NATURAL PERSONS AND TAX I REVISION

Introduction 1
GROSS INCOME Section 1 1
Variable Remuneration Section 7B 1
Variable Remuneration Section 7B 2
Variable Remuneration
Example 1: Normal Tax Consequences of Bonus (Employee) 3
EXEMPTIONS Section 10 4

DEDUCTIONS Section 11 4
Deductions Available to Individuals
Deductions: Individuals that Carries on Business 5
Deductions: Individuals Employed and Earn Remuneration 5
Deductions: Passive Income 6
Deductions: Individuals Carrying on More than One Trade 6

Prohibited Deductions
Deductions Claimable Against Remuneration from Employment: S23(m) 7
Example 2: Determine effects of Expenditure 8
Private and Domestic Expenditure: S23(b) 9
Example 3: Determine effects of Expenditure 10
Example 3: Determine effects of Expenditure 11

Specific Deductions Available to Individuals

Contributions by Members Retirement Funds Section 11 11
Example 4: Calculate Taxable Income (Individual) 12
Example 4: Calculate Taxable Income (Individual) 12

Deductions of Donations to Certain Organizations: S18A 13

Donations in Kind: Section 18A(3), (3A) and (B) 13
Example 5: Donations 14
Example 5: Donations 15
Example 5: Donations 16

CALCULATION OF NORMAL TAX PAYABLE

TAX TABLES 17
NORMAL TAX REBATES Section 6 17

Medical Schemes Fees Tax Credit Section 6A 18

Example 6: Calculate S6A Credit (Individual) 19

Additional Medical Expenses Tax Credit Section 6B 20

Person who is 65 (+), Person/Spouses’ Child = Disability 20
All Remaining Taxpayers 21
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TAXATION II
ACC3004H
NATURAL PERSONS AND TAX I REVISION

1. INTRODUCTION

The provisions of the ITA and the definition of normal tax provides that any person is
required to pay normal take in respect of any taxable income received, accrued to or in
favor of that person – on an annual basis.
- Provisions apply to a broad range of persons, including:
- Natural Persons
- Juristic Persons

The YOA for an individual is from 1 March – 28/29 February of the following year.
In determining the taxable income and normal tax payable by any person, a specific
sequence needs to be followed, as it is dictated by the provisions included in the Act
- Additionally, there are certain specific deductions available to individual TP’s based
on a particular amount or subtotal of taxable income before the deduction:
- S11F
- S18A
- ® Amount of deductions is \ dependent on the individual’s taxable income
___before the deduction
- AAR, the sequence of the calculation of an individual’s taxable income and normal
tax payable is increasingly important

2. GROSS INCOME (S1)

Gross Income is the starting point of the taxable income framework:
- Gross income consists of the general gross income definition as well as special
inclusions
- If there is no special inclusion dealing with a particular receipt or accrual, the general
income definition must be applied

3. VARIABLE REMUNERATION (S7B)

Amounts are generally included in a person’s gross income at the earlier of receipt or
accrual and are subject to normal tax accordingly.
§ “Receipt” and “Accrual” are not defined in the ITA
§ These terms have been defined in previous tax judgements that have set to
precedent and can be relied on

“Received”: Amounts are deemed to have been “Accrued”: Amounts are deemed to a taxpayer
received by the taxpayer when the amount has when the taxpayer is unconditionally entitled to the
been received by the taxpayer for their own benefit amount
and on their own behalf -Mooi
-Geldenhuys

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Section 7B: Applies to variable remuneration and overrides this definition of “accrual” or
“actually incurred”

Variable Remuneration: Defined in S7B(1) and includes amounts received by an employee

from an employer such as:
- Overtime-pay
- Bonuses
- Commission
- Travel allowance
- Reimbursement allowances
- Any amount paid in respect of (IRO) leave not taken by the employee i.e. Leave pay

® These amounts are deemed to accrue to employee and constitute expenditure actually
___incurred by the employer on the date that amount is actually paid by employer ®
___employee.
® This will then correspond to date on which the variable remuneration is included in the
__employee’s taxable income and deducted from the employer’s taxable income.

EXAMPLE 1

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EXAMPLE 1: SOLUTION

Bilqees:
- Bonus = Variable Remuneration as defined
- It follows that amount is deemed to accrue to employee when it is actually paid to
employee
- \ Will be included in Bilqees’s gross income on 1 April 2020 ® Subject to tax in
__2021 YOA

Baker (Pty) Ltd:

- Bonus = Variable Remuneration as defined
- It follows that amount is deemed to be actually incurred by employer when actually
paid ® employee
- Thus, will be deducted from Baker (Pty) Ltd’s taxable income in 2021 YOA

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4. EXEMPTIONS (SECTION 10)

*Exempt Income – not subject to Normal Tax

Exempt income refers to particular amounts included in a TP’s gross income but are not
included in the TP’s income – they are not subject to Normal Tax.

Exemptions are used to:

i. Incentivize investment
ii. Provide relief to the poor
iii. Prevent double taxing

Exemptions are outlined in Section 10 of Income Tax Act:

- Provides for full exemptions (i.e. local dividends)
- Provides for partial/limited exemptions (i.e. foreign dividends)

® Ultimately, the exemption is also limited to amount that was initially

___included in gross income

5. DEDUCTIONS

Deductions do NOT necessarily relate to a particular inclusion in a TP’s taxable income but
have the effect of reducing the TP’s taxable income.

Given that deductions are not generally limited to particular inclusion in the TP’s taxable
income, they could potentially exceed TP’s taxable income.
® Resulting in an assessed loss position for the particular TP

Deductions include both general and specific deductions:

§ Specific deduction provisions generally allow for the deduction of amounts that
would NOT qualify for a deduction ITO the general deduction formula, either
because:
i. Amount is capital in nature
ii. Amount does not constitute expenditure incurred in the production of
income

§ Where there is a specific provision that applies to deduct expenditure, the specific
deduction provision must be applied
§ It is only when there is no specific deduction that the general deduction formula is
considered and can be applied

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5.1. DEDUCTIONS AVAILABLE TO INDIVIDUALS

Deductions available to individuals depend on the particular activities that are carried on by
that individual and can be broken up into 3 categories:

a. Deductions available to individuals that carry on business

b. Deductions available to individuals that are employed and earn remuneration
c. Deductions available to individuals that earn passive income

5.1.1. DEDUCTIONS AVAILABLE TO INDIVIDUALS THAT CARRY ON BUSINESS

If individual carries on a business as a sole proprietor, there is no separation between the

individual and the business for tax purposes

- Individual and business are seen as same person and constitute 1 taxpayer together
- Individual carrying on business would generally meet the PREAMBLE to SECTION 11
- As that individual would be carrying on a trade and presumable would derive
income from that trade
- It follows that this individual could be entitled to any deductions and
allowances, provided the additional requirements of the general or specific
deduction provision is met IRO expenditure incurred in carrying on business
§ Such expenditure is not prohibited from being deducted ITO S23 of
ITA

5.1.2. DEDUCTIONS AVAILABLE TO INDIVIDUALS THAT ARE EMPLOYED AND EARN

REMUNERATION

If individual = employed and earns remuneration, the deductions available to them IRO
expenditure incurred in the course of their employment will be limited by the application of
S23(m).

S23(m): Outlines certain deductions available to employed individual IRO expenditure

______ incurred IRO their employment and disallows all other deductions.

\ It follows that all other deductions not specifically allowed ITO S23(m) may NOT be
__applied to deduct any expenditure incurred IRO of individual’s employment.

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5.1.3. PASSIVE INCOME

If individual earns passive income, deductions available to individual depend on the type of
passive income earned by individual.

Activities carried on to earn passive income are generally excluded from the trade
definition, however, there are 2 activities that are carried on to generate passive income
that is specifically included in the definition of trade – including:

a. Letting of any property

b. Granting of permission to use certain intellectual property

Any individual earning rental income and/or royalty income would meet the preamble to
S11 – since individual would be carrying on a trade and deriving income from that trade:
- It follows that individual could be entitled to any deductions and allowances
provided the additional requirements of the general or specific deduction provision
is met IRO of expenditure incurred to earn rental income and/or royalty income
- Such expenditure is not prohibited from being deducted ITO S23

Alternatively, investment in any equity and/or debt instruments to earn dividend and
interest income as well as any other activities carried on to generate passive income is not
considered trade.

5.1.4. INDIVIDUALS CARRYING ON MORE THAN ONE ACTIVITY

If employee carries on more than 1 activity \ fits into more than one of above categories,
the potential deductibility of expenditure incurred IRO each activity must be considered
separately.

i.e. If individual is employed and earns salary but also owns property that is let out, the
deductions available to them IRO expenditure incurred in the course of their
employment is limited ITO S23(m)
- However, the deductions available IRO the rental trade are not limited by S23(m).

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5.2. PROHIBITED DEDUCTIONS

5.2.1. DEDUCTIONS CLAIMABLE AGAINST REMUNERATION FROM EMPLOYMENT

[S23(m)]

S23(m) limits the deductibility of any expenditure, loss or allowance under S11 if incurred
IRO the employment or office held by person.
® This section does not apply to any agent or representative that derives their
___remuneration mainly in the form of commission income (i.e. more than 50%)

Following expenditure, losses and/or allowances incurred may be deducted by TP against

the remuneration earned IRO of their employment:

S11F Any contributions ® any retirement

fund
S11(c) Legal fees If an employee incurs legal costs IRO a dispute
with employer, the employee may be entitled
to a s11(c) deduction IRO legal costs
S11(i) Bad debts If an employer goes insolvent and cannot pay
their employee salaries, the employees would
be entitled to s11(i) deduction
S11(j) Allowance for bad debts
S11(e) Wear and Tear Allowance If an employee incurs the costs of a laptop and
uses it in the course of their employment, the
employee may be entitled to a s11(e) allowance
S11(nA) Refund of amount received IRO If previous employee breaches a restraint of
S11(nB) services rendered or received AAR of trade agreement and is required to refund the
trade payment payment
S23(b) Rent, repairs and other expenses Expenditure incurred IRO a home office to
incurred in connection with a extent that it’s not prohibited by S23(b).
domestic dwelling to extent that it is
not prohibited ITO S23(b)

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EXAMPLE 2

EXAMPLE 2: SOLUTION

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5.2.2. PRIVATE AND DOMESTIC EXPENDITURE [SECTION 23(b)]

Domestic and private expenditure includes:

- Rent
- Cost of repairs
- Cleaning
- Any other cost relating to a private home, amongst other expenses
® All of which is not deductible if incurred by a taxpayer.

However, expenditure that is incurred by TP IRO a private home may be deductible to

extent that home is occupied for the purposes of trade if the following requirements are
met:

i. The premises must be specifically equipped for trade, and

ii. The premises must be regularly and exclusively used for trade

If the trade for which private premises is occupied constitutes employment or the holding of
an office, in order for allowable expenditure to be deducted, ONE of the two requirements
must be met – in addition to the above 2 requirements:

i. If employee’s remuneration is derived mainly from commission (more than 50%), the
TP’s duties must be mainly performed otherwise than in the office provided to him
by their employer
ii. If employee’s remuneration is not derived mainly from commission, the TP’s duties
must be performed mainly in the qualifying part of the private home

If the above requirements are met, any expenditure incurred by TP IRO the portion of the
premises that is occupied for the purposes of trade is NOT prohibited from a deduction ITO
S23(b).
® It follows that if the requirements of the general or a specific deduction is met, the TP
___will be entitled to deduct the expenditure.

FLOWCHART:
Graphical representation of the proviso to S23(b) and the thought process to be followed in
determining whether S23(b) prohibits the deduction of private expenditure or not:

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EXAMPLE 3

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5.3. SPECIFIC DEDUCTIONS AVAILABLE TO INDIVIDUALS

5.3.1. CONTRIBUTIONS BY MEMBERS TO RETUREMENT FUNDS (SECTION 13)

S11F provides for the deduction of any contribution to a pension, provident or retirement
annuity fund made by a natural person or a NP’s employer on their behalf, subject to certain
limits.
§ Where an employer contributes to the fund on behalf of an employee, the employee
must be treated as having made the contribution ® fund that is equivalent to cash
equivalent value of the taxable benefit.

S11F applies “notwithstanding section 23(g)” which confirms that this deduction can be
applied against trade and non-trade income.

The S11F deduction available to a NP in any particular YOA is limited to the lessor of:

a. R350 000;

b. 27.5% of the higher of the person’s:

- Remuneration2 (excluding retirement lumpsums and severance benefits)3
- Taxable income (excluding retirement lumpsums and severance benefits)
before allowing the S11F and S18A deductions – SUBTOTAL 2 [APPENDIX 1]

c. Taxable income before allowing the S11F deduction and before the inclusion of any
taxable gains – SUBTOTAL 1 [APPENDIX 1]

Where any amount contributed to a pension, provident or retirement annuity fund is

disallowed a deduction in a particular YOA AAR of the application of the above limits, the
excess (un-deducted) contribution must be carried forward ® following YOA and must be
treated as a contribution actually made in the following YOA.

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EXAMPLE 4

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5.3.2. DEDUCTIONS OF DONATIONS TO CERTAIN ORGANIZATIONS (S18A)

S18A provides for a deduction, subject to a limit, for genuine donations of cash or other
forms of property made by the TP to certain specified beneficiaries during the YOA if the TP
is in possession of a valid S18A certificate/receipt. These beneficiaries include:
• Any approved PBO
• An institution, board or body as contemplated in S10(1)(cA); a funding body,
specialized agency or a department of government as contemplated in S10(1)(a) –
provided these entities carry on, or are involved in certain public benefit activities as
outlined in 9th Schedule [® 9th Schedule: out of Tax II syllabus]

The deduction available to TP IRO above donation is limited to 10% of TP’s taxable income
(excluding any retirement lumpsums or severance benefits) before allowing for this
deduction:
® i.e. SUBTOTAL 3

Where a donation or a portion thereof is disallowed form a deduction in a particular YOA

AAR of the application of above limits, it must be carried forward to following YOA and
treated as a donation actually made in that following YOA.

5.3.2.1. DONATIONS IN KIND [S18A(3), (3A) AND (3B)]

Where a non-cash donation is made, the value of that donation for the purposes of S18A
deduction is determined as follows:

PROPERTY DONATED VALUE OF DONATION FOR S18A PURPOSES

Trading stock
An asset (other than trading
stock) used by the TP for trade
An asset purchased or
constructed by TP for purposes
of the donation
The amount that has been taken into account for the purposes
of the section 22(8) recoupment.
The lower of:
-Tax Value; or
-Fair market value
® of asset on date of donation.
The lower of:
-Cost; or
-Fair market value of asset on date of donation.

Immovable property where the A = B + (C x D)

lower of market value or
municipal value exceeds cost
® Municipal value of immovable
property will be clearly stated in
scenario where necessary.
B = cost of immovable property
C = capital gain that would’ve been determined according to 8th
___Schedule had it been disposed of for an amount equal to
___lower of: MV or Municipal Value
D = 60% in the case of a NP or special trust and 20% in all other
_ __cases

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Other:
-Asset subject to a fiduciary
right, usufruct or other similar
right No deduction is allowed in respect of the donation.
-An intangible asset
-A financial instrument
(if unlisted or not issued by an
eligible financial institution).
The lower of:
Any other asset -Cost (less depreciation allowance of 20% per annum on the
_reducing balance method, if the asset is a movable asset)
-Fair market value of asset on date of donation.

EXAMPLE 5

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EXAMPLE 5: SOLUTION

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6. CALCULATION OF NORMAL TAX PAYABLE

The normal tax payable by an individual on an annual basis is determined as the tax on the
persons taxable income reduced by the primary, secondary and tertiary rebates, the
medical tax credits and any employees or provisional tax that has already been paid or
withheld from that individual during that YOA ® PLUS any additional tax ITO S12T

6.1. TAX TABLES

Individual taxpayers are subject to normal tax on a sliding scale as per the progressive tax
tables outlined below:

6.2. NORMAL TAX REBATES (SECTION 6)

In determining the normal tax and normal tax payable by a NP, the normal tax rebates are
applied to reduce the normal tax on the NP’s taxable income that is calculated using the tax
tables. These normal tax rebates are NOT refundable and cannot be carried forward to
following YOA.

The normal tax rebates available to a NP vary depending on the AGE of the TP on the last
day of YOA. These normal tax rebates are outlined below:

The primary rebate is available to ALL NPs. In addition to the primary rebate, a NP is entitled
to a secondary rebate if the NP is 65 years or older on last day of YOA
® Tertiary rebate available to NP who is 75 years and older on last day of YOA

These normal tax rebates are only apportioned for part periods if NP was:
- Born;
- Died; or
- Declared insolvent during YOA

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6.3. MEDICAL SCHEME FEES TAX CREDIT (SECTION 6A)

In determining the normal tax and normal tax payable by a NP, the medical scheme fees tax
credit can be applied to reduce the normal tax on the NP’s taxable income that is calculated
using the tax tables:
- If the NP paid any fees ® registered medical aid scheme (a scheme), in respect of
themselves of their dependents, during the YOA

It should be noted that any contributions made by an employer on employee’s behalf =

deemed to have been made by employee to the extent that contributions are included in
employee’s gross income
i.e. To the extent that contributions constitute a taxable benefit that has value.

The medical scheme fees tax credit available to NP for a YOA depends on the number of
dependents for whom the NP has made contributions to the scheme, as well as the number
of months that the NP has made contributions to the scheme.

® The medical scheme fees tax credit is NOT REFUNDABLE and cannot be carried forward
___to the following YOA.

The amounts of the medical scheme fees tax credit that could be available to a NP is
outlined below:

For example, a TP that contributes ® medical aid scheme on behalf of themselves and 2
dependents for the full 2020 YOA will be entitled to a medical scheme fee tax credit
calculated as follows: (R620 + R209) x 12 = R9 948

Where more than 1 person pays any fees to a medical aid scheme for the benefit of a
person or dependent, each person making contribution = entitled to a portion of the
medical scheme fees tax credit IRO the contributions made. the amount allowed to be
deducted by any one of the contributing persons is calculated as follows:

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EXAMPLE 6

EXAMPLE 6: SOLUTION

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6.4. ADDITIONAL MEDICAL EXPENSES TAX CREDIT

In determining the normal tax and normal tax payable by a NP, the additional qualifying
medical expenses tax credit can be applied to reduce the normal tax on the NP’s taxable
income that is calculated using the tax tables, if the NP actually paid any qualifying
irrecoverable medical expenditure IRO themselves or their dependents, during the YOA.

It should be noted that any qualifying medical expenses made by an EMPLOYER on an

employee’s behalf = deemed to have been made by the employee to the extent that
qualifying medical expenses are included in employee’s gross income.
- i.e. To the extent that the qualifying medical expenses constitute a taxable benefit
that has value

The additional qualifying medical expenses tax credit = available to TP whether or not
contributions ® medical aid scheme is made by TP during the YOA. The tax credit is NOT
REFUNDABLE and cannot be carried forward to following YOA.

In order to apply this provision correctly, a thorough and complete understanding of the
terms “child”, “dependent”, “disability” and “qualifying medical expenses” as outlined in
S6B(1) is required.

Taxpayers are grouped into the following 3 categories for the purposes of determining the
amount of S6B tax credit:

a. Persons who are 65 years or older (on last day of YOA)

b. Persons who are disabled or who have a spouse or child that is disabled
c. All remaining taxpayers

The rebate is calculated using the same method for the first 2 categories but differently for
the 3rd category.

6.4.1. PERSONS WHO IS 65 YEARS OR OLDER OR THE PERSON, HIS/HER SPOUSE OR

HIS/HER CHILD = PERSON WITH A DISABILITY [S6B(3)(a) & S6B(3)(b)]

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6.4.2. ALL REMAINING TAXPAYERS [S6B(3)(c)]

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