3 Income exempt from tax

Additional questions
Question 3.2
Your friend is a professional cricket player and you receive the following e-mail from him:
I need your advice on the following matter. As you know, I am ordinarily resident in
the Republic. I am an employee of the United Cricket Board of South Africa. I have
been selected to tour Pakistan, India, England, Australia and New Zealand with the
South African cricket team. I earn a monthly salary from the South African Cricket
Board and will be paid my salary while ‘working’ (playing cricket) in the above-
mentioned countries. The South African Cricket Board is not regarded as an employer
as contemplated in section 9(2)(h) (one of the provisions of section 10(1)(o)). The tour is
for nine weeks in total. We are not allowed to return home (the Republic) during this
nine-week period. All nine weeks fall in the current year of assessment.

You are required to:

Advise your friend whether the salary he earns while he is ‘working’ outside the
Republic is exempt from income tax.

Answer 3.2
Advice regarding the taxability of the salary earned outside the Republic
You are a resident of the Republic. Your gross income comprises all worldwide receipts
and accruals. The salary you earn while working for the United Cricket Board of South
Africa outside the Republic will be included in your gross income. The salary may, however,
be exempt from normal tax in terms of section 10(1)(o)(ii). To qualify for this exemption,
• you must render services outside the Republic and you must be an employee;
• these services must be for or on behalf of an employer;
• you must be outside the Republic for a period (or periods) exceeding 183 full days in
aggregate during a 12-month period commencing or ending during the year of
assessment;
• you must be outside the Republic for a continuous period exceeding 60 full days
during this 12-month period; and
• you must not be employed by an employer as contemplated in section 9(1)(e) (stated in
the question).

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A Student’s Approach to Income Tax/Natural persons

You state that you are going to be outside the Republic for nine weeks (that is to say 63
days). We assume that you have no other international tours during the current year and
that you are not going to go for an international holiday that would increase the number
of days outside the Republic to more than 183 days for the year. It seems that you will not
qualify for this exemption as you will not be outside the Republic for a period or periods
exceeding 183 full days in aggregate during a 12-month period commencing or ending
during the year of assessment. The salary will therefore be subject to normal tax.

Question 3.3
In the following scenarios, the amounts received or accrued by taxpayers may or may not
be exempt from normal tax:
1. Sam Cellini, 48 years old and divorced, contributed R40 000 to a tax free investment
during the current year of assessment. He earned R2 400 interest on this investment,
which was reinvested. This is his only contribution to a tax free investment. Other than
the interest, he also earned a salary of R420 000 for the year of assessment. He does not
belong to a retirement fund. He belongs to a medical aid fund to which he contributed
R20 000 for the year of assessment and his employer contributed R35 000. He had no
additional medical expenses.
2. Thato Maluka works for MPK auditors. During the current year of assessment MPK
gave Thato a bursary to cover his children’s school fees. There was no reduction in
Thato’s salary because of the bursary. Thato has twins in grade 7 (NQF level is less than
level 4). Thato earns R500 000 per annum. The bursary amounted to R5 000 per child.
Thato does not need to repay any amount. Thato had already paid their school fees in
full so he used the money to purchase school uniforms for them.
3. Pabs Mashile, a 38-year-old unemployed South African resident, received the invest-
ment income listed below during the current year of assessment. It arose from an
inheritance he received. He also received R8 000 from the unemployment insurance
fund and his incredibly rich mother gave him R500 000 to live on until he was able to
get employment again.
Investment income:
R
South African dividends (not from a tax free investment) 3 000
Foreign dividends from a non-listed company 1 200
Interest on a South African bank account (not a tax free investment) 15 000
South African dividends on property shares in a collective investment
scheme (not out of capital reserves) 400

You are required to:

(a) Calculate the normal tax for Sam Cellini.
(b) Calculate the income of Thato Maluka and Pabs Mashile.

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A Student’s Approach to Income Tax/Natural persons

Answer 3.3
Calculation of normal tax: R R
(a) Sam Cellini:
Salary per annum 420 000
Medical fringe benefit 35 000
Interest received 2 400
Gross income 457 400
Less: exempt income
Interest received on tax free investment (2 400)
Income and Taxable income 455 000

Normal tax per tables (R455 000 – R337 800) × 31% + R70 532 106 864
Less: Primary rebate (15 714)
Medical scheme tax credit (R332 × 12 months) (3 984)
Additional medical tax credit
Contributions (R20 000 + R35 000) 55 000
Less: 4 × R3 984 (15 936)
Excess contributions 39 064
Less: 7,5% × taxable income (R455 000) (34 125)
4 939
× 25% (1 235)
Add: s 12T normal tax for amount contributed over limit
(R40 000 – R33 000) × 40% 2 800
Normal tax 88 731

(b)
Thato Maluka:
Salary per annum 500 000
Fringe benefit (bursaries received – R5 000 × 2) 10 000
Gross income 510 000
Less: Exempt income
Bursary to twins
(up to maximum of R40 000) (section 10(1)(q)(ii))
(limited to actual amount) (10 000)
Income 500 000

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A Student’s Approach to Income Tax/Natural persons

R R
Pabs Mashile:
Gross income
Unemployment Insurance (section 10(1)(mB)) 8 000
Money from mother (not gross income as defined, capital nature) nil
South African dividends 3 000
Taxable foreign dividends from a non-listed company 1 200
Interest on a South African bank account 15 000
South African dividends on property shares
(not out of capital reserves) 400
Gross income 27 600
Less: Exempt income
Unemployment Insurance (section 10(1)(mB)) (8 000)
South African dividends (section 10(1)(k)(i)) (3 000)
Taxable foreign dividends from non-listed company
– (section 10B) (not specifically exempt) R1 200 × 25/45 (667)
Interest on South African bank account
– (section 10(1)(i)) maximum of R23 800 (15 000)
Income 933

Question 3.4
Here are a number of unrelated cases. For each case, indicate whether any exemption will
be available.
(a) Sarah Sugar elected to retire on 1 July 2020 and received a pension of R35 000 per
month from a foreign pension fund. Her services were rendered as follows during
her employment with the foreign company:
Durban, South Africa 5 years
London, United Kingdom 10 years
Johannesburg, South Africa 8 years
Sydney, Australia 3 years
Cape Town, South Africa 5 years

(b) Gratuity Ltd awarded the following bursaries during the current year of assessment:
• Godfrey, an employee, received R50 000 from his employer to pay for him to study
his Master’s degree at a South African university. The bursary was subject to the
condition that he would reimburse the company if he failed to complete the
qualification for reasons other than death, ill-health or injury. During the year,
Godfrey contracted cancer and was unable to complete his degree.

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A Student’s Approach to Income Tax/Natural persons

• Erin and Samantha are children of an employee. Their mother earns remunera-
tion of R189 000 per annum. Gratuity Ltd gave Erin a bursary of R24 000 to cover
her school fees for grade 12. They also gave Samantha a bursary of R28 000 to
assist with her studies at university (NQF level 6).
• Sally Smart started working for Gratuity Ltd during the current year of assess-
ment. She had just completed her BCom (NQF level 7) at Unisa and Gratuity Ltd
reimbursed her R30 000 for her study expenses. Sally used this money to settle
her student loan account.

(c) Kurt Cash owns a building business. During the 2022 year of assessment he was
building houses in Malawi. He took two foremen (his employees) with him to
Malawi and made use of Malawian labourers on site to build the houses. During the
2022 year of assessment:
• The project made a profit of R3 400 000. The foremen were paid a salary each of
R500 000 in relation to this project.
• Kurt was in Malawi from 1 June 2020 to 28 February 2022. He did not return to
South Africa once.
• Foreman A stayed with Kurt for the entire period, and did not return to South
Africa.
• Foreman B returned to South Africa one weekend each month to visit his wife.

You are required to:

For each case, calculate the amount that is exempt from income tax.

Answer 3.4
(a) As Sarah’s pension relates to services rendered both within South Africa and out-
side South Africa, the pension received relating to services rendered outside South
Africa will be exempt in terms of section 10. The formula provided in section 9 will
be used to calculate the South African-sourced income:
= Amount received × period in South Africa/total period
= (R7 000 × 8 months) × [(5 + 8 + 5 years)/31 years] = R32 516
Therefore R56 000 – R32 516 = R23 484 will be exempt from normal tax.
(b) Godfrey – The R40 000 will be exempt from normal tax in terms of section 10(1)(q).
The fact that he did not complete his studies due to ill-health does not change the
exemption.
Erin – Her mother earned less than R600 000 in the year of assessment and so
R20 000 of the bursary awarded to Erin will be exempt from tax. Her mother will
however be taxed on R4 000.
Samantha – Her mother earned less than R600 000 in the year of assessment and the
R60 000 exemption applies to each relative of the employee. The full amount of
R28 000 will be exempt and her mother will not be taxed on any amount.
Sally – A reimbursement of expenses after the completion of a qualification is not
exempt and will be a taxable fringe benefit for Sally.

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A Student’s Approach to Income Tax/Natural Persons

(c) Kurt is not an employee and therefore no exemption will be applicable to the profit
that he earned from the project. He is a South African resident and will be taxed on
his worldwide income.
Foreman A will qualify for the section 10(1)(o) exemption. He will not be taxed in
South Africa on the salary of R500 000 as he was out of the country for more than
183 days, including a continuous period of 60 days.
Foreman B will not qualify for the section 10(1)(o) exemption, even though he was
outside of South Africa for more than 183 days in aggregate during the year of assess-
ment (this did not include a continuous period of 60 days). His salary of R500 000 will
not be exempt.