Bianca & Jamie ©

Contents of BLR 310 EXAM NOTES

Theme 3: Jurisdiction to tax: (Chapters 3 and 21).............................................................1
Theme 4: Gross income: (Chapters 3 and 4)......................................................................20
Theme 5: Exempt income: (Chapter 5) ...............................................................................51
Theme 6: Deductions: (Chapters 6,7 and 12) .....................................................................61
Theme 7: Capital Gains Tax (CGT): (Chapter 17)............................................................ 101
Theme 8: The taxpayer: (Chapter 18, 25 & 27) ................................................................116
Theme 9: Tax Administration: (Chapter 33)....................................................................130
Theme 10: Tax Avoidance:.......................................................................................................161

Theme 3: Jurisdiction to tax: (Chapters 3 and 21)

Definition of gross income s1 of the Income Tax Act 58 of 1962:

S1 "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…

Basic framework for a calculating a person’s taxable income:

Gross income XX
Less: Exempt income (Y)
= Income X
Less: Deductions and allowances (Y)
Taxable income AA

All the requirements of the definition of gross income must be complied with for an
amount to qualify as gross income
These requirements are:
∑ In the case of a resident:
o There must be an amount, in cash or otherwise
o That is received by or accrued to or in favour of such resident
o During a year or period of assessment
o Excluding receipts or accruals of a capital nature
∑ In the case of a non-resident:
o There must be an amount, in cash or otherwise
o That is received by or accrued to or in favour of such resident
o During a year or period of assessment
o From a source within SA

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o Excluding receipts or accruals of a capital nature

- Gross income is revenue (income) in nature, not capital in nature

- Residents are taxed on a residence-based system of taxation
- Non-residents are taxed on a source-bases system of taxation
- 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 (capital gains tax)
(discussed in chapter 17)

[Don’t write ‘taxyear’! It is referred to as a year of assessment]

Residence of natural persons:

∑ If a double taxation agreement (DTA) between SA and the other 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’
∑ A natural person is a ‘resident’ if he is either ordinarily resident in the
Republic or meets the requirements of the physical presence test
∑ Can be a citizen and a non-resident, and vice versa
∑ Ordinarily resident:
o Cohen v CIR:
ß The taxpayer, who was a SA resident at the time, was requested
by his employer to work in the USA
ß Taxpayer and his family lived in NY for 20 months
ß During this period neither the taxpayer nor his family returned
to SA
ß Court had to consider whether the taxpayer ordinarily resided in
SA during this time
ß Principles laid down by the court:
∑ A person’s ordinary residence would be the
country to which he would naturally and as a
matter of course return from his wanderings
(real home)
∑ Consider not only the person’s actions during the
year of assessment to determine whether he is
ordinarily resident in a particular country, but
also his mode of life outside that year of
assessment
∑ Physical absence during the full year of
assessment is not decisive
o CIR v Kuttel:
ß Taxpayer held a majority interest in a SA company
ß Taxpayer agreed with his fellow shareholders to move to NY to
open an office for the company from where he could oversee the
company’s American business
ß After being granted a permanent residence permit in the USA,
the taxpayer emigrated to the USA with his family

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ß Taxpayer rented a house in USA, established church

membership, opened banking accounts, acquired an office,
bought a car and registered with social security
ß Following this move, apart from visits to SA and other countries,
the taxpayer lived and worked in USA
ß During the 31-month period under consideration, the taxpayer
made 9 visits to SA, staying up to 2 months each time
ß The visits were to attend to his business interests and family
matters
ß Taxpayer on average spent just over one-third of the time in SA
ß During his visits to SA, the taxpayer stayed in a house owned by
a company in which he and his wife were the sole shareholders
ß The house was not let and was available whenever the taxpayer
wanted to live in it
ß In applying the principle 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 SA
ß Court held that there was no evidence which indicated
that the taxpayer did not set up his usual or principle
residence in USA
ß Court held that the fact that the taxpayer kept his house in SA
was in no way inconsistent with his usual or principal residence
or home having been in the USA
ß He could not take all his assets to 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 SA
ß This, however, did not mean that the taxpayer ordinarily resided
in SA
o SARS’s Interpretation Note No 3 (Issue 2):
ß The question of whether a natural person is ordinarily resident
in a country is one of fact and each case must be decided on its
own merits, taking into consideration principles established by
case law
ß Factors that will be considered as a guideline:
∑ Intention to be ordinarily resident in Republic
∑ Most fixed and settled place of residence
∑ Habitual abode and his present habits and mode of life
∑ Place of business and personal interests of person and
family
∑ Employment and economic factors
∑ Status of individual in Republic and in other countries
∑ Location of personal belongings
∑ Nationality
∑ Family and social relations
∑ Political, cultural or other activities
∑ Application of permanent residence or citizenship
∑ Period abroad, purpose and nature of visits

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∑ Frequency of and reasons for visits

o Exception:
ß A person who is ordinarily resident in the Republic who is out of
the country for more than 183 days of which 60 days are
consecutive during the year of assessment, will be taxed in the
foreign country on the income received during that time
ß Exception to the exception:
∑ When you are out of the country for research
∑ Beginning and ending of being ‘ordinarily resident’:
o A natural person immigrating to Republic will be treated as being
‘ordinarily resident’ from the day on which he becomes ordinarily
resident in the Republic
(seen as non-resident for tax purposes for the period from the beginning of the year
until the day before he becomes ordinarily resident)
o 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 (date he boards the aircraft)
(Taxpayer emigrating from the Republic will 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, and will be taxed as a non-resident from the day he ceases to be
ordinarily resident till the end of the year of assessment)
∑ Physical presence:
o Does not apply to persons who are ordinarily resident in RSA
o 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
o He has to meet the requirements of the physical presence test which is
that he is physically present in the Republic for:
ß A period exceeding 91 days in aggregate during the current year
of assessment; and
ß A period exceeding 91 days in aggregate during each of the 5
years of assessment preceding the current year of assessment;
and
ß A period exceeding 915 days in aggregate during the 5 years of
assessment preceding the current year of assessment
o A 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 5 consecutive years of assessment during
which the person is physically present in the Republic for a qualifying
period or periods
o Rules of the physical presence test:
ß A part of a day present in the Republic is regarded as a day
ß 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
ß The more than 91 days and more than 915 days’ periods of
physical presence need not be continuous
o A person who is deemed to be exclusively a resident of another country
for the purposes of a double tax agreement between the governments of
the Republic and that other country will not be a resident of the

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Republic, even though he meets the qualifying requirements of being a

resident
o This rule will render the physical presence test irrelevant since the rules
in double tax agreements are similar to the ordinary residence test
∑ Beginning and ending of being a resident in terms of the physical presence
test
o A person will be a resident with effect from the first day of the relevant
year of assessment during which all the requirements of the physical
presence test are met (that is, the sixth year)
o Person who is resident in terms of the physical presence test will cease
to be a resident from the day that he ceases to be physically present in
SA if he remains physically outside SA for a continuous period of 330
full days from this date
ß This 330 full day period to terminate a person’s residence must
be continuous
ß This exception only applies if a person is already a resident in
terms of the physical presence test, which means that he must
have been physically present in the Republic for more than 91
days in the year that he ceases to be physically present
ß The 330-day-continuous 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 (day person leaves RSA)
o Interpretation Note No 4 (Issue 5) confirms that the 330 days of
absence starts on the day the person leaves the Republic

Residence of persons other than natural persons:

∑ For example, a company, close corporation or trust
∑ A person other than a natural person is defined as being ‘resident’ if it:
o Is incorporated, established or formed in the Republic
o Has its place of effective management in the Republic
∑ Where a company is incorporated, established or formed:
o A company that is formed and incorporated in SA in terms of s13 of the
Companies Act is clearly a resident and is liable for tax in SA on its
worldwide receipts
∑ Where a company is effectively managed:
o SARS’s Interpretation Note No 6 (Issue 2) 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
o This approach is consistent with the OECD’s commentary on Article 4
of the Model Tax Convention regarding the term ‘place of effective
management’
o 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 pre-dominantly made
∑ Residence of estates, trusts, clubs and associations:
o Resident where they are incorporated, established or formed or where
they have their place of effective management

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o If the executors, administrators or trustees are resident in SA or if the

entity is administered from SA, the entity is resident in SA
o The place where the assets of the entity are effectively managed is
crucial

Chapter 21: Cross-border transactions:

- Cross-border transactions include:

o Business transactions
o Investment transactions
- Cross-border transactions pose a challenge from an income tax perspective as
they may attract tax in more than one jurisdiction

Principles of SA taxation of cross-border transactions:

∑ A cross-border transaction may be subject to tax in:
o The jurisdiction where the income is sourced (source country)
o The jurisdiction where the recipient of the income is a resident
∑ Measures to prevent double taxation from obstructing cross-border trade:
o Countries that follow a residence-based tax system would normally
provide relief to its residents for certain foreign taxes incurred in
respect of cross-border transactions
ß If already paid tax in foreign country = tax credit
ß If no tax agreement between SA and foreign country, you will
have to apply to SARS for tax credit
o Certain cross-border transactions are exempted from tax
o Double tax agreement
ß Overrules domestic law

Source: (section 9 of the ITA)

∑ Statutory source rules:
o The Act specifies the source of a number of income streams
o Deal mostly with passive income (interest and royalties)
∑ Common law principles:
o If the source of a specific type of income is not specified in legislation,
case law must be considered
o CIR v Lever Brothers & Unilever:
ß Authority for determining the source of an amount
ß The source of receipts 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
ß Questions to ask: (this is the common law rule)
o What is the originating cause of the income?
o Where is the originating cause located?
ß That’s where the income should be taxed
ß In casu the originating cause was a contract
ß The contract was signed in Brazil, thus the source of income is taxed
in Brazil
o CIR v Black:

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ß If an amount has more than one originating cause, the source of

the income is based on the dominant case
o CIR v Nell:
ß Where an amount has more than one dominant cause, it may be
appropriate to apportion its source
o Liquidator, Rhodesian Metals Ltd v COT:
ß Source means not a legal concept but something which the
practical man would regard as a real source of income
∑ Some tax treaties that SA has entered into contain rules that determine where
income is deemed to arise. This overrides domestic law

Mr X v C: SARS:
Facts:
∑ The taxpayer appealed against CSARS’s disallowance of an amount claimed by
the taxpayer as non-taxable foreign income earned for services rendered to his
employer outside SA
∑ The taxpayer worked outside SA for 62 non-continuous days during which the
taxpayer held meetings outside SA
∑ The taxpayer entered into a contract of employment in Jhb with his employer
∑ The taxpayer was employed by the Jhb Branch of the company and would be
remunerated an annual salary net of taxes
Judgment:
∑ Court had to determine:
o Whether the appellant was ordinarily resident in SA during the relevant
tax period or whether he fell into the exclusionary provision of the
definition of ‘resident’ in the ITA
o Whether the disputed income can be categorised as having been
received by the taxpayer from a ‘source within the Republic’
∑ The contract of employment was entered by the taxpayer in SA
∑ He chose a SA address as his domicilium, as did his employer
∑ In the absence of an express provision to the contrary in the contract, the laws
of SA clearly governed the contract
∑ The taxpayer and his employer were content to declare his income for services
he rendered inside SA to SARS for the purpose of paying income tax
∑ The court held in determining where the employment is exercised, it is useful
to answer the following questions:
o what the contract itself stipulates concerning the law governing it
o where the contract was concluded
o who is paying the employee
o who the services are being rendered to
o where the services are being rendered
∑ The answer to the first two questions is SA, to the third is the employer in SA
and the fourth is to the employer
∑ The answer to the last question is outside SA to the client of the employer and
inside SA to the employer for the relevant 62 days
∑ The source of remuneration received by the taxpayer during the 62 days that
he rendered services for his employer outside SA is the same source from

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which remuneration was derived in the remaining days that he rendered

services for his employer inside SA
∑ The court concluded that the source of the disputed income was
from within RSA and the employment was exercised, in substance,
in RSA and thus received from a SA source

Attributable to permanent establishment:

∑ Article 5 of the Model Tax Convention on Income and on Capital of the
Organisation for Economic Co-operation and Development:
o “a fixed place of business through which the business of an enterprise is
wholly or partially carried on…”
o Including a place of management, branch, office, factory and workshop

Source of dividend income: (s9(2)(a))

∑ Depends on the residence of the company that pays the dividend
∑ Withholding tax of 20%

Source of interest income: (s9(2)(b))

∑ Can be from a SA source on either of the following bases:
o Residence of person paying interest; or
o Place where funds or credit obtained is being used or applied
∑ Interest incurred by a person who is a SA resident is from a SA source
∑ If a SA resident, however, incurs interest that is attributable to its permanent
establishment outside SA, the residence of the payer does not cause the source
of the interest to be in SA
∑ Alternatively, interest received by or accrued to a person in respect of the use
or application of funds or credit in SA is from a SA source
∑ If the funds or credit is used in SA, the payer’s residence is not relevant
∑ Interest paid by SA resident for a loan in SA is taxed in SA
∑ Interest paid by SA resident to foreign natural person has withholding tax of
20%
∑ The source of interest income had been legislated, so it is not necessary to
consider case law like the Lever Brothers-case to establish the source of
interest

Source of royalty income and know-how payments: (s9(2)(f))

∑ A royalty is any amount that is received or accrues in respect of the use, right
of use or permission to use intellectual property
∑ Royalty may be from a SA source based on:
o Residence of person paying the royalty; or
o Place where intellectual property is used or may be used
∑ Royalties incurred by a person who is a SA resident are from a SA source
∑ If a SA resident, however, incurs royalties that are attributable to its
permanent establishment outside SA, the residence of the payer does not
cause the source to be from SA

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∑ Alternatively, royalties received by or that accrue to a person in respect of the

use or right to use intellectual property in SA are from a SA source,
irrespective of the residence of the payer

Source of know-how payments: (s9(2)(f))

∑ Same principles as royalties
∑ Same withholding tax applies to both
∑ The source of income derived from:
o The imparting of, or undertaking to impart, any scientific, technical,
industrial or commercial knowledge or information; or
o The rendering of, or the undertaking to render, any assistance or
service in connection with the application or use of such knowledge or
information
∑ Source is the residence of the person paying the know-how payments, unless
attributable to a permanent establishment outside South Africa, or
∑ The place where the imparting of such knowledge or information and
assistance or services relating to such information is used or may be used
∑ Incurred by a person who is a SA resident are from a SA source, unless the
amount is attributable to a permanent establishment outside SA
∑ 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 SA are from a SA source

Source of rental income:

∑ The statutory source rules don’t deal with rental income
∑ The originating cause of rental income is usually the asset sued to earn rental
income
∑ COT v British United Shoe Machinery (SA) (PTY) Ltd:
o The asset concerned was machinery and the leases were so long in
duration, that the court held that the emphasis was on the property let
and not on the business of the lessor
o Source of rent derived from the use of the property was located where it
was used, in Rhodesia
o It’s too wide a proposition to state that the source of rent is always the
asset and that the place where the asset is used by the lessee necessarily
determines the source of the rent
o Regard must be had to:
ß Nature of property let
ß Nature of lessor’s business
ß Duration of the lease
o Source of rent from immovable property ‡ where property is
registered
o Source of rent from movable property ‡ where property is situated
∑ Where the emphasis is on the property let and not on the business of the
lessor, the source is located where the property is used
∑ Where the emphasis is on the business and not the asset, source of rental will
be where business is situated

SA taxation of income of non-residents:

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1. Tax liability and obligations

- Non-residents are only subject to tax in SA on income amounts received by or

accrued to them from a source in SA
- This SA tax may be in the form of normal tax or withholding tax
- If the income is subject to a withholding tax, a corresponding exemption from
normal tax usually exists to ensure that the amount is not taxed more than
once in SA
- Double taxation agreements or tax treaties must be considered to determine
whether SA may tax the income as required by the ITA

Non-residents are only liable to tax on capital gains that arise from the disposal of:
(Eight Schedule)
∑ Immovable property situated in SA
∑ An interest or right to or in immovable property situated in SA
∑ An asset that is effectively connected with a permanent establishment in SA

- A non-resident is required to register as a taxpayer for income tax purposes in

SA if it becomes liable for normal tax or is liable to submit an income return in
SA

Non-residents required to submit income tax returns in terms of Notice 342:

∑ Every non-resident that is a company, trust or other juristic person which
o Carried on a trade through a permanent establishment in SA
o Derived income from a source in SA
o Derived any capital gain or capital loss from the disposal of assets to
which the Eight Schedule applies
∑ Every company incorporated, established or formed in SA, which is not a
resident as result of the application of a tax treaty
∑ Every natural person who is not a resident and who carried on a trade, other
than solely an employee, in SA
∑ Every natural person, including non-residents, whose gross income exceeded
the tax threshold
∑ 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 Eight Schedule applies
∑ Every non-resident whose gross income included interest from a SA source
that was not exempt in terms of s10(1)(4)

- 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. This includes
specific reportable transactions that involve foreign trusts, foreign insurers
and foreign service providers

2. Withholding taxes:

- It commonly applies to amounts that are received by or accrue to a person

who does not have a sufficient presence in the source country to be certain of
efficient collection of the tax

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- Withholding taxes are generally imposed on passive income that does not
require the presence of the person in a country (for example royalties)
- Some countries, however, also impose withholding tax on more actively
earned income (for example service fees)
- These withholding taxes can significantly affect the profitability of
transactions undertaken, as they do not take account profit margins of the
transaction, but are only based on the gross amount received by the taxpayer

SA imposes withholding taxes on the following SA source income of a non-resident:

∑ Proceeds paid to non-resident sellers in respect of immovable property
disposed of
∑ Fees earned as entertainers and sportspersons
∑ Royalties
∑ Interest

Service fees:
∑ A withholding tax on some service fees paid to non-residents was proposed
but never came into effect
∑ Instead, certain arrangements involving rendering of services to a resident or
a non-resident’s permanent establishment in SA should be reported
∑ These service arrangements must be reported if:
o A non-resident or his employee/agent/representative is or was, or is
anticipated to be, physically present in SA to render the service, and
o 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 is remuneration,
which should in principle be subject to employees’ tax

Dividends tax:
∑ Dividends paid by SA resident companies are subject to dividends tax
∑ Dividends tax in relation to dividends paid to a shareholder in cash is also a
withholding tax
∑ This withholding tax applies to dividends paid to both residents and non-
residents
∑ [Explained in detail in chapter 19]

Employees’ tax:
∑ 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 normal tax liability
∑ [Explained in detail in chapter 10]

Common features of withholding taxes imposed in respect of payments

to non-residents:

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a. The withholding tax applies to SA sourced amounts

Withholding tax regime: Application:

Immovable property Amounts paid to non-residents in
respect of the disposal of immovable
property in SA

Foreign entertainers and sportspersons Amounts received by or accrued to a

non-resident regarding a personal
activity exercised in SA by the person as
an entertainer or a sportsperson

Royalties: Royalties paid to or for the benefit of a

non-resident from a source in SA.
Refers to amounts received by or
accrued for the use or right of use of
intellectual property and know-how
payments

Interest Interest paid to or for the benefit of a

non-resident from a source in SA.
Refers to interest, other than interest
arising on certain sale and leaseback
transactions

b. The withholding tax regime applies to payments made to non-

residents with a limited presence in SA

Exception:
∑ The obligation to withhold amounts from payments made to non-resident
sellers of immovable property

Withholding tax Subject to withholding Subject to normal tax:

regime: tax: (exempt from (exempt from
normal tax) withholding tax)
Immovable property Exception

Foreign entertainers Amount accrued/received Amount received by person

and sportspersons by person who is subject to
the withholding tax
who is:
- An employee of an
employer who is a
resident; and
- Is physically present
in SA for more than
183 days during any
12-month period
beginning or ending
during the year of

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assessment in which
the specified activity is
exercised

Royalties Royalties accrued/received Royalties accrued/received

by non-resident: by non-resident:
- Who is a natural - Who is a natural
person who was not person who was
physically present in physically present in
SA for more than SA for more than 183
183 days in the 12- days in the 12-month
month period period before the
before the accrual/receipt of
accrual/receipt of royalties
royalties - Where the intellectual
- Where the property or knowledge
intellectual property or information from
or knowledge or which the royalty is
information from paid is effectively
which the royalty is connected to a
paid is not permanent
effectively establishment of the
connected to a non-resident in SA
permanent provided that the non-
establishment of resident is registered
non-resident in SA as a taxpayer in SA
Exemption must be Person to whom royalties are
indicated in income tax paid must submit a
return (if person is declaration (WTRD) to
required to submit an person making payment
income tax return) stating that it is exempt from
withholding tax, together
with a written undertaking to
inform the payer if this is no
longer the case, before
royalty is paid. From 1 July
2020, such declaration is
only valid for 5 years

Interest Interest accrued/received Interest accrued/received by

by non-resident: non-resident:
- Who is a natural - Who is a natural
person who was not person who was
physically present in physically present in
SA for more than SA for more than 183
183 days in the 12- days in the 12-month
month period period before the
before the accrual/receipt of
accrual/receipt of interest
interest

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- Where the debt - Where the debt from

from which the which the interest
interest arises is arises is effectively
not effectively connected to a
connected to a permanent
permanent establishment of the
establishment of the non-resident in SA
non-resident in SA provided that the non-
Exemption must be resident is registered
indicated in income tax as a taxpayer in SA
return (if the person is Person wo whom royalties
required to submit an are paid must submit a
income tax return) declaration (WTID) to
person making payment
stating that it is exempt from
withholding tax, together
with a written undertaking to
inform the payer if this is no
longer the case, before
royalty is paid. From 1 July
2020, such declaration is
only valid for 5 years

- Withholding taxes, other than those that apply to payments made to non-
resident sellers of immovable property, are final taxes
- Non-resident recipient is not subject to any further tax in SA in respect of the
amount
- Amounts withheld on payments to non-resident sellers of immovable property
are advance payments of the normal tax on the gains realised by the seller on
the disposal of the property, and this amount has to be deducted to determine
the normal tax still payable by the non-resident when it is assessed for normal
tax

c. Basic calculation of amount to be withheld

- Calculated by applying a rate to the gross amount of the relevant transaction

- No deductions are allowed from this amount
- This tax is imposed on income/proceeds as opposed to the profit or gains
realised on the realisation of the transaction

Immovable property:
∑ Depends on the nature of the non-resident seller of the immovable property
∑ 7,5% if natural person
∑ 10% if company
∑ 15% if trust
∑ On amount payable in respect of the disposal of immovable property in SA
∑ This amount is not final tax, but an advance payment of normal tax

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Foreign entertainers and sportspersons:

∑ 15% on amount received by or accrued in respect of any specified activity
exercised in SA

Royalties:
∑ 15%
∑ On royalties paid from a SA source
∑ Rate may be reduced through a tax treaty/DTA

Interest:
∑ 15%
∑ On interest paid from a SA source
∑ Rate may be reduced through a tax treaty/DTA

- All these 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 announcement
- The change in the rate is subject to Parliament passing legislation within 12
months from announcement to give effect to the announcement
- If the amount withheld is denominated in a foreign currency, it must be
converted to rand at the spot rate on the date on which the amount was
deducted or withheld
- In the case of an amount withheld from the payments made to a non-resident
on the disposal of immovable property in SA, the amount to be paid to SARS
must be converted to rand at the spot rate on the date that the amount is paid
to SARS

d. Person responsible to withhold and pay the tax to SARS

- The obligation to withhold the tax rests upon the person who makes the
relevant payment to the non-resident
- This person is a withholding agent, as contemplated in s156 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

Withholding tax Person responsible to withhold or pay tax to

regime: SARS:

Immovable property Any person who pays an amount to a non-resident that

disposes of immovable property in SA, 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.
Will generally be the purchaser of the immovable
property

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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.
An estate agent or conveyancer, who assists with and is
remunerated for services relating to the disposal 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.
An estate agent or conveyancer who knew or should
reasonably have expected to have known and failed to
notify the purchaser is jointly and severally liable for the
tax.
Their liability is limited to the remuneration that they
earned from the services in respect of the transaction.
If an estate agent 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.

Foreign entertainers Any resident who is liable to pay amounts subject to this
and sportspersons withholding tax must withhold the tax from the
payment it makes to the person.
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.
Non-resident payers are not required to withhold this
tax.
If the tax was not withheld by the person making the
payment and was not recovered by SARS from the
person who should have withheld it, the taxpayer who
received the amount must pay the tax, as a final tax, to
SARS.

Royalties The person who pays the royalties must withhold the tax
from the payment of the royalties.
If the tax was not withheld by this person, the person to
whom the royalties were paid is liable for the
withholding tax.

Interest The person who pays the interest subject to the

withholding tax must withhold the tax from the
payment of the interest.
This person can be a resident or a non-resident.
If the tax was not withheld by this person, the person to
whom the interest was paid is liable for the withholding
tax.

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e. Timing of the payment and return to SARS:

- Tax payable to SARS must be withheld from a payment made to a recipient

- The withholding tax regimes therefore 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
- In the context of the withholding tax on royalties and interest, an amount is
deemed to be paid at the earlier of the date when it is actually paid or when it
becomes due and payable
- It may therefore happen that the withholding tax is payable to SARS even
before the actual payment of the royalty or interest is paid to the recipient

Tax withheld from amounts from the disposal of immovable properties in SA:
∑ Tax withheld by the purchaser from amounts paid to non-residents 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 SA, the amount must be paid to SARS
within 28 days from the date that it is withheld
∑ Purchaser must submit a return (NR02 return) at the time of the payment to
SARS
∑ Failure to pay the tax to SARS on time attracts a 10% penalty
∑ 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
∑ The purchaser of immovable property is not required to withhold an amount
when it has only paid a deposit to the seller to secure the disposal
∑ 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

Tax that must be withheld from amounts paid to 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
∑ If the person who received the amount has to pay the tax to SARS as opposed
to the 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
∑ These payments, whether made by the resident withholding agent or the
taxpayer itself, must be accompanied by a return (NR01)

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
∑ The payment must be accompanied by a return (WTR01)

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∑ 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 3 years
after the royalties have been paid

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
∑ The payment must be accompanied by a return (WT002)
∑ 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 reduced rate to the withholding agent, this tax can be refunded
if the declaration and/or written undertaking is obtained within 3 years after
the interest has been paid
∑ A refund is also available for withholding tax on interest due and payable,
which subsequently becomes irrevocable
∑ A person who must withhold tax from interest paid to a non-resident is
required to submit a third-party return (IT3(b) return) in terms of s26 of the
Tax Administration Act, which must indicate the amount of interest paid or
that becomes due and payable as well as the tax withheld in respect of it

Withholding from amounts paid to non-resident sellers of immovable

property:

- Not a final tax

- This tax is an advance payment in respect of the normal tax that arises on the
disposal of the property
- The seller may apply to SARS for a directive that no amount, or a reduced
amount, should be withheld

This request must be based on the following factors:

∑ Security that the seller can furnish for the payment of any taxes due on the
disposal of the property
∑ The extent to which the seller has other assets in SA
∑ Whether the seller will be subject to tax on the disposal of the immovable
property
∑ 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

- If the amounts payable to the seller to acquire the property do not exceed R2
million, the purchaser is not required to withhold tax
- No directive is required in such a case

Tax on foreign entertainers and sportspersons:

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- The scope of this tax is wider than just amounts that accrue directly to or are
received directly by the entertainer or sportsperson who exercises the
specified activity in SA
- 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
- The short period for which these persons are present in SA makes this tax
difficult to administer
- SARS must 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 SA 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 (this
notification should be done in the NR01 form)

Withholding tax on interest:

- Certain interest paid to foreign persons are exempt from both withholding tax
and normal tax
- These exemptions are based on the nature of the lender, the borrower or the
specific type of interest
- The amounts that are exempt from the withholding tax on interest on this
basis are:
o Interest paid to a foreign person by
ß The SA government in the national, provincial or local sphere
ß Any bank, the SA Revenue Bank, the Development Bank of SA
(DBSA) or the Industrial development corporation
(Does not apply where a bank on-lent the amount that the foreign person advanced
to another person. Local banks cannot be used as intermediaries for foreign funding
to avoid the withholding tax on interest)
o Interest paid to the following foreign persons
ß The African Development Bank
ß The World Bank
ß The International Monetary Fund (IMF)
ß The African Import and Export Bank
ß The European Investment Bank
ß The New Development Bank
o Interest paid to a foreign person on listed debt instruments
o Interest paid to a foreign person in respect of funds in a trust account
in terms of s21(6) of the Financial Markets Act
o Interest paid to a foreign person by another foreign person, unless
ß The payer is a natural person who has been present in SA for
more than 183 days in the 12-month period before the interest
was paid, or
ß The interest arises from a debt claim that is effectively connected
to the foreign person’s permanent establishment in SA if that
person is registered as a taxpayer in SA
- SA sourced interest paid to a foreign person may be included in the income of
a resident on the basis that it is attributable to a donation, settlement or other
disposition by that resident
- This interest is not subject to the withholding tax on interest

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Theme 4: Gross income: (Chapters 3 and 4)

Chapter 3: Gross income:

Definition of gross income:

∑ Amount in cash or otherwise
∑ Received by or accrued to a person
∑ During the year of assessment
∑ Not of a capital nature

1. Amount in cash or otherwise:

- The value of the receipt or accrual of an amount of cash, as well as non-cash

items should be included in a person’s gross income

Lategan v CIR:
Facts:
∑ 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 before the end of the year of
assessment and the balance was paid in instalments during the following year
Judgment:
∑ The court had to decide whether the full amount qualified as the total mount
for purposes of the definition of gross income, or only the part that he received
in cash
∑ 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
∑ 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 s1 definition of ‘gross income’ 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 was decided in Lategan

CIR v Butcher Bros (Pty) Ltd:

Facts:
∑ 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

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∑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
Judgment:
∑ Court had 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’
∑ 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

The ITA was amended after the Butcher Bross case by including in the definition of
‘gross income’ (s1) improvements to leasehold property (par h)

CSARS v Brummeria Renaissance (Pty) Ltd:

Facts:
∑ 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
Judgment:
∑ 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

Interpretation Note No 58 explains the principles that the court applied in the
Brummeria Renaissance case:
∑ Confirms that the principles applied in the case would only apply in instances
where an interest-free loan is granted in exchange for goods supplied, services
rendered, or any other benefit granted

Calculating the monetary value of the right to use the interest-free loan:
∑ The loan amount is multiplied by R1 per year of the lifetime of the life-right
holder and the weighted-average prime overdraft right determined for the
relevant year of assessment
∑ The amount so calculated is reduced by 93,1%
∑ This is a once-off calculation of the amount to be included in the gross income
in the year of assessment in which the borrower becomes entitled to the right
to use the loan

2. Received by or accrued to:

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- An amount must either be received by or it must accrue to a taxpayer during a

year of assessment to be included in the gross income for that year
- 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
- 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. Most
relevant court cases wherein the meaning of these terms is considered are
discussed below

2.1. Meaning of ‘received by’:

Geldenhuys v CIR:
Facts:
∑ 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/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
Judgment:
∑ 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 (she was
the usufructuary) 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 is ‘received’ by a taxpayer if it is received by him on his
behalf and for his benefit

- An amount received by a taxpayer on behalf of another person is therefore not

gross income for the taxpayer
- An amount has to be received by the taxpayer on his behalf and for his benefit
to be included in his gross income

Pyott Ltd v CIR:

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∑ Authority for deposits

Facts:
∑ The taxpayer 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
Judgment:
∑ The court had to rule whether the amount that the taxpayer deducted should
have been included in its gross income
∑ 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
∑ Taxpayer was not entitled to exclude the amount it was still going
to refund customers from its gross income
∑ Amount can only later be deducted when the deposit is paid back as
an allowable deduction
∑ 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

- The principle form 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 the 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 behalf and for its own benefit

ITC 1918(2019):
∑ Authority for gift cards
Facts:
∑ The taxpayer, a high street retailer of clothes and other merchandise, offered
gift cards to customers
∑ Court had to decide when the revenue from the ‘sale’ of the gift cards
constituted gross income: upon receipt or only when the gift card is redeemed,
or if not redeemed, upon expiry of the gift card
∑ Prior to the 2013 year of assessment, the taxpayer included the amounts
received form the issuing of gift cards as gross income and claimed an
allowance for future expenditure against the income
∑ Amounts received for gift cards were also kept in a separate account
∑ After the promulgation of the Consumer Protection Act, the taxpayer changed
its tax treatment for amounts received form the issuing of gift cards
∑ The taxpayer now excluded the amounts received in respect of the issuing of
gift cards from gross income
∑ The taxpayer’s arguments:

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o Primary argument was that the amounts were not received for its own
benefit, but for the benefit of the gift card holder who would redeem the
card in the future
o Secondary argument was that, under the CPA, the consideration paid
for a gift card was the property of the bearer until the supplied
redeemed the card in exchange for goods or services or the card expired
Judgment:
∑ Court held:
o Rejected the first level of the taxpayer’s argument and held that keeping
the receipts for unredeemed gift cards in a separate identifiable bank
account did not mean that the retailer (taxpayer) did not hold the
money on its own behalf and for its own benefit
o However, the position changed as a result of the introduction of the
CPA
o The CPA provided the cognisable legal context that requires the
taxpayer to take and hold the receipts for the card bearers and to
refrain from applying the receipts as if they were its own property
o Accordingly, the gird card receipts were received by the taxpayer, not
for its own benefit, but to be held for the card bearer
o The receipts could not be included in the taxpayer’s gross income until
the gift card is redeemed or, if not redeemed, expires

- The owner of the money in the voucher is the bearer of the gift card
- The merchant becomes the owner of the money when the voucher
holder redeems it (according to a judgment in the tax court which
does not create precedent)
- Merchant has separate bank accounts:
o Central account
ß On which income is taxed
o Separate (trust) account
ß Money received from vouchers not yet redeemed or expired
ß Not taxed on
- Not all trusts are exempted from tax – has to be created for a legal reason
- Prof’s opinion: (no precedent, so position is uncertain)
o Has to form part of gross income, even if not received for his own
benefit
o He received the money and has the intention to use it for his benefit
when the voucher is redeemed or expired
o It is not suspended due to an unforeseen future event (they know they
will receive the money)
o Sections are not practical:
ß S63 holds that the bearer of the voucher is the owner of the
money. You don’t always know who the owner of the money
is/for who the voucher is being bought
ß S65 creates a statutory secured creditor

CIR v Delagoa Bay Cigarette Co, Ltd:

∑ Authority for illegal income
Facts:
∑ The taxpayer operated an illegal lottery

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∑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
Judgment:
∑ 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 receipt and accruals from illegal activities will therefore still be
included in the taxpayer’s gross income

MP Finance Group CC (in liquidation) v CSARS:

∑ Authority for illegal income
Facts:
∑ 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
Judgment:
∑ The court had to rule on whether the amounts invested in the scheme
qualified as gross income for the taxpayer
∑ 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
∑ Court held:
o Deposits qualified as gross income for the taxpayer
o An illegal contract is not without all legal consequences; it
can have fiscal consequences
o 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 with regard to receipt of money stolen through robbery, burglary
or other criminal means
- Issue is not whether the victim intended to part with the money,
but whether the thief intended to benefit from it

2.2. Meaning of ‘accrued to’:

‘Accrued to’ means:

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∑ The taxpayer became entitled to an amount

∑ Taxpayer obtains a vested right to a future payment

CIR v People’s Stores (Walvis Bay) (Pty) Ltd:

Facts:
∑ 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

Judgment:
∑ 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
∑ Court applied principles established in the Lategan case and held
that an amount does not have to be due and payable to the taxpayer
for it to accrue to the taxpayer
∑ The taxpayer 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 it qualifies as an
‘amount’ and should be included in ‘gross income’

- The court in People’s Stores said that since it is the right to receive payment
that accrued to the taxpayer, and not the amount itself, it is the right that has
to be valued
- The court held 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
- However, a proviso was added to the s1 definition of ‘gross income’ 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 was decided in Lategan and People’s
Stores

CIR v Witwatersrand Association of Racing Clubs:

Facts:
∑ Taxpayer 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
∑ Taxpayer argued that in organising the event, t entered into a number of
contracts on behalf of the charities
Judgment:

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∑ The court found 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
∑ 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
∑ 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
∑ If the taxpayer had 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

Mooi v SIR:
Facts:
∑ 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 conditions, 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
Judgment:
∑ 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 findings:
o In applying the principle established in the Lategan case, the court said
that to determine the ‘amount’ in the case of a right, one has to
establish the value of the right
o 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. The right only accrued to the
taxpayer when the conditions were fulfilled, and the right
became exercisable
o 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 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

Historical order of ‘accrued to’ principles in case law:

1. Lategan – case:

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- Amount accrues to a taxpayer when the taxpayer becomes entitled to the

amount (at present value)
2. People’s Store – case:
- Amount accrues to a taxpayer when the taxpayer becomes entitled to the
amount (at present value)

Then ‡ SARS changed legislation

A proviso was added to the s1 definition of ‘gross income’ 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

3. Mooi – case:
- Amount accrues to a taxpayer when the taxpayer becomes unconditional
entitled to that amount (at face value)

2.3. Valuation of receipt or accrual:

- The value of receipt amount is the amount that has been received during the
year of assessment
- Difficulty lies with valuation of amounts that accrued to a taxpayer in a year of
assessment which are still outstanding at the end of the year of assessment

CIR v People Stores (Walvis Bay) (Pty) Ltd:

∑ The court had to decide how the outstanding amounts should be valued at
year-end
∑ Court was asked to consider whether the amounts should be included at their
face value (as they appeared in records), or whether the amounts had to be
discounted by the inclusion of their present value (remember value of money
decreases over time)
∑ Court held that the present (discounted) value of the outstanding amounts
had to be included

- This legal position was changed after this decision by an amendment to the
ITA which introduced a proviso to the definition of ‘gross income’ in s1
- The proviso provides that when:
o A person has become entitled to an amount during the year of
assessment, and
o That amount is payable on a date or dates falling after the last day of
that year
the face value of that amount shall be deemed to have accrued to the person during
such year

GUD Holdings v CSARS:

Facts:

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∑The taxpayer carries on business as a manufacturer and distributor of

automotive parts
∑ The taxpayer operates a discount scheme in respect of its sales to wholesalers
∑ In respect of this scheme, the wholesaler is entitled to a settlement discount if
the wholesaler makes payment in respect of each sale by the 25th day of the
month following that in which the relevant invoice is issued by the taxpayer
∑ The taxpayer records its income as the amount remaining after this deduction
∑ All of the taxpayer’s customers take advantage of the reduced price offered in
return for prompt payment
∑ The taxpayer’s return of gross income for the year of assessment under
consideration included an amount for income accrued, but not yet received, in
keeping with the definition of ‘gross income’
∑ However, the amount reflected as accrued was stated to be the sales figures
less the prompt payment discount
∑ SARS included in its assessment of the taxpayer’s gross income these
discounts
∑ The taxpayer argued that what had ‘accrued’ to him was only the amount to
which he would be entitled in the event of the debt being paid within the
prescribed time
Judgment:
∑ What is aimed by the taxpayer and customers is that the customer will
purchase the goods for the net price after deducting the discount
∑ The prescription that this price must be paid within the stipulated time is an
incentive, to the customer, to take advantage of the lower price
∑ The customer only becomes indebted for the full invoice price if his payment
is tardy
∑ The ‘discount’ is not so much a discount as it is a penalty which will be added
for late payment
∑ The court held that from this viewpoint, the concept that an amount
equivalent to the discount ‘accrues’ to the taxpayer for purpose of determining
his gross income is illogical
∑ The court held that the full invoiced price had not accrued to the taxpayer and
did not form part of his gross income at the end of the year of assessment

2.4. Unqualified amounts:

- If an asset is disposed of for a consideration that consists 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
- S24M of ITA:
o If an amount is not quantified yet, no accrual will take place until it is
quantified

Examples:

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∑ I will sell my next crop at R10/kg

o Accrues when crop is materialised and quantified
∑ I will sell my next crop at R1 000 000
o Accrues when crop is materialised (no need to quantify)

2.5. Disposal of income after receipt or accrual (without prior

cession) versus disposal of a right to future income (prior
cession):

Disposal of income after it was received or accrued to someone:

∑ 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’, the ultimate
disposal of the income by that person would not affect his liability for taxation
in respect of such receipt or accrual
∑ Example:
o If a dishonest employee embezzles the day’s takings, his act does not
affect the accrual in favour of the employer
o The amount forms part of the employer’s gross income the moment
that it has been received
o The subsequent loss thereof does not mean that it is no longer gross
income in the employer’s hands
∑ If a business is sold during a year of assessment and the seller disposes of all
the benefits of the profits earned for the current year of assessment to the
purchaser, the sale cannot alter the seller’s liability for tax on amounts that
have already accrued to him

Witwatersrand Association of Racing Clubs – case:

∑ 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

Disposal of a right to future income:

∑ 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
∑ Cession ‡ one person (cedent) transfers his rights to another person
(cessionary)
∑ Delivery of rights occurs through cession
∑ It should 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

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∑ 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
∑ Example:
o Rental income of a property may be ceded without transferring
ownership of the property
o S7(7) provides that the income received by the cessionary in such cases
are deemed to be included in the gross income of the cedent (owner of
property)
∑ Confusion is 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
paid it over to the cessionary. In such a case the cedent received the income
on behalf of the cessionary

It is possible to cede a right to future income to attempt to avoid a potential tax

liability.
Anti-avoidance provisions in the ITA:
∑ 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
∑ S7 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

Securities sold cum or ex income rights:

∑ Securities (shares 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 interest
∑ The general principles, as discussed above, would then be applicable to assess
which party should be liable for taxation
∑ If the income has already accrued to the seller prior to the sale, it is taxable in
his hands
∑ If the income accrues only after the sale, the buyer is the owner of the security
and it is taxable in his hands
∑ There is no question of apportioning the income
∑ The general principle is that the full income is taxable in the hands of either
the seller of the buyer, whichever one of them is entitled to it
∑ This general principle may be regulated by anti-avoidance provisions within
the Act
∑ For example, s24J provides that the interest may be deemed to accrue on a
day-to-day basis. In such a case the interest should be apportioned between
the seller and the buyer

Ntsanwisi v Khoza and Others:

Facts:
∑ The taxpayer and her husband had divorced

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∑In addition to the decree of divorce it had been ordered that the joint estate be
divided and that the wife was entitled to 50% of the husband’s pension
interest in the Government Employees Pension Fund to be paid out to her in
terms of s7(7) of the Divorce Act
∑ The fund duly paid out the relevant amount to the taxpayer, less tax as
calculated by SARS
∑ However, unbeknown to the Fund, the parties had entered into a later
settlement agreement, at variance with the order, in terms of which the wife
would be entitled to less than 50% of the husband’s pension fund interest
Judgment:
∑ Court had to determine whether the taxpayer could be compelled by the
husband to repay the amount overpaid to her, and whether an order
compelling the pension fund to apply for a new tax directive from SARS for a
recalculation of the relevant tax consequent upon the variation agreement
could be issued
∑ The court held that, until such time as the Fund had requested a new tax
directive from SARS, it was premature to conclude that the taxpayer had been
enriched at the expense of the husband and that there was no legal basis on
which SARS should be ordered to repay any amount of tax

3. Year or period of assessment:

- Definition of year or period of assessment in s1:

o 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
- For natural persons and trusts:
o The 2020 year of assessment extends from 1 March 2019 until 29
February 2020
o 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 conveniently be returned for
any year of assessment
- For companies:
o The 2020 year of assessment is its financial year ending during the
2020 calendar year
o If a company does not close its financial accounts on the last day of its
financial year, the Commissioner may accept financial accounts for a
period ending on a day other than the last day of the company’s
financial year

M v CSARS:
Facts:
∑ The taxpayer is a company that specialises in the development of security
estates
∑ During the 2016/2017 year of assessment the taxpayer acquired vacant land

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∑The taxpayer acquired the services of a surveyor to subdivide the land into
stands
∑ The taxpayer submitted the subdivision plans to the local municipality
∑ Before approval of the plans, the taxpayer developed the land into a complete
security village and actively marketed all 25 stands each with a unique
building package
∑ During the 2017/2018 year of assessment, the taxpayer entered into deeds of
alienation of immovable property in respect of all 25 stands
∑ On 23 February 2019 the conveyancing attorneys submitted the deeds of
alienation in respect of 23 of the 25 stands at the Deed’s office
∑ Due to a delay in the issuing of a subdivision certificate in respect of stands 24
and 25, the conveyancing attorneys submitted the deeds of alienation in
respect of stands 24 and 25 on 2 March 2019
∑ The taxpayer included the proceeds of the sale in his gross income for the
2019/2020 year of assessment
∑ The transfer of the stands into the name of the purchasers happened in April
2019
∑ The Commissioner of SARS is of the opinion that the proceeds of the sale in
respect of all 25 stands must be included in the taxpayer’s gross income for the
2018/2019 year of assessment, because the proceeds accrued to the taxpayer
when the deeds of alienation were entered into
Judgment:
∑ The moment the taxpayer is ready to submit the documents to the Deeds
Office, accrual takes place for the amount of sale of the immovable property
(irrespective of whether it is submitted or not)

4. 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 form income tax
- A portion of these amounts may still be subject to income tax by the inclusion
of taxable capital gain in taxable income ‡ capital gains tax

WJ Fourie Beleggings v C: SARS:

∑ ‘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.’
∑ Common sense remains the most useful too in deciding the issue

- Courts laid down a number of guidelines to help determine whether an

amount is of a capital nature or not
- These principles are discussed below

4.1. Nature of an asset:

CIR v George Forest Timber Company Limited:

Facts:

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∑The taxpayer was a 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
Judgment:
∑ The court had to consider whether the receipts from the sale of the timber
were of a revenue or capital nature
∑ Court found that in selling the timber the company did not realise a capital
asset, but created and sold a new product
∑ 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, in that
floating capital was consumed and disappeared in the very process of
production, while fixed capital did not
∑ Fixed capital produced fresh wealth which remained intact
∑ The receipts from selling the timber were found to be from the sale
of floating capital and not of a capital nature

CIR v Visser:
Facts:
∑ The taxpayer acquired mining options on certain farm properties
∑ The options 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
Judgement:
∑ The court had to decide whether the shares that the taxpayer received were of
a capital nature and therefore excluded from his gross income
∑ Court held:
o The nature of the transaction and the taxpayer’s intention when he
entered into this transaction should be considered
o The taxpayer’s intention with regard to any particular transaction,
although not necessarily conclusive, 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
o 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
o 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 another’s
o ‘Income’ may also be described as the product of a person’s wits and
energy. The consideration received by the taxpayer was a

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product of his wits and energy and therefore of an income

nature
∑ ‘Tree and fruit’ principle:
o Tree is capital in nature
o Fruit is revenue in nature

4.2. Intention of a company:

Elandsheuwel Farming (Edms) Bpk v SIB:

Facts:
∑ The taxpayer was a company that acquired a property that was used for
farming purposes
∑ One of the 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
Judgment:
∑ Court had to rule on whether the proceeds on the sale of the property were of a
capital nature and therefore excluded in the company’s gross income
∑ Court held:
o 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
o The shareholder’s intentions should be attributed to the
company itself
o After the new shareholders acquired control of the company,
the company’s purpose with regards to the land changed to
that of trading stock
o The profit realised on sale of the land was of a revenue
nature and should be included in the company’s gross
income

4.3. Business conducted with a profit-making purpose:

CIR v Pick n Pay Employee Share Purchase Trust:

Facts:
∑ The taxpayer was a trust established by the PnP group of companies to
administer a share purchase scheme for the benefit of employees of the group

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∑The trust was created and maintained to enable employees to purchase shares
in PnP, 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
Judgment:
∑ Court had to consider whether the proceeds on the sale of shares were of a
capital nature for the trust
∑ Court held:
o 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
o 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
o Any receipts accruing to the trust were not intended or
worked for but purely fortuitous in the sense of being an
incidental by-product
o The receipts were of a capital nature

Ernst Bester Trust v SCARS:

Facts:
∑ The taxpayer owned a farm in the Cape on which grapes and grain were
farmed
∑ It was approached by a business that wished to mine sand deposits on the
farm
∑ An agreement was concluded, and, over a number of years, sand was
periodically mined on the farm
∑ The income from the sales of sand, although irregular, exceeded the rental
income earned by the taxpayer in respect of the farm for each of the relevant
years of assessment
∑ It was initially contended by the taxpayer that the proceeds from its sales of
sand were capital in nature
Judgment:
∑ Court had to determine whether the proceeds from the sale of sand by the
taxpayer was of a capital nature
∑ The court held that the proceeds were revenue in nature as part of
an ongoing scheme of profit-making

4.4. Selling an asset to best advantage:

CIR v Stott:
Facts:
∑ The taxpayer was a surveyor and architect
∑ On a number of occasions, he purchased land when had funds to invest
∑ During a particular year he derived profit from the sale of plots of land which
were subdivided from two properties

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∑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 subdivides 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
Judgment:
∑ The taxpayer’s intention at the time the asset is purchased is decisive unless
there is a subsequent change in intention to show that when the article was
sold it was sold in pursuance of a scheme of profit-making.
∑ There was no evidence to show that the properties had been sold in the
pursuance of a scheme of profit-making
∑ The mere subdivision of land does not constitute trade
∑ A person may realise his capital asset to the best advantage
∑ The amounts realised in the hands of the taxpayer constituted accruals of a
capital nature

Asset sold at best advantage = capital nature

Asset sold as profit-making scheme = revenue nature

4.5. Realisation of a capital asset:

CIR v Nel:
Facts:
∑ The taxpayer purchased Krugerrands with the intention to hold them as a
long-term investment as a hedge against inflation
∑ He did not plan to sell the Krugerrands and thought they would be inherited
by his children
∑ The value of the Krugerrands increased steadily over the years and although
he had the opportunity to sell them, he never did
∑ During the relevant year, he urgently had to buy a motor car for his wife and
reluctantly exchanged some of his Krugerrands for the car
∑ The taxpayer made a gain on the disposal of the Krugerrands, which he
considered as being of a capital nature
Judgment:
∑ Court held:
o 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 to a revenue nature.
o Something more than the mere disposal is required for the proceeds to
be of a revenue nature.
o The taxpayer’s purpose in selling the Krugerrands was not to make a
profit but to realise a capital asset in order to acquire another capital
asset

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CIR v Richmond Estates (Pty) Ltd:

Facts:
∑ 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
Judgment:
∑ Court had to consider whether profit realised from sale of properties was
capital or income in nature
∑ Court held:
o 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
o 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, did not mean that
the taxpayer’s intention did not change
o The capital assets were sold due to legislative changes that
would negatively impact the value of the properties (sold at
best advantage)
o The mere decision to sell a capital asset at a profit does not mean that
the profit is of income nature

4.6. Change of intention:

John Bell & Co (Pty) Ltd v SIR:

Facts:
∑ A 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 marker 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 11 years and thereafter, once
the market value had improved, the property was realised at a profit
Judgment:
∑ Court emphasises the principle that a taxpayer is entitled to realise his
property to his best advantage

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∑ There was no factual evidence that indicated that the taxpayer had had a
change of intention to use the property as trading stock
∑ Something more than merely selling the asset is required in order
to change the character of the asset and so render its proceeds
gross income
∑ The taxpayer’s decision to wait for a time with the object of selling the
property at high profit when the market for property in that area had arisen
sufficiently did not affect its character as a capital asset
∑ The taxpayer must embark on some scheme for selling such assets for profit
and use the assets as his stock-in-trade

Natal Estates Ltd v CIR:

Facts:
∑ 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 authorities 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 proceeded with the development bit by bit and started to sell
developed land directly to the public and investors
∑ SARS assessed the taxpayer’s receipts from the sale of land as being revenue
in nature
Judgment:
∑ 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.
∑ 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
land as stock-in-trade or embarked upon a scheme of selling land for profit
∑ Change of intention implies something more than mere decision to sell an
asset of a capital nature.
∑ Court held that the taxpayer had gone over to the business of township
development on a grand scale.
∑ The company changed its intention to sell the land at a profit
∑ Income of sale of land was of a revenue nature

4.7. Mixed purpose:

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COT v Levy:
Facts:
∑ 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
Judgment:
∑ Court had to consider whether the taxpayer correctly treated the proceeds
from the sale of the shares as being of a capital nature
∑ 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
∑ The taxpayer’s dominant intention when acquiring the shares was
to hold shares as an income-earning investment
∑ The proceeds from the disposal of the shares were of a capital nature

4.8. Secondary purpose:

CIR v Nussbaum:
Facts:
∑ 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 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
∑ He testified that his approach was decidedly different for the three years
under consideration
∑ He turned 60 and decided to build up readily available cash resources to meet
expected future medical expenses and to buy a house

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∑Over this period, he sold shares ‘bit by bit’ in order to invest the proceeds in
fixed interest investments
∑ 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
Judgment:
∑ Court had to consider whether the receipts from the disposal of shares were
revenue or capital in nature
∑ The taxpayer’s intention with buying and selling shares was to invest in shares
∑ The court held that he had a secondary profit-making purpose when he
purchased and sold the shares.
∑ The court held that it cannot be said that the profit from the sale of shares is
merely incidental.
∑ Since the taxpayer had no absolving dominant purpose, the
secondary purpose was of a revenue nature

4.9. Realisation company:

Berea West Estates (Pty) Ltd v SIR:

Facts:
∑ The taxpayer 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
Judgment:
∑ Court had to consider whether the receipts from selling the plots were of a
capital nature

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∑ Where a company is formed with the purpose to sell an asset (a

realisation company) and does so at best advantage, it does not
mean that the company traded for profit
∑ One must look at the facts leading to the company’s incorporation, the
memorandum and articles and to its subsequent conduct
∑ This case is distinguishable from the Natal case where the taxpayer carried on
a business of selling land for profit at a grand scale, using the land as stock-in-
trade.
∑ The taxpayer, a realisation company, merely sold the land at best
advantage and did not deviate from this purpose
∑ Receipts from selling plots were of a capital nature

CSARS v Founders Hill (Pty) Ltd:

Facts:
∑ 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
Judgment:
∑ The taxpayer was formed solely for the purpose of acquiring the property from
holding company AECI Ltd and then selling it at a profit (thus the only
purpose was the realisation of the property) and therefore such property was
stock-in-trade
∑ The court held that the case was distinguishable from the Berea West case
where there was, apart from the purpose of realising the capital asset to its
best advantage, a real justification for the formation of the realisation
company without which the realisation of the property would have been
difficult
∑ Where a company was formed solely for the purpose of facilitating the
realisation of property that could not otherwise be dealt with satisfactorily (as
in the Berea-case), the profit achieved on the sale would be of a capital nature
and not taxable
∑ The taxpayer’s profits were gains made by an operation of a
business in carrying out a scheme of profit-making and was
therefore revenue in nature

4.10. Damages and compensation:

WJ Fourie Beleggings v C: SARS:

Facts:
∑ 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 taxpayer
received an amount of money in settlement of all claims it might have arising
from the early termination of the contract
∑ 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
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been paid for the loss or ‘sterilisation’ of his income-earning asset and should
be regarded as capital
Judgment:
∑ The court had to consider whether the settlement amount received was of a
revenue or capital nature
∑ 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
∑ The fact that the contract would form the taxpayer’s major source
of income for the period of its duration, did not transform the
contract into part of the taxpayer’s income-producing structure
∑ The contract had been concluded as part of the taxpayer’s business of
providing accommodation and it was therefore a product of the taxpayer’s
income-earning activities, not the means by which it earned
income
∑ The income producing structure was made up of the lease of the hotel and the
use which the hotel was put
∑ The contract could thus not be construed as being an asset of a capital nature
forming part of the taxpayer’s income-producing structure
∑ Amount paid to the taxpayer upon termination of the contract was not capital
in nature

Stellenbosch Farmers’ Winery Ltd v CIR:

Facts:
∑ 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 SA 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 the 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
Judgment:
∑ Court had to consider whether the amount received was of a capital nature
∑ The exclusive distribution right that the taxpayer had was a capital asset
∑ As a result of the termination the taxpayer lost a capital asset
∑ The termination agreement referred to payment of full compensation for the
closure of the taxpayer’s business relating to the exercise of the distribution
rights (an asset). There is no reference in the agreement to payment for loss of profits
∑ 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 amount received was of a capital nature

4.11. Isolated transactions:

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- 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 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

4.12. Closure of a business and goodwill:

- Trading stock realized during the windup of the business is are of an income
nature and subject to normal tax
- The amount received for the sale of the goodwill of the business is of a capital
nature, unless it is paid in the form of an annuity

4.13. Copyrights, inventions, patents, trademarks, formulae and

secret processes:

- 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
- 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

4.14. Debts and loans:

- If debts are bought with the intention of collecting them at a profit, the receipt
thereof is income in nature
- It may happen that a profit made on the collection of debts is capital in nature:
o 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
o If a greater amount is collected that what was paid for the debts, the
profit is capital in nature
o Here the debts are not acquired with the intention of deriving a profit
therefrom
o They are part and parcel of the business bought – the intention is to
generate a profit with the business, not the generate a profit from the
collection of the debts

4.15. 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
- If gambling activities are undertaken as a means of entertainment or hobby,
the proceeds are capital in nature
- The intention of the gambler will determine the capital or income nature of
the proceeds
- Amounts derived by racehorse owners and trainers are subject to normal tax
where betting is a regular practice

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- A professional punter and racehorse owner’s winnings are subject to normal

tax because they are so closely related to his business
- 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

4.16. Horse-racing:

- Racing stakes won by racehorse owners are subject to normal tax if the
activities carried on are undertaken for gain or in pursuance of a scheme of
profit-making, rather than a hobby

4.17. 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

4.18. Interest:

- Interest derived from a loan or investment of money is income in nature

- The capital investment is the ‘tree’ and the interest is the ‘fruit’ thereof

4.19. Krugerrands:

- Proceeds from the sale of Krugerrands should be subjected to the same tests
applicable to other assets when being classified as of either an income or a
capital nature

4.20. Restraint of trade:

- Payments received in respect of restraint of trade or 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
- Consideration received by a garage proprietor from an oil company for
undertakings to become a one-brand petrol station, that is, to sell only the
products of the oil company, is a capital receipt
- The garage owner in this case sold his right to also trade in other products or
brands, which is represented as a capital asset

4.21. Share transactions:

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- 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
- Shares may be trading stock and the profits resulting therefrom will be income
in nature
- Shares may be held for a long period with the intention to derive dividend
income and the proceeds resulting therefrom when disposed will be capital in
nature
- If 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
- For certain shares held by the taxpayer for more than 3 years, the receipt on
the disposal of the shares is deemed to be capital in nature
- Units held by a taxpayer in a portfolio of a collective investment scheme
should be investigated for their income or capital characteristics in the same
way as shares

Chapter 4: Specific inclusions in gross income:

- Receipts and accruals can be included in gross income in terms of

o The general definition of gross income; or
o The specific inclusions in paragraph (a) to (n) of the definition of gross
income in s1(1) of the Act
- These specific inclusions are included even though they may be of a capital
nature

Alimony payments: (par (b) of definition of gross income)

∑ On separation or divorce, judicial orders or maintenance orders instruct the
paying spouse to make alimony or maintenance payments to the receiving
spouse
∑ Alimony payments are normally paid monthly from the after-taxed income of
the paying spouse
∑ Such payments are made in respect of a spouse or child’s maintenance
∑ If the paying spouse refrains from paying, the receiving spouse can request a
court to grant a maintenance order
∑ Such an order instructs 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 whole period of
membership
∑ Such a payment in respect of a maintenance order is a once-off event
∑ Amounts paid in terms of such maintenance orders must be included in the
income of the paying spouse

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∑ The receiving spouse must still include such an amount in gross income in
terms of par (b) of the definition, but has no ‘income’ because of the
exemption in s10(1)(u)

For whom: Divorced on or before Divorced after 21 March

21 March 1962:
The paying spouse: S21 deduction
The receiving spouse: Par (b) inclusion in gross
income
1962:
No deduction
S7(11) inclusion in income if a
once-off payment in terms of a
maintenance order
Par (b) inclusion and s10(1)(u)
exemption

Restraint of trade:
∑ A person or company’s right to trade freely is an incorporeal asset and
compensation paid for the restriction or loss of such right is a receipt of a
capital nature
∑ Restraint of trade payments received by the following persons are specifically
included in gross income, irrespective of whether it is of a capital nature or
not: (par (cA))
o A person who is or was a ‘labour worker’ without a certificate of
exemption, or
o A person who is or was a ‘personal service provider’; or
o A person who is or was a ‘personal service company’ or ‘personal
service trust’
∑ The payer of a restraint of trade for the above will be allowed to claim a
deduction under s11(cA)
∑ 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
∑ Restraint of trade 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 payment 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 and consequently does not fall within
par (d)
∑ Restraint of trade received by a natural person that does not relate to
employment will not be included in gross income since it is capital in nature

Services: Compensation for termination of employment: (par (d) of

definition of gross income)
∑ Par(d) includes amounts in respect of the termination or variation of any
office or employment (par(d)(i)), as well as amounts received as a result of
employer-owned policies of insurance that pay out or are ceded as provided
(Par(d)(ii) and (iii))

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∑ Par(d) specifically excludes annuities and therefore effectively refers to lump

sum amounts
∑ Amounts from employer-owned policies of insurance (par(d)(ii)) are, in turn,
specifically excluded from par(a)
∑ This means that amounts from such policies of insurance will be included in
terms of par(d) even though they might be paid in the form of annuities
∑ Voluntary amounts are also specifically included, and such 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 (par(d)(i)) from an employer that is not a retirement
fund, it must be determined whether it also meets the requirements of the
definition of ‘severance benefit’
(This classification will determine in terms of which tax table the normal tax must be
calculated)

∑ The dominant criterion in a determination of whether any situation

constitutes employment for this purpose is that of control of the employee by
the employer
∑ The employer must have control of the conduct of the work in which the
employee is employed, and the employee must have the duty to carry out that
work in accordance with the instructions of the employer as given from time
to time
∑ There must also be a casual or direct relationship between the amount
received and the employment or office
∑ The word ‘office’ has been interpreted to mean a position that:
o Generally, carries with it some remuneration
o Has an existence independent of the person who fills it, and
o Will, usually, be filled by successive holders
∑ Lump sums from employer-owned policies of insurance consist of amounts
paid out or ceded to the employee or director and any of their dependants or
nominees
∑ All such amounts are deemed to be received by or accrued to the employee or
director
∑ The effect is that the employee or director must include all such amounts in
his or her gross income, even though a dependant or a nominee receives such
amount, or such policy is ceded to him or her
∑ All such amounts are exempt in terms of s10(1) (gG)

∑ Any par(d) amount that becomes payable in consequence of a person’s death

is deemed to accrue to such person immediately prior to his or her death
∑ Such amount is included in the deceased’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

∑ The following amounts fall within the terms of par(d)(i):

o 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

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o A payment made by a company to its managing director in

consideration of his resignation from the company
o 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
o Compensation paid to a prospective employee because of the failure of
his prospective employer to enter into a contract of employment
o An amount received by a director for surrendering his right to a
permanent directorship
o 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
s10(1) (gG) exemption will apply
o An asset given to an employee at retirement as a final benefit from his
employer

∑ Severance benefits:
o The concept ‘severance benefit’ includes both lump sums received from
an employer and an associated institution in relation to that employer
o It specifically excludes a retirement fund lump sum benefit, a
retirement fund lump sum withdrawal benefit and the two policies of
insurance in par(d)(ii) and (iii)
o Therefore, only lump sums in respect of the termination or variation of
any office or employment, and lump sums received in commutation of
amounts due under a contract of employment or service can be
severance benefits
o To be a severance benefit, the amount must be received by way of a
lump sum and one of the following three requirements must be met:
ß The person is 55 years of age, or
ß The person has become permanently incapable of holding his or
her office or employment due to sickness, accident, injury or
incapacity through infirmity or mind or body, or
ß 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 at any time held more than 5% 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 taxed in terms of the progressive tax table for natural persons)
∑ Any severance benefit paid after the death of a person accrues to such person
immediately prior to his or her death
∑ The severance benefit is therefore included in the deceased’s gross income
∑ The taxability of the two types of par(d)(i) amounts are summarised in the
table below:

Type: Taxability:
Par(d)(i) amounts that do not meet the Include in gross income in column 3
requirements of the definition of and tax in terms of progressive tax table
severance benefit applicable

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Par(d)(i) amounts that meet the Include in gross income in column 1 and
requirements of the definition of tax in terms of the separate tax table
severance benefit applicable to severance benefits

Lease premiums: (par (g) of definition of gross income)

∑ 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 of certain assets distinct
from and in addition to, or instead of, rent (CIR v Butcher Bros)
∑ 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
∑ A lease premium must be distinguished from a rental deposit and upfront
rental receipt:
o A rental deposit
ß Is generally received up front to cover potential damages that
may occur during the lease period
ß Is normally refundable to the lessee at the end of the lease
period if not required to cover damages or related costs
o An upfront rental receipt:
ß Also called a bullet rental
ß Is for the use or right of use, and remains rent in nature
∑ 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 same amount that is taxable in the hands of the lessor in terms of par (g)
is the amount that is deductible by the lessee paying the lease premium in
terms of s11(f)

Lessor: Lessee:
Include the full amount of the lease S11(f) deduction spread over the greater
premium in his gross income par (g) in of the lease period or 25 years
the year it was received or accrued

∑ Example:
o A lessee sublets land to a sub-lessee for a lump sum payment of
R120 000 plus a monthly rental of R25 000
ß The R120 000 is a lease premium, since it is a consideration
passing from the sub-lessee to the sub-lessor in addition to the
rent
ß The R120 000 will not form part of the gross income of the sub-
lessor, being a receipt or accrual of a capital nature, but may be
subject to capital gains tax if it meets all the requirements
o A lessee cedes or sells his rights under the lease to a third person for a
payment of R120 000
ß This amount is not a lease premium, since it is a consideration
(purchase price for the right of use) passing from a new lessee to
a former lessee and not from a lessee to a lessor

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∑ 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

Leasehold improvements:
∑ The lessor must include the value of the improvements effected on his land or
to his building by the lessee in his gross income
∑ 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
∑ If the amount of the improvement is stipulated in the lease agreement, the
amount is generally included in the lessor’s gross income in the year of
assessment when all the parties sign the lease agreement
∑ If the amount of the improvements is not stipulated in the lease agreement,
the date of completion of the improvement is generally regarded as the date of
accrual because the amount can only be determined then
∑ The amount to be included in gross income:
o the amount stipulated in the agreement as the value of the
improvements, or
o the amount stipulated in the agreement as the amount to be expended
on the improvements, or
o If no amount is stipulated, the 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
∑ A lease may obligate a lessee to erect certain specified buildings, or a
building that must meet certain specifications with a certain minimum value
o The amount to be included in the lessor’s gross income is the fair and
reasonable value of the improvements and not merely the minimum
amount stated
o 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

∑ The lessor must include the full amount in the year in which the right accrued

Theme 5: Exempt income: (Chapter 5)

Income of taxpayer as defined in s1:
∑ The amount of his gross income remaining after the exclusion of any amounts
exempt from normal tax for any year of assessment
∑ Gross income --- exempt income = income

Exempt income:
∑ Amounts received or accrued that are not subject to normal tax

Why governments use tax exemptions:

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∑ To incentivise investments
∑ To provide relief to the poor and underprivileged
∑ 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, to ensure that the same amount of income is not subject to
double taxation
∑ 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 s11(a) and 23(f)

1. Exemptions incentivising investments:

1.1. Interest received by natural persons: (s10(1)(i))

Where a natural person receives interest from a source in SA, the following amounts
qualify for an exemption:
∑ Where the person has not reached the age of 65, the first R23 800 interest
that the person received during the year, or
∑ 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 tax-free investments
∑ Non-natural persons (companies or trusts)

1.2. Interest received by non-residents: (s10(1)(h) and 50A to 50H)

- Only interest received from a SA source will be included in a non-resident’s

gross income
- The source of interest is in SA if the interest is paid by a resident (unless the
interest is attributable to a permanent establishment of the non-resident
situated outside SA) or is received or accrued regarding any funds used or
applied by any person in SA
- Interest received by a non-resident is exempt from normal tax, subject to the
exceptions mentioned below
- Interest received by a non-resident is not tax-free, since it may be subject to 15
withholding tax on interest
- The rate of the withholding tax on interest may be reduced by a double tax
agreement between SA and the other country

The normal tax exemption does not apply in the case of a:

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∑ Natural person:
o Who was physically present in SA for a period exceeding 183 days in
aggregate during the twelve-month period preceding the date on which
the interest is received by or accrues to that person, or
o If the debt from which the interest arises is effectively connected to a
permanent establishment of that person in SA, and
∑ Any other person:
o If the debt from which the interest arises is effectively connected to a
permanent establishment of that person in SA

- Where in the above cases the normal tax exemption does not apply, the
foreign person will be exempt from withholding tax on interest

1.3. Amounts received from tax-free investments: (s12T)

- 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 a person) is exempt from normal tax
- Capital gain or loss from the disposal of a tax-free investment is also
disregarded for capital gains tax purposes
- A dividend paid to a natural person in respect of a tax-free investment is also
exempt from dividends tax

Tax free investment:

∑ 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 a:
o Bank
o Long-term insurer
o Manager as defined in s1 of the Collective Investment Scheme Control
Act
o Manager as defined in s1 of the Collective Investment Scheme Control
Act of a collective investment scheme in participation bonds that
complies with the requirements determined by the Registrar
o Government of the RSA in the national sphere
o Mutual bank
o Co-operative bank

Investment contribution limit:

∑ A natural person is allowed to contribute up to R33 000 cash during a year of
assessment to these investments
∑ A lifetime contribution limitation of R500 000 will apply
∑ Individuals may open multiple 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
∑ The annual or lifetime limit will not be affected by the following:
o Amounts received from a tax-free investment and re-invested

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o Any transfers of amounts between tax-free investments of a person

∑ Any transfer of tax-free investments from one individual to another individual
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
∑ All the proceeds received from the tax-free investment will be exempt from
tax, although the taxpayer contributed in excess of these limits

Death or insolvency:
∑ 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 estate
for levying estate duty
∑ While the investments are held by the estate, the returns from these
investments will continue to be exempt from income and dividends tax

2. Exemptions relating to dividends:

- Dividends received from a SA resident company are generally exempt from

normal tax (s10(1)(k)(i))
- 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%)
- Dividends tax is withheld by the company and paid to SARS
- Since a company’s profit distributed to a shareholder is subject to 28% normal
tax paid by the company and 20% dividends tax paid by the shareholder,
dividends 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 avoidance
- Exemption applies to natural and corporate entity and residents and non-
residents

Cases where dividends are not exempt from normal tax:

∑ Dividends that form part of an amount that is paid as an annuity
∑ Amounts distributed by a Real Estate Investment Trust (REIT) or a controlled
company in respect of a REIT
∑ Dividends in respect of employee-based share schemes
∑ Dividends received by a company in consequence of a cession
∑ Dividends received by a company in consequence of the exercise of a
discretionary power of trustee of a trust
∑ Dividends received by a company in respect of shares borrowed by the
company
∑ Dividends applied against deductible financial payments
∑ Dividends received as part of a dividend-stripping transaction

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- Dividends declared by headquarter companies and foreign dividends may

qualify for specific exemptions

2.1. Dividends from resident companies: (s10(1)(k))

- Dividends declared by SA resident companies are exempt from normal tax

- This exemption applies irrespective of whether the recipient is a natural
person or a corporate entity, and irrespective of whether the recipient is a
resident or not
- Although these dividends are exempt from normal tax, they may be subject to
dividends tax

3. Exemptions relating to employment:

3.1. Salaries paid to an officer or crew member of a ship:

- 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 SA for a period or period
exceeding 183 full days in aggregate during the year of assessment

This exemption only applies if:

∑ The ship is engaged in the international transport of passengers or goods, or
∑ The ship is engaged in prospecting, exploration or mining for, or production
of, any minerals from the seabed outside SA, or
∑ The ship is a SA ship engaged in international shipping, or in fishing outside
SA

- In the case of case of a SA ship engaged in international shipping or in fishing

outside SA, the requirement that the person should be outside SA for a period
or periods exceeding 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
SA

4. Exemptions that incentives education:

4.1. Bursaries and scholarships: (s10(1)(q) and (qA))

- 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 (s10(1)(q))

Requirements for a bursary or scholarship to qualify for this exemption:

∑ The scholarship or bursary must be a bona fide scholarship or bursary
∑ It must be granted to enable or assist a person to study
∑ The person must study at a recognised educational or research institution
∑ Where a bursary is awarded to an employee or a relative of an employee,
further requirements apply, which are discussed below

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- S10(1) (qA) 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
- The same requirements for s10(1)(q) above apply
- The only difference brought about by s10(1) (qA) is that bursaries granted to a
relative who is a person with a disability are subject to a higher threshold

Scholarships or bursaries to non-employees:

∑ These are exempt from normal tax
∑ They refer to scholarships or bursaries that are competed for by, or are
awarded on merit 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:

∑ Exempt from normal tax as long as the employee agrees to reimburse the
employer if he fails to complete his studies (except failure to complete the
course as a result of death, ill-health or injury)

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:
o The remuneration proxy of the employee in relation to a year of
assessment may not exceed R600 000
o The amount of any scholarship or bursary awarded to a relative during
the year of assessment that is exempt, is limited to the following:
ß R20 000 in respect of grades R to 12 (R30 000 if disabled)
ß 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,
(R30 000 of disabled) and
ß R60 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 NQF Act (R90 000 if disabled)
∑ The disabled person must be a family member of the employee in respect of
whom the employee is liable for family care and support
∑ Remuneration proxy is the remuneration that the employee received from the
employer during the immediately preceding year of assessment
∑ 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
reference 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
accommodation when determining the employee’s remuneration proxy

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[See diagram on page 100 for a summary of the requirements]

Interpretation Note No 66 (1 March 2012):

∑ Deals with the taxation of scholarships and bursaries
∑ Provides the following guidelines:
o The phrase ‘bona fide scholarship or bursary granted’ refers to financial
or similar assistance granted to enable a person to study recognised
educational or research institution
o A bona fide scholarship or bursary could include the cost of the
following:
ß Tuition fees
ß Registration fees
ß Examination fees
ß Books
ß Equipment required in that particular field of study
ß Accommodation
ß Meals or meal voucher/card
ß Transport (from residence to campus and vice versa)
o A direct payment of fees is regarded as falling within the ambit of a
bona fide scholarship or bursary
o A recognised educational or research institution is a ‘college’ or
‘university’ as defined in s18 A of the ITA, 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
o The payment received by a person who undertakes research for the
benefit of another person will be subject to normal tax in his hands and
he will not qualify for the exemption
o 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 the exemption, nor are study expenses
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. 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 enabling that employee to further
his own studies
o Any scholarship or bursary granted subject to repayment due to non-
fulfilment of conditions 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 assessment 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 received by way of an interest-free or low-
interest loan will constitute a taxable benefit and will not qualify for the exemption,
as such loan was not granted to enable the employee to study
o 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
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o 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 to enable or assist the person to study.
Where an employer awards 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 reimbursement of expenses, a
taxable benefit
o A scholarship or bursary granted to a visiting academic for the purpose
of lecturing students does not satisfy the study requirements as the
object of the grant will be to impart knowledge, not to gain it
o Expenditure in connection with in-house or on-the-job training or
courses presented by other undertakings 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
o It is common practice for certain educational institutions, notably
universities, to allow their employees 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, the exemption will apply, subject to the limitations
provided for

5. Exemptions relating to government, government officials and

governmental institutions:

5.1. Government and local authorities: (s10(1)(a) and (bA))

- The receipts and accruals of the Government of the Republic is exempt from
normal tax
- This exemption applies to the national, provincial and local governments
- The receipts and accruals of any sphere of government of any country other
than SA are also exempt from tax (s10(1)(bA))

5.2. Semi-public companies and boards, governmental and other

multinational institutions: (s10(1) (bB), (t) and (zE))

The receipts and accruals of the following semi-public companies and boards are
exempt from normal tax:
∑ The Council for Scientific and Industrial Research
∑ The SA Inventions Development Agency
∑ The SA National Roads Agency
∑ Any traditional council or traditional community or any tribe
∑ The Armaments Corporation of SA Ltd contemplated in s2(1) of the
Armaments Corporations of SA Act
∑ The compensation fund or reserve fund established in terms of s15 of the
Compensation for Occupational Injuries and Diseases Act (COIDA)

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This Act regulates the compensation 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 mutual 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 compensation that would have been payable in circumstances in terms of
COIDA
∑ Any water service provider
∑ The Development Bank of SA
∑ The National Housing Finance Corporation established in 1996 by the
National Department of Human Settlements
∑ Amounts received by or accrued to the Small Business Development
Corporation Ltd by way of any subsidy or assistance payable by the state
∑ 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 organisation is exempt
∑ Multinational organisations providing foreign donor funding in terms of an
official development assistance agreement that is binding in terms of s231(13)
of the Constitution
∑ The following multilateral development financial institutions:
o African Development Bank
o World Bank including the International Bank for Reconstruction and
Development and International Development Association
o International Monetary Fund
o African Import and Export Bank
o European Investment Bank under the Treaty of Rome
o New Development Bank

6. Exemptions for organisations involved in non-commercial

activities:

6.1. Public benefit organisation: (s10(1) (cN) and 30)

- Receipts and accruals resulting from any public benefit activity (non-trading
activity) of any approved public benefit organisation as defined in s30(1) are
exempt from normal tax (s10(1) (cN))
- Public benefit activities are determined by the Minister of Finance and
published in the Government Gazette

Public benefit activities according to the different categories are:

∑ Welfare and humanitarian
o The provision of services to homeless children, elderly people, abused
persons or people in distress, and the development of poor and needy
communities
∑ Health care
o The provision of health care services to poor and needy persons,
education on family planning and services in connection with HIV/Aids
∑ Land and housing

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o The development of stands and housing units for low income groups,
residential care for certain elderly people and the building of certain
buildings used by the community
∑ Education and development
o The provision of education on all levels and training to the
unemployed, disabled persons or government officials
∑ Religion, belief or philosophy
o The promotion or practice of a belief or philosophical activities or any
religion that involves acts of worship, witness, teaching and community
service
∑ Cultural
o The promotion and protection of the arts, cultures, customs, libraries
and buildings of historical and cultural interest, and the development
of youth leadership
∑ Conservation, environment and animal welfare
o The protection of the environment and the care and rehabilitation of
animals, as well as environmental awareness programmes and clean-up
projects
∑ Research and consumer rights
o Research in certain fields and the protection of consumer rights and
improvement of products or services
∑ Sport
o The managing of amateur sport or recreation
∑ Providing of funds, assets or other resources
o 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
∑ General
o Supporting or promoting public benefit organisations, as well as the bid
to host or the hosting of any international event where foreign
countries will participate and that will have an economic impact on the
country

- The provision of funds to foreign public benefit organisations, which are

exempt from tax in the foreign 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
of the ITA has also been classified as a public benefit activity

What is a public benefit organisation:

∑ Defined in s30(1) as any organisation:
o That is a non-profit company defined in s1 of the Companies Act, or a
trust or association of person that has been incorporated, formed or
established in SA, or
o A SA agency or branch of a non-resident company, association or a
trust, that is exempt from tax in its country of residence
∑ The sole or principle object 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

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∑ 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 remuneration
∑ The activities of the organisation must be carried on for the benefit of, or must
be widely accessible to, the general public at large, including any sector
thereof
∑ All the above requirements must be met, and 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: (s10(1) (cN))
o The receipts and accruals derived otherwise than from any business
undertaking or trading activity, or
o The receipts and accruals derived from any business undertaking or
trading activity, if
ß The undertaking or activity is integral and directly related to the
sole or principle object of the organisation
ß The undertaking or activity is of an occasional nature and the
undertaken substantially with assistance on a voluntary basis
without compensation, or
ß The undertaking or activity is approved by the Minister by notice
in the Gazette, or
o 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

Theme 6: Deductions: (Chapters 6,7 and 12)

Chapter 6: General deductions:

- Taxable income is the amount remaining after deducting all allowable

deductions and allowances from the ‘income’ as determined

S11(a): (positive terms)

∑ General deduction formula
∑ Unless specifically provided for elsewhere in the Act, expenditure and losses
incurred in the carrying on of a trade might only be deductible if the
requirements laid down in s11(a) are complied with
∑ S11(a) contains positive terms (determining when something is deductible)
∑ Compliance with the positive terms in s11(a) to determine whether an amount
is deductible is, however, not sufficient
∑ The provisions of s23 must also be complied with

S23: (negative terms)

∑ S23 contains negative terms stating which deductions are prohibited (what
is not deductible)

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- First step to determine whether an expenditure or loss is deductible in terms

of s11(a) is to establish whether the taxpayer was carrying on a trade
- No deductions may be claimed in terms of the general deduction formula if
the taxpayer is not carrying on a trade
- The trading requirement also manifests in s23(a) and (b) (being domestic or
private expenditure not incurred for the purposes of trade) and s23(g)
(prohibiting the deduction of amounts not expended for the purposes of trade)

Meaning of ‘carrying on a trade’ (ss1(1). 11A and 20A):

- The opening words of s11 permit deductions from the income of a person only
if the person is carrying on a trade
- The implications are that:
o Expenditure incurred prior to the commencement of that trade is not
deductible in terms of s11
o Expenditure not incurring in carrying on a trade is not deductible in
terms of s11
o Expenditure can only be deducted from the income derived from the
carrying on of a trade

S1(1) definition of ‘trade’:

∑ ‘Every profession, trade, business, employment, calling, occupation or
venture, including the letting of any property and the use of or the grant of
permission to use any patent as defined in the Patents Act, or any design as
defined in the Designs Act, or any trademark 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’

Burgees v CIR:
∑ Held that the taxpayer, who laid down money to obtain a bank guarantee,
which he risked in the hope of making a profit, was engaged in a ‘venture’
∑ A taxpayer carrying on what, standing on its own, amounts to the carrying on
of a trade does not cease to carry on a trade simply because 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”
∑ The term ‘trade’ was intended to embrace every profitable activity

Wide definition of ‘trade’:

- Although the term ‘trade’ is defined, the Act requires the carrying on of a
trade before a s11 deduction can be claimed
- Person who earns a mere salary does not engage in trade
- Interpretation Note No 33 (Issue 5):
o Provide direction in interpreting the ‘carrying on of a trade’
requirement
o SARS will consider each case on its own and 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
- However, in the case Stephan v CIR a single venture was held to be the
‘carrying on of a trade’ (not a single activity like selling a car, but a venture like

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building a complex with the intention of selling it to someone else for

example, or a company is brought to life to resolve another company)
- 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
- Continuity and the profit motive are not prerequisites 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
- In appropriate circumstances, the taxpayer will be carrying on a trade even if
he has no objective to make a profit, or even if he deliberately sets out to make
a loss

- De Beers Holdings v CIR:

o Confirmed principle established in Modderfontein Deep Levels v
Feinstein
o 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
- Interpretation Note No 33 (Issue 5):
o 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 (passive earning of
income)
o 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
- In practice, SARS accepts that if capital is borrowed specifically to reinvest,
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
- Practice Note No 31:
o While it is evident that a person 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
o This practice will also be applied in cases where funds are borrowed at
a certain rate of interest and invested at a lower rate (the taxpayer took
active steps)

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o Although, strictly in law, there is no justification for the deduction, this

practice has developed over the years and will be followed by Inland
Revenue

Robin Consolidated Industries v CIR:

∑ The court had to determine whether the taxpayer had ‘carried on a trade’
during a particular year of assessment
∑ The taxpayer was a manufacturer, wholesaler and retailer of stationary 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 respectively, were undertaken by the liquidators
∑ The court held that transactions concluded by the liquidator involving
the realisation of the taxpayer’s stock during liquidation could not
constitute the carrying on of a trade by the taxpayer himself

Pre-trade expenditure and losses:

∑ Expenditure and losses are generally only deductible if incurred after the
commencement of a trade
∑ A taxpayer mostly 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)
∑ S11A says expenditure or losses incurred before the commencement of that
trade in the setting up of an income-earning structure and not previously
claimed or allowed as a deduction, will be deducted once that specific trade is
carried on (subject to the limitation provisions of s23H – discussed later)
∑ Expenditures which can be deducted as pre-trade expenditure:
o Expenditure qualifying for a specific deduction in terms of s11(a) to (w)
(not s11(x))
o Expenditure qualifying for a specific deduction in terms of s11D
(research and development expenditure)
o Expenditure qualifying for a specific deduction in terms of s24J
(interest incurred)
∑ If the pre-trade expenditure and losses qualifying for this deduction exceed
the taxable income from that trade, such excess may not be set off against
income from another trade
∑ Such excess may be carried forward to the following year of assessment and
may then be set off against taxable income of the same trade

General deduction formula (ss11(a) and 23(g)):

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- Courts have laid down a general deduction formula by holding that ss11(a) and
23(g) must be read together when one considers whether an amount may be
deducted
o Port Elizabeth Electric Tramway Co Ltd v CIR

Elements of the general deduction formula:

∑ Expenditure and losses
∑ Actually incurred
∑ During the year of assessment
∑ In the production of the income
∑ Not of a capital nature
∑ Either in part or in full laid out or expended for the purposes of trade

- The elements above must all be satisfied before an amount can be deducted in
terms of the general deduction formula

1. Expenditure and losses:

∑ Expenditures
o A voluntary obligation
ß You choose to drive your car – pay fuel
ß You choose to use municipal services – municipal taxes
o Requires that there is an obligation or liability to make payment
o There must be some form of impoverishment (even if only temporary)
o CSARS v Labat
∑ Losses are an involuntary obligation
o Burglary

Port Elizabeth Electric Tramway Co Ltd v CIR:

∑ ‘losses’ appeared to mean losses of floating capital employed in the trade
which produces the income

CSARS v Labat:
∑ Held that the terms ‘obligation’ or ‘liability’ 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 temporarily) or
at the very least movement of assets of the person who expends

2. Actually incurred:

Port Elizabeth Electric Tramway Co Ltd v CIR:

∑ The use of the words ‘actually incurred’ rather than ‘necessarily incurred’
widens the field of deductible expenditure

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∑ For instance, one man may conduct his business inefficiently or extravagantly,
incurring expenditure that another man does not incur; such expenditure is
therefore not ‘necessary’, but it is incurred and is therefore deductible

Caltex Oil (SA) Ltd v SIR:

∑ 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 not essential for the deduction of expenditure

- Not required that the amount spent had to be necessary for carrying on of
business

Edgars Stores Ltd v CIR:

∑ Only expenditure 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 s11(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
assessment, it is deductible only in the latter year of assessment

- There must 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

‘Actually incurred’ rule out the deduction of:

∑ Provisions for expenditure or losses that are uncertain; or
∑ Expenditure or losses that may arise in the future; or
∑ Expenditure or losses that are no more than impending or expected

- Estimates of contingent (uncertain) liabilities are not expenditure actually

incurred
- If there is no definite and absolute liability during the year of assessment to
pay an amount, expenditure has not been ‘actually incurred’

- 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 s11(a)
- If the taxpayer subsequently changes his intention and start using the asset as
trading stock, the expenditure may qualify for the s11(a) deduction
- No expenditure is incurred at the time that the intention changes, and
accordingly no deduction is available at this time
- The original cost of the asset is normally brought into account, and effectively
deducted as opening stock in terms of s22(2)(b)

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- If, however, it is trading stock that is treated as having been acquired at a cost
equal to the market value, that market value constitutes the cost price of the
trading stock

- 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
- Condition is that the dispute must first be settled
- To permit the deduction of disputed expenditure would encourage abuse

CIR v Golden Dumps:

∑ Where at the end of the year of assessment in which a deduction is claimed,
the outcome of the dispute is undetermined, it cannot be said that a liability
has been actually incurred
∑ The taxpayer could not properly claim the deduction in that year of
assessment, and the Receiver of Revenue could not properly allow it

CSARS v Labat:
∑ In this case shares were issued for the acquisition of a trademark
∑ Expenditure is actually incurred if a company issues shares in order to
discharge a liability that arose when it was obtained
∑ An example is where an asset is given in exchange for those shares
∑ The SCA disagreed with this decision 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 existing shareholders

- The allotment or issuing of shares in exchange for the acquisition of an asset

can therefore not qualify as an expenditure

Unquantified amounts: Acquisition of assets (s24M):

∑ 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
assessment in which it can be quantified

Disposal or acquisition of equity shares (s24N):

∑ S24N applies when a person sells equity shares to another person during the
year of assessment 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 if all the following requirements are met:
o 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
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)

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o The value of all the equity shares sold during the year to which s24N
applies, exceeds 25% of the total value of equity shares in the company
o The purchaser and seller are not connected persons after the disposal
o The purchaser is obliged to return the equity shares to the seller in the
event of his failure to pay any amount when due
o 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

3. During the year of assessment:

- Although s 11(a) does not specifically require it, the courts have held that
expenditure is only deductible in the year of assessment in which it is incurred
- Expenditure cannot be carried forward to a subsequent year of assessment or
carried back to a previous one
- If an amount is not claimed as a deduction in the correct year of assessment, it
may not be claimed in a later year
- This is so even though it may properly relate to the income of those particular
years
- This rule is, however, subject to the provisions of s23H, which may in certain
instances allow a deduction of expenditure which was incurred in a previous
year of assessment
- 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 in an unquantifiable amount, such expenditure is
deemed to be incurred only in the year of assessment that the amount can be
quantified (s24M(2)(b))

4. In the production of the income:

- ‘Income’ referred to in the phrase ‘in the production of income’ is income as

defined in s1(1) namely the gross income less the exempt income
- No deduction can be claimed if it does not relate to the production of income
as defined (s23(f))

Port Elizabeth Electric Tramway Co Ltd v CIR:

∑ Considered the meaning of ‘in the production of the income’
∑ 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:
o 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
expenditure)
o Is this action so closely connected (or a necessary
concomitant of) to the income-earning activities from which

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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 accident and a potential liability when driving any vehicle. The
two elements are closely connected 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

- It is not necessary that expenditure produces income in the year that it was
incurred before it is deductible
- The income may be earned only in a future year, but as long as the
expenditure was incurred for the purposes of earning that income, it is
deductible
- 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 on retirement, in recognition of prior
services rendered, will not qualify as a deduction
- This expenditure is not in production of any current or future income
- Provider v COT:
o The expenditure was incurred to induce current and future employees
to enter and remain in the service of the taxpayer
o 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
- Amounts caused by gross negligence not deductible

CSARS v Mobile Telephone Networks Holdings (Pty) Ltd:

∑ The Commissioner only allowed a portion of the audit fees as a deduction
∑ Mobile Telephone lent money to its subsidiaries and earned dividends from
investments made
∑ The HC referred to a case 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 accountancy 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 s11(a)
∑ This is in contrast with 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. It was held based on the basis that only 6% of the time was
spent on the audit of the dividend section

CIR v Nemojim (Pty) Ltd:

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∑ Considered the apportionment of expenditure incurred with a dual purpose,

namely, to produce moneys on resale (income) and dividends (exempt
income)
∑ Held that the expenditure had to be apportioned since the purpose could not
accurately be appropriated either to income or to exempt income

5. Not of a capital nature:

- To determine whether an amount is a capital or revenue expenditure one has

to look at the facts of each case and the purpose of the expenditure concerned

2 tests:
∑ Fixed v floating capital
∑ Operations v structure

New State Areas Ltd v CIR:

∑ Floating v fixed capital test
∑ 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
o 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
ß Incurred to perform the income-earning operations is income
in nature
o Fixed capital (being capital employed to acquire or improve property,
plant, tools, etc., which may qualify for capital allowances) is capital in
nature
ß Incurred to establish, improve or add to the income-earning
structure is capital in nature

SIR v Cadac Engineering Works (Pty) Ltd:

∑ Operations v structure test
∑ Expenditure incurred to perform income-earning operations is revenue
in nature
∑ Expenditure incurred to establish, improve or add to income-earning
structure is capital in nature

Rand Mines (Mining & Services) Ltd v CIR:

∑ 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:

∑ 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 character

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- 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
- When a right is acquired for a substantial period, it constitutes an enduring
benefit, this type of expenditure will 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 thus not deductible:
∑ Money spend in the acquisition of fixed capital assets for use in a business.
Included here would be all expenditure connected with or attached to the
acquisition of capital assets
∑ Money spent in order to create a source of income (purchase price of the
goodwill of a business)
∑ Expenditure incurred by a company in obtaining share capital
∑ Transfer fees paid to the transfer of a liquor licence from one set of premises
to another
∑ 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
∑ Amounts paid to extinguish competition in order to expand the goodwill of a
business
∑ 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

Losses of a capital nature that are not deductible under the general deduction
formula:
∑ The loss of money lent, except where the money is lost by moneylenders,
financiers or others whose business is to make loans
∑ 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)
∑ The loss incurred by a tenant on the termination of his lease in connection
with improvements effected by him to the hired premises
∑ 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
(s23)

Prepaid expenditure (s23H):

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- S23H provides exceptions to the normal rule that expenditure is only

deductible in the year of assessment in which it is incurred
- It limits the allowable deductions for certain prepaid expenditure to the extent
that only the expenditure relating to the goods supplied, the services rendered,
or the benefits enjoyed during the year of assessment will be deductible in that
year of assessment
- S23H can only be applied if 2 conditions are met and none of the 4 exceptions
listed in the provisos are applicable

Conditions that must be met:

∑ The expenditure must be allowable as a deduction in terms of the provisions
of s11(a) (general deduction formula, excluding trading stock), s11(c) (legal
expenditure), s 11(d) (repairs), s 11(w) (premiums in respect of key-man
policies) or s11A (qualifying pre-trade expenditure and losses), and
∑ The expenditure must be in respect of
o Goods or services, but all the goods or services will not be supplied or
rendered during the year of assessment, or
o Any other benefits, but the period to which the expenditure relates
extends beyond the year of assessment

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:
∑ Expenditure incurred in respect of goods to be supplied:
o Only expenditure in respect of goods actually supplied in a particular
year will be deductible in that specific year of assessment
∑ Expenditure incurred in respect of services to be rendered:
o 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
∑ Expenditure incurred in respect of any other benefit that the person will
enjoy:
o The amount to be deducted in any year will be determined as follows:

Months in the year during which

the person will enjoy the benefit Total expenditure
on the benefit
Total number of months during
which he will enjoy the benefit
- The deductibility of the prepaid portion in respect of which the benefits will
only be received or enjoyed in a future year is postponed to that future year
(s23H (1))

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- If the above apportionment 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 a manner as is fair and reasonable
(s23H (2))

S23H does not apply to the following situations: (the full amount will be deductible)
∑ If all the goods or services are to be supplied or rendered or enjoyed within 6
months after the end of the year of assessment during which the expenditure
was incurred, unless the expenditure is allowable under s11D(2) (research and
development expenditure) (proviso (aa)) (every prepaid expenditure should
be measured separately according to the contra fiscum rule)
∑ If the aggregate of all the amounts of expenditure incurred by the person,
which may otherwise have been limited by s23H, does not exceed R100 000
(proviso (bb)) (the total of all the prepaid portions of all the expenditure to
which s23H could have been applied must be measured against the R100 000)
∑ Any expenditure to which the provisions of s24K (interest-rate agreements) or
s24L (option contracts) apply (proviso (cc))
∑ 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 s24H) (proviso (dd))

- 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 (s23H(3))

Section 23 prohibited deductions:

1. Private maintenance (s23(a)):

- The costs incurred in the maintenance of any taxpayer, his family or

establishment (his home) are not allowed as a deduction

2. Domestic or private expenditure (s23(b) and (m)):

- 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
- Read together with the trade requirement in s11(a), expenditure linked to the
part occupied for trade purposes should consequently be deductible
- 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

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A part of any private home only qualifies as being occupied for the purposes of trade
if it is: (proviso (a))
∑ Specifically equipped for the purposes of the taxpayer’s trade, and
∑ Regularly and exclusively used for trade purposes

Apart from the aforementioned two requirements, if the trade constitutes any
employment or office, the taxpayer must also comply with one of the following two
conditions before a deduction in respect of the allowable expenditure is allowed:
(proviso (b))
∑ In the case where the income from that employment or office is derived
mainly (more than 50%) from commission or other variable payments based
on his work performance:
o The taxpayer’s duties must be mainly performed otherwise than in an
office provided to him by his employer, or
∑ In the case where the income from employment is not derived mainly from
commission:
o The taxpayer’s duties must be performed mainly in the qualifying part
of the private home

- The effect of the two provisos is that a portion of the taxpayer’s relevant
domestic or private expenditure, which would normally be prohibited
deductions, but which was incurred in respect of that part of his private home
used for the purpose of trade as explained, will be allowed as a deduction if all
the aforementioned requirements are met
- Examples of such allowable expenditure:
o Property rates
o Interest on a mortgage loan
o Security expenditure such as burglar alarms, electric fences and armed-
response services

3. Recoverable expenditure (s23(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 ‘recoverable’ is unsure
- The opinion that the word means ‘capable of being sued for’ was given in
Oosthuizen v Standard Credit Corporation

4. Interest, penalties and taxes (s23(d)):

- The deduction of any tax imposed under the Act or any interest or penalty
imposed under any other Act administered by the Commissioner (example the
VAT Act) is disallowed
- Interest paid by SARS to a person under a tax Act and deemed to have been
accrued to that person in terms of s7E that has to be repaid by that person to
SARS, must be deducted in the year of assessment that the interest is repaid to
SARS (s7F)

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- This deduction is only available to the extent that the interest is or was
included in the person’s taxable income

5. Provisions and reserves (s23(e)):

- Income carried to any reserve fund or capitalised in any way is denied as a

deduction (for example, a provision made out of income to provide for a
contingent liability)
- This provision underlines the ‘actually incurred’ requirement in terms of the
general deduction formula
- The creation of a provision definitely does not represent the ‘incurrence’ of
expenditure
- S23(e) will not apply where the Act specifically allows for the creation of a
reserve, for example the provision for doubtful debt

6. Expenditure incurred to produce exempt income (s23(f)):

- Expenditure incurred in respect of any amounts that are not included in the
term ‘income’ as defined in s1(1) will not qualify as a deduction
- Purpose of this prohibition is to prevent the deduction of expenditure incurred
in the production of gross income that is exempt in terms of s10 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
- 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

CIR v Nemojim (Pty) Ltd:

∑ 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, the court must assess the closeness of the
connection between 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

CIR v Standard Bank of SA Ltd:

∑ The same general test applies to this prohibition as to the general deduction
formula
∑ This general test entails that the purpose of expenditure and the closeness
of the connection between the expenditure and the income-earning
operations must be established

7. Non-trade expenditure (s23(g)):

- Expenditure may be incurred partly for the purpose of trade and partly for
private purposes

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- S23(g) prohibits the deduction of any moneys claimed as a deduction from

income derived from trade ‘to the extent to which such moneys were
not laid out or expended for the purposes of trade’
- It is possible to apportion any expenditure and claim the trade portion of the
expenditure as a deduction

Warner Lambert SA (Pty) Ltd v CSARS:

∑ The taxpayer, a SA 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
Comprehensive Anti-Apartheid Act, it compelled the parent company to
ensure that its SA 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 clearly incurred in the production of income; and social
responsibility expenditure incurred outside the workplace
∑ 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

SCARS v Scribante Construction:

∑ 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
∑ SCA 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

8. Notional interest (s23(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

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9. Restraint of trade (s23(l)):

- S23(l) prohibits the deduction of restraint of trade payments, except those

allowable in terms of s11(cA), being payments to natural persons, labour
brokers and personal service providers allowed over the lesser of the term of
the contract and three years (see chapter 12)

10. Unlawful activities (s23(o)):

- Expenditure incurred in respect of unlawful activities is not deductible

- Unlawful activities include activities referred to in the Prevention and
Combatting 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
- The deduction of any expenditure incurred constituting fruitless and wasteful
expenditure that was made in vain and that would have been avoided if
reasonable care had been exercised by the public entity, is prohibited
(s23(o)(iii))
- A new exemption provides that any amount of fruitless and wasteful
expenditure that was not allowed as a deduction and is subsequently
recovered by the public entity, is deemed to be exempt during the year of
assessment in which it is received or accrued

Prohibition against double deductions (s23B):

- Even though an amount may qualify for a deduction under more than one
provision of the Act, no amount may reduce the taxable income of a taxpayer
more than once (s23B (1))
- Sometimes it might seem that a taxpayer obtains a double deduction
- Example:
o The additional deduction in respect of learnership agreements (s12H)
o The salaries paid to the learners are allowed as deductions in terms of
s11(a) and additional fixed amounts are allowed as deductions in
respect of the same learners if certain conditions are met
- These types of incentives are not double deductions of the same amounts but
merely additional incentives for a specific purpose

- Specific deductions take precedence over the general deduction formula

- If a specific deduction is allowed, no deduction in terms of s11(a) is available,
even if there is a limitation on the amount of the specific deduction or
allowance, or if it is available in a different year of assessment (s23B (3))
- In effect the taxpayer cannot make a deduction under the specific provision
and the general deduction formula
- The taxpayer also does not have a choice between the specific provision and
the general deduction formula

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- Where the specific provision does not apply, the taxpayer may fall back on the
general deduction formula

- 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 (s23B (5))
- If the policy relates to death, disablement or illness arising solely from and in
the course of employment of the employee or director, the employer may
deduct such premiums paid (exclusion in s23B (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

Excessive expenditure (s23(g)):

- Expenditure can be excessive if it is not actually incurred in the production of

the income or for trade purposes
- If the Commissioner disallows the excessive portion of expenditure, the
recipient is nevertheless subject to tax on the full amount

Factors courts take into account to decide whether remuneration alleged to be

excessive was or was not paid in the production of income:
∑ The open market value and the nature of the services rendered
∑ The nature of the business
∑ The relationship between the employer and the employee
∑ The amount of the remuneration in relation to the net profit earned by the
employer
∑ The dependence of the remuneration paid on the profits earned, and
∑ The presence of motives other than ordinary commercial ones (for example
the avoidance of tax or the expression of family feelings)

- 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
- In such a situation, the Commissioner is entitled to challenge the deduction of
the whole or portion of the travel allowances as not being expenditure
incurred in the production of income

Cost of assets and VAT (s23C):

The VAT portion of the cost of an asset or an expenditure incurred has the following
impact:
∑ 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 expenditure (s23C (1))

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∑ If the taxpayer is a non-vendor and no input deduction is claimed, the VAT

portion must be included in the cost (or market value) of the asset or the
amount of the expenditure

- S23C also applies to the notional input tax claimable as a deduction by a

vendor when he acquires ‘second-hand goods- 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

The amount of the input
tax
The total rental

Specific transactions:

1. Advertising:

- Must comply with the general deduction formula to be claimed as a deduction

- The expenditure must be incurred in the production of income and not be of a
capital nature
- When advertising costs result in the acquisition of an asset of a permanent
nature (a direct enduring benefit), they are of a capital nature

CIR v Pick ‘n Pay Wholesalers:

∑ 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 production of income

- Interpretation Note No 45 (Issue 3) explains that sponsorship generally

involves the support or promotion of an activity such as a sporting event in
return for advertising of the sponsor’s products or services
- In terms of security expenditure, a company that, for example, provides an
armed response service or installs security gates may offer to secure a certain
premises in return for extensive advertising of such company’s logo at the
premises or at a high-profile event
- The sponsorship may also take the form of the provision of products related to
the advancement of crime-initiative projects
- In terms of the aforementioned Interpretation Note, the deduction will be
limited to so much of the contributions as the taxpayer can prove produced
commercial value for the business through exposure of its name or products

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2. Copyrights, inventions, patents, trademarks and know-how:

- The cost of taking out a patent is capital expenditure unless a dealer in patent
rights incurs it
- Similarly, a trader or manufacturer’s costs of registering a trademark or trade
name constitute capital expenditure
- The cost incurred for the outright acquisition of a patent or trademark 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
- 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 general deduction formula, other specific
deductions are allowed in respect of these costs
o Annual royalty payments for the use of a patent or trademark are
clearly deductible (the expenditure relates to the right of use and not to
the obtaining of enduring ownership)

3. Damages and compensation:

- Payments for damages or compensation resulting from negligence will only be

deductible if the negligence 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

Joffe & Co (Pty) Ltd v CIR:

∑ The construction of a building does not necessarily lead to its collapse during
that construction process
∑ Held that 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

4. Fines:

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- 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)

ITC 1490 (1990):

∑ 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 so would be contrary to public policy in that it would frustrate the
legislative intent and allow a punishment imposed to be diminished or
lightened

5. Legal expenditure (s11(a) and (c)):

Port Elizabeth Electric Tramway Co Ltd v CIR:

∑ Held that for legal expenditure to be deductible under s11(a), the taxpayer
must show that the legal expenditure is linked to an operation
undertaken with the object of producing income
∑ and not to operations that merely serve to protect an existing
source of income

- If legal expenditure is not deductible under s11(a) it may still be deductible

under s11(c)

Legal expenditure under s11(c):

∑ Any legal expenses actually incurred by the taxpayer during the year of
assessment in respect of any claim, dispute or action at law arising in the
course of or by reason of the ordinary operations undertaken by him in the
carrying on of his trade; provided that the amount to be allowed under this
paragraph in respect of any such expenses shall not be limited to so much
thereof as –
o Is not of a capital nature; and
o Is not incurred in respect of any claim made against the taxpayer for
the payment of damages or compensation if by reason of the nature of
the claim or circumstances and payment which is or might be made in
satisfaction or settlement of the claim does not or would not rank for
deduction from his income under par (a); and
o Is not incurred in respect of any claim made by the taxpayer for the
payment to him of any amount which does not or would not constitute
income of the taxpayer; and
o Is not incurred in respect of any dispute or action at law relating to any
such claim

Legal costs that may be deductible under s11(c):

∑ Legal costs incurred
o In the protection of income
o To prevent a diminution of income
o To prevent an increase in deductible expenditure
o To avoid a loss or resist a claim for compensation

African Greyhound Racing Association (Pty) Ltd v CIR:

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∑ 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. Legal expenditure: Of a capital nature (s11(a) and (c)):

- Both s11(a) and (c) require that the legal expenditure should not be of a capital
nature
- If the purpose of legal costs is to protect trademarks, 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

SIR v Cadac Engineering Works (Pty) Ltd:

∑ 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 s11(a) or (c)

- 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 distinction must be drawn between:

∑ Legal expenditure incurred in the creation of a right to receive income (capital
in nature)
∑ Legal expenditure incurred in the actual earning of the income itself (income
in nature)

7. Losses: Fire, theft and embezzlement (s23(c)):

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

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∑ This is because no deduction may be made for any loss that would otherwise
be allowable to the extent to which it is recoverable under a contract of
insurance, guarantee, security or indemnity (s23(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:
∑ If the loss is due to defalcations by the managing director or owner of the
business, it will not be allowed as a deduction
∑ 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 subordinate employees
are engaged in performing the duties entrusted to them

8. Provisions for anticipated losses or expenditure:

- Provisions made for anticipated losses or expenditure are not deductible,

since no loss or expenditure has been actually incurred as is required by the
general deduction formula
- Such a provision is expressly prohibited by s23(e)
- There are, however, provisions that do provide for certain allowances under
specified circumstances:
o The allowance granted for doubtful debt (s11(j))
o The deduction of future expenditure on contracts (s24C)
Chapter 7: Natural persons:

Assessed losses (s20):

An assessed loss:
∑ When the taxpayer’s expenditure in a year of assessment exceeds the income
produced from that trade
∑ An assessed loss therefore arises when the taxable income of a taxpayer for a
specific year of assessment is a negative amount (and an assessment was
issued to this effect)

S20 allows that, in the case of a natural person:

∑ The balance of an assessed loss suffered in a previous year may be carried
forward
∑ The assessed loss suffered carrying on in any trade during that same year may
be deducted from income derived from another trade carried on by the
taxpayer

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:

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∑ A balance of assessed loss incurred by him in any previous year that has
been carried forward from the preceding year of assessment; and
∑ 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
(An assessed loss incurred as a member of a company/close corporation whose
capital is divided into shares may not be deducted. The effect of this 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)

- The set-off is against income derived by the taxpayer

Conshu (Pty) Ltd v CIR:

∑ A set-off in terms of s20 can only arise if there would otherwise have been
taxable income i.e. pre-tax profit
∑ There must be some taxable income from which the assessed losses can be
deducted

- S20(1) and (2) also apply to non-trade income and a person whose non-trade
expenditure in a particular year of assessment exceeds his non-trade income
for that year can therefore establish a non-trade assessed loss (s20(2A) (a))
- Subject to s20(1), a natural person 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 (s20(2A) (b))
- Consequently, even though a natural person derives no income in Year 2, he
may still carry forward the balance of 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
- Taxpayers other than natural persons must still comply with the trade
requirement (SA Bazaars (Pty) Ltd v CIR)

Limitations regarding the set-off of assessed losses:

An insolvent’s 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 SA (proviso to s20(1)(a))
∑ This is because, in terms of s25C, 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 incurred prior to sequestration 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 s20(1)(a))
∑ Example:

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o Mr A 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 A provided that the
sequestration order has been set aside

Foreign assessed losses:

∑ Foreign assessed losses are fully ring-fenced
∑ Assessed losses and any balance of assessed loss incurred in carrying on any
trade outside SA cannot be offset against any taxable income
∑ It is to protect the existing tax base as there is no information available
relating to the magnitude of foreign losses and to what extent this may erode
the current SA tax base
∑ This restriction only prevents foreign assessed losses being set off against SA
taxable income, not SA assessed losses being set off against foreign taxable
income
∑ It also does not prevent assessed losses incurred in one foreign country being
set off against taxable income from another foreign country

- 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 retirement fund lump sum withdrawal
benefit or a severance benefit

Assessed losses: Ring-fencing of assessed losses from certain trades

(s20A):

- The aforementioned set-off provisions are subject to the ring-fencing

provisions in s20A in respect of assessed losses from certain trades
- Not every activity is a trade and taxpayers often disguise private consumption
as a trade so that expenses and losses can be set off against other income, for
example salary income
- S20A was introduced to prevent expenditure and losses associated with what
was called ‘suspect trades’, such as hobby activities, from being deducted as a
means to reduce taxable income

Ring fencing:
∑ An assessed loss from a specific trade can only be deducted against income
from that same trade

- Offsetting assessed losses from suspect trades against other taxable income
(from both trade and non-trade activities) is therefore restricted by ring-
fencing the losses from suspect trades
- The ring-fencing of an assessed loss from a certain trade applies only to
certain natural persons, not companies or trusts
- Before ring-fencing can apply, the sum of the natural person’s taxable income
(ignoring the provisions of s20A) and any assessed loss or balance of assessed

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loss set-off in determining the taxable income must firstly be equal to or

exceed a certain amount
- The effect is that the taxable income, before taking any assessed loss or
balance of assessed loss income into account must, for the 2020 year of
assessment, be equal to or exceed R1 500 001
- Secondly, the natural person must also meet one of the requirements of the
so-called ‘suspect trade’ test

The heart of the ring-fencing doctrine lies in s20A (1), which provides that:
∑ When the requirements in s20A (2) apply to a trade (see below)
∑ a natural person is prohibited
∑ from setting off an assessed loss incurred by him in that trade
∑ against the income derived by him during the same year of assessment from
another trade or a non-trading activity

- Ring-fenced losses are ring-fenced forever and may only be set off against
income from that same suspect trade (s20A (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)

The s20A (2) requirements:

The s20A (2) requirements involves an enquiry into two matters:

∑ The first focusses on the taxpayer’s level of taxable income
o The taxable income of the natural person for the year of assessment,
before setting-off any current or preceding years’ assessed losses from
any trade, is looked at
o It must be equal or exceed the amount at which the maximum marginal
rate of tax becomes applicable per the progressive tax table
o For the year of assessment ending on 29 February 2020, the maximum
marginal rate of tax of 45% becomes payable when the taxable income
of a natural person exceeds R 1500 000
o It is consequently only necessary to proceed to the second
enquiry if a natural person’s taxable income is equal to or
exceeds R1 500 001
o If the taxable income for the 2020 year of assessment is below
R1 500 001, there is no need to proceed to the second enquiry and the
ring-fencing of assessed losses from certain trades will not be
applicable (s20A will not be applicable)
∑ The second enquiry focusses on the loss-generating activity
o Only losses from suspect trades are subject to potential ring-fencing
o This aspect represents an ‘either/or’ test
o Under this test, the taxpayer is engaged in a ‘suspect trade’ either if

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ßHe has incurred losses in at least ‘three-out-of-five-years’ in that

specific trade (s20A(2)(a)); or
ß That specific trade has been explicitly listed as a suspect trade in
s20A(2)(b)
o Ring-fencing will apply if any one of the ‘either/or’ tests is
applicable (after meeting the first requirement)

‘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
- Loss years are determined without regard to any assessed loss or any balance
of assessed loss carried forward

Specific suspect trade list:

- Ring-fencing will apply if the trade in respect of which the assessed loss was
incurred constitutes any one of the following nine specified activities
- A ‘relative’ is defined for purposes of s20A to include a spouse, parent, child,
stepchild, brother, sister, grandchild or grandparent of the person

The specified activities are:

∑ Sport practised by the taxpayer or any relative
∑ Dealing in collectibles by the taxpayer or any relative
∑ The rental or residential accommodation unless
o 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
∑ The rental of vehicles, aircraft or boats as defined in the Eight Schedule,
unless
o At least 80% of vehicles, aircraft or boats are used by persons who are
not relatives of the taxpayer for at least half of the year of assessment
∑ The showing of animals in competitions by the taxpayer or his relative
∑ Farming or animal breeding, unless the taxpayer carries on farming, animal
breeding or activities of a similar nature on a full-time basis
∑ Performing or creative arts practised by the taxpayer or his relative
(mere passive investment is these activities is not a suspect trade, since the art must
be practised)
∑ Gabling or betting practised by the taxpayer or any relative
(does not include the owning of racehorses, but owners of racehorses are still subject
to the three-out-of-five-year rule)
∑ The acquisition or disposal of any cryptocurrency

- All farming activities carried on by a person are deemed to constitute a single

trade carried on by him (s20A (7))

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- 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 purposes of s20A, this unified treatment (or concession) is
appropriate, since farming typically entails multiple diverse activities

The s20A (3) ‘Facts and circumstances’ escape clause:

- Despite meeting the requirements of the ‘either/or’ test for a suspect trade,
there is an escape clause if the taxpayer can prove that the activity at issue is a
legitimate trade despite suspect classification
- The facts and circumstances 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 taxable capital gain) within a reasonable
period (s20A (3))
- The facts and circumstances listed in the six objective factors (s20A(3)(a)-(f))
are taken into account
- The burden of proof rests upon the taxpayer (s102 of the Tax Administration
Act)
- For an activity to escape the ‘suspect taint’, it must constitute a business in
contradistinction to a mere hobby or isolated venture

Six objective facts:

∑ The proportion of the gross income derived from that trade in relation to the
amount of the allowable deductions incurred in carrying on that trade during
a year of assessment.
[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)]
∑ The level of activities carried on or the amount of expenses incurred in
advertising, promoting or selling while carrying on the trade.
[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]
∑ Whether the trade is carried on in a commercial manner, taking into account
the following:
o The number of full-time employees appointed for purposes of his trade
(employees providing services of a domestic or private nature are
excluded for this purpose, regardless of whether or not they are also
involved in the trade)
o The commercial setting of the premises where the trade is carried on
o The extent of the equipment used exclusively for the trade

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o The time that the taxpayer spends at the premises conducting the
business
∑ 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:
o Any unexpected or unforeseen events that may give rise to losses
o The nature of the business
∑ 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 business plans and steps put in place
by the taxpayer concerned to prevent or limit further losses, and whether the
taxpayer intervened strategically to ensure that the activity will ultimately be
profitable]
∑ The extent to which any asset attributable to the trade is used, or is available
for use, by the person concerned, or any relative, for recreational purposes or
personal consumption.
[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]

Limitations on the facts and circumstances escape clause: the ‘six-out-of-

ten-year’ trade loss prohibition:

- The facts and circumstances escape clause is not altogether absolute

- It does not apply to any trade on the specific suspect trade list (other than
farming) 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 facts
and circumstances escape clause is not applicable and the ring-
fencing provisions of s20A (1) will apply
- 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
- 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

Miscellaneous provisions:

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Set-off against recoupment:

∑ Ring-fenced losses can generally be freely used against income from that
specific trade
∑ The income derived from any suspect trade includes the recoupment under s8
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
∑ This provision ensures that, for example, losses of a suspect trade can
similarly be used against income from recoupments under s8(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 recoupment 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 s20A applies must indicate the
nature of the business in his annual return
∑ Under this rule, a taxpayer is obliged to report a suspect trade under the
three-out-of-five-years test or the suspect activity list in his annual return

Chapter 12: Special deductions and assessed losses:

Restraint of trade payments (s11cA):

S11(cA) provides an allowance in respect of an amount actually incurred by a person

∑ In the course of the carrying on of his trade
∑ As compensation in respect of a restraint of trade
∑ Imposed on any person who
o Is a natural person
o Is or was a labour worker, or
o Is or was a personal service provider

- The deduction is 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
- 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 is the lesser of:

∑ The amount of the restraint of trade divided by the number of years, or part
thereof, during which the restraint of trade applies, or
∑ One-third of the amount incurred

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- The restraint of trade payment will be deductible over the period for which the
restraint is applicable (no apportionment), but never over a period of less than
three years
- If the restraint of trade is paid back to an employer, the amount repaid would
be regarded as a taxable recoupment in the hands of the employer to the
extent that a deduction was previously allowed
- The employee would then be entitled to a deduction for the amount repaid, to
the extent that the amount was previously included in the employee’s gross
income

Repairs: Introduction (s11(d)):

- S11(d) allows a deduction from income, expenditure actually incurred during

the year of assessment, on:
o 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 initial protective treatment or treatment in the
course of replacing infested woodwork); and
o 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 to

the extent that the expenditure is recoverable

Repairs: Meaning:

Repairs:
∑ Restore a structure, machine, etc. to unimpaired by replacing or fixing worn or
damaged parts
∑ Replacement or renewal of something that has become defaced or worn down
by use or possible by wear and tear

- Maintenance could fall under repairs, but will only be deductible under s11(d)
if the maintenance is required to keep the asset in good working order and
condition, which implies that the asset has become worn out by use or wear
and tear

Special Court for Hearing Income Tax Appeals has accepted the following principles:
∑ Repair is restoration by renewal or replacement of subsidiary parts of the
whole
∑ 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)
∑ 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 merely represents the cost

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of restoring the asset to a state in which it will continue to earn income as

before

- 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 property (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 expenditure will be
of a capital nature

Rhodesia Railways Ltd v Collector of Income Tax, Bechuanaland:

∑ The fact that it is necessary, in order to affect a repair, to dismantle
and re-erect an asset completely cannot make a repair a renewal

- If it is a subsidiary part of a larger structure, the work done would constitute a

repair
- If it is not, it will qualify as a separate entity and as the entirety, and the work
done would therefore not constitute repairs
- 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
- The question is one of degree

Flemming v KBI:
∑ 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 s11(d) deduction, 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 subordinate 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 s11(d) will only be available if the original
structure was in need of repair

Reconstruction in lieu of repairs:

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∑ 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
∑ S11(d) clearly provides that the deduction 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 s11(d)

Summarised distinction between repairs and improvements:

∑ Repairs:
o An asset or part of its original structure has deteriorated or was
damaged and was restored to its original condition (restoration)
∑ Improvements:
o Any construction on the asset in addition to its original structure where
the asset was improved from its original condition
o For example, increased income-earning capacity was achieved in the
process
∑ The structure or article should have been damaged or deteriorated and needed
replacement for it to be classified as a repair
∑ Materials need not be identical to the original materials replaced, but should
only restore the asset to the original condition
∑ Repairs done at the same time as improvements may qualify for deduction
under s11(d) if it can be clearly and separately identified from the
improvements (onus is on taxpayer)
∑ If something new is added to an asset, it will usually be considered to be an
improvement (for example underpinning of foundations to remedy cracks in a
building)
∑ Spare parts to be used in repairs will be deemed to be trading stock
∑ Not a requirement that repair is a better option than replacement

Repairs: Occupied for the purpose of trade or in respect of which income

is receivable:

S11(d) does not exclude the deduction of expenditure on repairs that are of a capital
nature but requires that:
∑ The repairs be affected to property
o Occupied for the purpose of trade, or
o In respect of which income is receivable, or
∑ To machinery, implements, utensils and other articles employed by the
taxpayer for the purposes of his trade

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- 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

ITC 163 (1930):

∑ 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 affect repairs up to a cost amounting to a substantial sum
prior to the occupation of the house by the lessee
∑ The court took the view that these were deductible repairs in respect of which
income is receivable, 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 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 existence 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 before
the deduction of repairs will be allowed

- When, however, initial repairs are affected because a bondholder stipulated

that they should be affected before it could advance funds to finance the
acquisition of the property, the repairs, incurred on the stipulation of the
bondholder, are regarded as capital in nature

In s23(b) the legislature reaffirms the requirement of s11(d) by not permitting any
deduction for the cost of repairs of:
∑ Any premises not occupied for the purposes of trade, or
∑ 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 occupied for the purposes of trade’ unless it is:
∑ Specifically equipped for purposes of the taxpayer’s trade, and
∑ Is regularly and exclusively used for those purposes

The following expenses will not qualify as deductible repairs:

∑ Repairs to vacant premises hired by a taxpayer who wishes to prevent
occupation by a competitor
∑ Expenditure on repairs (necessarily mainly due to the manner in which the
tenant treated the property) effected subsequent to reoccupation of the
premises by the owner

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(the fact that the expenditure on repairs arose because of the use of the premises
when income was received will be irrelevant. The expenditure is not wholly or
exclusively laid out or expended for purposes of trade)

- The deduction requires that machinery, implements, utensils and other

articles be employed by the taxpayer for the purpose of his trade before
expenditure on repairs effected to them may be deducted
- It is submitted that when initial repairs are affected to a second-hand asset
immediately after its purchase, but prior to its use in the business, the
deduction under s11(d) will not be allowed
- This is because the asset is 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

Bad debts (s11(i)):

- S11(i) permits a deduction from a taxpayer’s income of the amount of any debt
due to such taxpayer

The deduction is allowed:

∑ To the extent to which the debt has become bad during that year of
assessment
∑ The amount of the debt must have been included in the taxpayer’s income in
either the current or a previous year of assessment
∑ 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
waives his right to claim any portion of the debt owing to him, the portion for
which he has waived his recovery right cannot rank as a bad debt, because 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

When a debt becomes bad:

∑ The debtor commits an act of insolvency and the debt is written off
∑ The claim against the debtor prescribes
∑ The right to claim the debt has fallen away

If a bad debt is claimed as a deduction, the taxpayer must keep record of the
following information:
∑ Name of the debtor
∑ Date the debt was incurred
∑ Amount written off

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∑ His reasons for writing off the debt

∑ Circumstances in which the debt became due

When considering this deduction, remember:

∑ The debt must have become bad during the year of assessment for it to be
claimed in that year
o If a debtor becomes insolvent in a particular year of assessment, the
taxpayer (seller) cannot claim a deduction under s11(i) for that debt in a
later year of assessment
o 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
∑ Debt written off must have been included in the taxpayer’s income
o A bad debt arising from the sale of goods is deductible, since the
amount of the debt would have been included in the seller’s income
when the debt initially arose
o A bad debt arising out of money lent to an employee, for example, is
not deductible in terms of s11(i), since the amount of the debt would
never have been included in the lender’s income
∑ The bad debt must be owing to the taxpayer on the last day of the year of
assessment
o 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 reopened. S8(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
∑ When the debt is later recovered, it must be included in the gross income in
the year of assessment that 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 one of a capital nature
∑ The same principle applies to an inherited business
∑ 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
o Any subsequent amount payable under the guarantee is a capital loss
o 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

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∑ 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 s11(i)

Moneylenders:
∑ S11(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 s11(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:
∑ S11(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 requirements of s11(i) are satisfied
∑ In practice, SARS also permits a taxpayer to deduct the cost of collecting 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 to the extent that the debt is
recoverable from some other person under a guarantee or suretyship
agreement

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, VAT should be excluded when calculating a bad debt for the purposes
of s11(i)

Doubtful debt (s11(j)):

TAKE NOTE OF THE POSITION BEFORE AND AFTER 1 JAN 2019 IN RESPECT
OF THE CALCULATION

Doubtful debt allowance for years of assessments commencing before 1

January 2019:

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S11(j) allows an annual allowance for: (requirements)

∑ Any debt due to the taxpayer that the Commissioner considers to be doubtful,
and
∑ 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)

- 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
- S11(j) provides for an allowance of the amount of debt owed to the taxpayer
that is considered to be doubtful
- S11(i) allows for the deduction of an amount owed to the taxpayer that has
already become bad

- 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 doubtful
- The amount allowed is at the discretion of the Commissioner but is usually
calculated by applying a rate not exceeding 25% to the debt considered to be
doubtful
- For example:
o If the total amount of doubtful debt is R200 000 excluding VAT at
year-end, an allowance of R50 000 (200 000 x 25%) will be allowed as
a doubtful debt deduction under s11(j)

- 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

Doubtful debt allowance for years of assessment commencing on or after

1 January 2019:

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- S11(j) now allows two different allowance options based on whether a taxpayer
applied IFRS 9 (Financial Instruments) to the debt in question for financial
reporting purposes, or not

Irrespective of which option is applicable, an annual allowance can only be claimed

if: (requirements)
∑ The debt is due to the taxpayer, and
∑ The deduction of the debt would have been allowed had it become a bad debt
(implying that it must have previously been included in the taxpayer’s income
– a doubtful debt provision relating to an employee debt would therefore not
be allowed as a deduction)

- The amount of doubtful debt allowance must be included in the taxpayer’s

income in the following year of assessment (proviso to s11(j))
- The taxpayer can make an application to the Commissioner to issue a directive
to increase the 40% inclusion to a maximum of 85%
- The following factors will be considered:
o The history of the debt owed to the taxpayer (including the number of
repayments not met and the period of the debt)
o The steps taken to enforce repayment of the debt
o The likelihood of the debt being recovered
o Any security available in respect of that debt
o The criteria applied by the taxpayer in classifying debt as bad
o Any other factors that the Commissioner may deem relevant

Assessed losses (s20):

An ‘assessed loss’ is defined for the purposes of s20 as:

∑ An amount
∑ by which the deductions allowed under s11
∑ exceeds the income from which they are deducted

- 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’ means the excess of:

∑ Any assessed losses incurred in the carrying on of a trade
∑ Over the taxable income derived from the carrying on of a trade plus any other
taxable income

For the purposes of determining the taxable income of a person, the following
amounts will be allowed to be set off against the income derived by him from
carrying on any trade:
∑ A balance of assessed loss
o Incurred by him in any previous year
o That has been carried forward from the preceding year of assessment
(s20(1)(a))

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∑ An assessed loss
o Incurred by him during the same year of assessment
o 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 (s20(1)(b))

Assessed losses: Balance set off by companies:

SA Bazaars (Pty) Ltd v CIR:

∑ Held that s20(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 s20(A), 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
preceding year to that year of assessment
- The result is that the company loses that balance of assessed loss, even if it
subsequently commences its trade

Robin Consolidated Industries Ltd v CIR:

∑ The court held that s20(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 should not be deviated from, i.e. the
set-off of an assessed loss is admissible only:
o Against income derived from trade, and
o Where the balance of assessed loss has been carried forward from the
previous year

- 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) SARS expresses the view that, in order
for a company to set-off an assessed loss, the company must
o Carry on a trade, and
o Income must have accrued to the company
- Both these requirements must be satisfied before an assessed loss may be
carried forward
- There are cases where it is clear that a 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
carrying on 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 loss may not be set off

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against the interest, since the company cannot be regarded as carrying on the
trade of a moneylender
- A company could, however, 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 special circumstances set out in s103(2), a company may be prevented from

setting off an assessed loss against other income derived by it
- 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:
o 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

Theme 7: Capital Gains Tax (CGT): (Chapter 17)

- GCT was introduced in SA with effect from 1 October 2001 (the valuation
date)
- It is levied to tax the disposal of assets (capital)

Building blocks for a capital gain or loss to be calculated:

∑ Asset
∑ The disposal of the asset during the year of assessment
∑ The base cost of the asset
∑ The proceeds on the disposal of the asset

- 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, and is subject to
normal tax
- The CGT consequences of the disposal of assets are determined under the
Eighth Schedule to the Act
- S26A forms the link between the Act and the Eighth Schedule by including
taxable capital gains as taxable income

The scope of CGT:

∑ 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 the relevant principles established in case law
∑ If the proceeds from the disposal are regarded as revenue in nature:

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o It will be included in gross income in the framework for the calculation

of income and will not be regarded as proceeds for the purposes of the
calculation of a capital gain or loss
∑ As a general rule, the principal Act (ITA) takes precedence over the Eighth
Schedule
∑ Whatever is included in gross income should not be taxed under the Eighth
Schedule
∑ The same applies to expenditure incurred – any amount claimed as a
deduction for tax purposes cannot be included in base cost
∑ Golden rule:
o All gains must either be dealt with under the principal Act or under the
Eighth Schedule

Proceeds from Provisions Calculation of Include in

disposal: applicable: gain where taxable income:
asset is sold:
Revenue in nature Principal Act Include proceeds The full amount is
(or recoupment) in included in gross
gross income. income
Deduct
expenditure or
allowance in terms
of principal Act.
Capital in nature Eighth Schedule Calculate proceeds Apply inclusion
(exclude any gross rate to the amount
income amounts). and include only
Deduct base cost that portion in
(exclude any taxable income
deduction allowed using the
in terms of provisions of the
principal Act). Eighth Schedule.
- 40% for
individuals
- 80% for
companies

- Remember that the Eighth Schedule only applies to the disposal of assets on
or after 1 October 2001 (also referred to as the ‘valuation date’)

Persons liable for CGT (par 2):

∑ Every person is subject 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
∑ A person includes natural persons and persons other than natural persons like
companies, trusts, etc.
∑ Both residents and non-residents are subject to the Schedule’s provisions
∑ Regards should first be given to the provisions of any double taxation
agreement when dealing with non-residents

Residents (par 2(1)(a)):

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∑ SA has a residence-based tax system, which means that residents are taxed on
their worldwide income
∑ Residents pay tax on capital gains resulting from the disposal of assets
situated anywhere in the world

Non-residents (par 2(1)(b) and par 2(2)):

∑ Only subject to CGT in SA on the disposal of the following assets:
o Immovable (fixed) property situated in SA
o Any interest in immovable property situated in SA
o Any assets (movable and immovable) that are effectively connected
with a permanent establishment of that non-resident in SA
∑ Interest in immovable property situated in SA includes:
o Equity shares held in a company
o The ownership or right to ownership of any other entity (including a
trust)
o A vested interest in the assets of a trust
∑ When the resulting gain that the non-resident makes on the disposal of the
interest will be subject to CGT:
o The non-resident disposes of his interest in immovable property and
o 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
SA, and
o The non-resident directly or indirectly holds at least 20% of the interest

Withholding tax applicable to the disposal of immovable property in SA by non-

residents (s35A):
∑ S35A was introduced to facilitate the collection of normal tax on capital gains
from non-residents
∑ It provides that a certain percentage of the proceeds from the disposal of
immovable property in SA by a non-resident seller must be withheld by the
purchaser and paid over to SARS
∑ Amounts to be withheld by the purchaser:
o 7,5% of the amount payable if the seller is a natural person
o 10% of the amount payable if the seller is a company
o 15% of the amount payable if the seller is a trust
∑ The purchaser must complete form NR02 and an IRP6(3) which 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 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
∑ Withholding tax on immovable property in terms of s35A is not a final tax, but
should rather be seen as a prepayment of the normal tax on the capital gain of
the non-resident seller

Requirements in order to calculate a capital gain or loss (building blocks

of CGT):
∑ There has to be an asset
∑ There must have been a disposal of the asset during the year of assessment

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o A disposal is the even that triggers CGT, which includes deemed

disposals
∑ The base cost of the asset must be determined
o The base cost of an asset includes:
ß Acquisition cost
ß Improvement cost
ß Direct cost in respect of the acquisition and disposal of the asset
∑ The proceeds on disposal of the asset must be determined (selling price)

- In terms of par 5, capital gain or loss is disregarded in terms of personal-use

items (for example selling your car), however the sale of immovable property
will be subject to CGT as well the sale of financial instruments such as shares

Determination of taxable capital gain and assessed capital losses (paras 3

to 10):
∑ Proceeds LESS Base cost EQUALS Capital gain/loss

Basic framework for CGT (building blocks):

∑ Asset (par 1)
o Property of whatever nature and any right to, or interest in such
property
∑ Disposal (par 11)
o Any event, act, forbearance or operation of law which results in the
creation, variation, transfer or extinction of an asset
∑ Proceeds (par 35)
o Equal to the total amount received by or accrued to a person in respect
of the disposal
∑ Base cost (par 20)
o If acquired after 1 Oct 2001, the acquisition cost of the asset PLUS
qualifying expenditure

1. The definition of ‘asset’:

Defined in paragraph 1 of the Eight Schedule as:

∑ Property of any nature, whether movable or immovable, corporeal or
incorporeal, and any right or interest of any nature in such property

- Excludes currency, but includes gold or platinum coins and cryptocurrency

- Where cash is donated, there would be no CGT as cash is not an asset
(currency is excluded), but donations tax would need to be considered
- A deposit of cash with a bank does not constitute currency and is not excluded
from the definition. The asset is the right to claim the amount from the bank
- Trading stock is an asset, but these amounts would already have been taken
into account for income tax purposes, so not again for CGT purposes

2. Disposals:

Definition according to par 1:

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∑ An event, act, forbearance or operation of law envisioned in par 11, or which is

in terms of this Schedule, treated as a disposal of an asset

- Disposal events are listed in par 11(1)

- Non-disposal events are listed in par 11(2)
- ‘disposals’ include deemed disposals

Deemed disposal (par 12):

∑ Means that a person is deemed to have disposed of an asset at market value
and immediately reacquired that same asset at market value
∑ With a deemed disposal the asset will establish a base cost equal to the market
value on the date of reacquisition
∑ See examples on pages 590-594

Time of disposal (par 13):

∑ The time of disposal is important, because it may affect the rate at which a
capital gain is taxed, and whether a capital loss may be set off against a capital
gain
∑ When a specific event, act, forbearance or operation of law occurs:
o Time of disposal is when that stipulated event occurs
∑ In the case of a suspensive condition:
o Time of disposal is when the suspensive condition is met
∑ If none of the events above apply:
o Time of disposal is when ownership of the asset changes

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
∑ If the asset in question was excluded from the joint estate, the disposal is
treated as having been made solely by the spouse making the disposal

3. Proceeds:

Definition:
∑ The total amount received by or accrued to a person in respect of that disposal
∑ Has to be a causal connection between receipt of proceeds and the disposal of
the asset

- If proceeds are less than base cost, you made a capital loss
- If proceeds are more than base cost, you made a capital gain

Amounts expressly included as proceeds:

∑ Amount by which any debt owed by a person has been reduced or discharged
∑ Amount received by or accrued to a lessee from the lessor related to
improvements to leased property
∑ Amount by which the market value of a person’s interest in a company, trust
or partnership decreases in consequence of a value-shifting arrangement

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Amounts excluded from the definition of proceeds (par 35(3)):

∑ Amounts taken into account in taxable income for normal tax purposes (i.e.
included in the gross income of that person or that was taken into account
when determining the taxable income of that person)
∑ Amounts repaid or repayable to the purchaser
∑ Any reduction of the proceeds as a result of:
o Cancellation, termination or variation of an agreement
o Prescription or waiver of a claim
o Release from an obligation
o Any other event (e.g. price of disposed asset is reduced – must take
place in the same year of assessment)

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:
o Any capital loss arising from such a disposal is ring-fenced until
sufficient proceeds have accrued to the seller, but
o 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

4. Base cost:

Base cost of a pre-valuation date assets (asset acquired before 1 Oct 2001):
∑ The value of the asset on 1 Oct 2001 PLUS expenditure incurred in on or after
1 Oct 2001
∑ 3 methods to determine the valuation date value:
o 20% TIMES the proceeds; LESS an allowable expenditure incurred on
or after 1 Oct 2001
o Market value of the asset as at 1 Oct 2001; or
o Time-apportionment base cost method
[see diagram on pages 617-617 for diagram]

Base cost of asset acquired after 1 Oct 2001:

∑ Expenditure incurred to acquire that asset
∑ PLUS qualifying expenditures as in par 20 (e.g. valuation/transfer costs,
improvement or enhancement of asset, etc. See list on pages 597-600)

Qualifying expenditure excluded from base cost (par 20(2)):

∑ Borrowing costs (including interest), bond registration costs, bond
cancellation costs, etc
∑ Expenditure relating to holding costs (e.g. repairs, maintenance, insurance,
security, etc.)

The following must reduce the base cost (par 20(3)):

∑ Expenditure already allowed as a deduction for income tax purposes
∑ Expenditure reduced, recovered or paid by another person

Immigrants (par 24):

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∑ Where non-residents become SA residents, their assets are treated as having

been disposed of on the day of becoming SA residents, and then reacquired at
market value on the same day

Determining the market value of assets (par 31):

∑ Generally, the price is based on willing buyer, willing seller at arm’s length in
an open market
∑ However, depending on the type of asset, other rules may apply
∑ Financial instrument listed on a recognised exchange:
o Ruling price on exchange at close of business on last business day
before disposal
∑ Long-term insurance policy:
o Greater of surrender value or insurer’s market value
∑ SA collective investment scheme (securities and property)
o Management company’s repurchase price
∑ Foreign collective investment scheme
o Management company’s repurchase price or if not available, selling
price in open market
∑ Immovable farming property
o Price based on willing buyer, willing seller at arm’s length in open
market, or 30% below fair market value
∑ Unlisted shares:
o Price based on willing buyer, willing seller at arm’s length in open
market ignoring any restrictions on transferability and stipulated
method of valuation

Identical assets (par 32):

∑ Assets that form part of a group of similar assets
∑ When an asset of this nature is sold, it may not be possible to physically
identify the particular asset (e.g. Krugerrands or shares)
∑ Identical assets meet the following requirements:
o Should any asset be sold, it would realise the same amount, regardless
of which asset was disposed of
o All the assets in the group must share the same characteristics, but
should have individual identification numbers
∑ To determine the base cost of identical assets, taxpayers must apply one of the
following methods:
o Specific identification
o First in, first out (FIFO); or
o Weighted average
∑ There are no restrictions to the use of the specific identification or FIFO
methods
∑ The weighted average method may only be used for the following classes of
assets:
o Local and foreign listed shares
o Participatory interests in collective investment schemes
o Gold and platinum coins which prices are regularly published in
newspapers
o Listed s24J instruments

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∑ Weighted average method may not be used for:

o Financial instruments not listed
o Gold and platinum coins of which prices are not published in
newspapers
o Other tangible assets

Part disposals (par 33):

∑ When disposing part 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 part

Market value of the asset disposal

Base cost of entire asset X ______________________________
Market value of the entire asset

∑ The remainder of the expenditure would be allowable as base cost on a future

disposal of the retained part
∑ The following events will not trigger part-disposal for CGT purposes:
o The granting of an option in respect of an asset
ß The base cost will only be affected when the option is exercised
and the asset is disposed of
o The granting, variation or cession of a right of use of an asset without
the receipt or accrual of any proceeds
ß Entering into a lease agreement is not regarded as a part-
disposal
o Improvement, by a lessee, of immovable property owned by a lessor
ß Time of disposal occurs when the lease expires
o Replacement of part of an asset where that replacement comprises a
repair

Exclusions from CGT:

Primary residence exclusion (par 45):

- Has to be situated in SA – only available to SA residents

- Only applies to natural persons and special trusts
- ‘Residence’ includes a boat, caravan, mobile home, etc.

Possibilities of the primary residence exclusion rule:

∑ R2 million gain or loss rule:
o If the primary residence is sold for more than R2 million, the first R2
million of the capital gain or loss should be disregarded
∑ R2 million proceeds rule:
o If the primary residence is sold for R2 million or less and capital gain is
realised, the full capital gain is disregarded

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- Where the R2 million proceeds rule cannot apply (proceeds from the disposal
exceed R2 million or the two exclusions apply), then the R2 million gain or
loss rule may still be applied

Requirements:
∑ Limited to land size of 2 hectares
∑ Limited to period it was occupied as primary residence
∑ Limited to residential use of primary residence

Apportionment of exclusion:
∑ Where 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 million (typically spouses married in community of
property)
∑ Exclusion is limited to the period occupied as primary residence
o Only applies to the period that the person was ordinarily resident in the
primary residence
o Person need not be living in the residence at the time of sale, but only
had to use it as primary residence for a part of the time he owned it
o A person is treated as being ordinarily resident in a residence for a
period of up to two years if he does not reside in it during this period
for the following reasons:
ß Residence was offered for sale and he vacated it due to the
acquisition or intended acquisition of a new primary residence
ß Residence was erected on land acquired for the purpose of
building his primary residence
ß Residence was accidentally rendered uninhabitable
ß Taxpayer died
o When the residence is used as a trade, and the trade constitutes the
temporary letting and hiring of the primary residence, the non-
residential use will be treated as residential use even if the person is
absent from it for a continuous period of up to five years. This applies
if:
ß The person 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
ß No other residence was treated as his primary residence during
the period of letting, and
ß He was either temporarily absent from SA during the period of
letting or was employed or engaged in carrying on business in
SA at a location further than 250km from the residence during
the relevant period
∑ Exclusion is limited to the residential use of the primary residence
o Any trade or non-residential use of the primary residence does not
qualify for the exclusion

[see diagram on page 645 for a visual illustration]

Other exclusions (paras 52 – 64E):

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∑ Personal use items

o Used mainly for purposes other than the carrying on of a trade
o Capital loss is disregarded, but a capital gain is taken into account
o Boats not exceeding 10m in length
o Aircraft having an empty mass of 450kg or less
o Excludes:
ß Immovable property
ß Financial instruments (shares)
∑ Lump sum payments from pension, pension preservation, provident,
provident preservation and retirement annuity funds
∑ Long-term assurance policies exclusion
o Does not apply to foreign policies
∑ Disposal of small business assets exclusion
o 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
o A small business is a business where the market value of all the assets
does not exceed R10 million as at the date of disposal
o Where a person owns more than one business, the exclusion only
applies where all the assets of the combined businesses do not exceed
R10 million
o This exclusion is only available to natural persons made in the disposal
of:
ß An active business asset owned by him as a sole proprietor, or
ß Interest in each of the active business assets of a partnership, or
ß An entire direct interest of at least 10% in the equity of a
company
o Active business asset excludes:
ß Financial instruments
ß Assets held mainly to derive annuities, rental income, foreign
exchange gains, royalties, or similar income
o For a person to qualify for this exclusion, he must
ß Have held the small business for his own benefit for a
continuous period of at least five years prior to the disposal
ß Have been substantially involved in the operations of the small
business during that period
ß 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
ß Have realised all his qualifying capital gains within a period of
24 months, commencing from the date of the first qualifying
disposal
∑ Disposal of microbusiness assets exclusion
∑ Options exclusion
∑ Compensation for personal injury, illness or defamation
∑ Gabling, games and competitions
o As authorised by and conducted under the laws of
SA
o The following will be subject to CGT:

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ß Foreign winnings by natural persons

ß Illegal gambling games and competitions in SA
ß Capital gains by companies, trusts and other non-natural
persons from any gabling, games or competitions whether local
or foreign and whether lawful or unlawful
∑ Collective investment scheme and securities
∑ Donations to public benefit organisations and other exempt persons
∑ Exempt persons
o Only applies to persons who are fully exempt from tax with regard to all
gross income in terms of s10
∑ Capital gains or losses of public benefit organisations
∑ Disposals by small business funding entities
∑ Assets used to produce exempt income
∑ Awards under the Restitution of Land Rights Act
o 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
o The compensation may be in the form of a restitution of a right to land,
or an award or compensation
∑ Disposal of equity shares in foreign companies
o Called the capital gains tax participation exemption and can be divided
into two categories:
ß General participation exemption that applies to the disposal of
foreign equity shares by residents
ß Specific participation exemption that applies to the disposal of
foreign equity shares by headquarter companies
o General participation exemption
ß Requirements:
∑ Person 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
∑ The transferred foreign equity shares are disposed to a
non-resident
∑ Person receives consideration that equals or exceeds the
market value
o Headquarter company participation exemption
ß If the company holds a participation interest of at least 10% of
the equity shares and voting rights of the transferred foreign
company
o Person must also disregard capital gain determined in respect of any
foreign return of capital received by that person from a foreign
company where that person holds at least 10% of the total equity shares
in that company
o This 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
∑ Land donated under the Restitution of Land Rights Act
∑ Disposal by a trust in terms of a share incentive scheme
∑ Disposals by an international shipping company

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Annual exclusion:

- Natural persons and special trusts qualify for an annual exclusion of R40 000
per annum against their totalled capital gain or loss
- The annual exclusion is R300 000 the year the taxpayer dies
- The annual exclusion is a fixed amount which is deducted from the totalled
capital gain/loss after you determined your capital gain/loss of the sale of all
the capital assets
- Totalled capital gain/loss LESS annual exclusion EQUALS
aggregate capital gain/loss
- The annual exclusion cannot be rolled forward and if the full annual exclusion
is not utilised in that year of assessment the ‘unused’ balance is ‘lost’
- Examples:
o Lerato has a totalled capital gain of R50 000 for the 2020 year of
assessment. If we apply the annual exclusion, her aggregate capital
gain is R10 000 (R50 000 – R40 000)
o Lerato has a totalled capital gain of R30 000 for the 2020 year of
assessment. If we apply the annual exclusion, her aggregate capital
gain is nil, but she loses the R10 000 she didn’t utilise (R30 000 –
R40 000)
o Lerato realises a totalled capital loss of R5 000 in the 2020 year of
assessment. If we apply the annual exclusion her capital loss will be
nil, and she will lose the R35 000 annual exclusion that she didn’t use

Rollovers:

- 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

1. Involuntary disposals (par 65)

- Instances where an asset is destroyed, lost, stolen or expropriated and the

person receives compensation (such as an insurance pay-out) and the
proceeds are used to acquire a replacement asset
- The capital gains tax will be realised when the replacement asset is sold
- There is no requirement that the replacement asset must fulfil the same
function as the old asset

Requirements:
∑ 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

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∑ All these replacement asses constitute assets contemplated in s9(2)(k) or (j),

that is, certain immovable property and assets attributable to a permanent
establishment in SA; 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:
∑ If a non-depreciable replacement asset, the capital gain is deferred to the date
when the replacement asset is disposed of
∑ If a depreciable asset, the capital gain will be taxed in proportion to the capital
allowances claimed on the replacement asset

2. Reinvestment in replacement assets (par 66):

- 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

Requirements:
∑ If a person disposes of an asset; and
∑ The replaced asset qualified for capital allowances; 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; and
∑ All these replacement assets constitute assets contemplated in s9(2)(j) or (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

3. Transfer of assets between spouses (s9HB):

- Transferee steps into the shoes of the transferor

- The transferor must disregard any capital gain or loss determined in respect of
the disposal of an asset to his spouse (transferee)
- Does not apply if the transfer is made to a spouse who is a non-resident,
unless that asset remains in the tax net of SA

The transferee is treated as having:

∑ Acquired the asset on the same date on which it was acquired by the transferor

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∑ Acquired the asset for an amount equal to the base cost expenditure incurred
by the transferor prior to the disposal
∑ Incurred that expenditure on the same date and in the same currency that it
was incurred by the transferor
∑ Used the asset in the same manner that it was used by the transferor in the
period prior to the disposal
∑ 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

- If you sell something to a connected person (e.g. your brother), the proceeds
are at market value, not contract value

Calculating taxable capital gains:

To do list:

1. Proceeds (par 35) LESS base cost (par 20) EQUALS capital gain/loss

2. Apply relevant rollovers and exclusions for final capital gain/loss

3. Totalled capital gain/loss (par 3&4) LESS annual exclusion (R40 000) (par 5)
EQUALS aggregate capital gain/loss (par 6&7)

4. Aggregate capital gain/loss LESS assessed capital loss bought forward from
previous years EQUALS net capital gain/loss

5. Net capital gain MULTIPLIED with inclusion rate (40% for individuals/80%
for companies) EQUALS taxable capital gains (par 10)

Proceeds XXX
LESS: Base Cost (xx)
EQUALS: Capital gain/loss (calculation done for each asset XXX
disposal)
LESS: Apply rollover relief and exclusions to each disposal (xx)
Totalled capital gain/loss (ADD: All the calculated capital XXX
gains and losses together)
LESS: Annual exclusions (individuals) (XX)
EQUALS: Aggregate capital gain/loss XXX
LESS: Assessed capital loss brought forward from previous year (xx)
EQUALS: Net capital gain/loss XXX
Net capital gain MULTIPLIED 40% / 80% included in taxable income of X
taxpayer / capital loss rolled forward

New Adventure Shelf v C:SARS:

∑ High Court case
∑ The appellant triggered a capital gain with the sale of immovable property in
their 2007 year of assessment

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∑ Sale was cancelled in the subsequent year, before the purchase price was paid
in full
∑ In terms of the cancellation, the property was returned to the appellant and
the appellant retained payments already made by the purchaser as damages
for breach of contract
∑ The appellant wanted to:
o Reopen their 2007 year of assessment
o Have SARS withdraw their assessment
o Reduce their tax liability seeing that they never received the full
proceeds for the disposal of the asset
∑ HC held:
o The taxpayer did not qualify for any form of relief sought in this
application
o Any adjustments due to cancellation must be made to 2012 year of
assessment (year the contract was cancelled)
∑ One cannot reopen a previous year of assessment that has already
been finalised and was correct, based on something that happened
in a subsequent year that affected that previous year of
assessment’s taxable income
∑ Any adjustments based on the cancellation of the contract would
have to take place in the year of cancellation
∑ Taxpayer would have to pay CGT on the sale of the asset in 2007
which was finalised by SARS
∑ In 2012 the taxpayer would have an adjusted base cost and proceeds due to
the cancellation of the contract and in terms of par 3(b)(ii) and par 4(b)(ii)
(this would create a capital loss for the taxpayer in 2012)

Advice to avoid the abovementioned scenario:

∑ If it is feasible, the contract should be drafted in such a way that the accrual of
the proceeds of a profitable sale is deferred or staggered so that there isn’t an
accrual until the actual receipt of the proceeds, by including certain
suspensive conditions to stagger or defer the accrual of the proceeds of the
sale

Cancellation of contracts after 1 January 2016:

Non-disposal event:
- Par 11(2)(o)
- Where a contract is cancelled in the same year of assessment and the parties
are restored into the position they were before the agreement was entered into

Reverses the capital gain/loss in the year of cancellation

- Par 3(c) and 4(c)

Reinstate the base cost:

- Par 20(4)
- When the sale is cancelled

Amendment to par 35(3)(c) with effect from 15 January 2020:

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- The paragraph now states that proceeds may not be reduced in terms of any
cancellation or termination of an agreement that results in the asset being
reacquired by the person that disposed of it

If there is a cancellation in the same year:

∑ Non-disposal event in terms of par 11(2)(o)

If there is a cancellation in a subsequent year:

∑ Par 3(c), par 4(c) and par 20(4) would apply
∑ Cancellation will nullify the capital gain recognised the year of entering into
the contract

Theme 8: The taxpayer: (Chapter 18, 25 & 27)

Partnerships: Chapter 18:

Partnership:
∑ 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 sharing it between them

Legal status of a partnership:

∑ A partnership is not a separate legal persona distinct from the individuals who
represent it
∑ Thus, a 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

- The partnership is, however, liable for VAT on taxable supplies made by the
partnership and not its individual partners

Types of partnerships:
∑ General partnership
o All the partners manage the business and are personally liable for its
debts
∑ Limited partnership
o Certain partners are not involved in the management of the business
and also only liable for the partnership debt to a limited extent
o The liability of a limited partner is usually limited to the partner’s
partnership contribution
o A silent partner is one who shares in the profits and losses, but who is
not involved in the management of business and whose association
with the business is not publicly known

Normal tax consequences for a partnership and its partners (s24H):

∑ A partnership is not a separate legal entity and is not liable for normal tax

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∑ The individual partners are liable for normal tax on the partnership’s taxable
income
∑ Where any trade or business is carried on in partnership, each partner is
deemed to be carrying on such trade or business (s24H(2))
∑ Where the partnership receives income, it is deemed to be received by each
member of the partnership, and the same applies for any deduction or
allowance for which the partnership may have qualified
∑ 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 (s24H(5))
∑ Partners are jointly and severally liable for the taxable income of the
partnership (if partner A doesn’t pay his part of the tax of the partnership,
partner B will be liable for partner A’s tax liability with regard to the
partnership)

Grundlingh v CSARS:
Legal question:
∑ Whether the taxpayer’s share of the profits of the Lesotho partnership was
taxable only in Lesotho
Facts:
∑ The taxpayer was a SA resident and a partner of a legal partnership in Lesotho
∑ The double tax agreement (DTA) between SA 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
∑ The taxpayer argued that the Lesotho partnership was an enterprise of
Lesotho and therefore only taxable in Lesotho
Court held:
∑ Neither the SA Income Tax Act nor the Lesotho Income Tax Act recognise a
partnership as a separate legal taxable entity
∑ The taxpayer (i.e. partner) is deemed to carry on the business of the Lesotho
partnership
∑ The individual partners, and not the partnership, are tax entities, liable to pay
taxes
∑ The Lesotho partnership is not an enterprise, liable to pay tax in Lesotho, and
therefore the article of the DTA mentioned above is not applicable
∑ The profits from the Lesotho partnership was not only taxable in Lesotho in
the hands of a SA resident, but also in SA

Calculating the taxable income of partners in a partnership:

∑ SARS’s practice 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

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∑ Each partner pays tax according to his total taxable income (including his
share of the partnership income) and the exemptions, 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

Taxable income of partnership results in an assessed taxable loss:

∑ Should the determination of the taxable income of a partnership result in an
assessed loss, the assessed 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 s20 and 20A (chapter 12)

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 (s24H(5))
∑ This applies irrespective of any contrary rule contained in any law or the
partnership agreement
∑ Amounts are deemed to be received by or accrue to 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

Connected persons:
∑ The Act contains provisions aimed at combating tax avoidance where
transactions are entered into between connected persons
∑ These are 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
∑ Example:
o Khosi and Dino are partners in a partnership. Khosi is also a
beneficiary of a family trust. Discuss who will be connected persons
under these circumstances:
ß Khosi and Dino are connected persons because they are partners
in the same partnership
ß Khosi and her family trust are connected persons because par
(b) of the definition of ‘connected persons’ provides that a
beneficiary of the trust is a connected person in relation to the
trust
ß 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

Dissolution/termination of a partnership agreement:

∑ A partnership may be dissolved in the following ways:
o Ceasing to trade

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o The death of a partner

o The retirement of a partner
o 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 occurred, a new
agreement is entered into between the continuing partners – the old
partnership ceases to exist, and a new partnership is formed
∑ Tax consequences of payments made to former partners after the dissolution
of the partnership depend on what the payments were made for
∑ Important principles:
o Income is deemed to be received or accrue to a partner at the time it
accrues or is received by the partnership (s24H(5))
o 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)
o 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 CSARS and Stellenbosch Farmers’ Winery
Ltd v CIR)
o The disposal of an interest in a partnership asset qualifies as a disposal
of an asset for CGT purposes
o An increase or decrease in a partner’s interest in the partnership assets
triggers a part disposal of the partnership assets for CGT purposes
∑ 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:
o The amount should be included in the former partner’s gross income
o The lump sum amount represents a payment of an amount that already
accrued to the former partner
o 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 (s24H(5))
o If 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
o 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
o If the agreement results in him receiving more than the amount that
accrued to him, the excess amount will be 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:
o The amount will be of a capital nature in his hands
o The amount will qualify as proceeds from the disposal of an interest in
the partnership assets and will be subject to CGT
o If this amount is paid to the outgoing partner in instalments over an
agreed period, the amount that accrued to the outgoing partner is still
of a capital nature

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o The amount is treated as having accrued to the outgoing partner at the

time of disposal for CGT purposes
o 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
o 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

Insolvent natural persons: Chapter 25:

The effect of sequestration of various taxpayers:

When a natural person becomes insolvent, three taxpayers have to be dealt with:
1. The insolvent natural person for the period before sequestration (taxpayer 1)
2. The insolvent estate (taxpayer 2)
3. The insolvent natural person for the period from sequestration onwards
(taxpayer 3)

- When a natural person (taxpayer 1) becomes insolvent, his current status is

terminated on the day before the date of sequestration of his estate
- On the date of sequestration, a new taxpayer (taxpayer 2), namely the
insolvent estate, comes into existence
- The purpose of taxpayer 2 is to sell all the assets of the person and to use the
money to pay the outstanding debt
- The insolvent natural person himself is regarded as a new taxpayer (taxpayer
3) from the date of sequestration
- Taxpayer 3 will be taxed on any income that he derives in his personal
capacity from that date
- Taxpayer 3 is not the rehabilitated insolvent person

The Insolvency Act provides for 2 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)
o The date of sequestration is the date on which the surrender of the
estate is accepted by the court
∑ The person’s creditors approach the court to request the sequestration of a
person’s estate (compulsory sequestration)
o The date of sequestration is the date of the provisional sequestration
order, provided such order is subsequently made final
o If the sequestration order was set aside, the tax assessments issued for
taxpayer 1 and taxpayer 2 must be set aside as if it never existed and a
new tax assessment will be issued in the hands of taxpayer 1

- Insolvency of a natural person means that his liabilities exceed his assets and
he is unable to pay his debts
- When an order of sequestration is granted by the court, the estate of the
insolvent person vests in the Master of the HC

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- The Master appoints a trustee to liquidate assets of the insolvent estate and to
pay creditors and costs to the extent that there are available funds

Insolvency of a partner in a partnership:

∑ The insolvency of the partner brings about the dissolution of the partnership
∑ For income tax purposes the estate of each insolvent partner constitutes a
separate ‘person’
∑ The partnership is not regarded as a separate taxable person
∑ Its taxable income is taxed in the hands of the individual partners (s24H)

1).The insolvent natural person before sequestration (taxpayer 1):

- A final income tax return has to be completed for taxpayer 1 for the period
from the first day of the year of assessment to the day before the date of
sequestration
- The primary and secondary rebates available to taxpayers 1 and 3 will be
apportioned proportionately between the periods before and after
sequestration

Although certain amounts might actually be received or accrued only after the date of
sequestration, they are still deemed to accrue to taxpayer 1. The following are
examples of such deemed accruals:
∑ 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. However,
upon the sequestration of an employee within five years of receiving the equity
shares, there is no inclusion in income. Amounts received by the trustee upon
the sale of these shares will only be subject to CGT
∑ Equity instruments acquired by directors and employees of a company (on or
after 26 Oct 2004) are taxed when they vest in the director or employee
∑ Shares received under certain circumstances before 1 Oct 2001 in exchange for
fixed property or other shares are deemed to have been disposed of by
taxpayer 1 on the day before the date of sequestration 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

Assessed loss of taxpayer 1:

∑ An assessed loss of taxpayer 1 can be set off against the income of taxpayer 2
from the carrying on of any trade in SA
∑ This will happen if the trustee of the insolvent estate carries on with a trade
that was being carried on by taxpayer 1 before sequestration
∑ An assessed loss of taxpayer 1 cannot be carried forward to taxpayer 3 unless
the order of sequestration has been set aside
∑ If the order is set aside, the amount to be carried forward to taxpayer 3 will be
reduced by the amount that was allowed to be set off against the income of
taxpayer 2 from the carrying on of a trade
∑ This could happen if the trustee has been continuing with a trade of taxpayer 1
and taxpayer 2 has already been registered as a taxpayer before the
sequestration order is set aside

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- When taxpayer 1’s assets pass to taxpayer 2 at sequestration, there is no actual

or deemed disposal of assets by taxpayer 1
- The assets are realised only when they are sold by the trustee out of taxpayer 2
(the insolvent estate)

- The trustee of taxpayer 2 (the insolvent estate) is also responsible for the tax
affairs of taxpayer 1 for the period prior to the date of sequestration
- Any tax payable by taxpayer 1 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 taxpayer 2
- The trustee must admit the claim and accord it the preference to which it is
entitled in terms of the Insolvency Act

2).The insolvent estate (taxpayer 2):

- Its first period of assessment commences on the date of sequestration and

ends on the last day of February that follows thereafter
- Its last period of assessment will end on the date when the estate is finally
wound up

Taxpayer 1 and 2 are deemed to be one and the same person for the purposes of
determining the following:
∑ The amount of any allowance, deduction or set-off to which taxpayer 2 may be
entitled
o Write-off of assets can continue in taxpayer 2. Assume that taxpayer 2
disposes of depreciable assets in respect of which taxpayer 1 previously
claimed capital allowances. In determining the possible deduction of a
s11(o) allowance, the cost and tax value of the assets to taxpayer 2 will
be taken as the same cost and the tax value of taxpayer 1.
o As already mentioned, any assessed loss (s20) from taxpayer 1’s final
tax calculation may be carried forward to taxpayer 2
∑ Any amount which is recovered or recouped by or otherwise required to be
included in the income of taxpayer 2
o Closing stock of taxpayer 1 in his last assessment will become opening
stock of taxpayer 2 in its first assessment
o Assume that taxpayer 1 has previously written off a debtor and claimed
a deduction. If the debt is later collected by taxpayer 2, the recoupment
of the previously allowed deduction must be included in the income of
taxpayer 2
∑ Any taxable capital gain or assessed capital loss of taxpayer 2
o The base cost of any asset of taxpayer 2 equal to taxpayer 1’s base cost
o Taxpayer 2 is entitled to the same CGT exemptions and exclusions as
well as the same inclusion rate that taxpayer 1 would have been entitled
to
o In the year of sequestration, taxpayers 1, 2 and 3 share the R40 000
annual exclusion

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o In subsequent years, taxpayers 2 and 3 will each be entitled to a full

annual exclusion of R40 000
∑ The annual and lifetime contributions in respect of tax-free investments
o Any amount received by or accrued to taxpayer 2 in respect of a tax-free
investment of taxpayer 1 will be exempt from normal tax

- The trustee of an insolvent estate is the representative taxpayer in respect of

the income received by or accrued to taxpayer 2
- The trustee is responsible for the administration and liquidation of an
insolvent estate
- He must complete a return of the income derived by the insolvent estate and
submit the resulting claim for tax against the assets of the estate
- The trustee could be held personally liable for any tax payable in his capacity
as representative taxpayer, if he disposes of any property with which
outstanding taxes could have been paid

- Taxpayer 2 pays normal tax at the rates applicable to natural persons

- It does, however, not qualify for any of the personal rebates, or for the local
interest exemption because it is not a natural person
- Taxpayer 2 can claim any deductions for which it qualifies, for example
administration charges, such as the trustee’s remuneration
- Taxpayer 2 can also claim any qualifying exemption, for example local
dividends
- 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

3).The insolvent person after sequestration (taxpayer 3):

- Any insolvent person who enters into employment or carries on a profession

or business after his sequestration is liable for tax on that income in his own
right as taxpayer 3
- The first tax period runs from the date of sequestration to the last day of that
year of assessment
- The primary and secondary rebates for taxpayers 1 and 2 are apportioned
proportionately between the periods before and after sequestration

Assessed loss:
∑ An assessed loss of taxpayer 1 cannot be carried forward to taxpayer 3 as it is
carried forward to taxpayer 2
∑ If the order of sequestration has been set aside, the amount to be carried
forward from taxpayer 1 to 3 is reduced by the amount which was set off
against the income of taxpayer 2 from the carrying on of a trade
∑ Any assessed loss of taxpayer 2 may not be carried forward to taxpayer 3,
since they are not deemed the same person for tax purposes

The deceased and deceased estates: Chapter 27:

Three taxpayers involved:

∑ The deceased taxpayer in the final period of assessment before death

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∑ The deceased estate

∑ The beneficiaries of the deceased

Normal tax: the deceased person:

- Final normal tax calculation for the period from the first day of the year of
assessment until the date of his death
- 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
- In the event of the deceased being a provisional taxpayer, the executor is
exempt from having to submit an estimate on behalf of the deceased
- The executor must complete the return of income of the deceased to the date
of death and submit the resulting claim for normal tax payable against the
assets of the estate
- This means that the final normal tax payable by the deceased will be paid out
of the deceased estate
- The tax so paid will qualify as a deduction in the calculation of the dutiable
amount of the deceased estate for estate duty purposes, subject to certain
condition

Income received by or accrued to the deceased person:

∑ The following is relevant for the final normal tax calculation of the deceased:
o Deemed to have disposed of his assets at the date of death at the
market value of those assets at that date
o 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
death
o When a taxpayer dies during the year of assessment, the date used to
determine the ages of children for the purposes of additional medical
tax credit is the date of the taxpayer’s death
o If the deceased’s period of assessment is less than a full year, the
normal tax rebates to which he is entitled are proportionately reduced

∑ Although certain amounts may be received by or accrue to the executor of a

deceased estate only after the date of death, they are deemed to accrue to the
deceased taxpayer immediately prior to his death. The following are examples
of such deemed accruals:
o An employee must include in his 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. If the employee dies within five years of receiving
such shares, there is no income tax liability on the value of the shares.
The effect is that the amount will only be subject to CGT
o Equity instruments acquired by directors and employees of a company
are taxed when they vest in the director or employee
o Shares received under certain circumstances before 1 Oct 200 in
exchange for fixed property or other shares are deemed to have been
disposed of by the taxpayer on the day before his death for an amount

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equal to the lesser of the market value on that day and the market value
on the date of the original exchange
o Lump sum awards from retirement funds payable to the member of any
other person on the death of the member of the fund are deemed to
accrue to the member immediately before his death
o Lump sum payable in consequence of a person’s death in respect of
compensation for the loss of office or employment is deemed to have
accrued to the person immediately before his death. This also applies
to any lump sump received as a severance benefit from an employer

CGT consequences of the deceased person:

∑ A deceased person is deemed to have disposed of his assets to the deceased
estate at the date of his death for an amount equal to market value
∑ This rule does not apply for the following assets:
o Assets awarded to a SA resident surviving spouse
o A long-term insurance policy in respect of which the capital gain or loss
would have been disregarded
o An interest of the deceased in a retirement fund if the capital gains or
losses in respect of those fund interests would have been disregarded
∑ The deceased must disregard any capital gain or loss on assets bequeathed to
the government, public benefit organisation and certain exempt institutions
∑ Assets awarded to surviving resident spouse:
o Deemed disposal is at either the amount of the current year’s
expenditure (trading stock, livestock or produce) or at the base cost of
the assets on the date of death
o Any capital gain or capital loss in respect of a capital asset is rolled over
from the deceased to the surviving resident spouse
∑ Assets awarded to a non-resident spouse:
o The roll-over relief does not apply as this will result in a capital gain
being rolled over from a taxable person to a non-taxable person
o The normal deemed disposal at market value applies, regardless of the
type of asset involved
∑ When a couple is married out of community of property with the accrual
system applicable:
o An accrual claim has to be calculated at date of death
o The spouse with the smaller accrual has a claim against the other
spouse at that date
o An amount can therefore either be owed to the surviving spouse by the
deceased’s estate or vice versa
o As part of settling this claim an asset may be transferred from one
spouse to the other
o If the deceased estate has to transfer an asset to a surviving spouse, the
disposal is at the date of death at base cost if the surviving spouse is a
resident and at market value if a non-resident
o If the surviving spouse transfers an asset to the deceased estate, the
disposal is deemed to take place to the deceased spouse immediately
before death
∑ It may happen that an asset is transferred directly to a non-spouse beneficiary
of the deceased and not to the estate first and then to the beneficiary

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o The disposal of the deceased is then deemed to be to the beneficiary

and not to the estate, but still at market value
o The beneficiary is deemed to have acquired the asset at market value at
the date of the deceased person’s death
∑ In the calculation of the deceased person’s final taxable capital gain, he will be
entitled to:
o Annual exclusion of R300 000 in the year of death instead of the usual
R40 000 which is never apportioned
o Personal-use asset exclusion
o Primary residence exclusion
o Potential small business asset exclusion (where any portion of the R1,8
million exclusion is not used by the deceased, it will be available to his
deceased estate)

Normal tax: the deceased estate:

- This new taxpayer is created after the date of the taxpayer’s death
- The estate of a deceased person is a person separate from the deceased for
normal tax purposes
- The executor must register the deceased estate as a taxpayer, complete the
return of income derived by the deceased estate and submit the resulting
claim for normal tax payable against the assets of the estate
o This means that the final normal tax payable by the deceased estate will
be paid out of cash in the deceased estate and will qualify as a
deduction in the calculation of the dutiable value of the deceased estate
for estate duty purposes
- The deceased estate must be treated as a natural person, except that it will not
qualify for the personal rebates, or the medical tax creditors
- If the deceased person was a resident at the time of his death, the deceased
estate is also deemed to be a resident
- Tax-free investment:
o For the purposes of determining the annual and lifetime contributions
in respect of tax-free investments, the deceased person and his
deceased estate must be deemed to be one and the same person
o Any amount received by or accrued to the deceased estate in respect of
a tax-free investment held by the deceased person at date of death, will
be exempt from normal tax
o Any amount in a tax-free investment that was owned by a deceased
person and transferred to another individual will be deemed to be a
contribution and will be subject to the annual and lifetime contribution
limits of the recipient beneficiaries
- Executor’s fees relating to selling the assets of the deceased are not deductible
for normal tax purposes
- Any assessed loss or assessed capital loss existing at the time of death cannot
be carried over to the deceased estate; it merely falls away
- After assets are transferred to the deceased estate, they could be producing
income in the deceased estate before the assets are distributed to the
beneficiaries:
o This income is generally taxed in the hands of the deceased estate for
the period before the assets are transferred to the beneficiaries

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- When assets are sold to third parties, capital gains or losses could be realised
by the deceased estates

Income of the deceased estate:

∑ Income received by or accrued to the executor of a deceased estate in his
capacity as executor is included in the income of the deceased estate
o This relates to income received or accrued after the deceased’s death up
to the date on which the executor is no longer entitled to the income
o 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
o Income received by or accrued to the executor that would have been
included in the income of the deceased person had he been alive will
also be included in the income of the deceased estate
o Example:
ß An employer awards a performance bonus to a person after his
death. The bonus is neither provided for in the employment
contract nor is it usual practice for an employer to award it. the
bonus will only be payable to the executor of the employee’s
deceased estate after his death, but because it would have been
income of the deceased had he been alive, it will be included in
the deceased estate’s income
ß This does not apply to lump sums awarded to a person as a
result of death, which will be included in the deceased’s gross
income
o This does not apply to amounts received by the executor that the
deceased person had a right to claim during his lifetime
o Example:
ß Leave pay due to a deceased person 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, even though the
amount is received by the executor after the date of death
o It will be necessary to determine the capital or non-capital nature of the
proceeds on disposal of assets by the deceased estate
o Allowances granted to the deceased in the year of assessment preceding
his death (e.g. allowances for doubtful debts or credit agreements):
ß Are included in the income of the of the deceased’s final period
of assessment
ß These allowances are usually included in the income of the
taxpayer in the following year of assessment
ß The deceased person and the deceased estate are two separate
taxpayers, and an allowance granted to one cannot be included
in the income of another
ß Therefore, it is included in the income of the deceased’s final
period of assessment and not in the income of the deceased
estate

In community of property marriages:

∑ When a person dies who was married in community of property, the executor
of the deceased estate administers the assets of the joint estate
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∑ He pays the liabilities of the joint estate, collects the income derived from the
joint assets and distributes the deceased person’s half of the net joint estate to
the beneficiaries in terms of the couple’s joint will
∑ The remaining half accrues to the surviving spouse by virtue of his equal share
in the joint estate
∑ The surviving spouse will be liable for normal tax on his one-half of the
income accruing from the joint assets after the date of death of the deceased
spouse
∑ This half of the income, even though it was received by the executor, was
received on behalf of the surviving spouse and is not taxed in the deceased
estate
∑ The income accruing from the remaining half of the joint assets up until the
date of death is taxed in the hands of the deceased spouse
∑ Only one half of the income accruing after death on assets forming part of the
joint estate will be taxed in the deceased estate
∑ If the deceased person was married in community of property, but was
permanently separated from his spouse, the taxable income of the deceased
person could be calculated as if the marriage were out of community of
property

Capital gains tax consequences for the deceased estate:

∑ Any disposal by the deceased estate is treated for capital gains tax purposes as
if it was made by the deceased (this does not mean that the deceased and his
estate are deemed to be one and the same person)
∑ If the deceased person was a resident at the time of his death, the deceased
estate is also deemed to be a resident
∑ If the deceased person was a non-resident, only certain assets will be subject
to capital gains tax consequences in the deceased estate
∑ Primary residence held by a deceased estate:
o Treated as being ordinarily resided in by the deceased person for a
maximum period of two years after his death
o Should the executor dispose of the residence after two years, the R2
million primary residence exclusion may be set off only against the
portion of the gain applicable to the first two years following the date of
death
o This means that both the deceased and the deceased estate could
qualify for the primary residence exclusion
o The deceased estate is not entitled to any unused portion of the small
business asset exclusion of R1,8 million, but is entitled to disregard any
capital gain or loss on the disposal of any personal-use assets
∑ Annual exclusion:
o An annual exclusion of R40 000 applies to the net capital gain or
assessed capital loss within the deceased estate, not the increased
R300 000 because the deceased and the deceased estate are not
deemed to be one and the same person
o The annual exclusion is available to the estate in the year of death and
in each year thereafter, until the estate is wound up
o This annual exclusion is not apportioned in the year of death or in the
last year of assessment of the estate, even if shorter than 12 months
∑ The deceased estate uses the same inclusion rate as an individual, namely 40%

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∑ It is taxed using the progressive tax tables applicable to individuals

Assets transferred to a resident surviving spouse:

∑ The deceased estate is treated as having acquired the asset from the deceased
at a cost equal to the deceased person’s base cost
∑ This amount plus any further qualifying costs constitutes the base cost of the
asset to the deceased estate
∑ The deceased estate is deemed to have disposed of those assets to the resident
surviving spouse at the same amount
∑ Therefore, no capital gain or loss arises on these assets in the deceased estate

[If the spouse is a non-resident, the asset is treated as a transfer to ‘other

beneficiaries’]

Assets transferred to other beneficiaries:

∑ No capital gain or loss on assets will be transferred from the deceased estate to
other beneficiaries of the deceased person
∑ The deceased estate is treated as having acquired the assets from the deceased
person at a cost equal to their market value at the date of death of the
deceased person
∑ The deceased estate is then deemed to have disposed of those assets at this
amount, together with any further expenditure the deceased estate may incur,
to the beneficiary
∑ This only applies to assets that are transferred to beneficiaries of the deceased
person (heirs and legatees)
∑ For all assets that are sold to third parties, the proceeds on disposal by the
deceased estate will be the selling price received by the executor of the estate

- Any assessed capital loss from the deceased person’s final tax return may not
be carried forward to the deceased estate

Beneficiaries of the deceased:

∑ The beneficiaries of the deceased are not taxed on their inheritance itself
∑ The deceased estate will pay estate duty on the value of the estate
∑ The inheritance itself is of a capital nature and will not be taxed in the hands
of the beneficiaries
∑ However, any income derived from that legacy/inheritance in the hands of the
beneficiaries will be taxable in the hands of those beneficiaries

The minor:

- Minor children are taxed on income in own right

- Rules to prevent tax-avoidance:
o S7(3) – income received by a minor child or stepchild as a result of a
donation made to that child by the parent is deemed to have been
received or accrued to the parent
o S7(4) – income received by a minor child or stepchild as a result of a
cross-donation made by a 3rd person to be received by the parent of that

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child is deemed to have been received or accrued to the parent of that

child

Theme 9: Tax Administration: (Chapter 33)

Tax administration framework:

Chapter 2 of the Constitution:

∑ Everyone has the right to administrative action that is lawful, reasonable and
procedurally fair (s33(1))
∑ Everyone whose rights have been adversely affected by administrative action
is entitled to be given written reasons (s33(2))
∑ National legislation should be enacted to give effect to these rights (s33(3))
o Promotion of Administrative Justice Act (PAJA)
o Tax Administration Act (TAA)

∑ PAJA was enacted to govern the exercise of administrative action in general

∑ The process of administering tax legislation is one of public administration,
thus, SARS’s actions are subject to PAJA
∑ TAA was promulgated on 4 July 2012 and came into effect on 1 October 2012
∑ The Constitution and PAJA apply in a wider context than just tax legislation,
and TAA specifically applies to the administration of tax legislation

Purpose of TAA (s2):

∑ TAA ensures effective and efficient tax collection by:
o Aligning the administration of the tax Acts to the extent practically
possible
o Prescribing the rights and obligations of taxpayers to whom the TAA
applies
o Prescribing the powers and duties of persons engaged in the
administration of various tax Acts
o Generally giving effect to the objects and purposes of tax
administration

Application and scope of TAA (ss 3, 4 and 6):

∑ Applies to every person who is liable to comply with a provision of a tax Act
(including SARS), whether personally or on behalf of another person (s4(1))
∑ Affords certain powers and imposes certain duties on SARS to be exercised for
purposes of the administration of any tax Act (s6(1))

Business days in TAA:

∑ A day that is not a Saturday, Sunday or public holiday
∑ Days between 16 December of each year and 15 January of the following year,
both days inclusive, are not business days for purposes of any requirement
that involves a period in the dispute resolution provisions of the Act

Practice generally prevailing:

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∑ A practice is generally prevailing if it is set out in an official publication

regarding the application or interpretation of a tax Act (s5(1))
∑ An official publication is a binding general ruling, interpretation note, practice
note or public notice issued by a senior SARS official or the Commissioner
∑ Such a practice, other than a binding general ruling, ceases to be generally
prevailing:
o From the date that the provision of the tax Act that is the subject of the
official publication is repealed or amended in a manner that is material
to the practice
o From the date of judgment, if a court overturns or modifies an
interpretation of the tax Act that is the subject of the official publication
o From the date that the official publication is withdrawn or modified
(s5(2))

Tax Acts include:

∑ Income Tax Act
∑ VAT Act
∑ Estate Duty Act
∑ Transfer Duty Act
∑ Securities Transfer Tax Act

International tax agreements:

∑ 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 SA and the competent authority of another country,
relating to the automatic exchange of information under such agreement
∑ Example:
o USA FATCA International Agreement
o Entered into between the governments of USA and SA to automatically
exchange information under the provisions of the double taxation
agreement between these countries

International tax standards:

∑ Purpose is to ensure greater transparency of tax-relevant information and the
automatic exchange of information between tax administrations
∑ This is important in countering cross-border tax evasion, aggressive tax
avoidance and base erosion and profit shifting (BEPS)
∑ Example – Inappropriate transfer pricing arrangements
∑ The OECD Standard for Automatic Exchange of Financial Account
Information in Tax Matters:
o Includes the Common Reporting Standard
o This is an international agreement to automatically share information
on residents’ assets and incomes in conformity with the standard
o The reporting financial institutions are obliged to obtain specified
information and provide it to SARS
∑ The Country-by-Country Reporting Standard for Multinational Enterprises is
part of the framework established for obtaining Country-by-Country reports
o Originating from the OECD BEPS actions and is intended to enhance
transparency and enable tax authorities to assess transfer pricing and
other BEPS risks at a high level
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Persons involved in the tax administration process:

∑ SARS, the Commissioner and SARS officials:
o SARS is an organ of state within the public administration
o The National Treasury determines SA’s tax regime and SARS is
primarily tasked with enforcing tax legislation
o The Minister of Finance is responsible for both these entities
o Persons who must execute the powers and duties afforded to SARS
under the TAA are divided into three tiers:
ß The Commissioner
∑ Appointed by the President
∑ The chief executive officer of SARS responsible for SARS
performing its functions and making all decisions in the
exercise of its powers by SARS
ß A senior SARS official
∑ Commissioner, and
∑ A SARS official with written authority from the
Commissioner to exercise powers and duties of a senior
SARS official, or a person occupying such a post
designated by the Commissioner
ß A SARS official
∑ Commissioner, and
∑ An employee of SARS or person contracted or engaged by
SARS for purposes of administration of a tax Act who
carries out the provisions of such Act under the control,
direction or supervision of the Commissioner
∑ Taxpayer:
o A person upon whom the liability for tax in terms of a tax Act is, or may
be, imposed and who will be personally liable for such tax or may be
chargeable for a tax offence
o The term ‘taxpayer’ also includes:
ß A representative taxpayer
ß A withholding agent
ß A responsible third party
ß A person who is the subject of a request to provide information
under any international tax agreement
∑ Tax Ombud:
o Was established to provide taxpayers accessible and affordable
remedies where they have been affected by non-adherence to
procedures or failure by SARS to respect their rights
o The Tax Ombud is a person appointed in this role by the Minister
o Current Tax Ombud:
ß Judge Bernard Ngoepe appointed on 1 October 2013
o The mandate of the Tax Ombud is to review and address certain
complaints by a taxpayer
o The compliant should relate to a service, procedural or administrative
matter arising from the application of the provisions of the TAA by
SARS

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o The Tax Ombud can only review a request if the taxpayer has exhausted
the available complaints and resolution mechanisms available at SARS
(s18(4))
o The Tax Ombud may initiate reviews, but requires prior approval of the
Minister
o The Tax Ombud must attempt to resolve all issues within its mandate
(s20(1))
o Its recommendations are not binding on a taxpayer or SARS
o If its recommendations are not accepted by a taxpayer or SARS,
reasons must be provided
o These reasons may be included in a report to the Minister or the
Commissioner
∑ Tax practitioners:
o Taxpayers often engage practitioners to assist them in complying with
their obligations due to the complexity and specialised nature of tax
legislation
o Every person who provides advice to another with respect to the
application of a tax Act, or completes or assists in completing a
document to be submitted to SARS by another in terms of a tax Act,
must register with:
ß A recognised controlling body, and
ß SARS, as a tax practitioner (s240(1))
o The person must register within 21 business days after he first provides
advice or completes, or assists to complete, a return
o The following persons do not have to register:
ß A person advises or assists for no consideration to another
person, his employer or a connected person in relation to that
employer
ß A person who only provides advice in anticipation of or in the
course of any litigation to which the Commissioner is a party or
complainant
ß Person only provides advice as an incidental or subordinate part
of providing goods or other services to another person
ß A person only advises or assists in respect of the employer by
whom that person is employed on a full-time basis, or to a
connected person in relation to that employer
ß A person only advises or assists under the supervision of a
registered tax practitioner who has assigned or approved the
assignment of those functions to the person (example a
candidate attorney)
o A person may not register as a tax practitioner, or may be deregistered
if, during the preceding five years, the person has been:
ß Removed from a related profession by a controlling body of
serious misconduct
ß Convicted (in SA or elsewhere) of any offence involving
dishonesty for which the person has been sentenced to a period
of imprisonment exceeding 2 years without the option of a fine
or to a fine exceeding the amount prescribed in the Adjustment
of Fines Act
ß Convicted of a serious tax offence

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ß Non-compliant (outstanding debts exceeding R100 or

outstanding returns with no payment arrangement in place for
an aggregate period of 6 months during the preceding 12 months

Non-compliance and offences:

∑ TAA has measures to ensure and enforce compliance with the requirements of
the tax Acts
o Information gatherings and investigative powers to detect non-
compliance
o Penalties to deter non-compliance
∑ Criminal offences in terms of Chapter 17 of the TAA:
o More serious transgressions
o SARS may lodge a compliant with the National Prosecuting Authority
(NPA) to institute criminal proceedings
∑ TAA distinguishes between criminal offences arising from:
o Non-compliance with tax Acts (s234)
o Tax evasion and fraudulent refunds (s235)
o Transgressions of the secrecy provisions (s236)
o Filing a return without authority (s237)
∑ A serious tax offence is a tax offence for which a person may be liable on
conviction to imprisonment exceeding two years, without the option of a fine;
or to a fine exceeding the equivalent amount of a fine under the Adjustment of
Fines Act

Protective measures in the TAA to counteract potential abuse of power by SARS

officials:
∑ Conflict of interest provisions (s7)
∑ Issuance of identity cards to persons exercising powers or duties for purposes
of administering any tax Act (s8)
∑ Requirement for delegation of powers or duties to be done in a specific
manner (s10)

Tax Administration Regulations

∑ Separate from the TAA
∑ [Referred to further in our notes as Rules]
∑ Govern procedure to be followed:
o Lodging an objection and appeal against an assessment or decision
o Alternative dispute resolution (ADR)
o Conduct and hearing of appeals
o Application on notice to a tax court and transitional arrangements

Tax returns:

Registration and changes in particulars (ss22 and 23):

∑ A person must apply to be registered under a tax Act within 21 business days
after becoming obliged to register, unless a specific tax Act provides otherwise
(s22(1))
∑ Person must provide SARS with further particulars and documents required
for purpose of the registration (s22(2))

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∑ This may include biometric information (22(3))

∑ Where a person applies for registration but fails to provide all particulars and
documents required by SARS, the person is regarded as not having applied for
the registration until all the particulars and documents have been provided
(s22(4))
∑ Where a person who is obliged to register fails to do so, SARS may register the
person for one or more taxes as is appropriate (s22(5))
∑ Tax reference number:
o Allocated by SARS to a person registered under a tax Act (s24(1))
o Must be included in all returns or documents submitted to SARS
(s24(3))
o If not included, the return or document may be declared invalid
(s24(4))
∑ Person registered with SARS under a tax Act should inform SARS of changes
in the following particulars within 21 business days (s23):
o Postal address
o Physical address
o Duly authorised or representative taxpayer
o Banking particulars used for transactions with SARS
o Electronic address used for communication with SARS

Return must be made in the prescribed form and time (s25 and 27)
∑ Timing for return to be submitted:
o Should be submitted on the date specified in the tax Act
o A taxpayer is not absolved of the obligation to submit the return on the
basis that it had not received a tax return from SARS (s25(4))
o Where a tax Act does not specify the date on which a return must be
submitted, it must be submitted on a date prescribed by the Minister by
public notice (s25(1))
o SARS may extend the time period for filing a return in a particular case
or for a class of persons (ss25(6) and (7))
o Such extensions will however not affect the deadline for payment of the
tax (s25(8))
∑ Contents of return:
o Must contain the information prescribed by a tax Act or the
Commissioner and be a full true return (s25(2))
o Must be signed by the taxpayer or its duly authorised representative
o If a tax return is submitted on eFiling, the submission of the return is
regarded as signing the return
o The person signing a return is regarded for all purposes in connection
with a tax Act to be cognisant of the statements made in the return
(s25(3))
o Where a return contains an undisputed error, SARS may request the
taxpayer to submit a corrected return (s25(5))
o A senior SARS official may require that a person submits further, or
more detailed, returns regarding any matter for which a tax return is
required under a tax Act (s27) (e.g. a return for controlled foreign
companies)

A return submitted to SARS includes:

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∑ Self-assessment (for example a VAT 201 declaration)

∑ A form that is a basis for SARS assessment (ITR12 for natural persons; ITR 14
for companies), or
∑ A document that incorporates relevant material as required by a tax Act

Self-assessment (VAT 201 declaration) of a company:

∑ Must file tax return on 25 of the next Month following the VAT period
∑ Taxpayer submits VAT return with various tax outputs that they declare, and
the VAT input claims that they are making
∑ The company will in a VAT refund or a VAT payable position
∑ This VAT return submitted by the taxpayer will be the original assessment

ITR 12 and ITR 14:

∑ Taxpayer submits all the relevant information to SARS and then SARS issues
an assessment
∑ Assessment is a determination of tax liability or tax refund

Document retention (s29):

∑ Failure to retain records is a criminal offence

∑ Burden of proof is on the taxpayer who must discharge this proof on a balance
of probabilities (documentary evidence obtained and retained by the taxpayer
plays an important role in discharging this burden)
∑ The taxpayer must keep records, documents or books of account that: (s29(1))
o Enable the person to observe the requirements of a tax Act
o Enable SARS to be satisfied that the requirements were observed
o Are required by a tax Act or by the Commissioner by public notice
∑ Period or retention (s29(3)):
o Where a person has submitted a tax return, the person must retain the
documents for a period of 5 years after submitting the return (s29(3(a))
o Where a person is not required to submit a return due to the
application of a threshold or an exemption, the person must retain the
above documents for a period of 5 years from the end of the relevant
tax period (s29(3)(b))
∑ A person must retain records for longer than 5 years where: (s32)
o The records are relevant for an audit or investigation of which the
person has been notified of or is aware of, records must be retained
until the audit is completed
o Person has lodged an objection or appeal against an assessment or
decision, records must be retained until the dispute resolution process
is completed
∑ Form of records kept or retained: (s30)
o In their original form, in an orderly fashion and in a safe place
o In a form prescribed by the Commissioner in a public notice, which
may include an electronic form
o In a form specifically authorised by a senior SARS official that is
acceptable to the official
∑ Access to records (s31 and 33):

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o Must at all reasonable times during retention period be open for

inspection by SARS officials in SA

Information gatherings:
- SARS may select a person for inspection, verification, audit or on any basis
including a random risk assessment basis (s40)
- There are 6 information gathering methods at SARS’s disposal

1. Inspection (s45):
∑ A SARS official may without prior notice conduct an inspection at any
premises where he has reasonable belief that a trade or enterprise is being
carried on to determine: (s45(1))
o The identity of the person occupying the premises
o Whether such person is registered for tax
o Whether the person retains records, books of account or documents in
the form as required by the TAA
∑ 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 (s45(2))

2. Request for relevant material (s46):

∑ 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 (s46(2)(a))
∑ Requests to persons other than the taxpayer must be limited to material
maintained or kept, or that should be reasonably maintained or kept, by that
person in relation to the taxpayer (s46(3))
∑ A senior SARS official may also request relevant material held or kept by a
company that is part of the same group of companies as the taxpayer and
located outside SA (s46(2)(b)) (Must be provided within 90 days from date of
request)
∑ Information, a document or thing is relevant material if, in SARS’s opinion, it
is foreseeably relevant for the administration of a tax Act
∑ SARS may require that the material be submitted orally or in writing and
within a reasonable period (s46(1))
∑ SARS may specify the place, format and time the relevant material must be
provided (s46(4))
∑ The period within which the material has to be provided may be extended on
good cause shown (s46(5))
∑ The relevant material requested must be referred to in the request with
reasonable specificity (s46(6))
∑ The senior SARS official may direct that relevant material be provided under
oath or solemn declaration (s46(7(a))
∑ The senior SARS official may direct that relevant material for purpose of a
criminal investigation be provided under oath or solemn declaration in
accordance with certain provisions of the Criminal Procedure Act (s46(7)(b))
∑ May request relevant material for purposes of revenue estimation (s46(8))

3. Production of relevant material in person (s47):

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∑ 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
∑ The purpose is for such a person to be interviewed by a SARS official
concerning the tax affairs of the person
∑ The interview is not for purpose of a criminal investigation, but to clarify
issues of concern to render further verification or audit unnecessary or to
expedite a current verification or audit (s47(1))
∑ A person may be required to produce relevant material in his control (s47(2))
∑ Such material must be referred to in the notice with reasonable specificity
(s47(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 exceed the
distance prescribed by the Commissioner (s47(4))

4. Field audit or criminal investigation:

∑ Civil investigation:
o Field audit
o Taxpayer bears the onus to prove that the correct amount of tax was
paid
o Taxpayer is obliged to provide all information requested by SARS for
purposes of the investigation
∑ Criminal investigation:
o SARS bears the onus to prove that the person has committed an offence
o As a general rule, a taxpayer is not obliged to provide SARS with
information that may be self-incriminating
∑ Where it appears before or during 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 who decides whether a criminal investigation should be
pursued (s43(1))
∑ Relevant material gathered during an audit after the referral for criminal
investigation must be kept separate from the criminal investigation and may
not be used in the criminal proceedings (s43(2))
∑ Where a case referred for criminal investigation is not pursued or terminated,
all relevant material must be returned to the SARS official responsible for the
audit (s43(3)
∑ During a criminal investigation, SARS has to apply its information gathering
powers with due recognition of the taxpayer’s constitutional rights as a
suspect in a criminal investigation (s44(1))
∑ Where a criminal investigation is pursued, SARS may use information
obtained prior to the case being referred for criminal investigation (s44(2))
∑ Any relevant material obtained during the criminal investigation may be used
for purpose of audit as well as subsequent civil and criminal proceedings
(s44(3))
∑ Commencement of an audit or criminal investigation:
o Senior SARS official grants a SARS official written authorisation to
conduct audit or criminal investigation

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o Of the official does not produce the written authorisation, it may be

assumed that the official is not authorised to conduct the audit or
investigation (s41)
o SARS official responsible for an audit must provide the taxpayer notice
of commencement of the audit (s42(1))
o SARS official may request a person to make relevant material available
at the person’s premises which the official may require to audit or
criminally investigate in connection with the administration of a tax Act
in relation to that person or another person
o Such a request must be made with at least 10 business days’ prior
notice (s48(1))
o This request must be made by notice which must state the place where,
date and time that the audit or investigation is due to start and indicate
the initial scope of the audit or investigation (s48(2))
∑ Conducting an audit or criminal investigation:
o The person at whose premises an audit or criminal investigation is
carried out is required to provide reasonable assistance to SARS
o The person must make appropriate facilities available, answer the
relevant questions and submit relevant material as required (s49(1))
o No person may without just cause obstruct a SARS official from
carrying out the audit or investigation
o No person may refuse to give access or provide assistance (s49(2))
o The SARS official responsible for an audit must provide the taxpayer
with a report indicating the stage of completion of the audit (s42(1))
∑ Conclusion and finalisation of an audit or criminal investigation:
o Where the audit or investigation was inconclusive, SARS must inform
the taxpayer within 21 business days after completion of the audit or
investigation
o Where the audit identified potential adjustments of a material nature:
ß SARS must provide the taxpayer with a document containing the
outcome of the audit or investigation within 21 business days
after conclusion
ß This document must set out the grounds for the proposed
assessment or decision (s42(2))
ß 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 (s42(3))
ß The taxpayer can waive his right to receive this document
(s42(4))
o SARS is not required to notify the taxpayer where a senior SARS official
has reasonable grounds to believe that such notification of the stage of
completion or outcome where adjustments of a material nature were
identified, would impede the purpose, progress or outcome of the audit
(s42(5))
o In such a case, SARS must 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

5. Inquiries:

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∑ SARS may conduct an inquiry where there are reasonable grounds to believe
that a person has:
o Failed to comply with an obligation imposed under a tax Act
o Committed a tax offence
o Disposed of, removed or concealed assets which may fully or partly
satisfy an outstanding tax debt
o Relevant material is likely to be revealed at an inquiry
∑ A senior SARS official may authorise a person to conduct such inquiry
(s50(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 (s50(1))
∑ A judge may grant such order if he is satisfied that there are reasonable
grounds to believe that the above circumstances are applicable (s50(1))
∑ The presiding officer may notify a person in writing to appear before the
inquiry
∑ The person will be examined under oath or solemn declaration and will be
required to produce any relevant material in the person’s custody (s53)
∑ Such inquiry is private and confidential (s56(1))
∑ Evidence given by a person under oath or solemn declaration at the inquiry
may be sued by SARS during subsequent proceedings involving the person or
another person
∑ A person has the right to have a representative present when the person
appears as a witness before the presiding officer (s52(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 (s57(2))
∑ Incriminating evidence relating to the following may however be admissible in
criminal proceedings against the person giving the evidence: (s57(2))
o The administrating or taking of an oath or the administrating or
making of a solemn declaration
o Giving false evidence or making a false statement
o Failing to answer questions fully and satisfactorily that were lawfully
put to a person

6. Search and seizure:

∑ Search of premises under a warrant:
o SARS may search the premises as well as any person present, and seize
relevant material (s59(1))
o SARS applies for a warrant
o During application, SARS must set out facts to indicate that there are
reasonable grounds to believe that a person failed to comply with a
provision of a tax Act or committed a tax offence, and that the relevant
material likely to be found on the premises may provide evidence of the
failure or offence (s60(1))
o The warrant must contain (s60(2)):
ß The alleged failure or offence
ß The person alleged to have failed to comply or to have
committed the offence

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ß The premises to be searched

ß The fact that relevant material is likely to be found on the
premises
o The warrant must be exercised within 45 business days (s59(3))
o When a SARS official exercises a power under a warrant, he must
produce the warrant (s61(1))
o If a warrant is not produced, a person may refuse the official access to
the premises (s61(2))
o During the search, the SARS official may: (s61(3))
ß Open or remove anything the official suspects to contain
relevant material
ß Seize any relevant material
ß Where relevant material is on a computer or storage device, the
computer or storage device may be seized and retained for as
long as necessary to copy the material required
ß Make extracts from or copies of relevant material and require a
person to give an explanation of relevant material
ß If premises listed is a vessel, aircraft or vehicle, stop it and
search it or the person therein
o Official must make inventory of relevant material seized (s61(4))
o Official may only search a person of the same gender (s61(5))
o Official may request assistance of a police officer if the official considers
it reasonably necessary (s61(6))
o A person may not without reasonable cause refuse to give assistance as
may reasonably be required to execute the warrant (s61(7))
o Seized material must be retained and preserved until no longer
required for the investigation or until conclusion of legal proceedings in
which it is required to be used (s61(8))
∑ Search of premises not identified in the warrant (s62):
o In limited circumstances by a senior SARS official
o Official has reasonable grounds to believe that:
ß Relevant material included in warrant is at the premises not
identified in warrant
ß Relevant material may be removed or destroyed
ß Warrant cannot be obtained in time to prevent the removal or
destruction; and
ß Delay in obtaining the warrant would defeat the object of the
search and seizure
o Official may not enter dwelling-house or domestic premises not
identified in warrant without occupant’s consent, except any part
thereof used for purposes of trade
∑ Search without a warrant (s63):
o In limited circumstances by a senior SARS official
o Only if the person affected consents thereto or the official on
reasonable grounds is satisfied that: (s63(1))
ß There may be an imminent removal or destruction of relevant
material likely to be found on the premises
ß If SARS applies for a search warrant under the relevant
empowering section of the TAA, it will be issued; and
ß The delay in obtaining a warrant would defeat the object of the
search and seizure
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o 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 TAA and also the alleged non-compliance or offence (s63(2))
o SARS may not enter a dwelling-house or domestic premises without the
occupant’s consent, except any part thereof used for purposes of trade
∑ Search and seizure of material subject to legal professional privilege (s64):
o SARS must arrange for the attendance of a legal practitioner before
execution of the warrant (s64(1))
o The legal practitioner must be a legal practitioner from the panel from
which the chairpersons of the Tax Board must be selected (s64(2))
o This legal practitioner may appoint a substitute legal practitioner to be
present on his behalf during the execution of the warrant
o If specific material is claimed to be subject to legal professional
privilege in the absence of a legal practitioner, it must be sealed and
handed over to the appointed legal practitioner to determine if such
privilege exists within 21 business days (s64(3))
o If such determination is not made or a party is not satisfied with it, the
legal practitioner has to retain the information until the parties resolve
the dispute or a court makes an order (s64(6))
∑ Application for return of seized material (s66):
o 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
o If SARS refuses, the person may apply to the High Court for the return
and compensation
o The court may make an order as it deems fit

Assessments:

- Dealt with in Chapter 8 of TAA

- Refers to the determination of the amount of a tax liability or refund
- This assessment can be made by the taxpayer or SARS, depending on the type
of tax and circumstances
- The first assessment made in respect of a tax liability is referred to as the
original assessment
- Subsequent to this original assessment, SARS can make additional
assessments, reduce an assessment or even withdraw an assessment
- If a taxpayer is aggrieved by an assessment, the dispute resolution process
(discussed later) must be followed
- If no further remedy is available to the taxpayer to dispute an assessment, that
assessment becomes final

Original assessments: (s91)

∑ Some tax returns provide SARS with information which it processes, and then
issues an assessment
∑ Self-assessments:
o The tax payable based on these returns is self-assessed by the taxpayer
o Example VAT returns (VAT 201 declarations)

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o In the case of a self-assessment, the return submitted is the original

assessment (s91(2))
∑ When you do your tax return as an individual or a company, SARS issues an
assessment once you submitted your return called an ITA 34
∑ This assessment made by SARS is the original assessment based on
information submitted by the taxpayer on the return (s91(1))
∑ If SARS makes an assessment, it must issue a notice of assessment to the
taxpayer stating: (s96(1))
o The name of the taxpayer
o The taxpayer’s reference number, or if one has not been allocated, any
other form of identification
o The date of the assessment
o The amount of the assessment
o The tax period in relation to which the assessment is made
o The date for paying the amount assessed
o A summary of the procedures for lodging an objection to the
assessment
∑ If a taxpayer is required to make a determination of the amount of a tax
liability, but no return is required, the payment of the tax due is the original
assessment (s91(3))

Additional assessments: (s92)

∑ SARS must make an additional assessment if it is satisfied that the assessment
does not reflect the correct application of a tax Act to the prejudice of SARS or
the fiscus (s92)
∑ SARS often makes additional assessments after obtaining further information
by way of one of their information gathering mechanisms
∑ SARS may not raise an additional assessment after the expiry of a specified
period of time after the original assessment

Reduced assessments: (s93)

∑ SARS may make a reduced assessment if the amount of a tax liability is
reduced by reason of a successful dispute, to give effect to a judgment
pursuant to an appeal where there is no further rights of appeal or a
settlement (s93(1)(a),(b) or (c))
∑ SARS may reduce an assessment if satisfied that there is a readily apparent
undisputed error in the assessment by SARS or the taxpayer in a return
(s93(1)(d))
∑ If an error is disputed, the taxpayer must follow the dispute resolution process
∑ SARS may also make a reduced assessment where a senior SARS official is
satisfied that an assessment was based on a third party’s failure to submit a
return, submission of an incorrect return by a third party, a processing error
by SARS or a return fraudulently submitted by person not authorised by the
taxpayer (s93(1)(e))
∑ Reduced assessment is not subject to prescription periods, as it would not
prejudice the taxpayer
∑ Reduced assessments can be made without the taxpayer lodging an objection
or noting an appeal (s93(2))

Jeopardy assessments: (s94)

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∑ Protective assessments that can be used to secure the early collection of tax
that would otherwise be in jeopardy
∑ SARS has the right to raise a jeopardy assessment prior to the date that a tax
return is due, if the Commissioner is satisfied that such assessment is
necessary to secure an amount of tax that may otherwise be in jeopardy
(s94(1))
∑ This assessment is typically 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
∑ The notice of assessment must provide reasons why the tax is considered to be
in jeopardy (s96(2))
∑ The taxpayer may lodge an objection or note an appeal in a similar manner as
any other type of assessment
∑ However, a taxpayer may also make a review application to the High Court on
grounds that: (s94(2))
o The amount assessed is excessive, or
o The circumstances that justify a jeopardy assessment do not exist
∑ The burden of proof is on SARS to prove that making a jeopardy assessment
was reasonable under the circumstances (s94(3))

Estimation of assessments:
∑ If a taxpayer fails to submit a tax return, fails to make payment of tax or
submits a return or information that is incorrect or inadequate, SARS may
make an assessment, based in whole or in part, on an estimate (s95(1) and
91(4))
∑ The estimate must be based on information readily available to SARS (s95(2))
∑ In the case of an estimated assessment or an assessment that is not fully based
on a return submitted by the taxpayer (e.g. an additional or jeopardy
assessment), the notice of assessment must contain a statement of the
grounds of the assessment (s96(2)(a))
∑ The fact that SARS made an assessment based on an estimate does not detract
from the taxpayer’s obligation to submit a return if a tax Act requires it
(s91(5)(a))
∑ The taxpayer may within 30 business days from the date of the assessment
request SARS to issue a reduced assessment or additional assessment by
submitting a complete and accurate return (s91(5)(b) and 96(6))
∑ An assessment based on estimation is not subject to objection and appeal
unless the taxpayer submits the return and SARS does not issue a reduced or
additional assessment (s91(5)(c))
∑ SARS bears the burden of proving that the estimate on which an assessment
was made is reasonable
∑ If a taxpayer is unable to submit an accurate return, a senior SARS official and
the taxpayer may agree in writing to the amount of tax chargeable and issue
an assessment accordingly
∑ This agreed assessment is not subject to objection and appeal (s95(3))

Withdrawal of assessments: (s98)

∑ SARS may withdraw an assessment when the assessment:
o Was issued to the incorrect taxpayer

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o Was raised for the incorrect tax period

o Was due to incorrect payment allocation

Pay now, argue later:

∑ Metcash Trading v CSARS:
o ‘Pay now, argue later’-principle is not unconstitutional
∑ S164 of the TAA
o Taxpayer may request SARS to suspend the payment of tax or a portion
thereof

Prescription (s99):

SARS may not make an assessment under the following circumstances (s99(1)):
∑ 3 years from date of original assessment (income tax)
∑ 5 years from date of original assessment by way of self-assessment by the
taxpayer (VAT)
∑ Where a dispute was resolved under the dispute resolution process

The above prescription rules do not apply where (s99(2)):

∑ Amount of tax chargeable was not assessed due to fraud, misrepresentation or
non-disclosure of material facts
∑ In the case of self-assessment, the amount of tax chargeable was not assessed
due to fraud, intentional or negligent misrepresentation, intentional or
negligent non-disclosure of material facts, or failure to submit a return, or
where not return is required, failure to make payment
∑ Agreement to such effect between SARS and the taxpayer before expiry of the
limitation period
∑ Where it is necessary to give effect to the resolution of a dispute under the
dispute resolution process

- Where a delay is caused by a taxpayer who failed to provide relevant material

within the period specified by SARS or by an information entitlement dispute,
include legal proceedings, SARS is allowed to extend the prescription periods
appropriately 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 (s99(3))

SARS may extent the prescription period by 3 years in the case of an assessment by
SARS, or by 2 years in the case of a self-assessment where an audit or investigation
relates to the following matters: (s99(4))
∑ The application of the doctrine of substance over form
∑ The application of the general anti-avoidance provisions of the Income Tax
Act or VAT Act
∑ The taxation of hybrid entities or hybrid instruments
∑ The transfer pricing matters

CSARS v Char-Trade:
Facts:

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∑ During the 2007 to 2011 years of assessment the respondent (Char-Trade)

made various loans to related close corporations and companies within its
group of companies
∑ These loans were reported by Char-Trade in its annual financial statements
and described as ‘unsecured, bear interest at current rates and have no fixed
terms of repayment’
∑ During an audit by CSARS, it was discovered that Char-Trade had provided
interest free loans or loans to a number of related close corporations and
companies
∑ CSARS subjected the loans to secondary tax on companies (STC) on the basis
that these loans constituted deemed dividends, as less than the official rate
was charged
∑ As a result of the non-payment of STC by Char-Trade, CSARS also levied
interest in terms of s64B(9) of the ITA on the capital amounts owed by it
∑ CSARS issued assessments for STC against Char-Trade for the 2007 to 2011
STC cycles, in terms of s64C(2)(g) of the ITA
∑ The adjustments made by CSARS in the revised assessment resulted in Char-
Trade’s total tax liability for payment of STC in the amount of R4 653 870.02
∑ Of this, R1 812 609 was in respect of Char-Trade’s STC liability for the 2007
STC cycle
∑ In December 2012 Char-Trade filed a notice of objection against the
assessments on the basis that s64C(2)(g) of the ITA was not applicable, as the
loans it had made to independent companies were not made to connected
persons as defined in the ITA
∑ CSARS disallowed the objection
∑ In April 2013 Char-Trade lodged an appeal against the disallowance of its
objection
o In the Notice of Appeal Char-Trade conceded that the loans were made
to ‘connected persons’ as defined in the ITA, however, that the loans
made to connected persons during the years of assessment bore
interest that was not less than the official rate of interest
o Thus, no STC was payable
∑ In June 2014, Char-Trade relied on the provisions of s99 of the TAA, that the
assessment for 2007 had prescribed and fell to be set aside in its entirety
∑ The 2007 year of assessment ultimately became the only focus on this appeal
∑ Char-Trade has effectively conceded the entire merits of the appeal
Legal question:
∑ The issue in dispute is whether SCARS was prohibited by s99(1)(b)
of the TAA from issuing the assessment for STC in respect of the
dividend cycle that ended in 2007
Judgment:
∑ This would be the case if more than 5 years have lapsed since the
date of assessment of the original assessment
∑ This issue must be determined against the backdrop of the following factors:
o In the 2007 income tax return interest payable to the taxpayer by
connected persons is stated to be R2 160 868
o In the amended Annual Financial Statement for 2007, dated 12 June
2014, interest received from connected persons is reflected as
R8 273 267

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o Char-Trade never submitted any return in respect of STC in respect of

the dividend cycle ending in 2007
o No payment of STC has been made in respect of the 2007 year
∑ The taxpayer bears the onus in terms of s102(1)(a) of the TAA to
prove that it is not liable for STC for 2007 and must prove
prescription, namely that 5 years has expired after the date of
assessment of an original assessment
∑ Char-Trade’s submissions regarding prescription:
o If there had been an obligation on Char-Trade to render a
return and pay STC as contended by CSARS, then the
payment accompanied by the return should have been made
to CSARS by 31 March 2007
o The assessment in respect of STC for 2007 was issued on 9
November 2012, more than 5 years after the end of the
deemed dividend cycle
∑ Char-Trade was obliged in terms of s64B(7) of the ITA to submit a return for
STC for 2007
∑ The court had to determine when did the five-year prescription
period commence running
∑ The effect of s99(1)(b) of the TAA, read with the definition of ‘date
of assessment’, is that prescription cannot commence to run
against CSARS until such time as a return has been submitted by
the taxpayer
∑ It is by submitting a return that the taxpayer informs CSARS about
a dividend, including a deemed dividend, and that STC is payable
thereon
∑ Prescription in terms of the dividend cycle of 2007 could only have
commenced once Char-Trade had filed a return of STC
∑ Char-Trade was acknowledged it was liable for STC and was
obliged to file the return for all these years including the 2007 year
of assessment
∑ As Char-Trade failed to submit the STC return, there was no
original assessment from which assessment date the five-year
period could have run

Penalties:

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Penalties

Administrative non-
Understatement
compliance penalties
penalty (s221-224)
(s208-220)

Fixed amount Percentage-based

penalties (s210-211) penalties (s213)

Reportable
arrangement and
mandatory disclosure
penalty (s212)

Administrative non-compliance penalties:

∑ Imposed for failures to comply with the administrative requirements of a tax
Act
∑ A penalty assessment must be used (s214(1))
∑ This could be an assessment for the penalty only but may also be incorporated
in the same assessment as a tax liability
∑ This penalty assessment must give the taxpayer notice of the: (s214(1))
o Non-compliance in respect of which the penalty is assessed and its
duration
o Amount of the penalty imposed
o Date for paying the penalty
o Automatic increase of the penalty
o Summary of the procedures for requesting remittance of the penalty
∑ A penalty is due upon assessment and must be paid on or before the date
specified in the notice of penalty assessment
∑ If 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 (s214(2))
∑ SARS may issue an altered penalty assessment within 3 years from the date of
the penalty assessment if it satisfied that a penalty was not assessed in
accordance with the requirements discussed below (s219)
∑ [Consists of fixed amount penalties and percentage-based penalties]

Fixed amount penalties:

∑ Imposed where a taxpayer failed to comply with specific obligations under a
tax Act
∑ The penalty imposed is based on the taxpayer’s taxable income for the year of
assessment immediately prior to the year of assessment during which the
penalty is assessed (table in s211(1))

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∑ The penalty amount increases for every month or part thereof that a person
fails to remedy the non-compliance (s211(2))
∑ If SARS is in possession of the person’s current address and is able to deliver a
penalty assessment, the penalty increases from the date of the penalty
assessment up to a maximum of 35 months (s211(2)(a))
∑ If SARS is not in possession of the person’s current address, the penalty
increases every month after the date of non-compliance up to a maximum of
47 months (s211(2)(b))

Reportable arrangement and mandatory disclosure penalty (s212):

∑ An administrative non-compliance penalty is imposed on the following who
fails to report or make the required disclosure:
o The promoter or person who obtains a tax benefit from a reportable
arrangement, or
o An intermediary that is required to make disclosures in terms of the
OECD Standard for Automatic Exchange of Financial Account
Information in Tax Matters
∑ This person is liable for a penalty for each month that the failure to report or
disclose continues, up to a maximum of 12 months
∑ The penalty for each month is: (s212(1))
o R50 000 in the case of a participant to a reportable arrangement
o R100 000 in the case of the promoter of a reportable arrangement
∑ The amount of the above penalties is doubled if the amount of the anticipated
tax benefit for the participant in a reportable arrangement exceeds R5 million
and tripled if the tax benefit exceeds R10 million (s212(2))
∑ In the case of any 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 (s213):

∑ Where tax was not paid by the date required under a tax Act, SARS must
impose a penalty equal to a percentage of the amount of unpaid tax, as
prescribed under the relevant tax Act (s213(1))
∑ If the amount of tax in respect of which this penalty is imposed changes, the
penalty must be adjusted accordingly (s213(2))

Remittance of administrative non-compliance penalties:

∑ A person who is aggrieved by a penalty assessment may on or before the date
of payment of the penalty request SARS to remit the penalty
∑ The request must include a description of the circumstances that prevented
the person from complying with the obligations in respect of which the
penalty was imposed, as well as supporting documents and other information
required by SARS (s215(2))
∑ A remittance request suspends SARS’s collection process relating to the
penalty, unless SARS has reasonable grounds to believe that there is a risk of
dissipation of the assets by the person or the non-compliance involves fraud
(s215(3))
∑ A decision by SARS not to remit a penalty in whole or in part is subject to
objection and appeal (s220)

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Understatement penalties:
∑ Non administrative non-compliance penalties
∑ Penalty is imposed when there is prejudice to SARS or the fiscus as a result of:
o Failure to submit a return as required under a tax Act or the
Commissioner
o An omission from a return
o An incorrect statement in a return
o If no return is required, the failure to pay the correct amount of ‘tax’
o An impermissible avoidance arrangement
∑ A taxpayer must, in addition to the tax payable for a tax period, pay an
understatement penalty (s222(1))
∑ No understatement penalties are payable if an understatement results from a
bona fide inadvertent error (s222(1))
∑ Bona fide inadvertent error constitutes:
o According to SARS’s guidelines, a genuine error that result from an
unintentional default, an accidental omission, an unplanned statement,
an involuntary failure to pay the correct tax or an unpremeditated
impermissible avoidance arrangement
o According to courts, an innocent misstatement by taxpayer acting in
good faith without the intention to deceive
∑ Burden of proof rests with SARS to prove facts they rely on to impose penalty
∑ An understatement penalty can also be imposed in cases where an estimated
or agreed assessment is raised (s223(2))
∑ Once it has been established that an understatement exists, the
understatement penalty is determined by applying the highest applicable
percentage, determined based on the table in s223(1), to the shortfall in
relation to each understatement (s222(2))
∑ The shortfall is the quantification of the prejudice to the fiscus that should be
subject to the understatement penalty
∑ the rate to be applied to the shortfall considers the circumstances in which the
understatement occurred or was identified (top row) as well as the degree of
culpability reflected in the behaviour that caused the understatement (first
column)

Penalty percentage table (s223(1)) as on page 1159 of Silke textbook:

Behaviour: Standard case If obstructive, Voluntary Voluntary

or if it is a disclosure disclosure
repeat case after before
notification of notification of
audit audit
Substantial
understatement 10% 20% 5% 0%

Reasonable
care not taken
25% 50% 15% 0%
in completing
return

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No reasonable
grounds for tax
50% 75% 25% 0%
position taken

Impermissible
avoidance
75% 100% 35% 0%
arrangement

Gross
negligence 100% 125% 50% 5%

Intentional tax
evasion 150% 200% 75% 10%

∑ The more aggravating the behaviour, the higher the percentage at which the
penalty is imposed
∑ The behaviour of substantial understatement differs from the other items
listed as behaviours as a penalty is not necessarily imposed based on a
taxpayer’s culpability, but rather on the quantum of the understatement
∑ Substantial understatement refers to a case where the prejudice to SARS or
the fiscus exceeds the greater of:
o 5% of the amount of tax properly chargeable or refundable under a tax
act for the relevant tax period, or
o R1 million

Purlish Holdings (Pty) Ltd v CSARS:

Facts:
∑ The taxpayer paid provisional tax to SARS, but submitted nil tax returns, as a
result of which SARS owed the taxpayer a large refund
∑ SARS commenced with an audit into the taxpayer’s corporate income tax and
VAT affairs
∑ From the audit it became apparent that the taxpayer had earned substantial
income which were inclusive of VAT
∑ Despite this, the taxpayer failed to register for VAT, failed to submit VAT
returns for the relevant tax periods and only submitted nil returns for
corporate income tax (CIT) purposes
∑ SARS levied 100% understatement penalties (USP) for gross negligence, but
then following the partial allowance of an objection from the taxpayer the
rates were reduced to 25% for CIT and 50% for VAT
∑ The Tax Court (court a quo) confirmed SARS may have levied the USP and the
court then adjusted the USP back to 100% for both CIT and VAT
SCA legal questions:
∑ Is SARS entitled to impose USP?
∑ Can the tax court increase the USP imposed?
SCA judgment:
∑ In respect of the first issue:
o The submission of ‘nil returns’ would have had the effect of conferring
on the appellant an entitlement to a refund
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o This would have resulted in all the funds paid in by the appellant being
reflected as a credit in the appellant’s account with SARS, as a result of
which SARS was unable to channel such funds for the relevant
governmental activities
o SARS would have suffered substantial financial loss if it had acceded to
the appellant’s request for a refund without conducting an audit
o Had it not been for the audit, the appellant’s liability to pay VAT would
not have been exposed, as it had not registered for VAT
o The resource allocation in the form of additional time and human
capital necessitated by the extensive audit also constituted prejudice to
SARS, as such resources could have been utilised for other matters
o Thus, the use of additional SARS resources for purposes of
auditing the appellant’s tax affairs indeed prejudiced SARS
o Prejudice is not only determinable in financial terms
o The court was accordingly satisfied that SARS has proven
that there were understatements as contemplated by s221
o The court was unable to find that the understatements were
as a result of a bona fide inadvertent error
o Held that SARS was entitled to impose the USP
∑ In respect of the second issue:
o S129(3) of the TAA empowers the Tax Court to increase an
understatement penalty
o But that only arises if the issue has been properly raised for
adjudication before that court
o SARS had never raised the issue of the increase of the reduced penalties
for adjudication before the Tax Court
o SARS only sought to justify the reduced penalties
o To that extent the appeal against the decision of the Tax Court must
succeed
o Held that the USP of 100% imposed by the Tax Court in
respect of both income tax and VAT for the relevant periods
must be set aside and SARS’s USP of 25% in respect of income
tax and 50% in respect of VAT reinstated

Voluntary disclosure programme (VDP):

∑ TAA contains a permanent framework for voluntary disclosure across all tax
types
∑ This framework was introduced to encourage voluntary compliance in the
interest of the good management of the tax system and the best use of SARS’s
resources
∑ If a taxpayer has committed a default, he may apply for voluntary disclosure
relief under certain circumstances
∑ If the application is approved, SARS will not pursue criminal prosecution
against the taxpayer and will grant relief in respect of certain penalties
imposed under the TAA

Application:
∑ A person may apply for a VDP in personal or other capacity (s226(1))

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∑ If the person applying has been given notice of an audit or criminal

investigation related to the default that it intends to disclose and this audit or
investigation has not been concluded, the person may not qualify for
voluntary disclosure relief (s226(2))
∑ In order to qualify for the relief in such a case, a senior SARS official must be
of the view that: (s226(2))
o The default would not otherwise have been detected during the audit or
investigation, and
o The application would be in the interests of good management of the
tax system and best use of SARS’s resources
∑ A valid voluntary disclosure must (s227):
o Be voluntary
o Involve a default
o Default must not have occurred within 5 years of the disclosure of a
similar default
o Be full and complete in all material respects
o Involve a behaviour referred to in the understatement penalty
percentage table
o Not result in a refund due by SARS
o Be made in the prescribed form and manner
∑ A person who is in doubt about its eligibility of voluntary disclosure relief can
request a non-binding private opinion from a senior SARS official in this
regard (s228)

Relief:
∑ If a senior SARS official approves a voluntary disclosure application, the
taxpayer and SARS must enter into a voluntary disclosure agreement (s230)
∑ SARS may issue an assessment or make a determination in order to give effect
to such an agreement
∑ Such assessment or determination is not subject to objection and appeal
(s232)
∑ Where a taxpayer qualifies for a voluntary disclosure relief and has entered
into a voluntary disclosure agreement, SARS must despite the provisions of
any Act: (s229)
o Not pursue criminal prosecution
o Grant relief in respect of any understatement penalty referred to in the
relevant columns of the table in s223(1)
o Grant 100% relief in respect of an administrative non-compliance
penalty (this excludes penalties for late submissions of a tax return)
∑ If after concluded the agreement it is established that the applicant failed to
disclose a matter that was material for the purpose of making a valid voluntary
disclosure, a senior SARS official may: (s231(1))
o Withdraw the voluntary disclosure relief granted
o Regard an amount paid in terms of the agreement to be part payment
of any further outstanding tax debt in respect of the relevant default
o Pursue criminal prosecution
∑ This decision is subject to objection and appeal (s231(2))
∑ VDP does not give relief for taxpayer’s tax debt, interest on such tax debt or
penalties imposed on late submission of a return

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Dispute resolution: (Chapter 9 of TAA)

Overview:
∑ Internal remedies (objection and application processes), alternative dispute
resolution or resolution before a Tax Board or Tax Court should be exhausted
before a higher court is approached
∑ The mere fact that an assessment is disputed by a taxpayer does not suspend
the obligation to make payment of the tax in question
∑ Once a taxpayer has failed to utilise the next available remedy in the dispute
resolution process or has exhausted all tis means of disputing an assessment
or decision, that assessment or decision becomes final
∑ Either SARS or the taxpayer may initiate a settlement procedure by
communicating with the other
∑ Such a settlement would be aimed at arriving at finality and include
o Requesting a reduced assessment where there is a readily apparent
undisputed error in an assessment by SARS or a taxpayer in a return
o Requesting SARS to withdraw an assessment
∑ When dealing with a service, procedural or administrative matter, a taxpayer
may resort to lodging a complaint with the SARS Complaints Management
Office (CMO) or ultimately the tax Ombud, and finally, institute proceedings
for judicial review of the administrative action under PAJA
[see diagram on page 1181]

Burden of proof (s102):

∑ Burden of proof lies on the taxpayer
∑ SARS only bears the onus of proof with:
o Understatement penalties
o Estimated assessments

Payment of tax pending objection or appeal (s164):

∑ A person’s obligation to pay a tax debt on the specified date is not
automatically suspended by an objection or appeal of pending the decision of
a court
∑ A senior SARS official may suspend the payment of tax if requested by the
taxpayer and after considering all relevant factors
∑ SARS may not recover the tax from the date that it receives the request for
suspension until 10 business days after notice of SARS’s decision has been
issued to the taxpayer

Metcash Trading Ltd v Commissioner SARS and another:

ÿ Authority for right to access to courts
ÿ Court dealt with the constitutionality of three sections of the Value Added Tax
Act that make up a “pay now, argue later” rule:
1. Payment of an assessment is not suspended by an appeal
2. Empowers the Commissioner to enforce payment by filing a statement
with a court which acts as a civil judgment
3. Puts the correctness of the assessment beyond challenge in such
proceedings
ÿ Does the “pay now, argue later” rule infringe on the taxpayer’s right to access
to courts?

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ÿ The Commissioner, holding that Metcash had claimed fictitious credits,

assessed it for VAT of over R77 million plus double tax, a penalty and interest
ÿ Section 36(1) of the Act says that upon assessment by the Commissioner of
SARS, a taxpayer is obliged to pay the assessed tax and then possible
adjustments and refunds is left for dispute for determination later
ÿ He disallowed an objection and demanded payment, failing which he would
use the Act’s enforcement procedure
ÿ Witwatersrand High Court held:
o The sections infringed the right of access to the courts (s34 of
Constitution)
o Double-tax provision was unconstitutional form of administrative
punishment for the commission of a crime
ÿ Unanimous judgment of the Court:
o HC had erred and that none of the sections unjustifiably infringed the
right of access to court
o The “pay now, argue later” rule is not unfair
o In any event, to the extent that there is a restriction on the right of
access, it is only partial and temporary and is subject to at least some
judicial control
o Having regard to the pressing national interest in enforcing honest and
prompt payment of VAT, such limitation of the right of access to the
courts as the “pay now, argue later” rule may constitute is justified
under s36 of the Constitution
ÿ Constitutional Court held:
o Declined to confirm the invalidation of the three sections in question
o “pay now, argue later” principle does not infringe right to access to
court

Nondabula v Commissioner: SARS and another:

ÿ Authority for right to just administrative action
ÿ SARS audit against N was wrong
ÿ Tax Court:
o N lost objection
ÿ High Court held:
o Principle of ‘pay now, argue later’ is part of SA law and the Constitution
o But, where it leads to a taxpayer having to liquidate all assets or sell his
business and being seriously prejudiced, the Commission can relax the
principle
o In case, the Commission did not want to relax the principle
o N would be bankrupt and 25 breadwinners would lose their jobs,
resulting in most of the community being prejudiced
o The court compelled the Commission to relax the principle

Gaertner v Minister of Finance and others:

ÿ Authority for right to privacy
ÿ Applicants are directors and the owner of an importer and distributor of bulk
frozen foodstuff (OCS)
ÿ SARS officials conducted a search in terms of s4 of the Customs and Excise
Act at OCS’s premises and at G’s home
ÿ The Act does not require SARS officials to obtain a warrant before a search is
conducted

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ÿ High Court held:

o Granted applicants’ application to declare parts of s4 unconstitutional
to the extent that they permit targeted non-routine searches without
judicial warrant
ÿ Constitutional Court held:
o All parties agreed that s4 is inconsistent with the Constitution and
should be declared invalid as it infringes the right to privacy
o However, parties disagreed on the extent of the invalidity and how the
reading-in should be formulated (reading-in until the legislature made
remedial changes to the Act)
o Held s4 infringes the right to privacy unjustifiably
o Section is overbroad as it does not define the premises that can be
searched without a warrant, nor does it give guidance to the inspectors
on the manner in which the searches are to be conducted
Court read in warrant requirements when SARS officials wish to search private
residences for purposes of the Act

Objections:
∑ Taxpayer has 2 options:
o Request reasons for the assessment within 30 days from the date of
assessment in terms of Rule 6
o Object to the assessment within 30 days from the date of assessment
∑ Rule 6 – Requesting reasons for the assessment:
o A taxpayer who is aggrieved by an assessment may, prior to lodging an
objection, request SARS to furnish reasons for the assessment, which
should enable the taxpayer to formulate an objection to the assessment
in the form and manner referred to in Rule 7
o Request must be delivered to SARS within 30 days from the date of the
assessment
o If SARS is satisfied that reasonable grounds exist for not complying
with this period, it can be extended by a period not exceeding 45 days
o If SARS is satisfied that the reasons required enable the taxpayer to
formulate an objection have been provided, SARS must inform the
taxpayer accordingly within 30 days after delivery of the request
o If SARS is of the view that such reasons have not yet been provided, it
must provide the reasons within 45 days after delivery of the request
for reasons
∑ Rule 7 – Objection against the assessment:
o If the taxpayer is aggrieved by an assessment it may object to the
assessment within 30 days after one of the following two dates:
ß The date of the assessment; or
ß If the taxpayer requested reasons for the assessment, the date of
the reasons or the notice that adequate reasons have already
been provided
o What happens if you submit your objection late:
ß If SARS is satisfied that reasonable grounds exist for not
complying with this period, it can be extended for another 30
business days

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ß In exceptional circumstances, the period of objection may be

extended up to three years from date of assessment
o What SARS will consider when deciding to extend the period for
objection:
ß Prospects of success on the merits
ß Reasons for delay
ß Period of delay
o SARS may allow or disallow an objection in whole or in part (s106(2))
o Requirements for an objection:
ß Must be lodged in prescribed form
ß Must be lodged in prescribed period
ß Must set out grounds of objection:
∑ Which amounts of disputed assessment is being objected
to
∑ Which grounds of the assessments are being disputed
ß E-filing, alternatively, must provide address for notices to be
served on taxpayer
ß Must be signed by taxpayer
ß Must be delivered to Commissioner at address specified in the
assessment
o If an objection does not meet all the requirements, SARS may regard
the objection to be invalid
o SARS may then, within 30 days from the delivery of the invalid
objection, notify the taxpayer and point out the invalidity
o Taxpayer must then within 20 days from receiving such a notice from
SARS file a revised and valid objection (7(5))
∑ If no objection has been filed or the objection has been withdrawn, the
assessment will be final (s100)

[REMINDER = ‘Days’ in the Regulations are referred to as business days]

Appeal (s107):
∑ The taxpayer may appeal against the decision of the commissioner to disallow
the objection
∑ The taxpayer has 2 choices:
o Follow the ADR process; or
o Proceed directly to the litigation process, which involves an appeal to:
ß Tax Board (if tax in dispute is less than R1 000 000)
ß Tax Court (if tax in dispute is more than R1 000 000, if the
taxpayer chooses this course, or if the chairperson of the Tax
Board refers the matter to the Tax Court)
∑ Notice of appeal must be delivered within 30 days from the receipts of the
notice of SARS’s disallowance of the objection
∑ The period of 30 days may be extended by a senior SARS official for:
o 21 business days, if satisfied that reasonable grounds exist for the delay,
or
o Up to 45 business days, if exceptional circumstances exist that justifies
an extension beyond 21 days
∑ If SARS does not allow an extension, this decision is subject to objection and
appeal (s104(2))

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∑ Requirements for a valid notice of appeal:

o Must be lodged in prescribed form
o Must be lodged in prescribed period
o Must set out:
ß Grounds of objection he is appealing
ß Grounds for disputing the disallowance of objection
ß Any new grounds the taxpayer is appealing
o Must provide address for notices to be served on taxpayer
o Must be signed by taxpayer
o Must be delivered to Commissioner at address specified in the
assessment
∑ The taxpayer may not appeal on a ground that constitutes a new objection
against a part or amount of the disputed assessment that was not objected to
(rule 10(3))
∑ If the taxpayer relies on a ground in their notice of appeal that was not initially
raised in the objection, SARS may request the taxpayer within 15 days of
notice of appeal to submit substantiating documents to decide if they will
proceed with the appeal process (rule 10(4))
o Example:
o Taxpayer objected to the disallowance of certain deductions claimed
based on the fact that the expenditure was in the production of income
o The taxpayer may expand on this ground of objection in his appeal in
the sense that he may introduce legal or factual grounds to support this
argument as to why the expenditure is in the production of income
o This would not constitute a new ground of objection being introduced
in the appeal stage

Computek v CSARS:
∑ A taxpayer is prohibited from introducing new grounds of
objection at appeal stage
Facts:
∑ An audit conducted by SARS revealed that Computek had under-declared and,
in consequence, underpaid VAT to SARS in terms of the VAT Act
∑ A notice of objection was filed by Computek, but nowhere in the objection
form nor on annexures filed with it did they state that there was an objection
to the capital amount
∑ SARS informed the taxpayer that its objection had been disallowed because
‘there was no objection to the quantum of additional VAT output raised
suggesting your acceptance of these figures’
∑ The taxpayer (Computek) filed a notice of appeal in respect of SARS’s
disallowance of its objection
∑ Once again, there was no reference to the capital amount
∑ It was only when the taxpayer filed its rule 11 statement thereafter with the
Tax Court that it raised issue for the first time
Judgment by the SCA:
∑ Held that not having raised an objection to the capital assessment
in its notice of objection, Computek was precluded from raising it
on appeal before the tax court and that when the taxpayer
challenged the capital amount for the first time in its rule 11
statement, it effectively raised a new objection directed at an

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individual assessed amount that had not previously been objected

to

ADR

Taxpayer appeals
disallowance of Tax Board
objection by SARS

Tax Court

Alternative dispute resolution (ADR) (Rules 13-25; s107(5) and (6)):

∑ An attempt to resolve the dispute through mutual agreement
∑ Proceedings on appeal are suspended while ADR is in progress
∑ SARS and the taxpayer may attempt to resolve the dispute through ADR
procedures specified in the rules where the parties accept each other’s
interpretaiton of the facts and legislation
∑ Parties may agree to settle the matter (Rule 23 and 24)
∑ If the matter cannot be resolved at ADR level, it will proceed to litigation
process in front of either the Tax Board or the Tax Court
∑ Procedure for ADR:
o Taxpayer should indicate in his notice of appeal that he wishes to make
use of the ADR procedures
o SARS 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
o Even if the taxpayer has not indicated in his notice of appeal that he
wishes to make use of the ADR, the Commissioner may propose to the
taxpayer that the ADR process be followed
o The ADR proceedings commence on the date that the Commissioner
informed the taxpayer that the dispute is appropriate for ADR. The
parties must finalise the ADR within 90 days
o A senior SARS official must appoint a person, who may be a person
employed by SARS, to facilitate the ADR proceedings
o The taxpayer or his representative taxpayer (if for example a company)
must be personally present, unless the facilitator in exceptional
circumstances allows them to be represented in their absence by a
representative of their choice
o A dispute that is subject to the ADR procedures may be resolved:
ß By an agreement under which one of the parties accepts the
other’s interpretation of the facts or the law or both; or
ß The parties may agree to settle the matter
o If the dispute is not resolved, the matter proceeds to the tax board or
the tax court for a de novo hearing

Tax Board (Rules 26-30; ss108-115):

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∑ Consists of a chairperson and, if deemed necessary by the chairperson, an

accountant and a representative of the commercial community
∑ The chairperson must consider representation made by a senior SARS official
or the taxpyaer when determining whether an accountant or a commercial
representative should be included
∑ 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 must in the
first instance be heard by a Tax Board
∑ When the matter will be set down before the Tax court:
o 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
o If the chairperson prior to or during the hearing and 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, he may
direct the appeal be set down for hearing de novo before the Tax Courts
∑ The Tax Board must decide the matter after hearing the taxpayer’s appeal
∑ The Tax Board must dcide the matter on the basis that the burden of proof is
upon the taxpayer, unless in the case of understatement penalties or estimated
assessments
∑ In the case of an assessment under appeal, the Tax Board may:
o Confirm the assessment
o Order the assessment to be altered
o Refer the assessment back to SARS for further examination and
assessment
o Make an appropriate order in a procedural matter
∑ If SARS alters an assessment as a result of the referral, the altered assessment
is subject to objection and appeal
∑ The chairperson must prepare a written statement of the Tax Board’s decision
within 60 days after conclusion of the hearing which must include
o The Tax Board’s findings of the facts of the case
o The reasons for its decision
∑ If the taxpayer or SARS is dissatisfied with the Tax Board’s decision, they 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

Tax Court (Rule 31-49 and 50-64 ; ss 116-132):

∑ Consists of:
o A judge or an acting judge of the High Court, who is the president of the
Tax Court
o An accountant selected from a panel of members, and
o A representative of the commercial community selected from a panel of
members
∑ When 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, together with the usual Tax Court
members:
o The amount in dispute is more than R50 million, or
o The Commissioner and the taxpayer so agree

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∑ In the case of an assessment or decision under appeal the Tax Board may:
o Confirm the assessment
o Order the assessment to be altered
o Refer the assessment back to SARS for further examination and
assessment
o Make an appropriate order in a procedural matter
∑ If SARS alters an assessment as a result of the referral, the assessment is
subject to objection and appeal
∑ The Tax Court must dcide the matter on the basis that the burden of proof is
upon the taxpayer, unless in the case of understatement penalties or estimated
assessments
∑ Where an objection or appeal has been designated as a test case because it is
likely to be determinative of all or a substantial number of the issues involved
in one or more other objections or appeals, a senior SARS official may
temporarily halt the other objections or appeals by staying it
∑ The decision in the test case, unless the court directs otherwise, is
determinative of the issues in an objection or appeal so stayed
∑ A judgment of the Tax Court must also be published for general information
and, unless the sitting of the Tax Court was public, in a form that does not
reveal the taxpayer’s identity
∑ 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

Theme 10: Tax Avoidance:

Tax avoidance v tax evasion:

Duke of Westminister v IRC (1953):

∑ Every man is entitled 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
unappreciative the Commissioner of Inland Revenue or his fellow taxpayer
may be of his ingenuity, he cannot be compelled to pay an increased tax

Tax avoidance = legal

Tax evasion = illegal

Example of tax avoidance:

∑ Taxpayer donates R100 000 to his major children without having to pay tax in
terms of s7(3) of the ITA, because an individual may make an annual donation
of R100 000 that is tax free

Examples of tax evasion:

∑ Falsification of a tax return
∑ Non-disclosure of income
∑ Overstatement of a deductible expenditure

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- Tax avoidance schemes are the reason the OECD (Organisation for Economic
Co-operation and Development) introduced the Base Erosion and Profit
Shifting (BEPS) Action Plan
- Aim of BEPS:
o To close the gap in international tax frauds that allow multinational
enterprises to legally but artificially shift profits to low- or no-tax
jurisdictions (e.g. the double-Irish-Dutch sandwich)
- The effect of aggressive tax planning schemes on a country:
o Erodes the country’s profits
o Damages the economy and tax system of the country
o Uneven distribution of the tax burden
- Anti-avoidance provisions in the ITA:
o Section 7
ß When income is deemed to have accrued or been received
o Sections 54-64
ß Donations tax
o Section 103
ß General anti-avoidance provision
ß Assessed losses in companies (s103(2))

Impermissible tax avoidance arrangements:

∑ Sections 80A-80L of ITA contains General Anti-Avoidance Rules (GAAR)
which applies from after 1 November 2006
∑ Impermissible avoidance arrangement in terms of s80A:
If the sole or main purpose was to obtain a tax benefit AND
a. In the context of a business;
i. It was entered into/carried out by means of or in a manner which
would not normally be employed for bona fide business purposes
(other than obtaining a tax benefit) or
ii. It lacks commercial substance, in whole or in part, taking into
account provisions of section 80C
b. In a context other than business, it was entered into/carried out by means
or in a manner which would not normally be employed for bona fide
purposes (other than obtaining a tax benefit) OR
c. In any context:
i. It created rights/obligations that would not normally be created
between persons dealing at arm’s length;
ii. It would result directly/indirectly in the misuse or abuse of
provisions of this Act

Test to determine whether an arrangement would be an impermissible

tax avoidance arrangement (s80A):
∑ Was an ‘arrangement’ entered into?
∑ Is the result that a tax benefit is obtained?
∑ Was the sole or main purpose to obtain a tax benefit?
∑ Is there lack of commercial substance?

Was an arrangement entered into?

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∑ Includes transactions, operations, schemes, agreements, understandings

(whether enforceable or not) and any of the foregoing involving the alienation
of property

Is the result that a tax benefit is obtained?

∑ Includes any avoidance, postponement or reduction of any liability for tax
∑ ‘tax’ includes any tax, levy or duty imposed by the Act or any other law
administered by the Commissioner
∑ Any avoidance, postponement or reduction in these taxes will therefore also
be a tax benefit
∑ The existence of a tax benefit can be established by a comparison of the
taxpayer’s situation with an alternative arrangement which might reasonably
have been carried out but for the existence of the tax benefit
∑ The ‘but for’ test simply asks whether, but for the existence of an arrangement,
would tax have been suffered

Was the sole or main purpose to obtain a tax benefit?

∑ The purpose of the avoidance arrangement should be reasonably considered
in light of the relevant facts and circumstances
∑ An avoidance arrangement is presumed to have been entered into with the
sole or main purpose of obtaining a tax benefit (s80G)
∑ 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
∑ This presumption places the onus of proof on the taxpayer who must
objectively prove that he had another sole or main purpose for entering into
the agreement

Is there a lack of commercial substance?

∑ Determine whether the arrangement being entered into or carried out in the
normal course of business
∑ Consideration should be given to the intention of the taxpayer, the profit and
the frequency of such act, including the requisite for a series of actions to
obtain the income
∑ Commissioner must show, on a balance of probabilities, that abnormality
exists or that there was misuse or abuse
∑ Only one of the sub-requirements in the context concerned must be met in
order to meet this requirement:
o Means or manner not normally employed
ß 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
ß Comparison between the taxpayer’s transaction and the way in
which a similar transaction would normally be carried out
o Rights or obligations not normally created
ß The rights or obligations created by the arrangement would not
normally be contracted or created between persons dealing at
arm’s length
o Misuse or abuse of provisions of the Act

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ß 2 step process:
∑ Interpret the provisions relied on by the taxpayer giving
rise to the tax benefit to determine the provisions’ object,
spirit and purpose
∑ Determine whether the transaction frustrates or defeats
the object, spirit or purpose of the provisions
ß Will be abusive tax avoidance if:
∑ A taxpayer relies on specific provisions in order to achieve
an outcome that those provisions seek to prevent
∑ A transaction defeats the underlying rationale of the
provisions that are relied upon
∑ An arrangement circumvents the application of certain
provisions in a manner that frustrates or defeats the
object, spirit or purpose of those provisions
o A ‘lack of commercial substance’ (only applies in the context of
business)
ß The general rule is that an avoidance arrangement lacks
commercial substance if it results in a significant 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

Tax consequences of impermissible tax avoidance (s80B):

∑ The Commissioner may determine the tax consequences under this Act of any
impermissible avoidance arrangement for any party by:
o Disregarding, combining or recharacterizing any steps in or part of the
impermissible avoidance agreement
o Reallocate any gross income received or accrual of a capital nature,
expenditure or rebate among the parties
o Recharacterize any gross income received or accrual or expenditure of a
capital nature
o Treat the impermissible tax avoidance arrangement as if it had not
been entered into or carried out
o Such other manner as in circumstances of the case the Commissioner
deem appropriate for the prevention and diminution of the relevant tax
benefit

Tax benefit includes:

∑ Any reduction of tax
∑ An increase in an entitlement of a vendor
∑ A reduction in the consideration payable by any person in respect of any
supply of goods or services
∑ 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

Assessed losses (s103(2)):

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- Section 103(2) was introduced to prevent a specific type of tax avoidance,

namely the trafficking in assessed losses, capital losses or assessed capital
losses of companies, close corporations and trusts
- It addresses situations where a company has assessed losses and such a
company is then acquired by a profit-making company who then diverts
taxable income to the company with the assessed losses, in order to set off
such income against the assessed loss (and effectively not pay tax or pay less
tax)

Requirements for section 103(2) to apply:

∑ There must be an agreement affecting a company or trust, or a change in the
o Shareholding of any company
o Members’ interest in any company that is a close corporation, or
o Trustees or beneficiaries of any trust
∑ The above must result (directly or indirectly) in a receipt or accrual of income
or a capital gain by the company or trust during any year of assessment
∑ The purpose of the agreement or change is solely or mainly to use any
assessed loss, any balance of assessed loss, any capital loss or any assessed
capital loss to avoid or reduce a tax liability

- When these requirements are met, the use of the assessed loss or balance of
assessed los is denied
- The income that was channelled to the other entity may not be offset against
the assessed loss of this other entity
- Similarly, the set off of the capital loss or assessed capital loss against the
capital gain is denied

ITC 1388 (1983):

∑ The taxpayer bought two companies with assessed losses
∑ The court extracted the essence of s103(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 advantage it seemed to have was its assessed loss
∑ This assessed loss was accordingly forfeited

ITC 1347 (1981):

∑ 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 purpose of the use of the assessed loss and that the assessed
loss could consequently be carried forward

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Substance over form and simulated transactions:

- When considering substance over form, the courts look at the substance of the
scheme and ignore the form of the scheme by asking:
o What is the true intention of the parties?
- Killburn v Killburn Estate:
o “Courts of law will not be deceived by the form of a transaction; it will
rend aside the veil in which the transaction is wrapped and examine its
true nature and substance”
- CSARS v NWK:
o There is, in principle, nothing wrong with arrangements that are tax-
effective
o But there is something wrong with dressing up or disguising a
transaction to make it appear to be something it is not

Simulated transactions:
∑ Simulated transactions may amount to tax evasion (CSARS v Bosch)
∑ Roshcon (Pty) Ltd v Anchor Auto Body Builders CC and Others:
o For a court to declare a transaction a simulated transaction, it does not
have to look at any particular legislation but has to look at the facts of
each particular case
o The parties may arrange their affairs to avoid statutory prohibitions,
provided their arrangement does not result in a simulated transaction
and is consequently in fraudem legis
o The fundamental issue is whether the parties actually intended that the
agreement that they had entered into should have effect in accordance
with its terms
o Simulation is a question of the genuineness of the transaction under
consideration
o If it was genuine then it was not simulated, and if it was simulated then
it was a dishonest transaction, whatever the motives of those who
concluded the transaction
∑ Michau v Maize Board:
o What taxpayers may not do is conceal the true nature of their
transaction or, call it by a name or give it a shape intended not to
express but disguise its true nature
o In such event a court will strip off its ostensible form and give effect to
what the transaction really is
∑ CSARS v NWK (2011):
o The test should go further and requires examination of the commercial
sense of the transaction; of its real substance and purpose
o 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
∑ For years the NWK-case was the flagship on tax avoidance and simulated
transactions
∑ However, in 2018 there was a case in the SCA between Sasol Oil and SARS

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Sasol Oil v SARS (2018):

Sasol Ltd
[SA]

SIH*
Sasol Oil
[SA]
[SA]
*now known as SIC

STI SISL SOIL

[Isle of Man] [UK] [Isle of Man]

Procurement arrangements of Sasol:

∑ Arrangement pre-2001:
o STI negotiated contracts on behalf of the Sasol Group to buy crude oil
delivered directly to Sasol Oil in Durban
o Then the agreement changed
∑ Arrangement 2001-2003:
o STI was resposible for the procurement of the crude oil
o They purchased the oil from the Middle-East and then sold it to SISL
o SISL then sold it on to Sasol Oil [SA]
∑ Arrangement from 2004:
o Sasol oil set up the subsidiary SOIL
o SOIL acquired the group procurement agreement from STI and STI
also transferred all the rights in the existing oil contracts to SOIL
o SOIL then acquired the oil who sold it to SISL who then sold it to Sasol
Oil [SA]

SARS’s allegations:
∑ SARS attacked the oil sales for the 2005-2007 years of assessment
∑ SARS alleged that the transactions were simulations of the actual intentions of
the parties which were to sell the oil directly to Sasol
∑ In the alternative, SARS was of the view that Sasol entered into the
transactions in 2001 to avoid a tax liability

What happened in the case:

∑ SOIL is a fully-owned foreign subsidiary of a SA company
∑ SOIL would then qualify as a controlled foreign company of Sasol, a SA
shareholder
∑ Thus, SOIL’s net-income has to be imputed and taxed in SA

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∑ However, there is an exemption – if SOIL has a foreign business

establishment, they are exempted from this imputation
∑ Foreign business establishment means that they are actually conducting
business in the foreign country (they have staff/building/equipment) – it
must not just be a shell company with no actual business operations
∑ SOIL did qualify for this foreign business establishment exemption
∑ There is, however, a crawl-back provision where certain profits can crawled
back and imputed to be taxed in SA
∑ If there is a sale of goods by a controlled foreign company to a connected
person in SA, such a sale of goods would have to be imputed and be taxed in
SA
∑ In effect, if SOIL had the oil directly to Sasol Oil [SA], the crawl-back
provision would apply and the relevant income of SOIL would have to be
imputed and taxed in SA (which would not have been very tax efficient when
taking into account that Isle of Man’s corporate tax rate is 0%)
∑ To circumvent this, if SOIL sells to SISL who then sells to Sasol Oil [SA], it
would not be an imputation of income for tax purposes in SA
∑ This is what SARS was arguing to be the tax liability for Sasol

SARS’s arguments:
∑ SISL was only used as a conduit, the real transaction is between Sasol Oil [SA]
purchasing oil from STI
o SISL has no commercial risk or purpose in the transaction
o SARS imputed income from SOIL for tax purposes to Sasol Oil [SA]
∑ Back-to-back sale of the crude oil by SOIL to SISL is simulated and designed
only to avoid residency-based tax in the hands of Sasol Oil [SA] in terms of
seciton 103(1) (old GAAR rules)
∑ The restructure took place after the company received advice from PWC,
which dealt with SA’s change from source basis to residency basis (taxed on
worldwide income), so there is potential imputation of income to a SA
resident of a controlled foreign company’s profits
o The transaction was entered into to avoid this consequence
∑ The ownership of the oil that is transferred to SISL was ‘hollow’; oil could have
been shipped directly to Sasol Oil [SA]

Flaw in SARS’s argument:

∑ SARS argued that the transactions entered into by Sasol in 2001 were tax
avoidance
∑ However, SOIL wasn’t in existence in 2001
∑ STI was selling to SISL in 2001
∑ STI and SISL are not subsidiaries of Sasol Oil [SA] (see diagram), so they are
not controlled foreign companies of Sasol Oil [SA]
∑ Thus, there could not have been any imputation to Sasol Oil [SA]
∑ There are no participation rights held by Sasol Oil [sa] in STI or in SISL; these
participation rights were held by SIH [SA]
∑ There could thus not have been any tax avoidance by Sasol Oil [SA] in 2001
since it had no tax liability; STI and SISL are subsidiaries of the Sasol Oil [SA]
holding company

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Sasol Oil’s evidence:

∑ The transactions had a legitimate purpose
o There was rationalization of staff and the close proximity to the London
trading market
∑ PWC advised Sasol Oil [SA] that STI should not make sales directly to Sasol
Oil [SA], but rather to a UK resident group company, which will then sell and
ship the oil to Sasol Oil [SA]
o PWC said there is potential imputation of income of a controlled
foreign company on the sale of goods to a connected person in SA
o PWC also cautioned that there should be commercial justification of
disposing of the oil to SISL
o The advice didn’t trigger the transactions or change of procurement
∑ Sasol had witnesses testifying the reasoning for including SISL in the supply
chain as it was intended that it would act as oil trader and shipper in the
supply chain
∑ The intention of the parties is that ownership passes from SOIL to SISL and
then to Sasol; or pre-2004 from STI to SOIL and then to Sasol
o With the ownership the parties assumed commercial risks associated
with crude oil
o Sasol presented invoices to support this argument that the commercial
risk was assumed by SISL and that it wasn’t just passing on the oil
without taking ownership thereof
∑ Sasol presented supply contracts to support their argument that there was
constructive delivery between parties, there was no false constructs of the
parties’ intentions
∑ For the anti-avoidance provisions of section 103(1) to apply, the ‘but for’ test
has to be applied
o The question would be: But for the arrangement, would Sasol have had
a tax liability?
o Sasol did not have any tax liabilities in 2001 as alleged in SARS’s
argument

Judgment:
∑ Majority:
o Lewis, JA said to test for simulation one must consider the
arrangement and whether they reflect the true intention of the parties
o Quoted from the Roshcon-case:
ß “The position remains that the court examines the transaction
as a whole, including all surrounding circumstances; any
unusual features of the transaction and the manner in which
the parties intend to implement it, before determining in any
particular case whether a transaction is simulated.”
o Held that the intention to pass ownership from STI to SISL was real
and the arrangement gave action to this intention, so the transactions
had legitimate purpose
o No difference between the substance and form of the arrangements
o PWC advice was not the trigger for the transactions
o SARS did not lead evidence that Sasol had intentions different to what
was in the contracts
∑ Minority:

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o There is a simulation – genesis for the structure was found in the PWC
opinion in 2001
o No evidence that use of SISL is commercially justified (no commercial
substance)
o Unusual elements in agreements
o Sasol witness’ evidence was evasive and unsatisfactory
∑ Judgment of Ponnan, JA:
o “In my view, it is clear that the relevant agreements were genuine
agreements and trule intended by the parties in accordance with their
terms. There was no simulation or, more particularly, no dishonest
intention by the parties to deceive by concealing real agreements.”
o For the written agreements to have been a sham, would have required
the most extensive and ellaborate fraud stretching over a period of
many years
o It would have required the involvement of persons participating
directly, as well as the boards of directors of not just Sasol Oil [SA], but
also of their related companies, etc.

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