to any arrangement, or any steps in or parts of an arrangement entered into
on or after 2 November 2006.
Section 80A defines the term ‘impermissible avoidance arrangement’ by listing the requirements
which must be met. The powers that the Commissioner has with respect to an impermissible avoid-
ance arrangement are set out in s 80B. The provisions of s 80C to 80G expand on the requirements
listed in s 80A and s 80H to 80K contains general provisions and describes certain procedural issues
that arise.
Section 80L defines the terms ‘arrangement’, ‘avoidance arrangement’, ‘impermissible avoidance
arrangement’, ‘party’, and ‘tax’. The term ‘tax benefit’ is however defined in s 1 and not in s 80L.
When can the provisions on impermissible tax avoidance arrangements be applied? (s 80A)
Four requirements must be met before the provisions of ss 80A to 80L can be applied.
(1) There must be an arrangement (s 80L definition of ‘arrangement’).
(2) The arrangement results in a tax benefit and now constitutes an avoidance arrangement (s 80L,
definitions of ‘tax’, ‘tax benefit’ and ‘avoidance arrangement’).
(3) The sole or main purpose of the avoidance arrangement is to obtain a tax benefit (introduction
to s 80A and s 80G).
(4) If the avoidance arrangement is in the context of business, one of four requirements must be
met, namely
l means or manner not normally employed (s 80A(a)(i))
l rights or obligations not normally created (s 80A(c)(i))
l lack of commercial substance (s 80A(a)(ii))
l misuse or abuse of provisions of the Act (s 80A(c)(ii))
If the avoidance arrangement is in a context other than business (therefore in a personal or
private context), one of three requirements must be met namely
l means or manner not normally employed (s 80A(a)(i))
l rights or obligations not normally created (s 80A(c)(i))
l misuse or abuse of provisions of the Act (s 80A(c)(ii))
1050
32.2 Chapter 32: Tax avoidance
The following flow chart illustrates the requirements for SARS to apply Part IIA:
An arrangement
(Requirement 1)
The arrangement results in a tax

benefit (it therefore is an avoidance
agreement)
(Requirement 2)
Sole or main purpose was

to obtain a tax benefit
(Requirement 3)
In the context of Not in the context of

business business
or
Lacks commercial – Means or manner not normally employed;

substance or
(Requirement 4) – Rights or obligations not normally created;
or
– Misuse or abuse of provisions of the Act
(Requirement 4)
The four requirements are now discussed.

Requirement 1
The word ‘arrangement’ includes any one of the following six items:
l transactions
l operations
l schemes
l agreements
l understandings (whether enforceable or not)
l any of the foregoing involving the alienation of property.
In terms of s 80H, the Commissioner may apply the provisions of Part IIA to the steps or parts of an
arrangement.
Requirement 2
The word ‘tax benefit’ includes any avoidance, postponement or reduction of any liability for tax. The
word ‘tax’ includes any tax, levy or duty imposed by the Act or any other law administered by the
Commissioner. Examples of taxes imposed by other acts are VAT, Estate Duty, Securities Transfer
Tax and Transfer Duty. An avoidance, postponement or reduction in any of these taxes will therefore
also be a tax benefit.
Requirement 3
An avoidance arrangement is presumed to have been entered into or carried out with the sole or
main purpose of obtaining a tax benefit. This will be presumed unless and until the party obtaining
the tax benefit proves that, reasonably considered in light of the relevant facts and circumstances,
obtaining a tax benefit was not the sole or main purpose of the avoidance arrangement (s 80G(1)).
The taxpayer must therefore objectively prove that he had another sole or main purpose, and the
facts and circumstances must not contradict what the taxpayer says his purpose was. The purpose
1051
regarding both the arrangement as a whole and the steps in the arrangement must be investigated
(s 80G(2)).
Requirement 4
The first step here is to determine whether the avoidance arrangement is in the context of business or
not. The concept ‘in the context of business’ refers to the avoidance arrangement being entered into
or carried out in the normal course of business.
Only one of the sub-requirements in the context concerned must be met in order to meet Require-
ment 4.
(i) Means or manner not normally employed
This requirement is met if the means or manner it was entered into or carried out would not normally
be employed for bona fide purposes other than obtaining a tax benefit. The principle of substance
over form and simulated transactions are relevant in the discussion of bona fide purposes (see 32.7).
(ii) Rights or obligations not normally created
This requirement is met if the rights or obligations created would not normally be contracted or
created between persons dealing at arm’s length. The principle of substance over form and simu-
lated transactions are also relevant in the consideration of whether rights and obligations are normally
created in a given arrangement (see 32.7).
(iii) Misuse or abuse of provisions of the Act
This provision attempts to ensure that the purpose of the legislation and the intention of the Legisla-
ture in respect of other provisions of the Act as well as the provisions of ss 80A to 80L are taken into
account. In short, this requirement merely confirms the requirements of the rules of interpretation and
the Constitution namely that the contextual and purposive approach must be followed in the interpre-
tation of legislation. The misuse or abuse requirement apparently developed from the Canadian
general anti-avoidance rules. A Canadian court case that might provide guidance is Canada Trustco
Mortgage Co v Canada (2005 SSC 54). The court indicated a two-stage process namely:
l Interpret the provisions, relied on by the taxpayer, giving rise to the tax benefit to determine the
provisions’ object, spirit and purpose.
l Determine whether the transaction frustrates or defeats the object, spirit or purpose of the provi-
sions.
It was argued that this process will lead to a finding of ‘abusive tax avoidance’ (comparable to our
’impermissible tax avoidance’) if:
l a taxpayer relies on specific provisions in order to achieve an outcome that those provisions seek
to prevent, or
l a transaction defeats the underlying rationale of the provisions that are relied upon, or
l an arrangement circumvents the application of certain provisions, such as specific anti-avoidance
rules, in a manner that frustrates or defeats the object, spirit or purpose of those provisions.
(iv) A ‘lack of commercial substance’ (only applies in the context of business)
Section 80C(1) provides a general rule for determining whether an avoidance arrangement lacks
commercial substance. Section 80C(2) contains a non-comprehensive set of characteristics that
serve as indicators of a lack of commercial substance. See 32.3 for a discussion on ‘reportable
arrangements’ relevant to this requirement.
The general rule is that an avoidance arrangement lacks commercial substance if it results in a sig-
nificant tax benefit for a party, but the avoidance arrangement does not have a significant effect upon
either the business risks or the net cash flow of that party (s 80C(1)). The word ‘significant’ is not
defined in s 80C. It is submitted that the courts may view the significance of the tax benefit either
from the viewpoint of the specific taxpayer (subjectively) or from the viewpoint of the ‘man on the
street’ (objectively), and that it will most probably be viewed objectively. The specific circumstances
of each arrangement will be taken into account since ‘significant’ will differ from person to person.
Obtaining as ‘significant’ tax benefit could indicate that it was the main purpose of the arrangement.
Examples of indicators of a lack of commercial substance, according to s 80C(2), include but are not
limited to:
l The legal substance or effect of the avoidance arrangement as a whole differs significantly from
the legal form of its individual steps.
l Round-trip financing, as described in s 80D, is present.
1052
l An accommodating or tax-indifferent party, as described in s 80E, is included or present.

l The inclusion or presence of elements that have the effect of offsetting or cancelling each other.
The legal substance is the true legal rights and obligations flowing from the transaction, and therefore
the true reality. The legal form is what the taxpayer has actually done (the legal form of his transac-
tion), possibly pointing to the economic or commercial effect thereof.
Round-trip financing includes an avoidance arrangement in which
l funds are transferred between or among parties, and
l this transfer would
– result in a direct or indirect tax benefit, and
– significantly reduce, offset or eliminate any business risk by any party (s 80D(1)).
The round-trip provision applies to any round-tripped funds, without any regard to whether the round
tripped amounts can be traced back, and ignoring the timing, sequence, or manner in which round-
tripped amounts are transferred or received (s 80D(2)). The fact that the flow of funds takes place
during different years of assessment is therefore irrelevant.
The self-neutralising mechanism draws upon precedent in the United Kingdom and other jurisdictions
that gave rise to the so-called fiscal nullity doctrine. It is targeted primarily at complex schemes,
typically involving complex financial derivatives, which seek to exploit perceived loopholes in the law
through transactions in which one leg generates a significant tax benefit while another effectively
neutralises the first leg for non-tax purposes.
Example 32.1. Round-trip financing
Holdco owns all the shares of Company A and Company B. Company A owns a new administra-
tive building which has never been used. A sale-and-lease-back transaction was concluded be-
tween Company A and Company B in terms of which Company A sold the building to Company B
who immediately leased the same building back to Company A. Company B qualifies for the
s 13quin allowance (as calculated taking s 23D into account) which exceeds the rental income.
Company A entered into this arrangement to eliminate the risk associated with the ownership of
the building and realised a capital loss on the sale.
Can ss 80A to 80L be applied?
Requirement 1: Was an arrangement entered into?
A number of transactions were entered into – a sales transaction as well as a lease transaction. An
arrangement was therefore entered into.
Requirement 2: Is the result that a tax benefit is obtained?
Company A obtained a tax benefit since the tax deductible lease payments and the capital loss
present a tax benefit. Company B also obtained a tax benefit since the s 13quin allowance ex-
ceeds the rental income. The arrangement is therefore an ‘avoidance arrangement’ as defined.
Requirement 3: Was the sole or main purpose to obtain a tax benefit?
The onus is on the taxpayer obtaining the tax benefit to prove that, reasonably considered in light
of the relevant facts and circumstances, obtaining a tax benefit was not the sole or main purpose
of the avoidance arrangement. This is so because s 80G(1) determines that it is presumed that
obtaining a tax benefit was the sole or main purpose unless and until the party obtaining the tax
benefit proves the contrary. Company A entered into the arrangement to eliminate the risk associ-
ated with ownership. If the company can objectively prove that there was another sole or main
purpose than obtaining a tax benefit, requirement 3 will not be met.
Requirement 4: Is there a lack of commercial substance?
There is a lack of commercial substance since the requirements of s 80D(1) are met. Funds were
transferred from Company B to Company A when the building was bought. Company A will repay
funds to Company B by means of the future lease payments. Both Company A and Company B
obtain a tax benefit from this transaction and a significant reduction in Company A’s business risk
of ownership is achieved. Round-trip financing is therefore present in this arrangement.
Sections 80A to 80L can only be applied if Company A does not discharge the onus in terms of
s 80G(1). If ss 80A to 80L is applied, the sale-and-lease-back transaction as well as the resulting tax
benefits may be ignored when SARS raises a tax assessment. Interest will also be levied on the
amount of taxes that would have been paid if the transaction were never entered into.
1053
One of the indicators of a lack of commercial substance in a transaction is the inclusion or presence
of an accommodating or tax-indifferent party (such party must therefore be a party to the avoidance
arrangement). A party is an accommodating or tax-indifferent party when
l a party receives an amount that has no impact on his normal tax liability (he is, for example, not
subject to tax), or the receipt is significantly offset either by any expenditure, loss or assessed
loss of his, and
l that amount would have had, as a direct or indirect result of the participation of the accommodating
or tax-indifferent party, an impact on the tax liability of another party if the amount was received
by this second party or involves a prepayment by the second party. Examples of this are if the
second party would have been subject to tax on that amount if he received it, or if the amount
would have constituted a non-deductible expenditure for the second party.
(Section 80E(1)(a) and (b).)
A person may be an accommodating or tax-indifferent party whether he is a connected person in
relation to any other party or not (s 80E(2)). The term ‘connected person’ is defined in relation to
various persons (s 1 and chapter 13.2.1).
The provisions of s 80E are not applicable if
l the tax actually paid by the accommodating or tax-indifferent party in other jurisdictions amounts
to at least two-thirds of the income tax that would have been paid in South Africa (s 80E(3)(a) and
s 80E(4)). This tax is after taking into account any double tax agreement and any assessed loss,
credit or rebate to which the party in question may be entitled or any other right of recovery to
which the party in question (or any connected person in relation to the party in question) may be
entitled, or
l if substantive ongoing active business operations (of at least 18 months) in connection with the
avoidance arrangement are carried out directly by the accommodating or tax-indifferent party
through a substantial business establishment outside South Africa and the party in question were
a controlled foreign company (s 80E(3)(b)).
These safe-harbour rules, indicating the circumstances under which s 80E does not apply, are very
necessary – if, for example, a South African company buys a stock item from a foreign company, the
transaction could (in the absence of the safe-harbour rules) have been classified as ‘accommodating
a tax-indifferent party’. This is because the proceeds of the sale of the stock item would have been
subject to tax in South Africa if those stock items were bought from a South African company. The
safe-harbour rules of s 80E(3) may assist in an attempt to ensure that the foreign company is not
seen as a tax-indifferent party to the transaction. If applicable, proof should be available that the
foreign company would have had a tax liability equal to at least two thirds of the potential South
African tax liability in another jurisdiction.
The example above illustrates a very important point: any transaction with a tax-haven is potentially
subject to the application of the provisions of ss 80A to 80L unless the taxpayer can prove that the
sole or main purpose of the transaction was not to obtain a tax benefit.
The consequences of the application of ss 80A to 80L (s 80B)

Once all the s 80A requirements of an ‘impermissible avoidance arrangement’ are present, s 80B em-
powers the Commissioner to take certain action:
1. A general remedy is provided for the Commissioner in s 80B(1)(f). In terms of this general remedy
the tax consequences under the Act may be determined as if the transaction had not been en-
tered into or carried out. In the alternative, it must be determined in such other manner as in the
circumstances of the case the Commissioner deems appropriate for the prevention or diminution
of the relevant tax benefit. The words ‘determine the tax consequences under the Act’ entail that
the Commissioner may only determine or adjust taxes levied by the Act (referring to the Income
Tax Act) when an arrangement is found to be an impermissible avoidance arrangement.
2. The Commissioner is also provided with specific remedies to impermissible tax avoidance
arrangements as contained in s 80B(1)(a)–(e). These specific remedies allow the Commissioner
to, for example,
l disregard or combine any steps in or parts of the arrangement
l disregard any accommodating or tax-indifferent party or deem the party and any other party
as one and the same person
l deem connected persons to the impermissible avoidance arrangement as one and the same
person, or
1054
l to re-allocate or reclassify any gross income, receipts or accruals of a capital nature, expen-
diture or rebates.
The Commissioner must make the necessary and appropriate adjustments to the applicable tax
liabilities to ensure the consistent treatment of all the parties to the arrangement (s 80B(2)). This must
be done subject to the time limits imposed by ss 99, 100 and 104(5)(b) of the Tax Administration Act.
These adjustments are subject to the normal three-year prescription rules. The adjustments are also
subject to objection and appeal.
General provisions
It is important to note that the provisions of Part IIA may be applied to any step in or part of an
arrangement or to the arrangement as a whole (s 80H).
Section 80F allows the Commissioner to combine connected persons and disregard an accommo-
dating or tax-indifferent party or to combine it with another party for the purposes of determining
l whether an avoidance arrangement lacks commercial substance, or
l whether a tax benefit exists.
The Commissioner must give notice, with reasons, to the parties of an intention to invoke the pro-
visions of ss 80A to 80L. The taxpayer then has 60 days to submit reasons to the Commissioner why
the provisions of ss 80A to 80L should not be applied, but may request a longer period. On receipt of
the reply (or expiry of the 60 day-period for a reply) the Commissioner has 180 days to request
additional information, withdraw the notice, or invoke the provisions of ss 80A to 80L. If additional infor-
mation comes to the attention of the Commissioner, the reasons for invoking the provisions of ss 80A to
80L may be modified or a new notice may be issued if a prior notice has been withdrawn (s 80J).
Interest charged by SARS may not be waived in terms of s 89quat(3) or 3A if the provisions of s 80A
to 80L have been invoked due to unpaid tax (s 80K). The implication of this is that SARS must, from
the effective date as defined in s 89 quat(1), levy interest on the amounts of tax that were not paid as
a result of the taxpayer entering into an impermissible avoidance arrangement.
Remember
Although the definition of the word ‘tax’ includes any tax levied in terms of the Act or any other Act
administered by the Commissioner, s 80B only empowers the Commissioner to determine the tax
consequences under the Act (referring to the Income Tax Act). The Commissioner cannot apply the
provisions of ss 80A–80L to recover any tax levied in terms of any other Act administered by the
Commissioner. For example, the Commissioner may not impose Estate Duty or VAT by applying
ss 80A–80L.
Tax avoidance and s 73 of the VAT Act

The VAT Act contains similar provisions to those of ss 80A–80L, and gives the Commissioner the right
to adjust VAT (s 73).
The Commissioner may determine a VAT liability in respect of certain schemes. This will be the case
if a scheme has been entered into or carried out and has resulted in a tax benefit being granted to
any person, and the scheme was entered into or carried out in a manner that would not normally be
employed for bona fide business purposes.
A scheme includes any transaction, operation, scheme or understanding, including all steps and
transactions by which it is carried into effect.
A tax benefit includes
l any reduction of tax
l an increase in an entitlement of a vendor
l a reduction in the consideration payable by any person in respect of any supply of goods or
services, or
l any other avoidance or postponement of liability for the payment of any tax, duty or levy imposed
by the VAT Act or by any other law administered by the Commissioner.
Remember
The burden of proof of the correctness of the VAT return lies with the vendor. If the Commissioner
decides to change the VAT return, the changes of the Commissioner would not be reversed
unless it is shown by the vendor that the decision is wrong (s 102 of the Tax Administration Act).
1055
32.3 Reportable arrangements (ss 34–39 of the Tax Administration Act)

Unless where otherwise stated, all reference to section numbers in this part are references to the Tax
Administration Act.
Obligation to disclose (s 37)

Certain prescribed information has to be disclosed to SARS in respect of a reportable arrangement.
The person who is a ‘participant’ in an ‘arrangement’ on the date on which the arrangement qualifies
as a ‘reportable arrangement’ must disclose the prescribed information to SARS within 45 business
days after the arrangement qualified as a reportable arrangement. Where a person becomes a ‘par-
ticipant’ in an ‘arrangement’ after the date on which the arrangement qualifies as a ‘reportable ar-
rangement’, the person must disclose the prescribed information to SARS within 45 business days
after becoming a ‘participant’ (s 37).
A ‘participant’ means a ‘promoter’ or a person who directly or indirectly will derive or assumes that
the person will derive a ‘tax benefit’ or ‘financial benefit’ by virtue of an ‘arrangement’. A participant is
also any other person who is a party to an arrangement listed in a public notice. The ‘promoter’
means a person who is principally responsible for organising, designing, selling, financing or manag-
ing the ‘arrangement’ (s 34).
A ‘financial benefit’ means a reduction in the cost of finance, including interest, finance charges,
costs, fees and discounts on a redemption amount and ‘tax benefit’ means the avoidance, post-
ponement, reduction, or evasion of a liability for tax (s 34).
The only circumstance under which a participant need not disclose the information is if the ‘partici-
pant’ obtains a written statement from any other ‘participant’ that the other ‘participant’ has disclosed
the ‘reportable arrangement’ (s 37(3)).
The Commissioner may grant an extension of the above periods in which the information has to be
disclosed if reasonable grounds exist (s 37(5)).
Failure to disclose
A ‘promoter’ or a person who will directly, or indirectly, derive a ‘tax benefit’ or ‘financial benefit’ by
virtue of an ‘arrangement’ in a reportable arrangement must disclose the information. Failure to dis-
close the information in respect of the reportable arrangement, will render such person liable to an
administrative non-compliance penalty for each month that the failure continues (s 212; see chap-
ter 33). The penalty is calculated as follows:
Anticipated tax benefit Anticipated tax benefit Anticipated tax benefit
for the participant for the participant for the participant
< R5 million > R5 million > R10 million
In the case of a participant R50 000 per month R100 000 per month R150 000 per month
other than the promoter
In the case of the promoter R100 000 per month R200 000 per month R300 000 per month
Any other person who is a party to an arrangement listed in a public notice who fails to disclose
information in respect of a ‘reportable arrangement’ is liable to a penalty of R50 000 (s 212(3)).
What is a reportable arrangement? (s 35)

An arrangement is defined as any transaction, operation, scheme, agreement or understanding
(whether enforceable or not). It is a reportable arrangement if a person is a participant in the ar-
rangement and the arrangement either contains the characteristics listed below or has been listed as
an ‘arrangement’ in a public notice (s 35) and is not an excluded arrangement referred to in s 36.
The characteristics of a reportable arrangement are:
l It contains provisions for the calculation of interest as defined in s 24J of the Income Tax Act,
finance costs, fees or other charges that are wholly or partly dependent on the assumptions relat-
ing to the tax treatment of that arrangement (s 35(1)(a)).
l It has any of the characteristics that are indicative of an avoidance arrangement lacking commer-
cial substance as contemplated in s 80C(2) of the Income Tax Act (s 35(1)(b)).
1056
l It gives rise to an amount that is or will be disclosed by any participant in any year of assessment
or over the term of the arrangement as
– a deduction for purposes of the Income Tax Act but not as an expense for purposes of finan-
cial reporting standards, or
– revenue for purposes of financial reporting standards but not as gross income for purposes of
the Income Tax Act (s 35(1)(c)).
l It does not result in a reasonable expectation of a pre-tax profit for any participant (s 35(1)(d)).
l It results in a reasonable expectation for a participant of a pre-tax profit that is less than the value
of the tax benefit. In other words, it produces a tax benefit that exceeds the (reasonably ex-
pected) pre-tax profit, on a present value basis (s 35(1)(e)).
The Commissioner determined in Notice 140 (3 February 2016) that the following arrangements have
certain characteristics that may lead to an undue tax benefit:
l An arrangement that would have qualified as a ‘hybrid equity instrument’ as defined in s 8E, of
the Income Tax Act, if the prescribed period had been 10 years (see chapter 16). This does not
include an instrument listed on a regulated exchange (see chapter 16).
l An arrangement whereby a company buys back shares from one or more of its shareholders for
an aggregate amount exceeding R10 million and the company issued or is required to issue
shares within 12 months of entering into the arrangement or the date of any buy-back in terms of
the arrangement.
l An arrangement where a resident makes a contribution or payment to a non-resident trust and
has or acquires a beneficial interest in the trust and the amount of all contributions or payments or
the value of the interest exceeds or is reasonably expected to exceed R10 million. Contributions
to a foreign collective investment scheme (as contemplated in par (e)(ii) of the definition of ‘com-
pany’ in s 1 of the Income Tax Act) or a foreign investment company (as defined in s 1 of the In-
come Tax Act) are excluded.
l An arrangement where one or more persons acquire the controlling interest in a company by
means of acquiring shares, voting rights or a combination thereof and the company has a bal-
ance of assessed loss exceeding R50 million or is reasonably expected to have an assessed loss
exceeding R50 million.
l An arrangement between a resident and a foreign insurer in terms of which
– the aggregate amount that has been paid or is reasonably expected to be paid to the foreign
insurer exceeds R5 million, and
– any amount payable to beneficiaries in terms of the arrangement is determined mainly by
reference to the value of particular assets or categories of assets held by or on behalf of the
foreign insurer.
l An arrangement whereby a non-resident renders consultancy, construction, engineering installa-
tion, logistical, managerial, supervisory, technical or training services to a resident or to a non-
resident’s permanent establishment in South Africa. Such arrangement only qualifies as a report-
able arrangement if
– the non-resident was or is physically present in South Africa in connection with or for the pur-
pose of rendering such services (or is anticipated to be present in South Africa for such pur-
pose), and
– the expenditure incurred or to be incurred on or after 3 February 2016 exceeds or is antici-
pated to exceed R10 million in aggregate.
If the expenditure incurred in relation to this arrangement qualifies as remuneration for purposes
of the Fourth Schedule to the Income Tax Act, the arrangement does not qualify as a reportable
arrangement.
Excluded arrangements (s 36)

The following arrangements are excluded arrangements:
l a loan, advance or debt in terms of which cash or a fungible asset is received by the borrower on
condition that the same amount of cash or an equivalent asset will be returned to the lender at a
determinable future date
l a lease
l a transaction undertaken through an exchange regulated in terms of the Financial Markets Act 19
of 2012, and
1057
l a transaction in participatory interests in a scheme regulated in terms of the Collective Investment

Schemes Control Act 45 of 2002.
Furthermore, an arrangement will only qualify as an excluded arrangement if
l the arrangement must be undertaken on a stand-alone basis, or
l the arrangement would have qualified as having been undertaken on a stand-alone basis were it
not for a connected arrangement entered into for security and no tax benefit is obtained or en-
hanced by virtue of that security arrangement.
However, an arrangement is not an excluded arrangement if it is entered into
l with the main purpose of obtaining or enhancing a tax benefit, or
l in a specific manner or form that enhances a tax benefit.
Paragraph 3 of Notice 140 (3 February 2016) provides that the following arrangements are excluded
arrangements:
l if the aggregate tax benefit which is or may be derived from the arrangement by all participants
to the arrangement does not exceed R5 million, and
l if the tax benefit from the arrangement is not the main or one of the main benefits of the arrange-
ment.
The Commissioner is given the power to decide that an arrangement is an excluded arrangement by
notice in the Government Gazette.
Information to be disclosed (s 38)

The following information in relation to a ‘reportable arrangement’ must be submitted in the pre-
scribed form and manner and by the date specified:
l a detailed description of all the steps and key features
l a detailed description of the assumed tax benefits for all participants
l the names, registration numbers and registered addresses of all participants
l a list of all its agreements, and
l any financial model that embodies its projected tax treatment (s 38).
The Commissioner must issue a reportable arrangement reference number to each participant for
administrative purposes (s 38).
32.4 Section 103(2): Assessed losses

Section 103(2) was introduced to prevent a specific type of tax avoidance, namely the trafficking in
assessed losses. In the absence of this provision, a tax advantage could be achieved by ‘obtaining’
a company, close corporation or trust with an assessed loss. Taxable income could then be diverted
to this entity and set off against the assessed loss. This provision is clearly aimed at preventing such
a scheme for tax avoidance.
The following three requirements must all be met before s 103(2) can be applied:
l There must be an agreement affecting a company or trust, or a change in the
– shareholding of a company
– members’ interest in a company that is a close corporation, or
– trustees or beneficiaries of a trust.
l The above must result in a receipt or accrual of income or a capital gain by the company or trust.
l The purpose of the agreement or change is solely or mainly to use any assessed loss, any bal-
ance of assessed loss, any capital loss or any assessed capital loss to avoid or reduce a tax lia-
bility.
When these requirements are met, the use of the assessed loss is denied. In other words, the income
that was channelled to the other entity may not be offset against the assessed loss of this other entity.
1058
32.4–32.5 Chapter 32: Tax avoidance

Ayize carries on a successful business undertaking. With the sole purpose of avoiding liability for
the payment of tax, he acquires the total share capital of B (Pty) Ltd, which has an assessed
loss. After that, he sells his existing business to B (Pty) Ltd. B (Pty) Ltd therefore derives income
from continuing the former business.
It is submitted that s 103(2) may be applied. There is an agreement and a change in the share-
holding of company B, as a result of which income has accrued to the company. The agreement
has been entered into and the change in the shareholding has been effected by Ayize solely for
the purpose of using the assessed loss in order to avoid liability for the payment of tax. The posi-
tion would not be altered even if Ayize did not transfer the existing business to B (Pty) Ltd, but
simply diverted a portion of the income-producing operations of his own business to B (Pty) Ltd.
Section 103(4) provides that it will be presumed, until the contrary is proved, that the agreement has
been entered into or changes have been effected solely or mainly for the purpose of utilising the
assessed loss, balance of assessed loss, capital loss or assessed capital loss to avoid or postpone
the tax liability, or to reduce the amount thereof.
Where the Commissioner has applied the provisions of s 103(2) in respect of an agreement entered
into or effected after 2 July 1996, he may not exercise the discretion given to him in terms of
s 89quat(3) or (3A). This means that he is not able to direct that interest is not payable by the taxpay-
er in respect of that portion of the tax which is attributable to the successful application of
s 103(2) (s 103(6)).
It is submitted that the use of an assessed loss in a scheme for the avoidance of tax need not be
challenged by the Commissioner exclusively in terms of s 103(2), but may in appropriate circum-
stances also be challenged in terms of the provisions of ss 80A–80L.
In practice, when income has been diverted to a company with an assessed loss that continues its
existing operations and s 103(2) is applied, SARS raises two assessments upon the company. One
will exclude the diverted income and show the assessed loss, as increased or diminished by the
operations of the year, excluding that associated with the diverted income (provided, of course, that
trading took place and the assessed loss is maintained), and the other will show the diverted income
on which the company will have to pay tax.
32.5 Case law on s 103(2)
32.5.1 ITC 1388 (1983)

The taxpayer in ITC 1388 bought two companies with assessed losses. The court extracted the
essence of s 103(2) in stating that the Commissioner may disallow an assessed loss. The taxpayer’s
dominant motive in acquiring the first company was to acquire its goodwill and to continue trading in
its name. In fact, no mention was made of its assessed loss in the negotiations for its purchase. The
assessed loss accordingly survived. As far as the second company is concerned, however, the
assessed loss was clearly visible in its financial statements; it had ceased trading three years earlier
(it had been collecting its book debts since then), it had no goodwill or premises, and the only ad-
vantage it seemed to have was its assessed loss. This assessed loss was accordingly forfeited.
32.5.2 ITC 983 (1961) and ITC 989 (1961)

In ITC 983 the court held that, based on the facts established in evidence, the main purpose of the
holding company for acquiring shares in another company was to enable the holding company to
obtain a productive manufacturing unit that could go into immediate operation to supplement its own
productive capacity, not the avoidance or reduction of tax. Section 103(2) was therefore inapplicable.
Similarly, in ITC 989, the taxpayer had shown that his main purpose for purchasing the shares of a
company with an assessed loss was not to avoid tax. While the taxpayer derived some advantage by
purchasing the shares and thus acquiring the benefit of the assessed loss, this did not constitute its
sole or main purpose.
The principle established in these two cases illustrates that s 103(2) can be applied successfully only
if the sole or main purpose of the acquisition of shares is to utilise an assessed loss.
1059
32.5.3 SA Bazaars (Pty) Ltd v CIR (1952 A) and New Urban Properties Ltd v SIR (1966 A)
It was held in SA Bazaars (Pty) Ltd v CIR (1952 A) that the essential continuity of carrying forward an
assessed loss from one year to the next year is permanently interrupted by the taxpayer’s not carry-
ing on a trade during the whole of a particular year.
The principle established in New Urban Properties Ltd v SIR is that, if a balance of assessed loss
incurred by a company is prohibited from being set off against income accruing to the company
through the operation of s 103(2), that balance of assessed loss may fall away completely. This may
happen if the company does not maintain its traditional trading activities. It was held that this continu-
ity is also interrupted by the operation of s 103(2).
The decision in the New Urban Properties case means that, even if a company does carry on trading
during a year in respect of which the Commissioner has successfully invoked s 103(2), this trading
will not entitle it to carry forward the balance of assessed loss to the next year of assessment. The
balance of the assessed loss will be retained only if the traditional trading activities are maintained.

A (Pty) Ltd, a clothing manufacturer, buys all the shares of company B (Pty) Ltd, a vehicle manu-
facturer, and transfers the clothing manufacturing business to B (Pty) Ltd. A (Pty) Ltd is profitable
and pays taxes annually. B (Pty) Ltd has suffered losses and therefore has an assessed loss.
During the year of assessment, profits of R250 000 are generated by B (Pty) Ltd from
clothing manufacturing operations, while vehicle manufacturing ceased.
B (Pty) Ltd will not be allowed to off-set the profits of R250 000 against its assessed loss and the
assessed loss will be forfeited, as no vehicle manufacturing trade was carried on during the year.
32.5.4 ITC 1123 (1968)

In ITC 1123, the court found that the shareholder’s only purpose in acquiring the majority shareholding
of a company with an assessed loss was to try to use the assessed loss to avoid the tax that it would
otherwise have had to pay on its own continuing income. The Commissioner’s decision to disallow
the set-off of the company’s income against its assessed loss was found to be correct.
The purchase of the shares of a company with an assessed loss by a taxpayer who has taxable
income may therefore be open to attack under s 103(2).
32.5.5 Glen Anil Development Corporation Ltd v SIR (1975 A)

In the Glen Anil case, the children of a township developer purchased the shares of the holding
company of a group of companies which had no assets other than an assessed loss in Glen Anil, one
of the subsidiaries. Glen Anil purchased all future townships. It was claimed that the purpose was to
limit the future growth of the taxpayer’s personal estate and thus his ultimate liability for estate duty. A
further expected result of the scheme was that undistributed profits tax (which was levied in those
years) could be saved. There was also a possible saving in normal tax available to the taxpayer over
the period that it would take to off-set the balance of Glen Anil’s assessed loss against future taxable
income.
The court concluded that the savings of estate duty, undistributed profits tax and normal tax were all
important considerations, but that the taxpayer had failed to discharge the presumption that the main
purpose was to use the assessed loss as required by s 103(4).
32.5.6 ITC 1347 (1981)

ITC 1347 concerned the acquisition of the shares in a clothing manufacturing company with an
assessed loss by another clothing manufacturer. This acquisition was effected for sound business
reasons. On the facts, the court found that the shares were not acquired solely or mainly for the pur-
pose of the use of the assessed loss and that the assessed loss could consequently be carried forward.
32.5.7 Conshu (Pty) Ltd v CIR (1994 A)

In the Conshu case, the principle was established that s 103(2) contains no limitation about the time-
frame in which the provision can be invoked. This means that if an agreement for the utilisation of an
assessed loss is reached in a particular year, but the assessed loss is utilised only in subsequent
years, the Commissioner may still apply s 103(2) in the later years.
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32.5–32.7 Chapter 32: Tax avoidance
Harms JA stated (at 57):

I have shown that the [taxpayer] did not claim the benefit of s 20 (the assessed loss) in 1985. He did so for
the first time in 1986. There was consequently no occasion for the Commissioner to disallow the set-off of
any assessed loss or balance of assessed loss during the former year. In addition, the [taxpayer] had no
otherwise taxable income during 1985 against which the assessed loss could have been set off. To hold
that, because the Commissioner could not have applied s 103(2) to the 1985 year, entails that he could also
not have done it in relation to 1986, would be destructive of the purpose of the provision. It would also allow
for the evasion of the provision.
32.6 Section 103(5): Cession

Section 103(5)(a) identifies a particular type of cession of a right to an amount as a tax-avoidance
scheme. In order for it to apply, all of the following requirements must be met:
l There must be a transaction, operation or scheme.
l The right to receive any amount was ceded in exchange for an amount of dividends.
l In consequence of that cession, the taxpayer or any other party to the transaction, operation or
scheme’s liability for normal tax must have been reduced or extinguished.
The effect of the application of s 103(5) is that the Commissioner is required to determine both the
taxpayer’s and any other party’s liability for normal tax as if the cession had never taken place.
Section 103(5)(a) applies to
(a) any transaction, operation or scheme concluded on or after that date, and
(b) any transaction, operation or scheme concluded before that date if the taxpayer is at liberty to
terminate the operation of the relevant transaction, operation or scheme without incurring liabil-
ity for damages, compensation or similar relief (s 103(5)(b)).

On 1 March 2017 XYZ University (which is exempt from normal tax) ceded the right to receive
R150 000 dividends to Taxpayer Limited. On the same day Taxpayer Limited ceded the right to
receive R200 000 interest to the university.
In this instance, the right to receive interest has been ceded by Taxpayer Limited in return for the
right to receive dividends. The Commissioner will assess Taxpayer Limited as if the transaction
had never occurred. Taxpayer Limited will, for normal tax purposes, be deemed to have received
interest of R200 000 (even though it actually received dividends amounting to R150 000).
It would appear that the outright disposal of, for example, an interest-bearing security, rather than the
cession of the right to interest, would not be covered by s 103(5)(a). This provision is applicable only
if a cession of only income took place.
If the Commissioner has applied the provisions of s 103(5)(a) in respect of any transaction, operation
or scheme, he may not exercise the discretion given to him in terms of s 89quat(3) or (3A).
32.7 Substance over form and simulated transactions

It has become traditional to accept that the courts can take only the actual transactions (the form or
contracts) of a scheme and not the true essence (the substance or true intention) of the transactions
into account when determining tax liability. However, recent court cases have proved the contrary.
The courts have based their findings on the substance of the schemes, and have ignored the form in
which the schemes were cast by means of different contracts. The current climate in the courts is
therefore not conducive to successful tax avoidance schemes. In certain recent cases the courts
ignored the form of the agreements entered into by the parties in determining the true intention of the
parties.
In Erf 3183/1 Ladysmith (Pty) Ltd and Another v CIR (1996 A) the question was whether the taxpayer
had obtained a right whose value was taxable in terms of par (h) of the definition of ‘gross income’ in
s 1 of the Act. This paragraph stipulates that a lessor will acquire a taxable right if another person is
obliged to make improvements to his property in terms of an agreement that grants the right to the
use or occupation of the property. The value of this right will be included in the lessor’s gross income.
The lessor will thus only be taxable if he placed the obligation on the user of the property.
The lessor in question concluded various contracts that ensured that another entity placed the obli-
gation to effect the improvements on the user of the property. Therefore, the lessor argued that he
could not be taxed, since he had not placed the obligation on the user of the property.
1061
The court acknowledged the principle that taxpayers could arrange their affairs in such a way that
meant they fell outside the ambit of a certain provision of the Act. However, it was for the court to
decide whether they were successful. The court made its decision by considering the true intention of
the parties, based on the substance of the transaction, and by interpreting the express, implied and
tacit terms of the agreements. As it appeared that the parties were involved in a disguised (dis-
honest) transaction, the court investigated the agreements and surrounding circumstances further.
The court ignored the disguised transaction and considered the true intention of the parties. The
court found that the true intention of the parties, or of the agreement between them, was that a right
to have improvements made to the land had accrued to the lessor and that he was liable to tax on the
value of the improvements.
In Commissioner of Customs and Excise v Randles, Brothers and Hudson Limited 1941 AD 369 at
395–396, the court held that
[a] disguised transaction . . . [is] [i]n essence . . . a dishonest transaction: dishonest, inasmuch as the par-
ties to it do not really intend it to have, inter partes, the legal effect which its terms convey to the outside
world. The purpose of the disguise is to deceive by concealing what is the real agreement or transaction
between the parties. The parties wish to hide the fact that their real agreement or transaction falls within the
prohibition or is subject to the tax, and so they dress it up in a guise which conveys the impression that it is
outside of the prohibition or not subject to the tax. Such a transaction is said to be in fraudem legis, and is
interpreted by the Courts in accordance with what is found to be the real agreement or transaction between
the parties. Of course, before the Court can find that a transaction is in fraudem legis in the above sense, it
must be satisfied that there is some unexpressed agreement or tacit understanding between the parties.
The principle of ‘substance over form’ therefore confirms the practice that the true intention behind a
transaction is of utmost importance, irrespective of what is recorded in the resulting contracts. How-
ever, the principle only applies where the parties to it do not really intend it to have, inter partes, the
legal effect which its terms convey to the outside world.
That the principle of ‘substance over form’ has its limitations and cannot simply be used to ignore
agreements where the parties in fact and in law intend to give effect to an agreement, appears from
CIR v Cape Consumers (Pty) Ltd 1999 (4) SA 1213 (C) at 1224H–I, where the following was stated:
The doctrine of the disguised transaction is not a panacea for appellant to ignore agreements where the
parties in fact and in law intend that they must be given their legal effect. This is precisely what occurred in
the instant case and accordingly there exists no basis to ignore such agreements.
In CSARS v NWK Ltd (2011 SCA) where Lewis JA, giving the judgment of the court, followed her
affirmation that a taxpayer is free to arrange his affairs so as to minimise tax liability and that there is
nothing wrong with arrangements that are tax-effective, with the qualification:
‘But there is something wrong with dressing up or disguising a transaction to make it appear to be some-
thing that it is not …’
Lewis JA also held that,
‘In my view the test to determine simulation cannot simply be whether there is an intention to give effect to a
contract in accordance with its terms. Invariably where parties structure a transaction to achieve an objec-
tive other than the one ostensibly achieved they will intend to give effect to the transaction on the terms
agreed. The test should thus go further, and require an examination of the commercial sense of the transac-
tion: of its real substance and purpose. If the purpose of the transaction is only to achieve an object that
allows the evasion of tax, or of a peremptory law, then it will be regarded as simulated. And the mere fact
that parties do perform in terms of the contract does not show that it is not simulated: the charade of per-
formance is generally meant to give credence to their simulation.’
1062
33 Tax administration
Redge de Swardt

l discuss the interaction between the Constitution of the Republic of South Africa,
the Promotion of Administrative Justice Act, the Promotion of Access to Information
Act and the Tax Administration Act
l identify taxpayers who are liable for rendering returns
l indicate to a taxpayer who is liable to render a return, how to register and obtain a
tax return
l determine the period that should be covered by the return
l apply the rules applicable to the books, accounts and records of the taxpayer
l determine how far SARS can go in investigating the books, accounts and records
of the taxpayer
l identify the representative taxpayers and their responsibilities
l determine the circumstances under which the Commissioner may issue additional,
reduced, jeopardy and estimated assessments
l determine the implication of payments to SARS
l calculate the interest on payments due to or by SARS
l allocate any payment to SARS
l determine the circumstances under which a refund is authorised by SARS
l identify the circumstances under which an administrative non-compliance penalty
may be levied
l identify the circumstances under which an understatement penalty may be levied
l use the dispute resolution process whenever the taxpayer is dissatisfied with his
assessment or is involved in any dispute with SARS
l identify persons that should register with SARS as tax practitioners
l determine what constitutes an offence and the penalties for an offence.
Remember
The Tax Administration Act No 28 of 2011 is referred to as the TAA in this chapter.
Contents
Page
33.1 Introduction ........................................................................................................................... 1066
33.1.1 Tax administration ............................................................................................ 1066
33.1.2 Application of the Act ....................................................................................... 1066
33.1.3 Administration of a tax Act ............................................................................... 1067
33.1.4 Exchange of information between tax administrations .................................... 1067
33.1.5 Tax Ombud (ss 15 to 21) ................................................................................. 1068
33.2 Tax registration (s 22) ........................................................................................................... 1068
33.2.1 Changes in particulars (s 23) ........................................................................... 1068
33.3 Tax returns ............................................................................................................................. 1068
33.3.1 Form and date of submission (s 25) ................................................................ 1068
33.3.2 Signing a tax return (s 25(3)) ........................................................................... 1069
33.3.3 Corrected return (s 25(5)) ................................................................................ 1069
1063
Page
33.3.4 Third party returns (s 26) ................................................................................. 1069
33.3.5 Other returns (s 27) .......................................................................................... 1070
33.3.6 Statement concerning accounts (s 28) ............................................................ 1070
33.3.7 Country-by-country reporting (CbCR) (Notice 1117 – 20 October 2017) ....... 1071
33.4 Retention of records.............................................................................................................. 1071
33.4.1 Duty to keep records (s 29) ............................................................................. 1071
33.4.2 Retention period in case of audit, objection or appeal (s 32) ......................... 1071
33.4.3 Form of records kept or retained (s 30) ........................................................... 1071
33.4.4 Inspection of records (s 31) ............................................................................. 1072
33.4.5 Translation (s 33).............................................................................................. 1072
33.4.6 Duty to keep records relating to potentially affected transactions .................. 1072
33.5 Assessments ......................................................................................................................... 1072
33.5.1 Introduction ...................................................................................................... 1072
33.5.2 Additional assessment (s 92) ........................................................................... 1073
33.5.3 Reduced assessments (s 93) .......................................................................... 1073
33.5.4 Jeopardy assessments (s 94) .......................................................................... 1073
33.5.5 Estimated assessments (s 95) ......................................................................... 1074
33.5.6 Withdrawal of an assessment (s 98) ................................................................ 1074
33.5.7 Limitations for issuing assessments (s 99) ...................................................... 1074
33.5.8 Finality of assessments (s 100) ........................................................................ 1075
33.6 Information gathering ............................................................................................................ 1076
33.6.1 Inspection, verification or audit ........................................................................ 1076
33.6.2 Referral for criminal investigation..................................................................... 1077
33.6.3 Inspection ......................................................................................................... 1078
33.6.4 Request for relevant material (s 46) ................................................................. 1078
33.6.5 Production of relevant material in person (s 47) .............................................. 1079
33.6.6 Field audit or criminal investigation (ss 42 and 48) ......................................... 1079
33.6.7 Assistance during field audit or criminal investigation (s 49) .......................... 1080
33.6.8 Inquiries ............................................................................................................ 1080
33.6.9 Search and seizure .......................................................................................... 1080
33.6.10 Legal professional privilege (ss 42A and 64) .................................................. 1082
33.7 Taxpayers and persons chargeable to tax (ss 151 and 152) ............................................. 1083
33.7.1 Representative taxpayer (ss 153 and 154) ...................................................... 1083
33.7.2 Withholding agent (ss 156 and 157) ................................................................ 1084
33.7.3 Responsible third party (ss 158 and 159)........................................................ 1084
33.7.4 Taxpayer’s right to recovery (s 160) ................................................................ 1084
33.7.5 Security by taxpayer (s 161) ............................................................................ 1085
33.8 Payment of tax ....................................................................................................................... 1085
33.8.1 Payment of tax debt (s 162) ............................................................................. 1085
33.8.2 Preservation order (s 163) ............................................................................... 1085
33.8.3 Payment of tax pending objection or appeal (s 164) ...................................... 1086
33.8.4 Taxpayer account (s 165) ................................................................................ 1087
33.8.5 Allocation of payments (s 166) ........................................................................ 1087
33.8.6 Instalment payment agreement (ss 167 and 168) ........................................... 1087
33.8.7 Refunds of excess payments (s 190) .............................................................. 1088
33.8.8 Refunds subject to set-off and deferral (s 191) ............................................... 1088
33.8.9 Interest ............................................................................................................. 1088
33.9 Recovery of tax (ss 169 to 184) ............................................................................................ 1089
33.9.1 Application for civil judgment (ss 172 to 176) ................................................. 1089
33.9.2 Sequestration, liquidation or winding-up proceedings (ss 177 and 178) ....... 1090
33.9.3 Collection of tax from third parties (ss 179 to 184) ......................................... 1090
33.9.4 Liability of third party appointed to satisfy tax debts (s 179)........................... 1090
33.9.5 Liability of financial management for tax debts (s 180) ................................... 1091
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Page
33.9.6 Liability of shareholders for outstanding tax debts (s 181) ............................. 1091
33.9.7 Liability of transferee for outstanding tax debts (s 182) .................................. 1092
33.9.8 Liability of person assisting in dissipation of assets (s 183)............................ 1092
33.9.9 Compulsory repatriation of a taxpayer's foreign assets (s 186) ...................... 1092
33.10 Penalties (ss 208 to 224) ...................................................................................................... 1093
33.10.1 Administrative non-compliance penalties (ss 208 to 220)............................... 1093
33.10.2 Procedure for imposing an administrative non-compliance penalty (s 214)... 1094
33.10.3 Procedure to request remittance of penalty (s 215) ........................................ 1095
33.10.4 Understatement penalty (ss 221 to 224).......................................................... 1096
33.10.5 Transitional arrangements: Understatements prior to the commencement
of the TAA (s 270) ............................................................................................ 1099
33.11 Voluntary disclosure programme (ss 225 to 233) ........................................................... 1099
33.11.1 Introduction ...................................................................................................... 1099
33.11.2 Qualification of person subject to audit or investigation for voluntary
disclosure (s 226)............................................................................................. 1100
33.11.3 Requirements for valid voluntary disclosure (s 227) ....................................... 1100
33.11.4 No-name voluntary disclosure (s 228) ............................................................. 1100
33.11.5 Voluntary disclosure relief (s 229).................................................................... 1100
33.11.6 Voluntary disclosure agreement (s 230) .......................................................... 1101
33.11.7 Withdrawal of voluntary disclosure relief (s 231) ............................................. 1101
33.11.8 Additional relief under the voluntary disclosure programme (ss 14 to 18 of
the Rates and Monetary Amounts and Amendment of Revenue Laws
Amendment Act, 2016, and ss 2 and 3 of the Rates and Monetary
Amounts and Amendment of Revenue Laws (Administration) Act, 2016) ...... 1101
33.12 Dispute resolution ................................................................................................................. 1102
33.12.1 Burden of proof (s 102) .................................................................................... 1102
33.12.2 Dispute resolution process (s 104) .................................................................. 1102
33.12.3 Reasons for the assessment (Rule 6 ) ............................................................. 1104
33.12.4 Objection against the assessment (Rule 7; ss 104 to 106) ............................. 1104
33.12.5 Appeal against the assessment (Rule 10; s 107) ............................................ 1105
33.12.6 Alternative dispute resolution (ADR) process (Rule 13 to 25; s 107(5)
and (6)) ............................................................................................................. 1106
33.12.7 Tax Board (Rules 11, 26 to 30; ss 108 to 115) ................................................ 1107
33.12.8 Tax Court (Rule 11; ss 116 to 132) .................................................................. 1108
33.12.9 Appeal to the High Court (ss 133 to 141) ........................................................ 1108
33.13 Settlement of dispute (ss 142 to 150)................................................................................... 1109
33.14 Write off or compromise of a tax debt (ss 192 to 207) ........................................................ 1110
33.15 Criminal offences (ss 234 to 238) ......................................................................................... 1110
33.15.1 Criminal offences relating to non-compliance with tax Acts (s 234) ............... 1110
33.15.2 Evasion of tax and obtaining undue refunds by fraud or theft (s 235) ............ 1111
33.15.3 Criminal offences relating to filing return without authority (s 237) ................. 1111
33.16 Tax practitioners (ss 239 to 243) ......................................................................................... 1112
33.16.1 Registration of tax practitioners (s 240) ........................................................... 1112
33.16.2 Recognised controlling body (s 240A) ............................................................ 1113
33.16.3 Complaint to controlling body of tax practitioner (ss 241 to 243) ................... 1113
33.17 Advance rulings (ss 75 to 90).............................................................................................. 1114
33.18 Tax compliance status (s 256) ............................................................................................ 1116
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33.1 Introduction
33.1.1 Tax administration

Tax administration refers to the process under which a person registers for a specific tax, submits
relevant returns or information, retains prescribed documentation, is assessed for the tax and makes
payment of the amount assessed. This process can be illustrated as follows:
Registration Return Assessment Payment /

(33.2) (33.3) (33.5) refund (33.8)
Dispute Recovery /
resolution collection of tax
(33.12) (33.9)
The South African Revenue Service (SARS) is primarily tasked with the function of collecting taxes
and ensuring compliance with tax laws. Whereas National Treasury sets South Africa's tax regime,
SARS administers it.
The Tax Administration Act 28 of 2011 (’the TAA’) was promulgated on 4 July 2012 and came into
effect on 1 October 2012. The Act aims to align the administration of the various tax Acts where
practically possible.
The TAA also prescribes the rights and obligations of taxpayers as well as the powers and duties of
SARS officials. A SARS official is, for purposes of the TAA, defined as
l the Commissioner;
l an employee of SARS; or
l a person contracted or engaged by SARS, other than an external legal representative, for pur-
poses of the administration of a tax Act and who carries out the provisions of a tax Act under the
control, direction or supervision of the Commissioner (definition of “SARS official” in s 1 of the
TAA).
Remember
Some of the provisions of the TAA relating to the levying of interest did not become effective on
1 October 2012. These provisions will become effective on a date still to be announced by the
Minister. Until such time, the provisions of the various tax Acts relating to the levying of interest
remain in force.
33.1.2 Application of the Act

The TAA applies to every person who is liable to comply with a provision of a tax Act, whether per-
sonally or on behalf of another person. The Act also binds SARS.
The term 'tax Act' is defined in s 1 of the Act to mean the TAA or an Act, or portion of an Act, referred
to in s 4 of the SARS Act, excluding customs and excise legislation.
If the TAA is silent with regard to the administration of a tax Act and it is specifically provided for in
any of the above tax Acts, the provisions of that tax Act apply (s 4(2)). If there is any inconsistency
between the TAA and any of the above tax Acts, the other tax Act prevails (s 4(3)).
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33.1 Chapter 33: Tax administration
33.1.3 Administration of a tax Act

SARS may only exercise the powers and duties assigned under the TAA for the purpose of the ad-
ministration of a tax Act (s 6).
The administration of a tax Act means to:

l obtain full information in relation to:
– anything that may affect the liability of a person for tax in respect of a previous, current or
future tax period
– a taxable event, or
– the obligation of a person (whether personally or on behalf of another person) to comply
with a tax Act
l ascertain whether a person has filed or submitted correct returns, information or documents in
compliance with the provisions of a tax Act
l establish the identity of a person for purposes of determining liability for tax
l determine the liability of a person for tax
l collect tax and refund tax overpaid
l investigate whether an offence has been committed in terms of a tax Act, and, if so
– to lay criminal charges, and
– to provide the assistance that is reasonably required for the investigation and prosecution
of tax offences or related common law offences
l enforce SARS’ powers and duties under a tax Act to ensure that an obligation imposed by or
under a tax Act is complied with
l perform any other administrative function necessary to carry out the provisions of a tax Act,
l give effect to the obligation of the Republic of South Africa to provide assistance under an
international tax agreement, and
l give effect to an international tax standard.
33.1.4 Exchange of information between tax administrations

SARS may request a taxpayer or another person to submit relevant material within a reasonable time
to give effect to the obligation of the Republic to provide assistance under an international tax
agreement or to give effect to an international tax standard (s 46(1) read with s 3(2)(i) and (j)).
An international tax agreement is an agreement entered into with the government of another country
in accordance with a tax Act, or any other agreement entered into between the competent authority
of the Republic and the competent authority of another country relating to the automatic exchange of
information under such agreement. An international tax standard is defined in s 1 as, subject to
changes by the Minister in a regulation,
l the OECD Standard for Automatic Exchange of Financial Account Information in Tax Matters;
l the Country-by-Country Reporting Standard for Multinational Enterprises specified by the Minis-
ter; or
l any other international standard for the exchange of tax-related information between countries
specified by the Minister.
The Commissioner may require a person to register to submit a return under an international tax
agreement or international tax standard (s 26(3)).
The purpose of the above is to ensure greater transparency of tax relevant information and the auto-
matic exchange of information between tax administrations. These are important steps in countering
cross-border tax evasion, aggressive tax avoidance and base erosion and profit shifting (BEPS)
through, for example, inappropriate transfer pricing arrangements.
SARS may require South African financial institutions to collect information under an international tax
standard, such as the OECD Standard for Automatic Exchange of Financial Account Information in
Tax Matters, which encompasses the Common Reporting Standard (CRS). This is an international
agreement to share information on residents’ assets and incomes automatically in conformity with the
standard. The reporting financial institutions is obliged to obtain the information and provide it to
SARS.
The inclusion of Country-by-Country Reporting Standard for Multinational Enterprises in the definition
of ‘international tax standard’ is part of establishing the framework for obtaining Country-by-Country
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(CbC) reports. CbC reports originate from a 2014 report by the OECD/G20 BEPS project entitled
‘Guidance on Transfer Pricing Documentation and Country-by-Country Reporting’. This report de-
scribed a three-tiered standardised approach to transfer pricing documentation that consists of a
master file, a local file and a country-by-country (CbC) Report.
33.1.5 Tax Ombud (ss 15 to 21)

The TAA provides for the powers and duties of a Tax Ombud. The mandate of the Tax Ombud is to
review and address certain complaints by a taxpayer. The complaint should relate to a service mat-
ter, a procedural matter, or an administrative matter arising from the application of the provisions of
the Act by SARS (s 16(1)(a)). The Tax Ombud may also at the request of the Minister review any
systemic and emerging issue related to a service matter or the application of the provisions of the
TAA or procedural or administrative provisions of a tax Act. The Tax Ombud may also initiate such
review, but only with the approval of the Minister (s 16(1)(b)).
The Tax Ombud may only review a request if the taxpayer has exhausted the available complaints
resolution mechanisms in SARS (unless there are compelling reasons for not doing so) (s 18(4)). The
Tax Ombud must attempt to resolve all issues within its mandate (s 20(1)). Its recommendations are
not binding on a taxpayer or SARS. However, if its recommendations are not accepted by a taxpayer
or SARS, reasons must be provided to the Tax Ombud. These reasons may be included in a report to
the Minister or the Commissioner (s 20(2)).
Judge Bernard Ngoepe was appointed as the first Tax Ombud on 1 October 2013. More information
on the tax ombud can be obtained at http://www.taxombud.gov.za.
33.2 Tax registration (s 22)

Unless a specific tax Act provides otherwise, a person must apply to be registered under a tax Act
within 21 business days after becoming obliged to register. An application for registration must be
made in the prescribed form and manner and the person must provide SARS with further particulars
and documents required by SARS for purpose of the registration (s 22(2)).
Where a person applies for registration under a tax Act, but has not provided all particulars and
documents as required by SARS, the person may be regarded as not having applied for the registra-
tion until all the particulars and documents have been provided to SARS (s 22(4)).
Where a person who is obliged to register under a tax Act, fails to do so, SARS may register the
person for one or more taxes as is appropriate (s 22(5)).
SARS will allocate a tax reference number to a person registered under a tax Act. This reference
number must be included in all returns or other documents submitted to SARS. If the reference num-
ber is not included in a return or document, SARS may regard the return or document as invalid.
The Commissioner may require a person to register as person who is required to submit a third party
return (see 33.3.4), or a return under an international tax agreement or international tax standard
(s 26(3)).
33.2.1 Changes in particulars (s 23)

Where a person is registered with SARS under a tax Act and any of the following particulars of the
person change, the person has to inform SARS of such change within 21 business days (in this
context, business days means days other than Saturdays, Sundays and public holidays):
l postal address
l physical address
l duly authorised or representative taxpayer
l banking particulars used for transaction with SARS, or
l electronic address used for communication with SARS.
33.3 Tax returns

33.3.1 Form and date of submission (s 25)
A return is a form, declaration, document or other manner of submitting information to SARS. It could
either be a self-assessment or a basis on which an assessment is to be made by SARS. A document
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that incorporates relevant material requested by SARS also qualifies as a return. A return may there-
fore not always constitute the basis of an assessment, but could be used by SARS to verify the cor-
rectness of information submitted by a taxpayer (s 1).
Where a tax Act or the Commissioner requires a person to submit a return, or where a person submits a
return voluntarily, it must be submitted in the prescribed manner and form, and on the date specified in
a tax Act. Where a tax Act does not specify the date on which a return must be submitted, it has to be
submitted on the date prescribed by the Minister by public notice (s 25(1)).
SARS may extend the time period for filing a return in a particular case or for a class of persons (s 25(6)
and (7)). However, such extension will not affect the deadline for payment of the tax (s 25(8)).
Where a taxpayer has not received a tax return from SARS, the taxpayer is not absolved from the
obligation to submit the return (s 25(4)).
SARS may require a person to submit further or more detailed returns regarding any matter for which
a tax return is required under a tax Act (s 27).
Remember
l Returns submitted for VAT purposes, have to be submitted on a VAT 201 declaration. This
return has to be submitted and payment made by the 25th of the month following the relevant
tax period. Where the 25th of a month falls on a Saturday, Sunday or public holiday, the re-
turn has to be submitted on the last business day before the 25th. Where VAT returns are
submitted and payment made on SARS eFiling, the return may be submitted and payment
made on or before the last business day of the month following the relevant tax period (s 28
of the Value-Added Tax Act).
l For employees’ tax purposes, an employer has to submit an EMP 201 on or before the 7th
day of the month that follows the month in which the employer paid remuneration to an em-
ployee (par 2 of the Fourth Schedule to the Income Tax Act).
l For corporate income tax purposes, an ITR 14 has to be submitted before the expiry of a
period of 12 months after the taxpayer's year end.
l For personal income tax purposes, an ITR 12 has to be submitted on the date announced by
the Minister in the Government Gazette. These dates generally depend on whether the tax-
payer files his return via eFiling and whether the taxpayer is a provisional taxpayer.
l A trust must submit a ITR 12T on the date announced by the Minister in the Government
Gazette.
33.3.2 Signing a tax return (s 25(3))

A tax return has to be signed by the taxpayer or by the taxpayer's duly authorised representative
(s 25(3)). Where a tax return is submitted on eFiling, the submission of the return is regarded as
signing the return. The person signing a tax return is regarded for all purposes in connection with a
tax Act to be cognisant of the statements made in the return (s 25(3)).
33.3.3 Corrected return (s 25(5))

Where a return contains an undisputed error, SARS may, prior to issuing an original assessment,
request the taxpayer to submit a corrected return to correct the error (s 25(5)). Once an assessment
is issued, a taxpayer can request SARS to issue a reduced assessment where there was a readily
apparent undisputed error by SARS or the taxpayer in a return (s 93(1)(d); see 33.5.3)
33.3.4 Third party returns (s 26)

The Commissioner may request any of the following persons by public notice to submit a return by a
specified date as a third party:
l a person who employs another person
l a person who pays amounts to another person
l a person who receives amounts on behalf of another person, or
l a person who otherwise transacts with another person.
The Commissioner may require a person to register as person who is required to submit a third party
return, or a return under an international tax agreement or international tax standard (s 26(3)). The
purpose of this is to ensure that relevant financial institutions comply with international tax standards
such as the Common Reporting Standard (CRS) (see 33.1.4).
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A person who is required to submit a third-party return must do so in the prescribed form and man-
ner. The return must contain the information prescribed by the Commissioner and must be a full and
true return. The Commissioner may also determine the time, place and date that the information must
be supplied.
Where a third party is obliged to provide a return, it must comply with the due diligence requirements
as prescribed in a tax Act, an international tax agreement, or by the Commissioner in the public
notice consistent with an international standard for exchange of information.
If a person who is required to submit a third party return requires information, a document or thing
from another person, that person must provide it within a reasonable time (s 26(4)).
The following persons are required to submit third party returns as indicated:
Person Return Description of information to be submitted
Banks, co-operative banks, the SA Postbank, fi- IT3(b) Amounts paid or received in respect of, or
nancial institutions regulated by the executive offic- by way of any investment, rental of immov-
ers or board as defined in the Financial Services able property, interest or royalty;
Board Act, 1990; companies listed on the JSE;
state-owned companies; organs of state; estate
agents and attorneys who receive any amount in
respect of an investment, interest or rental income Transactions that are recorded in an ac-
on behalf of a third person; and a person liable to count maintained for another person; and
pay withholding tax on interest (Public Notice 1 of any tax withheld.
2016).
Banks, co-operative banks, the SA Postbank, finan- IT3(c) Amounts paid in respect of the purchase
cial institutions regulated by the executive officers or and disposal of financial instruments
board as defined in the Financial Services Board
Act, 1990; state-owned companies; organs of state
(Public Notice 1 of 2016).
Financial institutions regulated by the executive IT3(f) The purchase of, and contributions made
officers or board as defined in the Financial Ser- in respect of any retirement annuity policy
vices Board Act, 1990 (Public Notice 1 of 2016). or income protection policy;
The payment of an amount that occurs
upon the death of a person in terms of an
insurance policy
Any person who purchases any livestock, produce, IT3(e) Monies paid in respect of a purchase, sale
timber, ore, mineral or precious stones for a prima- or shipment of livestock, produce, timber,
ry producer other than on a retail basis (Public ore, mineral, precious stones or by way of
Notice 1 of 2016). a bonus
Any medical scheme (Public Notice 1 of 2016). IT3(f) Contributions made by persons in respect
of a medical scheme, and all expenses
paid for a person by a medical scheme
A person who issued a financial instrument or poli- IT3(s) Contributions to, withdrawals from and
cy in respect of a tax-free investment (s 12T) (Pub- transfers to and from a tax-free investment;
lic Notice 1 of 2016). and
Any other amounts received or accrued in
respect of a tax-free investment
Reporting Financial Institution (Public Notice 192 of BRS: The return must contain the information
2017). Under the OECD’s Common Reporting Stan- CRS referred to in the CRS as further specified
dards (CRS) certain financial institutions are re- in the BRS: CRS. The return must include
quired to identify reportable accounts and report information in respect of each Reportable
thereon. Account of the Reporting Financial Institu-
tion
33.3.5 Other returns (s 27)

A senior SARS official may require a person to submit further or more detailed returns regarding any
matter for which a tax return or third-party return is required (s 27(1)). A person who is required to
submit such other return must do so in the prescribed form and manner. The return must further
contain the information prescribed by the official and must be a full and true return (s 27(2)).
33.3.6 Statement concerning accounts (s 28)

Where a person submits financial statements or accounts that were prepared by another person
(such as the person’s bookkeeper or accountant) in support of a tax return, SARS may require the
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33.3–33.4 Chapter 33: Tax administration
taxpayer to submit a certificate or statement from the person who prepared the financial statements
or accounts that sets out the following:
l the extent of examination of the taxpayer's book of account
l the extent of examination of the documents from which the taxpayer's books of account were
drawn up, and
l whether or not the entries in the book of accounts and documents disclose the true nature of
transactions, receipts, accruals, payments or debits in so far as may be ascertained from the ex-
amination.
Where a taxpayer requests a person who prepared its financial statements or account for the above
certificate or statement, the person must provide a copy of the document to the taxpayer.
33.3.7 Country-by-country reporting (CbCR) (Notice 1117 – 20 October 2017)

Certain multinational entities are required to report certain information on a country-by-country basis
to tax authorities. This is commonly referred to as country-by-country reporting (CbC reporting). This
information is intended to enhance transparency and enable tax authorities to assess transfer pricing
and other BEPS risks at a high level. SARS published a public notice (Public Notice No 1117 in
GG41186) that requires the submission of country-by-country information, master files and local files
for financial years commencing on or after 1 January 2016.
33.4 Retention of records

33.4.1 Duty to keep records (s 29)
The Act requires that a person has to retain certain documents for specified periods of time. A person
must keep the records, documents or books of account that
l enable the person to observe the requirements of a tax Act
l are required by a tax Act, and
l that will enable SARS to be satisfied that the requirements were observed (see Notice 508 of
27 June 2014).
Where a person has submitted a tax return for a specific period, the person has to retain the above
documents for a period of five years after submitting the return. A person who is required to submit a
return, but has not submitted the return, still has to retain the above documents. In this case, the five-
year document retention period will only start running when the person submits the return. Where a
person is not required to submit a return, but received income or had a capital gain or loss, or en-
gaged in any other activity that would be subject to tax if it were not for the application of an exemp-
tion or a threshold, the person has to retain the above documents for a period of five years from the
end of the relevant tax period.
33.4.2 Retention period in case of audit, objection or appeal (s 32)

Although a person is generally only required to retain records for a period of five years, under the
following circumstances records have to be retained for a longer period:
l where the records are relevant for an audit or investigation (see 33.6.1) which the person subject
to the audit or investigation has been notified of or is aware of, the person has to retain the rec-
ords until the audit is completed, and
l where a person has lodged an objection or noted an appeal against an assessment or decision,
the person has to retain the relevant records until the objection or decision becomes final
(see 33.12).
33.4.3 Form of records kept or retained (s 30)

Documents must be retained
l in their original form, in an orderly fashion and in a safe place
l in a form prescribed by the Commissioner in a public notice, which may include an electronic
form, or
l in a form specifically authorised by a senior SARS official in a form that is acceptable to the
official.
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33.4.4 Inspection of records (s 31)

The documents, books of account and documents that a person is obliged to retain must at all rea-
sonable times during the retention period be open for inspection by a SARS official in the Republic.
The SARS official may inspect the records in order to determine whether the person complies with the
prescriptions for retaining documents as well as for purpose of an inspection, audit or investigation
(see 33.6.1).
33.4.5 Translation (s 33)
Where information is not in one of the official languages of the Republic, a senior SARS official may
request that a translation be provided in one of the official languages. If so required, the translation
must be prepared and certified by a sworn and accredited translator or another person approved by
the senior SARS official.
33.4.6 Duty to keep records relating to potentially affected transactions
(Public Notice 1334 of 2016)
Taxpayers are required to keep prescribed records, books of account or documents in respect of
potentially affected transactions. A potentially affected transaction is a transaction that is entered into
between a resident and a non-resident that are connected persons in relation to each other (see
definition of ‘affected transaction’ in s 31; refer to chapter 21). A person is required to keep the pre-
scribed records, books of account and documents, referred to as transfer pricing documentation, if
l it has entered into a potentially affected transaction, and
l the aggregate of the person’s potentially affected transactions for the year of assessment, without
offsetting any potentially affected transactions against one another, exceeds or is reasonably ex-
pected to exceed R100 million.
The transfer pricing documentation that should be kept includes a description of the person’s owner-
ship structure, information relating to each connected person with which a potentially affected trans-
action has been entered, and a business operation summary. The business operation summary
includes a description of the business, an organogram indicating the location of the person’s senior
management team, major economic and legal issues affecting the profitability of the person and the
industry, a description of any business restructurings or intangible transfers, the person’s market
share within the industry, analysis of relevant market competition environment and key competitors,
the key value drivers identified by available industry research findings or reports, industry policy or
industry incentives or restrictions affecting the person’s business, and the role of the person, as well
as the connected persons in relation to the potentially affected transaction in the group’s supply
chain.
In addition to the above, the person must keep a prescribed list of records in respect of any potential-
ly affected transaction that exceeds or is reasonably expected to exceed R5 000 000 in value. Refer
to Article 3 and 4 of Public Notice 1334 of 2016 for a detailed list of information that must be kept.
33.5 Assessments
33.5.1 Introduction
Once a taxpayer has submitted a tax return, SARS will process the information provided on the return
and issue an assessment. In respect of some taxes, however, the return itself is considered to be a
self-assessment. This is, for example, the case with VAT returns (VAT201 declarations) and certain
PAYE returns (EMP201s). Such assessment raised by SARS (or the self-assessment where applica-
ble) is called an original assessment. Other than this, SARS may also raise additional assessments,
reduced assessments and jeopardy assessments.
Where SARS raises an assessment, it has to provide the taxpayer with a notice of assessment. A
notice of assessment has to contain the following information:
l the name of the taxpayer
l the taxpayer’s taxpayer reference number, or if one has not been allocated, any other form of
identification
l the date of the assessment (this date is very important for purposes of determining certain peri-
ods during which the taxpayer may take steps if he wishes to dispute the assessment – see
33.12)
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l the amount of the assessment

l the tax period in relation to which the assessment is made
l the date for paying the amount assessed, and
l a summary of the procedures for lodging an objection to the assessment.
In the case of an estimated assessment or an assessment that is not fully based on a return submit-
ted by the taxpayer (for example, in the case of an additional assessment or a jeopardy assessment),
the notice of assessment must contain a statement of the grounds of the assessment. In the case of a
jeopardy assessment, the notice of assessment must provide reasons for why the tax is considered
to be in jeopardy (s 96(2)).
Remember
Assessments for different taxes have different reference numbers, for example:
l corporate income tax and assessment is referred to as an IT 14
l personal income tax, an IT 34, and
l value-added tax, a VAT 217.
33.5.2 Additional assessment (s 92)

SARS must make an additional assessment where it is satisfied that an assessment does not reflect
the correct application of a tax Act to the prejudice of SARS or the fiscus.
SARS may not raise an additional assessment after the expiry of a period of time after the original
assessment. The limitation periods are discussed in detail below (s 99).
33.5.3 Reduced assessments (s 93)
SARS may raise a reduced assessment under the following specific circumstances:
l where the taxpayer successfully disputed an assessment under the dispute resolution provisions
of the Act (see 33.12)
l where a reduced assessment is necessary to give effect to a settlement (see 33.13)
l where a reduced assessment is necessary to give effect to a judgment pursuant to an appeal
against a decision of the tax court (that is an appeal to the High Court or the Supreme Court of
Appeal) and there is no right to further appeal
l where SARS is satisfied that there is a readily apparent undisputed error in the assessment by
SARS or the taxpayer in a return, or
l where a senior SARS official is satisfied that an assessment was based on the failure to submit a
return, or submission of an incorrect return by a third party, or a processing error by SARS or a
return fraudulently submitted by a person not authorised by the taxpayer.
SARS may raise a reduced assessment even if the taxpayer has not lodged an objection or noted an
appeal. This may apply in the case where a reduced assessment is raised by SARS in order to cor-
rect an undisputed error on a tax return.
33.5.4 Jeopardy assessments (s 94)
SARS has the right to raise a jeopardy assessment prior to the date that a tax return is due if it is
satisfied that such assessment is necessary to secure an amount of tax that may otherwise be in
jeopardy. Such assessment would typically be raised where SARS is of the view that a taxpayer may
be deliberately wasting an asset from which a tax liability could be paid, or that the taxpayer may be
fleeing the country.
In the case of a jeopardy assessment, the notice of assessment must provide reasons for why the tax
is considered to be in jeopardy (s 96(2)).
In a case where SARS has raised a jeopardy assessment, the taxpayer can lodge an objection and
note an appeal against the assessment as is the case with any other type of assessment (see 33.12).
However, a taxpayer may also make a review application to the High Court on grounds that
l the amount assessed is excessive, or
l the circumstances that justify a jeopardy assessment does not exist.
The onus is on SARS in all of these proceedings to prove that making a jeopardy assessment was
reasonable under the circumstances.
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33.5.5 Estimated assessments (s 95)

SARS may base an original assessment, additional assessment, reduced assessment or jeopardy
assessment in whole or in part on an estimate based on the information available to it where
l the taxpayer has failed to submit a return, or
l the taxpayer submitted information or a return that is inaccurate or incomplete.
In the case of an estimated assessment, the notice of assessment must contain a statement of the
grounds of the assessment (s 96(2)).
In a case where a taxpayer is unable to submit an accurate tax return, a senior SARS official may
agree with the taxpayer in writing on the amount of tax chargeable and raise an assessment accord-
ingly. This would, for example, be the case where a taxpayer has for some reason lost some of his
financial information and is for this reason not in a position to submit an accurate tax return. Where
SARS raises an estimated assessment in these circumstances, the assessment will not be subject to
objection or appeal.
33.5.6 Withdrawal of an assessment (s 98)

Under specific circumstances SARS may withdraw an assessment irrespective of whether a taxpayer
lodged an objection to the assessment. The circumstances under which SARS may withdraw an
assessment are:
l an assessment issued to the incorrect taxpayer
l an assessment raised in respect of an incorrect tax period, or
l an assessment issued as a result of an incorrect payment allocation.
An assessment withdrawn by SARS is regarded as not having been issued, unless a senior SARS
official agrees with the taxpayer in writing on the amount of tax properly chargeable for the relevant
tax period and issues a revised original, additional or reduced assessment. Such assessment is not
subject to objection or appeal (s 98(2)).
33.5.7 Limitations for issuing assessments (s 99)

An assessment may not be made under the following circumstances:
l where a period of three years has passed since the date of assessment of an original assessment
by SARS
l in the case of a self-assessment in respect of which a return had to be submitted, after a period
of five years from the date of assessment of an original assessment by way of self-assessment by
the taxpayer
l in the case of a self-assessment in respect of which a return had to be submitted, but was not
submitted, after a period of five years from the date of assessment of an original assessment by
SARS
l in the case of an additional assessment if the amount that should have been assessed, or the full
amount that should have been assessed, under the preceding assessment was not assessed
due to a practice generally prevailing at the date of assessment
l in the case of a reduced assessment where the amount assessed under the preceding assess-
ment, was made in accordance with a practice generally prevailing at the date of assessment
l in the case of an assessment in respect of a tax for which a return is not required, if payment was
made in accordance with a practice generally prevailing at the time of payment, or
l in the case of a dispute that was resolved under the dispute resolution process (see 33.12).
The above limitations on SARS to raise assessments do not apply:
l in the case of assessment by SARS, where the full amount of tax chargeable was not assessed
due to fraud, misrepresentation or non-disclosure of material facts
l in the case of a self-assessment, where the fact that the full amount of tax chargeable was not
assessed was due to fraud, intentional or negligent misrepresentation, intentional or negligent
non-disclosure of material facts, or failure to submit a return, or where no return is required, failure
to make payment
l where SARS and the taxpayer agree prior to expiry of the limitation period that the limitations will
not apply
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l where it is necessary to give effect to the resolution of a dispute under the dispute resolution
process (see 33.12)
l where a reduced assessment is issued where SARS is satisfied that there is a readily apparent
undisputed error in the assessment by SARS or the taxpayer in a return, but only if SARS became
aware of the error before expiry of the above period, or
l where SARS receives a request for a reduced assessment where a senior SARS official is satis-
fied that an assessment was based on the failure to submit a return, or submission of an incorrect
return by a third party, or a processing error by SARS or a return fraudulently submitted by a per-
son not authorised by the taxpayer.
Where a delay is caused by a taxpayer that failed to provide relevant material within the period speci-
fied by SARS or by an information entitlement dispute, including legal procedings, SARS may extend
the above prescription periods by a period that is approximate to the delay. The Commissioner must
give the taxpayer at least 30 days notice of such an extension prior to expiry of the prescription
period (s 99(3)).
Where an audit or investigation relates to the following, SARS may extend the prescription period by
three years in the case of an assessment by SARS, or by two years in the case of a self-assessment:
l the application of the doctrine of substance over form
l the application of the general anti-avoidance provisions of the ITA or VAT Act (Part IIA of Chap-
ter III of the ITA and s 70 of the VAT Act), or any other general anti avoidance provisions under a
tax Act
l the taxation of hybrid entities or hybrid instruments, or
l the application of s 31 of the ITA (ie transfer pricing provisions) (s 99(4)).
Example 33.1. Additional assessments
l Kayn submitted his personal income tax return in respect of the 2012 year of assessment on
30 June 2013 and received his assessment on 15 July 2013 with a date of assessment of 31
August 2013. SARS may not raise an assessment in respect of Kayn's 2013 tax return after 31
August 2016, unless the full amount of tax chargeable was not assessed due to fraud, mis-
representation or non-disclosure of material facts (s 99(2)(a)).
l Guard Corp submitted its April 2012 VAT return on 25 May 2012. SARS may not raise an as-
sessment in respect of Guard Corp's April 2012 tax period after 25 May 2017, unless the fact
that the full amount of tax chargeable was not assessed was due to fraud, intentional or negli-
gent misrepresentation, intentional or negligent non-disclosure of material facts (s 99(2)(b)).
l Staff Co failed to submit its employees’ tax returns (EMP201s) during 2009. This was identi-
fied during a SARS audit and SARS raised assessments in respect of its 2009 tax period on
10 January 2012. SARS may not raise subsequent assessments in respect of Staff Co's 2009
tax period after 10 January 2017, unless the fact that the full amount of tax chargeable was
not assessed was due to fraud, intentional or negligent misrepresentation, intentional or neg-
ligent non-disclosure of material facts (s 99(2)(b)).
33.5.8 Finality of assessments (s 100)

The Act provides that an assessment only becomes final after a certain event takes place. The fact
that an assessment became final, however, does not mean that SARS may not raise additional as-
sessments in respect thereof (certain restrictions to this are discussed below). A taxpayer may, how-
ever, generally not dispute an assessment after it has become final.
An assessment or a decision by SARS not to extend the period during which an objection may be
submitted or an appeal noted (or any other decision that is subject to objection or appeal under a tax
Act), becomes final:
l in the case of assessment based in whole or in part on an estimate, if the taxpayer does not
request SARS to issue a reduced or additional assessment by submitting a complete and correct
return within 30 days from the date of assessment
l in the case of an estimated assessment based on a written agreement with a taxpayer who is
unable to submit an accurate tax return, at the time of raising the assessment. Such assessment
is not subject to objection and appeal (s 95(3))
l if the taxpayer did not object to the assessment, or if the taxpayer withdrew his objection
l if, after an objection has been ruled on, the taxpayer did not file a notice of appeal
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l if a dispute has been settled (see 33.12)

l where an appeal has been determined by a tax board and the case has not been referred to the
tax court by either SARS or the taxpayer
l where an appeal has been determined by the tax court and there is no right to further appeal, or
l where an appeal has been determined by a High Court and there is no right to further appeal.
The fact that an assessment became final does not prevent SARS from making an additional assess-
ment in respect thereof. However, where an amount of tax has been dealt with in a disputed assess-
ment, SARS has limited power to raise an additional assessment (s 100(2)):
l in the case where an appeal has been determined by a High Court and there is no right to further
appeal, SARS may not make an additional assessment; and
l where a dispute has been settled, or an appeal has been determined by a tax board and the
case has not been referred to the tax court or where an appeal has been determined by the tax
court and there is no right to further appeal, and in the case of an assessment by SARS a period
of 3 years has expired since the date of original assessment (or 5 years in the case of a self-
assessent), SARS may only raise an additional assessment if
– in the case of assessment by SARS, the full amount of tax chargeable was not assessed due to
fraud, misrepresentation or non-disclosure of material facts, or
– in the case of a self-assessment, the fact that the full amount of tax chargeable was not as-
sessed was due to fraud, intentional or negligent misrepresentation, intentional or negligent
non-disclosure of material facts, or failure to submit a return, or where no return is required,
failure to make payment.
33.6 Information gathering
33.6.1 Inspection, verification or audit

SARS may select a person for inspection, verification or audit on any basis, which may include a
random or risk-assessment basis (s 40).
A SARS official must be granted written authorisation from a senior SARS official to conduct a field
audit or criminal investigation. If the official does not produce the written authorisation, any person
may assume that the official is not authorised to conduct the audit or investigation (s 41).
A SARS official involved or responsible for the audit must provide the taxpayer with a report indicat-
ing the stage of completion of the audit. The form and manner of this report may be prescribed by the
Commissioner by public notice (s 42(1)).
Notice 788 was published on 1 October 2012 in terms of s 42 of the TAA. The
Notice provides that a SARS official involved in or responsible for an audit has
to provide the taxpayer with a report within 90 days of the start of the audit and
Please note! within 90 day intervals thereafter until the conclusion of the audit. The report
must include a description of the current scope of the audit, the stage of com-
pletion of the audit, and relevant material still outstanding from the taxpayer.
Upon conclusion of the audit or criminal investigation, SARS must

l where the audit or investigation was inconclusive, inform the taxpayer within 21 business days
after conclusion of the audit or investigation, or
l where the audit identified potential adjustments of a material nature, provide the taxpayer with a
document containing the outcome of the audit within 21 business days after conclusion of the
audit or investigation (this period may be extended if required due to the complexities of the au-
dit). This document must also set out the grounds for the proposed assessment or decision
(s 42(2)). The taxpayer must then respond in writing to the facts and conclusions set out in the
document within 21 business days of delivery of this document (the period may be extended on
request by the taxpayer if due to the complexities of the audit) (s 42(3)).
Where a senior SARS official has reasonable grounds for believing that notifying the taxpayer of the
stage or completion of the audit, or notifying the taxpayer of the outcome of an audit where potential
adjustments of a material nature were identified, would impede the purpose, progress or outcome of
the audit, SARS is not required to notify the taxpayer as such (s 42(5)). In such a case, SARS must
1076
raise an assessment or make a decision resulting from the audit and provide the taxpayer with
grounds of assessment within 21 business days of the date of assessment (this period may be ex-
tended due to the complexity of the audit).
33.6.2 Referral for criminal investigation

A distinction is drawn between a civil investigation (ie an inspection, verification or audit) and a
criminal investigation. One of the main reasons for this distinction lies in the onus of proof that applies
to the respective investigations. Under a civil investigation, the taxpayer generally bears the onus to
prove that the correct amount of tax was paid. Under a criminal investigation, SARS bears the onus to
prove that the person has committed an offence. Under a civil investigation a taxpayer is therefore
obliged to provide all information requested by SARS for purposes of the investigation. As a general
rule, a taxpayer is not obliged under a criminal investigation to provide SARS with information that
may be self-incriminating.
Where it appears before or during the course of an audit that a person may have committed a serious
tax offence, the investigation of the offence must be referred to a senior SARS official responsible for
criminal investigations. This person must decide whether a criminal investigation should be pursued
(s 43(1)).
A tax offence is defined as an offence in terms of a tax Act, or any other offence involving fraud on
SARS or a SARS official relating to the administration of a tax Act, or theft of monies due or paid to
SARS for the benefit of the National Revenue Fund. A serious tax offence is defined as a tax offence
for which a person may be liable on conviction
l to imprisonment exceeding two years without the option of a fine, or
l to a fine exceeding the equivalent amount of a fine under the Adjustment of Fines Act 101 of
1991.
Any relevant material gathered during an audit after the referral for criminal investigation must be
kept separate from the criminal investigation. This material may not be used in criminal proceedings
instituted in respect of the offence (s 43(2)). Where a case has been referred for criminal investigation
and it is then
l decided not to pursue a criminal investigation, or
l it is decided to terminate the investigation, or
l after referral for prosecution, decided not to prosecute
all relevant material and files must be returned to the SARS official responsible for the audit
(s 43(3)).
During a criminal investigation, SARS has to apply its information gathering powers with due recogni-
tion of the taxpayer's constitutional rights as a suspect in a criminal investigation (s 44(1)).
Remember
Section 35(3) of the Constitution of the Republic of South Africa, 1996, provides that every ac-
cused person has a right to a fair trial, which includes the right:
l to be informed of the charge with sufficient detail to answer it
l to have adequate time and facilities to prepare a defence
l to a public trial before an ordinary court
l to have their trial begin and conclude without unreasonable delay
l to be present when being tried
l to choose, and be represented by, a legal practitioner, and to be informed of this right
promptly
l to have a legal practitioner assigned to the accused person by the state and at state expense,
if substantial injustice would otherwise result, and to be informed of this right promptly
l to be presumed innocent, to remain silent, and not to testify during the proceedings
l to adduce and challenge evidence
l not to be compelled to give self-incriminating evidence
l to be tried in a language that the accused person understands or, if that is not practicable,
to have the proceedings interpreted in that language
continued
1077
l not to be convicted for an act or omission that was not an offence under either national or
international law at the time it was committed or omitted
l not to be tried for an offence in respect of an act or omission for which that person has pre-
viously been either acquitted or convicted
l to the benefit of the least severe of the prescribed punishments if the prescribed punishment
for the offence has been changed between the time that the offence was committed and the
time of sentencing, and
l of appeal to, or review by, a higher court.
Where a decision was made to pursue the criminal investigation of a serious tax offence, SARS may
use information obtained prior to the case being referred for criminal investigation (s 44(2)). Any
information obtained during the criminal investigation may be used for purpose of audit as well as
subsequent civil and criminal proceedings (s 44(3)).
The information obtained during the civil and criminal phases of an investigation may therefore be
used for the following purposes:
For purpose of civil investigation For purpose of criminal
Phases of information gathering
(inspection, verification or audit) investigation
Information obtained during a civil investigation
Yes Yes
prior to referral for criminal investigation
Information obtained during a civil investigation
Yes No
after referral for criminal investigation
Information obtained during a criminal investi-
Yes Yes
gation
33.6.3 Inspection
A SARS official may, for the purpose of the administration of a tax Act and without prior notice, con-
duct an inspection at premises where he has reasonable belief that a trade or enterprise is being
carried on to determine
l the identity of the person occupying the premises
l whether such person is registered for tax, or
l whether the person retains records, books of account or documents in the form as required by
the Act (s 45(1)).
A SARS official may not enter a dwelling-house or domestic premises without the consent of the
occupant, except any part used for purpose of trade (s 45(2)).
33.6.4 Request for relevant material (s 46)

A senior SARS official may require a taxpayer, whether identified by name or otherwise objectively
identifiable, or another person, to submit relevant material to SARS (s 46(2)(a)). A senior SARS official
may also request relevant material held or kept by a company that is part of the same group of com-
panies as the taxpayer and located outside South Africa (s 46(2)(b)) (For this purpose, group of
companies requires an interest of more than 50% of the equity shares or voting rights – see par (d)(i)
of the definition of ‘connected person’ in s 1 of the ITA). ‘Relevant material’ is defined in s 1 of the
TAA as any information, document or thing that in SARS’ opinion is foreseeably relevant for the ad-
ministration of a tax Act. SARS's request for material must further be for the purpose of the admin-
istration of a tax Act in relation to a taxpayer (see 33.1.2).
Remember
It is SARS that determines whether information is foreseeably relevant for the administration of a tax
Act. The term ‘foreseeable relevance’ does not imply that taxpayers may unilaterally decide
relevance and refuse to provide access to the information.
SARS may require that the material be submitted orally or in writing and within a reasonable period
(s 46(1)). SARS may specify the place, format and time in which the relevant material must be pro-
vided (s 46(4)). The format in which SARS requires the taxpayer to submit the material must be
1078
reasonably accessible to the taxpayer. The period within which the material has to be provided may
be extended on good cause shown (s 46(5)). The relevant material requested by SARS must be
referred to in the request with reasonable specificity (s 46(6)).
Remember
Since SARS may specify the format in which the relevant material must be provided, SARS may, for
example, specify that information must be provided in electronic format as opposed to printed
copies.
A senior SARS official may further

l require relevant material from an objectively classifiable class of taxpayers (s 46(2)), or
l direct that relevant material be provided under oath or solemn declaration (s 46(7)(a)), or
l direct that relevant material that is required for purpose of a criminal investigation, be provided
under oath or solemn declaration and, if necessary, in accordance with certain provisions of the
Criminal Procedure Act, 51 of 1977. The latter will ensure that documents obtained from certain
third parties, for example bank statements from a bank, are obtained in a manner that renders
them admissible as prima facie evidence of the facts contained therein thereby obviating the
unnecessary calling of the third parties as witnesses (s 46(7)(b)), or
l request relevant material that a person has available for purposes of revenue estimation (s 46(8)).
SARS may in certain circumstances raise estimated assessments (see 33.5.5; s 95).
Where SARS requests relevant material from a company located outside South Africa that is part of
the same group of companies as the taxpayer, the material must be provided within 90 days from the
date of the request. If the material is not provided within this period (or a period extended by SARS),
the taxpayer is prohibited from producing the relevant material in subsequent proceedings, unless a
competent court directs otherwise on the basis of circumstances outside the control of the taxpayer
or related group company (s 46(9)).
33.6.5 Production of relevant material in person (s 47)

A senior SARS official may require, by notice, that a person submit relevant material in person at a
determined time and place. Such request may be made to any person, whether chargeable to tax or
not, an employee of the person, or a person who holds an office in the person. The purpose of this
request is for such persons to be interviewed by a SARS official concerning the tax affairs of the
person, if the interview
l is intended to clarify issues of concern for SARS to render further verification or audit unneces-
sary or to expedite a current verification or audit, and
l is not for purpose of a criminal investigation (s 47(1)).
The person may be required to produce relevant material in the person's control (s 47(2)), which
material must be referred to in the notice with reasonable specificity (s 47(3)). A person may decline
to attend the interview if the distance between his usual place of residence and the place where the
interview is to be held exceeds the distance prescribed by the Commissioner by public notice
(s 47(4)) (see Notice 789 of 1 October 2011).
33.6.6 Field audit or criminal investigation (ss 42 and 48)

A SARS official duly authorised to conduct an investigation, verification or audit may request a person
to make relevant material available at the person's premises that the official may require to audit or
criminally investigate in connection with the administration of a tax Act in relation to the person or
another person. Such request must be made with at least 10 business days’ prior notice (s 48(1)).
This request must be made by notice, which must
l state the place where, date and time that the audit or investigation is due to start (the date and
time must be within normal business hours), and
l indicate the initial scope of the audit or investigation (s 48(2)).
The SARS official responsible for an audit must provide the taxpayer with a report indicating the
stage of completion of the audit (s 42(1)). Where the audit or criminal investigation was inconclusive,
SARS must within 21 days of conclusion inform the taxpayer accordingly. Where potential
1079
adjustments of a material nature were identified, SARS must within 21 days of conclusion of the audit
or criminal investigation provide the taxpayer with a document containing the outcome of the audit (ie
a letter of audit findings). The document must also include the grounds for the proposed assessment
(s 42(2)). The 21-day period may be extended if required by the complexities of the audit. The tax-
payer must within 21 days of receiving the document respond in writing to the facts and conclusions
set out in the document. The taxpayer may request that this period be extended based on the com-
plexities of the audit (s 42(3)). The taxpayer may also waive the right to receive this document
(s 42(4)).
33.6.7 Assistance during field audit or criminal investigation (s 49)

The person at whose premises an audit or criminal investigation is carried out, is required to provide
reasonable assistance to SARS. The person must make appropriate facilities available, answer ques-
tions relating to the audit or investigation and submit relevant material as required (s 49(1)). SARS
may direct that relevant material be provided under oath or solemn declaration (s 46(7)(a)), or that
relevant material that is required for purpose of a criminal investigation be provided under oath or
solemn declaration, and, if necessary, in accordance with certain provisions of the Criminal Proce-
dure Act 51 of 1977.
No person may without just cause obstruct a SARS official from carrying out the audit or investigation.
A person may also not refuse to give access or provide assistance (s 49(2)).
The person may recover the costs for using photocopying facilities from SARS after completion of the
audit (or on a monthly basis if the person so requests). The fees for these costs are prescribed in
terms of the Promotion of Access to Information Act.
33.6.8 Inquiries
Where there are reasonable grounds to believe that a person has failed to comply with an obligation
imposed under a tax Act, or that a person has committed a tax offence, or that a person has disposed
of, removed or concealed assets which may fully or partly satisfy an outstanding tax debt, and relevant
material is likely to be revealed at an inquiry, SARS may conduct an inquiry for the purpose of the
administration of a tax Act. A senior SARS official may authorise a person to conduct such inquiry (s
50(3)). A judge may, on application made ex parte and authorised by a senior SARS official, grant an
order that a designated person act as presiding officer at an inquiry (s 50(1)). A judge may grant such
order if he is satisfied that there are reasonable grounds to believe that the above circumstances are
applicable (s 51(1)).
The presiding officer may notify a person, whether or not chargeable to tax, in writing to appear
before the inquiry. The person will be examined under oath or solemn declaration and will be re-
quired to produce any relevant material in the person's custody (s 53). Such inquiry is private and
confidential (s 56(1)). SARS may however use evidence given by a person under oath or solemn
declaration at the inquiry during subsequent proceedings involving the person or another person
(except for incriminating evidence in subsequent criminal proceedings against the person) (s 56(4)).
A person has the right to have a representative present when the person appears as a witness before
the presiding officer (s 52(3)).
The person may not refuse to answer a question at the inquiry on the grounds that it may incriminate
the person. Incriminating evidence is, however, not admissible in criminal proceedings against the
person giving the evidence (s 57(2)). Where incriminating evidence relates to the following, it may
however be admissible in criminal proceedings against the person giving the evidence:
l the administrating or taking of an oath or the administrating or making of a solemn declaration
l giving false evidence or making a false statement, or
l failing to answer questions fully and satisfactorily that were lawfully put to a person (s 57 (2)).
33.6.9 Search and seizure

SARS may search premises in order to seize relevant material that may provide evidence of a per-
son's non-compliance with a tax Act or the committal of a tax offence. As a general rule, SARS has to
apply to a judge for a warrant under which such search and seizure is carried out. A search and
seizure may however in limited circumstances be carried out without a warrant. During the execution
of a warrant, a person may claim that specific material is subject to legal professional privilege. Such
material must then be handed to a specially appointed attorney to determine if such privilege exists.
1080
Search of premises under a warrant (ss 59 to 61)

SARS may apply to a judge for a warrant under which SARS may enter the premises where relevant
material is kept. SARS may search the premises and any person present and seize relevant material
(s 59(1)). Premises include a building, aircraft, vehicle, vessel or place (s 1).
In the above application SARS must set out facts that indicate that there are reasonable grounds to
believe that
l a person failed to comply with a provision of a tax Act, or committed a tax offence, and
l relevant material likely to be found on the premises may provide evidence of the failure or offence
(s 60(1)).
The warrant must contain the following:
l the alleged failure or offence
l the person alleged to have failed to comply or to have committed the offence
l the premises to be search, and
l the fact that relevant material is likely to be found on the premises (s 60(2)).
The warrant must be exercised within 45 business days (or longer period as a judge or magistrate
deem appropriate on good cause shown (s 59(3)). When a SARS official exercises a power under a
warrant, he must produce the warrant (s 61(1)). If a warrant is not produced, a person may refuse the
official access to the premises (s 61(2)).
In carrying out the search, the SARS official may:
l open or remove anything which the official suspects to contain relevant material
l seize any relevant material
l where relevant material is on a computer or storage device, the computer or storage device may
be seized and retained for as long as is necessary to copy the material required
l make extracts from or copies of relevant material and require a person to give an explanation of
relevant material, and
l if the premises listed in the warrant is a vessel, aircraft or vehicle, stop, board and search the
vessel, aircraft or vehicle or person therein (s 61(3)).
The SARS official must conduct the search with strict regard for decency and order. The official may
only search a person if the official is of the same gender as the person (s 61(5)). The official may
request the assistance of a police officer if the official considers it reasonably necessary (s 61(6)). No
person may obstruct the SARS official or police officer from executing the warrant. A person may also
not without reasonable cause refuse to give assistance as may reasonably be required to execute the
warrant (s 61(7)).
The SARS official must make an inventory of the relevant material seized (s 61(4)). Such material
must be retained and preserved until it is no longer required for the investigation into the non-
compliance or offence, or until the conclusion of legal proceedings in which it is required to be used
(s 61(8)).
Search of premises not identified in the warrant (s 62)
Under certain restricted circumstances, a senior SARS official may enter and search premises that
are not identified in a warrant. This may be the case where a senior SARS official has reasonable
grounds to believe that:
l the relevant material included in the warrant that may provide evidence of the person's non-
compliance or offence, is at the premises not identified in the warrant
l the relevant material may be removed or destroyed
l a warrant cannot be obtained in time to prevent the removal or destruction, and
l the delay in obtaining the warrant would defeat the object of the search and seizure.
The SARS official may, however, not enter a dwelling-house or domestic premises not identified in the
warrant without the occupant's consent, except any part thereof used for purposes of trade.
Search without a warrant (s 63)
SARS may under certain narrow circumstances conduct a search without a warrant. This power may
only be invoked if the person affected consents thereto or if a senior SARS official on reasonable
grounds is satisfied that:
l there may be an imminent removal or destruction of relevant material likely to be found on the
premises
1081
l if SARS applies for a search warrant under the relevant empowering section of the Act, a search
warrant will be issued, and
l the delay in obtaining a warrant would defeat the object of the search and seizure (s 63 (1)).
Before the SARS official carries out the search, he must inform the affected person that a search is
being conducted under this section of the Act. The SARS official must also inform the affected person
of the alleged non-compliance or offence (s 63 (2)).
The SARS official may, however, not enter a dwelling-house or domestic premises without the occu-
pant's consent, except any part thereof used for purposes of trade.
Application for return of seized material (s 66)

A person may request SARS to return some or all of the material seized and pay the costs of physical
damage caused during the conduct of a search and seizure. If SARS refuses the request, the person
may apply to the High Court for the return of the material and compensation. The Court may make an
order as it deems fit.
If a court sets aside a warrant or orders the return of seized material, the court may authorise SARS to
retain the original or copy of any relevant material in the interests of justice.
33.6.10 Legal professional privilege (ss 42A and 64)

Legal professional privilege refers to a person's privilege to refuse to disclose, and to prevent any
other person from disclosing, confidential communications between the person and his attorney.
Such privilege protects communications between attorney and client that are made for the purpose of
furnishing or obtaining professional legal advice or assistance and may not be disclosed without
permission of the person.
Where the need to search for material over which the taxpayer may claim legal professional privilege
is foreseeable, SARS must arrange for the attendance of the attorney before execution of the warrant
(s 64(1)). The attorney must be an attorney from the panel from which the chairpersons of the tax
board must be selected (this is an attorney appointed by the Minister of Finance in consultation with
the relevant Judge President) (s 64(2)). The attorney may appoint a substitute attorney to be present
during the execution of the warrant.
If an attorney is not present and a person alleges the existance of legal professional privilege during
execution of the warrant, the material must be sealed and as soon as reasonably possible handed
over to the appointed attorney, who must then make the determination of whether or not a privilege
applies (s 64(3)).
The appointed attorney must take personal responsibility to remove material in respect of which privi-
lege is alleged from the premises or for receipt of the sealed information. The attorney must make a
determination of whether the privilege applies within 21 business days. The attorney may consider
representations made by the parties. If such determination is not made, or a party is not satisfied with
the determination, the attorney has to retain the information until the parties resolve the dispute or a
court makes an order.
Where a person alleges the existance of legal professional privilege during an enquiry or during the
conduct of a search and seizure by SARS, the person must provide the following information to
SARS, the presiding officer (in the case of an inquiry) or the appointed attorney (in the case of a
search and seizure) (s 42A(1)):
l a description and purpose of each item of the material in respect of which the privilege is asserted
l the author of the material and the capacity in which the author was acting
l the name of the person for whom the above author was acting in providing the material
l confirmation in writing that the above person is claiming privilege in respect of each item of the
material
l if the material is not in possession of the person for whom the author was acting, from whom did
the person asserting privilege obtain the material, and
l if the person asserting privilege is not the person for whom the author was acting, under what
circumstances and instructions regarding the privilege did the person obtain the material.
If SARS disputes the assertion of privilege upon receipt of the above information, SARS must make
arrangements with a practitioner from the panel appointed under s 111 to take receipt of the material.
The practitioner is not regarded as acting on behalf of either party. The person asserting privilege
must seal and hand over the material in respect of which privilege is asserted to the practitioner. The
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practitioner must within 21 business days after being handed the material make a determination of
whether the privilege applies and may do so in the manner the practitioner deems fit, including
considering representations made by the parties. If a determination of whether the privilege applies is
not made by the practitioner or a party is not satisfied with the determination, the practitioner must
retain the relevant material pending final resolution of the dispute by the parties or an order of court.
Any application to a High Court must be instituted within 30 days of the expiry of the period of 21
business days, failing which the material must be handed to the party in whose favour the determina-
tion, if any, was made (s 42A(3) and (4)).
33.7 Taxpayers and persons chargeable to tax (ss 151 and 152)
For purposes of the TAA, a taxpayer includes:
l a person who is or may be chargeable to tax or with a tax offence (a person chargeable to tax is
the person upon whom the liability for tax in terms of a tax Act is imposed and who is personally
liable for the tax)
l a representative taxpayer
l a withholding agent
l a responsible third party, and
l a person who is the subject of a request to provide information under an international tax agree-
ment.
33.7.1 Representative taxpayer (ss 153 and 154)

A representative taxpayer is a person who is responsible for paying tax on behalf of another person
as an agent (but excludes a withholding agent – see 33.7.2). A representative taxpayer includes a
person who is
l a representative taxpayer for income tax purposes (as defined in the Income Tax Act)
l a representative employer for employees' tax purposes, and
l a representative vendor for VAT purposes.
A representative taxpayer may be held liable for the tax liability of the taxpayer that he represents in
his representative capacity as well as in his personal capacity.
A representative taxpayer may, in his capacity as representative taxpayer, be held liable for the tax
liability of the taxpayer representative as regards to
l income that the representative taxpayer is entitled to
l moneys to which the representative taxpayer is entitled to or has the management or control
l transactions concluded by the representative taxpayer, and
l anything else done by the representative taxpayer.
A representative taxpayer may be held liable in his personal capacity for the tax payable in his repre-
sentative capacity, if, while the amount remains unpaid, the representative taxpayer
l alienates, charges or disposes of amounts in respect of which the tax is payable, or
l disposes of or parts with moneys that are in his possession or came to the taxpayer after the tax
is payable, if he could legally have paid the tax from such moneys.
SARS has the same power of recovery against the assets of a representative taxpayer who is per-
sonally liable for the tax as it has against the assets of the taxpayer. The representative tax-payer has
the same rights and remedies as the taxpayer has against such powers of recovery (s 184(1); see
33.9).
Example 33.2. Liability of representative taxpayer
X Inc, a practicing attorney, acts as the representative taxpayer of a non-resident company, Y

BV. On 15 February 2017, Y BV transferred R1 million to X Inc to be paid to SARS respect of Y
BV’s VAT liability relating to its January 2017 tax period. Y BV’s January 2017 VAT return was
submitted to SARS on 25 February 2017. However, Y BV instructed X Inc not to make the pay-
ment due to SARS and to transfer the R1 million back to Y BV’s foreign bank account.
Could SARS hold X Inc liable for payment of the amount due by Y BV? If so, what remedies do
SARS have to collect the amount from X Inc?
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SOLUTION
X Inc may be held liable in its representative capacity for the R1 million owed by Y BV, since it is
the representative vendor of Y BV. SARS may institute a civil claim against X Inc for the collection
of the amount in its representative capacity.
If X Inc transfers the R1 million back to Y BV, X Inc may be held liable in its personal capacity for
the tax owed by Y BV. Section 155(b) provides that a representative taxpayer may be held per-
sonally liable for the tax payable in its representative capacity, if, while the amount remains un-
paid, it disposes or parts with money from which the tax could legally have been paid. SARS has
the following remedies to collect the amount from X Inc:
l Civil judgment against X Inc (ss 172 to 176; see 33.9.1);
l Liquidation proceedings against X Inc (ss 177 to 178; see 33.9.2);
l Require a person who holds or owes money to X Inc to pay it to SARS (s 179; see 33.9.3);
l SARS may hold the person that controls or is regularly involved in the management of X Inc’s
financial affairs personally liable for the outstanding tax debt if the person’s negligence or
fraud resulted in the failure to pay the amount (s 180; see 33.9.4);
l If X Inc is liquidated or wound up, SARS may hold the persons who were its shareholders
within one year prior to its liquidation or winding up personally liable for the outstanding tax
debt to the extent that such persons received assets of X Inc within one year prior to its liqui-
dation or winding up and the tax debt existed at the time that the shareholders received the
asset (s 181; see 33.9.5);
l SARS may hold a connected person in relation to X Inc personally liable for the outstanding
tax debt if the connected person received an asset from X Inc at no consideration or at a
consideration less than the market value within one year prior to receiving notice of the liabil-
ity from SARS (s 182; see 33.9.6);
l SARS may hold any person who knowingly assists in dissipating X Inc’s assets in order to
obstruct the payment of the tax debt personally liable for the outstanding tax debt (s 183; see
33.9.7).
33.7.2 Withholding agent (ss 156 and 157)

A withholding agent is a person who must under a tax Act withhold an amount of tax and pay it to
SARS. A withholding agent becomes personally liable for an amount withheld and not paid to SARS,
or for an amount that should have been withheld and was not withheld. Where SARS recovers an
amount from a withholding agent who became liable for such amount in his personal capacity, the
amount is regarded as having been paid on behalf of the relevant taxpayer in respect of the taxpay-
er's liability to tax.
SARS has the same power of recovery against the assets of a withholding agent who is personally
liable for the tax as it has against the assets of the taxpayer. The withholding agent has the same
rights and remedies as the taxpayer has against such powers of recovery (s 184(1) see 33.9).
33.7.3 Responsible third party (ss 158 and 159)

A responsible third party is a person, other than a representative taxpayer and a withholding agent,
who becomes liable in a representative or personal capacity for the tax liability of another person.
The collection of tax from a third party is discussed in paragraph 33.9.3.
33.7.4 Taxpayer’s right to recovery (s 160)

Where a representative taxpayer, withholding agent or responsible third party has as such paid an
amount of tax, he is entitled
l to recover the amount of tax from the person on whose behalf it was paid, or
l to retain the amount of tax paid from moneys or assets in the person's possession or that may
come to the person in his representative capacity.
Unless a tax Act provides otherwise, a taxpayer in respect of whom an amount has been paid to
SARS by a withholding agent under a tax Act or by a responsible third party, is not entitled to recover
the amount paid from the withholding agent or responsible third party. The taxpayer is, however,
entitled to recover the amount of an unlawful or erroneous payment from SARS (s 160(2)).
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33.7.5 Security by taxpayer (s 161)

A taxpayer may be required to provide security for the payment of tax. Where this is required, SARS
must require the taxpayer by written notice to deposit or furnish the security to SARS within a period
that SARS determines. A senior SARS official may require a taxpayer to provide security under the
following circumstances:
l where the taxpayer is a representative taxpayer, withholding agent or responsible third party who
was previously held liable under a tax Act in his personal capacity
l where the taxpayer has been convicted of a tax offence
l where the taxpayer has frequently failed to pay an amount of tax due
l where the taxpayer has frequently failed to carry out other obligations imposed under a tax Act
which constitutes administrative non-compliance (see 33.10.1), or
l where the taxpayer is under the management or control of a person who is or was a person as
contemplated above.
The security must be of the nature, amount and form as the senior SARS official directs. If the security
is in the form of a cash deposit and the taxpayer fails to make the deposit, the amount may be recov-
ered as if it were an outstanding tax debt of the taxpayer, or may be set off against a refund due to
the taxpayer (s 161(4)). In the case of a taxpayer other than a natural person who is unable to provide
security when required, the senior SARS official may require any or all of the shareholders, members
or trustees who are involved in the management of the taxpayer to enter into a contract of suretyship
in respect of the taxpayer's debt.
33.8 Payment of tax

A taxpayer is obliged to pay his tax liability on a specific date. SARS may, however, under certain
circumstances demand earlier payment (see 33.8.1). Any payment made by a taxpayer will first be
allocated to the oldest tax debt of the taxpayer (see 33.8.5).
SARS may apply to the High Court for a preservation order that will prohibit the taxpayer or any other
person to deal in any way with assets in order to secure the payment of tax (see 33.8.2). A person
has to pay his tax liability on the specified date even if the taxpayer lodged an objection or noted an
appeal against the assessment. The obligation to make payment may, in such a case and under
specific circumstances, be suspended (see 33.8.3).
33.8.1 Payment of tax debt (s 162)

Tax must be paid on a day and place notified by SARS, or the Commissioner by public notice, or as
notified in terms of a tax Act. The Commissioner may, by public notice, prescribe the method of
payment, including electronic payment (s 162(2)) (see Notice 437 of 15 April 2016). A taxpayer must
settle his tax liability in a single amount or in terms of an instalment payment agreement (s 162(1)).
Any amount of tax debt not paid on the due date is referred to as outstanding tax debt (s 1).
If there are reasonable grounds for believing that
l a taxpayer will not pay his tax debt
l a taxpayer will dissipate his assets, or
l that recovery may become difficult in the future
a senior SARS official may require that the taxpayer pay the full amount of tax due upon receiving the
notice of assessment, or that the taxpayer must provide security (s 162(3); see 33.7.5). This may be
required irrespective of the fact that the date of payment is determined on the notice of assessment.
A taxpayer may also be required to make an immediate payment of tax where the taxpayer and SARS
entered into an instalment payment agreement and a senior SARS official is satisfied that the tax is in
jeopardy, that the taxpayer provided incorrect information or that the taxpayer's financial position
changes materially. In such case, the senior SARS official must issue a notice of withdrawal or
modification.
33.8.2 Preservation order (s 163)

A senior SARS official may authorise an ex parte application to the High Court for the preservation of
any assets of the taxpayer or other person. The application may be authorised in order to prevent any
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realisable assets from being disposed of or removed, which may frustrate the collection of the full
amount of tax that is due or payable or which the official on reasonable grounds is satisfied may be
due or payable. The application may be made if required to secure the collection of tax. Such appli-
cation must be approved by a senior SARS official and will have the effect that the taxpayer or other
person may not deal in any manner with the assets to which the order relates (s 163(1)). In anticipa-
tion of a preservation order, SARS may seize the taxpayer's assets. Where SARS has seized the
assets for this purpose, it must within 24 hours commence with the application for a preservation
order. Until a preservation order is made in respect of the seized assets, SARS must take reasonable
steps to preserve and safeguard the assets including appointing a curator bonis in whom the assets
vest (s 163(2)).
A preservation order may be made in respect of
l any realisable asset seized by SARS
l realisable assets specified in the order and held by the person against whom the order is made
l all realisable assets held by the person whether specified in the order or not, and
l all assets that, if transferred to the person after the order has been made, would be realisable
assets (s 163(3)).
The preservation order must provide for notice to be given to the taxpayer or person from whom the
assets are seized (s 163(5)).
The court which made the preservation order may on application vary or rescind the order if it is
satisfied that the operation of the order
l may cause the taxpayer undue hardship, and
l that such hardship outweighs the risk that the assets may be destroyed, lost, damaged, con-
cealed or transferred (s 163(9)).
33.8.3 Payment of tax pending objection or appeal (s 164)

A person's obligation to pay his tax debt on the specified date is not automatically suspended by an
objection or appeal or pending the decision of a court (s 164(1)). However, if the taxpayer disputes or
intends to dispute the liability to pay the tax, he may request a senior SARS official to suspend the
payment of tax or a portion thereof (s 164(2)). A senior SARS official may suspend the payment of tax
having regard to relevant factors, including (s 164(3)):
l whether the recovery of the disputed tax will be in jeopardy or there will be a risk of dissipation of
assets
l the compliance history of the taxpayer with SARS
l whether fraud is prima facie involved in the origin of the dispute
l whether payment will result in irreparable hardship to the taxpayer not justified by the prejudice to
SARS or the fiscus if the disputed tax is not paid or recovered, or
l whether the taxpayer has tendered adequate security for the payment of the disputed tax and
accepting it is in the interest of SARS or the fiscus.
If payment of tax was suspended and subsequently:
l no objection is lodged
l an objection is disallowed and no appeal is lodged, or
l an appeal to the tax board or court is unsuccessful and no further appeal is noted
the suspension is revoked with immediate effect from the date of the expiry of the relevant prescribed
time period or any extension of the relevant time period under the Act (s 164(4)).
The senior SARS official may deny a request for suspension of an obligation to make payment (or
may revoke such suspension) if the SARS official is satisfied that
l after lodging the objection or noting the appeal, the objection or appeal is frivolous or vexatious
l the taxpayer is employing dilatory tactics in conducting the objection or appeal
l on further consideration of the above factors that were considered when the application was
made, the suspension should not have been granted, or
l there is a material change in any of the above factors that were considered when the application
was made (s 164(5)).
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Unless SARS has reasonable belief that there is a risk of dissipation of assets, no recovery proce-
dures may be taken during the period commencing on the date that SARS receives the request for
suspension and 10 business days after notice of SARS's decision has been issued to the taxpayer.
The same applies where the decision to suspend is revoked. Recovery procedures may then not be
taken during the period commencing on the day that the suspension is revoked and 10 business
days after the notice of revocation has been issued to the taxpayer (s 164(6)).
33.8.4 Taxpayer account (s 165)

SARS has to maintain one or more accounts for each taxpayer, which must reflect the tax liability in
respect of each tax type included in the account (s 165(1) and 165(2)). The taxpayer account must
record the following details:
l the outstanding tax liability
l any penalty imposed
l the interest payable on outstanding tax debts
l the outstanding tax liability for any other tax type
l tax payments made by the taxpayer or on the taxpayer's behalf, and
l any credit for amounts paid that the taxpayer is entitled to have set off against the taxpayer's tax
outstanding liability (s 165(3)).
A statement of account can be requested at any SARS branch office, or electronically on SARS
eFiling.
33.8.5 Allocation of payments (s 166)

Despite anything to the contrary in a tax Act, SARS may allocate a payment to the oldest amount of
outstanding tax due (s 166(1)).
Despite anything to the contrary contained in a tax Act, SARS may allocate payment made in terms of
a tax Act against an amount of penalty or interest or the oldest amount of an outstanding tax debt at
the time of the payment. This allocation may be made to a specific tax type or to a specific group of
taxes in a manner prescribed by public notice (s 166(2)). SARS may not allocate a payment to a tax
in respect of which the obligation to make payment has been suspended (see 33.8.3) or to amounts
that are payable in terms of an instalment payment agreement (see 33.8.6).
33.8.6 Instalment payment agreement (ss 167 and 168)

A taxpayer generally has to pay his full tax debt on a specified date. A senior SARS official may,
however, under certain circumstances agree with the taxpayer that his debt is payable in one sum or
in instalments within an agreed period. Before a senior SARS official may conclude an instalment
payment agreement with a taxpayer, he must be satisfied that the:
l criteria or risks prescribed by public notice have been considered, and
l agreement will facilitate the collection of tax debt (s 167(1)).
A senior SARS official may further only enter into an instalment payment agreement with a taxpayer if
l the taxpayer suffers from a deficiency of assets or liquidity which is reasonably certain to be
remedied in the future
l the taxpayer anticipates income or other receipts that can be used to satisfy the tax debt
l the prospects of immediate collection activity are poor or uneconomical, but are likely to improve
in the future
l collection activity may be harsh in the particular case and the instalment credit agreement is
unlikely to prejudice tax collection, or
l the taxpayer provides the security as may be required by the senior SARS official (s 168).
Where an instalment payment agreement has been entered into, SARS may terminate the agreement
if the taxpayer fails to pay an instalment or otherwise fails to comply with the terms of the agreement.
Any payments made prior to termination of the agreement are considered to be part payment on the
tax debt (s 167(4)).
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33.8.7 Refunds of excess payments (s 190)

SARS must pay a refund if a person is entitled to a refund, including interest thereon, where an
amount
l is properly refundable under a tax Act and reflected as such on an assessment, or
l was erroneously paid in respect of an assessment in excess of the amount actually payable
(s 190(1)).
Where an amount was erroneously paid in respect of an assessment in excess of the amount actually
payable, the amount is regarded as a payment to the National Revenue Fund, unless a refund is
made in the case of an assessment by SARS within three years from the later of the date of the as-
sessment or erroneous payment, or in the case of a self-assessment, within five years from the later
of the date that the return had to be submitted, or if no return is required, five years from the date that
payment had to be made or the erroneous payment was made (s 190(4)). This time restriction does
not apply to amounts properly refundable and reflected as such on an assessment.
SARS does not have to authorise a refund before a verification, inspection or audit of the refund has
been finalised (s 190(3); see 33.6). However, if the taxpayer provides security acceptable to a senior
SARS official, SARS must authorise the refund before finalisation of the verification, inspection or
audit (s 190(3)). A decision by SARS not to authorise a refund in the case where an amount was
erroneously paid in respect of an assessment in excess of the amount actually payable is subject to
objection and appeal (s 190(6)).
Where a refund is unduly paid to a person, the amount so refunded is regarded as an outstanding tax
debt from the date of payment. SARS may therefore collect the amount due as is the case with any
other tax due to SARS (s 190(5); see 33.9). Where a bank which holds an account for a client into
which an undue refund is paid reasonably suspects that the undue refund relates to a tax offence,
the bank must immediately report the suspicion to SARS. The bank may not carry out any transaction
in respect of the amount for a period not exceeding two business days, unless SARS or a High Court
directs otherwise or SARS issues a notice in terms of s 179 (see 33.9.4) to the bank to pay the
amount to SARS in satisfaction of a taxpayer's outstanding debt (s 190(5A)).
33.8.8 Refunds subject to set off and deferral (s 191)

Where an amount is refundable to a taxpayer, but the taxpayer has an outstanding tax debt, the
amount refundable (and any interest thereon) is treated as
l payment made by the taxpayer to the extent of the outstanding tax debt, and
l any remaining amount must be set off against any outstanding debt under customs and excise
legislation (s 191(1)).
The above set off does not apply to a tax debt
l that is disputed (see 33.12) and for which the 10-business-day period after SARS received a
request for suspension of a payment obligation or after SARS revoked a suspension, has not ex-
pired, or the obligation to make payment has been suspended by SARS (see 33.8.3), or
l in respect of which an instalment payment agreement (see 33.8.6) or compromise agreement
(see 33.14.) applies (s 191(2)).
33.8.9 Interest
Some of the provisions of the Act relating to interest did not commence on 1 October 2012. The effect
of this is that interest is still imposed in terms of specific provisions of the relevant tax Acts. The
Minister may determine by public notice the date on which the interest provisions of the Act come
into operation in respect of a tax type.
Interest payable by a taxpayer

If a taxpayer fails to pay his tax in full within the period prescribed, interest must be paid by him at the
prescribed rate on the outstanding balance of the tax. The outstanding balance is the balance of the
tax for each completed month reckoned from the due date for payment during which any portion of
the tax has remained unpaid. The due date is the date for payment specified in the notice of assess-
ment or the date on which the tax became payable in terms of the Act (s 89(2) of the Income Tax Act).
The ‘prescribed rate’ is defined in s 1 as the rate fixed by the Minister of Finance by notice in the
Government Gazette in terms of the Public Finance Management Act. When the Minister changes the
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rate in terms of this Act, the new rate will apply to the Income Tax Act from the first day of the second
month following the date on which the new rate came into operation (if interest is payable to a qualify-
ing provisional taxpayer in terms of s 89quat(4), the prescribed rate is the rate determined at four
percentage points below the rate contemplated above).
Interest is payable, unless the Commissioner, having regard to the circumstances, grants an exten-
sion of the period for payment and directs otherwise (s 89(2)).
The Commissioner may prescribe by notice in the Government Gazette that any interest payable
under the Act must be calculated on the daily balance owing and compounded monthly. The Com-
missioner has not yet made such a prescription (s 89quin(2) of the Income Tax Act).
Section 187 of the TAA provides that interest payable under a tax Act should be calculated on the
daily balance owing. The Commissioner may also prescribe by public notice that interest should be
determined in respect of a specific tax type on the daily balance owing and compounded monthly.
Section 187 only comes into operation on a date still to be determined by the Minister of Finance.
Interest payable by SARS
Where a person becomes entitled to an amount of interest that is payable by SARS in terms of any
tax Act, the amount is deemed to accrue to the person on the date on which the amount is paid (s 7E
of the Income Tax Act). This rule, which applies only from 1 March 2018, overrides the general rule
that an amount is included in a person’s gross income at the earlier of receipt or accrual. The effect
of this rule is that interest payable by SARS is only included in the recipient’s gross income when the
amount is actually paid and not when the person becomes entitled to it.
33.9 Recovery of tax (ss 169 to 184)

Where a taxpayer fails to pay an amount of tax due on or before the due date, SARS may initiate
certain procedures to recover the tax debt.
SARS may recover an amount of tax debt from any of the taxpayer's assets. In the case of a repre-
sentative taxpayer who is not personally liable for the tax (see 33.7.1), SARS may recover a tax debt
from assets belonging to the person represented which are in the representative's possession or
under his management or control (s 169(2)). The proceedings for the recovery of tax may not be
initiated after a period of 15 years from the date that an assessment became final (or the date that a
decision giving rise to a tax liability becomes final) (s 171).
The only evidence that SARS needs to produce in order to prove that an assessment was raised and
the particulars thereof is a copy or an extract of a document issued by SARS that purports to be an
assessment. Such document is conclusive evidence of the fact that an assessment was made and
that the particulars of the assessment are correct (except in the case of proceedings on appeal
against the assessment) (s 170).
SARS may recover an amount of tax debt by
l applying for a civil judgment for the recovery of tax
l initiating sequestration, liquidation or winding-up proceedings against the taxpayer, or
l by collecting the amount of tax due from certain third parties.
33.9.1 Application for civil judgment (ss 172 to 176)

In order to attach and sell a taxpayer's assets in execution as payment of a tax debt, SARS first has
to obtain a civil judgment against the taxpayer. In order to obtain a civil judgment, SARS has to file a
certified statement with the clerk of a Magistrates’ Court or registrar of a High Court. The certified
statement must set out the outstanding tax debt and must be certified as correct by SARS. SARS may
only file a certified statement with the clerk of a Magistrates' Court or registrar of a High Court after
giving the taxpayer at least 10 business days' notice (s 172(1)). However, SARS does not have to
notify the taxpayer if SARS is satisfied that giving notice would prejudice the collection of the tax
(s 172(3)).
The effect of a certified statement filed by SARS with the clerk of a Magistrates' Court or registrar of a
High Court is that it is treated as a civil judgment lawfully given in the relevant court in favour of SARS
for a liquid debt for the amount specified in the statement (s 174). This gives SARS the right to
instruct a bailiff to attach a taxpayer's assets and sell the assets in execution as payment of the debt.
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SARS may file a certified statement for civil judgment irrespective of whether or not the amount of tax
debt is subject to an objection or appeal, unless
l the 10-business-day period after SARS received a request for suspension of a payment obliga-
tion or after SARS revoked a suspension, has not expired, or
l the obligation to make payment has been suspended by SARS (see 33.8.3) (s 172(2)).
Remember
l Even if the Magistrates' Court Act 32 of 1944 contains provisions to the contrary, SARS may
file the certified statement with the clerk of the Magistrates' Court that has jurisdiction of the
taxpayer named in the statement.
l SARS may amend the amount of the tax debt specified in the certified statement if SARS is
of the opinion that the amount is incorrect. The amendment to the certified statement is,
however, not effective until initialled by the clerk or registrar of the relevant court (s 175(2)).
l SARS may withdraw a certified notice by sending a notice of withdrawal to the clerk or registrar
of the relevant court (s 176(1)). SARS is not prohibited from filing a new certified statement
setting out an amount of the tax debt that was included in a withdrawn statement (s 176(2)).
l If SARS is satisfied that a person has paid the full amount of the tax debt set out in a certified
statement and has no other outstanding tax debts, SARS must withdraw the statement if
requested by the person in the prescribed form and manner (s 176(3)).
33.9.2 Sequestration, liquidation or winding-up proceedings (ss 177 and 178)

A senior SARS official may authorise the institution of proceedings for the sequestration, liquidation or
winding-up of a person for an outstanding tax debt, irrespective of whether the person is present in
the Republic, or has assets in the Republic. If a tax debt is subject to an objection or appeal, or
further appeal against a decision of a tax court, such proceedings may only be initiated with leave of
the court before which the proceedings are brought (s 177).
Sequestration, liquidation or winding-up proceedings may, despite any law to the contrary, be insti-
tuted in any competent court, whether or not the taxpayer is registered, resident or domiciled, or has
a place of effective management or a place of business, in the Republic (s 178).
33.9.3 Collection of tax from third parties (ss 179 to 184)

SARS has the power to collect and recover a taxpayer's outstanding tax debt from certain third
parties, referred to as responsible third parties. Outstanding tax debt refers to an amount of tax debt
not paid by the due date. A responsible third party is defined in s 158 as a person who becomes
otherwise liable for the tax liability of another person, other than as a representative taxpayer or as a
withholding agent, whether in a personal or representative capacity.
SARS has the same powers of recovery against the assets of a responsible third party as SARS has
against the assets of the taxpayer. The responsible third party has the same rights and remedies as
the taxpayer has against SARS's powers of recovery (s 184(1)).
The Act provides that the following persons may become personally liable for the outstanding tax
debt of another person:
l a representative taxpayer (see 33.7.1)
l a withholding agent (see 33.7.2)
l a responsible third party:
– a third party appointed to satisfy tax debts (see 36.9.4)
– a person involved in the financial management of a taxpayer (see 36.9.5)
– a shareholder of a company (see 36.9.6)
– a transferee (see 36.9.7), or
– a person who assisted with the dissipation of assets (see 36.9.8).
33.9.4 Liability of third party appointed to satisfy tax debts (s 179)

A senior SARS official may authorise the issue of a notice to a third party to pay an amount of money
to SARS in satisfaction of a taxpayer's outstanding debt. SARS may only issue the above notice to a
third party after SARS has delivered a final demand for payment to the tax debtor. The final demand
must be delivered at least 10 business days before the notice is issued to the third party. The final
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demand must set out the recovery steps that SARS may take if the tax debt is not paid. The final
demand must also set out the relief mechanisms under the TAA, including
l in the case of a natural person, that the tax debtor may apply for a reduction in the amount to be
paid to SARS based on the basic living expenses of the tax debtor and his or her dependents,
and
l in the case of a person other than a natural person, that the tax debtor may apply for a reduction
in the amount to be paid to SARS based on serious financial hardship (s 179(5)).
If a senior SARS official is satisfied that delivering a final demand to a tax debtor will prejudice the
collection of the tax debt, SARS does not have to deliver a final demand (s 179(6)).
A third party may be required to pay such amount to SARS if the third party holds or owes or will hold
or owe any money, including a pension, salary, wage or other remuneration, for or to the taxpayer
(s 179(1)). If the third party is unable to comply with the notice, it has to inform the senior SARS
official of the reasons for not being able to comply. The SARS official may then withdraw or amend
the notice as is appropriate (s 179(2)). A third party, who receives such notice, must pay the money
to SARS in accordance with the notice. If the third party parts with the money contrary to the notice,
the third party becomes personally liable for the money (s 179(3)).
A person affected by the notice may request SARS to amend the notice to extend the period over
which the amount must be paid to SARS to allow the taxpayer to pay the basic living expenses of the
taxpayer and his or her dependants (s 179(4)).
Example 33.3. Liability of third party appointed to satisfy outstanding tax debts
l Paynow (Pty) Ltd ( ‘Paynow’) received an additional assessment for income tax in respect of
its 2016 year of assessment on 31 December 2016. The due date for this assessment was
28 February 2017. Paynow did not object to the assessment and failed to pay the amount
due by 28 February 2017. On 4 March 2017, SARS delivered a final demand for payment to
Paynow. By 21 March 2017, Paynow had not settled the outstanding amount. A senior SARS
official then notified Paynow’s bank to pay the amount that Paynow owed SARS from
Paynow’s bank account. Paynow’s bank is obliged to make the payment and if they don't,
they become personally liable for the amount.
l Peter Maudu received his assessment for personal income tax in respect of his 2017 year of
assessment on 15 May 2017. The due date for this assessment was 31 July 2017. Peter
Maudu disagreed with the amount assessed and filed an objection to the assessment on 20
May 2017. Peter did not apply for the suspension of his obligation to make payment in terms
of s 164 of the TAA. On 3 August 2017, SARS delivered a final demand to Peter Maudu. By
19 August 2017 Peter had not settled the outstanding amount. A senior SARS official then
notified Peter Maudu's employer to pay the amount that Peter Maudu owed SARS from his
next salary payment. Peter Maudu's employer is obliged to make the payment. Had Peter
Maudu successfully applied under s 164 of the TAA for suspension of the obligation to make
payment, SARS would not have the power to notify Peter Mudau's employer to make the
payment until the objection has been dealt with.
33.9.5 Liability of financial management for tax debts (s 180)

A person who controls or is regularly involved in the management of the overall financial affairs of a
taxpayer may under certain circumstances be held personally liable for the outstanding tax debt of
the taxpayer. This will be the case where the person's negligence or fraud resulted in the failure to
pay the tax debt. A senior SARS official must be satisfied that the person is or was negligent or
fraudulent in respect of the payment of the taxpayer's tax debts (s 180).
SARS must provide such person the opportunity to make representations before the person is held
liable for the taxpayer's tax debts if this will not place the collection of tax in jeopardy or as soon as
practical after the person is held liable (s 184(2)).
33.9.6 Liability of shareholders for outstanding tax debts (s 181)

Shareholders of a company (other than a listed company) that is being wound up other than by
means of involuntary liquidation may under certain circumstances become personally liable for the
company's outstanding tax debt. This may be the case where the company is being wound up with-
out having satisfied its tax debt, including its liability as a responsible third party, withholding agent,
representative taxpayer, employer or vendor (s 181(1)). Only persons who were shareholders of the
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company within one year prior to its winding up may become personally liable. These shareholders
are jointly and severally liable to pay the tax debt to the extent that
l they received assets from the company within one year prior to its winding up in their capacity as
shareholders, and
l the tax debt existed at the time of the receipt of those assets, or would have existed had the
company complied with its obligations under a tax Act (s 181(4)).
These shareholders' liability is secondary to the liability of the company. SARS first has to attempt to
recover the unpaid tax from the company and if the company is not able to pay the tax debts, SARS
may recover the debt from these shareholders (s 181(3)). These shareholders may avail themselves
of any rights against SARS as would have been available to the company (s 181(4)).
SARS must provide such shareholder the opportunity to make representations before the shareholder
is held liable for the company's tax debts if this will not place the collection of tax in jeopardy, or as
soon as practical after the shareholder is held liable (s 184(2)).
33.9.7 Liability of transferee for outstanding tax debts (s 182)

A connected person to a taxpayer who receives an asset from the taxpayer for no consideration, or
for consideration below the fair market value of the asset, may become personally liable for the
taxpayer’s outstanding tax debt (the connected person is referred to as a transferee) (s 182(1)). The
transferee's liability only applies to an asset that it received from the taxpayer within one year before
SARS notifies the transferee of its liability. The transferee's liability is further limited to the lesser of:
l the tax debt that existed at the time of the receipt of the asset, or would have existed had the
taxpayer complied with its obligations under a tax Act, and
l the fair market value of the asset at the time of transfer less the fair market value of any consid-
eration at the time of payment (s 182(2)).
SARS must provide a transferee the opportunity to make representations before the transferee is held
practical after the transferee is held liable (s 184(2)).
33.9.8 Liability of person assisting in dissipation of assets (s 183)

Where a person knowingly assists a taxpayer with the dissipation of the taxpayer's assets in order to
obstruct the collection of a tax debt of the taxpayer becomes jointly and severally liable with the
taxpayer for the taxpayer's tax debt. Such a person's liability is limited to the extent that the person's
assistance reduced the assets available to pay the taxpayer's tax debt (s 183).
SARS must provide such person the opportunity to make representations before he or she is held
practical after the person is held liable (s 184(2)).
33.9.9 Compulsory repatriation of a taxpayer's foreign assets (s 186)

A senior SARS official may apply to the High Court for an order compelling the taxpayer to repatriate
assets located outside the Republic within a specific period in order to satisfy an outstanding tax
debt. The senior SARS official may apply for such order where the
l taxpayer concerned does not have sufficient assets located in the Republic to satisfy the tax debt
in full, and
l SARS official believes that the taxpayer has assets outside the Republic, or has transferred
assets outside the Republic for no consideration, or consideration less that the fair market value,
which may satisfy the tax debt (s 186(1)).
In addition to an order to repatriate assets located outside the Republic, the court may
l limit the taxpayer’s right to travel outside the Republic and require the taxpayer to surrender his
or her passport to SARS
l withdraw a taxpayer’s authorisation to conduct business in the Republic, if applicable
l require the taxpayer to cease trading, or
l issue any other order it deems fit (s 186(3)).
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33.10 Penalties (ss 208 to 224)

In order to enforce compliance with the obligations imposed under a tax Act, the Act provides for the
following penalties to be imposed where a taxpayer failed to comply with a provision of a tax Act or
understated his tax liability:
Penalties
Administrative non-compliance Understatement penalty (33.10.4)

penalties (33.10.1)
Fixed amount Percentage-based

penalties penalty
Reportable
arrangement
penalty
33.10.1 Administrative non-compliance penalties (ss 208 to 220)

An administrative non-compliance penalty or penalty means a penalty imposed by SARS in accord-
ance with Chapter 15 of the TAA or a tax Act other than the TAA, and excludes an understatement
penalty (see 33.10.4) (s 208).
Fixed amount penalties (ss 210 to 211)
SARS must impose a penalty in accordance with the table below where a taxpayer failed to comply
with specific obligations as listed in a public notice. At present, the only incidences that are subject
to a fixed amount penalty are
l a natural person’s failure to submit an income tax return as and when required under the Income
Tax Act for years of assessment commencing on or after 1 March 2006 where the person has two
or more outstanding income tax returns for such years of assessment (Government Gazette
No 35733, 1 October 2012)
l failuire by a Reporting Financial Institution to submit, or remedy the non-submission of a return
required under Public Notice 192 of 2017 (see 33.3.4).
A fixed amount penalty may not be imposed in respect of the failure to pay tax that is subject to a
percentage-based penalty, or non-compliance that is subject to an understatement penalty
(s 210(2)).
Fixed amount penalty table (s 211(1)):
1. 2. 3.
Item Assessed loss or taxable income for preceding year Penalty
(i) Assessed loss R250
(ii) R0–R250 000 R250
(iii) R250 001–R500 000 R500
(iv) R500 001–R1 000 000 R1 000
(v) R1 000 001–R5 000 000 R2 000
(vi) R5 000 001–R10 000 000 R4 000
(vii) R10 000 001–R50 000 000 R8 000
(viii) Above R50 000 000 R16 000
The preceding year referred to in column 2 of the fixed amount penalty table means the year of
assessment immediately prior to the year of assessment during which the penalty is assessed
(s 208). The penalty that may be imposed on a taxpayer in respect of any non-compliance is there-
fore based on the person’s taxable income for the year of assessment immediately prior to the year of
assessment during which the penalty is assessed.
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The following persons are treated as falling under item (vii) of the above table, unless the person is
not trading, or already falls under item (viii):
l a listed company
l a company whose gross receipts or accruals for the preceding year exceeded R500 million
l a company that forms part of the same group of companies, which group includes any of the
above two companies, and
l a company that is exempt from income tax under the Income Tax Act, but liable to tax under
another tax Act and whose gross receipts and accruals exceed R30 million (s 211(3)).
The amount of the penalty in column 3 of the table increases automatically by the same amount for
each month (or part thereof) that the taxpayer failed to remedy the non-compliance within one month
after the date of
l delivery of the penalty assessment, where SARS is in possession of the current address of the
person and is able to deliver the assessment. A penalty assessment means an assessment in re-
spect of an administrative non-compliance penalty only, or tax and an administrative non-
compliance penalty which are assessed at the same time. The monthly increase is limited to 35
months after the date of delivery of the penalty assessment, or
l the non-compliance where SARS is not in possession of the current address of the person and is
unable to deliver the penalty assessment. In such case the monthly increase is limited to 47
months after the date of non-compliance (s 211(2)).
Where a person’s taxable income (other than a listed company, a company whose gross receipts for
the preceding year of assessment exceeded R500 million, or a company that forms part of the same
group of companies as such company) for the preceding year of assessment is unknown, or the
person was not a taxpayer in that year, a penalty may be imposed in accordance with item (ii) of the
above table. Alternatively, the Commissioner may estimate the taxable income of the relevant person
for the preceding year based on available information and impose a penalty accordingly (s 211(4)).
If the Commissioner estimated the person’s taxable income for the preceding year and upon deter-
mining of the person’s actual taxable income it appears that the person falls within another item in
column 1 of the table, the penalty must be adjusted accordingly (s 211(5)).
Reportable arrangement penalty (s 212)

Where a participant to a reportable arrangement who is the promotor or a person who obtains a tax
benefit from the arrangement fails to disclose the information in respect of the reportable arrange-
ment (see 33.4.6), the participant is liable to an administrative non-compliance penalty for each
month that the failure continues (up to 12 months). The penalty for each such month is
l R50 000 in the case of a participant other than the promoter, or
l R100 000 in the case of the promoter (s 212(1)).
The amount of the above penalty is doubled if the amount of the anticipated tax benefit for the partic-
ipant exceeds R5 million and tripled if the benefit exceeds R10 million (s 212(2)).
In the case of a participant who does not derive a tax benefit from the arrangement, the penalty for
failure to report the arrangement is R50 000.
Percentage-based penalty (s 213)

Where an amount of tax was not paid as and when required under a tax Act, SARS must, in addition to
any other penalty or interest for which the person may be liable, impose a penalty equal to a percent-
age of the amount of unpaid tax as prescribed under the tax Act (s 213(1)). If the amount of tax in
respect of which this penalty is imposed changed, the penalty must be adjusted accordingly
(s 213(2)).
33.10.2 Procedure for imposing an administrative non-compliance penalty (s 214)

An administrative non-compliance penalty (whether a fixed amount penalty or a percentage-based
penalty) is imposed by way of a penalty assessment. A penalty assessment means an assessment
in respect of an administrative non-compliance penalty only, or tax and an administrative non-
compliance penalty which are assessed at the same time. Where a penalty assessment is made,
SARS must give notice of the assessment, which must include the following:
l the non-compliance in respect of which the penalty is assessed and its duration
l the amount of the penalty imposed
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l the date for paying the penalty

l the automatic increase of the penalty, and
l a summary of procedures for requesting remittance of the penalty (s 214(1)).
A penalty is due upon assessment and must be paid on or before the date specified in the notice of
penalty assessment. In the case where a penalty assessment is made together with an assessment
for tax, the penalty must be paid on or before the date that the tax must be paid (s 214(2)).
33.10.3 Procedure to request remittance of penalty (s 215)

A person who is aggrieved by a penalty assessment may request SARS to remit the penalty in
accordance with the remedies set out below. Such request must be made in the prescribed form and
manner and on or before the date for payment of the penalty (s 215(1)). The period applied for the
remittal of a penalty may be extended if SARS is satisfied that the non-compliance
l in issue relates to the failure to register for a tax or to a nominal or first incidence of non-
compliance and that reasonable grounds exist for the late receipt of the remittance request, or
l was due to circumstances that rendered the person incapable of complying with the relevant
obligation of a tax Act.
A remittance request must include
l a description of the circumstances which prevented the person from complying with the relevant
obligation under a tax Act in respect of which the penalty has been imposed, and
l the supporting documents and information as may be required by SARS in the prescribed form
(s 215(2)).
During the period commencing on the date that SARS receives the remittance request and ending on
a date 21 business days after notice has been given of SARS's decision relating to the remittal of the
penalty, SARS may not take any collection steps in respect of the penalty amount unless where there
are reasonable grounds for believing that there is
l a risk of dissipation of assets by the person concerned, or
l fraud involved in the origin of the non-compliance or the grounds for remittance (s 215(3)).
The Act provides for the following remedies for a taxpayer that received a penalty assessment:
Remittance of a penalty for failure to register (s 216)

SARS may remit a penalty in whole or in part that is imposed on a person that has failed to register as
and when required under the TAA, if the:
l failure to register was discovered because the person approached SARS voluntarily, and
l person has filed all returns required under a tax Act.
Remittance of a penalty for nominal or first incidence of non-compliance (s 217)

SARS may remit a penalty imposed in respect of
l a first incidence of non-compliance in respect of which a fixed amount administrative non-
compliance penalty, reportable arrangement penalty or percentage-based administrative non-
compliance may be imposed, or
l an incidence of non-compliance in respect of which a fixed amount administrative non-compliance
penalty may be imposed, if the duration of the non-compliance is less than five business days.
SARS may further only remit a penalty or portion thereof up to an amount of R2 000 if SARS is satis-
fied that
l reasonable grounds for the non-compliance exist, and
l the non-compliance in issue has been remedied (s 217(1)).
The first incidence of non-compliance means an incidence of non-compliance by a person if no
‘penalty assessment’ under the Act relating to administrative non-compliance penalties was issued
during the preceding 36 months, whether involving an incidence of non-compliance of the same or a
different kind. For purposes of this definition, a penalty assessment that was fully remitted due to
exceptional circumstances present that rendered the person incapable of complying with the rele-
vant obligation under a tax Act (see below), must be disregarded.
In the case of a reportable arrangement penalty, SARS may remit a penalty up to R100 000 (s 217(2)).
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In the case of a percentage-based administrative non-compliance penalty, SARS may remit the
penalty if SARS is satisfied that
l the penalty has been imposed in respect of a first incidence of non-compliance in respect of which
a fixed amount administrative non-compliance penalty, reportable arrangement penalty or per-
centage based administrative non-compliance may be imposed, or involved an amount of less
than R2 000
l reasonable grounds for the non-compliance exist, and
l the non-compliance in issue has been remedied (s 217(3)).
Remittance of a penalty in exceptional circumstances (s 218)

SARS must on request remit a penalty or, if applicable, a portion thereof, if SARS is satisfied that one
or more of the following circumstances rendered the person incapable of complying with the relevant
obligation under a tax Act:
l a natural or human-made disaster
l a civil disturbance or disruption in services
l a serious illness or accident
l serious emotional or mental distress
l any of the following acts by SARS:
– a capturing error
– a processing delay
– provision of incorrect information in an official publication or media release issued by the
Commissioner
– delay in providing information to any person, or
– failure by SARS to provide sufficient time for an adequate response to a request for information
by SARS
l serious financial hardship, such as in the case of
– an individual, lack of basic living requirements, or
– a business, an immediate danger that the continuity of business operations and the continued
employment of its employees are jeopardised, or
l any other circumstance of analogous seriousness.
Penalty incorrectly assessed (s 219)

If SARS is satisfied that a penalty was not assessed in accordance with the provisions of the Act relat-
ing to administrative non-compliance penalties, SARS may, within three years of the penalty assess-
ment, issue an altered assessment accordingly.
Objection and appeal against decision not to remit penalty (s 220)
A decision by SARS not to remit a penalty in whole or in part is subject to objection and appeal under
the provision of the Act relating to dispute resolution (see 33.12).
Remember
If a tax Act other that the TAA provides for grounds on which SARS may remit a penalty, SARS
may remit a penalty on such grounds despite the above (s 215(5)).
33.10.4 Understatement penalty (ss 221 to 224)

In the case of an understatement, the taxpayer has to pay, in addition to the tax payable, an under-
statement penalty determined in terms of an understatement penalty percentage table, unless the
understatement results from a bona fide inadvertent error (s 222(1)). An understatement means
prejudice to SARS or the fiscus as a result of
l a default in rendering a return,
l an omission from a return,
l an incorrect statement in a return,
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l if no return is required, the failure to pay the correct amount of ‘tax’, or

l an impermissible avoidance arrangement (s 221).
An impermissible avoidance arrangement means an arrangement in respect of which any of the
following applies:
l ss 80A to 80L of the Income Tax Act
l s 73 of the Value-Added Tax Act, or
any other general anti-avoidance provision under a tax Act.
The imposition of an understatement penalty is subject to objection and appeal in terms of the dis-
pute resolution provisions of the Act (s 224; see 33.12). In the case of an appeal against an under-
statement penalty imposed by SARS, the tax board (or tax court) must decide the matter on the basis
that the burden of proof is upon SARS and may reduce, confirm or increase the understatement
penalty so imposed (s 110 read with s 129(3)).
An understatement penalty is calculated by applying the highest applicable understatement penalty
percentage in accordance with the table below to each shortfall in relation to each understatement in
a return.
Understatement penalty percentage table (s 223) (the meaning of these terms is discussed below):
1 2 3 4 5 6
Item Behaviour Standard If obstructive, Voluntary Voluntary
case or if it is a disclosure after disclosure
repeat case notification of before notification
audit of audit
(i) Substantial understatement 10% 20% 5% 0%
(ii) Reasonable care not taken 25% 50% 15% 0%
in completing return
(iii) No reasonable grounds for 50% 75% 25% 0%
tax position taken
(iv) Impermissible avoidance 75% 100% 35% 0%
arrangement
(v) Gross negligence 100% 125% 50% 5%
(vi) Intentional tax evasion 150% 200% 75% 10%
The shortfall in relation to each understatement in a return is calculated as the sum of:
(1) The difference between the amount of tax properly chargeable

for the tax period and the amount of tax that would have been
If there is a difference
chargeable for the tax period if the ‘understatement’ were accepted
between both (1) and (2),
the shortfall must be
AND reduced by the amount of
any duplication between
(2) The difference between the amount properly refundable for the these items.
tax period and the amount that would have been refundable if the
understatement were accepted
AND
(3) The difference between the amount of an assessed loss or any other
benefit to the taxpayer properly carried forward from the tax period to a
succeeding tax period and the amount that would have been carried
forward if the ‘understatement’ were accepted, multiplied by the
maximum tax rate applicable to the taxpayer ignoring any assessed loss
or other benefit brought forward from a preceding tax period.
The meaning of the terms as per the understatement penalty percentage table is as follows:
‘Substantial understatement’ means a case where the prejudice to SARS or the fiscus exceeds the
greater of
l 5% of the amount of tax properly chargeable or refundable under a tax Act for the relevant tax
period, or
l R1 million (s 221).
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‘Repeat case’ means a second or further case of any of the behaviours listed under items (i) to (vi) of
the understatement penalty percentage table within five years of the previous case (s 221).
‘Tax position’ means an assumption underlying one or more aspects of a tax return, including
whether or not
l an amount, transaction, event or item is taxable
l an amount or item is deductible or may be set off
l a lower rate of tax than the maximum applicable to that class of taxpayer, transaction, event or
item applies, or
l an amount qualifies as a reduction of tax payable (s 221).
An understatement penalty is also chargeable in cases where an estimated assessment (see 33.5.5)
or agreed assessment is raised.
Taxpayer’s remedies against the imposition of an understatement penalty
A taxpayer has the following remedies against the imposition of an understatement penalty:
l Request for the remittance of an understatement penalty where the taxpayer was in possession of
a ‘more likely than not’ tax opinion by an independent registered tax practitioner (s 223(3)): SARS
may remit an understatement penalty imposed for a substantial understatement if SARS is satis-
fied that the taxpayer
– made full disclosure of the transaction, operation, scheme, agreement or understanding
(whether enforceable or not) that gave rise to the prejudice to SARS or the fiscus by no later
than the date that the relevant return was due, and
– was in possession of an opinion by an independent registered tax practitioner that
• was issued by no later than the date that the relevant return was due
• took account of the specific facts and circumstances of the arrangement, and
• confirmed that the taxpayer’s position is more likely than not to be upheld if the matter pro-
ceeds to court.
Remember
For purposes of a remittance request for a ‘substantial understatement penalty’:
l The opinion in issue must have been given by a tax practitioner that is independent from the
taxpayer. Opinions by, for example, in-house tax practitioners will not qualify given their
potential vested interests in such matters, as in-house tax practitioners are not independent
of their employers and are not subject to the same statutory or other sanctions as other
practitioners. They are not required to register as tax practitioners, since they qualify for an
exclusion from registration, and could legally retain their employment even if removed from
the rolls of a recognised controlling body.
l The opinion must be issued by the tax practitioner before the date that the relevant return is
due. The taxpayer must have made full disclosure of the arrangement and all these facts
should have been taken into account by the tax practitioner.
SARS may lodge a complaint with a ‘recognised controlling body’ if a registered tax practitioner
has, in the opinion of the senior official, given an opinion contrary to clear law, recklessly or
through gross incompetence, with regard to any matter relating to a tax Act (s 241(2)(c)) (see
33.16.3).
l Objection (and appeal) against SARS’s decision not to remit an understatement penalty: A deci-
sion by SARS not to remit an understatement penalty (that is in terms of a request for the remit-
tance of an understatement penalty where the taxpayer was in possession of a ‘more likely than
not’ tax opinion by an independent registered tax practitioner) is subject to objection and appeal
in terms of the dispute resolution provisions of the TAA (s 224; see 33.12). The taxpayer bears the
onus of proof in such objection or appeal.
l Objection (and appeal) against the imposition of an understatement penalty (s 224; see 33.12):
The onus to prove the grounds for imposition of an understatement penalty and the applicable
percentage is on SARS (s 129(3)).
l Objection (and appeal) against the amount of understatement penalty imposed (s 224; see
33.12): The onus to prove the grounds for imposition of an understatement penalty amount and
the applicable percentage is on SARS (s 129(3)).
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33.10.5 Transitional arrangements: Understatements prior to the commencement

of the TAA (s 270)
The general transitional approach under the TAA is that the Act applies to an act, omission or pro-
ceeding taken, occurring or instituted before the commencement date (that is 1 October 2012)
(s 270(1)). As an exception to this general transitional approach, the Act allows for additional tax
(rather than an understatement penalty), penalties and interest to be imposed if the verification, audit
or investigation had been completed before the Act commenced, but the assessment had not been
issued. The TAA provides that additional tax, interest and penalties may under these circumstances
be imposed under the provisions of the relevant tax Acts as if those provisions were not repealed on
commencement of the Act (s 270(6)).
Remember
Under the additional tax provisions of the relevant tax Acts, the penalty was subject to SARS’
discretion and a taxpayer could incur a penalty of between 0% and 200% of the understate-
ment. Under the TAA a structured approach based on taxpayer behaviour was adopted. Both
before and after the commencement date of the Act, a penalty was imposed for an understatement
and was and still is calculated as a percentage of the amount of the shortfall. In both cases the
relevant behaviour of the taxpayer influences the amount of the penalty. Whereas the additional
tax penalty scheme allowed the recognition of extenuating circumstances to reduce penalties
from 200%, the Act now incorporates similar factors under broader behavioural categories,
namely reasonable care not taken, unreasonable tax position, gross negligence and intentional
tax evasion.
Additional tax, penalty or interest (as imposed under the provisions of the relevant tax Acts prior to
the commencement of the Act) may be assessed and recovered under the Act under the following
two scenarios:
l the verification, audit or investigation necessary to determine the additional tax, penalty or interest
had been completed before 1 October 2012, but the additional tax, penalty or interest were not
imposed prior to 1 October 2012, or
l an understatement, non-compliance or failure to pay occurred before 1 October 2012 and an
understatement penalty, administrative non-compliance penalty or interest under the Act cannot
be imposed (ss 270(6) and 270(6A)).
Where an understatement was made in a return submitted before the commencement of the TAA
(that is 1 October 2012) and SARS imposed an understatement penalty, the taxpayer may object to
the penalty. If the return was rendered under the Income Tax Act (excluding returns required under
the Fourth Schedule to the Income Tax Act), a senior SARS official must, in considering the objection,
reduce the penalty in whole or in part if satisfied that there were extenuating circumstances
(s 270(6D)(a)). If the return was rendered under the Value-Added Tax Act or the Fourth Schedule to
the Income Tax Act, a senior SARS official must reduce the penalty in whole if the penalty was
imposed under circumstances other than intentional tax evasion (that is the circumstances referred to
in item (vi) of the understatement penalty table) (s 270(6D)(b)). A taxpayer may lodge the above
objection irrespective of whether or not the taxpayer has previously lodged an objection to the
assessment imposing the penalty.
33.11 Voluntary disclosure programme (ss 225 to 233)

33.11.1 Introduction
Where a taxpayer has committed a default, he may apply for voluntary disclosure relief under certain
circumstances. If such application is successful, SARS will not pursue criminal prosecution and will
grant relief in respect of certain penalties imposed under the Act.
For purpose of voluntary disclosure relief, default means the submission of inaccurate or incomplete
information to SARS, or the failure to submit information or the adoption of a ‘tax position’, where such
submission, non-submission, or adoption resulted in an understatement (s 225).
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Remember
Tax is defined in s 1 of the Act, for purposes of administration under the TAA, to include a tax,
duty, levy, royalty, fee, contribution, penalty, interest and any other moneys imposed under a tax
Act. Tax Act is defined as the TAA or an Act referred to in s 4 of the SARS Act (see 33.1.2), but
excludes the Customs and Excise Act. The voluntary disclosure programme therefore does not
provide relief in respect of non-compliance with the Customs and Excise Act.
33.11.2 Qualification of person subject to audit or investigation for voluntary disclosure

(s 226)
A person may apply, whether in a personal, representative, withholding or other capacity, for volun-
tary disclosure relief (s 226(1)). If the person applying for relief has been given notice of an audit or
criminal investigation into its affairs, which has not been concluded, it may be that the person does
not qualify for voluntary disclosure relief (s 226(2)). This will be the case if the audit or criminal inves-
tigation is related to the disclosed default. In order to qualify for the relief in such case, a senior SARS
official has to be of the view, after having regard to the circumstances and ambit of the audit investi-
gation, that
l the default would not otherwise have been detected during the audit or investigation, and
l WKH application would be in the interest of good management of the tax system and best use of
SARS resources (s 226(2)).
Remember
A person is deemed to have been notified of a pending audit or criminal investigation, if
l a representative of the person
l an officer, shareholder or member of the person, if the person is a company
l a partner in partnership with the person
l a trustee or beneficiary of the person, if the person is a trust, or
l a person acting for or on behalf of or as an agent or fiduciary of the person
has been given notice of the audit or investigation (s 226(3)).
33.11.3 Requirements for valid voluntary disclosure (s 227)

The requirements for a valid voluntary disclosure are that the disclosure must
l be made voluntarily
l involve a default which has not occurred within five years of the disclosure of a similar default
l be full and complete in all material respects
l involve a behaviour referred to in column 2 of the understatement penalty percentage table, ie a
substantial understatement, reasonable care not taken in completing return, no reasonable
grounds for tax position taken, impermissible avoidance arrangement, gross negligence, or inten-
tional tax evasion
l not result in a refund due by SARS, and
l be made in the prescribed form and manner.
33.11.4 No-name voluntary disclosure (s 228)
A senior SARS official may issue a non-binding private opinion as to a person's eligibility for voluntary
disclosure relief. The person must provide the SARS official with sufficient information to issue the
non-binding private opinion, which information need not include the identity of any party to the default.
33.11.5 Voluntary disclosure relief (s 229)
Where a taxpayer qualifies for voluntary disclosure relief and has entered into a voluntary disclosure
agreement, SARS must, despite the provisions of any tax Act:
l not pursue criminal prosecution for a statutory offence under a tax Act arising from the default or
a related common law offence
l grant the relief in respect of any understatement penalty referred to in column 5 or 6 of the under-
statement penalty percentage (see 33.10.6), and
1100
l grant 100% relief in respect of an administrative non-compliance penalty that was or may be
imposed under the Act or a penalty imposed under a tax Act. This relief excludes relief from a
penalty imposed under the Act or in terms of a tax Act for the late submission of a return.
Remember
l Voluntary disclosure relief does not provide relief from interest imposed on tax debt or from a
penalty imposed for the late submission of a tax return.
33.11.6 Voluntary disclosure agreement (s 230)

Where a senior SARS official approves a voluntary disclosure application and the relief granted, the
taxpayer and SARS must enter into a voluntary disclosure agreement. The agreement must include
details on
l the material facts of the ‘default’ on which the voluntary disclosure relief is based
l the amount payable by the person, which amount must separately reflect the understatement
penalty payable
l the arrangements and dates for payment, and
l relevant undertakings by the parties (s 230).
SARS may, in order to give effect to a voluntary disclosure agreement entered into with a taxpayer,
issue an assessment or make a determination. Such assessment or determination is not subject to
objection and appeal (s 232).
33.11.7 Withdrawal of voluntary disclosure relief (s 231)

In the event that, subsequent to the conclusion of a voluntary disclosure agreement, it is established
that the applicant failed to disclose a matter that was material for purposes of making a valid volun-
tary disclosure, a senior SARS official may:
l withdraw the voluntary disclosure relief granted
l regard an amount paid in terms of the voluntary disclosure agreement to constitute part payment
of any further outstanding tax debt in respect of the relevant default, and
l pursue criminal prosecution for a statutory offence under a tax Act or a related common law
offence (s 231(1)).
Any such decision by a senior SARS official is subject to objection and appeal (s 231(2); see 33.12).
33.11.8 Additional relief under the voluntary disclosure programme (ss 14 to 18 of the Rates
and Monetary Amounts and Amendment of Revenue Laws Amendment Act, 2016,
and ss 2 and 3 of the Rates and Monetary Amounts and Amendment of Revenue
Laws (Administration) Act, 2016)
Additional relief is provided for under the voluntary disclosure programme in respect of amounts not
declared to SARS from which foreign assets were wholly or partly derived (referred to here as ‘affect-
ed assets’).
The relief is for any tax imposed in terms of the Estate Duty Act or the Income Tax Act (other than
employee’s tax) in respect of any year of assessment ending on or before 28 February 2015. The
exemption therefore applies in respect of estate duty, income tax, donations tax and dividends tax.
The receipts or accruals not declared to SARS as required by the Estate Duty Act and the Income
Tax Act from which a foreign asset held by the person during the period 1 March 2010 to 28 February
2015 was derived (i.e. affected assets), will be exempt from the relevant tax. Where such amounts
are received by way of an inheritance or donation, the inheritance or donation will be exempt from
Estate Duty or Donations Tax in the hands of the estate or the donor.
In addition to the exemption from the relevant tax, the person will not be liable for an understatement
penalty imposed in terms of the Tax Administration Act.
The person will, however, be required to include an amount in its taxable income in the first year of
assessment ending on or after 1 March 2014 (for a natural person it will be its 2015 year of assess-
ment). In calculating the amount to be included, the person has to determine the aggregate
1101
market value of all affected assets as at the end of each year of assessment that ended on or after 1
March 2010, but before 1 March 2015. The person has to include 40% of the highest of such values
in its taxable income. The market value of the affected assets must be determined in the relevant
foreign currency and translated to rand at the spot rate on the last business day in South Africa on or
before the end of each year of assessment.
Where the person has not disposed of the affected asset on or before 28 February 2015, the person
will for capital gains tax purposes be deemed to have acquired the asset on 28 February 2015 at a
cost equal to the above market value in the foreign currency.
Where a person held a foreign asset that was derived from receipts or accruals not declared to SARS
in terms of the Estate Duty Act or the Income Tax Act, but disposed of the asset before 1 March
2010, the person may qualify for the additional voluntary disclosure relief, except if the asset was
disposed of by way of donation or to a trust on loan account. The value of such assets for the pur-
pose of calculating the inclusion in the person’s taxable income will be the highest value of the asset
while actually held by the person. Where the market value of such asset cannot be determined, SARS
may agree to accept a reasonable estimate.
The relief is not available for the receipts or accruals from which a foreign asset was wholly or partly
derived that was disclosed to SARS under an international tax agreement.
An application for relief may also not be made for or on behalf of a trust. However, a donor or benefi-
ciary in relation to a non-resident discretionary trust may elect that any affected foreign asset held by
the trust during the period 1 March 2010 to 28 February 2015 be deemed to have been held by the
donor or beneficiary.
33.12 Dispute resolution

33.12.1 Burden of proof (s 102)
A taxpayer bears the burden of proving:
l that an amount, transaction, event or item is exempt or otherwise not taxable
l that an amount or item is deductible or may be set off
l the rate of tax applicable to a transaction, event, item or class of taxpayer
l that an amount qualifies as a reduction of tax payable
l that a valuation is correct, or
l whether a decision that is subject to objection and appeal under a tax Act, is incorrect (s 102(1)).
The result is that a decision of the Commissioner may not be reversed or altered upon the hearing of
an appeal unless the taxpayer shows it to be wrong.
The burden of proving that where an original, additional, reduced or jeopardy assessment is based
on an estimate, that the estimate is reasonable (see 33.5.5) or the facts on which SARS based the
imposition of an understatement penalty (see 33.10.6), is upon SARS (s 102(2)).
33.12.2 Dispute resolution process (s 104)

The TAA prescribes the procedures that have to be followed when a taxpayer is aggrieved with an
assessment or certain decisions made by SARS. An aggrieved taxpayer may object to and appeal an
assessment (s 104(1)) as well as the following decisions:
l a decision by a senior SARS official not to extend the period for lodging an objection
l a decision by a senior SARS official not to extend the period for lodging an appeal, and
l any other decision that may be objected to or appealed against under a tax Act (s 104(2)).
A taxpayer may only dispute an assessment or decision as mentioned above in proceedings under
the dispute resolution provisions of the TAA, unless a High Court otherwise directs. Internal remedies,
such as the objection and appeal process and resolution thereof by means of alternative dispute
resolution or before a tax board or tax court must be exhausted before a higher court is approached
(s 105).
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Remember
l The dispute resolution process is set within specific time periods. The time period within
which a taxpayer may object to an assessment or decision or within which the taxpayer may
request reasons for an assessment commences on the ‘date of assessment’. This date is, in
the case of an assessment by SARS, the date of the issue of the notice of assessment. In the
case of self-assessment by the taxpayer where a return is required, it is the date that the
return is submitted. If no return is required, it is the date of the last payment of the tax for the
tax period or, if no payment was made in respect of the tax for the tax period, the effective
date (definition of ‘date of assessment’ in s 1 of the TAA).
l In cases where the TAA does not provide for a remedy, or where the TAA provides for a
remedy which has been exhausted by the taxpayer who is thereafter still of the view that the
administrative action was unlawful, unreasonable or procedurally unfair, the taxpayer may
institute proceedings in a court for the judicial review of the administrative action under PAJA
(see 33.1.1).
l An objection to an assessment does not automatically suspend the taxpayer’s obligation to
pay the tax in dispute or SARS’ right to recover the tax. In order to suspend this payment
obligation, the taxpayer has to apply for suspension under s 164(3) of the TAA (s 164(1); see
33.8.3)
l SARS may issue a reduced assessment where there is an error in assessment due to an
undisputed error by SARS or the taxpayer, despite the fact that no objection has been lodged
or appeal noted (s 93; see 33.5.3)
Rules were promulgated under s 103 of the TAA on 11 July 2014 governing the procedures to lodge
an objection and appeal against an assessment or ‘decision’. The rules further govern the conduct
and hearing of an appeal before a tax board or tax court and provide for alternative dispute resolu-
tion procedures under which SARS and the person aggrieved by an assessment or ‘decision’ may
resolve a dispute. References to ‘rules’ below are references to these rules.
The steps in the dispute resolution process are illustrated below:
An assessment is raised (see 35.5)

or a senior SARS official makes a
decision that is subject to objection /
appeal (see 35.5)
STEP 1: STEP 2: STEP 3:
Request reasons for the If the taxpayer does not If the objection is
assessment accept the reasons, the disallowed (or only partly
taxpayer may note an allowed), the taxpayer
objection. may note an appeal
Within 30 days after
date of assessment
Within 30 days after Within 30 days from
SARS provides reasons response a to request for the receipt of the
reasons for the assess- notice of SARS's
ment, or 30 days after the decision on the
Within 45 days of date of assessment objection
receipt of the request
(where reasons have
already been provid- Objection allowed Attempt to resolve
ed, the taxpayer dispute through
must be notified alternative dispute
within resolution
30 days). Assessment or decision
altered accordingly OR
If the taxpayer accepts
the reasons, no further Litigation
steps
Tax Tax
OR
board court
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33.12.3 Reasons for the assessment (Rule 6)

A taxpayer who is aggrieved by an assessment or decision that is subject to objection and appeal
may, prior to lodging an objection, request SARS to furnish reasons for the assessment. The reasons
for the assessment should enable the taxpayer to formulate an objection to the assessment or deci-
sion. The request must be delivered to SARS within 30 days from the date of the assessment. If SARS
is satisfied that reasonable grounds exist for not complying with this period, the period may be
extended by a period not exceeding 45 days.
If SARS is satisfied that the reasons required to enable the taxpayer to formulate an objection have
been provided, SARS has to inform the taxpayer accordingly within 30 days after delivery of the
request. Such notice must refer to the documents wherein the reasons were provided. If SARS is of
the view that such reasons have not yet been provided, it has to provide the reasons within 45 days
after delivery of the request for reasons. If a SARS official is satisfied that more time is required by
SARS to provide reasons due to exceptional circumstances, the complexity of the matter, or the
principle or the amount involved, the period for providing the reasons may be extended by SARS by
a period not exceeding 45 days.
In Minister of Environmental Affairs & Tourism v Phambili Fisheries (Pty) Ltd 2003 (6) SA 407 (SCA),
the Supreme Court of Appeal endorsed the standard for what constitutes ‘adequate reasons’ laid
down by the Federal Court of Australia in Ansett Transport Industries (Operations) Pty Ltd and Anoth-
er v Wraith and Others (1983) 48 ALR 500 at 507, which stated the following:
[T]he decision-maker [must] explain his decision in a way which will enable a person aggrieved to say, in
effect: “Even though I may not agree with it, I now understand why the decision went against me. I am now
in a position to decide whether that decision has involved an unwarranted finding of fact, or an error of law,
which is worth challenging.” This requires that the decision-maker should set out his understanding of the
relevant law, any findings of fact on which his conclusions depend (especially if those facts have been in
dispute), and the reasoning processes which led him to those conclusions. He should do so in clear and
unambiguous language, not in vague generalities or the formal language of legislation. (Own emphasis.)
Remember
Rule 1 defines ‘deliver’ by a taxpayer or appellant as handing the document to SARS; sending it
to SARS by registered post; sending it to SARS by electronic means to an e-mail address or
telefax number; or if the taxpayer uses a SARS electronic filing service to dispute an assessment,
submitting it through the SARS electronic filing service.
‘Deliver’ by SARS is defined in the case of a person other than a company as handed to the per-
son; left with another person over 16 years of age apparently residing or employed at the per-
son’s last known residence, office or place of business; sent to the person by post to the
person’s last known address; or sent to the person’s last known electronic address. In the case
of a company, ‘deliver’ by SARS means delivered to the public officer of the company; left with a
person older than 16 years apparently residing or employed at the place of business of the
company; sent by post addressed to the company or its public officer at the company or public
officer’s last known address; or sent to the company or its public officer’s last known electronic
address. If the taxpayer uses a SARS electronic filing service to dispute an assessment, ‘deliver’
by SARS also means posting a document on the electronic filing page of the taxpayer.
33.12.4 Objection against the assessment (Rule 7; ss 104 to 106)

If the taxpayer is not satisfied with the reasons provided by SARS or is aggrieved by an assessment,
he may object to the assessment within 30 days after one of the following two dates:
l the date of the assessment, or
l if the taxpayer requested reasons for the assessment (see Step 1), the date of the reasons or
notice that adequate reasons have already been provided.
A senior SARS official may extend the period within which objections must be made if satisfied that
reasonable grounds exist for the delay in lodging the objection. However, the period for objection
must not be so extended
l for a period exceeding 21 business days, unless a senior SARS official is satisfied that excep-
tional circumstances exist which gave rise to the delay in lodging the objection (with effect from
the promulgation of the Tax Administration Law Amendment Act, 2016, the 21 business day peri-
od is extended to 30 business days)
l if more than three years have lapsed from the date of assessment or the decision, or
l if the grounds for objection are based wholly or mainly on a change in a practice generally pre-
vailing which applied on the date of assessment or the decision (s 104(5)).
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If SARS does not allow an extension, its decision is subject to objection and appeal (s 104(2)).
Remember
Interpretation Note No 15 (20 November 2014) provides that factors that are relevant to the
Commissioner’s discretion in condoning the late lodging of an objection are the:
l prospects of success on the merits
l reasons for the delay, and
l period of the delay.
The taxpayer’s objection must comply with the following requirements:

l It must be lodged on the prescribed forms.
l It must be submitted within the prescribed period.
l It must specify the grounds of the objection in detail, including
– the part or specific amount of the disputed assessment objected to
– which of the grounds of assessment are disputed, and
– the documents required to substantiate the grounds of objection that the taxpayer has not
previously delivered to SARS for purposes of the disputed assessment.
l If a SARS electronic filing service is not used, it must specify an address at which the taxpayer
will accept notice and delivery of the Commissioner’s decision in respect of such objection.
l It must be signed by the taxpayer. If the taxpayer is unable to sign personally, the person signing
on behalf of the taxpayer must state in an annexure to the objection the reason why the taxpayer
is unable to sign the objection; that he has the necessary power of attorney to sign on behalf of
the taxpayer; and that the taxpayer is aware of the objection and agrees with the grounds thereof.
l It must be delivered to the Commissioner at the address specified in the assessment for this
purpose.
Where a taxpayer delivers an objection that does not comply with the above requirements, SARS may
regard the objection as invalid. In such case, SARS must, within 30 days of delivery of the invalid
objection, notify the taxpayer accordingly and must state the grounds for invalidity. SARS only has to
notify the taxpayer if the taxpayer uses a SARS electronic filing service for the objection, or if the
taxpayer specified an address in its objection, or if SARS is in possession of the taxpayer’s current
address. A taxpayer may, within 20 days of receiving the notice, submit a new and valid objection
without having to apply for an extension of the period in which an objection should be lodged. If a
taxpayer fails to submit a new objection, or submits a new objection that does not comply with the
above requirements, he may thereafter only submit a new objection together with an application to
SARS for an extension of the period in which an objection should be lodged. SARS must consider a
valid objection in the manner and within the period prescribed under the TAA and the rules (s 106(1);
Rule 9). SARS may disallow the objection or allow it either in whole or in part (s 106(2)). If the objec-
tion is allowed either in whole or in part, the assessment or decision against which the objection was
lodged must be altered accordingly (s 106(3)). SARS must notify the taxpayer of its decision
(s 106(4)). The notice must state the basis for the decision and a summary of the procedures for
appeal (s 106(5)).
A senior SARS official may designate an objection or appeal as a test case if the official considers
that the determination of the objection or appeal, whether on a question of law only or on both a
question of fact and a question of law, is likely to be determinative of all or a substantial number of
the issues involved in one or more other objections. The senior official may then stay the other objec-
tions or appeals by reason of the taking of a test case on a similar objection or appeal before the tax
court (s 106(6); Rule 12).
If no objections are made to an assessment or when the objections have been allowed in full or
withdrawn, the assessment or altered assessment will be final and conclusive (s 100; see 33.5.7).
33.12.5 Appeal against the assessment (Rule 10; s 107)
The taxpayer may appeal against the decision of the Commissioner to disallow the objection. He has
two choices. He may either follow the ADR process or the litigation process. The litigation process
involves an appeal to the
l Tax Board (only if tax in dispute does not exceed R1 000 000), or
l the Tax Court (when the tax in dispute exceeds R1 000 000 or the taxpayer chooses this course,
or if the chairperson of the tax board refers the matter to the tax court).
1105
A notice of appeal must be delivered within 30 days from the receipt of the notice of SARS's decision
on the objection and must be delivered to the SARS office that dealt with the objection or any ad-
dress stated by SARS in its notice of disallowing the objection. The period of 30 days may be ex-
tended by a senior SARS official for
l 21 business days, if satisfied that reasonable grounds exist for the delay. or
l up to 45 business days, if exceptional circumstances exist that justifies an extension beyond
21 business days (s 107(2)).
If SARS does not allow an extension, its decision is subject to objection and appeal (s 104(2)).
The following requirements must be met for a valid appeal:
l It must be lodged on the following prescribed forms:
– NOA – for personal income tax, administrative penalties and corporate income taxpayers in
respect of an assessed tax
– ADR2 – for corporate income taxpayers in respect of all other taxes not included in the NOA
scope (ie VAT and PAYE).
l The taxpayer must indicate in respect of which grounds stated in the objection he is appealing,
as well as the grounds for disputing the basis of the decision to disallow the objection and any
new ground on which the taxpayer is appealing (in which case, SARS may require the taxpayer to
produce substantiating documents).
l It must be submitted within the prescribed period.
l It must be signed by the taxpayer. If the taxpayer is unable to sign personally, the person signing
on behalf of the taxpayer must state in an annexure to the objection the reason why the taxpayer
is unable to sign the objection; that he has the necessary power of attorney to sign on behalf of
the taxpayer; and that the taxpayer is aware of the objection and agrees with the grounds thereof.
l It must be delivered to the Commissioner at the address specified in the assessment for this
purpose.
l It must specify an address at which the taxpayer will accept notice and delivery of the Commis-
sioner’s decision in respect of such objection.
33.12.6 Alternative dispute resolution (ADR) process (Rules 13 to 25; s 107(5) and (6))
SARS and the taxpayer may by mutual agreement attempt to resolve the dispute through ADR pro-
cedures specified in the rules (s 107(5)). The proceedings on the appeal are suspended while the
ADR procedure is ongoing (s 107(6)). The procedure for attempting to resolve the dispute through
the ADR process is as follows:
l In the notice of appeal (ADR2/NOA) the taxpayer may indicate that he wishes to make use of the
ADR procedures if they are available.
l The Commissioner must inform the taxpayer whether or not the dispute may be resolved by way
of the ADR procedures within 30 days of receipt of the notice of appeal.
l Even if the taxpayer has not indicated in his notice of appeal that he wishes to make use of the
alternative dispute resolution, the Commissioner may propose to the taxpayer that the alternative
dispute resolution process be followed.
l The ADR proceedings commence on the date that the Commissioner informed the taxpayer that
the dispute is appropriate for alternative dispute resolution. The parties must finalise the ADR
within 90 days.
l The Commissioner may appoint any person, including a person employed by SARS, to facilitate
the ADR proceedings.
l The taxpayer or his representative taxpayer (for example, when the taxpayer is a company) must
be personally present, unless the facilitator, in exceptional circumstances, allows them to be rep-
resented in their absence by a representative of their choice.
l A dispute that is subject to the ADR procedures may be resolved by an agreement under which
one of the parties accepts the other’s interpretation of the facts or the law or both, or the parties
may agree to settle the matter (see 33.13),
1106
33.12.7 Tax Board (Rules 11, 26 to 30; ss 108 to 115)

A tax board consists of a chairperson (who must be an advocate or attorney from a panel appointed
by the Minister) and, if considered necessary by the chairperson, an accountant and a representative
of the commercial community (these persons must be members of a panel appointed for this pur-
pose). The chairperson must consider representation made by a senior SARS official or the taxpayer
when considering whether it is necessary to include an accountant or a commercial representative (s
110(1)).
If the tax in dispute does not exceed R1 000 000 and both a senior SARS official and the taxpayer
agree, the appeal against an assessment or decision must in the first instance be heard by a tax
board (s 109(1)). In making the decision whether an appeal should be heard by a tax board, a senior
SARS official must consider whether the grounds of the dispute or legal principles related to the
appeal should rather be heard by the tax court (s 109(4)). If the chairperson of the tax board prior to
or during the hearing, considering the grounds of the dispute or the legal principles related to the
appeal, believes that the appeal should be heard by the tax court rather than the tax board, the
chairperson may direct that the appeal be set down for hearing de novo before the tax court
(s 109(5)).
The chairperson determines the procedures during the hearing of an appeal as the chairperson sees
fit, and each party must have the opportunity to put the party’s case to the tax board (s 113(1)). A
senior SARS official must appear at the hearing of the appeal in support of the assessment or ‘deci-
sion’ (s 113(5)). The appellant must appear in person in the case of a natural person, or in any other
case, be represented by the representative taxpayer (s 113(6)). If a third party prepared the ‘appel-
lant’s’ return involved in the assessment or ‘decision’, that third party may appear on the ‘appellant’s’
behalf (s 113(7)). The appellant may also request to be represented at the hearing by another per-
son. This request must be made together with the notice of appeal (or within a further period as the
chairperson may allow) (s 113(8)).
If neither the appellant nor anyone authorised to appear on the appellant’s behalf appears before the
tax board at the time and place set for the hearing, the tax board may, at the request of the senior
SARS official, confirm the assessment or decision in respect of which the appeal has been lodged.
The SARS representative must show proof that the appellant was furnished with the notice of the
sitting of the tax board (s 113(9)). If the tax board so confirms an assessment or decision, the appel-
lant may not thereafter request that the appeal be referred to the tax court (s 113(10)).
If the senior SARS official fails to appear before the tax board at the time and place set for the hear-
ing, the tax board may allow the appellant’s appeal at the appellant’s request (s 113(11). If the tax
board so allows the appeal, SARS may not thereafter refer the appeal to the tax court (s 113(12)).
If the chairperson is satisfied that sound reasons exist for the appellant or SARS’s non-appearance
and the reasons are delivered by the appellant or SARS to the clerk of the tax board within 10 busi-
ness days after the date determined for the hearing (or the longer period as may be allowed in ex-
ceptional circumstances), the chairperson will not confirm the assessment or decision or allow the
appeal due to the non-appearance (s 113(13)).
The tax board must decide the matter after hearing the taxpayer’s appeal (s 114(1)). After hearing the
appellant’s appeal lodged against an assessment or decision, the tax board must decide the matter
on the basis that the burden of proof is upon the taxpayer (s 110 read with s 129(1)). In the case of
an appeal against an understatement penalty imposed by SARS under a tax Act, the tax board must
decide the matter on the basis that the burden of proof is upon SARS and may reduce, confirm or
increase the understatement penalty so imposed (s 110 read with s 129(3)). In the case of an as-
sessment or decision under appeal, the tax board may
l confirm the assessment or ‘decision’
l order the assessment or ‘decision’ to be altered, or
l refer the assessment back to SARS for further examination and assessment (if SARS alters an
assessment as a result of the referral, the assessment is subject to objection and appeal)
(s 129(4)).
(Section 110 read with s 129(2).)
The chairperson has to prepare a written statement of the tax board’s decision within 60 days after
conclusion of the hearing. The statement must include the tax board’s findings of the facts of the
case and the reasons for its decision (s 114(2)). If the appellant or SARS is dissatisfied with the tax
board’s decision, the taxpayer may require in writing within 21 business days after the date of the
notice that the matter be referred to the tax court for hearing (s 115(1)).
1107
33.12.8 Tax Court (Rule 11; ss 116 to 132)

The Tax Court has jurisdiction over tax appeals lodged by a taxpayer (s 117(1)). The court may also
hear and decide an interlocutory application or an application in a procedural matter relating to a
dispute under the dispute resolution provisions of the Act as provided for in the rules (s 117(3)).
Every tax court consists of
l a judge or an acting judge of the High Court, who is the president of the tax court
l an accountant selected from a panel of members, and
l a representative of the commercial community selected from a panel of members(s 118(1)).
Where the appeal involves a complex matter that requires specific expertise, the president of the tax
court may direct that the representative of the commercial community should be a person with the
necessary experience in the specific field of expertise. A senior SARS official or the taxpayer may
make representations to this effect (s 118(2)(a)). Where the appeal involves the valuation of assets,
the president of the tax court, a senior SARS official or the taxpayer may request that the representa-
tive of the commercial community must be a sworn appraiser (s 188(2)(b)).
If an appeal to the tax court involves a matter of law only or is an interlocutory application or an appli-
cation in a procedural manner relating to a dispute under the dispute resolution provisions of the Act
as provided for in the rules, the president of the court sitting alone must decide the appeal (s 118(3)).
When the
l amount that is the subject of the dispute exceeds R50 million, or
l Commissioner and the taxpayer so agree
the Judge President of the Relevant Provincial Division of the High Court may direct that the Tax
Court hearing the appeal will consist of three judges or acting judges of the High Court, one of whom
will be the President of the Tax Court, together with the usual other members of the court (s 118(5)).
The Commissioner or any person authorised by him may appear in support of the assessment at the
hearing of an appeal (s 125).
After hearing the appellant’s appeal lodged against an assessment or decision, the tax court must
decide the matter on the basis that the burden of proof is upon the taxpayer (s 129(1)); see 33.11.1).
In the case of an assessment or decision under appeal or an application in a procedural matter, the
tax court may
l confirm the assessment or ‘decision’
l order the assessment or ‘decision’ to be altered, or
l refer the assessment back to SARS for further examination and assessment (if SARS alters an
assessment as a result of the referral, the assessment is subject to objection and appeal)
(s 129(2)).
In the case of an appeal against an understatement penalty imposed by SARS under a tax Act, the
tax court must decide the matter on the basis that the burden of proof is upon SARS and may reduce,
confirm or increase the understatement penalty (s 129(3)).
Where an objection or appeal has been designated as a test case because it is likely to be determi-
native of all or a substantial number of the issues involved in one or more other objections or appeals,
a senior SARS official may stay the other objections or appeals (see 33.12.4). The decision in the test
case is, unless the court directs otherwise, determinative of the issues in an objection or appeal so
stayed (s 129(5)).
A judgment of the tax court must be published for general information and, unless the sitting of the
tax court was public, in a form that does not reveal the appellant’s identity (s 132).
The tax court is not a court of law; therefore the Commissioner is not bound by a ruling given by it in a
previous case although it is a competent court to decide an issue between the parties (see CIR v City
Deep Ltd 1924 AD 298 at 306).
A decision of the tax court will be final, subject to the right of both the taxpayer and the Commissioner
to appeal to the High Court.
33.12.9 Appeal to the High Court (s 133 to 141)

l The taxpayer or the Commissioner may appeal in the manner provided in the Act against any
decision of the tax court.
1108
l They may appeal either to the Provincial Division of the High Court having jurisdiction in the area
in which the sitting of the tax court was held or directly to the Supreme Court of Appeal, with the
leave of the President of the tax court (s 133(2)).
l An appeal against a decision of the Tax Court may be made both on questions of fact and on
questions of law, and the notice of intention to appeal must be lodged within 21 business days af-
ter the date of the notice issued by the registrar notifying the parties of the decision of the tax
court or within whatever further period the President may allow (s 134(1)).
l If a party fails to lodge a notice of intention to appeal within the time allowed, he will be deemed
to have abandoned his right of appeal, except that he will still retain the right to cross-appeal if
the other party notes an appeal.
33.13 Settlement of dispute (ss 142 to 150)

Section 146 of the Act prescribes the circumstances when it would be appropriate for the Commis-
sioner to forgo tax and for a decision to be made to settle a dispute.
Remember
‘Dispute’ is defined in s 142 as a disagreement on the interpretation of either the relevant facts
involved or the law applicable thereto, or of both the facts and the law, which arises pursuant to
the issue of an assessment or the making of a decision.
‘Settle’ is defined in s 142 as to after the lodging of an appeal under this Chapter, resolve a dis-
pute by compromising a disputed liability, otherwise than by way of either SARS or the person
concerned accepting the other party’s interpretation of the facts or the law applicable to those
facts or of both the facts and the law, and settlement must be construed accordingly.
The Commissioner may settle a dispute, in whole or in part, on the basis that it is fair and equitable to
both the person concerned and SARS when it will be to the best advantage of the State, having
regard to
l whether the settlement would be in the interest of good management of the tax system, overall
fairness and the best use of SARS’ resources
l the cost of litigation in comparison to the possible benefits with reference to the prospects of
success in court, or whether there are any complex factual or quantum issues in contention or ev-
identiary difficulties to make the case problematic in the courts
l whether a group of participants in a tax avoidance arrangement has accepted the Commission-
er’s position in the dispute and now seeks an appropriate manner to unwind existing structures
and arrangements, or
l when the settlement of the dispute will promote compliance in a cost-effective way (s 146).
It will be considered inappropriate and not to the best advantage of the state to settle a dispute when
l there has been intentional tax evasion or fraud
l the settlement would be contrary to the law or a clearly established practice of SARS on the
matter
l it is in the public interest to have judicial clarification of the issue
l the pursuit of the matter through the courts will significantly promote compliance with the tax
laws, or
l the person concerned has not complied with the provisions of the Act and the Commissioner is of
the opinion that the non-compliance is of a serious nature (s 145).
All disputes settled in whole or in part must be evidenced by a written agreement between the parties
in the format prescribed by the Commissioner and must include
l details on how each particular issue was settled
l relevant undertakings by the parties
l treatment of that issue in future years
l withdrawal of objections and appeals, and
l arrangements for payment (s 147(3)).
The Commissioner has the right to recover any outstanding amounts in full when the person con-
cerned fails to adhere to any agreed payment arrangement. Any settlement is conditional upon full
disclosure of material facts known to the person concerned at the time of settlement (s 147(2)).
1109
If a dispute between SARS and the person aggrieved by an assessment or decision is settled, SARS
may, despite anything to the contrary contained in a tax Act, alter the assessment or decision to give
effect to the settlement (s 150(1)). An altered assessment or decision is not subject to objection and
appeal (s 150(2)).
33.14 Write off or compromise of a tax debt (ss 192 to 207)

Although it is SARS's duty to assess and collect all tax debts and not to forgo any tax debts, SARS
may, when required by the circumstances, deviate from the strictness and rigidity of this duty if it
would be to the best advantage of the State (ss 193(1) and (2)). Under certain circumstances SARS
may make a decision to 'write off' a tax debt or not to pursue the collection of a tax debt (s 193(3)).
A senior SARS official may
l decide to temporarily 'write off' an outstanding tax debt if satisfied that the tax debt is uneconom-
ical to pursue, or
l decide to temporarily 'write off' an outstanding tax debt for the duration of the period that the
debtor is subject to business rescue proceedings under Chapter 6 of the Companies Act, or
Remember
A tax debt is uneconomical to pursue if the total cost of recovery of the tax will in all likelihood
exceed the anticipated amount to be recovered of the outstanding debt (s 196(1)).
A decision to temporarily write off an amount of tax debt does not absolve the debtor from the
liability to make payment (s 195(2)). The decision to temporarily write off an amount of tax debt
may at any time be withdrawn if the senior SARS official is satisfied that it is no longer uneco-
nomical to pursue to the debt and that the decision to temporarily write off the debt would jeop-
ardise the general tax collection effort (s 195(3)).
l if the liability to pay the tax debt is not disputed under Chapter 9 of the TAA (see 33.12), perma-
nently write off an outstanding tax debt to the extent that the debt is irrecoverable, or if the debt is
'compromised' (ss 197 to 199), or
l if the liability to pay the tax debt is not disputed under Chapter 9 of the TAA (see 33.12), authorise
the 'compromise' of a portion of a tax debt where the taxpayer is not able to make payment of the
full amount of the tax debt (ss 200 to 205).
33.15 Criminal offences (ss 234 to 238)

A person may be charged with certain tax offences in terms of the Act. The person may be tried in
respect of that offence by a court having jurisdiction within any area in which that person resides or
carries on business, in addition to jurisdiction conferred upon a court by any other law (s 238).
The Act distinguishes between criminal offences relating to
l non-compliance with tax Acts (s 234)
l tax evasion and fraudulent refunds (s 235)
l secrecy provisions (s 236), and
l filing a return without authority (s 237).
33.15.1 Criminal offences relating to non-compliance with tax Acts (s 234)

A person will be guilty of an offence and, upon conviction, subject to a fine or to imprisonment for a
period not exceeding two years, where the person wilfully and without just cause
l fails or neglects to register or notify SARS of a change in registered particulars (see 33.2)
l fails or neglects to appoint a representative taxpayer or notify SARS of the appointment or
change of a representative taxpayer (see 33.7.1)
l fails or neglects to register as a tax practitioner as required under s 240 (see 33.16.1)
l fails or neglects to submit a return or document to SARS or issue a document to a person as
required under a tax Act
l fails or neglects to retain records as required under the TAA
1110
l submits a false certificate or statement under the record keeping provisions of the Act (see
33.3.5)
l issues an erroneous, incomplete or false document required under a tax Act to be issued to
another person
l refuses or neglects to:
– furnish, produce or make available any information, document or thing (excluding information
requested for purpose of revenue estimation)
– reply to or answer truly and fully any questions put to the person by a SARS official
– take an oath or make a solemn declaration, or
– attend and give evidence
as and when required in terms of the TAA
l fails to comply with a directive or instruction issued by SARS to the person under a tax Act
l fails or neglects to disclose to SARS any material facts which should have been disclosed under
the TAA or to notify SARS of anything which the person is required to so notify SARS under a tax
Act
l obstructs or hinders a SARS official in the discharge of the official’s duties
l refuses to give assistance required as part of an audit or investigation (see 33.6)
l holds him- or herself out as a SARS official engaged in carrying out the provisions of the TAA
l fails or neglects to comply with the provisions of the Act applicable to third parties if that person
was given notice by SARS to transfer the assets or pay the amounts to SARS as referred to in
those sections (see 33.9.3), or
l dissipates that person’s assets or assists another person to dissipate that other person’s assets in
order to impede the collection of any taxes, penalties or interest.
33.15.2 Evasion of tax and obtaining undue refunds by fraud or theft (s 235)
A person is guilty of an offence and, upon conviction, subject to a fine or to imprisonment for a period
not exceeding five years, where the person does any of the following with intent to evade or to assist
another person to evade tax or to obtain an undue refund under a tax Act, and the person:
l makes or causes or allows to be made any false statement or entry in a return or other document,
or signs a statement, return or other document so submitted without reasonable grounds for be-
lieving the same to be true
l gives a false answer, whether orally or in writing, to a request for information made under the TAA
l prepares, maintains or authorises the preparation or maintenance of false books of account or
other records or falsifies or authorises the falsification of books of account or other records
l makes use of, or authorises the use of, fraud or contrivance, or
l makes any false statement for the purposes of obtaining any refund of or exemption from tax.
Any person who makes a false statement referred to above may, unless the person proves that there
is a reasonable possibility that he or she was ignorant of the falsity of the statement and that the
ignorance was not due to negligence on his or her part, be regarded as being aware of the falsity of
the statement (s 235(2)). Only a senior SARS official may lay a complaint with the South African Police
Service or the National Prosecuting Authority regarding an offence referred to above (s 235(3)).
33.15.3 Criminal offences relating to filing return without authority (s 237)

A person will be guilty of an offence and, upon conviction, subject to a fine or to imprisonment for a
period not exceeding two years where the person
l submits a return or other document to SARS under a forged signature
l uses an electronic or digital signature of another person in an electronic communication to SARS, or
l otherwise submits to SARS a communication on behalf of another person, without the person’s
consent and authority.
1111
33.16 Tax practitioners (ss 239 to 243)

33.16.1 Registration of tax practitioners (s 240)
Every person who provides advice to another person with respect to the application of a tax Act, or
completes or assists in completing a document to be submitted to SARS by another person in terms
of a tax Act, must register with
l a recognised controlling body, and
l with SARS as a tax practitioner (s 240(1)).
Both the above registrations must be made within 21 business days after the person first provides the
advice or completes or assists to complete a return.
The following persons do not have to register with a recognised controlling body or as a tax
practitioner:
l a person who only provides the advice or completes or assists in completing a document for no
consideration to that person or his or her employer or a connected person in relation to that
employer or that person
l a person who only provides the advice in anticipation of or in the course of any litigation to which
the Commissioner is a party or where the Commissioner is a complainant
l a person who only provides the advice as an incidental or subordinate part of providing goods or
other services to another person
l a person who only provides the advice or completes or assists in completing a document to or in
respect of the employer by whom that person is employed on a full-time basis to or in respect of
that employer and connected persons in relation to that employer, or
l a person who only provides the advice or completes or assists in completing a document under
the supervision of a registered tax practitioner who has assigned or approved the assignment of
those functions to the person (s 240(2)). The person who has assigned or approved the assign-
ment of these functions to another person, is regarded as accountable for the actions of the per-
son performing the functions for the purposes of a complaint to a recognised controlling body
(see 33.16.13).
A person may not register as a tax practitioner or SARS may deregister the person, if during the
preceding five years, the person has been
l removed from a related profession by a controlling body for serious misconduct, or
l convicted (whether in the Republic or elsewhere) of
– theft, fraud, forgery or uttering a forged document, perjury or an offence under the Prevention
and Combating of Corrupt Activities Act 12 of 2004, or
– any other offence involving dishonesty
for which the person has been sentenced to a period of imprisonment exceeding two years
without the option of a fine or to a fine exceeding the amount prescribed in the Adjustment of
Fines Act 101 of 1991 (s 240(3)), or
l convicted of a serious tax offence.
Remember
A tax offence is defined as an offence in terms of a tax Act, or any other offence involving fraud
on SARS or a SARS official relating to the administration of a tax Act, or theft of moneys due or
paid to SARS for the benefit of the National Revenue Fund. A serious tax offence is defined as a
tax offence for which a person may be liable on conviction
l to imprisonment exceeding two years without the option of a fine, or
l to a fine exceeding the equivalent amount of a fine under the Adjustment of Fines Act 101 of
1991.
Where prosecution for a serious tax offence has been instituted against a person but not yet finalised,
a senior SARS official may not register the person or may suspend the person’s registeration if after
institution of the criminal proceedings the person continues with commiting a serious tax offence. The
person may not be registered, or may be suspended for the duration of the criminal proceedings
commencing on the date that the prosecution is instituted and ending on the date that the person is
finally acquitted (s 240(4)).
1112
33.16.2 Recognised controlling body (s 240A)

The following bodies are currently recognised controlling bodies:
l the Independent Regulatory Board for Auditors (IRBA) established in terms of the Auditing Pro-
fessions Act, 2005
l a law society established in terms of the Attorneys Act, 1979
l the General Council of the Bar of South Africa, a Bar Council and a Society of Advocates referred
to in the Admission of Advocates Act, 1964
l the Chartered Institute of Management Accountants (CIMA)
l the Chartered Secretaries Southern Africa (CSSA)
l the Institute of Accounting and Commerce (IAC)
l the South African Institute of Chartered Accountants (SAICA)
l the South African Institute of Professional Accountants (SAIPA)
l the South African Institute of Tax Practitioners (SAIT)
l the Association of Chartered Certified Accountants (ACCA), and
l the Association of Accounting Technicians Southern Africa (AAT(SA)).
The above controlling bodies must, within a prescribed period and in the prescribed form and man-
ner, submit a list of its members who are registered tax practitioners (s 240A(3)(a)).
The Commissioner may recognise a controlling body for natural persons who complete tax returns or
provide tax related advice if the body maintains
l minimum qualification and experience requirements
l continuing professional education requirements
l codes of ethics and conduct, and
l disciplinary codes and procedures.
In order to be recognised as a controlling body, the body must be approved in terms of s 30B of the
Income Tax Act and must have at least 1 000 members (or reasonable prospects of having 1 000
members within one year after registration (s 240A(2)). The body must further, within a period and in
a form and manner that may be prescribed, submit a report on its members and its compliance with
the above requirements (s 240A(3)(b)).
Despite the general prohibition to disclose taxpayer information, SARS may disclose information to a
controlling body as may be required to verify that these requirements are being given effect to
(s 70(2)(d)).
33.16.3 Complaint to controlling body of tax practitioner (ss 241 to 243)

A senior SARS official may lodge a complaint with a controlling body if a registered tax practitioner or
person who carries on a profession governed by the controlling body, did or omitted to do anything
with respect to the affairs of a taxpayer, including that person’s affairs, that in the opinion of the
official
l was intended to assist the taxpayer to avoid or unduly postpone the performance of an obligation
imposed on the taxpayer under a tax Act
l by reason of negligence on the part of the person resulted in the avoidance or undue postpone-
ment of the performance of an obligation imposed on the taxpayer under a tax Act, or
l constitutes a contravention of a rule or code of conduct for the profession which may result in dis-
ciplinary action being taken against the registered tax practitioner or person by the body.
The senior SARS official lodging the complaint may disclose the information relating to the taxpayer
as in the opinion of the official is necessary to lay before the controlling body to which the complaint
is made (s 242(1)). Prior to lodging the complaint or disclosing the information, SARS must deliver to
the taxpayer concerned and the person against whom the complaint is to be made notification of the
intended complaint and information to be disclosed (s 242(2)). The taxpayer or that person may,
within 21 business days after the date of the notification, lodge with SARS an objection to the lodging
of the complaint or disclosure of the information (s 242(3)). If on the expiry of that period of 21 busi-
ness days no objection has been lodged or, if an objection has been lodged and SARS is not satis-
fied that the objection should be sustained, a senior SARS official may thereupon lodge the complaint
(s 242(4)).
1113
33.17 Advance rulings (ss 75 to 90)

In order to promote clarity, consistency and certainty regarding the interpretation and application of a
tax Act, SARS may make an advance ruling on any provision of a tax Act (ss 76 and 77). Taxpayers
can apply for two types of advance rulings, namely binding private rulings and binding class rulings.
A binding private ruling is a written statement issued by SARS regarding the application of a tax Act
to one or more parties to a proposed transaction, in respect of the transaction. A binding class ruling
is a written statement issued by SARS regarding the application of a tax Act to a specific class of
persons in respect of a proposed transaction. In this context a class means shareholders, members,
beneficiaries or the like in respect of a company, association, pension fund, trust, or the like. It also
includes a group of persons that may be unrelated and are similarly affected by the application of a
tax Act to a proposed transaction and agree to be represented by the applicant of the binding class
ruling.
An application for an advance ruling must be made on a prescribed form and manner (s 79(1)). In
respect of a binding private ruling, it must be made by a person who is a party to the proposed
transaction, or by two or more parties to the proposed transaction as co-applicants (s 79(2)). An
application for a binding class ruling may be made by any person on behalf of a class (s 79(3)).
SARS may reject an application for an advance ruling under the following circumstances (s 80):
l if the application requests or requires the rendering of an opinion, conclusion or determination
regarding
– the market value of an asset
– the application or interpretation of the laws of a foreign country
– the pricing of goods or services supplied by or rendered to a connected person in relation to
the applicant or a class member
– the constitutionality of a tax Act
– a proposed transaction that is hypothetical or not seriously contemplated
– a matter which can be resolved by SARS issuing a directive under the Fourth Schedule to the
Income Tax Act
– whether a person is an independent contractor, labour broker or personal service provider, or
– a matter which is submitted for academic purposes
l if the application contains
– a ‘frivolous or vexatious issue’
– an ‘alternative course of action by the applicant or a class member that is not seriously con-
templated’
– or an issue that is the same as or substantially similar to an issue that is
• currently before SARS in connection with an audit, investigation or other proceeding involv-
ing the applicant or a class member or a connected person in relation to the applicant or a
class member
• the subject of a policy document or draft legislation that has been published, or
• subject to dispute resolution under the dispute resolution provisions of the Act
l if the application involves the application or interpretation of a general or specific anti-avoidance
provision or doctrine
l if the application involves an issue
– that is of a factual nature
– the resolution of which would depend upon assumptions to be made regarding a future event
or other matters which cannot be reasonably determined at the time of the application
– which would be more appropriately dealt with by the competent authorities of the parties to an
agreement for the avoidance of double taxation
– in which the tax treatment of the applicant is dependent upon the tax treatment of another party
to the proposed transaction who has not applied for a ruling
– in respect of a transaction that is part of another transaction which has a bearing on the issue,
the details of which have not been disclosed, or
– which is the same as or substantially similar to an issue upon which the applicant has already
received an unfavourable ruling
1114
l if the application involves a matter the resolution of which would be unduly time-consuming or
resource intensive
l if the application requests SARS to rule on the substance of a transaction and disregard its form.
The Act provides that the Commissioner may publish by public notice a list of additional considera-
tions in respect of which the Commissioner may reject an application (s 80(2)). The following aspects
on which the Commissioner may reject an application for an advance ruling were published on 24
June 2016 (Notice 748):
Aspects under the Income Tax Act:
l the qualifying allowance, contemplated in s 24C, in respect of future expenditure, that the Com-
missioner may determine (see chapter 8)
l the effect of a ‘salary sacrifice’ for purposes of the definition of “remuneration” in par 1 of the
Fourth Schedule
l the interpretation and application of the exemption under s 10(1)(c)(v) in relation to any agree-
ment entered into before 1 January 1990 (see chapter 6)
l the deductibility of any expense incurred by an employer in order to transfer or extinguish, in whole
or in part, its post-retirement medical aid obligation to past and present employees (excluding
deductions under section 12M – see chapter 8), specifically including, but not limited to:
– lump sum contributions to pension, provident or benefit funds
– lump sum settlement payments made directly to employees, or
– premiums paid by the employer to acquire annuity policies
l the determination of the place of effective management, whether a ‘foreign business establish-
ment’ in relation to a controlled foreign company is in existence and any determination as to
whether a “permanent establishment” as defined in s 1 has been created 1 (see chapters 5 and
19).
Aspects under the Value-Added Tax Act (‘the VAT Act’):
l the liability for tax of a supplier of goods or services that is not a party to the application and the
entitlement to deduct input tax in respect of goods or services acquired by a person who is not a
party to the application
l confirmation that a person is acting as an agent or principal in respect of a supply of goods or
services
l the application of s 8(15) and whether a supply of goods or services constitutes a single supply
(see chapter 32), and
l confirmation that the issuing of a tax invoice, debit or credit note complies with the requirements
imposed by any law relating to electronic communications, or that any technical requirements are
met in respect of electronic invoicing.
Aspects involving Donations Tax:
l considering the price or amount that would constitute ‘fair market value’ under s 55(1) of the
Income Tax Act (see chapter 26)
l any exercise of the Commissioner’s discretion under s 58(1) of the Income Tax Act concerning
the adequacy of consideration given for the disposal of property.
General aspects:
l applications concerning the attribution, allocation or apportionment of expenditure or input tax
(from an income tax or VAT perspective), excluding a request for an alternative apportionment
method in terms of s 41B of the VAT Act
l applications pertaining to the tax consequences of transactions contained in agreements which
have already been concluded, except requests for:
– VAT rulings or VAT class rulings in terms of s 41B of the VAT Act, and
– the reconfirmation of a ruling, prior to its expiry date, if the fact (including all the terms of the
transaction) and the applicable provisions of the relevant legislation remained the same
l applications involving transactions in respect of which material facts cannot be established at the
time of the application.
1115
Applying for an advance ruling is subject to a fee in order to defray the costs of the advance ruling
system (s 81). The fee comprises an application fee and cost recovery fees. The current fees (as
published in Gazette 36119 on 8 February 2013) are as follows:
l an application fee of R2 500 in the case of a small, medium and micro enterprise (that is any
person other than a listed company if its gross income for the most recent year of assessment did
not exceed R20 million) and R14 000 in the case of any other taxpayer
l cost recovery fees of R650 per hour to non-urgent applications and R1 000 per hour to urgent
applications (an urgent application is one that is filed less than 40 days, but more than 20 days
prior to the proposed application taking place), and
l direct costs incurred in connection with an application. This may include travel costs or the costs
incurred in obtaining the services of a consultant or expert when necessary to advise on the
technical aspects of a proposed transaction. These costs may not be incurred without first obtain-
ing approval from the applicant in writing.
After an application is accepted, SARS must, if requested, provide the applicant with an estimate of
cost recovery fees anticipated in connection with the application. SARS must notify the applicant if it
subsequently appears that this estimate may be exceeded (s 81(2)).
An application for a VAT class ruling or a VAT ruling in terms of s 41B of the VAT Act is not subject to
an application fee (proviso to s 41B(1) of the VAT Act).
A senior SARS official may issue a binding general ruling that can be effective for either a particular
tax period or other definite period, or an indefinite period (s 89). A binding general ruling must state:
l that it is a ‘binding general ruling’ made under s 89 of the Act
l the provisions of a tax Act, which are the subject of the binding general ruling, and
l either the tax period or other definite period for which it applies, or in the case of a binding gen-
eral ruling for an indefinite period, that it is for an indefinite period and the date or tax period from
which it applies.
SARS may issue a binding general ruling as an interpretation note or in another form and may be
issued in the manner that the Commissioner prescribes (s 89(3)). However, a publication or other
written statement does not constitute and may not be considered or treated as a binding general
ruling unless it contains the information listed above.
33.18 Tax compliance status (s 256)

A taxpayer may apply to SARS for a confirmation of the taxpayer’s tax compliance status in the pre-
scribed form and manner (s 256(1)). SARS must issue, or decline to issue, the confirmation within
21 business days from the date on which the application is submitted (s 256(2)). If a senior SARS
official is satisfied that the issuing of a confirmation of the taxpayer’s tax compliance status may
prejudice the efficient and effective collection of revenue, the confirmation may be issued within a
longer period as may reasonably be required (s 256(2)).
A senior SARS official may provide a taxpayer with confirmation of the taxpayer’s tax compliance
status and may confirm that the taxpayer is tax compliant by issuing a confirmation of the taxpayer’s
tax compliance status only if satisfied that the taxpayer is registered for tax and does not have any
(s 256(3)):
l outstanding tax debt, excluding
– a tax debt in respect of which the taxpayer has entered into an instalment payment agreement
(see 33.8.6)
– the portion of a tax debt compromised (see 33.14)
– a tax debt that has been suspended (see 33.8.3), or
– a tax debt that does not exceed R100, or
l outstanding return unless an arrangement acceptable to the SARS official has been made for the
submission of the return.
A taxpayer’s tax compliance status will be indicated as non-compliant for the period commencing on
the date that the taxpayer no longer complies with the above requirements and ending on the date
that the taxpayer remedies such non-compliance (s 256(7)).
1116
A confirmation of the taxpayer’s tax compliance status must be in the prescribed form and include at
least (s 256(4)):
l the original date of issue of the tax compliance status confirmation
l the name, taxpayer reference number, address and identity number or company registration
number of the taxpayer
l the date of the confirmation of the tax compliance status, and
l confirmation of the tax compliance status of the taxpayer.
Despite the general prohibition of disclosure of taxpayer information, SARS may confirm the tax-
payer’s tax compliance status as at the date of a request (or a previous date as prescribed by the
Minister in a regulation) by a sphere of government, parastatal or other person to whom the taxpayer
has presented the tax compliance status confirmation (s 256(5)).
SARS may, after giving the taxpayer prior notice and an opportunity to respond to the allegations of
at least 14 days prior to alteration, alter the taxpayer’s tax compliance status to non-compliant if the
confirmation
l was issued in error, or
l was obtained on the basis of fraud, misrepresentation or non-disclosure of material facts
(s 256(6)).
1117
Appendix A Tax monetary thresholds
1. Income tax monetary thresholds subject to periodic legislative change

General thresholds
Monetary amount for Monetary amount for
Description the 2017 year of the 2018 year of
assessment assessment
Broad-based employee share schemes:
Employees can receive tax-exempt shares if, subject to
certain conditions, the shares are part of a broad-based
employees share plan. Companies can also deduct
shares issued under the plan
Maximum exemption for shares received by employees R50 000 (acquired R50 000 (acquired
(definition of ‘qualifying share’ in s 8B(3)) during the current during the current
and preceding four and preceding four
years of assessment) years of assessment)
Maximum annual deduction for shares issued by the em-
ployer (proviso to s 11(lA)) R10 000 R10 000
Exemption for interest:
In respect of persons younger than 65 years (s 10(1)(i)) R23 800 R23 800
In respect of persons 65 years or older (s 10(1)(i)) R34 500 R34 500
Annual donations tax exemption:
Exemption for casual gifts donated by entities (s 56(2)(a)) R10 000 R10 000
Exemption for donations made by natural persons
(s 56(2)(b)) R100 000 R100 000
Capital gains exclusions:
Annual exclusion for individuals and special trusts
(par 5(1) of the Eighth Schedule) R30 000 R40 000
Exclusion on death (par 5(2) of the Eighth Schedule) R300 000 R300 000
Exclusion for the disposal of a primary residence (capital
gain or loss - par 45(1)(a) of the Eighth Schedule) R2 000 000 R2 000 000
Exclusion in respect of disposal of primary residence
(based on amount of proceeds on disposal – par 45(1)(b)
of the Eighth Schedule) R2 000 000 R2 000 000
Maximum market value of all assets allowed within the
small business definition on disposal when person is over
55 (definition of ‘small business’ in par 57(1) of the Eighth
Schedule) R10 000 000 R10 000 000
Exclusion amount on disposal of small business when
person is over 55 (par 57(3) of the Eighth Schedule) R1 800 000 R1 800 000
Retirement savings thresholds

Deductible retirement fund contributions:
Maximum deduction allowed in respect of contributions
made to any pension fund, provident fund or retirement
annuity fund (s 11F)
Pension fund, provident fund and retirement annuity fund
members may deduct their contributions subject to certain
percentage or monetary ceiling (the latter of which is pro-
vided here) R350 000
continued
1119

Permissible lump sum withdrawals upon retirement:
Pension fund and retirement annuity fund members may
withdraw lumps sums on retirement
Pension fund monetary amount for permissible lump sum
withdrawals (par (ii)(dd) of the proviso to par (c) of the
definition of ‘pension fund’ in s 1) R165 000 R165 000
Retirement annuity fund monetary amount for permissible
lump sum withdrawals (par (b)(ii) of the proviso to the
definition of ‘retirement annuity fund’ in s 1) R165 000 R165 000
Tax-free portion of lump sum benefit on retirement
(par 9(b) of Schedule I to the Rates and Monetary
Amounts and Amendment of Revenue Laws Act of 2016) R500 000 R500 000
Tax-free portion of lump sum benefit on withdrawal prior
to retirement (par 9(a) of Schedule I to the Rates and
Monetary Amounts and Amendment of Revenue Laws
Act of 2016 ) R25 000 R25 000
Deductible business expenses for individuals

Car allowance:
Individuals receive an annual vehicle allowance to defray
business travel expenses, including deemed depreciation
on the vehicle
Ceiling on vehicle cost (s 8(1)(b)(iiiA)(bb)(A)) R560 000 R595 000
Ceiling on debt relating to vehicle cost
(s 8(1)(b)(iiiA)(bb)(B)) R560 000 R595 000
Employment-related fringe benefits

Exempt scholarship and bursaries:
Employers can provide exempt scholarships and bur-
saries to employees and their relatives, subject to annual
monetary ceilings
Annual ceiling of employee’s remuneration proxy if bur-
sary is granted to a relative of the employee (par (ii)(aa)
of the proviso to s 10(1)(q)) R400 000 R600 000
Annual ceiling of bursary amount granted to an employ- l R15 000 in respect l R20 000 in respect
ee’s relative who is not a person with a disability as de- of grade R up to of grade R up to
fined in s 6B (par (ii)(bb) of the proviso to s 10(1)(q)) and including a and including a
qualification to qualification to
which an NQF level which an NQF level
4 has been allo- 4 has been allo-
cated in accord- cated in accord-
ance with Chap- ance with Chapter
ter 2 of the National 2 of the National
Qualifications Qualifications
Framework Act, Framework Act,
2008, and 2008, and
continued
1120
Appendix A: Tax monetary thresholds

l R40 000 in respect l R60 000 in respect
of a qualification to of a qualification to
which an NQF level which an NQF level
from 5 up to and from 5 up to and
including 10 has including 10 has
been allocated in been allocated in
accordance with accordance with
Chapter 2 of the Chapter 2 of the
above Act. above Act.
Annual ceiling of bursary amount granted to an employ- l R30 000 in respect
ee’s relative who is a person with a disability as defined of grade R up to
in s 6B (par (ii)(bb) of s 10(1)(qA)) and including a
qualification to
which an NQF level
4 has been allo-
cated in accord-
ance with Chapter
2 of the National
Qualifications
Framework Act,
2008, and
l R90 000 in respect
of a qualification to
which an NQF level
from 5 up to and
including 10 has
been allocated in
accordance with
Chapter 2 of the
above Act.
Exempt death benefit:
Compensation paid in respect of the death of an employ-
ee is exempt subject to a monetary ceiling and certain
requirements (s 10(1)(gB)(iii)(B)) R300 000 R300 000
Medical scheme contributions:
Medical scheme fees tax credit (for each month in the
year of assessment in respect of which fees were paid):
In respect of benefits to the taxpayer (s 6A(2)(b)(i)) R286 R303
In respect of benefits to the taxpayer and one dependant
(s 6A(2)(b)(ii)) R572 R606
In respect of benefits to each dependant in addition to
the taxpayer and one dependant (s 6A(2)(b)(iii)) R192 R204
Acquisition of immovable property by employee:
Nil value placed on fringe benefit when employee who is
not a connected person to the employer acquires im-
movable property if:
Employee’s remuneration proxy does not exceed R250 000 R250 000
Market value of the immovable property does not exceed R450 000 R450 000
Awards for bravery and long service:
The deemed values of bravery and long service awards
are reduced by the monetary amount indicated (par (a)
and (b) of the further proviso to paragraph 5(2) of Sev-
enth Schedule) R5 000 R5 000
Employees’ accommodation:
Employees’ accommodation is taxed by means of a for-
mula if the employer owns the accommodation, but no
tax is payable if the employee earns less than the amount
indicated (par 9(3)(a)(ii) of Seventh Schedule) R75 000 R75 750
continued
1121

Accommodation for expatriate employees:
The value of accommodation provided to expatriate em-
ployees is taxable to the extent that it exceeds the
amount indicated (par 9(7B)(ii) of Seventh Schedule) R25 000 R25 000
Exemption for de minimis employees’ loans:
Employees’ loans below the amount indicated are not
deemed to have any value as a fringe benefit
(par 11(4)(a) of Seventh Schedule) R3 000 R3 000
Monetary ceiling of additional deduction for the employer
when utilising a learnership agreement with an employee
in respect of learnership agreements entered into before 1
October 2016 R30 000 R30 000
when utilising a learnership agreement with an employee
in respect of learnership agreements entered into on or
after 1 October 2016, where the learner holds the follow-
ing qualification in terms of Chapter 2 of the National
Qualifications Framework Act:
14)/HYHOXSWRDQGLQFOXGLQJ R40 000 R40 000
in the case of an employee completing a learnership
agreement in respect of learnership agreements entered
into before 1 October 2016 R30 000 R30 000
in the case of an employee completing a learnership
agreement in respect of learnership agreements entered
into on or after 1 October 2016, where the learner holds
the following qualification in terms of Chapter 2 of the
National Qualifications Framework Act:
involving a learnership agreement with an employee with
a disability in respect of learnership agreements entered
into before 1 October 2016 R20 000 R20 000
involving a learnership agreement with an employee with
a disability in respect of learnership agreements entered
into on or after 1 October 2016, where the learner holds
the following qualification in terms of Chapter 2 of the
National Qualifications Framework Act:
Depreciation
Small-scale intellectual property:
Intellectual property with a cost below the amount indi-
cated is immediately deductible (par (aa) of the proviso
to s 11(gC)) R5 000 R5 000
Urban development zone incentive:
Developers undertaking projects in excess of the amount
indicated must provide special notice to the Commis-
sioner (s 13quat(10A)) R5 000 000 R5 000 000
continued
1122
Appendix A: Tax monetary thresholds

Low-cost housing:
An allowance is provided for in respect of the cost of a
low-cost residential unit (s 13sex) or in respect of the
amount owed to the taxpayer as a result of the disposal
of a low-cost residential unit to an employee of the tax-
payer (s 13sept)
For an apartment to qualify as a ‘low-cost residential unit’,
the cost thereof must not exceed the amount indicated
(par (a)(i) of definition of ‘low-cost residential unit’, s 1) R350 000 R350 000
For a stand-alone building to qualify as a ‘low-cost resi-
dential unit’, the cost thereof must not exceed the amount
indicated (par (b)(i) of definition of ‘low-cost residential
unit’, s 1) R300 000 R300 000
Miscellaneous
Public benefit organisations (PBO):
PBO trading income is exempt up to the greater of 5% of
total receipts and accruals or the amount indicated
(s 10(1)(cN)(ii)(dd)(ii)) R200 000 R200 000
Donations to transfrontier parks are deductible if the do-
nation equals the amount indicated (s 18A(1C)(a)(ii)) R1 000 000 R1 000 000
PBOs providing housing are exempt if beneficiaries are
households with a monthly income of the stated amount
or less (par 3(a) of Part I of the Ninth Schedule and
par 5(a) of Part II of the Ninth Schedule) R15 000 R15 000
Recreational clubs:
Club trading income is exempt up to the greater of 5% of
the total receipts and accruals or the amount indicated
(s 10(1)(cO)(iv)(bb)) R120 000 R120 000
Pre-paid expenses:
Limit of pre-paid expenses that will not be deferred until
delivery of goods, services or benefits (par (bb) of the
proviso to s 23H(1)) R100 000 R100 000
Small business corporations:
Corporations qualify for tax incentives if gross income
does not exceed the amount indicated (s 12E(4)(a)(i)) R20 000 000 R20 000 000
Housing associations:
Housing association investment income is exempt up to
the amount indicated (s 10(1)(e)) R50 000 R50 000
Registered micro businesses:
Qualifying turnover for micro business to be able to choose
the turnover tax regime (par 2(b) of the Sixth Schedule) R1 000 000 R1 000 000
Maximum of total receipts from disposal of immovable
property and assets of a capital nature by micro business
(par 3(e) of the Sixth Schedule) R1 500 000 R1 500 000
Minimum value of individual assets and liabilities in re-
spect of which a micro business is required to retain rec-
ords (par 14(c) and (d) of the Sixth Schedule) R10 000 R10 000
1123
Administration
Investment income exempt from provisional tax:
If a natural person solely generates income from interest,
dividends and real estate rentals, the income amount
indicated is exempt from provisional tax
Any natural person who does not derive income from
carrying on of any business (par (dd) of the definition of
‘provisional taxpayer’ in par 1 of the Fourth Schedule) R30 000 R30 000
Appeals to the Tax Board:
If a taxpayer appealed against an assessment before
1 January 2016, the appeal is in the first instance heard
by the Tax Board if the amount of tax in dispute does not
exceed the amount indicated (s 107 of the Tax Admin-
istration Act) R500 000 R500 000
If a taxpayer appealed against an assessment on or after
1 January 2016, the appeal is in the first instance heard
by the Tax Board if the amount of tax in dispute does not
exceed the amount indicated (s 107 of the Tax Admin-
istration Act) R1 000 000 R1 000 000
2. Value-added tax monetary thresholds subject to periodic legislative change
Description
Registration:
Compulsory (s 23(1)(a)). R1 000 000
Voluntary (s 23(3)(b)(ii), (c) and (d)) R50 000
Foreign suppliers of electronic services (s 23(1A)) R50 000
Commercial accommodation (proviso (ix) of the definition of ‘enterprise’ in s 1) R120 000
Payments basis of VAT registration (s 15(2)(b)(i)) R2 500 000
Exception to payments basis: in respect of supplies of goods or services made by
a vendor, other than public authorities, certain municipal entities, and municipal-
ities, in excess of the stipulated amount (s 15(2A)) R100 000
Tax invoices:
Abridged tax invoice (s 20(5)) R5 000
No tax invoice required (s 20(6)) R50
Tax periods:
Category C submission of VAT 201 return (s 27(3)(a)(i)) R30 000 000
Category D submission of VAT 201 return (s 27(4)(c)(i)) R1 500 000
1124
Appendix B Rates of tax and other information
Rates of tax
NATURAL PERSONS AND PERSONS OTHER THAN COMPANIES AND TRUSTS
(BUT INCLUDING SPECIAL TRUSTS AS WELL AS INSOLVENT AND DECEASED ESTATES)
Year of assessment ending 28 February 2018
Taxable income
But does Rates of tax
From
not exceed
R R R R
0 ............. 189 880 0 + 18% of each R1
189 881 ............. 296 540 34 178 + 26% of the amount above ......................... 189 880
708 311 ............. 1 500 000 209 032 + 41% of the amount above ......................... 708 310
1 500 001 ............. 533 625 + 45% of the amount above ......................... 1 500 000
RETIREMENT LUMP SUM BENEFITS

Taxable income from benefits Rate of tax
Not exceeding R500 000 ............................. 0% of taxable income.
Exceeds R500 000 but not R700 000 .......... R0 plus 18% of taxable income exceeding R500 000.
Exceeds R700 000 but not R1 050 000 ....... R36 000 plus 27% of taxable income exceeding R700 000.
Exceeds R1 050 000 .................................... R130 500 plus 36% of taxable income exceeding
R1 050 000.
(The amount of tax determined must be reduced by the amount of tax levied on the person in respect
of any previous year of assessment in respect of taxable income comprising of any retirement fund
lump sum benefit.)
RETIREMENT LUMP SUM WITHDRAWAL BENEFITS

Taxable income from benefits Rate of tax
Not exceeding R25 000 ............................... 0% of taxable income.
Exceeds R25 000 but not R660 000 ............ 18% of taxable income exceeding R25 000.
Exceeds R660 000 but not R990 000 .......... R114 300 plus 27% of taxable income exceeding R660 000.
Exceeds R990 000 ....................................... R203 400 plus 36% of taxable income exceeding R990 000.
TURNOVER TAX DUE BY MICRO BUSINESSES

Taxable Turnover Tax Liability
On the first R335 000 0%
R335 001 to R500 000 1% of each R1 above R335 000
R500 001 to R750 000 R1 650 + 2% of the amount above R500 000
R750 001 and above R6 650 + 3% of the amount above R750 000
1125
TRUSTS
2018 2017
Tax rates applicable to trusts (other than special trusts) on each Rand
of taxable income for years of assessment ending on 28/29 February 45% 41%
COMPANIES AND CLOSE CORPORATIONS

(OTHER THAN MINING COMPANIES, LONG-TERM INSURERS AND RETIREMENT FUNDS)
Financial years during the period of twelve months ending 31 March
2018 2017
Normal tax on taxable income:
Companies ......................................................................... 28% 28%
Non-resident companies with a branch in the Republic .... 28% 28%
Personal service provider companies................................ 28% 28%
Small business corporations 2018
On taxable income not exceeding R75 750 ................... 0%
On taxable income exceeding R75 750 but not ex- 7% of the amount that
ceeding R365 000 .......................................................... exceeds R75 750
On the taxable income exceeding R365 000 but not R20 248 + 21% of the
exceeding R550 000 ...................................................... amount that exceeds
R365 000
On taxable income exceeding R550 000 ....................... R59 098 + 28% of the amount
that exceeds R550 000
Small business corporations 2017
On taxable income not exceeding R75 000 ................... 0%
On taxable income exceeding R75 000 but not ex- 7% of the amount that
ceeding R365 000 .......................................................... exceeds R75 000
On the taxable income exceeding R365 000 but not R20 300 + 21% of the
exceeding R550 000 ...................................................... amount that exceeds
R365 000
On taxable income exceeding R550 000 ....................... R59 150 + 28% of the
amount that exceeds
R550 000
Companies with tax holiday status in terms of s 37H ........ 0% 0%
Dividends tax .................................................................... 20% 15%
INTEREST RATES APPLICABLE IN TERMS OF THE INCOME TAX ACT

Effective date Fringe Amounts owing to Amounts owing by
of change benefits SARS1 SARS
1 July 2010 9,5% 5,5%

1 March 2011 8,5% 4,5%
1 May 2014 9% 5%
1 November 2014 9,25% 5,25%
1 November 2015 9,5% 5,5%
1 March 2016 9,75% 5,75%
1 May 2016 10,25% 6,25%
1 July 2016 10,50% 6,5%
1 November 2017 10,25% 6,25%
Until change in PFMA rate
1 October 2010 7%
1 March 2011 6,5%
1 August 2012 6%
1 February 2014 6,5%
1 August 2014 6,75%
1 August 2015 7%
1 December 2015 7,25%
1 February 2016 7,75%
1 April 2016 8%
1 August 2017 7,75%
(until change in repo rate)
Note
1. This rate also applies to refunds of tax where an appeal is upheld in court or conceded by SARS.
1126
Appendix B: Rates of tax and other information
Additional information
2017 2018
Primary rebate for natural persons ................................................................. R13 500 R13 635
Secondary rebate (65 years or older) ............................................................. R7 407 R7 479
Tertiary rebate (75 years or older) ................................................................. R2 466 R2 493
Tax threshold for individuals under 65 years of age ....................................... R75 000 R75 750
Tax threshold for individuals 65 years or older ............................................... R116 150 R117 300
Tax threshold for individuals 75 years or older ............................................... R129 850 R131 150
Travel allowance subject to PAYE .................................................................. 80% 80%
Excess of reimbursive travel allowance subject to PAYE ............................... above R3,55
Fringe benefit – first company car .................................................................. 3,5% 3,5%
Fringe benefit – second and subsequent company cars ............................... 3,5% 3,5%
Donations tax rate ........................................................................................... 20% 20%
Estate duty levied at........................................................................................ 20% 20%
Tax rates for the prior year of assessment (2017)

NATURAL PERSONS OTHER THAN COMPANIES AND TRUSTS
(BUT INCLUDING SPECIAL TRUSTS AND INSOLVENT AND DECEASED ESTATES)
Taxable income
But does Rates of tax
From not
exceed
R R R R
0 ……………. 188 000 0 + 18% of each R1
188 001 ……………. 293 600 33 840 + 26% of the amount above ......................... 188 000
701 301 206 964 + 41% of the amount above ......................... 701 300
1127
Appendix C Travel allowance
Travel allowance
The Minister of Finance has determined the rate per kilometre referred to in s 8(1)(b)(ii) and (iii) in the
Government Gazette (GN 195 Government Gazette 40660 of 3 March 2017) as follows:
SCHEDULE
1. In this Schedule, ‘value’, in relation to a motor vehicle used by the recipient of an allowance as
contemplated in subparagraphs (ii) and (iii) of section 8(1)(b) of the Income Tax Act, 1962, means
(a) where that motor vehicle (not being a motor vehicle in respect of which paragraph (b)(ii) of this
definition applies) was acquired by that recipient under a bona fide agreement of sale or ex-
change concluded by parties dealing at arm’s length, the original cost thereof to him/her, includ-
ing any value-added tax but excluding any finance charge or interest payable by him/her in
respect of the acquisition thereof; or
(b) where such motor vehicle
(i) is held by that recipient under a lease as contemplated in paragraph (b) of the definition of
“instalment credit agreement” in section 1 of the Value-Added Tax Act, 1991; or
(ii) was held by him/her under such a lease and the ownership thereof was acquired by
him/her on the termination of the lease,
the cash value thereof as contemplated in the definition of ‘cash value’ in section 1 of the Value-
Added Tax Act; or
(c) in any other case, the market value of that motor vehicle at the time when that recipient first
obtained the vehicle or the right of use thereof, plus an amount equal to value-added tax which
would have been payable in respect of the purchase of the vehicle had it been purchased by the
recipient at that time at a price equal to that market value.
2. The rate per kilometre referred to in the said subparagraphs (ii) and (iii) must, subject to the provi-
sions of paragraph 4, be determined in accordance with the scale set out in paragraph 3, and must
be the sum of
(a) the fixed cost divided by the total distance in kilometres (for both private and business purposes)
shown to have been travelled in the vehicle during the year of assessment: Provided that where
the vehicle has been used for business purposes during a period in such year which is less than
the full period of such year, the fixed cost must be an amount which bears to the fixed cost the
same ratio as the period of use for business purposes bears to 365 days;
(b) where the recipient of the allowance has borne the full cost of the fuel used in the vehicle, the fuel
cost; and
(c) where that recipient has borne the full cost of maintaining the vehicle (including the cost of re-
pairs, servicing, lubrication and tyres), the maintenance cost.
3. Cost scale
Fixed Fuel Maintenance
Where the value of the vehicle cost cost cost
R c c
Does not exceed R85 000 ......................................................... 28 492 91.2 32.9
exceeds R85 000 but does not exceed R170 000 ..................... 50 924 101.8 41.2
exceeds R170 000 but does not exceed R255 000 .................. 73 427 110.6 45.4
exceeds R255 000 but does not exceed R340 000 ................... 93 267 118.9 49.6
exceeds R595 000 ..................................................................... 154 879 150.9 84.9
1129
4. Simplified method for distances less than 12 000 kilometres. Where—

(a) the provisions of section 8 (1) (b) (iii) are applicable in respect of the recipient of an allowance or
advance;
(b) the distance travelled in the vehicle for business purposes during the year of assessment does
not exceed 12 000 kilometres, or where more than one vehicle has been used during the year of
assessment the total distance travelled in those vehicles for business purposes does not exceed
12 000 kilometres; and
(c) no other compensation in the form of a further allowance or reimbursement is payable by the
employer to that recipient,
that rate per kilometre is, at the option of the recipient, equal to 355 cents per kilometre.
5. Effective date.— The rate per kilometre determined in terms of this Schedule applies in respect of
years of assessment commencing on or after 1 March 2017.
1130
Appendix D Expectation of life and present
value tables
VALUATION OF ANNUITIES OR OF FIDUCIARY, USUFRUCTUARY OR

OTHER LIMITED INTERESTS IN PROPERTY IN THE ESTATES OF
DECEASED PERSONS — REGULATIONS UNDER THE ESTATE DUTY ACT, 1955
Table A
THE EXPECTATION OF LIFE AND THE PRESENT VALUE OF R1 PER ANNUM FOR LIFE
CAPITALISED AT 12 PER CENT OVER THE EXPECTATION OF LIFE OF MALES AND FEMALES
OF VARIOUS AGES
Expectation of life Present value of R1 per annum for life
Age Age
Male Female Male Female
0 64,74 72,36 8,327 91 8,331 05 0

1 65,37 72,74 8,328 28 8,331 14 1
2 64,50 71,87 8,327 76 8,330 91 2
3 63,57 70,93 8,327 14 8,330 64 3
4 62,63 69,97 8,326 44 8,330 33 4
5 61,69 69,02 8,325 67 8,329 99 5
6 60,74 68,06 8,324 80 8,329 61 6
7 59,78 67,09 8,323 81 8,329 18 7
8 58,81 66,11 8,322 71 8,328 69 8
9 57,83 65,14 8,321 46 8,328 15 9
10 56,85 64,15 8,320 07 8,327 53 10
11 55,86 63,16 8,318 49 8,326 84 11

12 54,87 62,18 8,316 73 8,326 08 12
13 53,90 61,19 8,314 80 8,325 22 13
14 52,93 60,21 8,312 65 8,324 27 14
15 51,98 59,23 8,310 29 8,323 20 15
16 51,04 58,26 8,307 70 8,322 03 16
17 50,12 57,29 8,304 89 8,320 71 17
18 49,21 56,33 8,301 80 8,319 26 18
19 48,31 55,37 8,298 41 8,317 64 19
20 47,42 54,41 8,294 71 8,315 84 20
21 46,53 53,45 8,290 61 8,313 83 21

22 45,65 52,50 8,286 13 8,311 61 22
23 44,77 51,54 8,281 17 8,309 12 23
24 43,88 50,58 8,275 64 8,306 33 24
25 43,00 49,63 8,269 59 8,303 26 25
26 42,10 48,67 8,262 74 8,299 81 26
27 41,20 47,71 8,255 16 8,295 95 27
28 40,30 46,76 8,246 77 8,291 71 28
29 39,39 45,81 8,237 37 8,286 97 29
30 38,48 44,86 8,226 94 8,281 70 30
31 37,57 43,91 8,215 38 8,275 83 31

32 36,66 42,96 8,202 57 8,269 30 32
33 35,75 42,02 8,188 36 8,262 10 33
34 34,84 41,07 8,172 62 8,254 00 34
35 33,94 40,13 8,155 36 8,245 09 35
36 33,05 39,19 8,136 47 8,235 17 36
37 32,16 38,26 8,115 58 8,224 26 37
38 31,28 37,32 8,092 74 8,211 99 38
39 30,41 36,40 8,067 81 8,198 66 39
40 29,54 35,48 8,040 30 8,183 86 40
41 28,69 34,57 8,010 67 8,167 62 41
42 27,85 33,67 7,978 44 8,149 83 42
continued
1131
Expectation of life Present value of R1 per annum for life

Age Age
Male Female Male Female
43 27,02 32,77 7,94344 8,130 12 43
44 26,20 31,89 7,90547 8,108 81 44
45 25,38 31,01 7,86380 8,085 27 45
46 24,58 30,14 7,81924 8,059 56 46
47 23,79 29,27 7,77109 8,031 19 47
48 23,00 28,41 7,71843 8,000 26 48
49 22,23 27,55 7,662 36 7,966 17 49
50 21,47 26,71 7,602 01 7,929 50 50
51 20,72 25,88 7,537 13 7,889 67 51

52 19,98 25,06 7,467 48 7,846 46 52
53 19,26 24,25 7,393 87 7,799 65 53
54 18,56 23,44 7,316 31 7,748 34 54
55 17,86 22,65 7,232 34 7,693 55 55
56 17,18 21,86 7,144 14 7,633 63 56
57 16,52 21,08 7,051 78 7,568 96 57
58 15,86 20,31 6,952 25 7,499 27 58
59 15,23 19,54 6,850 04 7,423 21 59
60 14,61 18,78 6,742 06 7,341 35 60
61 14,01 18,04 6,630 10 7,254 57 61

62 13,42 17,30 6,512 32 7,160 20 62
63 12,86 16,58 6,393 01 7,060 46 63
64 12,31 15,88 6,268 22 6,955 37 64
65 11,77 15,18 6,137 89 6,841 61 65
66 11,26 14,51 6,007 26 6,723 93 66
67 10,76 13,85 5,871 65 6,598 93 67
68 10,28 13,20 5,734 03 6,466 35 68
69 9,81 12,57 5,591 82 6,328 18 69
70 9,37 11,96 5,451 65 6,184 66 70
71 8,94 11,37 5,307 75 6,036 07 71

72 8,54 10,80 5,167 44 5,882 78 72
73 8,15 10,24 5,024 37 5,722 22 73
74 7,77 9,70 4,878 76 5,557 43 74
75 7,41 9,18 4,734 90 5,388 93 75
76 7,07 8,68 4,593 54 5,217 27 76
77 6,73 8,21 4,446 63 5,046 79 77
78 6,41 7,75 4,303 09 4,870 92 78
79 6,10 7,31 4,158 98 4,693 89 79
80 5,82 6,89 4,024 40 4,516 47 80
81 5,55 6,50 3,890 51 4,343 99 81

82 5,31 6,13 3,768 02 4,173 15 82
83 5,09 5,78 3,652 76 4,004 82 83
84 4,89 5,45 3,545 46 3,839 88 84
85 4,72 5,14 3,452 32 3,679 21 85
86 4,57 4,85 3,368 64 3,523 71 86
87 4,45 4,58 3,300 66 3,374 26 87
88 4,36 4,33 3,249 07 3,231 75 88
89 4,32 4,11 3,225 97 3,102 96 89
90 4,30 3,92 3,214 38 2,989 12 90
N.B.—The age is to be taken as at the next birthday after the date when the right was acquired.
Example.—Find the present value of an annuity or usufruct of R100 per annum for life of: (A) a female
who becomes entitled thereto at the age of 42 years 3 months, or (B) a male who becomes entitled
thereto at the age of 65 years 9 months.
(A) (B)
Age when acquired .................................................................... 42 years 3 months 65 years 9 months
Age next birthday ....................................................................... 43 years 66 years
Present value of R1 per annum for life ....................................... R8,130 12 R6,007 26
Therefore present value of R100 per annum for life equals ....... R813,01 R600,73
1132
Appendix D: Expectation of life and present value tables
Table B
PRESENT VALUE OF R1 PER ANNUM CAPITALISED AT 12 PER CENT OVER FIXED PERIODS
Years Amount Years Amount Years Amount Years Amount
R R R R
1 0,892 9 26 7,895 7 51 8,307 6 76 8,331 8
2 1,690 0 27 7,942 6 52 8,310 4 77 8,332 0
3 2,401 8 28 7,984 4 53 8,312 8 78 8,332 1
4 3,037 4 29 8,021 8 54 8,315 0 79 8,332 3
5 3,604 8 30 8,055 2 55 8,317 0 80 8,332 4
6 4,111 4 31 8,085 0 56 8,318 7 81 8,332 5
7 4,563 8 32 8,111 6 57 8,320 3 82 8,332 6
8 4,967 6 33 8,135 4 58 8,321 7 83 8,332 6
9 5,328 2 34 8,156 6 59 8,322 9 84 8,332 7
10 5,650 2 35 8,175 5 60 8,324 0 85 8,332 8
11 5,937 7 36 8,192 4 61 8,325 0 86 8,332 8
12 6,194 4 37 8,207 5 62 8,325 9 87 8,332 9
13 6,423 6 38 8,221 0 63 8,326 7 88 8,333 0
14 6,628 2 39 8,233 0 64 8,327 4 89 8,333 0
15 6,810 9 40 8,243 8 65 8,328 1 90 8,333 0
16 6,974 0 41 8,253 4 66 8,328 6 91 8,333 1
17 7,119 6 42 8,261 9 67 8,329 1 92 8,333 1
18 7,249 7 43 8,269 6 68 8,329 6 93 8,333 1
19 7,365 8 44 8,276 4 69 8,330 0 94 8,333 1
20 7,469 4 45 8,282 5 70 8,330 3 95 8,333 2
21 7,562 0 46 8,288 0 71 8,330 7 96 8,333 2
22 7,644 6 47 8,292 8 72 8,331 0 97 8,333 2
23 7,718 4 48 8,297 2 73 8,331 2 98 8,333 2
24 7,784 3 49 8,301 0 74 8,331 4 99 8,333 2
25 7,843 1 50 8,304 5 75 8,331 6 100 8,333 2
N.B.—Fractions of a year are to be disregarded when using this table.

Example.—Testator, who died on 1 April 2017, left to A an annuity or usufruct value R100 per annum,
to terminate when A attains majority, which will occur, say, at 30 September 2027. This period is
found to be 10 years 6 months, but is taken as 10 years.
Present value of R1 per annum for 10 years ................................................................ = R5,650 2
Therefore present value of R100 per annum for 10 years ............................................ = R565,02
1133
Appendix E Write-off periods acceptable to SARS
Binding General Ruling No 7 (Interpretation Note No 47)
Period of write-off Period of write-off

Item Item
(Number of years) (Number of years)
Adding machines ............................................ 6 Fire extinguishers (loose units) ....................... 5
Air conditioners: Fire detection systems .................................... 3
Mobile .................................................. 5 Fishing vessels ............................................... 12
Room unit............................................. 10 Fitted carpets .................................................. 6
Window type ........................................ 6 Food bins ........................................................ 4
Air conditioning assets (excluding pipes, Food-conveying systems ................................ 4
ducting and vents): Fork-lift trucks ................................................. 4
Air-handling units ................................. 20 Front-end loaders ........................................... 4
Cooling towers ..................................... 15 Furniture and fittings ....................................... 6
Condensing sets .................................. 15 Gantry cranes ................................................. 6
Chillers: Garden irrigation equipment (movable) .......... 5
Absorption type .................................... 25 Gas cutting equipment ................................... 6
Centrifugal ............................................ 20 Gas heaters and cookers ............................... 6
Aircraft: Light passenger or commercial Gearboxes ...................................................... 4
helicopters ................................................... 4 Gear shapers .................................................. 6
Arc welding equipment ................................... 6 Generators (portable) ..................................... 5
Artefacts .......................................................... 25 Generators (standby) ...................................... 15
Balers .............................................................. 6 Graders ........................................................... 4
Battery charges ............................................... 5 Grinding machines ......................................... 6
Bicycles ........................................................... 4 Guillotines ....................................................... 6
Boilers ............................................................. 4 Gymnasium equipment:
Bulldozers........................................................ 3 Cardiovascular equipment .................. 2
Bumping flaking .............................................. 4 Health testing equipment .................... 5
Carports .......................................................... 5 Other.................................................... 10
Cash registers ................................................. 5 Spinning equipment ............................ 1
Cell phone antennae ....................................... 6 Weights and strength equipment ........ 4
Cell phone masts............................................. 10 Hairdressers’ equipment ................................ 5
Cellular telephones.......................................... 2 Harvesters....................................................... 6
Cheque-writing machines ............................... 6 Heat dryers ..................................................... 6
Cinema equipment .......................................... 5 Heating equipment ......................................... 6
Cold drink dispensers ..................................... 6 Hot water systems .......................................... 5
Communication systems ................................. 5 Incubators ....................................................... 6
Compressors ................................................... 4 Ironing and pressing equipment..................... 6
Computers: Kitchen equipment.......................................... 6
Mainframe ............................................. 5 Knitting machines ........................................... 6
Personal ................................................ 3 Laboratory research equipment ..................... 5
Computer software (mainframes): Lathes ............................................................. 6
Purchased ............................................ 3 Laundromat equipment .................................. 5
Self-developed ..................................... 1 Law reports: sets (legal practitioners) ............ 5
Computer software (personal computers) ....... 2 Lift installations (goods/passengers) .............. 12
Concrete mixers (portable).............................. 4 Medical theatre equipment ............................. 6
Concrete transit mixers ................................... 3 Milling machines ............................................. 6
Containers ....................................................... 10 Mobile caravans ............................................. 5
Crop sprayers.................................................. 6 Mobile cranes ................................................. 4
Curtains ........................................................... 5 Mobile refrigeration units ................................ 4
Debarking equipment ...................................... 4 Motors ............................................................. 4
Delivery vehicles ............................................. 4 Motorcycles .................................................... 4
Demountable partitions ................................... 6 Motorised chainsaws ...................................... 4
Dental and doctors equipment ........................ 5 Motorised concrete mixers ............................. 3
Dictaphones .................................................... 3 Motor mowers ................................................. 5
Drilling equipment (water) ............................... 5 Musical instruments ........................................ 5
Drills ................................................................ 6 Navigation systems ......................................... 10
Electric saws ................................................... 6 Neon signs and advertising boards ................ 10
Electrostatic copiers ........................................ 6 Office equipment – electronic ......................... 3
Engraving equipment ...................................... 5 Office equipment – mechanical ...................... 5
Escalators ........................................................ 20 Oxygen concentrates ..................................... 3
Excavators ....................................................... 4 Ovens and heating devices ............................ 6
Fax machines .................................................. 3 Ovens for heating food ................................... 6
Fertiliser spreaders.......................................... 6 Packaging and related equipment ................. 4
Firearms .......................................................... 6 Painting (valuable) .......................................... 25
1135
Period of write-off Period of write-off

Item (Number of years) Item (Number of years)
Pallets .............................................................. 4 Spot-welding equipment ................................. 6
Passenger cars ............................................... 5 Staff training equipment .................................. 5
Patterns, tooling and dies ................................ 3 Surge bins....................................................... 4
Pellet mills........................................................ 4 Surveyors:
Perforating equipment ..................................... 6 Field equipment .................................. 5
Photocopying equipment ................................ 5 Instruments ......................................... 10
Photographic equipment ................................. 6 Tape-recorders ............................................... 5
Planers ............................................................ 6 Telephone equipment ..................................... 5
Pleasure craft, etc ........................................... 12 Television and advertising films ...................... 4
Ploughs ........................................................... 6 Television sets, video machines and
Portable safes.................................................. 25 decoders ..................................................... 6
Power tools (hand-operated) ........................... 5 Textbooks ....................................................... 3
Power supply ................................................... 5 Tractors ........................................................... 4
Public address systems .................................. 5 Trailers ............................................................ 5
Pumps ............................................................. 4 Traxcavators ................................................... 4
Race horses .................................................... 4 Trolleys ........................................................... 3
Radar systems................................................. 5 Trucks (heavy duty) ........................................ 3
Radio communication equipment.................... 5 Trucks (other).................................................. 4
Refrigerated milk tankers ................................ 4 Track-mounted cranes .................................... 4
Refrigeration equipment .................................. 6 Typewriters ..................................................... 6
Refrigerators .................................................... 6 Vending machines (including video game
Runway lights .................................................. 5 machines) .................................................... 6
Sanders ........................................................... 6 Video cassettes .............................................. 2
Scales .............................................................. 5 Warehouse racking ......................................... 10
Security systems (removable) ......................... 5 Washing machines ......................................... 5
Seed separators .............................................. 6 Water distillation and purification plant ........... 12
Sewing machines ............................................ 6 Water tankers .................................................. 4
Shakers ........................................................... 4 Water tanks ..................................................... 6
Shop fittings..................................................... 6 Weighbridges (movable parts) ....................... 10
Solar energy units............................................ 5 Wire line rods .................................................. 1
Special patterns and tooling............................ 2 Workshop equipment ...................................... 5
Spin dryers ...................................................... 6 X-ray equipment ............................................. 5
1136
Appendix F Subsistence allowance –
foreign travel
List of daily maximum amount per country which is deemed to have been expended
Maximum Maximum
deemed deemed
Country Currency Country Currency
expended expended
amount amount
Albania Euro 97 Egypt Egyptian
Algeria Euro 110 Pounds 873
Angola US $ 303 El Salvador US $ 98
Antigua and Equatorial Guinea Euro 166
Barbuda US $ 220 Eritrea US $ 109
Argentina US $ 133 Estonia Euro 92
Armenia US $ 220 Ethiopia US $ 95
Austria Euro 131 Fiji US $ 102
Australia Australian $ 230 Finland Euro 171
Azerbaijani US $ 145 France Euro 129
Bahamas US $ 191 Gabon Euro 160
Bahrain B Dinars 36 Gambia Euro 74
Bangladesh US $ 79 Georgia US $ 95
Barbados US $ 202 Germany Euro 125
Belarus Euro 62 Ghana US $ 130
Belgium Euro 146 Greece Euro 138
Belize US $ 152 Grenada US $ 151
Benin Euro 111 Guatemala US $ 114
Bolivia US $ 78 Guinea Euro 78
Bosnia- Guinea Bissau Euro 59
Herzegovina Euro 75 Guyana US $ 118
Botswana Pula 826 Haiti US $ 109
Brazil Reals 409 Honduras US $ 186
Brunei US $ 88 Hong Kong Hong Kong $ 1 395
Bulgaria Euro 91 Hungary Euro 89
Burkina Faso CFA Francs 58 790 Iceland ISK 25 466
Burundi Euro 73 India Indian Rupee 5 932
Cambodia US $ 99 Indonesia US $ 86
Cameroon Euro 120 Iran US $ 120
Canada Canadian $ 177 Iraq US $ 125
Cape Verde Ireland Euro 139
Islands Euro 65 Israel US $ 209
Central African Italy Euro 125
Republic Euro 94 Jamaica US $ 151
Chad Euro 121 Japan Yen 16 424
Chile US $ 106 Jordan US $ 201
China (People’s Kazakhstan US $ 100
Republic) US $ 127 Kenya US $ 138
Kiribati Australian $ 233
Colombia US $ 94
Kuwait (State of) Kuwaiti Dinars 51
Comoro Island Euro 122
Kyrgyzstan US $ 172
Cook Islands New Zealand $ 211
Laos US $ 92
Côte d’Ivoire Euro 119
Latvia US $ 150
Costa Rica US $ 116
Lebanon US $ 158
Croatia Euro 99 Lesotho Rand 750
Cuba US $ 114 Liberia US $ 112
Cyprus Euro 117 Libya US $ 120
Czech Republic Euro 90 Lithuania Euro 154
Democratic Macau Hong Kong $ 1 196
Republic of Macedonia Euro 100
Congo US $ 164 Madagascar Euro 58
Denmark Danish Kroner 2 328 Madeira Euro 290
Djibouti US $ 99 Malawi Malawi Kwacha 31 254
Dominican Malaysia Ringgit 382
Republic US $ 99 Maldives US $ 202
Ecuador US $ 163 Mali Euro 178
1137
Maximum Maximum
deemed deemed
Country Currency Country Currency
expended expended
amount amount
Malta Euro 132 Sierra Leone US $ 90
Marshall Islands US $ 255 Singapore Singapore $ 232
Mauritania Euro 97 Slovakia Euro 102
Mauritius US $ 114 Slovenia Euro 106
Mexico Mexican Pesos 1 313 Solomon Islands Sol Islands $ 1 107
Moldova US $ 117 South Sudan US $ 146
Mongolia US $ 69 Spain Euro 112
Montenegro Euro 94 Sri Lanka US $ 100
Morocco Dirhams 1 081 St. Kitts & Nevis US $ 227
Mozambique US $ 101 St. Lucia US $ 215
Myanmar (Burma) US $ 123 St. Vincent & The
Namibia Rand 950 Grenadines US $ 187
Nauru Australian $ 278 Sudan US $ 200
Nepal US $ 64 Suriname US $ 107
Netherlands Euro 122 Swaziland Rand 1 367
New Zealand New Zealand $ 206 Sweden Swedish Krona 1 317
Nicaragua US $ 90 Switzerland S Franc 201
Niger Euro 75 Syria US $ 185
Nigeria US $ 242 Taiwan New Taiwan $ 4 015
Niue New Zealand $ 252 Tajikistan US $ 97
Norway NOK 1 753 Tanzania US $ 129
Oman Riyals Omani 77 Thailand Thai Baht 4 956
Pakistan Pakistani Ru- Togo CFA Francs 64 214
pees 6 235 Tonga Pa’anga 251
Palau US $ 252 Trinidad and
Palestine US $ 147 Tobago US $ 213
Panama US $ 105 Tunisia Tunisian Dinar 198
Papua New Guinea Kina 285 Turkey Euro 101
Paraguay US $ 76 Turkmenistan US $ 125
Peru US $ 139 Tuvalu Australian $ 339
Philippines US $ 122 Uganda US $ 111
Poland Euro 88 Ukraine Euro 131
Portugal Euro 87 United Arab
Qatar Qatar Riyals 715 Emirates Dirhams 699
Republic of United Kingdom B Pounds 102
Congo Euro 149 Uruguay US $ 133
Reunion Euro 164 USA US $ 155
Romania Euro 83 Uzbekistan Euro 80
Russia Euro 330 Vanuatu US $ 166
Rwanda US $ 102 Venezuela US $ 294
Samoa Tala 193 Vietnam US $ 91
Sao Tome Euro 160 Yemen US $ 94
Saudi Arabia Saudi Riyal 512 Zambia US $ 119
Senegal Euro 113 Zimbabwe US $ 123
Serbia Euro 83 Other countries
Seychelles Euro 132 not listed US $ 215
1138
Table of cases
In this book, the page references given for quotations from judgments in tax cases are from the South African
Tax Cases Reports.
Paragraph of text
A
African Greyhound Racing Association (Pty) Ltd v CIR 1945 TPD 344, 13 SATC 259 ........................... 6.10.8
African Products Manufacturing Co Ltd, CIR v 1944 TDP 248, 13 SATC 164 ........................................ 12.4.1
Airworld and another, CSARS v [2008] 2 All SA 593 (SCA);
[2008] JOL 21130 (SCA); 2008 (3) SA 335 (SCA); 70 SATC 48 ........................................................... 2.4.3
Anglovaal Mining Limited v CSARS [2010] 1 All SA 187 (SCA);
[2009] JOL 24272 (SCA); 2010 (2) SA 299 (SCA); 71 SATC 293 ....................................................... 3.6.21
B
Berea West Estates (Pty) Ltd v SIR 1976 (2) SA 614 (AD);
[1976] 3 All SA 93 (A); 38 SATC 43 (A) ................................................................................................ 3.6.9
Berold, CIR v 1962 (3) SA 748 (AD); [1962] 3 All SA 454 (A); 24 SATC 729 .......................... 16.2.7, 24.6.9.1
Black, CIR v 1957 (3) SA 536 (AD); (1957) 21 SATC 226 (A) .......................................................... 3.7.2, 21.3
Boyd v CIR 1951 (3) SA 525 (AD); (1951) 17 SATC 366 (A); [1951] 3 All SA 389 (A) ................................. 4.2
BP Southern Africa (Pty) Ltd v CSARS, 69 SATC 79 ..................................................................... 6.3.5, 6.10.2
British Airways plc, C:SARS v 2005 (4) SA 231 (SCA);
[2005] JOL 14066 (SCA); 67 SATC 167 ............................................................................................ 31.12.6
British United Shoe Machinery (SA) (Pty) Ltd, COT v 1964 (3) SA 193 (FC);
26 SATC 163 ............................................................................................................................. 3.7.2, 21.3.7
Brookes Lemos Ltd v CIR 1947 (2) SA 976 (AD); 14 SATC 295 ............................................................... 3.4.1
Brummeria Renaissance (Pty) Ltd, CSARS v [2007] 4 All SA 1338 (SCA);
2007 (6) SA 601 (SCA); 69 SATC 205 .............................................................. 3.3, 16.2.7, 19.3.1, 24.6.9.1
Burgess v CIR 1993 (4) SA 161 (AD); [1993] 2 All SA 496 (A);
[1993] 2 All SA 511 (A); 55 SATC 185 ..................................................................................................... 6.2
Butcher Bros (Pty) Ltd, CIR v 1945 AD 301; 13 SATC 21 ........................................................ 3.3, 4.9, 19.3.1
C
Cadac Engineering Works (Pty) Ltd, SIR v 1965 (2) SA 511 (AD);
[1965] 2 All SA 547 (A); 27 SATC 61 ........................................................................................ 6.3.5, 6.10.9
Caltex Oil (SA) Ltd v SIR 1975 (1) SA 665 (AD); [1975] 2 All SA 222 (A); 37 SATC 1 .............................. 6.3.2
Canada Trustco Mortgage Co v Canada (2005 SSC54) ............................................................................ 32.2
Cape Brandy Syndicate v IRC (1921) 1 KB 64 ......................................................................................... 2.4.3
Cape Consumers (Pty) Ltd, CIR v 1999 (4) SA 1213 (C), 61 SATC 91 ............................................ 3.4.7, 32.7
Cape Lime Company Ltd, SIR v 1967 (4) SA 226 (AD); 29 SATC 131 ................................................... 13.2.3
Capstone 556 (Pty) Ltd, CSARS v (20844/2014) [2016] ZASCA 2 (9 February 2016) ........................... 3.6.21
CIR v Berold 1962 (3) SA 748 (A) .......................................................................................................... 16.2.6.
Cohen v CIR 1946 AD 174; 13 SATC 362 ................................................................................................. 3.2.1
Commissioner of Customs and Excise v Randles, Brothers and Hudson Limited
1941 AD 369; 33 SATC 48 (A) ............................................................................................................... 32.7
Concentra (Pty) Ltd v CIR 1942 CPD 509; 12 SATC 95 ............................................................................ 6.3.3
Conshu (Pty) Ltd v CIR 1994 (4) SA 603 (AD); [1994] 2 All SA 501 (A); 57 SATC 1 .............................. 32.5.7
Crown Mines Ltd, CIR v 1922 AD 91; 32 SATC 190 .................................................................................... 4.4
CSARS v Founders Hill (509/10) [2011] 3 All SA 243 (SCA); [2011] JOL 27200 (SCA);
2011 (5) SA 112 (SCA) ................................................................................................................ 3.6.6, 3.6.9
CSARS v NWK 2011 (2) SA 67 (SCA); [2010] JOL 26534 (SCA);
[2011] 2 All SA 347 (SCA); 73 SATC 55 ................................................................................................. 32.7
CSARS v Tradehold Ltd (132/11) [2012] ZASCA 61 (SCA) .................................................................... 17.7.3
D
De Beers Holdings (Pty) Ltd v CIR 1986 (1) SA 8 (AD);
[1986] 1 All SA 310 (A); 47 SATC 229 (A) .................................................................................... 6.2, 31.9.1
1139
Paragraph of text
Delagoa Bay Cigarette Co, CIR v 1918 TPD 391, 32 SATC 47 ................................................................. 3.4.1
De Villiers v CIR 1929 AD 227 ...................................................................................................................... 4.4
Drakensberg Garden Hotel (Pty) Ltd, CIR v 1960 (2) SA 475 (AD);
[1960] 2 All SA 283 (A); 23 SATC 251 ............................................................................................. 16.2.3.3
Duke of Westminster v IRC 51 TLR 467, 19 TC 490 ................................................................................... 32.1
E
Edgars Stores Ltd, CIR v (1986 (4) SA 312 (T); (1986) 48 SATC 89 (T) .................................................. 6.3.2
Edgars Stores Ltd v CIR 1988 (3) SA 876 (AD); 50 SATC 81 ................................................................... 6.3.2
Elandsheuwel Farming (Edms) Bpk v SBI 1978 (1) SA 101 (AD); [1978] 1 All SA 391;
39 SATC 163 ................................................................................................................................. 3.6, 3.6.2
Epstein, CIR v 1954 (3) SA 689 (AD); [1954] 4 All SA 7 (A); 19 SATC 221 .................................. 3.7.2, 21.3.8
Erf 3183/1 Ladysmith (Pty) Ltd and Another v CIR 1996 (3) SA 942 (SCA);
[1997] JOL 213 (A); 58 SATC 229 ......................................................................................................... 32.7
Ernst Bester Trust v CSARS, 70 SATC 151 ................................................................................................ 14.3
Essential Sterolin Products (Pty) Ltd v CIR 1993 (4) SA 859 (AD); [1993] 2 All SA 632 (A);
[1993] 2 All SA 644 (A) .......................................................................................................................... 3.7.2
Estate G v COT 1964 (2) SA 701 (SR); [1964] 3 All SA 182 (SR);
1964 RLR 134 (SR); 26 SATC 168 ........................................................................................................... 6.2
Eveready (Pty) Ltd v CSARS 74 SATC 185 (SCA) ..................................................................................... 14.5
F
Flemming v KBI 1994, 57 SATC 73 (A) ................................................................................................... 12.4.1
Financier v COT 1950 (3) SA 293 (SR) ................................................................................................... 16.2.3
G
G Brollo Properties (Pty) Ltd, CIR v 56 SATC 47, 1994 (2) SA 147 (A) ............................................... 16.2.3.5
Geldenhuys v CIR 1947 (3) SA 256 (C); 14 SATC 419 .................................................................... 3.4.1, 17.9
General Motors SA (Pty) Ltd, CIR v 1982 (1) SA 196 (T); 43 SATC 249 ............................................... 6.10.11
Genn & Co (Pty) Ltd, CIR v 1955 (3) SA 293 (AD);
[1955] 3 All SA 382 (A); 20 SATC 113 (A) .............................................................................................. 16.2
George Forest Timber Co Ltd, CIR v 1924 AD 516; 1 SATC 20 ............................................................... 3.6.1
Glen Anil Development Corporation Ltd v SIR 1975 (4) SA 715 (A);
[1975] 4 All SA 620 (A); 37 SATC 319 ...................................................................................... 2.4.3, 32.5.5
Golden Dumps (Pty) Ltd, CIR v 1993 (4) SA 110 (AD); (1993) 55 SATC 198 (A);
[1993] 2 All SA 496 (A); [1993] 2 All SA 504 (A); 55 SATC 198 ............................................................ 6.3.2
Greases (SA) Ltd v CIR 1951 (3) SA 518 (AD) .......................................................................................... 3.4.1
Grundlingh v C:SARS (FB 2009) .............................................................................................................. 18.3
Guardian Assurance Holdings (SA) Ltd, SIR v 1976 (A) SA 522 (AD);
[1976] 4 All SA 419 (A); 38 SATC 111 ................................................................................................. 6.3.5
G Brollo Properties (Pty) Ltd, CIR v 56 SATC 47, 1994 (2) SA 147 (A) ............................................... 16.2.3.5
H
Hickson, CIR v 1960 (1) SA 746 (AD); [1960] 1 All SA 544 (A); 23 SATC 243 (A) .......................... 6.5.1, 6.5.2
Hogan, KBI en ’n Ander v, 1993 (4) SA 150 (AD); [1993] 2 All SA 469 (A); 55 SATC 329 .......................... 4.2
J
Joffe & Co (Pty) Ltd v CIR 1946 AD 157; 13 SATC 354 ..................................................... 6.3.1, 6.10.3, 13.11
John Bell & Co (Pty) Ltd v SIR 1976 (4) SA 415 (AD);
[1976] 4 All SA 398 (A); 38 SATC 87 ............................................................................................. 3.6, 3.6.6
Johnstone & Co Ltd, WF v CIR 1951 (2) SA 283 (AD);
[1951] 2 All SA 415 (A); 17 SATC 235 ........................................................................................... 6.3.4, 6.8
K
Kempton Furnishers (Pty) Ltd, SIR v 1974 (3) SA 36 (AD);
[1974] 3 All SA 105 (A); 36 SATC 67 ..................................................................................................... 12.5
Kirsch v CIR 1946 WLD 261; 14 SATC 72 ............................................................................................... 21.3.6
Kirsch, SIR v 1978 (3) SA 93 (T); [1978] 3 All SA 308 (T); 40 SATC 95 (T) ................................... 3.7.2, 21.3.6
1140
Table of cases
Paragraph of text
Kluh Investments (Pty) Ltd v CSARS 77 SATC 23 .................................................................................... 22.16
Kotze, KBI v 1992 (1) SA 825 (T) ; 54 SATC 149 ....................................................................................... 4.12
Kotze, CSARS v 2000 (C) ; 64 SATC 447 ..................................................................................................... 4.4
Kuttel, CIR v 1992 (3) SA 242 (AD); 54 SATC 298 .................................................................................... 3.2.1
L
Labat, CSARS v, (669/10) (2011) ZASCA 157; 72 SATC 75 ............................................ 6.3.1, 6.3.2, 20.2.1.1
Lategan WH v CIR 1926 CPD 203; 2 SATC 16 ............................................................. 3.3, 3.4.2, 17.9, 19.3.1
Levene v IRC [1928] AC 217; 13 TC 486 .................................................................................................. 3.2.1
Lever Bros & Unilever Ltd, CIR v 1946 AD 441; 14 SATC 1 ............................................................ 3.7.2, 21.3
Levy, COT v 1952 (2) SA 413 (AD); [1952] 2 All SA 371 (A);
18 SATC 127 (A); 18 SATC 127 ..................................................................................................... 3.6, 3.6.7
Liquidator, Rhodesia Metals Ltd v COT 1938 AD 282; 9 SATC 363 ................................................ 3.7.2, 20.3
Lockie Bros Ltd v CIR 1922 TPD 42; 32 SATC 150 ............................................................................... 6.10.10
M
Master Currency v CSARS 155/2012 [2013] ZASCA 17 .................................................................... 31.10.2.3
Mobile Telephone Networks Holdings (Pty) Ltd, CSARS v, [2014] 966/12 (SCA) .................................... 6.3.4
Modderfontein Deep Levels Ltd v Feinstein 1920 TPD 288 ......................................................................... 6.2
Mooi v SIR 1972 (1) SA 675 (AD); [1972] 2 All SA 57 (A); 34 SATC 1 ...................................................... 3.4.2
Morrison v CIR 1950 (2) SA 449 (AD); [1950] 2 All SA 509 (A); 16 SATC 377 ....................................... 3.6.15
MP Finance Group CC (in liquidation) v CSARS, 2007 (5) SA 521 (SCA); 69 SATC 141 ......................... 3.4.1
N
Nasionale Pers Bpk v KBI 1986 (3) SA 549 (AD); [1986] 2 All SA 397 (A); 48 SATC 55 .......................... 6.3.2
Nussbaum, CIR v 1996 (4) SA 1156 (A), 58 SATC 283 ......................................................... 3.6, 3.6.8, 3.6.21
Natal Estates Ltd v SIR 1975 (4) SA 177 (A);
[1975] 4 All SA 375 (A); 37 SATC 193 ....................................................................... 3.6, 3.6.6, 3.6.9, 6.3.2
Natal Laeveld Boerdery BK v KBI 60 SATC 81, 1997 (SCA) .............................................................. 16.2.3.5
Nel, CIR v [1997] 4 All SA 310 (T); [1998] JOL 1481 (T); 59 SATC 349 ................................ 3.6, 3.6.5, 3.6.19
Nell, CIR v 24 SATC 261, 1961 (3) SA 774 (A) .............................................................................. 21.3, 21.3.8
Nemojim (Pty) Ltd, CIR v 1983 (4) SA 935 (AD);
[1983] 2 All SA 485 (A); 45 SATC 241 ............................................................................. 6.3.4, 6.5.6, 14.11
Newfield, COT v, 1970 RAD ....................................................................................................................... 18.6
New State Areas Ltd v CIR 1946 AD 610; 14 SATC 155 ........................................................................... 6.3.5
New Urban Properties Ltd v SIR 1966 (1) SA 215 (A); 27 SATC 175 ..................................................... 32.5.3
O
Oosthuizen v Standard Credit Corporation Limited 1993 (3) SA 891 (A); 55 SATC 338 .......................... 6.5.3
Overseas Trust Corporation Ltd v CIR 1926 AD 444; 2 SATC 71 (A) ........................................... 3.7.2, 21.3.8
P
Partington v The Attorney General (1869) 21 LT 370 ................................................................................ 2.4.3
People’s Stores (Walvis Bay) (Pty) Ltd, CIR v 1990 (2) SA 353 (A); 52 SATC 9 ............................. 3.4.2, 3.4.3
Pick ’n Pay Employee Share Purchase Trust, CIR v 1992 (4) SA 39 (AD);
[1992] 2 All SA 245 (A); 54 SATC 271 ................................................................... 3.6, 3.6.3, 3.6.21, 16.2.7
Pick ’n Pay Wholesalers (Pty) Ltd, CIR v 1987 (3) SA 453 (AD);
[1987] 4 All SA 432 (A); 49 SATC 132 ................................................................................................ 6.10.1
Pinestone Properties CC, CSARS v 2002 (4) SA 202 (N); 63 SATC 421 ................................................... 12.4
Plate Glass & Shatterprufe Industries (Finance Co) (Pty) Ltd v SIR
1979 (3) SA 1124 (T); 41 SATC 103 .................................................................................................. 6.10.11
Port Elizabeth Electric Tramway Co Ltd v CIR 1936 CPD 241;
8 SATC 13 ...................................................................................................... 6.3, 6.3.1, 6.3.2, 6.3.4, 6.10.8
Processing Enterprises (Pvt) Ltd, COT v 1975 (2) SA 213 (RA); 37 SATC 109 ...................................... 13.2.3
Professional Suites Ltd v COT (High Court Northern Rhodesia) (December 1960)
24 SATC 573 .......................................................................................................................................... 4.11
Provider v COT 1950 (4) SA 289 (SR); 17 SATC 40 .................................................................................. 6.3.4
Pyott Ltd v CIR 1945 AD 128, 13 SATC 121 (A) ................................................................................. 3.4.1, 3.6
1141
Paragraph of text
R
Rand Mines (Mining & Services) Ltd v CIR 1997 (1) SA 279 (SCA);
[1997] 1 All SA 279 (A); [1997] JOL 562 (A); 59 SATC 85 .................................................................... 6.3.5
Rhodesia Railways Ltd v Collector of Income Tax, Bechuanaland
[1933] AC 368; 6 SATC 225 ................................................................................................................ 12.4.1
Richmond Estates (Pty) Ltd, CIR v 1956 (1) SA 602 (AD);
[1956] 1 All SA 449 (A); 20 SATC 355 ........................................................................................... 3.6, 3.6.5
Ridgeway Hotel Ltd, COT v (Federal Supreme Court) (November 1961) 24 SATC 616 ........................... 4.11
Robin Consolidated Industries Ltd v CIR [1997] (2) All SA 195 (A); 59 SATC 199 ........................ 6.2, 12.12.2
Rosen, SIR v 1971 (1) SA 172 (AD); [1971] 1 All SA 180 (A); 32 SATC 249 ............................................ 24.14
RTCC v CSARS (VAT 1345) [2016] ZATC 5 ......................................................................................... 31.21.3
S
SA Bazaars (Pty) Ltd v CIR 1952 (4) SA 505 (A); [1952] 4 All SA 337 (A);
18 SATC 240 ........................................................................................................... 12.12.1, 12.12.2, 32.5.3
Safranmark (Pty) Ltd, SIR v 1982 (1) SA 113 (A); [1982] 3 All SA 212 (A); 43 SATC 235 ...................... 13.2.3
Scribante Construction (Pty) Ltd, C:CSARS v 2001(2) SA 601 (E); 62 SATC 443 ..................... 6.5.7, 16.2.3.5
Shapiro v CIR 4 SATC 29, 1928 NLR 436 ............................................................................................ 16.2.3.3
Shein, COT (SR) v 22 SATC 12, 1958 (3) SA 14 (FC) ............................................................................ 21.3.8
Simpson, CIR v 1949 (4) SA 678 (AD); [1949] 4 All SA 460 (A); 16 SATC 268 .................. 2.4.1, 7.5.3, 24.6.7
SIR v Smant 1973 (1) SA 754 AD .............................................................................................................. 3.4.7
Smith v SIR 1968 (2) SA 480 (AD); [1968] 2 All SA 503 (A); 30 SATC 35 (A) ......................................... 6.10.4
Somers Vine, SIR v 1968 (2) SA 138 (AD); [1968] 2 All SA 31 (A); 29 SATC 179 ........................................ 4.6
South African Custodial Services (Pty) Ltd,
Commissioner for SARS v [2011] ZASCA 233 ................................................................................ 16.2.1.2
South Atlantic Jazz Festival (Pty) Ltd v CSARS [2015] ZAWCHC 8 ........................................... 31.15.1, 31.18
Standard Bank of SA Ltd, CIR v 1985 (4) SA 428 (AD);
[1985] 2 All SA 512 (A); 47 SATC 179 ...................................................................................... 6.5.6, 16.2.3
Stellenbosch Farmers’ Winery v CSARS, (511/11 and 504/11)
[2012] ZASCZ 72 .................................................................................................... 3.6.10, 18.11, 31.10.2.3
Stephan v CIR 1919 WLD 1; 32 SATC 54 ........................................................................................ 3.6.11, 6.2
Stevens v CSARS 2006 SCA; 69 SATC 1 ......................................................................................... 4.4, 19.3.1
Stone v SIR 1974 (3) SA 584 (AD); [1974] 4 All SA 38 (A); 36 SATC 117 ............................................. 6.10.11
Stott v CIR 1928 AD 252; 3 SATC 253 (A) .......................................................................................... 3.6, 3.6.4
Strong and Co of Romsey Ltd v Woodifield (Surveyor of Taxes)
[1906] AC 448, 5 TC 215 .................................................................................................................... 12.4.2
Sub-Nigel Ltd v CIR 1948 (4) SA 580 (AD); [1948] 4 All SA 352 (A); 15 SATC 381 ................................. 6.3.4
T
Taeuber and Corssen (Pty) Ltd v SIR 1975 (3) SA 649 (A);
[1975] 3 All SA 489 (A); 37 SATC 129 ................................................................................................ 3.6.20
Ticktin Timbers CC v CIR 61 SATC 399 [1999] 4 All SA 192 (A) ........................................................ 16.2.3.5
Transvaal Associated Hide and Skin Merchants v COT (Botswana)
1967 (BCA); 29 SATC 97 .......................................................................................................... 3.7.2, 21.3.8
Tuck v CIR 1988 (3) SA 819 (AD); [1988] 2 All SA 453 (A); 50 SATC 98 ..................................................... 3.6
Turnbull v CIR 1953 (2) SA 573 (AD); [1953] 2 All SA 413 (A); 18 SATC 336 ........................................ 13.7.1
V
Van Der Merwe v SBI 1977 (1) SA 462 (AD); [1977] 1 All SA 591 (A) ..................................................... 3.4.7
Visser, CIR v 1937 TPD 77; 8 SATC 271 ............................................................................................ 3.6, 3.6.1
1142
Table of cases
Paragraph of text
W
Warner Lambert SA Pty (Ltd) v CSARS, 65 SATC 346 .............................................................................. 6.5.7
Watermeyer, SIR v 1965 (4) SA 431 (AD); [1965] 4 All SA 359 (A); 27 SATC 117 ...................................... 4.2
Witwatersrand Association of Racing Clubs, CIR v 1960 (3) SA 291 (AD);
23 SATC 380 .................................................................................................................... 3.4.2, 3.4.7, 18.11
WJ Fourie Beleggings v Commissioner for South African Revenue Services
71 SATC 125 ..................................................................................................................... 3.6, 3.6.10, 18.11
Woulidge, CSARS v 2002 (2) SA 199 (A); 63 SATC 483 .......................................................... 16.2.7, 24.6.9.1
Z
Zamoyski, CIR v 1985 (3) SA 145 (C); 47 SATC 50 ................................................................................... 22.7
1143
Special court cases
Paragraph in text Paragraph in text

ITC 43 (1925) 2 SATC 115 ........................... 3.6.11 ITC 1006 (1962) 25 SATC 248 ..................... 13.2.3
ITC 77 (1927) 3 SATC 72 ................... 3.7.2, 21.3.6 ITC 1036 (1963) 26 SATC 84 ......................... 6.3.5
ITC 140 (1929) 4 SATC 215 ......................... 6.10.7 ITC 1073 (1965) 27 SATC 199 ..................... 6.10.7
ITC 162 (1930) 5 SATC 76 ........................... 12.4.2 ITC 1123 (1968) 31 SATC 48 ....................... 32.5.4
ITC 163 (1930) 5 SATC 77 ........................... 12.4.2 ITC 1154 (1970) 33 SATC 159 ........................ 12.3
ITC 181 (1930) 5 SATC 258 ............................ 12.5 ITC 1241 (1975) 37 SATC 300 ........................ 12.3
ITC 214 (1931) 6 SATC 67 ........................... 3.6.15 ITC 1264 (1977) 39 SATC 133 ..................... 12.4.1
ITC 238 (1932) 6 SATC 353 ......................... 12.4.1 ITC 1275 (1978) 40 SATC 197 .......................... 6.2
ITC 243 (1932) 6 SATC 370 ......................... 12.4.2 ITC 1310 (1979) 42 SATC 177 ........................ 12.3
ITC 249 (1932) 7 SATC 44 ......................... 6.10.11 ITC 1319 (1980) 42 SATC 263 ........................ 22.3
ITC 265 (1932) 7 SATC 149 ........................... 3.4.7 ITC 1338 (1981) 43 SATC 171 .......................... 4.5
ITC 469 (1940) 11 SATC 261 ....................... 6.10.1 ITC 1347 (1981) 44 SATC 33 ....................... 32.5.6
ITC 491 (1941) 12 SATC 77 ......................... 12.4.1 ITC 1365 (1982) 45 SATC 27 ....................... 6.10.2
ITC 561 (1944) 13 SATC 313 ....................... 12.4.2 ITC 1378 (1983) 45 SATC 230 ....................... 3.4.7
ITC 575 (1944) 13 SATC 476 ............................ 6.8 ITC 1388 (1983) 46 SATC 126 ..................... 32.5.1
ITC 586 (1945) 14 SATC 123 .......................... 22.3 ITC 1439 (1987) 50 SATC 178 .......................... 4.4
ITC 618 (1946) 14 SATC 480 ....................... 6.10.5 ITC 1433 (1985) 50 SATC 40 ....................... 6.10.4
ITC 641 (1947) 15 SATC 233 ....................... 3.6.16 ITC 1490 (1990) 53 SATC 108 ..................... 6.10.6
ITC 643 (1947) 15 SATC 243 ....................... 12.4.2 ITC 1518 (1989) 54 SATC 113 .......................... 6.8
ITC 678 (1949) 16 SATC 245 .................... 16.2.3.5 ITC 1589 (1993) 55 SATC 153 ....................... 6.3.4
ITC 761 (1952) 19 SATC 103 ............................ 4.2 ITC 1596 (1995) 57 SATC 341 ................... 31.21.3
ITC 772 (1953) 19 SATC 301 ....................... 3.6.20 ITC 1598 (1995) 58 SATC 35 .......................... 12.3
ITC 792 (1954) 20 SATC 98 .............................. 6.8 ITC 1601 (1995) 58 SATC 131 ...................... 12.11
ITC 826 (1956) 21 SATC 189 ......................... 3.7.2 ITC 1693 (1999) 62 SATC 518 ................... 31.21.3
ITC 915 (1960) 24 SATC 218 ....................... 12.4.1 ITC 1783 (2004) 66 SATC 373 ....................... 6.3.2
ITC 983 (1961) 25 SATC 55 ......................... 32.5.2 ITC 1801 (2005) 68 SATC 57 ......................... 6.3.2
ITC 989 (1961) 25 SATC 122 ....................... 32.5.2 ITC 1873 (2014) 77 SATC 93 .......................... 22.5
1145
Table of provisions
This table gives the paragraph numbers of the text in which the listed provisions of the Income Tax Act
58 of 1962, the Estate Duty Act 45 of 1955, the Value-Added Tax Act 89 of 1991 and the Tax Administra-
tion Act 28 of 2011 are primarily dealt with.
Provision Paragraph in text Provision Paragraph in text

Income Tax Act 58 of 1962 ‘special trust’ .............................. 2.5.2, 24.3.2, 26.6
‘average exchange rate’ ............................... 15.2.1 ‘spot rate’ ...................................................... 15.2.1
‘company’ ..................................................... 19.2.1 ‘tax’....................................................... 2.1, 2.2, 2.5
‘connected person’ ....................................... 13.2.1 ‘taxable income’ .............................................. 2.5.3
‘contributed tax capital’ ................................ 19.4.1 ‘trade’ ................................................................. 6.2
‘controlled foreign company’ ........................... 21.7 ‘trading stock’ ...................................... 12.4.1, 14.1
‘depreciable asset’ .............. 13.2.4, 13.10.3, 13.11 ‘trust’ ................................................................ 24.1
‘dividend’ ...................................................... 19.3.1 ‘trustee’ ............................................................ 24.1
‘domestic treasury management ‘year of assessment’ ............................. 2.5.3, 2.5.2
company’ ................................................... 15.2.2 1(1)........................................................ 2.5.3, 2.5.2
‘equity share’ ....................................... 16.3, 20.2.1 1(2).................................................................. 2.2.3
‘exchange difference’ ...................................... 15.3 2(1)..................................................................... 2.3
‘foreign company’ ....................................... 19.5.2 3(4)(b) ................................................ 12.8.1, 12.10
‘foreign dividend’ ......................................... 21.3.1 3(4)e............................................................ 10.11.6
‘foreign return of capital’ .............. 17.10.2, 17.11.1 5 ....................................................... 22.16.1, 22.17
‘functional currency’ ..................................... 15.2.2 5(1).................................................................. 2.5.1
‘gross income’ ......................................... 2.5.3, 3.1 5(2).................................................... 2.5.2, 22.16.1
(a) ................................................. 4.2, 10.2, 25.4.4 5(9)...................................................... 9.5.1, 22.9.1
(b) ...................................................................... 4.3 5(10) .................... 9.5, 22.9, 22.9.1, 22.16.1, 22.17
(c) ............................................. 4.4, 4.12, 8.1, 10.2
6 ...................................... 2.5.1, 24.3, 25.4, 25.4.5
(cA) ............................................... 4.5, 10.2, 12.2.1
6(1)........................................................... 7.2, 9.2.1
(cB) ............................................... 4.5, 10.2, 12.2.1
6(2) ............................. 2.5.2, 7.2, 7.2.1, 9.2.1, 10.5
(d) ................................... 4.6, 9.1, 9.2.1, 10.2, 18.6
6(2)(b) ................................. 7.2.1, 9.2.1, 10.5, 25.3
(e) ...................................................... 4.7, 9.3, 10.2
(eA) .............................................. 4.7, 9.3.3.1, 10.2 6(2)(c) ................................. 7.2.1, 9.2.1, 10.5, 25.3
(f) .................................................... 4.8, 9.2.2, 10.2 6(4)................................. 7.2.1, 25.2.1, 25.2.3, 25.3
(g) .............................................. 4.9, 13.7.1, 13.7.3 6A .................... 7.2, 7.2.2, 9.2.1, 10.5, 25.3, 25.4.5
(gA) .................................................................. 4.10 6B ................. 7.2, 7.2.2, 9.2.1, 10.5, 12.2.8, 25.4.5
(h) ............................................ 4.11, 13.7.2, 13.7.3 6quat ..................................................... 7.2, 21.6.3
(i) .............................................. 4.12, 8.1, 8.4, 10.2 6quin ......................................................... 21.6.3.2
(jA) .......................................................... 4.13, 14.6 7 ............................... 2.4.1, 7.5, 10.8.3, 24.5, 24.6
(k) ........................................................ 4.14, 19.3.2 7(1) ...................................................... 24.5, 24.6.4
(l) ..................................................................... 4.15 7(2) .......... 7.5, 7.5.1, 10.5, 10.11.2, 17.10.4,24.6.2
(lA) ................................................................... 4.16 7(2A) ........................................................ 7.5, 7.5.2
(lC) ................................................................... 4.17 7(2B) ............................................................... 7.5.4
(m) ................................................................... 4.18 7(2C) ............................................................... 7.5.2
(n) ................................................. 4.1, 4.19, 13.2.5 7(3) .......................................... 7.7, 17.10.4, 24.6.3
‘group of companies’ .................................... 20.4.1 7(4) .......................................... 7.7, 17.10.4, 24.6.3
‘headquarter company’ .................. 17.10.2, 21.9.1 7(5) ............................................................... 24.6.4
‘identical security’ ........................................... 14.9 7(6) ................................................. 17.10.4, 24.6.5
‘identical shares’ .............................................. 14.9 7(7) ................................................. 17.10.4, 24.6.6
‘income’ .......................................................... 2.5.3 7(8) ................................................. 17.10.4, 24.6.7
‘low-cost residential units’ .... 13.4.2, 13.4.3, 13.4.4 7(9) ............................................................... 24.6.1
‘pension fund’ ........................... 7.4.1, 10.1, 12.2.2 7(10).............................................................. 24.6.1
‘pension preservation fund’ ............................. 10.1 7(11)......................................... 4.3, 7.6, 9.3.2, 10.2
‘person’ ...................................... 2.5.1, 25.2.2, 25.4 7A....................................................................... 7.8
‘provident fund’ .......................... 7.4.1, 10.1, 12.2.2 7B............................................. 10.2.2, 10.5, 12.2.7
‘provident preservation fund’ ........................... 10.1 7C .......................................... 16.2.7,24.6.9.2, 26.6
‘relative’ ........................................................ 13.2.1 7D ............................... 8.4.1116.2.6, 24.6.9.1, 26.6
‘representative taxpayer’ ............... 24.5, 25.2, 25.3 7E .................................................................... 3.4.8
‘resident’ ................................................... 3.2, 21.2 8 ................................................................ 4.4, 10.2
‘residential units’ ........................................... 13.4.3 8(1)................................... 2.5.3, 4.4, 8.2, 8.3, 18.6,
‘retirement annuity fund’ ............ 7.4.1, 10.1, 12.2.2 18.7.1, 31.12.4.1
‘return of capital’ ............................. 17.11.1, 19.4.2 8(1)(a) ............................................... 2.5.3, 8.1, 8.2
‘severance benefit’ .................................. 4.6, 9.2.1 8(1)(b) ............................................................. 8.3.1
‘share’ .................................................. 16.3, 20.2.1 8(1)(c) ............................................................. 8.3.2
1147

‘year of assessment’ – continued ‘year of assessment’ – continued
8(1)(d) ............................................................. 8.3.3 10(1)(k) ................................. 4.14, 5.3, 8.7.3, 10.2,
8(4) ................................................ 4.1, 4.19, 13.10 14.11, 19.3.2, 24.4
8(4)(a) ...................... 4.13, 6.5.3, 7.1, 12.2.2, 12.4, 10(1)(l) .......................................................... 5.10.1
12.5, 12.8.2, 13.1, 13.2.5, 13.3.1, 10(1)(lA) ......................................... 5.10.2, 21.5.2.1
13.4.1, 13.5.2, 13.6.1, 13.7.1, 10(1)(mB) ........................................................ 5.4.2
13.7.2, 13.10.1, 13.10.7, 25.3 10(1)(nA) ......................................... 5.4.3, 8.1, 10.2
8(4)(b) ........................................................ 13.10.1 10(1)(nB) ......................................... 5.4.4, 8.1, 10.2
8(4)(e) .................................... 13.1, 13.6.1, 13.10.3 10(1)(nC).................................. 5.4.5, 8.1, 8.6, 10.2
8(4)(eA)–(eE) ..................................... 13.1, 13.10.3 10(1)(nD).................................. 5.4.7, 8.1, 8.7, 10.2
8(4)(k) ................................................ 13.1, 13.10.2 10(1)(nE) ......................................... 5.4.6, 8.1, 10.2
8(4)(l) .................................. 13.1, 13.10.4, 16.2.1.5 10(1)(o) ........................... 5.4.8, 5.4.9, 8.1, 21.6.2.2
8(4)(n) .................................... 13.1, 13.9.2, 13.10.5 10(1)(o)(iA)...................................................... 5.4.8
8(4A) .................................... 13.3.1, 13.3.3, 13.3.5, 10(1)(p) .................................................... 5.6.3, 8.1
13.4.1, 13.4.3, 13.4.5, 13.4.7, 10(1)(q) . ..................................................... 4.4, 5.5
13.6.2, 13.7.6, 13.9.5 10(1)(qB)......................................................... 5.5.1
8(5) ......................................... 13.1, 13.10, 13.10.6 10(1)(t) ............................................................ 5.6.6
8A .............................. 8.1, 8.5, 10.2, 25.2.1, 25.3.1 10(1)(u) ................................. 4.3, 5.11.1, 7.6, 9.3.2
8B .................................. 4.4, 8.1, 8.6, 10.2, 12.2.4, 10(1)(y) ........................................................... 5.8.3
14.10, 25.2.1, 25.3.1, 31.12.4.1 10(1)(yA) ....................................................... 6.5.13
8C .......................... 4.4, 4.19, 8.1, 8.6, 10.2, 14.10, 10(1)(zE) ......................................................... 5.6.6
25.2.1, 25.3.1, 26.5, 31.12.4.1 10(1)(zJ)................................................. 5.8.1, 23.9
8E .................................................. 12.8.1, 16.4.1.1 10(1)(zK) .................................... 5.8.2, 19.5.4, 23.9
8EA ................................................ 12.8.1, 16.4.1.2 10(2)(b) ............................................................ 24.4
8F ............................................................... 16.4.2.1 10A................................................................ 10.5.2
8FA ............................................................ 16.4.2.2 10B........................ 4.14, 5.3.8, 14.4, 21.6.2.1, 24.4
8G ................................................................. 19.4.1 10C ................................................... 5.2.5, 9.1, 9.4
9 ............................................................ 2.2.3, 21.3 11 ................................................ 10.5.2, 12.1-12.7
9(2)(a)–(l) .................................................. 9.3, 10.3 11(a).......................... 6.4, 6.5.7, 12.1, 12.2.6, 12.3,
9(4) .................................................................. 21.3 13.1, 14.1, 14.4, 14.11, 25.2.2
9A ....................................................... 3.4.6, 21.6.1 11(c)........................... 6.4, 6.5.10, 6.5.12, 7.4, 12.3
9C .................................. 12.8.2, 14.1, 14.10, 14.11 11(cA) ............................................... 6.5.11, 12.2.1
9D .................................................................... 21.7 11(d) .......................... 6.4, 7.4, 12.4, 12.4.1, 12.4.2
9H ..................................... 8.6, 8.7.4, 14.10, 17.7.3 11(e).................... 6.5.12, 7.4, 13.1, 13.3.1, 13.12.1
9HA ................................ 8.6, 17.11.4, 25.3, 25.4.5 11(f)............................................... 4.9, 13.1, 13.7.1
9I ................................................................... 21.9.1 11(g) ............................... 4.11, 13.1, 13.4.1, 13.7.2
10 .................................................................... 2.2.3 11(gB) .................................................. 13.1, 13.8.1
10(1)(a) ........................................................... 5.6.1 11(gC) .................................................. 13.1, 13.8.1
10(1)(bA) ........................................................ 5.6.1 11(gD) .................................................. 13.1, 13.9.1
10(1)(bB) ........................................................ 5.6.6 11(h).............................................. 4.9, 13.1, 13.7.3
10(1)(c) ........................................ 5.6.2, 5.6.4, 10.3 11(i) ....................... 6.5.10, 6.5.12, 7.4, 12.5, 18.7.7
10(1)(cA) ...................................................... 5.11.2 11(j) ............................................... 6.5.12, 7.4, 12.6
10(1)(cE) ......................................................... 5.7.4 11(jA) ............................................................... 16.6
10(1)(cG) ........................................................ 5.8.6 11(k) ................................................................ 7.4.1
10(1)(cN) ............................................ 5.7,2, 19.5.3 11(l) ....................... 6.5.10, 7.4, 12.2.2, 18.6, 18.7.2
10(1)(cO) ............................................ 5.7.3, 19.5.3 11(lA) ............................................................ 12.2.4
10(1)(cQ) ............................................ 5.8.2, 19.5.3 11(m)................................................. 12.2.5, 18.7.1
10(1)(cP) ......................................................... 5.9.2 11(nA) ............................... 6.5.10, 6.5.12, 7.4, 12.7
10(1)(d) ............................................... 5.2.8, 19.5.3 11(nB) ............................... 6.5.10, 6.5.12, 7.4, 12.7
10(1)(e) ............................................... 5.7.1, 19.5.3 11(o).............................. 13.1, 13.2.5, 13.6.1, 13.11
10(1)(g) ......................................................... 5.11.4 11(w) ................................. 4.18, 6.4, 12.2.6, 18.7.4
10(1)(gA) ...................................................... 5.11.4 11(x) ....................................................... 2.5.3, 12.1
10(1)(gB) ...................................................... 5.11.4 11A............................................... 6.2.1, 6.4, 13.8.1
10(1)(gC) .................................. 5.4.1, 9.3, 21.6.2.3 11D ................................... 6.4, 13.1, 13.3.3, 13.8.1
10(1)(gE) ...................................................... 5.11.5 11E .......................................................... 4.1,19.5.3
10(1)(gG) ................................................. 4.2, 5.2.7 11F ............................................ 6.5.12, 7.4.1, 10.5,
10(1)(gH) ........................................................ 5.2.7 13.10.1, 18.6, 18.7.3
10(1)(gI) .............................................. 5.2.7, 6.5.17 12B.............................................. 13.1, 13.3.2, 22.8
10(1)(h) ....................... 5.2.2, 5.10.3, 21.5.2.1, 24.4 12C ......................................... 13.1, 13.3.3, 13.5.2,
10(1)(hA) ...................................................... 5.11.3 13.6.1, 13.8.1, 13.12.1
10(1)(i) ........................... 5.2.1, 25.2.1, 25.2.2, 25.4 12D .......................................... 13.1, 13.4.7, 13.7.1
10(1)(iB) .......................................................... 5.2.6 12DA .................................................... 13.1, 13.3.5
10(1)(j) ............................................................ 5.6.5 12E ................... 12.8.1, 13.1, 13.3.4, 13.6.1, 19.5.4
1148
Table of provisions

‘year of assessment’ – continued ‘year of assessment’ – continued
12F ....................................................... 13.1, 13.6.2 23(q) .................................................. 6.5.16, 14.11
12H ............................................................... 12.2.8 23(r) .................................................. 6.5.17, 12.2.6
12I .......................................... 13.1, 13.9.2, 13.10.5 23A............................... 13.1, 13.3.1, 13.6.1, 13.7.5
12J ................................ 12.8, 12.8.1, 12.8.2, 14.10 23B............................................................ 6.6, 12.1
12K ................................................................. 5.9.1 23C(1) ................................................................ 6.9
12L ....................................................... 13.1, 13.9.3 23D .............................. 13.1, 13.3.1, 13.4.1, 13.7.6
12M ...................................................... 12.2.3, 18.6 23F .......................................................... 14.1, 14.7
12N .............. 13.3.2, 13.3.3, 13.4.1, 13.4.2, 13.4.3, 23G ...................................................... 13.1, 13.7.6
13.4.5, 13.4.6, 13.4.7, 13.5.1, 23H ...................................... 6.4, 12.1, 12.2.6, 12.4
13.6.2, 13.7.4, 13.8.1, 13.9.2 23I ................................................................. 13.8.1
12NA .................................................... 13.1, 13.4.8 23L ............................................................ 4.20, 6.7
12O ................................................................. 5.8.4 23M ............................................................ 16.2.4.1
12P ........................................................ 5.8.3, 14.4 23N ............................................................ 16.2.4.2
12Q ........................ 5.8.5, 13.6.1, 17.10.2, 21.6.2.4 23O ........................ 12.1, 13.2.4, 14.2, 14.4, 19.5.4
12R ......................................... 2.2.3, 13.4.6, 19.5.5 24 ................................................................... 12.10
12S ................................................... 13.4.6, 19.5.5 24A.................................................... 25.2.1, 25.3.1
12T ...................................... 5.2.3, 7.2, 25.2.2, 25.4 24BA ............................................... 14.11, 20.2.1.2
12U .......................................... 13.1, 13.3.2, 13.9.4 24C ................................................................ 12.11
13 ............................... 13.1, 13.4.1, 13.8.1, 13.12.1 24H ....................................................... 18.3, 18.10
13bis .................................................... 13.1, 13.5.1 24I .................................................. 4.19, 15.1-15.8
13quat ................................................. 13.1, 13.4.2 24J ............................................ 16.2, 13.10.4, 14.2
13quin .................................................. 13.1, 13.4.5 24JA .............................................................. 16.2.6
13sex ................................................... 13.1, 13.4.3 24JB ................................................................. 16.6
13sept .................................................. 13.1, 13.4.4 24K......................................................... 6.4, 16.5.1
17A .................................................................. 22.6 24L ......................................................... 6.4, 16.5.2
18A ............................................ 7.4.2, 12.9, 13.9.6 24M ..................................... 3.4.4, 6.3.2.1, 13.10.1
19 .............. 13.1, 13.10.7, 14.1, 14.4, 14.10, 25.2.2 24N .................................................... 3.4.5, 6.3.2.2
20 ............................. 7.1.1, 12.12 – 12.12.3, 23.10, 24O ............................................................ 16.2.3.4
25.2.1, 25.2.2, 25.2.3, 25.2.4 24P ................................................................ 13.6.1
20A ................................................... 7.1.1, 12.12.1 25 ........................................... 17.11.4, 25.3.1, 25.4
20B ............................................................. 13.11.1 25A...................................................... 7.5.2, 25.4.3
20C ............................................................... 21.9.1 25B...................................... 24.5, 24.7, 24.8, 24.14
21 ....................................................................... 7.6 25B(2A) .......................................................... 24.14
22 ........................................................... 14.1-14.11 25BA ............................................................... 5.2.6
22(1) ....................................................... 14.1, 14.2 25BB .................................................. 14.10, 19.5.7
22(2) ....................................................... 14.1, 14.3 25C ................................................... 25.2.1, 25.2.2
22(2A) ..................................................... 14.1, 14.8 25D ............................................................... 15.2.3
22(3) ....................................................... 14.1, 14.4 26 ................................................. 22.1, 22.3, 22.10
22(3A) ..................................................... 14.1, 14.8 26A................................................ 2.5.3, 17.1, 17.5
22(4) ....................................................... 14.1, 14.5 27 ...................................................... 13.7.2, 19.5.8
22(4A) .............................................................. 14.9 30 .................................................................... 5.7.2
22(4B) .............................................................. 14.9 30A.................................................................. 5.7.3
22(8) ................................ 12.4.1, 14.1, 14.6, 14.10 30B.................................................................. 5.2.8
22(9) ................................................................ 14.9 30C ................................................................. 5.8.2
22B ................................................................ 14.11 31 ..................................................................... 21.8
23 .................................................... 2.5.3, 6.5, 12.1 33 ..................................................................... 13.6
23(a) ............................................................... 6.5.1 35A.................................... 2.2.3.2, 21.5.2, 21.5.2.2
23(b) ....................... 6.5.2, 6.5.12, 7.4, 12.4, 18.7.6 37B....................................................... 13.1, 13.9.5
23(c) ............................................. 6.5.3, 12.4, 12.5 37C ...................................................... 13.1, 13.9.6
23(d) ............................................................... 6.5.4 37D ...................................................... 13.1, 13.9.7
23(e) ............................................................... 6.5.5 38 .................................................................. 19.2.1
23(f ) ..................................................... 6.5.6, 14.11 40A...................................... 14.10, 19.5.1, 20.2.1.3
23(g) ............................. 6.1, 6.3, 6.5.713.11, 14.11 40B.................................................. 14.10, 20.2.1.3
23(h) ............................................................... 6.5.8 40C ......................................... 14.10, 14.11, 20.2.2
23(i) ................................................................ 6.5.9 40CA ................................................ 14.5, 20.2.2.1
23(k) .................................... 6.5.10, 6.5.12, 10.8.2, 41 .............................. 12.8.1, 20.4.1, 20.4.2, 20.4.3
10.8.3, 12.7, 19.5.6 42 ...................................... 14.5, 14.10, 20.5, 31.13
23(l) .................................................. 6.5.11, 12.2.1 43 ..................................................................... 20.6
23(m) ......................... 6.5.2, 6.5.12, 7.4, 12.7, 18.6 44 .......................................................... 20.7, 31.13
23(n) ............................................................. 6.5.13 45 .......................................................... 20.8, 31.13
23(o) ............................................................. 6.5.14 46 ..................................................................... 20.9
23(p) ............................................................. 6.5.15 47 ........................................................ 20.10, 31.13
1149

‘year of assessment’ – continued FIRST SCHEDULE – continued
47A–47K ........................... 2.2.3.2, 21.5.2, 21.5.2.3 11(c).............................................................. 22.5.3
48 ..................................................................... 23.1 11(A) ............................................................. 22.5.3
48A .................................................................. 23.6 12 ................................................... 22.3, 22.6, 22.7
48B .................................................................. 23.6 12(3B) ........................................................... 22.7.2
48C ................................................................ 23.10 13 ................................................................... 22.15
49A–49H ............... 2.2.3.2, 13.8.1, 21.5.2, 21.5.2.4 13A................................................................. 22.15
50A–50H ................. 2.2.3.2, 5.2.2, 21.5.2, 21.5.2.5 14 ................................................................... 22.16
54 ............................................... 2.2.3.5, 26.1, 26.2 15 ..................................................... 22.16, 22.16.1
55 ............................................................ 26.3, 26.4 16 ................................................................... 22.16
55(1) ..................................................... 26.3, 26.10 17 ................................................................... 22.17
55(3) ................................................................ 26.4 19 ..................................................................... 22.9
56 ..................................................................... 26.7 20 ................................................................... 22.14
56(1) ............................................................. 26.7.1 SECOND SCHEDULE ........................................ 9.3
56(2)(a) ......................................................... 26.7.2 ‘retire’ .............................................................. 9.3.1
56(2)(b) ......................................................... 26.7.3 ‘formula C’ .................................................... 9.3.3.2
56(2)(c) ......................................................... 26.7.1 2 .................................................................. 9.1, 9.3
57 ..................................................................... 26.9 2(1)(a) ............................................... 9.1, 9.3, 9.3.1
57A .................................................................. 26.8 2(1)(b) ..................................... 9.1, 9.3, 9.3.1, 9.3.2
58 ..................................................................... 26.5 2(1)(b)(iA) ............................... 9.1, 9.3, 9.3.1, 9.3.2
59 ................................................................... 26.11 2(1)(c) ............................................... 9.1, 9.3, 9.3.1
60 ................................................................... 26.11 2A.......................................................... 9.3, 9.3.3.2
62 ................................................................... 26.10 2C ...................................................................... 9.3
64 ............................................................ 26.1, 26.2 3 ......................................................................... 9.3
64D-64N ......................................... 2.2.3.2, 2.2.3.4 3A....................................................................... 9.3
64D ............................................................... 19.3.4
4(1)..................................................................... 9.3
64E ........................... 19.3.4, 19.3.7, 19.3.8, 19.3.9
4(2)bis .................................................... 6.5.15, 9.3
64EA ............................................................. 19.3.5
4(3).................................................................. 9.3.1
64EB ............................................................. 19.3.6
5 ............................................................... 9.3, 9.3.1
64F ............................................. 5.2.3, 19.3.6, 23.9
6 ..................................................... 9.3, 9.3.1, 9.3.2
64FA ........................................ 19.3.6, 19.3.7, 23.9
7…………………………………………………..9.3.1
64G ............................................................... 19.3.5
64H ............................................................... 19.3.5 FOURTH SCHEDULE................ 2.2.3.2, 2.5.2, 10.1
64K ............................................................. 19.3.10 ‘annual equivalent’ ........................................... 10.1
64L .............................................................. 19.3.11 ‘balance of remuneration’………………..10.1, 10.5
64LA ........................................................... 19.3.11 ‘employee’................................... 10.1, 10.3, 12.2.7
64M ............................................................. 19.3.11 ‘employer’ .................................. 10.1, 10.4, 12.2.7
64N .................................................................. 19.3 ‘independent contractor’............................... 10.8.1
66(13)(a)(b) ...................................... 25.2.1, 25.2.3 ‘labour broker’ ............................................... 10.8.2
67 .................................................................. 21.5.1 ‘personal service company’ .............. 10.8.3, 19.5.6
72A ............................................................ 21.7.2.2 ‘personal service provider’ ............... 10.8.3, 19.5.6
80A–80L .......................................................... 32.2 ‘provisional tax’ ................................................ 11.2
89bis ........................................................... 11.10.1 ‘provisional taxpayer’ ....................................... 11.2
89bis(2) ...................................................... 11.10.1 ‘remuneration’ .................................................. 10.2
89quat ........................................................ 11.10.2 ‘SITE’ ................................................................ 10.6
103(1) .............................................................. 32.2 ‘standard employment’ .................................... 10.7
103(2) ................................................ 12.12.2, 32.4 2 ........................... 10.1, 10.3, 10.5, 10.8.2, 10.11.2
103(4) ..................................................... 32.4, 32.5 5……………………………………….10.8.2, 10.11.2
103(5) .............................................................. 32.6 6 .................................................................. 10.11.2
107(1) ............................................................. 2.4.1 7 .................................................................. 10.11.2
108 ......................................................... 2.4.1, 21.4 9 ......................................................... 10.5, 10.11.3
FIRST SCHEDULE .................................. 22.1, 22.3 11 ....................................................... 10.5, 10.11.4
2 ....................................................................... 22.5 11A................................................................ 10.2.3
3 .................................................. 22.3, 22.5, 22.5.1 11C .................................................................. 10.9
4 ................................................ 22.5, 22.5.7, 22.11 13 ................................................................ 10.11.7
5 .................................................................... 22.5.1 14 .................................................. 10.11.5, 10.11.6
6 .................................................................... 22.5.1 15 ................................................................ 10.11.1
7 .................................................................... 22.5.1 17 ..................................................................... 11.6
8 .................................................................... 22.5.2 19 ..................................................................... 11.5
9 .................................................................... 22.5.1 20 .................................................................. 11.9.2
11 ...................................................... 22.5.3, 22.5.3 21 ..................................... 10.8.2, 10.8.3, 11.4, 117
11(a) ............................................................. 22.5.3 21(1)................................................................. 11.4
11(b) ............................................................. 22.5.3 21(2)................................................................. 11.4
1150
Table of provisions

‘standard employment’ – continued ‘base cost’........................................................ 17.8
23 .................................... 10.8.2, 10.8.3, 11.4, 11.8 ‘boat’ ................................. 17.9.6, 17.10.2, 17.10.5
23A .................................................... 11.4, 11.10.3 ‘disposal’ .......................................................... 17.7
24 ..................................................................... 11.5 ‘net capital gain’............................................... 17.5
27 .................................................................. 11.9.1 ‘personal use asset’ ...................... 17.10.2, 17.10.5
‘primary residence’ ..................................... 17.10.1
SIXTH SCHEDULE .............................................. 23 ‘special trust’ ................................... 17.5, 17.11.2.7
‘micro business’ ...................................... 23.1, 23.3 ‘taxable capital gain’ ........................................ 17.5
‘qualifying turnover’ ......................................... 23.2 ‘valuation date’ .............................................. 17.8.7
‘registered micro business’ ............................. 23.4 ‘value-shifting arrangement’ ........ 20.2.1.2, 17.12.1
‘tax period’ ....................................................... 23.7 2 ................................................. 17.3, 17.13, 24.14
‘taxable turnover’ ............................................. 23.5 2(1)(a) .............................................................. 17.3
2 .................................................................... 23.3.1
2(1)(b) .............................................................. 17.3
3 .................................................................... 23.3.2
2(2)................................................................... 17.3
3(g) .................................................................. 18.9
3 ......................................................... 17.5, 17.13.1
4 .................................................................... 23.3.2
4 ......................................................... 17.5, 17.13.1
5 ....................................................................... 23.5
5 ............................................... 17.5, 25.3.2, 25.4.5
6 ....................................................................... 23.5
6 ....................................................................... 17.5
7 ..................................................................... 23.10
9 .................................................................... 23.4.2 7 ....................................................................... 17.5
10 .................................................................. 23.4.2 8 ....................................................................... 17.5
11 ..................................................................... 23.7 9 ....................................................................... 17.5
14 ..................................................................... 23.8 10 ..................................................................... 17.5
11 .............................. 17.7.1, 17.7.2, 20.2.1.3, 24.9
SEVENTH SCHEDULE ................................ 8.1, 8.4 12 ......................................................... 14.4, 17.7.3
‘official rate of interest’ .................................. 8.4.11 12A.................................................. 13.10.7, 17.8.4
2(a) .......................................................... 8.7, 8.4.4 13 .................................................................. 17.7.4
2(b) ................................................................. 8.4.5 13(1)........................................ 8.7.4, 17.7.4, 24.9.2
2(c) ................................................................. 8.4.7 14 .................................................................. 17.7.5
2(d) ...............

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Silke: South African Income Tax

Professor Madeleine Stiglingh (volume editor)

Editor: Mandy Jonck

Outcomes of this chapter

Definition Rate structure Tax incidence

1.2 Tax base

1.3 Tax rate structure

There are three tax rate structures:

Example 1.2. Tax rate structure analysis

Using this information, determine the following:

1.4 Principles of taxation

1.4.1 The Equity Principle

Example 1.3. The Equity Principle

1.4.2 The Certainty Principle

1.4.3 The Convenience Principle

1.4.4 The Economic Efficiency Principle

Example 1.4. Economic efficiency

1.4.5 The Administrative Efficiency Principle

1.4.6 The Flexibility Principle

1.4.7 The Simplicity Principle

Example 1.5. Comprehensive example

Outcomes of this chapter

2.2 Taxation in South Africa

2.2.1 Brief history of taxation in South Africa

2.2.2 The legislative process

Draft Money Bill

Figure 2.1: The legislative process in South Africa

2.2.3 Current tax legislation

2.2.3.1 Normal tax

(a) Taxes withheld on payments of remuneration by employers to employees

(b) Taxes withheld on payments of dividends by companies to beneficial owners

(c) Taxes withheld on payments to non-residents

2.2.3.3 Turnover tax (ss 48–48C)

2.2.3.4 Dividends tax (ss 64D–64N)

2.2.3.5 Donations tax (s 54)

2.2.3.6 Value-added tax

2.2.3.7 Transfer duty

2.2.3.8 Estate duty

2.2.3.9 Securities transfer tax

2.2.3.10 Customs and excise tax

2.2.3.11 Unemployment insurance contributions

2.2.3.12 Skills development levies

2.3 Administration of tax legislation

2.4 Interpretation of tax law

2.4.1 Tax legislation

Double tax agreements

The Interpretation Act

Interpretation Notes and Binding General Rulings

2.4.2 Judicial decisions

When will a tax case be heard in a court of law?

The legal precedence principle

What part of the decision creates legal precedence?

Can income tax decisions of foreign countries create legal precedence?

2.4.3 Rules of interpretation

The purposive approach

The contra fiscum rule

The substance over form rule

2.5.1 The incidence of normal tax